<PAGE> 1
As filed with the Securities and Exchange Commission on August 16, 1999.
File No. 333-81151
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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FREESHOP.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
WASHINGTON 7310 91-1809146
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
<TABLE>
<S> <C>
JOHN WADE
CHIEF FINANCIAL OFFICER
FREESHOP.COM, INC.
95 SOUTH JACKSON STREET 95 SOUTH JACKSON STREET
SUITE 300 SUITE 300
SEATTLE, WASHINGTON 98104 SEATTLE, WASHINGTON 98104
(206) 441-9100 (206) 441-9100
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE (NAME, ADDRESS, INCLUDING ZIP CODE, AND
NUMBER TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL INCLUDING AREA CODE, OF AGENT FOR SERVICE)
EXECUTIVE OFFICES)
</TABLE>
COPIES TO:
<TABLE>
<S> <C>
CHRISTOPHER J. BARRY STEPHEN M. GRAHAM
BRYCE L. HOLLAND, JR. PERKINS COIE LLP
DORSEY & WHITNEY LLP 1201 THIRD AVENUE, 48TH FLOOR
U.S. BANK CENTRE, SUITE 4200 SEATTLE, WASHINGTON 98101
1420 FIFTH AVENUE (206) 583-8888
SEATTLE, WASHINGTON 98101
(206) 903-8800
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
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If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ---------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and we are not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, AUGUST 16, 1999
FREESHOP LOGO
3,200,000 SHARES
COMMON STOCK
This is the initial public offering of FreeShop.com, Inc. and we are offering
3,200,000 shares of our common stock. We anticipate that the initial public
offering price will be between $10.00 and $12.00 per share.
We have applied to list our common stock on the Nasdaq National Market under the
symbol "FSHP."
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE RISK FACTORS BEGINNING ON PAGE
8.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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<CAPTION>
UNDERWRITING
PUBLIC OFFERING DISCOUNTS AND PROCEEDS TO
PRICE COMMISSIONS FREESHOP
<S> <C> <C> <C>
Per Share $ $ $
Total $ $ $
</TABLE>
We have granted the underwriters the right to purchase up to 480,000 additional
shares to cover any over-allotments.
DEUTSCHE BANC ALEX. BROWN
DAIN RAUSCHER WESSELS
a division of Dain Rauscher Incorporated
VOLPE BROWN WHELAN & COMPANY
E*OFFERING
The date of this prospectus is , 1999
<PAGE> 3
[ON INSIDE COVER]
[At the top center of the page is the FreeShop logo with the phrase "THE ONLINE
NETWORK THAT PUTS CONSUMERS IN CONTROL OF THE DIRECT MARKETING PROCESS" set
forth underneath the logo. In the middle of the page is a color depiction of the
home page from the FreeShop.com Web site. Beneath the picture of the home page
is the following text: "The traditional world of direct marketing is based on
contacting a broad range of consumers through mail, telephone, and other
solicitations in the hope of generating responses from a small percentage of
those consumers. Unlike the traditional direct marketing process, FreeShop
aggregates over a thousand of free, trial, and promotional offers from marketers
in a single place where consumers can easily choose the offers that meet their
specific needs."]
[ON FOLD OUT FLAP INSIDE THE FRONT COVER]
[The phrase "Putting consumers in control of the direct marketing process"
appears across the top of the two pages. Underneath the heading, three blocks of
text appear across the page. The left block states "OVER SIX MILLION OFFERS TO
DATE FreeShop.com is more than a Web site. It is a network that connects
millions of consumers with thousands of offers. To date, FreeShop has generated
more than six million orders." The center block states "OUR BUSINESS MODEL
FreeShop.com generates revenue in multiple ways. Our core business is lead
generation, where marketers pay us a fee per lead, or customer request for an
offer. In addition, we generate revenue through advertising on our site and in
our Club FreeShop newsletters." The right block states "CLUB FREESHOP: OVER ONE
MILLION EMAIL MEMBERS Club FreeShop is a free membership program through which
we communicate with our most valued customers. Member regularly receive email
newsletters informing them of special offers, exclusive contests and other
promotional opportunities." In the middle of the page is a picture of the
FreeShop logo with rectangle banners labeled "Shoppers" and "Marketers" on
either side of the logo, with arrows pointing from the banners toward the
FreeShop logo. At the bottom left of the page, three color pictures of category
screens from the FreeShop.com Web site appear descending diagonally from left to
right. A fourth category screen appears to the right of the top category screen.
The caption next to the screens reads "FreeShop is organized by category to make
the site easy for customers to find what they want." centered on the bottom of
the page are three graphics from the FreeShop.com Web site arranged vertically
depicting graphics representing the themes of "Got kids?" "Live Longer" and
"Back to School!" The caption next to the graphics reads "Offers are also
organized using seasonal and interest-oriented themes." On the bottom right side
of the page, three color pictures of corporate screens from the FreeShop.com Web
site appear descending diagonally from left to right, including the privacy
pledge page and customer service page. A fourth corporate screen appears to the
right of the top corporate screen. The caption next to the screens reads "The
FreeShop site is designed to make it easy for customers to get comfortable
shopping on the Web."]
<PAGE> 4
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information and financial statements and accompanying notes appearing in this
prospectus.
FREESHOP.COM, INC.
FreeShop is a leading provider of direct marketing services on the
Internet. Consumers seeking to discover, learn about or try new products can
visit our Web site and choose from a selection of free, trial and promotional
offers. FreeShop provides a network through which consumers can seek out new
products of specific interest to them, unlike the traditional direct marketing
model in which marketers communicate to broad audiences in search of new
customers.
FreeShop currently has more than 1,000 offers from over 100 companies for
items such as catalogs, magazines, product samples, software, coupons and
consumer goods. To assist consumers in locating offers that interest them most,
we arrange offers by category, such as travel, personal finance, entertainment
and sports. Our primary source of revenue is lead generation, for which
marketers pay us fees based on the number of customer requests for the
marketers' offers. We also receive revenue from advertisements placed on our Web
site and in our Club FreeShop email newsletters. We believe our Internet-based,
consumer-directed process creates a highly effective method of direct marketing
in terms of cost, targeting, efficiency and consumer satisfaction.
Through our direct marketing network of consumers and marketers, we have
received and transmitted to marketer clients more than 6.0 million orders, which
are requests by consumers for various offers. According to Media Metrix, Inc.,
in June 1999, FreeShop was among the top 20 online shopping sites based on the
estimated number of different visitors to our Web site during that month. Our
customer database has grown from approximately 850,000 customers in January 1998
to more than 2.0 million customers as of July 1999. In addition, our email
newsletters are regularly received by the over 1,000,000 members of Club
FreeShop, informing them of special offers, exclusive contests and other
opportunities.
In December 1998, Fingerhut Companies, Inc. became a FreeShop shareholder
and currently holds 34.6% of our capital stock. Fingerhut is the eighth largest
cataloger and the second largest general merchandise cataloger in the United
States. We have recently initiated a non-contractual direct marketing
relationship with Fingerhut under which we have established Web site links and
are advertising and including inserts in some of Fingerhut's catalogs and order
delivery packages. In March 1999, Fingerhut was acquired by Federated Department
Stores, Inc., which operates over 400 full-line department stores, direct mail
catalog businesses and an electronic commerce business. We intend to seek to
further develop our relationship with Fingerhut and to initiate a similar
relationship with Federated.
As part of our strategy to increase the number and types of offers on our
Web site and increase our visitor and client bases, in May 1999, we acquired the
Catalog Site and the Worldwide Brochures Web sites, which greatly expanded our
catalog and travel-related offerings.
DIRECT MARKETING
The direct marketing industry is large and growing. In 1998, businesses
spent an estimated $80.1 billion in the United States marketing directly to
consumers through direct mail, telemarketing and direct response advertising in
both online and traditional media. Direct marketing, which involves any
communication to a consumer designed to generate a specific response or action
(generally the purchase of a product or service), allows marketers to reach
targeted audiences and to quantify and measure the effectiveness of their
campaigns and advertising spending. However, traditional direct marketers
generally lack specific information about a consumer's immediate interests and
needs. As a
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result, we believe the majority of direct mail is discarded and the majority of
telemarketing calls are terminated quickly or ignored.
The Internet is well suited for direct marketing because it can be used to
create an interactive environment between the consumer and the marketer. The
Direct Marketing Association estimates online direct marketing in the United
States will grow from $603 million in 1998 to $5.3 billion in 2003. We believe
online direct marketing is more attractive than traditional direct marketing
because it requires lower production costs and provides easier and faster
customer response features. In addition, online direct marketing allows
marketers to easily:
- develop one-to-one relationships with consumers;
- collect data and feedback on marketing campaigns; and
- customize marketing campaigns to broad audiences or specific groups.
Even with these advantages, we believe direct marketers face challenges in
fully utilizing the Internet as a marketing medium. With millions of Web sites,
only a fraction of which have significant audiences, it is difficult for
marketers to decide where to spend their marketing dollars. We believe we
provide marketers with an opportunity to take advantage of the effectiveness of
direct marketing while overcoming the challenges presented by both traditional
and online marketing methods.
OUR OBJECTIVE
Our objective is to be the dominant provider of online direct marketing
services. We intend to achieve this objective through the following key
strategies:
- increase visitor traffic and transactions through both online and
traditional marketing programs;
- increase our client base by expanding our sales staff and the services we
offer and by broadening our relationships with advertising agencies and
companies with national consumer brands;
- enhance FreeShop's brand name recognition through aggressive marketing;
- expand the number of categories and increase the number of offers within
each category;
- continue to develop and use technology to serve our marketer clients and
to make our Web site faster, easier to use and more personalized; and
- further develop our marketing relationship with Fingerhut and initiate a
similar relationship with Federated.
OUR HISTORY
FreeShop began as a division of Online Interactive, Inc., a Washington
corporation that was incorporated in June 1994. On June 30, 1997, Online
Interactive contributed the FreeShop division to its wholly-owned subsidiary,
FreeShop International, Inc., a Washington corporation incorporated on June 23,
1997, which then began operating as a separate entity. On February 19, 1999,
FreeShop International, Inc. changed its name to FreeShop.com, Inc. We have a
history of significant losses and have accumulated losses of over $9.6 million
since we began operations. The online direct marketing industry is highly
competitive and we anticipate incurring substantial losses in the foreseeable
future. Our offices are located at 95 South Jackson Street, Suite 300, Seattle,
Washington 98104. Our telephone number is (206) 441-9100.
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THE OFFERING
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Common stock offered by FreeShop............................ 3,200,000 shares
Common stock to be outstanding after the offering........... 14,955,155 shares(1)
Use of proceeds............................................. For marketing, working capital
and general corporate
purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol...................... FSHP
</TABLE>
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(1) Based on the number of shares actually outstanding as of July 31, 1999.
Includes (a) 1,890,432 shares of common stock issuable upon conversion of
472,608 shares of series B convertible preferred stock, which conversion
will occur not later than the completion of this offering, (b) 1,586,156
shares of common stock issuable upon conversion of 396,539 shares of series
B convertible preferred stock, which stock will be acquired pursuant to the
exercise of warrants and converted not later than the completion of this
offering, and (c) 35,280 shares of common stock issuable upon conversion of
8,820 shares of series B convertible preferred stock, which stock will be
issued and converted not later than the completion of this offering.
Excludes, as of July 31, 1999, a total of 953,289 shares of common stock
issuable upon exercise of outstanding stock options at a weighted average
exercise price of $1.50, and 27,700 shares of common stock issuable upon
exercise of warrants at a weighted average exercise price of $1.19.
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The terms "Freeshop," "we," "us," and "our" as used in this prospectus
refer to FreeShop.com, Inc. Unless otherwise specifically stated, information
throughout this prospectus assumes that:
- the Underwriters' over-allotment option is not exercised;
- Fingerhut will exercise warrants to purchase 396,539 shares of series B
convertible preferred stock and will purchase an additional 8,820 shares
of series B convertible preferred stock prior to the completion of this
offering, and all shares of series B convertible preferred stock will
convert into 3,511,868 shares of common stock not later than the
completion of this offering; and
- the effectiveness of a 1-for-2.5 reverse split of the outstanding shares
of common stock prior to the completion of this offering.
Free Shop is a registered trademark of FreeShop.com, Inc. "Find It! Try It!
Buy It!", "The starting point for smart online shopping", "Powered by FreeShop"
and "FreeShop by Email" are service marks of FreeShop. We may apply for certain
other trademarks and service marks, including Club FreeShop, FreeShop Savings
Club, Savings Central, FreeShop shopping assistant, Catalog Site, Catalog
Channel, The Catalog Site and Worldwide Brochures. All other trademarks and
service marks that we refer to in this prospectus are the property of their
respective owners. The information on our Web sites is not a part of this
prospectus.
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SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Set forth below is our actual statement of operations data. See Note 2 to
Freeshop's audited financial statements for a description of how we calculated
the number of shares used to compute basic and diluted net loss per share of
common stock.
The following unaudited pro forma statement of operations data gives effect
to the acquisitions of the Catalog Site and Worldwide Brochures Web sites and
related assets as if they had occurred on January 1, 1998, but does not reflect
the issuance and conversion of the series B convertible preferred stock which
will have occurred not later than the completion of this offering. See Note 7 to
our unaudited pro forma combined financial information for a description of the
method we used to compute basic and diluted net loss per share of common stock
and the number of shares used in that computation.
The following balance sheet data provides a summary at June 30, 1999,
- on an actual basis;
- on a pro forma basis to reflect
(1) the issuance of series B convertible preferred stock upon the
exercise of warrants,
(2) the sale of 8,820 additional shares of convertible preferred stock
and
(3) the conversion of all series B convertible preferred stock into
shares of common stock no later than the completion of this
offering; and
- on a pro forma as -adjusted basis to reflect the estimated net proceeds
from the sale of 3,200,000 shares of common stock in this offering at an
assumed initial offering price of $11.00 per share, after deducting
underwriting discounts and commissions and estimated offering expenses.
See "Selected Unaudited Pro Forma Financial Data," "Selected Actual Financial
Data" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
<CAPTION>
THREE MONTHS ENDED
(UNAUDITED)
YEAR ENDED ------------------------------------------------------------------
DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1998 1998 1998 1998 1998 1999 1999
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<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
ACTUAL
Revenues....................... $ 1,251 $ 220 $ 209 $ 321 $ 501 $ 667 $ 1,480
Gross profit................... 1,034 181 172 256 425 584 1,373
Operating loss................. (3,136) (573) (641) (970) (952) (1,378) (2,472)
Net loss....................... $ (3,199) $ (585) $ (658) $ (992) $ (964) $(1,366) $(2,420)
Basic and diluted net loss per
common share................. $ (0.51) $ (0.10) $ (0.11) $ (0.16) $ (0.14) $ (0.17) $ (0.29)
Shares used to compute basic
and diluted net loss per
common share................. 6,224 5,688 5,955 6,367 6,871 8,151 8,214
</TABLE>
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<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED JUNE 30,
DEC. 31, 1999
1998 (UNAUDITED)
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PRO FORMA (UNAUDITED)
Revenues.................................................. $ 1,893 $ 2,381
Gross profit.............................................. 1,455 2,135
Operating loss............................................ (4,233) (4,155)
Net loss.................................................. $ (4,296) $(4,092)
Basic and diluted net loss per common share............... $ (0.68) $ (0.50)
Shares used to compute basic and diluted net loss per
common share............................................ 6,277 8,219
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
(UNAUDITED)
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
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BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 4,330 $13,209 $45,195
Working capital........................................... 5,190 14,069 46,055
Total assets.............................................. 10,613 19,492 51,478
Long-term obligations, less current portion............... 81 81 81
Total shareholders' equity................................ 8,507 17,386 49,372
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RISK FACTORS
This offering involves a high degree of risk. You should carefully consider
the risks described below and the other information in this prospectus before
deciding to invest in shares of our common stock. Any of these risk factors
could materially and adversely affect our business, financial condition or
operating results. In that case, the trading price of our common stock could
decline, and you could lose all or a part of your investment.
RISKS RELATED TO OUR BUSINESS
WE HAVE A LIMITED OPERATING HISTORY, WHICH MAKES IT DIFFICULT TO PREDICT OUR
FUTURE PERFORMANCE.
Our limited operating history makes predicting our future performance
difficult and does not provide investors with a meaningful basis for evaluating
an investment in our common stock. From our inception in June 1994 through June
1997, we existed as a division of Online Interactive, Inc. We began operations
as an independent company in June 1997. In the first half of 1998, we began
offering advertising opportunities on our site and in our email newsletters in
addition to our primary business of lead generation. As a result, our
performance since the end of the first quarter of 1998 are not comparable to
prior periods. Moreover, we have never operated during a general economic
downturn in the United States, which typically adversely affects advertising and
marketing expenditures.
WE WILL FACE RISKS ENCOUNTERED BY EARLY-STAGE COMPANIES IN INTERNET-RELATED
BUSINESSES AND MAY BE UNSUCCESSFUL IN ADDRESSING THESE RISKS.
We face risks frequently encountered by early-stage companies in new and
rapidly evolving markets, including the market for online direct marketing. We
may not succeed in addressing these risks, and our business strategy may not be
successful. These risks include uncertainties about our ability to:
- attract a larger number of consumers to our Web site;
- sign up new marketing clients and add new and compelling content to our
Web site;
- manage our expanding operations;
- adapt to potential decreases in online advertising rates;
- successfully introduce new products and services;
- continue to develop and upgrade our technology and to minimize technical
difficulties and system downtime;
- create and maintain the loyalty of our customers and clients;
- maintain our current, and develop new, strategic relationships and
alliances; and
- attract, retain and motivate qualified personnel.
WE HAVE A HISTORY OF LOSSES, EXPECT FUTURE LOSSES AND MAY NEVER ACHIEVE
PROFITABILITY.
We have not achieved profitability and expect to continue to incur
operating losses for the foreseeable future. We incurred net losses of $3.2
million, or more than 2.5 times the amount of our revenues, for the year ended
December 31, 1998, and $3.8 million, or more than 1.75 times the amount of our
revenues, for the six months ended June 30, 1999. As of June 30, 1999, our
accumulated losses were $9.6 million, which represents our losses since we began
our operations. We have recently increased our operating expenses and capital
expenditures in order to accelerate our growth. We expect further increases in
operating expenses, including at least $20.0 million of the proceeds of this
offering, to expand marketing and brand name promotion spending over the next
twelve months. Although our revenues have grown in recent quarters, we will need
to significantly
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increase revenue to achieve profitability. Even if we do achieve profitability,
we may be unable to sustain profitability on a quarterly or annual basis in the
future. It is possible that our revenues will grow more slowly than we
anticipate or that operating expenses will exceed our expectations. See
"Selected Actual Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY AND REMAIN
UNCERTAIN, WHICH COULD NEGATIVELY AFFECT THE VALUE OF YOUR INVESTMENT.
Our operating results have varied significantly from quarter to quarter in
the past and may continue to fluctuate. As a result, we believe period-to-period
comparisons of our operating results are not meaningful. For example, during the
year ended December 31, 1998, the percentage of annual sales attributable to the
first, second, third and fourth quarters were 17.6%, 16.7%, 25.7% and 40%,
respectively. Our operating results for a particular quarter or year may fall
below the expectations of securities analysts and investors, which could result
in a decrease in our stock price.
Our limited operating history and the new and rapidly evolving Internet
markets make it difficult to ascertain the effects of seasonality on our
business. We believe, however, that our revenue may be subject to seasonal
fluctuations because advertisers generally place fewer advertisements during the
first and third calendar quarters of each year. In addition, expenditures by
advertisers tend to be cyclical, reflecting overall economic conditions as well
as budgeting and buying patterns. A decline in the economic prospects of
advertisers could alter current or prospective advertisers' spending priorities,
or the time periods in which they determine their budgets, or increase the time
it takes to close a sale with our advertisers.
The majority of our contracts are month-to-month and automatically renew
unless terminated by either party with 10 days' notice. The loss of a
significant number of these contracts in any one period might result in a
significant decline in our quarterly operating results. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
WE HAVE EXPERIENCED RAPID GROWTH WHICH HAS PLACED A STRAIN ON OUR RESOURCES, AND
ANY FAILURE TO MANAGE OUR GROWTH EFFECTIVELY COULD CAUSE OUR BUSINESS TO SUFFER.
We do not have a proven record in managing our growth and may not be
successful in doing so. We have grown from 29 employees on July 1, 1997 to 102
employees on July 31, 1999. We have recently hired key management personnel,
acquired two businesses and added personnel in connection with these
acquisitions. Due to our recent rapid growth and our inexperience in integrating
newly acquired businesses, we may not be successful in integrating new personnel
and acquired businesses into our existing operations. In addition, we plan to
continue expanding our sales and marketing, customer support and research and
development organizations. Past growth in these areas has placed, and any future
growth will continue to place, a significant strain on our management systems
and resources.
IF WE ARE UNABLE TO STRENGTHEN THE FREESHOP BRAND NAME, WE MAY NOT BE ABLE TO
COMPETE EFFECTIVELY AGAINST COMPETITORS WITH GREATER BRAND NAME RECOGNITION.
We may not be successful in strengthening our brand name. As competitive
pressures in the online direct marketing industry increase, we expect that brand
name strength will become increasingly important. If we cannot strengthen our
brand name, we may be unable to maintain or increase traffic to our Web site,
which would lead to decreased revenues from clients. We intend to devote
substantial resources to promote the FreeShop brand name. The reputation of our
brand name will depend on our ability to provide a high-quality online
experience for consumers visiting our Web site or receiving our Club FreeShop
e-mail newsletters. Negative experiences of consumers or marketers with FreeShop
might result in publicity that could damage our reputation and diminish the
strength of our brand name.
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IF WE CANNOT SECURE SUFFICIENT PROMOTIONAL OFFERS FROM OUR MARKETER CLIENTS, OUR
BUSINESS WILL SUFFER.
If we are unsuccessful in acquiring and renewing a continuing array of
free, trial and promotional offers for our Web site, traffic on our site will
likely decrease. The attractiveness of our Web site to consumers is based in
part on our ability to provide a broad variety of offers of interest to
consumers. Most of our contracts have month-to-month terms with short notice
periods and the loss of a significant number of these contracts at one time
would have an immediate and significant impact on our business. In addition, a
number of other Web sites give consumers access to similar offers. We face
competition for free, trial and promotional offers from these Web sites as well
as a variety of other online and traditional competitors. Without sufficient
variety and quality of offers, our Web site will become less attractive to
marketers, and our ability to generate revenue from marketer clients will be
adversely affected.
THE MAJORITY OF OUR CONTRACTS HAVE MONTH-TO-MONTH TERMS, AND THE LOSS OF A
SIGNIFICANT NUMBER OF THESE CONTRACTS IN A SHORT PERIOD OF TIME COULD HARM OUR
BUSINESS.
The majority of our contracts have month-to-month terms and automatically
renew unless terminated by either party with 10 days notice. The loss of a
significant number of these contracts in any one period could cause an immediate
and significant decline in our revenues, result in decreased traffic to our Web
site and cause our business to suffer.
THE LOSS OF THE SERVICES OF ANY OF OUR EXECUTIVE OFFICERS OR KEY PERSONNEL WOULD
LIKELY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
Our future success depends to a significant extent on the efforts and
abilities of our senior management, particularly Timothy C. Choate, our
Chairman, President and Chief Executive Officer, and other key employees,
including our technical and sales personnel. The loss of the services of any of
these individuals could adversely affect our business. We may be unable to
attract, motivate and retain other key employees in the future. Competition for
employees in our industry is intense, and in the past we have experienced
difficulty in hiring qualified personnel. We do not have employment agreements
with any of our key personnel, nor do we have key-person insurance for any of
our employees.
IF WE ARE UNABLE TO INTEGRATE THE OPERATIONS FROM OUR ACQUISITIONS OF THE
CATALOG SITE AND WORLDWIDE BROCHURES WEB SITES OR FROM ANY FUTURE ACQUISITIONS,
OUR BUSINESS WILL SUFFER.
We may not be successful in integrating the operations from our two recent
acquisitions or from any future acquisitions. In May 1999, we acquired the
Catalog Site and Worldwide Brochures Web sites and related assets. These are our
first acquisitions, and we have limited experience with completing and
integrating acquisitions. We may be unable to integrate their offers into our
Web site and their operations into our existing business. Both of these Web
sites have earned their revenues based on advertising contracts that call for a
flat fee for the period of the contract. We intend to seek to transition these
flat fee contracts into contracts that call for the clients to pay us for leads
generated through our Web site. We cannot be certain that the acquired sites'
advertisers will agree to enter into lead generation contracts or that we will
be able to keep their business.
Our business strategy includes growth through acquisitions, so we expect to
pursue other acquisitions in the future. Our recent acquisitions and any future
acquisitions present many risks and uncertainties generally associated with
acquisitions, including:
- difficulties integrating operations, personnel, technologies, products
and information systems of acquired businesses;
- potential loss of key employees of acquired businesses;
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<PAGE> 12
- adverse effects on our reported results of operations from
acquisition-related charges and amortization of goodwill and purchased
technology;
- increased fixed costs, which could delay profitability;
- inability to maintain the key business relationships and the reputations
of acquired businesses;
- potential dilution to current shareholders from the issuance of
additional equity securities;
- inability to maintain our standards, controls, procedures and policies;
- responsibility for liabilities of companies we acquire; and
- diversion of management's attention from other business concerns.
IF WE ARE UNABLE TO DEVELOP AND MAINTAIN A POSITIVE BUSINESS RELATIONSHIP WITH
FINGERHUT OR INITIATE A RELATIONSHIP WITH FEDERATED, OUR BUSINESS COULD SUFFER.
If we fail to develop and maintain a positive relationship with Fingerhut
or to initiate a relationship with Federated, it could adversely affect our
business. We recently initiated a non-contractual direct marketing relationship
with Fingerhut that will include Web site links, advertising and package and
catalog inserts. Because Fingerhut only recently invested in us, and because
Federated only recently acquired Fingerhut, we do not know what benefits, if
any, we will receive from our relationship with Fingerhut or any future
relationship we may initiate with Federated or the degree to which, if any,
these relationships may impact our business. Both Fingerhut and Federated
operate independently of FreeShop and, subject to future contractual
obligations, each remains free to act in its own interest regardless of the
effect of its actions on us. In addition, although Fingerhut will retain a
substantial equity interest in us immediately following this offering, apart
from the exercise of its warrants, neither Fingerhut nor Federated has any
obligation to make equity or other capital resources available to us in the
future. Because no contractual relationship with Fingerhut currently exists,
should Fingerhut become dissatisfied with its relationship with us or decide to
change its general business strategy relating to the Internet, our relationship
with Fingerhut, and our ability to develop a relationship with Federated, could
be adversely affected. If Fingerhut were to decide to discontinue or curtail its
relationship with us, our reputation and our stock price could be adversely
affected.
AN INCREASE IN THE NUMBER OF VISITORS TO OUR WEB SITE MAY STRAIN OUR SYSTEMS,
AND WE ARE VULNERABLE TO OTHER SYSTEM MALFUNCTIONS.
Any serious or repeated problems with the performance of our Web site could
lead to the dissatisfaction of consumers or our marketer clients. The amount of
traffic on our Web site has increased over time to approximately 2.7 million
visitors in July 1999, and we are seeking to further increase traffic. The
systems that support our Web site must be able to accommodate an increased
volume of traffic. Although we believe our systems can currently accommodate
approximately 10 million visitors monthly, in the past, our Web site and the
Worldwide Brochures Web site have experienced slow response times and other
systems problems for a variety of reasons, including failure of our Internet
service providers, hardware failures and failure of software applications. In
these instances, our Web site was typically unavailable or slow for
approximately one and one-half to two hours. Although these failures did not
have a material adverse effect on our business, we may experience similar
problems in the future which would have a material adverse effect on our
business. See "Business -- Operations and Technology."
WE MAY FACE SYSTEM FAILURES RESULTING FROM YEAR 2000 RISKS.
Because many computer applications have been written using two digits
rather than four to define the applicable year, some date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
year 2000 problem could result in system failures or miscalculations causing
disruptions of operations, including disruptions of our Web site. We have
obtained
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<PAGE> 13
confirmation from all but three of our third-party vendors that they have
resolved their year 2000 issues. Until we have received responses from all of
these vendors and completed our testing, we will not know the extent of our
exposure to year 2000 risks. In addition, the systems and services provided by
these vendors may fail to be year 2000 compliant despite their representations
to the contrary. Failure of these systems or services to be year 2000 compliant
could result in a systemic failure beyond our control and prevent us from
delivering our services to our customers, prevent users from accessing our Web
site and decrease the use of the Internet generally. Our limited contingency
plans to address the year 2000 problem include replacing non-compliant vendors
and distributing our workload to servers located at various cities around the
country to minimize the risk of systems failure. However, we do not intend to
develop any further contingency plans. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Year 2000 Issues."
WE FACE INTENSE COMPETITION FROM MARKETING-FOCUSED COMPANIES FOR MARKETER
CLIENTS AND MAY BE UNABLE TO COMPETE SUCCESSFULLY.
We may be unable to compete successfully with current or future
competitors. We face intense competition from many companies, both traditional
and online, to provide marketing and advertising services for marketer clients.
Among the free offer Web sites, our primary competitors include Volition.com and
Free2try.com. Among the lead generation Web sites, our primary competitors are
eNews, Cataloglink and Catalogcity. We expect competition from online
competitors to increase significantly because there are no substantial barriers
to entry in our industry. Increased competition could result in price reductions
for online advertising space and marketing services, reduced gross margins and
loss of our market share.
Many of our existing competitors, as well as a number of potential new
competitors, have longer operating histories, greater name recognition, larger
customer bases and significantly greater financial, technical and marketing
resources than FreeShop. These advantages may allow them to respond more quickly
and effectively to new or emerging technologies and changes in customer
requirements. It may also allow them to engage in more extensive research and
development, undertake farther-reaching marketing campaigns, adopt more
aggressive pricing policies and make more attractive offers to potential
employees, strategic partners and advertisers. In addition, current and
potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their products or services to address the needs of our prospective marketer
clients.
Online marketing is a rapidly developing industry, and new types of
products and services may emerge that are more attractive to consumers and
marketers than the types of services we offer. As a result, it is possible that
new competitors may emerge and rapidly acquire significant market share. See
"Business -- Competition."
WE MAY NEED TO INCUR LITIGATION EXPENSES IN ORDER TO DEFEND OUR INTELLECTUAL
PROPERTY RIGHTS, AND MIGHT NEVERTHELESS BE UNABLE TO ADEQUATELY PROTECT THESE
RIGHTS.
We may need to engage in costly litigation to enforce our intellectual
property rights, to protect our trade secrets or to determine the validity and
scope of the intellectual property rights of others. We cannot assure you that
our efforts to prevent misappropriation or infringement of our intellectual
property will be successful. An adverse determination in any litigation of this
type could require us to make significant changes to the structure and operation
of our online services and features or to license alternative technology from
another party. Implementation of any of these alternatives could be costly and
time-consuming and may not be successful. Any intellectual property litigation
would likely result in substantial costs and diversion of resources and
management attention.
Our success largely depends on our trademarks, including Free Shop, and
internally developed technologies, including our email systems and our
collection, order processing and lead delivery systems, which we seek to protect
through a combination of trademark, copyright and trade secret laws. Protection
of our trademarks is crucial as we attempt to build our brand name and
reputation. Despite actions we take to protect our intellectual property rights,
it may be possible for third parties
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<PAGE> 14
to copy or otherwise obtain and use our intellectual property without
authorization or to develop similar technology independently. In addition, legal
standards relating to the validity, enforceability and scope of protection of
intellectual property rights in Internet-related businesses are uncertain and
still evolving. Although we are not currently engaged in any lawsuits for the
purpose of defending our intellectual property rights, we may need to engage in
such litigation in the future. Moreover, we may be unable to maintain the value
of our intellectual property rights in the future. See "Business -- Intellectual
Property."
IF THIRD PARTIES ACQUIRE DOMAIN NAMES THAT ARE SIMILAR TO OUR DOMAIN NAMES, THEY
COULD DECREASE THE VALUE OF OUR TRADEMARKS AND TAKE CUSTOMERS AWAY FROM OUR WEB
SITE.
We currently hold the Internet domain names "freeshop.com,"
"catalogsite.com" and "wwb.com," as well as various other related names. We may
be unable to prevent third parties from acquiring similar domain names, which
could reduce the value of our trademarks, potentially weaken our brand name and
take customers away from our Web site. Domain names generally are regulated by
Internet regulatory bodies. The regulation of domain names in the United States
and in foreign countries is subject to change in the near future. Regulatory
bodies could establish additional top-level domains, appoint additional domain
name registrars or modify the requirements for holding domain names. The
relationship between regulations governing domain names and laws protecting
trademarks and similar intellectual property rights is unclear. Therefore, we
may be unable to prevent third parties from acquiring domain names that infringe
on, or otherwise decrease the value of, our trademarks and other intellectual
property rights. We believe there are online companies in other countries using
domain names that potentially infringe on our trademarks. We may be unable to
prevent them from using these domain names, and this use may decrease the value
of our trademarks and our brand name.
WE MAY FACE LITIGATION AND LIABILITY FOR INFORMATION DISPLAYED ON OUR WEB SITE.
We may be subjected to claims for defamation, negligence, copyright or
trademark infringement and various other claims relating to the nature and
content of materials we publish on our Web site. These types of claims have been
brought, sometimes successfully, against online services in the past. We could
also face claims based on the content that is accessible from our Web site
through links to other Web sites. We have no insurance coverage for these types
of claims. Any litigation arising from these claims would likely result in
substantial costs and diversion of resources and management attention.
SECURITY AND PRIVACY BREACHES COULD SUBJECT US TO LITIGATION AND LIABILITY AND
DETER CONSUMERS FROM USING OUR WEB SITE.
We could be subject to litigation and liability if third parties penetrate
our network security or otherwise misappropriate our users' personal or credit
card information. This liability could include claims for unauthorized purchases
with credit card information, impersonation or other similar fraud claims. It
could also include claims for other misuses of personal information, such as for
unauthorized marketing purposes. In addition, the Federal Trade Commission and
other federal and state agencies have been investigating various Internet
companies in connection with their use of personal information. We could be
subject to investigations and enforcement actions by these or other agencies. In
addition, we rent customer names and street addresses to third parties. Although
we provide an opportunity for our customers to remove their names from our
rental list, we nevertheless may receive complaints from customers for these
rentals.
The need to transmit confidential information securely has been a
significant barrier to electronic commerce and communications over the Internet.
Any compromise of security could deter people from using the Internet in
general, or, specifically, from using the Internet to conduct transactions that
involve transmitting confidential information, such as purchases of goods or
services. Many marketers seek to offer their products and services on our Web
site because they want to encourage people to use the Internet to purchase their
goods or services. Internet security concerns could frustrate these efforts.
Also, our relationships with consumers may be adversely affected if the security
measures we
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<PAGE> 15
use to protect their personal information prove to be ineffective. We cannot
predict whether events or developments will result in a compromise or breach of
the technology we use to protect customers' personal information. We have no
insurance coverage for these types of claims.
Furthermore, our computer servers may be vulnerable to computer viruses,
physical or electronic break-ins and similar disruptions. We may need to expend
significant additional capital and other resources to protect against a security
breach or to alleviate problems caused by any such breaches. We may be unable to
prevent or remedy all security breaches. If any of these breaches occur, we
could lose marketing clients and visitors to our Web site.
WE MAY NEED ADDITIONAL FINANCING, AND OUR PROSPECTS FOR OBTAINING IT ARE
UNCERTAIN.
We may be unable to obtain necessary additional financing in the future.
Our business does not generate the cash necessary to fund our operations. We
currently anticipate that our available cash resources combined with the net
proceeds from this offering will be sufficient to meet our anticipated capital
expenditures and working capital requirements through the next twelve months.
Thereafter, we expect we will need to raise additional funds to develop or
enhance our services or products, fund expansion, respond to competitive
pressures or acquire businesses or technologies. Unanticipated expenses, poor
financial results or unanticipated opportunities that require financial
commitments could give rise to earlier financing requirements. If we raise
additional funds through the issuance of equity or convertible debt securities,
the percentage ownership of our existing shareholders would be reduced, and
these securities might have rights, preferences or privileges senior to those of
our common stock. Additional financing may not be available on terms favorable
to us, or at all. If adequate funds are not available or are not available on
acceptable terms, our ability to fund our expansion, take advantage of business
opportunities, develop or enhance services or products or otherwise respond to
competitive pressures would be significantly limited, and we might need to
significantly restrict our operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
RISKS RELATED TO OUR INDUSTRY
IF THE ACCEPTANCE OF ONLINE ADVERTISING AND DIRECT MARKETING DOES NOT CONTINUE
TO INCREASE, OUR BUSINESS WILL SUFFER.
The demand for online marketing may not develop to a level sufficient to
support our continued operations or may develop more slowly than we expect. We
expect to derive almost all of our revenues from contracts with marketer clients
under which we provide online marketing services through our Web site and email
newsletters. The Internet has not existed long enough as a marketing medium to
demonstrate its effectiveness relative to traditional marketing methods.
Marketers that have historically relied on traditional marketing methods may be
reluctant or slow to adopt online marketing. Many marketers have limited or no
experience using the Internet as a marketing medium. In addition, marketers that
have invested substantial resources in traditional methods of marketing may be
reluctant to reallocate these resources to online marketing. Those companies
that have invested a significant portion of their marketing budgets in online
marketing may decide after a time to return to more traditional methods if they
find that online marketing is a less effective method of promoting their
products and services than traditional marketing methods.
We do not know if accepted industry standards for measuring the
effectiveness of online marketing will develop. An absence of accepted standards
for measuring effectiveness could discourage companies from committing
significant resources to online marketing. There are a variety of pricing models
for marketing on the Internet. We cannot predict which, if any, will emerge as
the industry standard. Absence of such a standard makes it difficult to project
our future pricing and revenues.
Email marketing is also vulnerable to potential negative public perception
associated with unsolicited email, known as "spam." Although we do not send
unsolicited email, public perception, press reports or governmental action
related to spam could reduce the overall demand for email marketing in general
and our Club FreeShop email newsletters in particular.
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<PAGE> 16
IF WE ARE UNABLE TO ADAPT TO RAPID CHANGES IN THE ONLINE MARKETING INDUSTRY, OUR
BUSINESS WILL SUFFER.
Online marketing is characterized by rapidly changing technologies,
frequent new product and service introductions, short development cycles and
evolving industry standards. We may incur substantial costs to modify our
services or infrastructure to adapt to these changes and to maintain and improve
the performance, features and reliability of our services. We may be unable to
successfully develop new services on a timely basis or achieve and maintain
market acceptance.
WE FACE RISKS FROM POTENTIAL GOVERNMENT REGULATION AND OTHER LEGAL UNCERTAINTIES
RELATING TO THE INTERNET.
Laws and regulations that apply to Internet communications, commerce and
advertising are becoming more prevalent. The adoption of such laws could create
uncertainty in use of the Internet and reduce the demand for our services.
Recently, Congress enacted legislation regarding children's privacy on the
Internet. Additional laws and regulations may be proposed or adopted with
respect to the Internet, covering issues such as user privacy, freedom of
expression, pricing, content and quality of products and services, taxation,
advertising, intellectual property rights and information security. The passage
of legislation regarding user privacy or direct marketing on the Internet may
reduce demand for our services or limit our ability to provide customer
information to marketers. Furthermore, the growth of electronic commerce may
prompt calls for more stringent consumer protection laws. For example, the
European Union recently adopted a directive addressing data privacy that may
result in limits on the collection and use of consumer information. See
"Business -- Government Regulation." The adoption of consumer protection laws
that apply to online marketing could create uncertainty in Internet usage and
reduce the demand for our services.
In addition, we are not certain how our business may be affected by the
application of existing laws governing issues such as property ownership,
copyrights, encryption and other intellectual property issues, taxation, libel,
obscenity and export or import matters. It is possible that future applications
of these laws to our business could reduce demand for our services or increase
the cost of doing business as a result of litigation costs or increased service
delivery costs.
Our services are available on the Internet in many states and foreign
countries, and these states or foreign countries may claim that we are required
to qualify to do business in their jurisdictions. Currently, we are qualified to
do business only in Washington, Minnesota and California. Our failure to qualify
in other jurisdictions if we were required to do so could subject us to taxes
and penalties and could restrict our ability to enforce contracts in those
jurisdictions.
RISKS RELATED TO THIS OFFERING
WE WILL HAVE BROAD DISCRETION IN THE USE OF THE PROCEEDS FROM THIS OFFERING, AND
THERE IS A RISK THAT WE MIGHT USE THE PROCEEDS INEFFECTIVELY.
We will have broad discretion over how we use the offering proceeds, and we
could spend the proceeds in ways with which you might not agree. We cannot
assure you that we will use these proceeds effectively. We plan to use the
proceeds of this offering for marketing, working capital and for general
corporate purposes. We have not determined how we will allocate proceeds among
these uses. Our business strategy includes growth through acquisitions, and we
may use a substantial portion of the offering proceeds to buy businesses we have
not yet identified. See "Use of Proceeds."
VIRTUALLY ALL OF OUR SHARES WILL BE ELIGIBLE FOR SALE SHORTLY AFTER THIS
OFFERING, WHICH COULD RESULT IN A DECLINE IN OUR STOCK PRICE.
If our shareholders sell substantial amounts of common stock in the public
market following this offering, the market price of our common stock could fall.
These sales also might make it more difficult for us to sell equity or
equity-related securities in the future at a time and price that we deem
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<PAGE> 17
appropriate. Based on shares outstanding as of July 31, 1999, upon completion of
this offering, we will have 14,955,155 shares of common stock outstanding. Of
these shares, the 3,200,000 shares being offered in this prospectus will be
freely tradable, and the remaining 11,755,155 shares will become eligible for
sale in the public market as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
- ---------------- ----
<C> <S>
126,030..... , 1999 (the date of this prospectus)
133,993..... , 1999 (90 days after the date of this prospectus)
7,836,344... , 2000 (180 days after the date of this prospectus)
3,658,788... At various times thereafter upon the expiration of one-year
holding periods
</TABLE>
This table reflects "lock up agreements" in which the holders of
approximately 11,495,132 shares have agreed not to offer or sell their shares
until 180 days after the date of this prospectus, without the consent of
Deutsche Bank Securities Inc.
In addition, shortly after the effective date of this offering, we expect
to register for sale up to 2,400,000 shares of common stock reserved for
issuance under the 1997 Stock Option Plan. As of July 31, 1999, options to
purchase 953,289 shares of common stock were outstanding. Shares acquired upon
exercise of these options will be eligible for sale in the public market from
time to time, subject to vesting. Holders of 89.7% of outstanding option shares
are subject to 180-day lockup restrictions that apply to the outstanding stock.
These stock options generally have exercise prices significantly below the
expected initial public offering price of our common stock. Also, at the
completion of this offering, we will have 27,700 shares of common stock issuable
upon the exercise of outstanding warrants. The possible sale of a significant
number of these shares may cause the price of our common stock to decline.
Neither Fingerhut, Timothy C. Choate nor John P. Ballantine, who in the
aggregate beneficially own approximately 68.9% of our capital stock as of July
31, 1999, are restricted from selling any of their FreeShop securities, other
than as provided in lock-up agreements with Deutsche Bank Securities Inc., a
stockholders agreement and under applicable securities laws. Also, shareholders
and warrant holders holding securities that represent approximately 5,184,175
shares of common stock may have the right to include their shares in
registration statements relating to our securities. By exercising their
registration rights and causing a large number of shares to be registered and
sold in the public market, these holders could cause the price of the common
stock to decline. See "Management -- Director Compensation," "-- Stock Option
Plan," "Description of Capital Stock -- Registration Rights" and "Shares
Eligible for Future Sale."
OUR SECURITIES HAVE NO PRIOR MARKET AND WE CANNOT PREDICT WHETHER AN ACTIVE
TRADING MARKET WILL DEVELOP.
There has not been a public market for our common stock. We cannot predict
the extent to which investor interest in our common stock will lead to the
development of an active trading market or how liquid that market might become.
The initial public offering price for the shares will be determined by
negotiations between us and the representatives of the underwriters and may not
be indicative of prices that will prevail in the trading market. See
"Underwriting."
THE PRICE OF OUR COMMON STOCK AFTER THIS INITIAL PUBLIC OFFERING IS LIKELY TO BE
VOLATILE AND MAY FALL BELOW THE INITIAL PUBLIC OFFERING PRICE.
The stock market has experienced significant price and volume fluctuations,
and the market prices of securities of Internet-related companies have been
particularly volatile. Investors may be unable to resell their shares at or
above the initial public offering price. In the past, companies that have
experienced volatility in the market price of their stock have been subject to
securities class action litigation. A securities class action lawsuit against us
could result in substantial costs and a diversion of management's attention and
resources.
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EXISTING SHAREHOLDERS WILL BE ABLE TO EXERCISE CONTROL OF OUR COMMON STOCK AND
MAY MAKE DECISIONS THAT ARE NOT IN THE BEST INTERESTS OF ALL SHAREHOLDERS.
Insider control of a large amount of our common stock could have an adverse
effect on the market price of our common stock. At the completion of this
offering, Fingerhut will own approximately 34.3% of the outstanding shares of
our common stock. In addition, following this offering, our founders, Messrs.
Choate and Ballantine, will beneficially own or control approximately 26.2% of
the outstanding shares of our common stock, and our executive officers and
directors, including Messrs. Choate and Ballantine, will beneficially own or
control approximately 27.6% of the outstanding shares of our common stock.
Although they are under no obligation to do so, if our officers, directors,
founders, their affiliates and Fingerhut were to vote together they would have
the ability to control the election of our board of directors and the outcome of
corporate actions requiring shareholder approval, including mergers and other
changes of corporate control, going private transactions and other extraordinary
transactions. This concentration of ownership may have the effect of delaying or
preventing a change of control of FreeShop, even if this change of control would
benefit shareholders.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements based on our current
expectations, assumptions, estimates and projections about our business and
industry. These forward-looking statements involve risks and uncertainties. Our
actual results could differ materially from those anticipated in such
forward-looking statements as a result of numerous factors, as more fully
described in "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" and elsewhere in this
prospectus. You should not unduly rely on these forward-looking statements,
which apply only as of the date of this prospectus.
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<PAGE> 19
USE OF PROCEEDS
We estimate the net proceeds from the sale of the 3,200,000 shares of
common stock offered hereby at an assumed initial public offering price of
$11.00 per share, after deducting the underwriting discounts and commissions and
estimated offering expenses, will be $32.0 million, or $36.9 million if the
underwriters' over-allotment option is exercised in full.
We intend to use at least $20.0 million of the net proceeds from this
offering to significantly expand marketing and brand name promotion spending
over the next twelve months. We expect to use the remaining net proceeds of this
offering for other general corporate purposes, including working capital and
capital expenditures, and also for possible acquisitions of complementary
businesses and technologies that extend the depth and breadth of our offerings
on our Web site or increase the capability of our Web site. We have no current
understandings, commitments or agreements with respect to any material
acquisitions. Pending such uses, we will invest the net proceeds of this
offering in short-term, interest-bearing, investment-grade securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock and
do not anticipate paying any cash dividends on our capital stock in the
foreseeable future. We may incur indebtedness in the future that may prohibit or
effectively restrict the payment of dividends, although we have no current plans
to do so.
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<PAGE> 20
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999,
- on an actual basis;
- on a pro forma basis to reflect
(1) the issuance of series B convertible preferred stock upon the
exercise of warrants,
(2) the issuance of 8,820 additional shares of convertible preferred
stock, and
(3) the conversion of all series B convertible preferred stock into
shares of common stock not later than the completion of this
offering; and
- on a pro forma as adjusted basis to reflect the estimated net proceeds
from the sale of 3,200,000 shares of common stock in this offering at an
assumed initial public offering price of $11.00 per share, after
deducting underwriting discounts and commissions and estimated offering
expenses.
<TABLE>
<CAPTION>
AS OF
JUNE 30, 1999
(UNAUDITED)
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Current portion of long-term obligations.................... $ 122 $ 122 $ 122
======= ======= =======
Long-term obligations, less current portion................. $ 81 $ 81 $ 81
------- ------- -------
Shareholders' equity:
Preferred stock, undesignated, no par value; 6,814,516
shares authorized and no shares issued and outstanding
actual, pro forma and pro forma as adjusted(1)......... -- -- --
Series A convertible preferred stock, no par value;
1,935,484 shares authorized and issued; no shares
outstanding, actual, pro forma and pro forma as
adjusted(2)............................................ -- -- --
Series B convertible preferred stock, no par value;
1,250,000 shares authorized, 472,608 issued and
outstanding, actual; 1,250,000 shares authorized, no
shares issued or outstanding pro forma and pro forma as
adjusted(3)............................................ 8,615 -- --
Common stock, no par value, 40,000,000 shares authorized;
8,923,287 issued and 8,243,287 outstanding, 12,435,155
issued and 11,755,155 outstanding and 15,635,155 issued
and 14,955,155 outstanding, actual, pro forma and pro
forma as adjusted, respectively(4)..................... 8,956 26,450 58,436
Additional paid-in capital................................ 1,976 1,976 1,976
Deferred stock compensation............................... (1,076) (1,076) (1,076)
Accumulated deficit....................................... (9,964) (9,964) (9,964)
------- ------- -------
Total shareholders' equity............................. 8,507 17,386 49,372
------- ------- -------
Total capitalization.............................. $ 8,588 $17,467 $49,453
======= ======= =======
</TABLE>
- ---------------
(1) Ten million shares of undesignated preferred stock are authorized, of which
1,935,484 shares were designated as series A convertible preferred stock and
1,250,000 shares were designated as series B convertible preferred stock.
(2) Shares of series A convertible preferred stock were issued on June 30, 1997.
On July 18, 1997, all of the shares of series A convertible preferred stock
were converted into common stock.
(3) The shares of series B convertible preferred stock were designated on May
21, 1999. As of June 30, 1999, 472,608 shares have been issued pursuant to
the exercise of warrants. Prior to the completion of this offering, 396,539
additional shares of series B convertible preferred stock will be issued
pursuant to the exercise of warrants and 8,820 shares of series B
convertible preferred stock will be issued and sold. Upon completion of this
offering each share of series B convertible preferred stock will be
converted into four shares of common stock.
(4) Based on the number of shares outstanding as of June 30, 1999. Excludes
953,289 shares of common stock issuable upon the exercise of options then
outstanding with a weighted average exercise price of $1.50 per share, and
27,700 shares of common stock issuable upon exercise of warrants then
outstanding with a weighted average exercise price of $1.19 per share. See
"Management -- Stock Option Plan" and Note 10 to FreeShop's audited
financial statements included in this prospectus.
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<PAGE> 21
DILUTION
The pro forma net tangible book value of FreeShop as of June 30, 1999, was
approximately $14,889,000, or $1.27 per share of common stock. Pro forma net
tangible book value per share represents the amount of total pro forma tangible
assets less total pro forma liabilities, divided by the number of shares of
common stock outstanding on a pro forma basis after giving effect to the
conversion of the Series B convertible preferred stock into 3,511,868 shares of
common stock concurrent with the closing of this offering. After giving effect
to the sale of shares of common stock offered by FreeShop at an assumed initial
public offering price of $11.00 per share and after deducting underwriting
discounts and commissions and estimated offering expenses, the pro forma net
tangible book value of FreeShop as of June 30, 1999 would have been $3.13 per
share of common stock. This represents an immediate increase in pro forma net
tangible book value of $1.86 per share to existing shareholders and an immediate
dilution of $7.87 per share to new investors. The following table illustrates
this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $ 11.00
Pro forma net tangible book value per share before this
offering............................................... $ 1.27
Increase per share attributable to new investors.......... 1.86
------
Pro forma net tangible book value per share after this
offering.................................................. 3.13
--------
Dilution per share to new investors......................... $ 7.87
========
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1999,
the differences between existing shareholders and new investors with respect to
the number of shares of common stock purchased from FreeShop, the total
consideration paid to FreeShop and the average price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- --------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders......................... 11,755,155 78.6% $26,450,036 42.9% $ 2.25
New investors................................. 3,200,000 21.4 35,200,000 57.1 11.00
---------- ----- ----------- ----- ------
Total.................................... 14,955,155 100.0% $61,650,036 100.0% $ 4.12
========== ===== =========== ===== ======
</TABLE>
The foregoing discussion and tables assume no exercise of any stock options
outstanding as of June 30, 1999. As of June 30, 1999, there were options
outstanding to purchase a total of 953,289 shares of common stock with a
weighted average exercise price of $1.50 per share and warrants outstanding to
purchase a total of 27,700 shares of common stock with a weighted average
exercise price of $1.19 per share. To the extent that any of the options or
warrants are exercised, there will be further dilution to new investors. See
"Management -- Stock Option Plan" and Note 10 to FreeShop's audited financial
statements included in this prospectus.
20
<PAGE> 22
SELECTED UNAUDITED PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following unaudited pro forma statement of operations data reflects the
acquisitions of the Catalog Site and Worldwide Brochures Web sites and related
assets as if they had occurred on January 1, 1998. The following unaudited pro
forma financial data is presented for informational purposes only and has been
derived from the unaudited pro forma financial statements and accompanying notes
appearing in this prospectus and should be read in conjunction with those
financial statements. The selected unaudited pro forma financial data does not
purport to be indicative of future operations and should not be construed as
representative of future operations of the combined businesses. See Notes 7 and
8 to FreeShop's unaudited pro forma combined financial information for a
description of the method we used to compute our basic and diluted net loss per
share of common stock.
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
YEAR ENDED SIX MONTHS ENDED
DEC. 31, 1998 JUNE 30, 1999
----------------- ------------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................................. $ 1,893 $ 2,381
Cost of revenues.......................................... 438 246
----------- -------
Gross profit........................................... 1,455 2,135
Operating expenses:
Sales and marketing.................................... 3,269 4,197
Research and development............................... 387 321
General and administrative............................. 605 598
Equity based compensation.............................. 174 622
Depreciation and amortization.......................... 1,253 552
----------- -------
Total operating expenses.......................... 5,688 6,290
Operating loss............................................ (4,233) (4,155)
Interest expense.......................................... 66 24
Other (income) expense.................................... (3) (87)
----------- -------
Net loss.................................................. $ (4,296) $(4,092)
=========== =======
Basic and diluted net loss per common share............... $ (0.68) $ (0.50)
=========== =======
Shares used to compute basic and diluted net loss per
common share........................................... 6,277 8,219
Pro forma basic and diluted net loss per common share..... $ (0.68) $ (0.46)
=========== =======
Pro forma shares used to compute pro forma basic and
diluted net loss per common share...................... 6,277 8,858
</TABLE>
21
<PAGE> 23
SELECTED ACTUAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected actual financial data are qualified in their
entirety by reference to, and you should read them in conjunction with,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and FreeShop's audited financial statements and accompanying notes
appearing in this prospectus. We have derived the statements of operations data
for December 31, 1998 from our audited financial statements that appear in this
prospectus, and this data is qualified by reference to the financial statements.
Prior to June 30, 1997, FreeShop's business operations were conducted as a
division of Online Interactive. On June 30, 1997, Online Interactive contributed
the FreeShop division to its wholly owned subsidiary, FreeShop International,
which began operating as an independent entity with a fiscal year end of
December 31. The statements of operations and balance sheet information for the
three fiscal years ended June 30, 1995, 1996 and 1997 reflect the data of the
FreeShop division of Online Interactive. The statements of operations and
balance sheet information for the six months ended December 31, 1997, the fiscal
year ended December 31, 1998 and the six month periods ended June 30, 1998 and
June 30, 1999 reflect data compiled since FreeShop began operating as an
independent entity. See Note 1 to Freeshop's audited financial statements
included in this prospectus.
<TABLE>
<CAPTION>
FREESHOP DIVISION
OF ONLINE INTERACTIVE, INC. FREESHOP
---------------------------- --------------------------------------------------------------
SIX MONTHS 12 MONTHS YEAR SIX MONTHS ENDED
YEAR ENDED JUNE 30, ENDED ENDED ENDED JUNE 30,
---------------------------- DEC. 31, DEC. 31, DEC. 31, -----------------
1995 1996 1997 1997 1997(1) 1998 1998 1999
-------- ------- ------- ------------ ------------ ------------ ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................ $ 313 $ 1,271 $ 1,198 $ 535 $ 1,037 $ 1,251 $ 429 $ 2,147
Cost of revenues................ 85 310 314 140 259 217 76 190
-------- ------- ------- ------- ------- ------- ------- -------
Gross profit.................. 228 961 884 395 778 1,034 353 1,957
Operating expenses:
Sales and marketing........... 134 624 1,810 1,175 2,225 3,088 1,030 4,141
Research and development...... 2 65 135 182 259 387 194 322
General and administrative.... 126 291 353 83 298 417 172 462
Equity-based compensation..... -- -- -- 63 64 174 122 622
Depreciation and
amortization................ -- 9 30 35 52 104 49 260
-------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses................ 262 989 2,328 1,538 2,898 4,170 1,567 5,807
Operating loss.................. (34) (28) (1,444) (1,143) (2,120) (3,136) (1,214) (3,850)
Interest expense................ -- -- -- 6 6 66 28 23
Other (income) expense.......... -- -- -- 0 0 (3) 1 (87)
-------- ------- ------- ------- ------- ------- ------- -------
Net loss........................ $ (34) $ (28) $(1,444) $(1,149) $(2,126) $(3,199) $(1,243) $(3,786)
======== ======= ======= ======= ======= ======= ======= =======
Basic and diluted net loss per
common share.................. $ (0.01) $ (0.01) $ (0.31) $ (0.22) $ (0.51) $ (0.21) $ (0.46)
======== ======= ======= ======= ======= ======= =======
Shares used to compute basic and
diluted net loss per common
share......................... 4,601 4,601 4,601 5,189 6,224 5,822 8,183
Pro forma basic and diluted net
loss per common share(2)...... $ (0.51) $ (0.43)
======= =======
Pro forma shares used to compute
pro forma basic and diluted
net loss per common
stock(2)...................... 6,224 8,821
</TABLE>
22
<PAGE> 24
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF DEC. 31,
---------------------------- --------------------------- AS OF JUNE 30,
1995 1996 1997 1997 1998 1999
-------- ------- ------- ------------ ------------ ------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents...... $ -- $ -- $ -- $ 26 $ 2,892 $ 4,330
Working capital (deficiency)... 3 80 322 (158) 2,014 5,190
Total assets................... 48 207 536 645 3,687 10,613
Long-term obligations, less
current portion.............. -- -- 5 160 195 81
Total shareholders' equity..... 8 105 432 82 2,244 8,507
</TABLE>
- ---------------
(1) The financial information presented for the 12 months ended December 31,
1997 is an unaudited 12 month period prepared by our management for
comparative purposes only.
(2) Pro Forma net loss per share is computed using the weighted average number
of common shares outstanding, including the pro forma effects of the
automatic conversion of FreeShop's series B convertible preferred stock into
shares of FreeShop's common stock effective upon the closing of this
offering as if the conversion occurred on the date the shares were
originally issued.
23
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We began our direct marketing business in 1994 as the FreeShop division of
Online Interactive, Inc., a company founded by Timothy C. Choate and John P.
Ballantine. In addition to operating the FreeShop division, Online Interactive
was also engaged in the business of selling software over the Internet. In July
1997, Micro Warehouse, Inc., a catalog retailer and direct marketer of
computers, software and related products, purchased all of the stock of Online
Interactive from its shareholders. Before the purchase was completed, Online
Interactive transferred the FreeShop division to FreeShop International, Inc., a
newly formed, wholly owned subsidiary and spun off FreeShop International
through a distribution to its shareholders. On February 19, 1999, FreeShop
International changed its name to FreeShop.com, Inc.
We began our online marketing operations in 1994 through a relationship
with Prodigy Communications Corporation, a proprietary online service. In 1995,
we also began a marketing relationship with America Online, Inc., another
proprietary online service. We came to believe proprietary online environments,
which provide content exclusively to their fee-paying members, were limiting our
ability to develop the FreeShop brand and to access the growing number of people
using the Internet. As a result, we terminated our relationship with Prodigy in
August 1997 and our relationship with America Online in March 1998. Since March
1998, we have focused exclusively on our FreeShop.com Web site.
With the Micro Warehouse purchase of Online Interactive in July 1997, Mr.
Choate joined Micro Warehouse as a vice president. In March 1998, Mr. Choate
rejoined FreeShop as chief executive officer and began initiatives to expand our
sources of revenue beyond our primary business of lead generation by offering
multiple advertising vehicles, such as banner advertising, site sponsorships and
sponsorships of our Club FreeShop email newsletters. We also increased our
efforts to expand consumer awareness of and visits to our Web site. We have
continued our efforts to improve the attractiveness to consumers of the
FreeShop.com Web site and to develop technology to improve our ability to offer
services to clients and to monitor and manage our Web site.
We derive our revenues primarily from online lead generation and
advertising contracts. We receive lead generation revenues when we deliver
customer information to a marketer in connection with an offer on our Web site.
We receive advertising revenues from sales of banner advertising, site
sponsorships and newsletter sponsorships. We also derive a small portion of our
lead generation revenues from the rental of customer names and street addresses
to third parties. Lead generation pricing is based on cost per lead and varies
depending on the type of offer. Generally, pricing of advertising is based on
cost per impression or per click through. The services we deliver are primarily
sold under short-term agreements that are subject to cancellation. We recognize
revenues in the period in which we deliver the service. See "Business -- Client
Services" and Note 2 to FreeShop's audited financial statements included in this
prospectus.
Our ten largest clients accounted for 25.0% of our revenues in the year
ended December 31, 1998 and 29.1% of our revenues in the six months ended June
30, 1999. No single client accounted for more than 6.7% of our revenues in the
six months ended June 30, 1998, 3.8% of our revenues in the year ended December
31, 1998 or 8.3% of revenues in the six months ended June 30, 1999.
In December 1998, Fingerhut invested $4.0 million in our business and
received common stock and warrants. As of June 30, 1999, Fingerhut had exercised
warrants for an additional investment of $8.6 million. Pursuant to the terms of
a letter agreement and an escrow agreement, Fingerhut has agreed to exercise the
remainder of its warrants for an additional investment of
24
<PAGE> 26
$8.9 million if this offering is completed on or before October 31, 1999.
Assuming the exercise of the warrants and conversion of the series B convertible
preferred stock, Fingerhut will hold approximately 43.7% of the common stock
immediately prior to the completion of this offering. Fingerhut's investments
have given us more resources to accelerate the growth of our business and have
permitted us to add experienced management, marketing and technical personnel.
Apart from the exercise by Fingerhut of these warrants, however, Fingerhut has
no obligation to make equity or other capital resources available to us in the
future. See "Business -- Strategy" and "Related Party Transactions."
Part of our strategy involves growth through the acquisition of businesses
that will expand our offerings to consumers and our services to marketers. In
May 1999, we purchased the Web sites and related assets of two companies,
Commonsite LLC, whose Catalog Site Web site offers more than 200 catalogs, and
Travel Companions International, Inc., whose Worldwide Brochures Web site offers
consumers more than 15,000 free travel brochures. Revenues generated by the
Catalog Site and Worldwide Brochures Web sites primarily come from flat-fee
advertising contracts. We intend to transition these advertising contracts to
lead generation contracts. We accounted for these acquisitions as asset
purchases and have included the results of the acquired businesses in our
financial statements from the date we completed the acquisitions. These
acquisitions resulted in the allocation of $2.7 million to goodwill and other
intangible assets in May 1999. We are amortizing these intangible assets over
periods ranging from one to five years. We have included unaudited pro forma
combined financial information in this prospectus reflecting these acquisitions
as if the acquisitions had occurred on January 1, 1998. Pro forma revenues were
$2.4 million for the six months ended June 30, 1999 and $1.9 million for the
year ended December 31, 1998. See our unaudited pro forma combined financial
statements, the Commonsite audited financial statements and the Travel
Companions International audited financial statements included in this
prospectus.
Our business has been operating at a loss and generating negative cash flow
since inception. As of June 30, 1999, we had accumulated losses of approximately
$9.6 million. After the completion of this offering, we plan to increase further
the level of our investment in marketing and promotion, development of
technology and expansion of our business. As a result, our losses and negative
cash flow are likely to continue to increase.
RESULTS OF OPERATIONS
We changed our fiscal year end from June 30 to December 31 in connection
with our spin off from Online Interactive in June 1997. Due to this change, we
believe comparison of the year ended December 31, 1998 to the six months ended
December 31, 1997 is not appropriate. Therefore, management prepared financial
information for the 12-month period ended December 31, 1997 for the purposes of
comparison only. The following discussion compares the results of operations for
the year ended December 31, 1998 to the unaudited 12-month period ended December
31, 1997 and compares the results of operations for the year ended June 30, 1997
to the year ended June 30, 1996.
Our financial statements for the years ended June 30, 1996 and 1997 reflect
the assets and liabilities and the revenues, expenses and cash flow of the
FreeShop division of Online Interactive. Certain expenses of Online Interactive
were allocated to us on a basis we believe reflects a reasonable allocation of
expenses to present FreeShop as a stand-alone company. See Note 1 to FreeShop's
audited financial statements included in this prospectus.
25
<PAGE> 27
The following table sets forth statement of operations data for the periods
indicated as a percentage of revenues:
<TABLE>
<CAPTION>
YEAR ENDED 12 MONTHS YEAR SIX MONTHS ENDED
JUNE 30, ENDED ENDED JUNE 30,
--------------- DEC. 31, DEC. 31, ----------------
1996 1997 1997(1) 1998 1998 1999
----- ------ ------------ ---------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues....................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues............... 24.4 26.2 25.0 17.3 17.6 8.8
----- ------ ------ ------ ------ ------
Gross profit................. 75.6 73.8 75.0 82.7 82.4 91.2
Operating expenses:
Sales and marketing.......... 49.1 151.1 214.7 246.9 240.1 192.9
Research and development..... 5.1 11.3 25.0 30.9 45.2 15.0
General and administrative... 22.9 29.5 28.7 33.4 40.1 21.5
Equity-based compensation.... 0.0 0.0 6.1 13.9 28.6 29.0
Depreciation and
amortization.............. 0.7 2.5 5.0 8.3 11.4 12.1
----- ------ ------ ------ ------ ------
Total operating
expenses................ 77.8 194.4 279.5 333.4 365.4 270.5
----- ------ ------ ------ ------ ------
Operating loss................. (2.2) (120.6) (204.5) (250.7) (283.0) (179.3)
Interest expense............... 0.0 0.0 0.7 5.2 6.6 1.1
Other (income) expense......... 0.0 0.0 0.0 (0.2) 0.2 (4.1)
----- ------ ------ ------ ------ ------
Net loss....................... (2.2)% (120.6)% (205.2)% (255.7)% (289.8)% (176.3)%
===== ====== ====== ====== ====== ======
</TABLE>
- ---------------
(1) The financial information for the 12-months ended December 31, 1997 is an
unaudited 12 month period prepared by our management for comparative
purposes only.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
Revenues. We derive our revenues primarily from online lead generation and
advertising contracts. Our revenues increased by $1.7 million, or 400%, to $2.1
million in the six months ended June 30, 1999, compared to $429,000 in the six
months ended June 30, 1998. This growth in revenue was attributable to the
introduction of advertising revenue in June 1998 and an increase in the number
of visits to our site, which increased lead generation revenues. We introduced
advertising, including banner ads, site sponsorships and newsletter
sponsorships, in the second and third quarters of 1998. Revenues from
advertising services were $839,000 in the six months ended June 30, 1999,
compared to $13,000 in the six months ended June 30, 1998. Over the same period,
lead generation revenues increased to $1.3 million from $416,000.
Cost of revenues. Cost of revenues consists of expenses associated with the
production and usage of the FreeShop.com Web site, including Internet connection
charges, banner ad serving fees, equipment and software depreciation and
personnel costs. Cost of revenues increased to $190,000 in the six months ended
June 30, 1999 from $76,000 in the six months ended June 30, 1998. The increase
was primarily due to costs related to additional Internet connection capacity
and personnel costs to support our growth. Gross margin increased to 91.2% in
the six months ended June 30, 1999, from 82.4% in the six months ended June 30,
1998. This increase in gross margin was primarily due to cost of revenues
increasing at a lesser rate than revenues.
Sales and marketing. Sales and marketing expenses consist primarily of
marketing and promotional costs related to developing our brand, as well as
personnel and other costs. Sales and marketing expenses increased by $3.1
million, or 302%, to $4.1 million in the six months ended June 30, 1999,
compared to $1.0 million in the six months ended June 30, 1998. The increase was
due to a $1.9 million, or 626%, increase in advertising and brand awareness
spending and a $726,000, or 131%, increase in personnel costs. We expect to
continue to increase our advertising and brand awareness spending in the future.
As a percentage of
26
<PAGE> 28
revenues, sales and marketing expenses decreased to 192.9% in the six months
ended June 30, 1999, from 240.1% in the six months ended June 30, 1998. This
decrease was primarily due to sales and marketing expenses (other than
advertising spending) increasing at a lesser rate than revenues.
Research and development. Research and development expenses primarily
include personnel costs related to maintaining and enhancing the features,
content and functionality of our Web site and related systems. Research and
development expenses increased by $128,000, or 66%, to $322,000 in the six
months ended June 30, 1999, compared to $194,000 in the six months ended June
30, 1998. The increase was primarily due to hiring additional staff to support
our growth. As a percentage of revenues, research and development expenses
decreased to 15% in the six months ended June 30, 1999, from 45.2% in the six
months ended June 30, 1998. The decrease was primarily due to research and
development expenses increasing at a lesser rate than revenues.
General and administrative. General and administrative expenses primarily
consist of management, financial and administrative personnel expenses and
related costs and professional service fees. General and administrative expenses
increased by $290,000, or 169%, to $462,000 in the six months ended June 30,
1999, compared to $172,000 in the six months ended June 30, 1998. The increase
was primarily due to increased personnel costs and professional service fees
necessary to support our growth. As a percentage of revenues, general and
administrative expenses decreased to 21.5% in the six months ended June 30,
1999, from 40.1% in the six months ended June 30, 1998. The decrease is
primarily due to general and administrative expenses increasing at a lesser rate
than revenues.
Equity-based compensation. Equity-based compensation expenses consist of
amortization of unearned compensation recognized in connection with stock
options and recognition of expenses when our principal shareholders sell our
stock to employees at a price below the estimated fair market value of our
common stock. Unearned compensation is recorded based on the intrinsic value
when we issue stock options to employees at an exercise price below the
estimated fair market value of our common stock at the date of grant. Unearned
compensation is also recorded based on the fair value of the option granted as
calculated using the Black-Scholes option pricing model when options or warrants
are issued to directors, advisors, and other service providers. Unearned
compensation is amortized over the vesting period of the option or warrant.
Equity-based compensation expenses increased by $500,000, or 410%, to $622,000
in the six months ended June 30, 1999, compared to $122,000 in the six months
ended June 30, 1998. This increase resulted primarily from recognition of
$406,000 of expenses related to the sale of securities to an employee by a
principal shareholder at a price below the estimated fair market value as an
inducement for the employee to come to work for FreeShop. As a percentage of
revenue, equity-based compensation expenses increased to 29.0% in the six months
ended June 30, 1999, from 28.6% in the six months ended June 30, 1998.
Depreciation and amortization. Depreciation and amortization expenses
consist of depreciation on leased and owned computer equipment, software, office
equipment and furniture and amortization on intellectual property, non-compete
agreements and goodwill from acquisitions. Depreciation and amortization
expenses increased by $211,000, or 431%, to $260,000 in the six months ended
June 30, 1999, compared to $49,000 in the six months ended June 30, 1998. This
increase resulted from the depreciation of approximately $700,000 in furniture
and equipment acquired from July 1998 through June 1999 and the amortization of
approximately $2.7 million in intangible assets related to the acquisition of
substantially all of the assets of Commonsite, LLC and Travel Companions
International, Inc. As a percentage of revenue, depreciation and amortization
expenses increased to 12.1% in the six months ended June 30, 1999, from 11.4% in
the six months ended June 30, 1998.
27
<PAGE> 29
Interest expense. Interest expense primarily relates to capital equipment
leases, and totaled $28,000 in the six months ended June 30, 1999 and $23,000 in
the six months ended June 30, 1998.
Other (income) expense. Other (income) expense consists primarily of
interest income. Interest income increased to $87,000 in the six months ended
June 30, 1999 from no interest income in the six months ended June 30, 1998, due
to higher cash balances resulting from the investment by Fingerhut in December
1998.
Income taxes. No provision for federal income taxes has been recorded for
any of the periods presented. As of June 30, 1999, we had approximately $7.3
million of federal net operating loss carryforwards that are available to offset
future taxable income; these carryforwards expire in various years beginning in
2012, if not previously utilized. We expect that Fingerhut will increase its
ownership of our common stock prior to the completion of this offering which
will limit, under the Tax Reform Act of 1986, the amounts of and benefits from
our net operating loss carryforwards. Based on preliminary estimates, we believe
the effect of such limitation, if imposed, will not have a material adverse
effect on our business, results of operations and financial condition.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO UNAUDITED 12 MONTHS ENDED DECEMBER 31,
1997
Revenues. Our revenues increased by $214,000, or 21%, to $1.3 million in
the year ended December 31, 1998, compared to $1.0 million in the 12-months
ended December 31, 1997. The growth in revenue in 1998 was primarily
attributable to the introduction of new revenue streams. We introduced
advertising, including banner ads, site sponsorships and newsletter sponsorships
in the second and third quarters of 1998. Revenues from advertising were
$288,000 in 1998, compared to no advertising revenues in 1997. Revenues from
lead generation were $963,000 in 1998, compared to $1.0 million in 1997. The
overall growth in revenues was partially offset by a reduction in lead
generation revenues resulting from the termination of our relationships with
Prodigy in August 1997 and America Online in March 1998.
Cost of revenues. Cost of revenues decreased to $217,000 in 1998 from
$259,000 in 1997. The decrease in cost of revenues was primarily due to lower
access charges for the Internet compared to the proprietary Prodigy and America
Online environments. As a result, gross margin increased to 82.7% in 1998, from
75.0% in 1997.
Sales and marketing. Sales and marketing expenses increased by $863,000, or
39%, to $3.1 million in 1998, compared to $2.2 million in 1997. The increase was
primarily due to a $988,000, or 405%, increase in advertising and brand
awareness spending which was partially offset by reduced contract labor
spending. As a percentage of revenues, sales and marketing expenses increased to
246.8% in 1998, from 214.6% in 1997.
Research and development. Research and development expenses increased by
$128,000, or 49%, to $387,000 in 1998, compared to $259,000 in 1997. The
increase was primarily due to hiring of additional staff to support our growth.
As a percentage of revenues, research and development expenses increased to
30.9% in 1998 from 25.0% in 1997.
General and administrative. General and administrative expenses increased
by $119,000, or 40%, to $417,000 in 1998, compared to $298,000 in 1997. The
increase was primarily a result of increased personnel costs and professional
service fees necessary to support our growth. As a percentage of revenues,
general and administrative expenses increased to 33.4% in 1998, from 28.7% in
1997.
Equity-based compensation. Equity-based compensation expenses increased by
$110,000, or 172%, to $174,000 in 1998, compared to $64,000 in 1997. This
increase resulted primarily from option grants made to advisors and directors
and four gifts of common stock made to employees
28
<PAGE> 30
by principal shareholders. As a percentage of revenue, equity-based compensation
expense increased to 13.9% in 1998 from 6.1% in 1997.
Depreciation and amortization. Depreciation and amortization expense
increased by $52,000, or 100%, to $104,000 in 1998, compared to $52,000 in 1997.
This increase resulted from the depreciation of approximately $171,000 in
furniture and equipment acquired during 1998. As a percentage of revenue,
depreciation and amortization expense increased to 8.3% in 1998 from 5.0% in
1997.
Interest expense. Interest expense increased by $60,000, to $66,000 in
1998, compared to $6,000 in 1997. The increase was due to the addition of leased
capital equipment in the third and fourth quarters of 1997 and throughout 1998.
Other (income) expense. Other (income) expense in 1998 consisted primarily
of interest income in the amount of $11,000 offset by the write-off of obsolete
assets in the amount of $9,000. There was no other (income) expense in 1997.
YEAR ENDED JUNE 30, 1997 COMPARED TO YEAR ENDED JUNE 30, 1996
Revenues. Our revenues decreased by $73,000, or 6%, to $1.2 million in the
year ended June 30, 1997, compared to $1.3 million in the year ended June 30,
1996. The decrease was primarily due to the decline in Prodigy's membership
base. Revenues related to the Prodigy relationship were $396,000, or 33% of
total revenue, in 1997 and $484,000, or 38% of total revenue, in 1996.
Cost of revenues. Cost of revenues increased to $314,000 in 1997 from
$310,000 in 1996. As a result, gross margin decreased to 73.8% in 1997 from
75.6% in 1996.
Sales and marketing. Sales and marketing expenses increased by $1.2
million, or 190%, to $1.8 million in 1997, compared to $624,000 in 1996. The
increase was primarily due to increased personnel costs related to building our
own internal sales and marketing staff in 1997 and costs associated with
termination of a contract with a third-party sales agent. As a percentage of
revenues, sales and marketing expenses increased to 151.1% in 1997 from 49.1% in
1996.
Research and development. Research and development expenses increased by
$70,000, or 108%, to $135,000 in 1997, compared to $65,000 in 1996. The increase
was primarily due to hiring of additional staff. As a percentage of revenues,
research and development expenses increased to 11.3% in 1997 from 5.1% in 1996.
General and administrative. General and administrative expenses increased
by $62,000, or 21%, to $353,000 in 1997, compared to $291,000 in 1996. The
increase was primarily a result of increased personnel costs and professional
service fees. As a percentage of revenues, general and administrative expenses
increased to 29.5% in 1997 from 22.9% in 1996.
Equity-based compensation. No equity-based compensation expense was
recognized in either period because FreeShop was operating as a division of
Online Interactive during both periods.
Depreciation and amortization. Depreciation and amortization expense
increased by $21,000, or 233%, to $30,000 in 1997, compared to $9,000 in 1996.
This increase resulted from the depreciation of approximately $109,000 in
furniture and equipment acquired during 1997. As a percentage of revenue,
depreciation and amortization expense increased to 2.5% in 1997 from 0.7% in
1996.
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QUARTERLY RESULTS OF OPERATIONS
The following table sets forth FreeShop's unaudited quarterly statement of
operations data for the six quarters ended June 30, 1999. In the opinion of our
management, this information was prepared on substantially the same basis as
FreeShop's audited financial statements and accompanying notes included in this
prospectus.
In the opinion of our management, all necessary adjustments, consisting
only of normal recurring adjustments and the adjustments necessary to record the
acquisition of substantially all of the assets of the Catalog Site and World
Wide Brochures Web sites in May 1999, have been included in the amounts stated
below to present fairly the unaudited quarterly results. You should read this
quarterly data in conjunction with FreeShop's audited financial statements and
accompanying notes included in this prospectus. Our operating results for any
quarter are not necessarily indicative of the operating results for any future
period.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1998 1998 1998 1998 1999 1999
--------- -------- --------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues.................. $ 220 $ 209 $ 321 $ 501 $ 667 $ 1,480
Cost of revenues.......... 39 37 65 76 83 107
----- ----- ------ ------ ------- -------
Gross profit........... 181 172 256 425 584 1,373
Operating expenses:
Sales and marketing.... 459 571 981 1,077 1,496 2,645
Research and
development.......... 113 81 86 107 141 181
General and
administrative....... 89 83 94 151 210 252
Equity-based
compensation......... 69 53 39 13 79 543
Depreciation and
amortization......... 24 25 26 29 36 224
----- ----- ------ ------ ------- -------
Total operating
expenses.......... 754 813 1,226 1,377 1,962 3,845
----- ----- ------ ------ ------- -------
Operating loss............ (573) (641) (970) (952) (1,378) (2,472)
Interest expense.......... 12 16 16 22 13 10
Other (income) expense.... -- 1 6 (10) (25) (62)
----- ----- ------ ------ ------- -------
Net loss.................. $(585) $(658) $ (992) $ (964) $(1,366) $(2,420)
===== ===== ====== ====== ======= =======
</TABLE>
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<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1998 1998 1998 1998 1999 1999
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF REVENUES:
Revenues.................. 100.0% 100.0% 100.0% 100.0% 100.0% 100%
Cost of revenues.......... 17.5 17.8 20.2 15.2 12.5 7.2
------ ------ ------ ------ ------ -------
Gross profit........... 82.5 82.2 79.8 84.8 87.5 92.8
Operating expenses:
Sales and marketing.... 208.4 273.4 305.6 215.2 224.4 178.7
Research and
development.......... 51.4 38.7 26.8 21.2 21.1 12.2
General and
administrative....... 40.3 39.8 29.3 30.1 31.5 17.1
Equity-based
compensation......... 31.6 25.5 12.2 2.5 11.9 36.7
Depreciation and
amortization......... 10.9 11.9 8.1 5.9 5.4 15.1
------ ------ ------ ------ ------ -------
Total operating
expenses.......... 342.6 389.3 382.0 274.9 294.3 259.8
------ ------ ------ ------ ------ -------
Operating loss............ (260.1) (307.1) (302.2) (190.1) (206.8) (167.0)
Interest expense.......... 5.5 7.8 4.9 4.3 2.0 .7
Other (income) expense.... 0.0 0.4 2.0 (1.9) (3.8) (4.2)
------ ------ ------ ------ ------ -------
Net loss.................. (265.6)% (315.3)% (309.1)% (192.5)% (205.0)% (163.5)
====== ====== ====== ====== ====== =======
</TABLE>
Revenues. Our revenues increased in each quarter presented, except for the
second quarter of 1998. Our revenues decreased by $11,000, or 5%, to $209,000 in
the second quarter of 1998, compared to $220,000 in the first quarter of 1998.
This decrease was due to the termination of our relationship with America Online
in March 1998. The relationship with America Online had accounted for $111,000,
or 50%, of total revenues in the first quarter of 1998. Revenues unrelated to
America Online increased by $94,000, or 86%, to $203,000 in the second quarter
of 1998 compared to $109,000 in the first quarter of 1998. In addition, our
current chief executive officer, Timothy C. Choate, rejoined FreeShop in March
1998 and focused on creating new revenue streams and accelerating the growth of
our business.
Cost of revenues. As a percentage of revenues, cost of revenues increased
during the first three quarters of 1998 as we built our infrastructure in
anticipation of future revenues. Since the third quarter of 1998, we have
recognized significant increases in gross margin due to cost of revenues
increasing at a lesser rate than revenues.
Sales and marketing. Sales and marketing expenses increased in absolute
dollars in each quarter presented. As a percentage of revenues, there was a
decrease in sales and marketing expenses in the fourth quarter of 1998 and the
second quarter of 1999. The decrease as a percentage of revenues in the fourth
quarter of 1998 resulted from an increase in revenues in the fourth quarter of
1998 without a corresponding increase in advertising and brand awareness
spending. As a percentage of revenue, sales and marketing expenses have
decreased in the second quarter of 1999. This decrease was primarily due to
sales and marketing expenses (other than advertising spending) increasing at a
lesser rate than revenues.
Research and development. Research and development expenses decreased in
the second quarter of 1998 primarily due to higher personnel costs and
recruiting fees paid in the first quarter of 1998. Research and development
expenses have increased steadily since the third quarter of 1998 as a result of
increased personnel costs related to the continued enhancement of our systems
and Web site.
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General and administrative. General and administrative expenses decreased
in the second quarter of 1998 primarily due to a decrease in personnel costs and
one-time severance costs incurred in the first quarter of 1998 resulting from
the departure of our former chief executive officer and another senior officer.
General and administrative expenses have increased steadily since the second
quarter of 1998 due primarily to additional personnel costs and professional
service fees necessary to support our growth.
Equity-based compensation. Equity-based compensation expenses for the first
three quarters of 1998 relates primarily to recognition of compensation for
gifts of stock made by a significant shareholder to some of our employees.
Compensation expenses in the fourth quarter of 1998 and the first quarter of
1999 relate to options granted. Compensation expenses in the second quarter of
1999 include both amounts related to grants of options and $406,000 of expense
related to the sale of securities to an employee by a significant shareholder at
a price below the estimated fair market value of our stock.
Depreciation and amortization. Depreciation and amortization expenses have
increased during each quarter presented primarily due to the acquisition of
additional computer equipment, software, office equipment and furniture. In the
second quarter of 1999 depreciation and amortization expenses increased in
absolute dollars and as a percentage of revenues. A significant portion of this
increase resulted from the amortization of intangible assets related to the
acquisition of substantially all of the assets of Commonsite, LLC and Travel
Companions International, Inc.
We anticipate our revenues may be subject to seasonal fluctuations. We
believe advertisers generally place fewer advertisements during the first and
third calendar quarters of each year. In addition, expenditures by advertisers
tend to be cyclical, reflecting overall economic conditions as well as budgeting
and buying patterns. Our results of operations may fluctuate significantly in
the future as a result of a variety of factors, many of which are beyond our
control.
STOCK OPTIONS GRANTED IN 1999
From January 1, 1999 to June 30, 1999, we granted options to purchase
191,616 shares of common stock under the 1997 Stock Option Plan. These options
were granted to employees, directors and service providers at exercise prices of
$2.50 to $4.27 per share which were below the fair market value of our common
stock at the date of grant. In relation to these grants, we will recognize
estimated compensation expenses of approximately $1.3 million over the vesting
terms of one to four years. Compensation expense related to the options of
approximately $566,000, $401,000, $207,000, $96,000 and $20,000 will be
classified as operating expenses in the years ending 1999, 2000, 2001, 2002 and
2003, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Since we began operating as an independent company in June 1997, we have
financed our operations primarily through the issuance of capital stock. Gross
proceeds from the issuance of stock through June 30, 1999 totaled $14.9 million,
including $4.0 million raised in December 1998 and $8.6 million raised in May
and in June 1999. As of June 30, 1999, we had a $500,000 bank line-of-credit
available at prime plus 1.5%. As of June 30, 1999, we had approximately $5.8
million in cash and cash equivalents and short-term investments and working
capital of $5.2 million.
Net cash used in operating activities was $3.4 million in the six months
ended June 30, 1999, $2.2 million in the year ended December 31, 1998 and
$595,000 in the six months ended December 31, 1997. Cash used in operating
activities for each period resulted primarily from net losses and increases in
accounts receivable, which were partially offset by increases in accounts
payable and accrued liabilities.
Net cash used in investing activities was $3.7 million in the six months
ended June 30, 1999, $67,000 in the year ended December 31, 1998 and $56,000 in
the six months ended
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December 31, 1997. In the six months ended June 30, 1999, $1.7 million was used
to acquire substantially all of the assets of Commonsite, LLC and Travel
Companions International, Inc., $1.5 million was used to purchase short-term
commercial paper and $500,000 was used to purchase equipment and furniture. For
the year ended December 31, 1998 and the six months ended December 31, 1997,
cash used in investing activities was primarily related to purchases of property
and equipment.
Net cash provided by financing activities was $8.6 million in the six
months ended June 30, 1999, $5.2 million in the year ended December 31, 1998 and
$677,000 in the six months ended December 31, 1997. Net cash provided by
financing activities resulted primarily from issuance of capital stock, which
was partially offset by principal payments made on capital leases.
We believe our current cash and cash equivalents, including expected net
proceeds from this offering, will be sufficient to meet our anticipated cash
needs for working capital and capital expenditures for at least the next 12
months. Thereafter, we expect we will need to raise additional capital to meet
our long term operating requirements. Although we have increased revenues, our
expenses also have continued to increase, and we expect to increase our expenses
significantly in future periods such that our expenses will exceed our revenues
for the foreseeable future. Accordingly, we do not expect to be able to fund our
operations from internally generated funds for the foreseeable future. Our cash
requirements depend on several factors, including the level of expenditures on
advertising and brand awareness, the rate of market acceptance of our services,
and the extent to which we use cash for acquisitions and strategic investments.
Unanticipated expenses, poor financial results or unanticipated opportunities
that require financial commitments could give rise to earlier financing
requirements. If we raise additional funds through the issuance of equity or
convertible debt securities, the percentage ownership of our shareholders would
be reduced, and these securities might have rights, preferences or privileges
senior to those of our common stock. Additional financing may not be available
on terms favorable to us, or at all. If adequate funds are not available or are
not available on acceptable terms, our ability to fund our expansion, take
advantage of business opportunities, develop or enhance services or products or
otherwise respond to competitive pressures would be significantly limited, and
we might need to significantly restrict our operations.
YEAR 2000 ISSUES
Because many computer applications have been written using two digits
rather than four to define the applicable year, some date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. The year
2000 issue could result in system failures or miscalculations causing
disruptions of operations, including disruptions of our Web site.
We have completed a review of our internal information technology and
non-information technology systems for year 2000 compliance. We do not believe
that we have material exposure to the year 2000 issue with respect to our
systems.
We are in the process of obtaining confirmation from all of our third-party
vendors that they have resolved their year 2000 issues. All of our vendors,
except three, have responded either orally or in writing and either confirmed
their compliance or provided patches for their affected software. We expect to
receive a reply from one remaining third-party vendor by October 31, 1999. We do
not expect the other two vendors to certify that their software of services are
Year 2000 compliant. The vendors who have already responded include all vendors
related to our critical systems.
We have completed an initial test of our internal systems and anticipate
conducting tests with the cooperation of our vendors after September 30, 1999 to
simulate the year 2000 rollover with hardware, software and key vendors. We plan
to make any modifications resulting from the test by the fourth quarter of 1999.
Based on the test results, if any vendor is found to be non-compliant, our
contingency plan is to attempt to find a replacement vendor. In addition, we
have developed a limited contingency plan related to the functioning of our Web
site and order processing
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<PAGE> 35
systems. We are plan to establish a number of servers in different cities to
help prevent systems failures, slow response times on our Web sites and to
provide backup in the event that there is a power or other electrical failure
that affects our computer servers and systems located in the Seattle area. Aside
from the identification of new vendors and the establishment of offsite servers,
we do not currently have any other contingency plans, and we do not anticipate
developing any other contingency plans.
To date, we have spent approximately $30,000 on year 2000 compliance. We
expect total expenditures to be between $40,000 and $50,000. Most of our future
expenses are expected to be operating expenses associated with the time spent by
employees working on year 2000 compliance matters.
The worst-case scenario pertaining to the year 2000 issue would be an
overall failure of the Internet, electronic and telecommunications
infrastructures. In addition, the systems and services provided by our
third-party vendors may fail to be year 2000 compliant despite their
representations to the contrary. The failure by these entities or systems to be
year 2000 compliant could result in a systemic failure beyond our control, which
could also prevent us from delivering our services to our customers or generally
prevent users from accessing our Web site, which would have a material adverse
effect on our business, results of operations and financial condition.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained For Internal Use," which is effective
for fiscal years beginning after December 15, 1998. SOP No. 98-1 provides
guidance on accounting for the costs of computer software developed or obtained
for internal use and defines specific criteria that determine when such costs
are required to be expensed, and when such costs may be capitalized. The
adoption of this standard has not had a material effect on our capitalization
policy, results of operations, financial position or cash flows.
In April 1998, the AICPA issued SOP 98-5, "Reporting the Costs of Start-up
Activities," which is effective for fiscal years beginning after December 15,
1998. SOP 98-5 provides guidance on the financial reporting of start-up costs
and organization costs. It requires costs of start up activities and
organization costs to be expensed as incurred. As we have expensed these costs
historically, the adoption of this standard has not had a significant impact on
our results of operations, financial position or cash flows.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives) and for
hedging activities. SFAS 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. We do not expect the adoption of this
statement to have a significant impact on our results of operations, financial
position or cash flows.
LIMITATION ON NET OPERATING LOSS CARRYFORWARDS
We have approximately $7.3 million of federal net operating loss
carryforwards as of June 30, 1999 which may be available to reduce the amount of
United States federal income taxes payable by us in the future. The exercise of
Fingerhut's warrants in May 1999 resulted in an ownership change for purposes of
Section 382 of the Internal Revenue Code. As a result, the use of our
pre-ownership change federal net operating loss carryforwards will be limited
annually by Section 382 of the Internal Revenue Code. Section 382 of the
Internal Revenue Code limits the amount of net operating losses that may be
utilized from pre-ownership change years to offset our taxable income in any
post-ownership change year. The limitation on the utilization of federal net
operating loss carryforwards in future years is not expected to be material.
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BUSINESS
OVERVIEW
FreeShop is a leading provider of direct marketing services on the
Internet. Consumers seeking to discover, learn about, or try new products can
visit our Web site and choose from a selection of free, trial and promotional
offers. FreeShop provides a network through which consumers can seek out new
products of specific interest to them, unlike the traditional direct marketing
model in which marketers communicate to broad audiences in search of new
customers. We arrange offers by category to assist consumers in finding offers
of interest to them. FreeShop currently has more than 1,000 offers from over 100
companies.
Our primary source of revenue is lead generation. We post offers from our
marketer clients for catalogs, magazine and newsletter subscriptions, product
samples, coupons, and trial periods for services, software and publications.
These clients pay us for each lead generated. We also offer marketers
opportunities to advertise on our Web site and to sponsor the Club FreeShop
newsletters. Club FreeShop members, who accounted for over 41% of our orders
generated in July 1999, receive regular email newsletters informing them of
special offers, exclusive contests and other opportunities. We believe our
consumer-directed process creates a highly effective method of direct marketing
in terms of cost, targeting, efficiency and consumer satisfaction.
INDUSTRY BACKGROUND
GROWTH OF THE INTERNET AND ONLINE COMMERCE
Over the past several years, the Internet has emerged as a powerful and
efficient new medium, enabling people worldwide to exchange information,
communicate and conduct business electronically. The number of people using the
Internet continues to expand rapidly. International Data Corporation (IDC)
estimates that the number of people using the Internet will grow from
approximately 160 million worldwide in 1998 to over 500 million worldwide by the
end of 2003.
Businesses have recognized the online commerce opportunity and are
increasingly using the Internet to sell and distribute products and services.
According to IDC, online commerce will increase from approximately $50 billion
worldwide in 1998 to approximately $1.3 trillion worldwide in 2003, representing
a compound annual growth rate of approximately 92%. As online commerce and the
number of people using the Internet grow, advertisers and direct marketers are
increasingly using the Internet to locate customers, advertise products or
services and facilitate transactions. Forrester Research estimates that
approximately $1.5 billion was spent on Internet advertising worldwide in 1998
and that this amount will grow to approximately $15.3 billion in 2003.
DIRECT MARKETING
Advertising expenditures can be broadly categorized as either brand
advertising or direct marketing. Brand advertising is intended to generate brand
name awareness and create a specific image for a particular company, product or
service. Direct marketing involves any direct communication to a consumer
intended to generate a specific response or action, generally the purchase of a
product or service. The Direct Marketing Association estimates that direct
marketing accounts for over 57% of total U.S. advertising expenditures, and in
1998, marketers spent $80.1 billion in the U.S. on direct marketing to
consumers.
Traditional Direct Marketing. Traditional direct marketing media include
direct mail, telemarketing and newspaper, magazine, radio and television
advertisements. Although traditional direct marketing is effective and widely
used, it presents a number of challenges for marketers and consumers alike.
Traditional direct marketers generally lack specific and timely information
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<PAGE> 37
on a particular consumer's immediate interests. As a result, marketers spend
considerable resources on communications most consumers don't want or need. For
example, according to BAIGlobal, Inc., the average response rate to the nearly
3.5 billion mailings of credit card solicitations in 1998 was only 1.2%. Given
the costs associated with traditional direct marketing, which include
telecommunications, postage, printing, assembly, labor and facilities, we
believe the often low response rates make the process inefficient.
Online Direct Marketing. Online direct marketing media include banner
advertisements, targeted email solicitations and Web site sponsorships. We
believe online direct marketing is more attractive than traditional direct
marketing because it requires lower production costs and provides easier and
faster customer response features. In addition, online direct marketing allows
marketers to easily:
- develop one-to-one relationships with consumers;
- collect data and feedback on marketing campaigns; and
- customize marketing campaigns to broad audiences or specific groups.
Even with these advantages, direct marketers face challenges in realizing
the full potential of the Internet as a marketing medium. With millions of Web
sites, only a fraction of which have significant audiences, it is difficult for
marketers to decide where to spend their marketing dollars. Even leading brand
name marketers who build their own Web sites must find ways to attract a
sizeable audience of visitors. In addition, technological hurdles may impede
conventional direct marketers from successfully extending their activities to
the Internet. In order to participate in most online marketing efforts,
marketers must build and maintain Web sites as well as incorporate order-taking
capabilities and develop systems to integrate online ordering with their
traditional databases.
We believe marketers desire a solution that benefits from the effectiveness
of direct marketing while overcoming the challenges presented by both
traditional and online marketing methods.
THE FREESHOP SOLUTION
FreeShop creates a direct marketing network by acting as an intermediary
between consumers and marketers. Consumers seeking to try new products are
presented with a selection of free, trial and promotional offers from marketers
seeking an audience of potential customers. We offer a consumer-directed
process, in which consumers select only those offers of immediate interest to
them. We then forward those orders to our marketer clients. We believe
FreeShop's solution creates a highly effective method of direct marketing in
terms of cost, targeting, efficiency and consumer satisfaction. Marketers pay us
for the number of customer leads delivered, the number of visitors we direct to
their Web site, or the number of times an advertisement is viewed.
Benefits to Consumers. FreeShop puts consumers in control of the direct
marketing process by empowering them to select offers that most interest them
and meet their individual needs. Through our FreeShop.com Web site, we bring
together consumers and marketers in an interactive environment. FreeShop has
more than 1,000 offers from over 100 companies. The offers include items such as
catalogs, magazines, product samples, software and coupons, covering a variety
of interests such as travel, personal finance, entertainment, automobiles and
sports. In addition, because many offers are free samples or trial offers,
consumers are able to try new products and services before making purchase
decisions. Furthermore, because credit card information is not required for many
offers, we believe FreeShop is attractive for visitors new to online shopping
who may otherwise be reluctant to shop online.
Benefits to Marketers. We believe FreeShop benefits marketers by offering
an effective way to acquire customers. Our clients receive visibility from our
traffic base of new and repeat
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customers. FreeShop offers marketers a diversity of programs designed to meet
their objectives throughout the entire marketing process, from awareness to
interest to trial to sale. Our services include lead generation, advertising and
sponsorship of the Club FreeShop newsletters. In addition, because set-up costs
are minimal, marketers can test the FreeShop network with little risk. Most
importantly, because consumers select the offers the consumers receive, we
believe marketers acquire higher quality leads and avoid the risk of tarnishing
their brand image as a result of making numerous unwanted solicitations.
STRATEGY
Our objective is to be the dominant provider of online direct marketing
services. We intend to achieve this objective through the following key
strategies:
Increase Traffic and Transactions. Our strategy of rapidly increasing
consumer traffic to our Web site is focused on both new and repeat visitors. New
visits will be driven primarily by our online and traditional advertising
programs, our Associates Program of over 20,000 member sites, other traffic
relationships, including our "Powered by FreeShop" participants, and
word-of-mouth referrals. We also have traffic relationships with companies such
as Excite, Inc., Go2Net, Inc. and Microsoft Corporation.
Under our traffic relationships, including our Associates Program, we
configure a link to our Web site for the other party to place on its Web site,
and we pay a fee for traffic and orders generated from that Web site. "Powered
by FreeShop" is a program in which we contract with larger Web sites to create
free offer content sites or promotions, which are co-branded with the brands of
FreeShop and our partner. We provide the free offer content, our partner
provides the promotion for the co-branded area, and we share any revenues
generated from the co-branded area.
We promote repeat visits through regular email communications to the over
1,000,000 members of Club FreeShop. In addition, we encourage repeat visits and
additional transactions by seeking to continually improve the consumer's
experience with FreeShop by increasing the volume and quality of our offers and
by improving the speed and overall ease-of-use of our Web site. In July 1999,
over 50% of our orders came from repeat visitors. Finally, to help retain our
loyal base of consumers, we monitor the performance of our client marketers in
fulfilling orders generated through our Web site.
Increase Client Base. We believe FreeShop offers marketers a cost-effective
alternative to traditional direct marketing and, as a result, we believe we have
a significant opportunity to increase the number of marketer clients we serve.
In particular, we believe more and more companies with national consumer brand
names are seeking Internet-based direct marketing vehicles, and we plan to
expand our relationships with these companies. We are rapidly increasing our
sales staff in order to drive this client growth. We plan to continue expanding
the services we offer our clients, including enhanced marketing programs, new
methods of presenting offers, expanded and customized data-gathering options and
increased opportunities for following up on initial lead generation. In addition
to enhancing our existing marketing programs, we will be developing new programs
in an effort to meet the needs of new and different marketers. Finally, we are
focusing on marketing our services to larger advertising agencies as a solution
for their client companies to access the rapidly increasing number of consumers
on the Internet.
Continue to Build the FreeShop Brand Name. We intend to continue to
increase the awareness and strength of the FreeShop brand name among both
consumers and marketers through site design and focused and aggressive
advertising. Because consumers and marketers tend to favor well known Web sites,
a strong brand name is critical to our efforts to grow visitor traffic, attract
marketing clients and increase the number and quality of free, trial and
promotional offers on our Web site. To date, we have used our Associates
Program, other traffic partnerships,
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online advertising and public relations in an effort to create a leading brand
name in our sector. We plan to initiate a major traditional marketing campaign
that will include outdoor, radio and print advertising in key metropolitan
markets.
Expand Offers. The number and quality of offers on our site is critical to
our ability to attract visitors and increase revenues from our marketer client
base. We believe we have a significant competitive advantage in attracting
additional marketer clients with national consumer brand names due to the large
number of consumers visiting our Web site and our selection of offers across
multiple categories. We plan to expand the number of categories and increase the
number of offers within each category. We will drive this content expansion
through a combination of internal sales efforts, partnerships and acquisitions.
As part of this strategy, we have recently entered into an agreement with NewSub
Services, Inc., a magazine distributor, to offer consumers access to over 600
magazine titles. We have also greatly increased the number and quality of the
catalog offers we provide through our recent acquisition of the Catalog Site Web
site. In addition, the acquisition of the Worldwide Brochures Web site has
dramatically increased the number of travel offers we provide. Other categories
which we intend to expand in the near future include product samples, coupons
and personal finance.
Continue to Develop and Use Technology to Enhance Web Site Capabilities. We
have designed and implemented numerous proprietary systems that enable us to
process orders from consumers within one business day of receipt and regularly
deliver lead information to marketers. We regularly update our Web site and
related system technologies to encourage consumers to place orders and
frequently revisit FreeShop.com. As part of our effort to drive repeat visits
and additional transaction volume, we continue to develop features that will
make the FreeShop experience faster, easier and more personalized.
Develop Relationship with Fingerhut and Federated. Fingerhut is the eighth
largest cataloger and second largest general merchandise cataloger in the United
States, selling general merchandise through catalogs and various Web sites. In
1999, we initiated a non-contractual direct marketing relationship with
Fingerhut. As a result of this relationship, at no cost to FreeShop, Fingerhut
places FreeShop advertisements and inserts cards listing Fingerhut's partner Web
sites, including FreeShop.com, in some of Fingerhut's catalogs and order
delivery packages. In addition to these programs, both FreeShop and Fingerhut
have placed links on their Web sites to the other's Web sites. These links
provide each company with additional sources of customers and customer
information. A portion of the revenues generated by FreeShop and Fingerhut as a
result of these links are shared with the other, based on fees prevailing in the
market at the time. FreeShop hopes to initiate similar efforts with Federated
Department Stores, Inc., which operates over 400 full-line department stores,
direct mail catalog businesses and an electronic commerce business. Federated
acquired Fingerhut in March 1999.
OUR WEB SITE
We have designed our Web site in an effort to make it fast and easy for
consumers to use, to enhance the FreeShop brand name and to encourage consumers
to request an offer. The site is organized around categories and promotions and
is regularly updated to refresh the content and encourage repeat visits by
consumers. The key features of FreeShop.com include offers, promotions,
highlighted offers and Club FreeShop.
Offers. Visitors are attracted to our Web site by the aggregation of free,
trial and promotional offers. Our base of more than 1,000 offers is organized
around categories, currently including: Auto, Business & Career, Catalogs,
Computing & Electronics, Entertainment, Family, Health & Sports, Hobbies, Home &
Living, Image & Fashion, International, Magazines, Men's Style, New Offers,
Personal Finance, Software and Travel. By organizing content into categories, we
allow customers to review offers in their self-selected areas of interest,
providing our clients the ability to do more targeted direct marketing.
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Each offer page provides a description of the product offered, delivery
information and any cancellation details for trial offers. The ordering process
is straightforward and requires the customer to provide basic information only
once. FreeShop saves this information, allowing the customer to order any
additional offers in subsequent visits by clicking the "Express Order" button.
Trial offers, such as magazines, may require the customer to enter credit card
information, which we pass on to our marketer client who processes any charges.
After a customer has ordered, we send emails to thank the customer for the order
and, later, to confirm that the order was received. The emails include
information on additional related offers, providing an opportunity to
cross-promote and "upsell" other offers.
Promotions. We organize offers from our clients around seasonal or other
events. Promotions run for limited time periods and include both special offers
created solely for individual promotions and offers listed under other
categories elsewhere on the site. Promotions function much like categories,
aggregating offers around a central theme.
Highlighted Offers. We have the ability to highlight offers and manage the
traffic directed to individual offers in various ways. Highlighted offers on our
home page are selected and regularly updated by our staff. These offers are
intended to provide a representation of the wide range of offers available on
our Web site. On subsequent pages, offers are highlighted based on an automated
ranking system.
We also create a list of our site's top offers based on our own assessment
of broad consumer appeal. This allows customers to review several of the site's
best offers without having to explore every category. The list provides a type
of "recommended viewing" guide for customers, which results in increased orders
for such offers.
Club FreeShop. We designed Club FreeShop to communicate with our most
valued customers. Club members, totalling over 1,000,000 as of July 1999,
regularly receive email newsletters informing them of special offers, exclusive
contests and other opportunities. Membership in the club is free and available
to any visitor who chooses to provide an email address to FreeShop. We invite
customers who place orders on FreeShop to join Club FreeShop as a way of
receiving updates about additional items of interest. We anticipate providing
more personalized and targeted offers to Club FreeShop members in the future,
which will allow for more focused marketing.
Other Features. As part of our effort to increase traffic on our Web site
from word-of-mouth advertising, we created Tell-a-Friend. This feature,
available throughout our site, allows a customer to send an email to a friend
with a link to a specific page or offer. In addition, to make our customers'
shopping experience more comfortable, FreeShop has adopted strong privacy and
customer service policies. Our privacy policy specifies that we disclose how
customer information is used by FreeShop and our marketing customers, allows
customers to remove their information from our customer databases and fully
complies with the standards of the Direct Marketing Association. The DMA
standards, among other things, allow customers to remove their information from
our database, to refuse to allow us to sell, rent or exchange their customer
information and to request that we not contact them in the future. Our privacy
policy also complies with the standards of TRUSTe, an independent, non-profit
entity which has established a recognized privacy standard for the Internet. In
accordance with TRUSTe standards, we post disclosure on our Web site regarding
our use of customer information, give our customers a choice on how their
information is used and have implemented data security, quality and access
measures to safeguard, update and correct customer information. In addition to
enabling customers to limit use of their personal information by FreeShop, we
provide our customers with access to general information about methods of
limiting use of their personal information by other direct marketers.
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CLIENT SERVICES
We offer marketers a diversity of services designed to meet their
objectives throughout the entire marketing process, from awareness to interest
to trial to sale. Our primary business is generating customer leads through
free, trial and promotional offers. We also provide a number of advertising
services on our Web site and within our Club FreeShop newsletters. In addition,
we offer the rental of our customer lists to other marketers.
- Lead Generation. We post offers from our clients for:
- catalogs;
- magazine and newsletter subscriptions;
- product samples and information;
- coupons and discounts; and
- trial periods for services, software and publications.
Consumers are able to place orders with us for these offers, and we
deliver this information to our clients, who are responsible for
fulfilling these orders. Information sent to our clients includes
information required for order fulfillment as well as additional
information requested by the marketer. Marketers pay us for each customer
order, or lead, we generate. Through the aggregation of commerce
opportunities on our Web site, we provide another form of lead generation
to our clients. We group these commerce offers in the same categories as
free and trial offers. When consumers decide to purchase a particular
item, they click through from our site to the actual commerce site
sponsoring the offer. In this way, we generate valuable leads to our
commerce partners and do not have responsibility for processing and
fulfilling orders for products.
- Advertising. We provide advertising opportunities through banner ads,
site sponsorships and sponsorships of our Club FreeShop newsletters.
Banner advertising clients benefit from our high traffic volume of
consumers likely to be in a shopping mode. Marketer clients can also
receive high-profile placement on our homepage and on specific category
pages through our site sponsorship program. We believe Club FreeShop
newsletter sponsorships appeal to marketers due to the receptive audience
the newsletters reach.
- List Rental. We also rent our consumer names and street addresses to
third parties, unless the consumer has requested they be excluded from
any such use. We add consumer information to our database the first time
a consumer requests an offer.
The majority of our contracts are month-to-month and automatically renew
unless terminated by either party with 10 days' notice. Some of our advertising
contracts have longer terms of up to eight months. In the first half of 1999,
our top ten clients accounted for 29.1% of revenues, and no client accounted for
more than 8.3% of revenues.
SALES AND MARKETING
CONSUMER BASE DEVELOPMENT
To encourage consumers to visit our Web site and increase transactions, we
must continue to enhance the recognition of the FreeShop brand name and
strengthen our position as a leader in the online direct marketing industry.
Additional visitor traffic to our Web site provides increased opportunities to
add members to our consumer base. The primary methods we use to further build
our traffic are online advertising, our Associates Program and other traffic
relationships, traditional advertising and Club FreeShop.
Online Advertising. We recognize the importance of well-placed advertising
in building traffic and strengthening our brand name. FreeShop has a number of
marketing relationships with
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leading Web sites that promote the FreeShop brand and specific offers to
targeted audiences. We continue to seek new cost-effective advertising vehicles
and to enhance our existing ones.
Associates Program and Traffic Relationships. We launched our Associates
Program in the fourth quarter of 1998 and, as of July 1999, we had over 20,000
associates. In July 1999, the Associates Program provided over 12.6% of our
traffic and 10.8% of our orders. Under our "Powered by FreeShop" program, we
have contracted with larger Web sites, including Go2Net and Excite, to create
free-offer content sites or promotions, which are co-branded with the brands of
FreeShop and our partners. We share revenues generated from the co-branded site,
but we own any customer information generated. In July 1999, approximately 6.8%
of our traffic and 8.0% of our orders were provided by other non-Associates
Program traffic relationships, including the "Powered by FreeShop" program.
Traditional Advertising. We plan to supplement our online presence with a
traditional marketing campaign, which will include outdoor, radio and print
advertising in key metropolitan markets. We recently hired a creative director
and engaged an advertising agency to assist with campaign development and
provide media placement services. Additionally, we have initiated direct
marketing efforts with Fingerhut that will include package and catalog inserts.
We also use public relations as a way to create customer awareness of the
FreeShop brand name. We have been the subject of newspaper, magazine and
television stories. Articles about FreeShop have appeared in Wired Magazine,
Advertising Age and PC World, among other publications, and television stories
featuring us have been aired nationally on CNBC and CNNfn. We believe ongoing
media coverage will be essential to increase general brand name awareness and to
attract new traffic to our site.
Club FreeShop. We created Club FreeShop to communicate with our most valued
customers. Consumers who join Club FreeShop regularly receive email newsletters
informing them of special offers, exclusive contests and other opportunities.
Consumer response to offers contained in the Club FreeShop newsletters is a
significant source of repeat orders.
CLIENT BASE DEVELOPMENT
We sell our services to our marketer clients primarily through our direct
sales force. The majority of FreeShop's sales organization, which included 13
salespeople as of July 31, 1999, focuses on small and medium-sized clients. Two
of our salespeople target larger national clients and advertising agencies. By
marketing directly to advertising agencies, we are able to position FreeShop as
the online marketing solution for their numerous clients. Our salespeople are
located in Washington, New York, Virginia and California. As part of our
strategy to increase our client base, we intend to significantly increase our
sales force in the near future. In addition, we have an ongoing advertising
campaign designed to promote the FreeShop brand name to marketers through
various trade and industry publications.
RECENT ACQUISITIONS
In order to increase the number and types of offers available on our Web
site and increase our visitor and client bases, we acquired two businesses in
May 1999 which expanded our catalog and travel-related offerings. We acquired
the Catalog Site Web site and substantially all of the related assets of
Commonsite, LLC for $441,000 and 52,920 shares of our common stock. The Catalog
Site Web site (www.catalogsite.com) offers over 200 catalogs. The business
acquired had revenues of $540,000 for the fiscal year ended December 31, 1998
and generated 194,000 leads in the quarter ended March 31, 1999. We also
acquired the Worldwide Brochures Web site and substantially all of the related
assets of Travel Companions International, Inc. for $1.4 million. The Worldwide
Brochures Web site (www.wwb.com) offers a selection of over 15,000 travel
brochures for locations around the world. The business acquired had revenues of
$220,000 for
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the fiscal year ended December 31, 1998 and generated 167,000 leads in the
quarter ended March 31, 1999.
OPERATIONS AND TECHNOLOGY
We have implemented a broad array of site management, customer service,
transaction processing and fulfillment systems using both proprietary and
licensed technologies. During July 1999, we received a total of approximately
350,000 orders and transmitted order data in various formats and media to over
100 clients on a regular basis. In July 1999, we received approximately 2.7
million visitors to our FreeShop.com Web site. We believe our systems can
currently accommodate approximately 10 million visitors over the course of a
month, and as our traffic increases, we intend to increase our capacity by
adding servers. All order information is integrated with our customer and Club
FreeShop member databases to provide for high levels of internal data analysis.
We have developed sophisticated databases and technology supporting these
systems that are not available commercially to our competitors.
Our systems are built around Microsoft Backoffice components to provide for
a scalable and redundant platform. In addition to in-house software, we use a
variety of third party software and service solutions to support our business.
LinkShare Corporation provides software and support for our Associates Program,
DoubleClick Inc. provides banner ad serving and reporting, and Marketwave
Corporation software is used for Web site traffic analysis. These tools are used
in conjunction with in-house developed tools to enhance marketing efforts and to
determine the effectiveness of various campaigns and content on our Web site.
Performance monitoring of our Web site is provided by multiple sources,
including Keynote Systems and our Internet service and Web site hosting
partners.
Web site content is posted and modified from our headquarters in Seattle
and offices in Minnesota through a combination of internally developed
applications. Visits to FreeShop.com are directed to a network of Microsoft IIS
Web servers at the Mead Group, a hosting facility in Seattle. The Mead Group
provides redundant power and environmental controls. In order to provide a high
level of security, all order information is gathered using secure servers at our
Seattle headquarters. The Internet connection to both facilities is provided by
Savvis Communications in the form of DS-3 and multiple T-1 redundant services.
In the near future we plan to establish a number of servers in different cities
to help prevent systems failures and slow response times on our Web sites.
COMPETITION
We face intense competition from both traditional and online advertising
and direct marketing companies. We also face competition from established online
portals and community Web sites that engage in direct marketing. Although we
believe no other company offers the combination and quality of services we
offer, we compete directly and indirectly for marketers and consumers with
companies in various categories, including:
- Free Offer Web Sites. There are a number of sites, both large and small,
that give consumers access to free offers, including Volition.com and
Free2Try.com.
- Specialty Lead Generation Web Sites. Various sites focus on generating
leads for a specific segment of the direct marketing industry, such as
the catalog, magazine or coupon segments. While these sites typically
provide a depth of offerings within their specific sector, they may not
offer promotions across a broad spectrum of product categories. These
sites include eNews, Cataloglink and Catalogcity. In some instances, we
include their offerings on our Web site.
- Other Web Sites. We also compete with a number of "community" sites that
offer content, services or information about a particular topic, as well
as other advertising networks. In
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addition, we compete with sites featuring loyalty programs that reward
consumers for taking specific actions.
The number of Web sites competing for consumer attention and marketers'
dollars has proliferated, and we expect that competition will continue to
intensify. We also compete with traditional media such as television, radio and
print for a share of marketers' total marketing budgets. We may be unable to
compete successfully against current or future competitors, many of which have
significantly greater financial, technical and marketing resources.
We believe that the principal competitive factors in our markets are:
- brand recognition;
- Web site speed and ease of use;
- quality and diversity of offers; and
- the volume of online visitors, duration and frequency of visits and their
demographic profiles.
GOVERNMENT REGULATION
Laws and regulations that apply to Internet communications, commerce and
advertising are becoming more prevalent. The adoption of such laws could create
uncertainty in Internet usage and reduce the demand for all products and
services offered on the Internet. Recently, Congress enacted legislation
regarding children's privacy on the Internet. It is possible that additional
laws and regulations may be proposed or adopted with respect to the Internet
covering issues such as user privacy, taxation, advertising, intellectual
property rights and information security. Several states have proposed
legislation to limit the use of personal user information gathered online or to
require online services to establish privacy policies.
The Federal Trade Commission recently reported that it has no present
intention of proposing legislation to address online privacy in the near future,
and that it believes self-regulation to be the best course of action, except for
rules enacted to implement the Children's Online Privacy Protection Act, which
governs the collection of personal information from children and the
confidentiality of such information. However, the FTC has initiated action
against at least one online service regarding the manner in which personal
information was collected from users and provided to third parties.
Legislation has recently been enacted in several states relating to sending
unsolicited emails, a practice commonly referred to as "spamming." The federal
government and several other states, including New York, are considering, or
have considered, similar legislation. Although the provisions of these current
and contemplated laws vary, generally they limit or prohibit both the
transmission of unsolicited emails and the use of familiar spamming techniques
such as the use of forged or fraudulent routing and header information. Some
states, including California, require that unsolicited emails include opt-out
instructions and that senders of such emails honor any opt-out requests. We
believe that neither our email newsletters nor our email order confirmations
will be affected by legislation directed at unsolicited emails because we do not
send unsolicited messages and because our current practices are intended to
comply with current and proposed legislation. However, if we are required to
change our business practices as a result of new legislation, our business could
suffer.
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We do not know how our business may be affected by the application of
existing laws governing issues such as property ownership, copyrights,
encryption and other intellectual property issues, taxation, libel, obscenity
and export or import matters. Most of these laws were adopted before the advent
of the Internet and do not contemplate or address the unique issues of the
Internet and related technologies. Changes in laws intended to address such
issues could create uncertainty in the Internet marketplace. That uncertainty
could reduce demand for our service or increase the cost of doing business as a
result of litigation costs or increased service delivery costs.
In addition, our services are available on the Internet in multiple states
and foreign countries, and these states and foreign countries may claim that we
are required to qualify to do business their jurisdictions. Currently, we are
qualified to do business only in Washington, Minnesota and California. Our
failure to qualify in other jurisdictions where we are required to do so could
subject us to taxes and penalties. It could also restrict our ability to enforce
contracts in those jurisdictions. The application of laws or regulations from
jurisdictions whose laws do not currently apply to our business could have a
material adverse effect on our business, results of operations and financial
condition.
The European Union has adopted a privacy directive that went into effect in
1998. Under this directive, business entities domiciled in member states of the
EU are limited in the transactions they may do with business entities domiciled
outside the EU, unless they are domiciled in a jurisdiction with privacy laws
comparable to the EU privacy directive. The United States presently does not
have laws that satisfy the EU privacy directive. Discussions between
representatives of the EU and the United States are ongoing and may lead to
certain safe harbor provisions which, if adhered to, would allow business
entities in the EU and the United States to continue doing business without
limitation. If these negotiations are not successful and the EU begins
enforcement of the privacy directive, there could be an adverse impact on
international Internet business. If we do business directly in the EU in the
future, we will be required to comply with the EU privacy directive.
INTELLECTUAL PROPERTY
We regard our copyrights, service marks, trademarks, trade secrets,
proprietary technology and similar intellectual property as critical to our
success, and we rely on trademark and copyright law, trade secret protection and
confidentiality and license agreements with our employees, customers,
independent contractors, partners and others to protect our intellectual
property rights. We have registered the trademark "Free Shop" in the United
States and may apply for registration in the United States for other trademarks
and service marks, including Club FreeShop, FreeShop Savings Club, Savings
Central, FreeShop shopping assistant, Catalog Site, Catalog Channel, The Catalog
Site and Worldwide Brochures. "Find It! Try It! Buy It!", "The starting point
for smart online shopping", "Powered by FreeShop" and "FreeShop by Email" are
service marks of FreeShop. However, effective trademark, service mark, copyright
and trade secret protection may not be available in every country in which
FreeShop's products and services are made available online.
We have registered a number of domain names, including freeshop.com,
catalogsite.com, wwb.com, clubfreeshop.com, among others. Domain names generally
are regulated by Internet regulatory bodies. The regulation of domain names in
the United States and in foreign countries is subject to change in the near
future. Regulatory bodies could establish additional top-level domains, appoint
additional domain name registrars or modify the requirements for holding domain
names. The relationship between regulations governing domain names and laws
protecting trademarks and similar intellectual property rights is unclear.
Therefore, we could be unable to prevent third parties from acquiring domain
names that infringe or otherwise decrease the value of our trademarks and other
proprietary rights. We believe there are online companies in other countries
using domain names that potentially infringe on our trademarks.
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FreeShop may be required to obtain licenses from others to refine, develop,
market and deliver new services. We may be unable to obtain any such license on
commercially reasonable terms, or at all, or guarantee that rights granted by
any licenses will be valid and enforceable.
EMPLOYEES
As of July 31, 1999, FreeShop had a total of 102 employees, including 76 in
sales and marketing, 17 in technology and development, and nine in finance and
administration. None of our employees are represented by unions, and we consider
relations with our employees to be good.
FACILITIES
We currently occupy 20,920 square feet in a leased facility in Seattle,
Washington. We expect that this facility will be adequate for our needs over the
next 12 months. Our current lease expires in May 2003.
LEGAL PROCEEDINGS
FreeShop is not currently a party to any material legal proceeding.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following table sets forth certain information, as of July 31, 1999,
regarding the executive officers, directors and key employees of FreeShop:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Timothy C. Choate...................... 34 Chairman, President and Chief Executive
Officer
William H. Fritsch..................... 47 Executive Vice President, Marketing
John A. Wade........................... 36 Secretary, Vice President, Finance and
Chief Financial Officer
Ronald C. Christiansen................. 46 Vice President, Sales
Lisa C. Wolff.......................... 30 Vice President, Business Development
Karen M. Leathers...................... 34 Vice President, Operations and Planning
Mark S. Noblitt........................ 35 Vice President, Technology
John P. Ballantine..................... 35 Director
Kirk M. Loevner........................ 41 Director
John B. Balousek....................... 53 Director
William J. Lansing..................... 40 Director
</TABLE>
Timothy C. Choate has served as Chairman, President and Chief Executive
Officer since March 1998. From July 1997 to March 1998, Mr. Choate served as a
vice president of Micro Warehouse, Inc. In 1994, Mr. Choate co-founded Online
Interactive, Inc., the former parent of FreeShop, and served as its Chairman,
President and Chief Executive Officer until June 1997. Before 1994, Mr. Choate
served as President of Softdisk Publishing LLC, a software publishing company.
Mr. Choate's prior experience includes serving as a Senior Marketing Manager at
Prodigy Communications Corporation, an Internet access and content provider, and
developing and launching the New Products Division for Business Week, a division
of the McGraw-Hill Companies Inc. Mr. Choate serves on the boards of directors
of Digital River, Inc., a provider of electronic commerce outsourcing solutions,
and Traveling Software, Inc., a software publishing company. Mr. Choate has a
B.S.E. degree in Marketing and Entrepreneurial Management from the Wharton
School of Business at the University of Pennsylvania.
William H. Fritsch has served as Executive Vice President, Marketing since
February 1999. Mr. Fritsch joined FreeShop in January 1999 as Vice President,
Sales and Marketing. In 1988, Mr. Fritsch co-founded CF2GS, a Seattle-based
direct marketing agency, and served as its president until 1998. Before 1988,
Mr. Fritsch served as Vice President for Sharp Hartwig Advertising, as the
Director of Marketing Services at Walt Disney Productions, as Marketing
Coordinator for The Smithers Company and as an auditor for Ernst & Ernst. Mr.
Fritsch has a B.S. degree in Accounting from the University of Akron in Ohio.
John A. Wade has served as Secretary, Vice President, Finance and Chief
Financial Officer since May 1998. From 1992 to May 1998, Mr. Wade served as the
Chief Financial Officer and Chief Operating Officer for Buzz Oates Enterprises,
a real estate development company. Prior to 1992, Mr. Wade served as the
Controller for A&A Properties, Inc., an asset management corporation, the
Controller for Labels West, a manufacturing concern, and as an auditor and
taxation specialist at McGladrey and Pullen, an international accounting firm.
Mr. Wade has a B.S. degree in Business Administration with a concentration in
Accounting from the San Diego State University School of Business.
Ronald C. Christiansen has served as Vice President, Sales since January
1999. In 1988, Mr. Christiansen co-founded CF2GS and served as its New Business
Development Director until 1998. Prior to 1988, Mr. Christiansen worked at
several large national advertising agencies,
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including Cole & Weber (an Ogilvy Mather company) and McCann Erickson. Mr.
Christiansen has an undergraduate degree in Advertising from Washington State
University.
Lisa C. Wolff has served as Vice President, Business Development since July
1998. Ms. Wolff joined FreeShop as Director of Business Development in July
1997. From 1995 to 1997, Ms. Wolff served as Director of Consumer Marketing and
as Product Manager for Online Interactive. From May 1994 to August 1994, Ms.
Wolff served as an Associate Product Manager for Microsoft Corporation's
TechNet. Prior to May 1994, Ms. Wolff worked for two years in corporate sales
and marketing at NeXT Computer, Inc., a computer software and hardware company.
Ms. Wolff has an MBA degree from the University of Washington and a B.A. degree
in Business Economics from the University of California at Santa Barbara.
Karen M. Leathers has served as Vice President, Operations and Planning
since July 1998. Since joining FreeShop in September 1997, Ms. Leathers has also
served as Director, Operations and Human Resources and Manager of Operations.
From March 1997 to August 1997, Ms. Leathers managed the Web-based data
acquisition team at Affinity Publishing, a partner marketing technology services
company. From 1993 to March 1997, Ms. Leathers managed the corporate Membership
Services Department at Recreational Equipment Incorporated. Prior to 1993, Ms.
Leathers served as a market analyst for Weyerhaeuser Company. Ms. Leathers holds
a B.A. degree in Business Management and Computers from The Evergreen State
College in Washington.
Mark S. Noblitt has served as Vice President, Technology since February
1999. Since July 1997, Mr. Noblitt has served as Director of Technology,
Production Engineering Manager and SQL Developer. From October 1996 to July
1997, Mr. Noblitt served as SQL Database Administrator for Online Interactive.
From June 1987 to January 1996, Mr. Noblitt served as Project Manager and Lead
Estimator for Leewens Corporation, a company specializing in hazardous waste
containment projects. Mr. Noblitt also serves on the Board of Advisors for
International Barter Corporation, an international commercial barter exchange
company. Mr. Noblitt is a Microsoft Certified Systems Engineer with specialties
in SQL, NT, Microsoft BackOffice, Microsoft Office and TCP/IP.
John P. Ballantine has served as a Director since July 1997. Since March
1999, Mr. Ballantine has served as Chairman and Chief Executive Officer of
iStart Ventures LLC, a company that develops early stage e-commerce concepts.
From July 1997 to March 1998, Mr. Ballantine served as a Vice President of Micro
Warehouse. In 1994, Mr. Ballantine co-founded Online Interactive and served as
its Executive Vice President and later as President and Chief Executive Officer.
From February 1993 to June 1994, Mr. Ballantine served as Vice President of
Softdisk Publishing, where he managed online shopping applications with America
Online, CompuServe, Prodigy and GEnie. From March 1989 to February 1993, Mr.
Ballantine served as Vice President of Sales for DataEnvelope, a full-service
software marketing and distribution company. Mr. Ballantine holds a B.S.E.
degree in Finance and International Business from the San Diego State University
School of Business.
Kirk M. Loevner has served as a Director since November 1998. In February
1999, Mr. Loevner founded PublishOne Inc., an online publishing service for
businesses, of which he is currently President and Chief Executive Officer. From
August 1996 to August 1998, Mr. Loevner served as President and Chief Executive
Officer of the Internet Shopping Network, Inc., an online retailer and auction
house. From November 1993 to July 1996, Mr. Loevner served as a Vice President
and General Manager of Silicon Graphics Inc., a leading supplier of visual
computing and high performance computer systems. Before November 1993, Mr.
Loevner served as a Vice President and General Manager of Apple Computer Inc., a
computer manufacturing company. Mr. Loevner currently serves on the board of
directors of the Software Industry and Information Association, a software
industry association. Mr. Loevner holds a B.S.E. degree in Computer
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Science from Tufts University and an MBA degree in General Management from
Harvard University.
John B. Balousek has served as a Director since February 1999. In 1998 Mr.
Balousek co-founded PhotoAlley.com, an internet retailer of photographic
equipment, supplies and services. From 1979 to 1997, Mr. Balousek served in
various positions, including President/Chief Operating Officer and Director of
Foote, Cone & Belding Communications, Inc., a global advertising and
communications company. In 1996, Mr. Balousek served as Chairman/Chief Executive
Officer of True North Technologies, a digital and interactive service of True
North Communications, Foote, Cone & Belding's parent company. Mr. Balousek
currently serves as a director for Geoworks Corporation, a provider of
end-to-end solutions for the wireless communications market; Transilluminant
Corporation, a privately held company focusing on electronic data marketing; and
EDB Holdings, Inc., a superoptical retailing company. Mr. Balousek has an
undergraduate degree from Creighton University and a graduate degree from
Northwestern University.
William J. Lansing has served as a Director since January 1999 and was
appointed by Fingerhut pursuant to the terms of a stockholders agreement between
us, Mr. Choate, Mr. Ballantine and Fingerhut. Mr. Lansing is the President and
Chief Executive Officer of Fingerhut. From May 1998 to May 1999, Mr. Lansing
served as President of Fingerhut. From November 1996 to May 1998, Mr. Lansing
served as a vice president for business development at General Electric Corp.
From January 1996 to October 1996, he served as Chief Operating Officer of
Prodigy. From 1986 to 1996, Mr. Lansing was a principal at McKinsey & Co., a
management consulting company. Mr. Lansing also serves on the board of directors
of Digital River, Inc., an electronic commerce solutions provider, Select
Comfort Corp., a specialty retailer and direct marketer of air beds, Net
Perceptions, Inc., a developer of Internet marketing solutions and BigStar
Entertainment, Inc., an online filmed entertainment superstore. Mr. Lansing has
a B.A. degree in English from Wesleyan University and a J.D. degree from
Georgetown University.
FreeShop currently has authorized six directors. Each director is elected
for a period of one year at our annual meeting of shareholders and serves until
the next annual meeting or until his successor is duly elected and qualified.
The executive officers serve at the discretion of the board. There are no family
relationships among any of the directors and executive officers of FreeShop.
BOARD COMMITTEES
In May 1999, the Board established two standing committees of the board of
directors, an audit committee and a compensation committee.
Audit Committee. The audit committee's responsibilities include reviewing
our internal accounting procedures and consulting with and reviewing the
services provided by our independent accountants. The audit committee currently
consists of Messrs. Ballantine and Balousek.
Compensation Committee. The compensation committee's responsibilities
include reviewing and recommending to the board of directors the compensation
and benefits of all our executive officers, administering our stock option plans
and establishing and reviewing general policies relating to compensation and
benefits of our employees. The compensation committee currently consists of
Messrs. Ballantine, Lansing and Loevner.
No interlocking relationships exist between our board of directors or
compensation committee and the board of directors or compensation committee of
any other company, nor has any such interlocking relationship existed in the
past.
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<PAGE> 50
DIRECTOR COMPENSATION
Directors do not currently receive cash compensation from FreeShop for
their services as members of the board of directors, although they may be
reimbursed for certain expenses in connection with attendance at board and
committee meetings. We do not provide additional compensation for committee
participation or special assignments of the board of directors. From time to
time, certain of our directors have received grants of options to purchase
shares of our common stock pursuant to the 1997 Stock Option Plan. In January
1998, we granted to Mr. Choate and Mr. Ballantine options to purchase 16,000
shares of common stock at an exercise price of $1.02 per share. In addition,
since March 1998, we have paid health insurance premiums on behalf of Mr.
Ballantine of approximately $250 per month. In September 1998, we granted to Mr.
Loevner an option to purchase 16,000 shares of common stock at an exercise price
of $1.50 per share. In February 1999, we granted to Mr. Balousek an option to
purchase 16,000 shares of common stock at an exercise price of $2.50 per share.
See "-- Stock Option Plan."
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid to our Chief Executive
Officer and former Chief Executive Officer for the year ended December 31, 1998.
No other executive officer of FreeShop earned a salary and bonus for such fiscal
year in excess of $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION ------------------
------------ SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION SALARY UNDERLYING OPTIONS COMPENSATION
--------------------------- ------------ ------------------ ------------
<S> <C> <C> <C>
Timothy C. Choate(1)....................... $26,825(2) 16,000 $ 5,085(3)
Chairman, President and Chief Executive
Officer
Mike Schutzler(4).......................... $26,951 136,000 $43,488(5)
</TABLE>
- ---------------
(1) Mr. Choate became our Chief Executive Officer in March 1998.
(2) Includes $19,220 in deferred compensation paid in January 1999.
(3) Represents health insurance premiums paid by us on behalf of Mr. Choate.
(4) Mr. Schutzler was the Chief Executive Officer until March 1998.
(5) This figure includes a $7,000 cash payment for severance and $36,488 worth
of common stock, at fair value, that Mr. Schutzler received on exercise of
certain options.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information regarding stock option
grants to our Chief Executive Officer and former Chief Executive Officer during
the fiscal year ended December 31, 1998. The potential realizable value is
calculated based on the assumption that the common stock appreciates at the
annual rate shown, compounded annually, from the date of grant until the
expiration of its term. These numbers are calculated based on Securities and
Exchange Commission requirements and do not reflect our projection or estimate
of future stock price growth. Potential realizable values are computed by:
- multiplying the number of shares of common stock subject to a given
option by the exercise price;
- assuming that the aggregate stock value derived from that calculation
compounds at the annual 5% or 10% rate shown in the table for the entire
ten-year term of the option; and
- subtracting from that result the aggregate option exercise price.
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<PAGE> 51
OPTION GRANTS IN 1998
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZED
---------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM
OPTIONS EMPLOYEES IN PRICE EXPIRATION -----------------------
NAME GRANTED FISCAL YEAR(1) (PER SHARE)(2) DATE 5% 10%
---- ---------- -------------- -------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Timothy C. Choate(3)...... 16,000(4) 2.78% $1.02 1/15/08 $10,314 $26,137
Mike Schutzler(5)......... 120,000(6) 20.82% $1.02 3/16/01 $12,608 $25,830
16,000(7) 2.78% $1.02 1/15/08 $10,314 $26,137
</TABLE>
- ---------------
(1) During 1998, 140,000 options were issued as severance compensation, 80,000
options were issued as compensation to members of the board of directors for
their services on the Board and 356,420 options were issued to employees.
(2) The exercise price per share of each option was equal to the fair market
value of the common stock on the date of grant as determined by the board of
directors.
(3) Mr. Choate became the Chief Executive Officer in March 1998.
(4) Represents options vesting according to the following schedule: 50% vesting
immediately with 6.25% vesting each quarter over a period of two years.
(5) Mr. Schutzler was the Chief Executive Officer until March 1998.
(6) Represents fully vested options exercisable at any time after March 18,
1998.
(7) Mr. Schutzler has forfeited these options.
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table sets forth for our Chief Executive Officer and former
Chief Executive Officer the number of shares acquired upon exercise of stock
options during the fiscal year ended December 31, 1998 and the number of shares
subject to exercisable and unexercisable stock options held at December 31,
1998.
AGGREGATED OPTION EXERCISES IN 1998
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 1998 DECEMBER 31, 1998(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Timothy C. Choate.......... -- $ -- 11,000 5,000 $ 40,700 $18,500
Mike Schutzler............. 41,700 $36,488 120,000 0 $440,000 $ 0
</TABLE>
- ---------------
(1) The value of unexercised in-the-money options at December 31, 1998 is based
on $4.72 per share, the assumed fair market value of the common stock at
such time, less the exercise price per share.
STOCK OPTION PLAN
On June 30, 1997, we adopted our 1997 Stock Option Plan, which was
subsequently approved by our shareholders. The plan authorizes the board of
directors, or a committee of independent directors, to act as the plan
administrator.
The plan provides for the grant of incentive stock options and
non-qualified stock options to purchase up to an authorized total of 2,400,000
shares of common stock. The plan administrator may grant incentive stock options
to our full-time employees or to our non-employee directors only. Non-qualified
stock options are available to employees, directors and other persons as the
plan administrator shall select.
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<PAGE> 52
The plan authorizes the plan administrator to, among other things:
- set the number of shares of common stock to be issued upon exercise of
the options;
- set the exercise price of the options, provided that, for incentive stock
options granted to greater than 10% shareholders, the price cannot be
less that 110% of the fair market value per share of common stock at the
date of grant of such options;
- designate the expiration date of the options, for incentive stock
options, which cannot be later than ten years from the date such options
were granted; and
- accelerate the vesting of the options, which otherwise vest over four
years according to a set schedule.
The 1997 Stock Option Plan will expire on June 30, 2007. The expiration of
the plan, however, will not affect the exercisability of options granted under
the plan prior to the its expiration.
401(k) PLAN
Our employees participate in the FreeShop.com, Inc. 401(k) plan, a
tax-qualified savings and retirement plan intended to qualify under Section 401
of the Internal Revenue Code. All employees who satisfy the eligibility
requirements relating to minimum age and length of service are eligible to
participate in the plan and may enter the plan on the first day of any month
after they become eligible to participate. Participants may make pre-tax
contributions to the plan of up to 15% of their eligible earnings, subject to a
statutorily prescribed annual limit. At our discretion, we may make matching
contributions of up to 100% of the first 6% of the compensation elected for
contribution to the plan by an employee. Each participant is fully vested in his
or her contributions and the investment earnings thereon, but vesting in any
matching contributions by us takes place over a period of five years.
Contributions by the participants or us, and the income earned on such
contributions, are generally not taxable to the participants until withdrawn.
Contributions by us, if any, are generally deductible by us when made.
Contributions are held in trust as required by law. Individual participants may
direct the trustee to invest their accounts in authorized investment
alternatives. We have made no matching contributions to the plan as of July 31,
1999.
DIRECTOR AND OFFICER INDEMNIFICATION AND LIABILITY
Our amended and restated articles of incorporation limit the liability of
our directors to the fullest extent permitted by Washington law, and our
articles incorporate by reference any later amendments to the Washington
Business Corporation Act. This act provides that a corporation's articles of
incorporation may contain a provision eliminating or limiting the personal
liability of directors for monetary damages for breach of their fiduciary duty
as directors, except for liability for:
- acts or omissions that involve intentional misconduct or a knowing
violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 23B.08.310 of the Washington Business
Corporation Act; or
- any transaction from which the director derived an improper personal
benefit.
Our bylaws provide that:
- we must indemnify our directors and officers against all reasonable
expenses incurred in a proceeding in which they are a party because they
are or were a director or officer;
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<PAGE> 53
- we must indemnify our directors and officers against liability incurred
in a proceeding in which they are a party because they are or were a
director or officer if:
1. they acted in good faith, and they reasonably believed, in the case
of conduct in the individual's official capacity, that their conduct
was in our best interests and, in all other cases, that their conduct
was at least not opposed to our best interests;
2. in the case of a criminal proceeding, the individual had no
reasonable cause to believe that his or her conduct was unlawful;
- we may indemnify other employees and agents to the same extent that we
indemnify our officers and directors, unless otherwise required by law,
our articles of incorporation, our bylaws or agreements; and
- we must advance expenses, as incurred, to our directors and executive
officers in connection with a legal proceeding to the fullest extent
permitted by Washington law.
We have entered into agreements with our directors that, among other
things, indemnify them for reasonable expenses incurred in legal proceedings if
the director acted in good faith and with a reasonable belief that such
director's official conduct was in the best interests of FreeShop, or, if not
taken in an official capacity, not opposed to FreeShop's best interests.
52
<PAGE> 54
RELATED PARTY TRANSACTIONS
TRANSACTIONS WITH MANAGEMENT AND OTHERS
TRANSACTIONS WITH DIRECTORS AND OFFICERS
In January and February 1998, Mr. Choate, our Chairman, President and Chief
Executive Officer, who holds approximately 18.2% of FreeShop prior to this
offering, made three loans to us for a total of $55,000. The loans beared
interest at a rate of 10% per year. We repaid these loans in full with interest
in September 1998.
In January and February 1998, Mr. Ballantine, a member of our board of
directors, who holds approximately 16.3% of FreeShop prior to this offering,
made two loans to us for a total of $30,000. The loans beared interest at a rate
of 10% per year. We repaid these loans in full with interest in September 1998.
From May 1998 through August 1998, Mr. Ballantine and Mr. Choate
transferred shares of our common stock owned by them to our employees as
compensation for services. Mr. Ballantine transferred a total of 46,000 shares
with an estimated value of $69,000, and Mr. Choate transferred a total of 10,000
shares with an estimated value of $15,000.
We have entered into indemnification agreements with each of our officers
and directors containing provisions that may require us, among other things, to
indemnify our officers and directors against liabilities that may arise by
reason of their status or service as officers and directors, other than
liabilities arising from willful misconduct of a culpable nature, and to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified. See "Management -- Director and Officer
Indemnification and Liability."
TRANSACTIONS WITH FINGERHUT
On December 10, 1998, we issued 1,619,387 shares of our common stock to
Fingerhut for $4.0 million, or $2.47 per share. Immediately following the
issuance of the shares, Fingerhut owned 19.9% of our issued and outstanding
common stock.
On December 10, 1998, we entered into a warrant agreement with Fingerhut
pursuant to which we granted to Fingerhut the following warrants to purchase our
common stock. Subsequently, in May of 1999 we agreed to issue Fingerhut shares
of our series B convertible preferred stock in lieu of common stock upon the
exercise of these warrants.
(1) Irrevocable "percentage warrants"
The percentage warrants are designed to allow Fingerhut to increase
its percentage ownership in us. If Fingerhut were to exercise all the
percentage warrants and convert the series B convertible preferred stock,
and if no dilution in Fingerhut's ownership percentage were to occur,
Fingerhut would own approximately 40.0% of our common stock immediately
prior to this offering. Fingerhut may exercise the percentage warrants at
any time. The percentage warrants expire on the earlier of December 31,
2000 or the completion of a qualified public equity offering, which
includes this offering, and include:
- a warrant to purchase 293,536 shares of our series B convertible
preferred stock at $17.18 per share;
- a warrant to purchase 179,072 shares of our series B convertible
preferred stock at $19.94 per share; and
- a warrant to purchase 208,918 shares of our series B convertible
preferred stock at $22.09 per share.
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<PAGE> 55
(2) "Anti-dilution" warrants
The anti-dilution warrants are designed to allow Fingerhut to maintain
its percentage ownership in us if the number of issued and outstanding
shares increase due to the exercise of outstanding options and warrants, or
the exercise of options to be granted under our stock option plan. Upon any
such dilutive event, the anti-dilution warrants may be exercised by
Fingerhut at its discretion for up to 184,288 shares of our series B
convertible preferred stock at $22.09 per share. As a result of this
offering, all of the anti-dilution warrants are currently exercisable. The
anti-dilution warrants expire on the earlier of December 31, 2000 or the
completion of a qualified public equity offering, which includes this
offering.
(3) "Third-party agreement" warrants
The third party agreement warrants are designed to allow Fingerhut to
maintain its ownership percentage in us if the number of issued and
outstanding shares increase due to the exercise of rights to purchase
additional shares of our common stock that are held by two parties. We
agreed with Fingerhut that the third-party agreement warrants may be
exercised by Fingerhut at its discretion in proportion to the exercise by
one or both of the other parties for a total of up to 12,153 shares of our
series B convertible preferred stock at $15.86 per share. The third-party
agreement warrants expire on the earlier of December 31, 2000 or the
completion of a qualified public equity offering, which includes this
offering.
On December 10, 1998, we entered into a stockholders agreement with Mr.
Ballantine, Mr. Choate and Fingerhut. Under the terms of the stockholders
agreement, we granted Fingerhut:
- a preemptive right to purchase shares in the event of additional
share issuances by us;
- a right to approve any pledge of all of our assets, amendment to our
articles of incorporation or bylaws, merger with another corporation
or sale of substantially all of our assets;
- a one-time right to demand registration of shares owned by Fingerhut,
exercisable after June 30, 2001;
- a right to "piggyback," or include shares owned by Fingerhut, in two
(2) registrations of shares initiated by us; and
- a right to appoint up to two (2) members of our board of directors.
To date, Fingerhut has appointed only one (1) director, William R.
Lansing.
Fingerhut's preemptive rights, special approval rights and board appointment
rights expire upon the completion of this offering.
In addition, Fingerhut, Mr. Choate and Mr. Ballantine have agreed to not make
any public sale of any of our equity securities, or any securities convertible
into any of our equity securities, during the thirty (30) day period before, and
the 180-day period after, the effective date of this offering or of any
underwritten demand registration or piggyback registration in which their shares
are included. The stockholders agreement terminates generally on the earlier of
December 10, 2008 or the closing of the sale of all of our assets or the
acquisition of us by merger or consolidation.
In May and June of 1999, Fingerhut exercised the first two tranches of its
percentage warrants consisting of its $17.18 percentage warrants and its $19.94
percentage warrants for a total of 472,608 shares of series B convertible
preferred stock, which are convertible into 1,890,432 shares of common stock.
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<PAGE> 56
On June 18, 1999 we entered into a letter agreement with Fingerhut under
which Fingerhut agreed to exercise all of its remaining exercisable warrants
upon completion of this offering, which consist of:
- Percentage warrants to purchase 208,918 shares of our series B
convertible preferred stock at $22.09 per share.
- Anti-dilution warrants to purchase 184,288 shares of our series B
convertible preferred stock at $22.09 per share.
- Third party warrants to purchase 3,333 shares of our series B convertible
preferred stock at $15.86 per share.
Additionally, Fingerhut agreed to purchase 8,820 shares of our series B
convertible preferred stock at $15.86 per share. Upon completion of this
offering Fingerhut has agreed to convert all of the series B convertible
preferred stock into common stock for a total of 3,511,868 shares of our common
stock.
In connection with the letter agreement, we entered into an escrow
agreement with Fingerhut, pursuant to which Fingerhut agreed to deposit into
escrow the full purchase price for the exercised warrants and the additional
shares of series B convertible preferred stock to be purchased by Fingerhut, in
exchange for the deposit into escrow by us of the warrant shares and the
additional shares. The escrow agreement provides for the release of the escrowed
funds to us and the shares to Fingerhut upon the completion of this offering.
CERTAIN BUSINESS RELATIONSHIPS
William J. Lansing, a member of our board of directors, is the current
President and Chief Executive Officer of Fingerhut. During the first two
quarters of 1999, we provided approximately $23,000 in lead generation services
to Fingerhut. Mr. Lansing is also a director of BigStar Entertainment, Inc., a
client of FreeShop. In 1998, we billed BigStar approximately $42,000 for our
services. During the first two quarters of 1999 we billed BigStar approximately
$70,000 for our services.
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<PAGE> 57
PRINCIPAL SHAREHOLDERS
The following table sets forth information concerning the beneficial
ownership of our outstanding common stock as of July 31, 1999 and as adjusted to
reflect the sale of the shares of common stock in this offering for:
- each person or group that we know owns beneficially more than 5% of our
common stock;
- each of our directors and executive officers individually; and
- all directors and executive officers as a group.
The term "beneficial ownership" includes shares over which the indicated
beneficial owner exercises voting and/or investment power. The rules also deem
common stock subject to options currently exercisable, or exercisable within 60
days, to be outstanding for purposes of computing the percentage ownership of
the person holding the options but do not deem such stock to be outstanding for
purposes of computing the percentage ownership of any other person. The
applicable percentage of ownership for each stockholder is based on 10,133,719
shares of common stock outstanding as of July 31, 1999 (including shares
issuable upon conversion of all outstanding series B convertible preferred
stock), together with applicable options and warrants for that shareholder.
Except as otherwise indicated, we believe the beneficial owners of the common
stock listed below, based on information furnished by them, have sole voting and
investment power over the number of shares listed opposite their names. The
information provided in the table below assumes no exercise of the underwriters'
over-allotment option.
<TABLE>
<CAPTION>
PERCENT OF
SHARES
NUMBER OF OUTSTANDING
SHARES --------------------
NAME AND ADDRESS BENEFICIALLY BEFORE AFTER
OF BENEFICIAL OWNER OWNED OFFERING OFFERING
------------------- ------------------ -------- --------
<S> <C> <C> <C>
Fingerhut Companies, Inc.(1)........................... 5,131,255 43.7% 34.3%
4400 Baker Road
Minnetonka, Minnesota 55343
Timothy C. Choate(2)................................... 1,843,121 18.2% 13.8%
95 South Jackson Street, Ste. 300
Seattle, WA 98104
John P. Ballantine(3).................................. 1,655,739 16.3% 12.4%
95 South Jackson Street, Ste. 300
Seattle, WA 98104
Kirk M. Loevner(4)..................................... 85,171 * *
John B. Balousek(5).................................... 50,000 * *
John A. Wade(6)........................................ 45,481 * *
William H. Fritsch(7).................................. 25,767 * *
William J. Lansing..................................... -- * *
All directors and officers as a group
(11 persons)(8)...................................... 3,705,279 36.3% 27.6%
</TABLE>
- ---------------
* Less than one percent of the outstanding shares of common stock.
(1) Represents 3,509,819 shares (including 472,608 shares of series B preferred
stock, which will be converted into 1,890,432 shares of common stock upon
the completion of this offering) held by Fingerhut directly and 1,586,156
shares of common stock that Fingerhut has a right to acquire pursuant to
warrants exercisable into series B convertible preferred stock and 35,280
shares of common stock issuable upon conversion of Series B convertible
preferred stock to be issued to Fingerhut within sixty days of July 31,
1999. Federated Department Stores, Inc. may be deemed to control Fingerhut
by virtue of its ownership of 100% of Fingerhut's capital stock and its
corresponding rights to elect Fingerhut's directors,
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<PAGE> 58
and, therefore, our capital stock owned by Fingerhut may also be deemed to
be beneficially owned by Federated.
(2) Represents 1,817,121 shares held by Mr. Choate directly, 12,000 shares held
by a trust established for Mr. Choate's children and 14,000 shares that Mr.
Choate has a right to acquire pursuant to options exercisable within sixty
days of July 31, 1999.
(3) Represents 1,641,739 shares held by Mr. Ballantine directly and 14,000
shares that Mr. Ballantine has a right to acquire pursuant to options
exercisable within sixty days of July 31, 1999.
(4) Represents 73,171 shares held by Kirk Loevner Trust w/d/t dated 8/5/96
directly and 12,000 shares that Mr. Loevner has a right to acquire pursuant
to options exercisable within sixty days of July 31, 1999.
(5) Represents 30,000 shares held by the Balousek Family Limited Partnership
and 10,000 shares held by the Balousek 1994 Irrevocable Trust and 10,000
shares that Mr. Balousek has a right to acquire pursuant to options
exercisable within sixty days of July 31, 1999.
(6) Represents 20,000 shares held by Mr. Wade directly and 25,481 shares that
the Mr. Wade has a right to acquire pursuant to options exercisable within
sixty days of July 31, 1999.
(7) Represents 16,667 shares held by Mr. Fritsch directly and 9,100 shares that
Mr. Fritsch has a right to acquire pursuant to options exercisable within
sixty days of July 31, 1999.
(8) Represents 3,620,698 shares listed as to all current directors and
executive officers and includes 84,581 shares issuable within sixty days of
July 31, 1999 upon the exercise of outstanding options.
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<PAGE> 59
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 40,000,000 shares of common stock,
no par value per share, and 10,000,000 shares of preferred stock, no par value
per share.
COMMON STOCK
As of July 31, 1999, there were 10,133,719 shares of our common stock
issued and outstanding (including shares issuable upon conversion of outstanding
series of preferred stock), held of record by 110 shareholders. Holders of
common stock are entitled to one vote per share on all matters to be voted upon
by the shareholders. The articles of incorporation do not authorize cumulative
voting for the election of directors, which means that the holders of a majority
of the shares voted can elect all of the directors then standing for election.
Subject to preferences of any outstanding shares of preferred stock, holders of
common stock are entitled to receive ratably any dividends the board of
directors declares out of funds legally available for the payment of dividends.
If we are liquidated, dissolved or wound up, the holders of common stock are
entitled to share in proportion to the percentage of their ownership all assets
remaining after payment of liabilities and liquidation preferences of any
outstanding shares of preferred stock. Holders of shares of common stock have no
preemptive or conversion rights or other subscriptive rights, and there are no
redemption or sinking fund provisions that apply to the common stock. All
outstanding shares of common stock are fully paid and nonassessable, and the
shares of common stock in this offering will be fully paid and nonassessable.
PREFERRED STOCK
In June 1997, we designated 1,935,484 shares of series A convertible
preferred stock, all of which was issued and later converted into common stock
in July 1997. In May 1999, we designated 1,250,000 shares of series B
convertible preferred stock. As of July 31, 1999, we had outstanding 472,608
shares of series B convertible preferred stock. We have agreed to issue an
additional 405,359 shares prior to the completion of this offering, as long as
this offering is completed on or before October 31, 1999. The series B
convertible preferred stock has identical rights and preferences as common stock
except that it has no voting rights. Each share of series B convertible
preferred stock is convertible into four shares of common stock at the option of
the holder or upon the completion of this offering.
Subject to the provisions of the articles of incorporation and limitations
prescribed by law, the board of directors has the authority to issue, without
further vote or action by the shareholders, up to 6,814,516 additional shares of
preferred stock in one or more series. The board has the authority to fix the
rights, preferences, privileges and restrictions of the shares of each series,
including dividend rights, convertibility, voting rights, redemption rights,
liquidation preferences and the number of shares constituting any series and the
designation of such series. Issuance of preferred stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire, or of discouraging a third party from attempting to
acquire, a majority of our outstanding voting stock.
WARRANTS
As of July 31, 1999, Fingerhut held irrevocable "percentage warrants" to
purchase 208,918 shares of our series B convertible preferred stock;
"anti-dilution warrants" to purchase 184,288 of our series B convertible
preferred stock; and "third party agreement warrants" to purchase 3,333 shares
of our series B convertible preferred stock. All Fingerhut warrants will expire
at the closing of this offering, if not previously exercised. Pursuant to the
terms of a letter agreement, Fingerhut has agreed to exercise the remainder of
its warrants prior to the completion
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<PAGE> 60
of this offering, as long as this offering is completed on or before October 31,
1999. See "Related Party Transactions."
In addition to the warrants held by Fingerhut, as of July 31, 1999, we had
warrants outstanding to purchase 27,700 shares of common stock. Generally, each
warrant contains provisions for the adjustment of the exercise price and the
number of shares issuable upon the exercise of the warrant upon the occurrence
of events such as stock dividends, stock splits, reorganizations,
reclassifications and consolidations.
REGISTRATION RIGHTS
According to the terms of a stockholders agreement between us, Fingerhut,
Messrs. Choate and Ballantine, Fingerhut is entitled to make a one-time demand
that we file a registration statement with respect to shares of common stock
owned by Fingerhut. However, we are not required to effect this "demand
registration" before June 30, 2001, and may postpone the registration for up to
180 days for bona fide business reasons. In addition, under the stockholders
agreement, Fingerhut is entitled to "piggyback" registration rights in
connection with any registration by us of our securities for our own account or
for the account of other security holders (other than in this offering and in
any registration of securities to be issued in connection with an acquisition or
under our employee compensation plans). If we propose to register any shares of
common stock under the Securities Act, of 1933, as amended, Fingerhut is
entitled to receive notice and to include its shares in the registration
statement, subject to certain limitations. Fingerhut is entitled to two
piggyback registrations under the agreement.
We have also granted piggyback registration rights to Commonsite with
respect to 52,920 shares of common stock in connection with our acquisition of
substantially all of the assets of Commonsite. Under the terms of the
registration rights agreement, after completion of this offering, Commonsite is
entitled to one piggyback registration in connection with any registration by us
of our securities for our own account or for the account of other security
holders (other than any registration of securities to be issued in connection
with an acquisition or under our employee compensation plans). If we propose to
register any shares of common stock under the Securities Act, Commonsite is
entitled to receive notice and to include its shares in the registration
statement, subject to certain limitations.
ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER AND BYLAWS PROVISIONS AND THE
WASHINGTON BUSINESS CORPORATION ACT
Articles and Bylaws. Our articles of incorporation and bylaws contain
provisions that may have the effect of delaying, deferring or preventing a
change in control. Neither the articles of incorporation nor the bylaws provide
for cumulative voting in the election of directors. Furthermore, the
authorization of undesignated preferred stock makes it possible for the board of
directors to issue preferred stock with voting or other rights or preferences
that could impede any attempt to change control of FreeShop.
Washington Business Corporation Act. Washington law imposes restrictions on
certain transactions between a corporation and certain significant shareholders.
Chapter 23B.19 of the Washington Business Corporation Act prohibits a "target
corporation," with some exceptions, from engaging in certain significant
business transactions with a person or group of persons that beneficially owns
10% or more of the voting securities of the target corporation (an Acquiring
Person) for a period of five years after such acquisition, unless the
transaction or acquisition of shares is approved by a majority of the members of
the target corporation's board of directors prior to the time of acquisition.
Transactions prohibited by this statute include, among others:
- a merger or consolidation with, disposition of assets to, or issuance or
redemption of stock to or from, the Acquiring Person;
59
<PAGE> 61
- termination of 5% or more of the employees of the target corporation as a
result of the Acquiring Person's acquisition of 10% or more of the
shares; or
- allowing the Acquiring Person to receive any disproportionate benefit as
a shareholder.
After the five-year period, a "significant business transaction" may occur,
as long as it complies with certain "fair price" provisions of the statute. A
public corporation may not "opt out" of this statute. This provision may have
the effect of delaying, deferring or preventing a change in control of FreeShop.
TRANSFER AGENT AND REGISTRAR
The registrar and transfer agent for our common stock is ChaseMellon
Shareholder Services, L.L.C. Its address is 400 South Oak Street, 4th Floor, Los
Angeles, California 90071, and its telephone number at this location is (213)
553-9731 .
LISTING
We have applied to list our common stock on the Nasdaq National Market
under the trading symbol "FSHP."
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of our common stock in the public
market could adversely affect prevailing market prices of our common stock.
Furthermore, because no shares will be available for sale shortly after this
offering because of certain contractual and legal restrictions on resale
described below, sales of substantial amounts of common stock in the public
market after these restrictions lapse could adversely affect the prevailing
market price and our ability to raise equity capital in the future.
Upon completion of this offering and based on shares of common stock
outstanding as of July 31, 1999, we will have outstanding an aggregate of
14,955,155 shares of our common stock, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options, and assuming the
exercise of all warrants held by Fingerhut and the conversion of all the series
B convertible preferred stock. Of these shares, 3,200,000 shares sold in this
offering will be freely tradable without restriction or further registration
under the Securities Act, unless such shares are purchased by "affiliates" as
that term is defined in Rule 144 under the Securities Act. The remaining
11,755,155 shares of common stock held by existing shareholders are "restricted
securities" as that term is defined in Rule 144 under the Securities Act.
Restricted securities may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rule 144 or 701
promulgated under the Securities Act, which rules are summarized below.
Lock-Up Agreements. A majority of shareholders, including each of our
officers and directors, who hold an aggregate of 11,495,132 shares of common
stock (which includes common stock issuable upon conversion of series B
convertible preferred stock), have agreed not to offer, sell, contract to sell
or otherwise dispose of, or enter into any transaction that is designed to, or
could be expected to, result in the disposition of any portion of, any common
stock for a period of 180 days after the effective date of the registration
statement of which this prospectus is a part, without the prior written consent
of Deutsche Bank Securities Inc. This consent may be given at any time without
public notice. We have entered into a similar agreement, except that we may
issue, and grant options or warrants to purchase, common stock or any securities
convertible into, or exercisable for or exchangeable for, shares of common
stock, pursuant to the exercise of outstanding options and warrants and the
issuance of options granted under our existing stock option plans. In addition,
Fingerhut, Mr. Ballantine and Mr. Choate have entered into a cross-lockup
agreement which prevents any of the parties from selling stock pursuant to a
waiver from Deutsche Bank Securities Inc. under the lock-up agreements unless
the other parties receive similar waivers.
60
<PAGE> 62
Before taking into account the lock-up agreements, the following shares
will be eligible for sale in the public market at the following times:
- Beginning on the effective date of the offering, 4,697,272 shares will be
immediately available for sale in the public market.
- Beginning 90 days after the effective date of the offering, approximately
6,599,095 shares will be eligible for sale pursuant to Rules 144 or 701.
- An additional 3,658,788 shares will become eligible for sale pursuant to
Rule 144 at various times after 90 days from the effective date of the
offering. Shares eligible to be sold by affiliates pursuant to Rule 144
are subject to volume restrictions as described below.
Rule 144. In general, under Rule 144 as currently in effect, beginning 90
days after the date of this prospectus, a person who has beneficially owned
shares of our common stock for at least one year would be entitled to sell
within any three-month period a number of shares that does not exceed the
greater of:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately 149,552 shares immediately after this offering; or
- the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to such sale.
Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about us.
Rule 144(k). Under Rule 144(k), a person who is not deemed to have been one
of our affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate, is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Therefore,
unless otherwise restricted, "144(k) shares" may be sold immediately upon the
completion of this offering.
Rule 701. In general, under Rule 701 of the Securities Act as currently in
effect, any of our employees, consultants or advisors who purchases shares from
us in connection with a compensatory stock or option plan or other written
agreement is eligible to resell such shares 90 days after the effective date of
this offering in reliance on Rule 144, but without compliance with some
restrictions, including the holding period, contained in Rule 144.
Registration Rights. Upon completion of this offering, Fingerhut and
Commonsite will be entitled to rights with respect to the registration of shares
of our common stock under the Securities Act. See "Description of Capital
Stock -- Registration Rights." After such a registration, these shares become
freely tradable without restriction under the Securities Act. Neither Fingerhut
nor Commonsite will have any obligation or other restrictions on resale with
respect to any of our securities, other than restrictions imposed by lock-up
agreements and applicable securities laws. Any sales of securities by these
shareholders could have a material adverse effect on the trading price of our
common stock.
Stock Options. Immediately after this offering, we intend to file a
registration statement under the Securities Act covering up to 2,400,000 shares
of common stock reserved for issuance under our 1997 Stock Option Plan. As of
July 31, 1999, options to purchase 953,289 shares of common stock were issued
and outstanding. Upon the expiration of the lock-up agreements described above,
at least 623,688 shares of common stock will be subject to vested options (based
on options outstanding as of July 31, 1999). Such registration statement is
expected to be filed and become effective as soon as practicable after the
effective date of this offering. Accordingly, shares registered under such
registration statement will, subject to vesting provisions and Rule 144 volume
limitations applicable to our affiliates, be available for sale in the open
market immediately after the 180-day lock-up agreements expire.
61
<PAGE> 63
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representatives Deutsche Bank Securities
Inc., Dain Rauscher Wessels, a division of Dain Rauscher Incorporated, Volpe
Brown Whelan & Company, LLC and E*OFFERING Corp. have severally agreed to
purchase from us the following respective numbers of shares of common stock at
the public offering price less the underwriting discounts and commissions set
forth on the cover page of this prospectus.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Deutsche Bank Securities Inc. ..............................
Dain Rauscher Wessels.......................................
Volpe Brown Whelan & Company, LLC...........................
E*OFFERING Corp.............................................
---------
Total............................................. 3,200,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the
underwriters are subject to several conditions, including the absence of any
material adverse change in our business and the receipt of certificates,
opinions and letters from us, our counsel and our experts. The agreement also
provides for the allocation of expenses incurred in the offering. In addition,
the agreement provides that the underwriters will purchase all the shares of
common stock offered by this prospectus, other than those covered by the
over-allotment option described below, if any of such shares are purchased.
Pursuant to the underwriting agreement, we have agreed to indemnify the
underwriters against liabilities under the Securities Act, and to contribute to
payments the underwriters may be required to make with respect to liabilities
under the Securities Act.
We have been advised by the representatives that the underwriters propose
to offer the shares of common stock directly to the public at the offering price
set forth on the cover page of this prospectus and to certain dealers at such
price less a concession not in excess of $ per share. The underwriters may
allow, and such dealers may re-allow, a concession not in excess of $ per
share to certain other dealers. After the initial public offering, the offering
price and other selling terms may be changed by the representatives.
A prospectus in electronic format is being made available on Internet
Websites maintained by E*OFFERING Corp. and E*TRADE Securities, Inc. Internet
purchases of the common stock offered by this prospectus will be available only
to registered customers of E*TRADE Securities, Inc. who possess sufficient net
worth and investment experience. All eligible accounts may submit a conditional
offer to E*TRADE Securities, Inc. to purchase shares. If demand exceeds
availability, E*TRADE Securities, Inc. will randomly allocate shares to
applicants in 100 share lots in a round-robin fashion, meaning that no applicant
will receive a second lot until all applicants have received one lot and so
forth, until all shares available to E*TRADE Securities, Inc. have been
distributed. The common stock offered by this prospectus will not be directed to
any additional Internet customers other than the registered customers of E*TRADE
Securities, Inc.
Other than the prospectus in electronic format, the information on
E*OFFERING's Web site is not part of this prospectus or the registration
statement of which the prospectus forms a part and has not been approved or
endorsed by FreeShop.com or any underwriter in such capacity and should not be
relied on by prospective investors. E*OFFERING, a member of the National
Association of Securities Dealers, Inc., will participate in the offering as one
of the underwriters. E*OFFERING was organized in January 1999. Except for its
participation as an underwriter in this
62
<PAGE> 64
offering, E*OFFERING has no relationship with us or any of our founders or
significant shareholders.
We have granted to the underwriters an option, exercisable not later than
30 days after the date of this prospectus, to purchase up to 480,000 additional
shares of common stock at the public offering price less the underwriting
discounts and commissions set forth on the cover page of this prospectus. The
underwriters may exercise this option only to cover over-allotments made in
connection with the sale of the common stock offered in this prospectus. To the
extent the underwriters exercise the option, each of the underwriters will
become obligated, subject to certain conditions, to purchase approximately the
same percentage of additional shares of common stock as the number of shares of
common stock to be purchased by it in the above table bears to the total listed
above. We will be obligated, pursuant to the option, to sell these shares to the
underwriters to the extent the option is exercised. If any additional shares of
common stock are purchased, the underwriters will offer such additional shares
on the same terms as those on which the 3,200,000 shares are being offered.
The underwriting fee is equal to the public offering price per share of
common stock less the amount paid by the underwriters to the company per share
of common stock. We anticipate that the total underwriting fee will be
approximately 7% of the aggregate initial public offering price. The following
table summarizes the underwriting compensation that will be paid in connection
with this offering.
<TABLE>
<CAPTION>
TOTAL
-------------------------------
WITHOUT WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
--------- -------------- --------------
<S> <C> <C> <C>
Underwriting discounts and commissions paid by us.... $ $ $
Reimbursement of expenses to or on behalf of the
underwriters....................................... $ $ $
Fees and expenses of underwriters' counsel relating
to NASD review..................................... $ $ $
</TABLE>
We estimate that the total expenses of the offering, excluding underwriting
discounts and commissions, will be approximately $750,000.
The representatives have advised us that the underwriters do not intend to
confirm orders to any account over which they exercise discretionary authority.
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
market price of the common stock. Specifically, the underwriters may over-allot
shares of the common stock in connection with this offering, thus creating a
short position in the common stock for their own account. Additionally, to cover
these over-allotments or to stabilize the market price of the common stock, the
underwriters may bid for, and purchase, shares of the common stock in the open
market. Finally, the representatives, on behalf of the underwriters, may reclaim
selling concessions allowed to an underwriter or dealer if the underwriting
syndicate repurchases shares distributed by that underwriter or dealer. Any of
these activities may maintain the market price of our common stock at a level
above that which might otherwise prevail in the open market. The underwriters
are not required to engage in these activities and, if commenced, may end any of
these activities at any time.
At our request, the underwriters have reserved up to 288,000 shares of
common stock for sale, at the initial public offering price, to our current
full-time employees, our current shareholders, selected marketer clients and
traffic partners, and other individuals who express an interest in purchasing
such shares through a directed share program. The number of shares of common
stock available for sale to the general public will be reduced to the extent
these reserved shares are purchased. Any reserved shares not purchased will be
offered by the underwriters to the general public on the same basis as the other
shares offered by this prospectus.
63
<PAGE> 65
PRICING OF THE OFFERING
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for our common stock will
be determined by negotiation among FreeShop and the representatives of the
underwriters. Among the primary factors to be considered in determining the
public offering price will be:
- prevailing market conditions;
- our results of operations in recent periods;
- the present stage of our development;
- the market capitalizations and stages of development of other companies
we and the representatives believe to the comparable to us; and
- estimates of our business potential.
LEGAL MATTERS
Dorsey & Whitney LLP, Seattle, Washington, will pass upon the legality of
the shares offered by this prospectus. Perkins Coie LLP, Seattle, Washington, is
acting as legal counsel to the underwriters in connection with this offering. A
partner of Dorsey & Whitney LLP owns an aggregate of 11,232 shares of our common
stock.
EXPERTS
The financial statements of Freeshop as of December 31, 1997 and 1998 and
for the years ended June 30, 1996 and 1997, the six months ended December 31,
1997 and the year ended December 31, 1998, included in this prospectus, have
been included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of PricewaterhouseCoopers as
experts in auditing and accounting.
The financial statements of Commonsite as of December 31, 1998 and for the
year then ended that are included in this prospectus, have been included in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of PricewaterhouseCoopers as experts in auditing and
accounting.
The financial statements of Travel Companions International as of December
31, 1998 and for the year then ended that are included in this prospectus, have
been included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of PricewaterhouseCoopers as
experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 covering the shares being sold in this offering. We have
not included in this prospectus some information contained in the registration
statement, and you should refer to the registration statement, including
exhibits and schedules filed with the registration statement, for further
information. You may review without charge a copy of the registration statement
at the public reference section of the Securities and Exchange Commission in
Room 1024, Judiciary Plaza, 450 5th Street, N.W., Washington, D.C. 20549; and at
the SEC's Regional Office located at 7 World Trade Center, Suite 1300, New York,
New York 10048 and 1400 Citicorp Center, 500 West Madison Street, Chicago, IL
60661. You may also obtain copies of such materials at prescribed rates from the
public reference section at the Commission, Room 1024, Judiciary Plaza, 450 5th
Street, N.W., Washington, D.C. 20549. In addition, the Securities and Exchange
Commission maintains a Web site on the Internet at the address
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Securities and Exchange Commission.
64
<PAGE> 66
INDEX TO FINANCIAL STATEMENTS
FREESHOP.COM, INC.
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Balance Sheet for the periods ended December 31, 1997,
December 31, 1998 and June 30, 1999 (unaudited)........... F-3
Statement of Operations for the periods ended June 30, 1996,
June 30, 1997, December 31, 1997, December 31, 1998, June
30, 1998 (unaudited) and June 30, 1999 (unaudited)........ F-4
Statement of Changes in Mandatorily Redeemable Preferred
Stock and Shareholders' Equity/Division Equity for the
periods ended June 30, 1996, June 30, 1997, December 31,
1997, December 31, 1998 and June 30, 1999 (unaudited)..... F-5
Statement of Cash Flows for the periods ended June 30, 1996,
June 30, 1997, December 31, 1997, December 31, 1998, June
30, 1998 (unaudited) and June 30, 1999 (unaudited)........ F-6
Notes to Financial Statements............................... F-7
COMMONSITE, LLC
FINANCIAL STATEMENTS
Report of Independent Accountants........................... F-20
Statement of Financial Position as of December 31, 1998 and
March 31, 1999 (unaudited)................................ F-21
Statement of Operations and Members' Deficit for the periods
ended December 31, 1998, March 31, 1998 (unaudited) and
March 31, 1999 (unaudited)................................ F-22
Statement of Cash Flows for the periods ended December 31,
1998, March 31, 1998 (unaudited) and March 31, 1999
(unaudited)............................................... F-23
Notes to Financial Statements............................... F-24
TRAVEL COMPANIONS INTERNATIONAL, INC.
FINANCIAL STATEMENTS
Report of Independent Accountants........................... F-28
Balance Sheet as of December 31, 1998 and March 31, 1999
(unaudited)............................................... F-29
Statement of Income for the periods ended December 31, 1998,
March 31, 1998 (unaudited) and March 31, 1999
(unaudited)............................................... F-30
Statement of Stockholders' Deficit for the periods ended
December 31, 1998 and March 31, 1999 (unaudited).......... F-31
Statement of Cash Flows for the periods ended December 31,
1998, March 31, 1998 (unaudited) and March 31, 1999
(unaudited)............................................... F-32
Notes to Financial Statements............................... F-33
FREESHOP.COM, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
Unaudited Pro Forma Combined Financial Information.......... F-36
Unaudited Pro Forma Combined Statement of Operations for the
year ended December 31, 1998 and the six months ended June
30, 1999.................................................. F-37
Notes to Unaudited Pro Forma Combined Financial
Statements................................................ F-39
</TABLE>
F-1
<PAGE> 67
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of FreeShop.com, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, of changes in mandatorily redeemable convertible preferred stock
and shareholders' equity/division equity and of cash flows present fairly, in
all material respects, the financial position of FreeShop.com, Inc. at December
31, 1997 and 1998, and the results of its operations and its cash flows for the
years ended June 30, 1996 and 1997, the six-month period ended December 31, 1997
and the year ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
As described in Note 1, FreeShop.com, Inc. was a wholly owned subsidiary of
Online Interactive, Inc. prior to July 1, 1997.
PricewaterhouseCoopers LLP
Seattle, Washington
April 16, 1999, except as to paragraphs three through five
of Note 13 which are as of June 18, 1999, and
paragraph six of Note 13 which
is as of August 9, 1999.
F-2
<PAGE> 68
FREESHOP.COM, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------- ------------
1997 1998 1999
----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents........................ $ 26,329 $ 2,892,144 $ 4,330,067
Accounts receivable, net......................... 204,691 339,179 1,019,058
Prepaid expenses................................. 13,598 30,497 380,377
Short-term investments........................... 1,485,600
----------- ----------- ------------
Total current assets........................ 244,618 3,261,820 7,215,102
Property and equipment, net...................... 354,496 381,296 857,397
Intangible assets................................ 2,496,929
Other assets and deposits........................ 45,818 43,454 43,454
----------- ----------- ------------
$ 644,932 $ 3,686,570 $ 10,612,882
=========== =========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable................................. $ 247,491 $ 464,872 $ 966,227
Accrued and other liabilities.................... 68,966 670,857 936,728
Payable to Online Interactive, Inc............... 27,269
Current portion of capital lease obligations..... 59,081 112,327 122,144
----------- ----------- ------------
Total current liabilities................... 402,807 1,248,056 2,025,099
----------- ----------- ------------
Long-term convertible debt....................... 50,000
Capital lease obligations, net of current
portion........................................ 159,757 144,727 81,219
Commitments (Note 9)
Mandatorily redeemable preferred stock, Series A
convertible, no par value; 10,000,000 shares
authorized, none issued and outstanding at
December 31, 1997 and 1998 and June 30, 1999,
liquidation value $0.086.......................
Shareholders' equity
Series B convertible preferred stock, no par
value; no shares authorized, issued or
outstanding at December 31, 1997 and 1998,
1,250,000 shares authorized, 472,608 issued
and outstanding at June 30, 1999
(unaudited)................................. 8,615,125
Common stock, no par value; 40,000,000 shares
authorized, 6,117,595 issued and 5,597,595
outstanding at December 31, 1997, 8,660,959
issued and 8,140,959 outstanding at December
31, 1998 and 8,923,287 issued and 8,243,287
outstanding at June 30, 1999 (unaudited).... 2,699,518 7,816,328 8,955,511
Additional paid-in capital..................... 62,968 294,529 1,975,849
Note receivable from shareholder............... (25,000)
Deferred stock compensation.................... (12,927) (1,075,975)
Accumulated deficit............................ (2,655,118) (5,854,143) (9,963,946)
----------- ----------- ------------
Total shareholders' equity.................. 82,368 2,243,787 8,506,564
----------- ----------- ------------
$ 644,932 $ 3,686,570 $ 10,612,882
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 69
FREESHOP.COM, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS ENDED
YEAR ENDED JUNE 30, ENDED YEAR ENDED JUNE 30,
------------------------ DECEMBER 31, DECEMBER 31, --------------------------
1996 1997 1997 1998 1998 1999
---------- ----------- ------------ ------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net revenues......... $1,270,949 $ 1,197,757 $ 534,733 $ 1,250,940 $ 429,002 $ 2,146,662
Cost of revenues..... 310,308 313,672 139,451 216,557 75,631 189,898
---------- ----------- ----------- ----------- ------------ -----------
Gross profit......... 960,641 884,085 395,282 1,034,383 353,371 1,956,764
---------- ----------- ----------- ----------- ------------ -----------
Operating expenses
Sales and
marketing........ 624,560 1,809,912 1,174,745 3,088,446 1,029,839 4,141,323
Research and
development...... 64,673 135,121 182,532 386,629 194,069 321,517
General and
administrative... 290,821 352,923 83,217 416,766 171,820 462,060
Equity based
compensation..... -- -- 62,968 174,102 122,696 621,756
Depreciation and
amortization..... 9,008 30,011 34,468 104,393 48,811 259,911
---------- ----------- ----------- ----------- ------------ -----------
Total operating
expenses...... 989,062 2,327,967 1,537,930 4,170,336 1,567,235 5,806,567
---------- ----------- ----------- ----------- ------------ -----------
Operating loss....... (28,421) (1,443,882) (1,142,648) (3,135,953) (1,213,864) (3,849,803)
Interest expense..... 6,226 65,654 28,457 23,492
Other (income)
expense............ (2,582) 761 (86,992)
---------- ----------- ----------- ----------- ------------ -----------
Loss before income
tax expense........ (28,421) (1,443,882) (1,148,874) (3,199,025) (1,243,082) (3,786,303)
Income tax expense...
---------- ----------- ----------- ----------- ------------ -----------
Net loss............. $ (28,421) $(1,443,882) $(1,148,874) $(3,199,025) $ (1,243,082) $(3,786,303)
========== =========== =========== =========== ============ ===========
Basic and diluted net
loss per share..... $ (0.01) $ (0.31) $ (0.22) $ (0.51) $ (0.21) $ (0.46)
========== =========== =========== =========== ============ ===========
Weighted-average
shares used in
computing net loss
per share.......... 4,600,840 4,600,840 5,188,910 6,223,726 5,821,924 8,182,728
========== =========== =========== =========== ============ ===========
Pro forma basic and
diluted net loss
per share.......... $ (0.51) $ (0.43)
=========== ===========
Pro forma weighted-
average shares used
in computing net
loss per share..... 6,223,726 8,821,184
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 70
FREESHOP.COM, INC.
STATEMENT OF CHANGES IN MANDATORILY REDEEMABLE PREFERRED STOCK AND
SHAREHOLDERS' EQUITY/DIVISION EQUITY
<TABLE>
<CAPTION>
MANDATORILY
REDEEMABLE CONVERTIBLE SERIES B CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------------- ----------------------- ----------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
---------- --------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1995......... -- $ -- -- -- -- $ -- $ --
Capital contributions............
Net loss.........................
---------- --------- ---------- ---------- ---------- ---------- ----------
Balance at June 30, 1996......... -- -- -- -- -- -- --
Capital contributions............
Issuance of common and Series A
preferred stock in connection
with spin-off................... 1,935,484 279,196 4,600,820 1,659,182
Net loss.........................
---------- --------- ---------- ---------- ---------- ---------- ----------
Balance at June 30, 1997......... 1,935,484 279,196 4,600,820 1,659,182 --
Forfeiture of common stock....... (520,000)
Conversion of preferred stock.... (1,935,484) (279,196) 774,194 279,196
Issuance of common stock......... 718,190 736,140
Common stock issued in exchange
for a note receivable........... 24,391 25,000
Stock options issued to third
parties......................... 62,968
Net loss.........................
---------- --------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1997..... -- -- 5,597,595 2,699,518 62,968
Issuance of common stock, net of
offering expenses of $36,563.... 2,487,670 5,108,150
Exercise of stock options........ 55,694 8,660
Repayment of note receivable from
shareholder.....................
Stock options and warrants issued
to third parties................ 147,561
Shares transferred to employees
by principal shareholders....... 84,000
Amortization of deferred
compensation....................
Net loss.........................
---------- --------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1998..... -- -- 8,140,959 7,816,328 294,529
Repurchase of common stock
(unaudited)..................... (160,000) (76,500)
Issuance of common stock
(unaudited)..................... 160,000 400,000
Issuance of common stock upon
conversion of promissory note
(unaudited)..................... 20,000 50,000
Issuance of common stock in
connection with business
combinations (unaudited)........ 52,920 736,000
Shares sold to employees by
principal shareholders
(unaudited)..................... 406,000
Exercise of stock options and
warrants (unaudited)............ 472,608 8,615,125 29,408 29,683
Stock options and warrants issued
to third parties (unaudited).... 1,275,320
Amortization of deferred
compensation (unaudited)........
Net loss (unaudited).............
---------- --------- ---------- ---------- ---------- ---------- ----------
Balance at June 30, 1999
(unaudited)..................... -- $ -- 472,608 8,615,125 8,243,287 $8,955,511 $1,975,849
========== ========= ========== ========== ========== ========== ==========
<CAPTION>
NOTE TOTAL
RECEIVABLE SHAREHOLDERS'
FROM DEFERRED DIVISION ACCUMULATED EQUITY/
SHAREHOLDER COMPENSATION EQUITY DEFICIT DIVISION EQUITY
----------- ------------ ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1995......... $ -- $ -- $ 7,747 $ -- $ 7,747
Capital contributions............ 125,198 125,198
Net loss......................... (28,421) (28,421)
-------- ----------- ----------- ----------- -----------
Balance at June 30, 1996......... -- -- 104,524 -- 104,524
Capital contributions............ 1,771,492 1,771,492
Issuance of common and Series A
preferred stock in connection
with spin-off................... (1,876,016) (62,362) (279,196)
Net loss......................... (1,443,882) (1,443,882)
-------- ----------- ----------- ----------- -----------
Balance at June 30, 1997......... -- -- -- (1,506,244) 152,938
Forfeiture of common stock....... --
Conversion of preferred stock.... 279,196
Issuance of common stock......... 736,140
Common stock issued in exchange
for a note receivable........... (25,000) --
Stock options issued to third
parties......................... 62,968
Net loss......................... (1,148,874) (1,148,874)
-------- ----------- ----------- ----------- -----------
Balance at December 31, 1997..... (25,000) -- -- (2,655,118) 82,368
Issuance of common stock, net of
offering expenses of $36,563.... 5,108,150
Exercise of stock options........ 8,660
Repayment of note receivable from
shareholder..................... 25,000 25,000
Stock options and warrants issued
to third parties................ (22,677) 124,884
Shares transferred to employees
by principal shareholders....... 84,000
Amortization of deferred
compensation.................... 9,750 9,750
Net loss......................... (3,199,025) (3,199,025)
-------- ----------- ----------- ----------- -----------
Balance at December 31, 1998..... -- (12,927) -- (5,854,143) 2,243,787
Repurchase of common stock
(unaudited)..................... (323,500) (400,000)
Issuance of common stock
(unaudited)..................... 400,000
Issuance of common stock upon
conversion of promissory note
(unaudited)..................... 50,000
Issuance of common stock in
connection with business
combinations (unaudited)........ 736,000
Shares sold to employees by
principal shareholders
(unaudited)..................... 406,000
Exercise of stock options and
warrants (unaudited)............ 8,644,808
Stock options and warrants issued
to third parties (unaudited).... (1,275,320) --
Amortization of deferred
compensation (unaudited)........ 212,272 212,272
Net loss (unaudited)............. (3,786,303) (3,786,303)
-------- ----------- ----------- ----------- -----------
Balance at June 30, 1999
(unaudited)..................... $ -- $(1,075,975) $ -- $(9,963,946) $ 8,506,564
======== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 71
FREESHOP.COM, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS ENDED
YEAR ENDED JUNE 30, ENDED YEAR ENDED JUNE 30,
----------------------- DECEMBER 31, DECEMBER 31, -------------------------
1996 1997 1997 1998 1998 1999
--------- ----------- ------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................. $ (28,421) $(1,443,882) $(1,148,874) $(3,199,025) $(1,243,082) $(3,786,303)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization......... 5,566 33,659 47,617 140,710 65,692 287,286
Bad debt expense...................... 58,907 146,310 122,485 56,551 20,156 51,040
Amortization of deferred
compensation........................ 9,750 212,272
Shares sold to an employee by a
principal shareholder............... 406,000
Shares transferred to employees by
principal shareholders.............. 84,000
Issuance of stock options and warrants
for services........................ 62,968 88,321 122,696
Issuance of stock for office rent..... 32,637
Loss on disposal of property and
equipment........................... 8,624 1,240 896
Changes in assets and liabilities:
Accounts receivable................. (198,548) (94,449) (196,560) (191,039) 19,173 (694,404)
Prepaid expenses and other assets... (17,280) (43,559) (21,074) (14,323) (349,880)
Accounts payable.................... 11,873 43,044 192,402 217,381 65,786 326,795
Accrued and other liabilities....... 50,502 (48,957) 27,545 601,891 270,017 125,109
Payable to Online Interactive,
Inc............................... (280,918) 308,187 (27,269) (7,800)
--------- ----------- ----------- ----------- ----------- -----------
Net cash used in operating
activities........................ (100,121) (1,662,473) (595,152) (2,231,179) (700,445) (3,421,189)
--------- ----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment........ (25,077) (108,894) (55,902) (67,428) (17,169) (579,965)
Payment for business combinations, net of
cash acquired........................... (1,666,440)
Purchase of short-term investments........ (1,485,660)
--------- ----------- ----------- ----------- ----------- -----------
Net cash used in investing
activities........................ (25,077) (108,894) (55,902) (67,428) (17,169) (3,732,005)
--------- ----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Contributed capital....................... 125,198 1,771,492
Proceeds from notes payable............... 135,000 135,000
Repayment of notes payable................ (85,000)
Principal payments under capital leases... (26,245) (63,951) (16,375) (53,691)
Proceeds from Shareholder Note
Receivable.............................. 25,000 25,000
Repurchase of common stock................ (400,000)
Issuance of common stock, net of issuance
costs................................... 703,503 5,153,373 743,288 429,683
Issuance of Series B preferred Stock...... 8,615,125
--------- ----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities.............. 125,198 1,771,492 677,258 5,164,422 886,913 8,591,117
--------- ----------- ----------- ----------- ----------- -----------
Net increase in cash and cash equivalents... -- 125 26,204 2,865,815 169,299 1,437,923
Cash and cash equivalents at beginning of
period.................................... -- -- 125 26,329 26,329 2,892,144
--------- ----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of
period.................................... $ -- $ 125 $ 26,329 $ 2,892,144 $ 195,628 $ 4,330,067
========= =========== =========== =========== =========== ===========
Cash paid during the period for Interest.... $ -- $ -- $ 6,226 $ 65,654 $ 23,608 $ 24,751
========= =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 72
FREESHOP.COM, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
FreeShop began as a division of Online Interactive, Inc. (Online), a
Washington corporation, incorporated in July 1994. On June 30, 1997, Online
Interactive contributed the FreeShop Division, including certain net assets, to
its wholly-owned subsidiary, FreeShop International, Inc., a Washington
corporation incorporated on June 23, 1997, which then began operating as a
separate entity. In connection with the spin-off, Online issued FreeShop common
shares equal to the number of Online shares (both preferred and common)
outstanding as of June 30, 1997. Online then distributed the FreeShop common
shares to its shareholders. Each Online shareholder received a number of
FreeShop shares equal to the number of Online shares held as of the Distribution
Record Date. However, 1,300,000 shares of common stock were forfeited on July
18, 1997 in connection with agreements between Online and certain shareholders.
As a result of the distribution, FreeShop ceased to be a subsidiary of Online.
On February 19, 1999, FreeShop International, Inc. changed its name to
FreeShop.com, Inc. (FreeShop or the Company). FreeShop operates an online direct
marketing network from a Web site at http://www.freeshop.com. Essentially,
FreeShop is an online marketing service that generates sales leads, creates
product awareness, and initiates consumer purchases through multiple online
marketing vehicles, including free and trial offers, banner advertising, email
newsletter sponsorship, and others.
The financial statements for the two years ended June 30, 1997 reflect the
revenues, expenses and changes in division equity and cash flows of the FreeShop
Division of Online. Certain general and administrative costs incurred by Online
have been allocated to the Company on a basis which management believes
represents a reasonable allocation of such costs to present FreeShop as a
stand-alone company. These allocations consist primarily of corporate expenses
such as executive and other compensation, depreciation, rent and legal expenses.
The corporate expenses have been allocated based on an estimate of Online
personnel time dedicated to the operations and management of FreeShop for the
year ended June 30, 1996 and the nine months ended March 31, 1997. For the
three-month period ended June 30, 1997, these corporate expenses were generally
allocated based on a specific identification basis rather than on the basis of
personnel time. A summary of these allocations are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------
1996 1997
-------- --------
<S> <C> <C>
Sales and marketing......................................... $ 97,564 $176,768
Research and development.................................... 77,147 110,230
General and administrative.................................. 282,694 362,810
-------- --------
$457,405 $649,808
======== ========
</TABLE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash equivalents consist of short-term highly liquid investments that
mature within three months of their acquisition. The Company deposits its cash
and cash equivalents in interest bearing demand deposit accounts with high
credit quality financial institutions. The Company has not experienced any
losses on its cash and cash equivalents.
F-7
<PAGE> 73
FREESHOP.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and
are depreciated using the straight-line method over their estimated useful
lives. The estimated useful lives are as follows:
<TABLE>
<S> <C>
Office furniture and equipment.............................. Five years
Computer hardware and software.............................. Three years
</TABLE>
The cost of normal maintenance and repairs are charged to expense as
incurred and expenditures for major improvements are capitalized, at cost. Gains
or losses on the disposition of assets in the normal course of business are
reflected in the results of operations at the time of disposal.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates its long-lived assets for financial impairment and
continues to evaluate them as events or changes in circumstances indicate that
the carrying amount of such assets may not be fully recoverable. The Company
evaluates the recoverability of long-lived assets by measuring the carrying
amount of the assets against the estimated undiscounted future cash flows
associated with these assets. At the time such evaluations indicate that the
future undiscounted cash flows of certain long-lived assets are not sufficient
to recover the carrying value of such assets, the assets are adjusted to their
fair values. No losses for impairment have been recognized.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments, including cash
and cash equivalents, accounts receivable, accounts payable and accrued
liabilities, approximate fair value because of their short maturities. The
carrying amount of the Company's capital leases and other equipment financing
obligations approximates the fair value of such instruments based upon
management's estimates of interest rates that would be available to the Company
for similar debt obligations at December 31, 1998.
DEFERRED REVENUES
Deferred revenues consist of advance billings and payments on marketing
contracts and is included in accrued and other liabilities in the accompanying
balance sheet.
REVENUE RECOGNITION
The Company has several revenue sources from its online marketing service
activities, including lead generation, advertising, list rental, barter and
transaction fees.
Lead generation revenue consists of fees received, generally on a per
inquiry basis, for delivery of leads to clients. Revenue is recognized in the
period the leads are provided to the client.
Advertising revenues consist of e-mail newsletter sponsorships, banner
advertising, and anchor positions. Newsletter sponsorship revenue is derived
from a fixed fee or a fee based on the circulation of the newsletter. Newsletter
sponsorship revenue is recognized in the period in which the newsletter is
delivered. Banner advertising and anchor positions can be based on impressions,
fixed fees, or per click through. Fixed fee contracts, which range from three
months to two years, are recognized ratably over the term of the agreement,
provided that no significant
F-8
<PAGE> 74
FREESHOP.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Company obligations remain. Revenue from impressions or click through based
contracts is recognized based on the number of impressions or click throughs
delivered over the total number of guaranteed impressions or click throughs.
List rental revenue is revenue received from the rental of customer names
to third parties through the use of list brokers. Revenue from list rental
activities is recognized in the period the names are delivered by the list
broker to the third party.
Transaction fees are recognized in the period the transaction occurred and
was reported to the Company by the online merchant.
Also included in revenues are barter revenues generated from exchanging
lead generation and advertising services for advertising services. Such
transactions are recorded at the lower of the estimated fair value of the
advertisements received or delivered, whichever is more reliably measurable.
Revenue from barter transactions is recognized when advertising or lead
generation is provided, and services received are charged to expense when used.
From July 1, 1995 through December 31, 1997 barter transactions were not
significant. For the year ended December 31, 1998 and the unaudited six months
ended June 30, 1999, the Company recognized approximately $83,000 and $250,000,
respectively, of revenue from barter transactions.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Total advertising
expense for the years ended June 30, 1996 and 1997, the six months ended
December 31, 1997, and the year ended December 31, 1998 and the unaudited six
months ended June 30, 1999, was $13,179, $148,543, $242,919, $1,190,811 and
$2,061,978, respectively.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
INCOME TAXES
The Company accounts for income taxes under the asset and liability method,
which requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of temporary differences between the carrying
amounts and the tax bases of assets and liabilities. If it is more likely than
not that some portion of a deferred tax asset will not be realized, a valuation
allowance is recorded.
NET LOSS PER SHARE
Basic net loss per share represents net loss available to common
shareholders divided by the weighted-average number of shares outstanding during
the period. Diluted net loss per share represents net loss available to common
shareholders divided by the weighted-average number of shares outstanding
including the potentially dilutive impact of common stock options and warrants
and series B convertible preferred stock. Common stock options and warrants are
converted using the treasury stock method. Series B convertible preferred stock
is converted using the if-converted method. Basic and diluted net loss per share
are equal for all periods presented because the impact of common stock
equivalents is anti-dilutive. Potentially dilutive securities totaling 528,536,
1,200,369, 4,315,977 and 4,492,857 shares for the year ended June 30, 1997, the
six months ended December 31, 1997, the year ended December 31, 1998 and the six
months ended June 30, 1999 (unaudited) respectively, were excluded from diluted
net loss per share due to their anti-dilutive effect.
F-9
<PAGE> 75
FREESHOP.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Pro forma net loss per share is computed using the weighted-average number
of common shares outstanding, including the pro forma effects of the automatic
conversion of the Company's series B convertible preferred stock into shares of
the Company's common stock effective upon the closing of the Company's initial
public offering as if such conversion occurred on the date the shares were
originally issued.
The following table sets forth the computation of the numerators and
denominators in the basic and diluted and pro forma net loss per share
calculations for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS ENDED
YEAR ENDED JUNE 30, ENDED YEAR ENDED JUNE 30,
------------------------- DECEMBER 31, DECEMBER 31, -------------------------
1996 1997 1997 1998 1998 1999
----------- ----------- ------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Numerator:
Net loss............. $ (28,421) $(1,443,882) $(1,148,874) $(3,199,025) $(1,242,321) $(3,786,303)
=========== =========== =========== =========== =========== ===========
Denominator:
Weighted-average
shares used in
computing net loss
per share.......... 4,600,840 4,600,840 5,188,910 6,223,726 5,821,924 8,182,728
=========== =========== =========== ===========
Weighted-average effect
of pro forma
securities:
Series B convertible
preferred stock.... 638,456
----------- -----------
Pro forma weighted-
average shares
outstanding used in
computing pro forma
net loss per share... 6,223,726 8,821,184
=========== ===========
</TABLE>
CONCENTRATIONS OF CREDIT RISK
Concentrations of credit risk with respect to accounts receivable are
limited due to the wide variety of customers to which the Company provides
services, as well as their dispersion across many different geographic areas. As
such, no single customer accounted for greater than 10% of total revenues or
accounts receivable balances for either the period ended December 31, 1998 or
June 30, 1999 (unaudited). The Company maintains an allowance for doubtful
accounts receivable based upon its historical experience and the expected
collectibility of all accounts receivable. Credit losses to date have been
within management's estimates.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year's presentation.
F-10
<PAGE> 76
FREESHOP.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial data as of June 30, 1999 and for the six months ended
June 30, 1998 and 1999 is unaudited; however, in the opinion of management, the
interim data includes all adjustments, consisting only of the adjustments
necessary to record the acquisition of substantially all of the assets of the
Catalog Site and World Wide Brochures web sites in May 1999 and normal recurring
adjustments necessary to present fairly the Company's financial position as of
June 30, 1999 and the results of its operations and cash flows for the six
months ended June 30, 1998 and 1999.
STOCK COMPENSATION
The Company follows SFAS No. 123, "Accounting for Stock-Based
Compensation", which establishes financial accounting and reporting standards
for stock-based employee compensation plans and for the issuance of equity
instruments to acquire goods and services from nonemployees.
The Company has elected to apply the disclosure-only provision of SFAS No.
123 for employee stock-based compensation plans. Accordingly, the Company
accounts for stock-based compensation to employees using the intrinsic-value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", and related interpretations. Compensation expense
for stock options is measured as the excess, if any, of the fair value of the
Company's common stock at the date of grant over the exercise price. The Company
records the fair value of equity instruments issued to non-employees in
accordance with the provisions of SFAS No. 123.
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity during a period
from non-owner sources. To date, the Company has not had any transactions that
are required to be reported in comprehensive income other than its net loss.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use". SOP 98-1 is effective
for financial statements for years beginning after December 15, 1998. SOP 98-1
provides guidance over accounting for computer software developed for internal
use including the requirement to capitalize specified costs and amortization of
such costs. Adoption of this standard during the first quarter of 1999 did not
have a material effect on the Company's results of operations, financial
position or cash flows.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-up Activities". SOP 98-5, which is effective for fiscal years beginning
after December 15, 1998, provides guidance on the financial reporting of
start-up costs and organization costs. It requires costs of start up activities
and organization costs to be expensed as incurred. As the Company has expensed
these costs historically, the adoption of this standard during the first quarter
of 1999 did not have a significant impact on results of operations, financial
position or cash flows.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities", which establishes accounting and reporting standards for
derivative instruments,
F-11
<PAGE> 77
FREESHOP.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. SFAS No.
133 is effective for all fiscal quarters of fiscal years beginning after June
15, 2000. The Company does not expect the adoption of this statement to have a
significant impact on results of operations, financial position or cash flows.
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1997 1998 1999
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Accounts receivable.................................... $284,410 $381,830 $1,123,058
Less: Allowance for doubtful accounts.................. (79,719) (42,651) (104,000)
-------- -------- ----------
$204,691 $339,179 $1,019,058
======== ======== ==========
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1997 1998 1999
-------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Computer hardware and software....................... $310,595 $ 468,483 $ 926,839
Office furniture and equipment....................... 129,517 129,517 259,712
-------- --------- -----------
440,112 598,000 1,186,551
Less: Accumulated depreciation and amortization...... (85,616) (216,704) (329,154)
-------- --------- -----------
$354,496 $ 381,296 $ 857,397
======== ========= ===========
</TABLE>
5. ACCRUED AND OTHER LIABILITIES
Accrued and other liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30,
1997 1998 1999
------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred revenue............................................ $20,000 $ 1,129 $ 98,232
Accrued advertising expense................................. 488,451 408,397
List rental deposit......................................... 74,538 5,446
Accrued vacation............................................ 12,802 37,169 53,163
Accrued commissions......................................... 3,313 13,918 116,000
Accrued commerce expense.................................... 164,465
Other....................................................... 32,851 55,652 91,025
------- -------- --------
$68,966 $670,857 $936,728
======= ======== ========
</TABLE>
6. BANK LINE-OF-CREDIT FACILITY
The Company has a line-of-credit facility with a bank. Pursuant to the
terms of the facility agreement, the Company may borrow up to $500,000 at the
bank's prime rate plus 1.5%, 9.25% at December 31, 1998. The line of credit is
collateralized by all assets of the Company and guaranteed up to $200,000 by the
Company's President and Chief Executive Officer. The credit
F-12
<PAGE> 78
FREESHOP.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
facility matures September 18, 1999, contains covenants not to encumber trade
accounts receivable and requires maintenance of certain financial ratios. At
December 31, 1998, the Company was in compliance with the loan covenants and no
balance was outstanding under the line.
7. RELATED PARTY TRANSACTIONS
In January and February 1998, the Company issued notes payable to
shareholders in the amount of $85,000. Such notes included interest at 10%. The
outstanding balance, including accrued interest of $5,745, was repaid in
September 1998.
During 1998, two of the Company's principal shareholders transferred 56,000
shares of common stock to certain employees of the Company as incentive
compensation. As a result, the Company recorded $84,000 of compensation expense
based on the fair market value of the Company's common stock on the date of
transfer.
During January 1999 (unaudited), the Company repurchased 50,000 shares of
common stock from a principal shareholder for $125,000 and subsequently retired
the shares. The repurchase price of $2.50 per share was less than the $5.20 per
share estimated fair value of the common stock at the date of repurchase.
8. LONG-TERM CONVERTIBLE DEBT
In March 1998, the Company issued an uncollateralized 10% convertible
promissory note totaling $50,000 to a third party. The note matures in March
2000. At any time prior to the maturity date, the third party may convert the
outstanding principal balance into shares of the Company's preferred stock at
the price at which such stock is being offered to other investors. During the
first quarter of 1999, the terms of the note were modified to allow conversion
into shares of common stock and the note was then converted. See Note 13 for
further discussion.
9. COMMITMENTS
In May 1998 a promotion agreement was entered into with CNET which provides
for CNET to invest in FreeShop an amount equal to 20% of the amount paid or
payable to CNET for promotion. The agreement called for an investment to be made
on September 30, 1998 on the same terms and conditions, including price, as
FreeShop was then closing the sale of such securities to other investors.
Subsequent investments are to be made on the scheduled closing date of each
subsequent equity financing on the same terms and conditions, including price,
as FreeShop is then closing the sale of such securities to other investors. If
no equity investments are closed within nine months of the previous investment
by CNET then one day after nine months CNET will make an equity investment using
the same terms and conditions as the previous investment made by CNET. No
investment was made by CNET during the year ended December 31, 1998.
The Company's office facilities are leased under operating leases that
provide for minimum rentals and require payment of property taxes and include
escalation clauses. In addition, the Company also rents certain equipment under
agreements treated for financial reporting purposes as capital leases. The
Company's property under capital leases which is included in property and
equipment on the balance sheet at December 31, 1997 and 1998 was $221,801 and
$246,299, respectively, which is net of accumulated amortization of $16,045 and
$92,150, respectively.
F-13
<PAGE> 79
FREESHOP.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments under the noncancellable leases are as
follows.
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
------------------------ --------- ----------
<S> <C> <C>
1999...................................................... $ 149,397 $ 289,105
2000...................................................... 120,798 403,730
2001...................................................... 42,969 426,648
2002...................................................... 448,397
2003...................................................... 192,055
--------- ----------
Total minimum lease payments................................ 313,164 $1,759,935
==========
Less: Amount representing interest.......................... (56,110)
---------
Present value of capital lease obligations.................. 257,054
Less: Current portion....................................... (112,327)
---------
Capital lease obligations, non-current portion.............. $ 144,727
=========
</TABLE>
Rent expense for the years ended June 30, 1996 and 1997, the six months
ended December 31, 1997 and year ended December 31, 1998, was $42,468, $49,003,
$60,594 and $199,136, respectively.
10. SHAREHOLDERS' EQUITY
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
On June 30, 1997, the Company's Board of Directors approved the designation
and issuance of 1,935,484 shares of Series A redeemable convertible preferred
stock. The preferred Series A shares are convertible into one share of common
stock (subject to anti-dilution adjustments) at any time at the option of the
holder.
On July 18, 1997, subsequent to the spin-off of FreeShop from Online, all
outstanding shares of Series A redeemable convertible preferred stock were
converted into common stock at a rate of 2.5 shares of preferred to one share of
common.
COMMON STOCK
On December 10, 1998, FreeShop issued 1,619,387 shares of the Company's
common stock to Fingerhut Companies Inc. (Fingerhut) at a price of $2.47 per
share. The shares were partially paid for by surrender and cancellation of the
$500,000 Convertible Promissory Note, which the Company had issued to Fingerhut
on December 4, 1998.
The Company and Fingerhut also entered into a Stockholders Agreement on
December 10, 1998 which grants Fingerhut a right of first refusal on shares
proposed for transfer by the Company's two principal shareholders, contains
certain agreements regarding composition of the Company's Board of Directors,
requires Board approval of certain specified actions by the Company, grants
Fingerhut preemptive rights to maintain its percentage ownership interest in
connection with proposed share issuances by the Company, grants certain demand
and piggyback registration rights to Fingerhut, and provides for certain
drag-along and tag-along rights among the parties with respect to proposed sales
of shares to third parties. The Stockholders Agreement terminates, on the
earlier of December 10, 2008 or the closing of a sale of the Company's assets or
the acquisition of the Company by merger or consolidation. Certain specific
provisions of the agreement terminate upon the consummation of an underwritten
public offering of the Company's securities in which the deemed market
capitalization of the Company is at least $75 million.
F-14
<PAGE> 80
FREESHOP.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
WARRANTS
In connection with the sale of common stock to Fingerhut, the Company
issued to Fingerhut a series of warrants to purchase shares of the Company's
common stock as follows: a warrant to purchase 1,174,143 shares at $4.30 per
share; a warrant to purchase 716,290 shares at $4.99 per share; a warrant to
purchase 835,672 shares at $5.53 per share; warrants to purchase from time to
time at $5.53 per share a number of shares equal to specified percentages of
shares of common stock that are issued upon exercise of specified options and
warrants; and warrants to purchase at exercise prices ranging from $2.47 per
share to $5.53 per share a number of shares of common stock equal to specified
percentages of shares of common stock that are issued to certain named third
parties pursuant to existing contractual arrangements. Unless sooner exercised,
all such warrants expire on the earlier of December 31, 2000, or the
consummation of an underwritten public offering of the Company's securities in
which the deemed market capitalization of the Company is at least $75 million.
In connection with the equipment acquired under capital lease as described
in Note 9, the Company issued warrants to purchase 16,400 shares of common
stock. The warrants are exercisable at a price equal to $1.02 per share and
expire from October 2002 to January 2003. The Company determined the fair value
of the warrants to be $12,019 using the Black-Scholes option pricing model and
recognized the entire expense during 1998.
In return for recruiting services, the Company issued warrants to purchase
11,300 shares of common stock in January 1998. The warrants are exercisable at a
price equal to $1.02 per share and expire in January 2003. The Company
determined the fair value of these warrants to be $8,277 using the Black-Scholes
option pricing model and recognized the entire expense during 1998.
A warrant to purchase 10,000 shares of the Company's common stock at an
exercise price of $1.50 per share was issued to the bank in connection with the
line of credit described in Note 6. The warrant expires in September 2003. The
Company determined the fair value of the warrants to be $10,625 using the
Black-Scholes option pricing model. The fair value was recorded as prepaid loan
fees during 1998 and will be amortized over the life of the credit facility.
STOCK OPTIONS
Effective June 30, 1997, the Company approved the 1997 Stock Option Plan
(the Plan) to provide for the granting of stock options to employees, directors
and consultants of the Company to acquire ownership in the Company and provide
them with incentives for their service. Under the terms of the Plan, 1,064,306
shares of common stock have been reserved for issuance to plan participants.
The Plan is administered by the Board of Directors of the Company, which
determines the terms and conditions of the options granted, including exercise
price, number of options granted and the vesting period of such options. The
maximum term of options is ten years from the date of grant. The options are
generally granted at the estimated fair value of the underlying stock, as
determined by the Board of Directors, on the date of grant. As of December 31,
1998, options to purchase 249,286 shares of common stock were available for
future grant under the Plan. No compensation expense has been recognized
relative to options issued to employees for the years ended June 30, 1996 and
1997, the six months ended December 31, 1997, nor the year ended December 31,
1998. For the year ended December 31, 1998, $3,177 of deferred compensation was
recorded and will be amortized over the vesting period of the related options.
F-15
<PAGE> 81
FREESHOP.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
During the six month period ended June 30, 1999 (unaudited), the Company
granted options to purchase 191,616 shares of common stock to employees and
service providers at an average exercise price of $3.15. Of those granted,
options to purchase 8,000 shares were forfeited. The Company recorded $1,275,320
of deferred compensation based upon the average deemed fair value of $6.95 which
will be amortized over the vesting period of the related options.
Had compensation expense for employee-related options been determined based
on the fair value at the grant dates consistent with the method of SFAS No. 123,
"Accounting for Stock Based Compensation", the Company's net loss and loss per
share for the six months ended December 31, 1997 and the year ended December 31,
1998 would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Net loss
As reported.............................. $(1,148,874) $(3,199,025)
Pro forma................................ $(1,167,435) $(3,248,168)
Loss per share
As reported.............................. $ (0.22) $ (0.51)
Pro forma................................ $ (0.22) $ (0.52)
</TABLE>
For SFAS No. 123 pro forma disclosure, the fair value of each option is
estimated on the date of grant using the minimum value method with the following
assumptions used for grants to employees in 1998 and 1997; weighted-average
risk-free interest rates of 4.78% and 5.70%, respectively, and expected lives of
four years.
The following table presents activity under the Plan:
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1997 DECEMBER 31, 1998
------------------- --------------------- ---------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
period...................... 528,536 $0.15 1,002,847 $0.56
Granted....................... 528,536 $0.15 474,311 1.02 645,420 1.30
Exercised..................... 55,694 0.15
Forfeited..................... 777,552 0.60
------- --------- ---------
Outstanding at end of
period...................... 528,536 $0.15 1,002,847 $0.56 815,021 $1.12
======= ========= =========
Weighted-average fair value of
options granted during the
period...................... $0.03 $0.30 $0.34
</TABLE>
F-16
<PAGE> 82
FREESHOP.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options outstanding
under the Plan at December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED-
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
RANGE OF OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
PRICES 1998 LIFE PRICE 1998 PRICE
- -------- -------------- ----------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C>
0$.15.. 100,934 8.5 $0.15 50,460 $0.15
1.02.. 367,667 6.0 1.02 242,394 1.02
1.50.. 342,420 9.0 1.50 59,306 1.50
2.50.. 4,000 10.0 2.50 2.50
--------- -------
815,021 7.6 $1.12 352,160 $0.98
========= =======
</TABLE>
During the six months ended December 31, 1997, the Company granted options
to purchase 195,122 shares of common stock to certain investors. These grants
were made outside of the stock option plan. As of December 31, 1998 all of these
options had expired without exercise. During the year ended December 31, 1998,
the Company granted options to purchase 209,000 shares of common stock to
consultants, advisors and investment managers and as severance to certain
employees.
The Company follows SFAS No. 123 in accounting for options and warrants
issued to non-employees. As such, the Company recognized $62,968 of general and
administrative expense for the six months ended December 31, 1997 in connection
with options issued to third parties. During the year ended December 31, 1998,
the Company recognized $32,800 and $34,350 of sales and marketing and general
and administrative expense, respectively, in connection with options issued to
terminated employees and advisors. The remaining fair value of options issued to
advisors of $9,750 is recorded as deferred compensation in the shareholders'
equity section and will be amortized over the remaining vesting period of the
options. Additionally, in connection with the sale of common stock, the Company
issued options to certain investment managers. The fair value of those options
of $36,563 was netted against the proceeds recorded in the transaction. In
determining fair value of the options and warrants on the date of grant, the
Company used the Black-Scholes option-pricing model with the following
assumptions used for grants in 1997 and 1998; no dividend yield; expected
volatility of 100%; weighted-average risk-free interest rates of 5.17% and
5.14%, respectively, and weighted-average expected lives of .55 years and 1.3
years, respectively. The weighted-average fair value of warrants issued during
1998 was $0.83 per share.
11. INCOME TAXES
A current provision for income taxes was not recorded for the six months
ended December 31, 1997 or the year ended December 31, 1998 due to taxable
losses incurred during such periods. A valuation allowance has been recorded for
deferred tax assets because realization is primarily dependent on generating
sufficient taxable income prior to the expiration of net operating loss
carry-forwards. Net operating losses of the FreeShop division of Online did not
carry over to the Company.
F-17
<PAGE> 83
FREESHOP.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets at December 31, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1998
--------- -----------
<S> <C> <C>
Net operating loss carryforwards............................ $ 371,326 $ 1,412,566
Nondeductible allowances.................................... 23,779 39,544
Expense related to stock options and restricted stock
rights.................................................... 21,416 30,635
Other....................................................... 2,176
--------- -----------
418,697 1,482,745
Less: Valuation allowance................................... (418,697) (1,482,745)
--------- -----------
$ -- $ --
========= ===========
</TABLE>
At December 31, 1997 and 1998, the Company has net operating loss
carry-forwards of approximately $1,092,000 and $4,155,000, respectively, for
federal income tax reporting purposes. The net operating losses will expire
beginning in 2012 if not previously utilized. As specified in Section 382 of the
Internal Revenue Code, a 50% or more ownership change by certain combinations of
the Company's shareholders during any three-year period would result in
limitations on the Company's ability to utilize its net operating loss
carry-forwards. Such an ownership change occurred as a result of the equity
issuances as described in Note 13. The limitation on the utilization of federal
net operating loss carryforwards in future years is not expected to be material.
12. SUPPLEMENTAL CASH FLOW INFORMATION
The following items are supplemental information of noncash investing and
financing activities:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS SIX MONTHS ENDED
JUNE 30, ENDED YEAR ENDED JUNE 30,
--------------- DECEMBER 31, DECEMBER 31, -----------------
1996 1997 1997 1998 1998 1999
------ ------ ------------ ------------ ------ --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Property and equipment acquired
with capital leases.......... $ -- $7,237 $237,846 $102,167 $ -- $ --
====== ====== ======== ======== ====== ========
Common stock issued in exchange
for note receivable from
shareholder.................. $ -- $ -- $ 25,000 $ -- $ -- $ --
====== ====== ======== ======== ====== ========
Common stock issued in
connection with business
combination.................. $ -- $ -- $ -- $ -- $ -- $736,000
====== ====== ======== ======== ====== ========
Conversion of preferred
stock........................ $ -- $ -- $279,196 $ -- $ -- $ --
====== ====== ======== ======== ====== ========
Conversion of note payable..... $ -- $ -- $ -- $ -- $ -- $ 50,000
====== ====== ======== ======== ====== ========
</TABLE>
13. SUBSEQUENT EVENTS
In January 1999, the Company repurchased 160,000 shares of common stock for
$2.50 per share. As described in Note 7 50,000 of these shares were repurchased
from a principle shareholder. The repurchase price of the common stock was less
than the $5.20 per share estimated fair value of the stock on the date of
repurchase. Concurrent with the repurchase the Company retired the shares and
sold 160,000 shares to unrelated third parties for $2.50 per share.
F-18
<PAGE> 84
FREESHOP.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
On March 1, 1999, the terms of the convertible promissory note described in
Note 8 were modified to allow conversion into shares of common stock. The note
was then retired through conversion into 20,000 shares of common stock.
In May 1999, the warrants issued to Fingerhut as described in Note 10 were
modified to provide for issuance of series B convertible preferred stock. Each
share of series B convertible preferred stock is convertible into four shares of
common stock. Each share of series B convertible preferred stock has similar
rights and obligations as 4 shares of common stock, except it has no voting
rights. Fingerhut then exercised one warrant to purchase 293,536 shares of
series B convertible preferred stock at a purchase price of $17.18 per share and
one warrant to purchase 179,072 shares of series B convertible preferred stock
at a purchase price of $19.94 per share on May 24, 1999 and June 18, 1999,
respectively.
In May 1999, the Board of Directors of the Company, authorized the
Company's management to file a registration statement for an initial public
offering of the Company's common stock.
In May 1999, FreeShop entered into purchase and sale agreements to acquire
substantially all of the assets of Commonsite LLC (Commonsite) and Travel
Companions International, Inc. (Travel). Total consideration for the acquired
assets of the two companies is $2,577,000, which is comprised of $1,841,000 in
cash and 52,920 shares of common stock. The aggregate purchase price will be
allocated to the net assets acquired, based upon their respective fair market
values. The excess of the purchase price over the fair market value of the
assets acquired and liabilities assumed of $1,382,247 has been allocated to cost
in excess of net assets acquired and will be amortized over three years.
In connection with the acquisition, liabilities were assumed as follows:
<TABLE>
<S> <C>
Fair value of assets acquired............................... $ 1,339,808
Cash paid................................................... (1,841,000)
Common stock issued......................................... (736,000)
Cost in excess of net assets acquired....................... 1,382,247
-----------
Liabilities assumed......................................... $ 145,055
===========
</TABLE>
The following summarizes the unaudited pro forma results of operations, on
a combined basis, as if the Company's acquisition of Commonsite and Travel
occurred as of the beginning of each of the periods presented, after including
the impact of certain adjustments such as amortization of cost in excess of net
assets acquired:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1998 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
Revenues.................................................... $ 1,893,267 $ 2,380,815
Pro forma net loss.......................................... (4,295,661) (4,091,812)
Pro forma basic and diluted net loss per share.............. $ (0.68) $ (0.50)
</TABLE>
The unaudited pro forma results are not necessarily indicative of the
results of operations which would actually have been reported had the
acquisition occurred prior to the beginning of the periods presented. In
addition, they are not intended to be indicative of future results.
Effective August 9, 1999, the Board of Directors declared a 1 for 2.5
reverse stock split on the Company's common stock. Common stock issued, stock
option, warrant and convertible preferred stock information in these financial
statements have been restated to reflect this reverse split.
F-19
<PAGE> 85
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of FreeShop.com, Inc.
In our opinion, the accompanying statement of financial position and the
related statements of operations and members' deficit and of cash flows present
fairly, in all material respects, the financial position of Commonsite, LLC.
(the "Company") at December 31, 1998, and the results of its operations and its
cash flows for the year ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
As described in Note 6, subsequent to year-end the members approved and
authorized the sale of substantially all of the Company's assets.
PricewaterhouseCoopers LLP
Seattle, Washington
May 6, 1999
F-20
<PAGE> 86
COMMONSITE, LLC
STATEMENT OF FINANCIAL POSITION
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash........................................................ $ 12,811 $ 23,652
Accounts receivable, net.................................... 42,358 29,151
-------- --------
Total current assets................................... 55,169 52,803
Property and equipment, net................................. 9,728 8,097
-------- --------
Total assets........................................... $ 64,897 $ 60,900
======== ========
LIABILITIES AND MEMBERS' DEFICIT
Accounts payable............................................ $ 6,536 $ 567
Related party payable....................................... 16,245 11,946
Accrued liabilities......................................... 6,609 6,046
Deferred revenue............................................ 109,337 120,422
-------- --------
Total current liabilities.............................. 138,727 138,981
-------- --------
Members' deficit............................................ (73,830) (78,081)
-------- --------
Total liabilities and members' deficit................. $ 64,897 $ 60,900
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE> 87
COMMONSITE, LLC
STATEMENT OF OPERATIONS AND MEMBERS' DEFICIT
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
DECEMBER 31, ----------------------
1998 1998 1999
------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Revenues............................................ $540,114 $ 106,053 $ 106,435
Cost of revenues.................................... 180,244 47,289 21,492
-------- --------- ---------
Gross profit........................................ 359,870 58,764 84,943
-------- --------- ---------
Operating expenses
Sales and marketing............................... 276,378 73,887 36,463
General and administrative........................ 72,290 30,446 52,731
-------- --------- ---------
Total operating expenses.................. 348,668 104,333 89,194
-------- --------- ---------
Net income.......................................... 11,202 (45,569) (4,251)
Members' deficit, end of period..................... (85,032) (85,032) (73,830)
-------- --------- ---------
Members' deficit, beginning of period............... $(73,830) $(130,601) $ (78,081)
======== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE> 88
COMMONSITE, LLC
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
DECEMBER 31, ------------------
1998 1998 1999
------------ -------- -------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................... $ 11,202 $(45,569) $(4,251)
Adjustments to reconcile net income to net cash used in
operating activities
Depreciation.......................................... 6,525 1,631 1,631
Bad debt expense...................................... 9,999 1,150 1,422
(Increase) decrease in accounts receivable............ (35,846) (18,098) 11,785
Decrease in accounts payable.......................... (9,005) (5,572) (5,969)
Increase (decrease) in related party payable.......... 16,245 12,803 (4,299)
Decrease in accrued liabilities....................... (6,449) (440) (563)
Increase in unearned revenue.......................... 2,272 56,665 11,085
-------- -------- -------
Net cash (used in) provided by operating
activities..................................... (5,057) 2,570 10,841
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from member contributions....................... 5,000
-------- -------- -------
Net cash provided by financing activities........ 5,000 -- --
-------- -------- -------
Net (decrease) increase in cash and cash equivalents....... (57) 2,570 10,841
Cash and cash equivalents, beginning of period............. 12,868 12,868 12,811
-------- -------- -------
Cash and cash equivalents, end of period................... $ 12,811 $ 15,438 $23,652
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE> 89
COMMONSITE, LLC
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
Commonsite, LLC ("Commonsite" or "the Company") is a limited liability
company in which there are seven limited partners. The Company was formed in
September 1995 to develop and operate a shopping portal focusing on catalog
companies. Essentially, the Company provides catalog companies with consumer
requests for their catalogs. In addition, the Company provides catalog companies
the development and hosting of online stores, links directly to their existing
Web sites and a software solution for tracking online sales back to the traffic
source.
Profits and losses of the Company are allocated based upon the ownership
percentages of the members.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments purchased within 90
days or less of maturity. They are recorded at cost which approximates fair
value. The Company deposits its cash and cash equivalents with high credit
quality financial institutions. The Company has not experienced any losses on
its cash and cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment consisting of computer hardware and software, are
stated at cost less accumulated depreciation and are depreciated using the
straight-line method over their estimated useful lives of three years. The cost
of normal maintenance and repairs are charged to expense as incurred.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates its long-lived assets for financial impairment and
continues to evaluate them as events or changes in circumstances indicate that
the carrying amount of such assets may not be fully recoverable. The Company
evaluates the recoverability of long-lived assets by measuring the carrying
amount of the assets against the estimated undiscounted future cash flows
associated with these assets. At the time such evaluations indicate that the
future undiscounted cash flows of certain long-lived assets are not sufficient
to recover the carrying value of such assets, the assets are adjusted to their
fair values. No losses from impairment have been recognized.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments, including cash
and cash equivalents, accounts receivable, accounts payable and accrued
liabilities, approximate fair value because of their short maturities.
DEFERRED REVENUE
Deferred revenue consists of advance billings and payments on marketing
contracts.
REVENUE RECOGNITION
Revenue is recognized based on the type of contract. Fixed fee contracts,
which range from three months to one year, are recognized ratably over the term
of the agreement, provided that no significant Company obligations remain.
Revenue from click through based contracts is
F-24
<PAGE> 90
COMMONSITE, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
recognized in the period in which the click throughs are delivered. Revenue from
catalog development is recognized under the percentage of completion method,
whereby revenue is recognized upon completion of agreed upon milestones.
CONCENTRATIONS OF CREDIT RISK
Concentrations of credit risk with respect to accounts receivable are
limited due to the wide variety of customers to which the Company provides
services, as well as their dispersion across many different geographic areas. As
such, no single customer accounted for greater than 10% of total revenues or
accounts receivable balances for the year ended December 31, 1998. The Company
maintains an allowance for doubtful accounts receivable based upon its
historical experience and the expected collectibility of all accounts
receivable. Credit losses to date have been within management's estimates.
INCOME TAXES
The Company is not subject to Federal income tax. The pro-rata income or
loss is included in the tax returns of the individual members.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reporting amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses. Actual results
could differ from those estimates.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial data as of March 31, 1999 and for the three months
ended March 31, 1998 and 1999 is unaudited; however, in the opinion of
management, the interim data includes all adjustments, consisting only of normal
recurring adjustments necessary to present fairly the Company's financial
position as of March 31, 1999 and the results of its operations and cash flows
for the three months ended March 31, 1998 and 1999.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use". SOP 98-1 is effective
for financial statements for years beginning after December 15, 1998. SOP 98-1
provides guidance over accounting for computer software developed for internal
use including the requirement to capitalize specified costs and amortization of
such costs. The Company does not expect the adoption of this standard to have a
material effect on it's results of operations, financial position or cash flows.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-up Activities". SOP 98-5, which is effective for fiscal years beginning
after December 15, 1998, provides guidance on the financial reporting of
start-up costs and organization costs. It requires costs of start up activities
and organization costs to be expensed as incurred. As the Company has expensed
these costs historically, the adoption of this standard is not expected to have
a significant impact on it's results of operations, financial position or cash
flows.
F-25
<PAGE> 91
COMMONSITE, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities", which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Company does not expect the adoption of this
statement to have a significant impact on it's results of operations, financial
position or cash flows.
3. RELATED PARTY TRANSACTIONS
The Company pays Bennett Company (Bennett) for services provided in
relation to the operations and management of the Company. A member of Commonsite
owns Bennett. Costs incurred by Bennett were billed to the Company based on an
estimate of Bennett personnel time dedicated to the operations and management of
Commonsite. A summary of these expenses is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
YEAR ENDED -------------------
DECEMBER 31, 1998 1998 1999
----------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Salaries.................................... $230,979 $73,123 $34,574
Equipment................................... 16,236 6,287 9,146
Connectivity................................ 22,957 5,136 4,487
Rent........................................ 12,637 2,575 3,475
Internet marketing.......................... 26,134 6,970 --
Other....................................... 5,848 1,234 841
-------- ------- -------
$314,791 95,325 52,523
======== ======= =======
</TABLE>
4. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ -----------
(UNAUDITED)
<S> <C> <C>
Accounts receivable................................... $ 66,866 $ 55,081
Less: Allowance for doubtful accounts................. (24,508) (25,930)
-------- --------
$ 42,358 $ 29,151
======== ========
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ -----------
(UNAUDITED)
<S> <C> <C>
Computer hardware and software........................ $19,578 $ 19,578
Less: Accumulated depreciation........................ (9,850) (11,481)
------- --------
$ 9,728 $ 8,097
======= ========
</TABLE>
F-26
<PAGE> 92
COMMONSITE, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. SUBSEQUENT EVENT
In May 1999, Commonsite entered into a purchase and sale agreement to sell
substantially all of its assets to FreeShop.com, Inc. Total consideration for
the assets is approximately $1,200,000 which is comprised of $441,000 in cash
and 52,920 shares of common stock.
F-27
<PAGE> 93
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of FreeShop.com, Inc.
In our opinion, the accompanying balance sheet and the related statements
of income, stockholders' equity and cash flows present fairly, in all material
respects, the financial position of Travel Companions International, Inc. (the
Company) at December 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for the opinion expressed
above.
As described in Note 6, subsequent to year-end, the stockholders of the
Company approved and authorized the sale of substantially all of the Company's
assets.
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
May 24, 1999
F-28
<PAGE> 94
TRAVEL COMPANIONS INTERNATIONAL, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 5,091 $ 3,545
Accounts receivable....................................... 8,772 34,225
Prepaid expenses.......................................... 700 820
--------- ---------
Total current assets................................... 14,563 38,590
Property and equipment, net................................. 3,050 2,265
--------- ---------
Total assets........................................... $ 17,613 $ 40,855
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Liabilities:
Current liabilities:
Debt................................................... $ 52,603 $ 51,668
Accounts payable....................................... 4,600 4,600
Accrued expenses....................................... 3,038 3,296
Deferred revenue....................................... 11,299 24,956
--------- ---------
Total current liabilities.............................. 71,540 84,520
Notes payable to stockholders............................. 459,678 454,678
--------- ---------
Total liabilities...................................... 531,218 539,198
--------- ---------
Stockholders' deficit:
Common stock, no par value; 5,000 shares authorized, 5,000
shares issued and outstanding.......................... 5,000 5,000
Accumulated deficit....................................... (518,605) (503,343)
--------- ---------
Total stockholders' deficit............................ (513,605) (498,343)
--------- ---------
Total liabilities and stockholders' deficit............ $ 17,613 $ 40,855
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE> 95
TRAVEL COMPANIONS INTERNATIONAL, INC.
STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------ ------------------
1998 1998 1999
------------ ------- -------
(UNAUDITED)
<S> <C> <C> <C>
Revenues................................................ $219,813 $58,380 $72,188
Cost of revenues........................................ 94,875 23,570 25,866
-------- ------- -------
124,938 34,810 46,322
-------- ------- -------
Operating expenses:
Sales and marketing................................... 9,393 3,324 1,950
General and administrative............................ 92,645 27,876 28,000
-------- ------- -------
Total operating expenses........................... 102,038 31,200 29,950
-------- ------- -------
Operating income........................................ 22,900 3,610 16,372
Interest expense........................................ 4,287 1,147 1,110
-------- ------- -------
Net income.............................................. $ 18,613 $ 2,463 $15,262
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE> 96
TRAVEL COMPANIONS INTERNATIONAL, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON
STOCK ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
------ ------ ----------- ---------
<S> <C> <C> <C> <C>
Balances, December 31, 1997................. 5,000 $5,000 $(537,218) $(532,218)
Net income.................................. 18,613 18,613
----- ------ --------- ---------
Balances, December 31, 1998................. 5,000 $5,000 $(518,605) $(513,605)
===== ====== ========= =========
Net income (unaudited)...................... 15,262 15,262
----- ------ --------- ---------
Balance, March 31, 1999 (unaudited)......... 5,000 $5,000 $(503,343) $(498,343)
===== ====== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE> 97
TRAVEL COMPANIONS INTERNATIONAL, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, ------------------
1998 1998 1999
------------ ------- --------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................... $ 18,613 $ 2,463 $ 15,262
Adjustments to reconcile net income to net cash provided
by operations:
Depreciation and amortization......................... 2,790 424 785
Changes in assets and liabilities:
Accounts receivable................................. 4,159 (25,453)
Prepaid expenses.................................... 78 28 (120)
Inventory........................................... 300 (74)
Deferred revenue.................................... (40) (40) 13,657
Accrued and other liabilities....................... 1,230 693 258
-------- ------- --------
Net cash provided by operating activities........ 27,130 3,494 4,389
-------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment...................... (1,139) -- --
-------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of debt............................... (3,209) (935)
Principal payments of notes payable to stockholders...... (19,700) (1,304) (5,000)
-------- ------- --------
Net cash used in financing activities............ (22,909) (1,304) (5,935)
-------- ------- --------
Net increase (decrease) in cash............................ 3,082 2,190 (1,546)
Cash at beginning of period................................ 2,009 2,009 5,091
-------- ------- --------
Cash at end of period...................................... $ 5,091 $ 4,199 $ 3,545
======== ======= ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest.............................................. $ 4,323 $ 1,250 $ 1,121
Significant non-cash financing activities:
Refinancing of accrued interest to debt............... 5,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE> 98
TRAVEL COMPANIONS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS DESCRIPTION
Travel Companions International (the Company), an S Corporation, was
incorporated in the State of Minnesota in October 1988. The Company is in the
business of distributing travel literature in conjunction with various travel
programs offered through American Express for its cardholders, as well as
programs implemented by Norvista, the global group of travel agencies and tour
operators belonging to the Finnair Group. The Company also publishes Worldwide
Brochures, a listing of over 15,000 free travel maps, guides, and brochures from
over 10,000 companies.
USE OF ESTIMATES
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization
are determined using the straight line method over the estimated useful lives of
the assets of three to seven years. The cost and related accumulated
depreciation or amortization on asset disposals are removed from the accounts
and any gain or loss thereon is included in operations in the year of disposal.
Maintenance, repairs and minor renewals are charged to expense as incurred,
while additions and betterments are capitalized.
REVENUE RECOGNITION
Literature distribution revenue, which comprises over 80% of total revenue,
consists of fees received for delivery of travel literature to both American
Express cardholders and Norvista customers. Revenue is recognized in the period
the literature is sent to the customer.
Advertising revenue consists of banner advertising and priority listings
placed on the Company's website. Both banner advertising and priority listing
revenue are derived from fixed fee contracts, with no guaranteed number of
impressions. Fixed fee contracts are recognized ratably over the term of the
agreement, provided that no significant Company obligations remain. Deferred
revenue consists of payments received from customers for future advertising
services to be performed by the Company under contract.
CONCENTRATIONS OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
Financial instruments that potentially subject the Company to credit risk
consist primarily of accounts receivable. The Company grants credit to customers
in the ordinary course of business. Two customers accounted for approximately
59% and 21% of total revenues during 1998.
F-33
<PAGE> 99
TRAVEL COMPANIONS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Receivables from these same two customers accounted for approximately 68% and
32% of total receivables at December 31, 1998, respectively.
INCOME TAXES
The Company has elected to be taxed as an S corporation under the
provisions of the Internal Revenue Code (the Code) and comparable state income
tax law. Under those provisions, the Company's income is reported on the
individual tax returns of the Company's stockholders. As such, the Company is
generally not subject to corporate income taxes. Therefore, no provision or
liability for income taxes is reflected in the financial statements of the
Company.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial data as of March 31, 1999 and for the three months
ended March 31, 1998 and 1999 is unaudited; however, in the opinion of
management, the interim data includes all adjustments, consisting only of normal
recurring adjustments necessary to present fairly the Company's financial
position as of March 31, 1999 and the results of its operations and cash flows
for the three months ended March 31, 1998 and 1999.
2. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ -----------
(UNAUDITED)
<S> <C> <C>
Property and equipment:
Computer equipment........................................ $23,488 $ 23,488
Furniture and office equipment............................ 23,881 23,881
Leasehold improvements.................................... 878 878
------- -----------
48,247 48,247
Less accumulated depreciation and amortization.............. 45,197 45,982
------- -----------
$ 3,050 $ 2,265
======= ===========
</TABLE>
3. BORROWING ARRANGEMENTS
DEBT
The Company has a note with a local development authority. The loan bears
simple interest at a rate of 8.5% and calls for monthly principal and interest
payments of $682 per month for five years with the remaining principal and
accrued interest due in April 2003. As of December 31, 1998, the balance
outstanding under this loan agreement was $52,603. The outstanding balance has
been classified as current in accordance with the terms of the agreement due to
the pending acquisition of the majority of the Company's assets as described in
Note 6. In the event that the acquisition is not consummated, approximately
$48,700 of the outstanding debt balance would be reclassified to long term.
Borrowings outstanding under the agreement are collateralized by all
inventory and equipment of the Company and are personally guaranteed by the
stockholders. In addition, the borrowings are collateralized by the proceeds
from life insurance policies maintained by the Company on all of its
stockholders with a face value of $300,000.
F-34
<PAGE> 100
TRAVEL COMPANIONS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTES PAYABLE TO STOCKHOLDERS
The Company has entered into subordinated note agreements with its
stockholders. The amounts outstanding under the note agreements totaled $459,678
and $454,678 as of December 31, 1998 and March 31, 1999 (unaudited),
respectively. These amounts do not bear interest and are due on demand
subsequent to May 31, 2000.
4. RELATED PARTY TRANSACTIONS
The Company leases office space on a month-to-month basis from one of its
stockholders. The Company recognized $18,000 of rent expense related to this
arrangement during the year ended December 31, 1998 and $4,500 during the three
months ended March 31, 1999 (unaudited).
5. RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 is effective
for financial statements for years beginning after December 15, 1998. SOP 98-1
provides guidance over accounting for computer software developed for internal
use including the requirement to capitalize specified costs and amortization of
such costs.
The Company does not expect the adoption of this standard to have a
material effect on the results of its operations, financial position or cash
flows.
6. SUBSEQUENT EVENTS
In May 1999, the Company entered into an asset purchase agreement to sell
substantially all of its assets to FreeShop.com, Inc. for a purchase price of
$1,400,000 in cash.
F-35
<PAGE> 101
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
In May 1999, FreeShop.com, Inc. (FreeShop) entered into purchase and sale
agreements to acquire substantially all of the assets of Commonsite, LLC
(Commonsite) and Travel Companions International, Inc. (Travel). Total
consideration for the two companies is $2,576,000, which is comprised of
$1,841,000 in cash and 52,920 shares of common stock. The unaudited pro forma
combined statements of operations are based on individual historical results of
operations of FreeShop, Commonsite and Travel for the year ended December 31,
1998 and for the six months ended June 30, 1999 after giving effect to the
acquisitions of Commonsite and Travel as if they had occurred on January 1,
1998.
The unaudited pro forma combined financial statements should be read in
conjunction with the historical financial statements and notes thereto of
FreeShop, Commonsite and Travel. The unaudited pro forma combined financial
statements are presented for illustrative purposes only and are not necessarily
indicative of results of operations that would have actually occurred had the
acquisitions of Commonsite and Travel been effected on the date assumed.
F-36
<PAGE> 102
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
--------------------------------------------------------------------------------
PRO FORMA
FREESHOP COMMONSITE TRAVEL COMBINED ADJUSTMENTS PRO FORMA
----------- ---------- -------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net revenues.................... $ 1,250,940 $540,114 $219,813 $ 2,010,867 $ (117,600)(3) $ 1,893,267
Cost of revenues................ 216,557 180,244 61,872 458,673 (20,547)(4) 438,126
----------- -------- -------- ----------- ----------- -----------
Gross profit.................... 1,034,383 359,870 157,941 1,552,194 (97,053) 1,455,141
Operating expenses
Sales and marketing........... 3,088,446 276,378 9,393 3,374,217 (105,000)(4) 3,269,217
Research and development...... 386,629 386,629 386,629
General and administrative.... 416,766 65,765 122,858 605,389 605,389
Equity based compensation..... 174,102 174,102 174,102
Depreciation and
amortization................ 104,393 6,525 2,790 113,708 1,141,000(2) 1,252,393
(2,315)(6)
----------- -------- -------- ----------- ----------- -----------
Total operating expenses........ 4,170,336 348,668 135,041 4,654,045 1,033,685 5,687,730
----------- -------- -------- ----------- ----------- -----------
Loss from operations............ (3,135,953) 11,202 22,900 (3,101,851) (1,130,738) (4,232,589)
Interest expense................ 65,654 65,654 65,654
Other (income) expense.......... (2,582) 4,287 1,705 (4,287)(5) (2,582)
----------- -------- -------- ----------- ----------- -----------
Net (loss) income............... $(3,199,025) $ 11,202 $ 18,613 $(3,169,210) $(1,126,451) $(4,295,661)
=========== ======== ======== =========== =========== ===========
Basic and diluted net loss per
share......................... $ (0.51) $ (0.68)(7)
=========== ===========
Weighted-average shares used in
computing net loss per
share......................... 6,223,726 52,920(1) 6,276,646(7)
=========== =========== ===========
Pro forma basic and diluted net
loss per share................ $ (0.51) $ (0.68)
=========== ===========
Pro forma weighted-average
shares used in computing net
loss per share................ 6,223,726 52,920(1) 6,276,646
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999
--------------------------------------------------------------------------------
PRO FORMA
FREESHOP COMMONSITE TRAVEL COMBINED ADJUSTMENTS PRO FORMA
----------- ---------- -------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net revenues.................... $ 2,146,662 $146,345 $ 87,808 $ 2,380,815 $ 2,380,815
Cost of revenues................ 189,898 25,689 30,241 245,828 245,828
----------- -------- -------- ----------- -----------
Gross profit.................... 1,956,764 120,656 57,567 2,134,987 2,134,987
Operating expenses
Sales and marketing........... 4,141,323 53,084 2,675 4,197,082 4,197,082
Research and development...... 321,517 321,517 321,517
General and administrative.... 462,060 73,476 62,260 597,796 597,796
Equity based compensation..... 621,756 621,756 621,756
Depreciation and
amortization................ 259,911 652 240 260,803 $ 292,014(2) 552,149
(668)(6)
----------- -------- -------- ----------- ----------- -----------
Total operating expenses........ 5,806,567 127,212 65,175 5,998,954 291,346 6,290,300
----------- -------- -------- ----------- ----------- -----------
Loss from operations............ (3,849,803) (6,556) (7,608) (3,863,967) (291,346) (4,155,313)
Interest expense................ 23,492 1,155 24,647 (1,155)(5) 23,492
Other (income) expense.......... (86,992) (86,992) (86,992)
----------- -------- -------- ----------- ----------- -----------
Net loss........................ $(3,786,303) $ (6,556) $ (8,763) $(3,801,622) $ (290,191) $(4,091,813)
=========== ======== ======== =========== =========== ===========
Basic and diluted net loss per
share......................... $ (0.46) $ (0.50)(7)
=========== ===========
</TABLE>
F-37
<PAGE> 103
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999
--------------------------------------------------------------------------------
PRO FORMA
FREESHOP COMMONSITE TRAVEL COMBINED ADJUSTMENTS PRO FORMA
----------- ---------- -------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Weighted-average shares used in
computing net loss per
share......................... 8,182,728 36,547(1) 8,219,275(7)
=========== =========== ===========
Pro forma basic and diluted net
loss per share................ $ (0.43) $ (0.46)
=========== ===========
Pro forma weighted-average
shares used in computing net
loss per share................ 8,821,184 36,547(1) 8,857,731
</TABLE>
F-38
<PAGE> 104
NOTES TO UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS
1. Reflects the issuance of 52,920 shares of FreeShop Common Stock in
connection with the Commonsite acquisition.
2. Reflects the amortization of the client lists, customer lists, data
base content, covenants not to complete and goodwill acquired in their
business combinations, which are being amortized over one, two, five,
two and three years, respectively.
3. Represents the revenue stream generated by commonsite for online
catalog development. Online catalog development services will not be
provided by FreeShop and no assets related to this service are included
in the acquisition.
4. Represents additional programming and management service fees of
Commonsite that FreeShop would not have required due to the similarity
in business operations.
5. Represents elimination of interest expense for debt not assumed in the
acquisitions.
6. Represents elimination of depreciation expense related to property and
equipment not purchased in the Commonsite acquisition offset by the
additional depreciation expense recorded for the increase in the value
of the property and equipment acquired in the Travel acquisition.
7. Net loss reflects the impact of the adjustments above. Basic and
diluted net loss per share is computed using the weighted-average
number of shares of common stock outstanding after the issuance of
FreeShop Common Stock in connection with the Commonsite acquisition.
8. Pro Forma basic and diluted net loss per share is computed using the
weighted-average number of shares of common stock outstanding after the
issuance of FreeShop Common Stock in connection with the Commonsite
acquisition, including the pro forma effects of the automatic
conversion of the Company's Series B convertible preferred stock into
shares of the Company's common stock effective upon the closing of the
Company's initial public offering as if such conversion occurred on the
date the shares were originally issued.
F-39
<PAGE> 105
[ON INSIDE BACK COVER]
[The FreeShop logo is centered on the page with the phrase "THE ONLINE NETWORK
THAT PUTS CONSUMERS IN CONTROL OF THE DIRECT MARKETING PROCESS."]
<PAGE> 106
YOU MAY RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS
PROSPECTUS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR SALE OF COMMON STOCK
MEANS THAT INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AFTER THE DATE OF
THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR SOLICITATION OF AN
OFFER TO BUY THESE SHARES OF COMMON STOCK IN ANY CIRCUMSTANCES UNDER WHICH THE
OFFER OR SOLICITATION IS UNLAWFUL.
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary....................... 3
Risk Factors............................. 8
Forward-Looking Statements............... 17
Use of Proceeds.......................... 18
Dividend Policy.......................... 18
Capitalization........................... 19
Dilution................................. 20
Selected Unaudited Pro Forma Financial
Data................................... 21
Selected Actual Financial Data........... 22
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. 24
Business................................. 35
Management............................... 46
Related Party Transactions............... 53
Principal Shareholders................... 56
Description of Capital Stock............. 58
Shares Eligible for Future Sale.......... 60
Underwriting............................. 62
Legal Matters............................ 64
Experts.................................. 64
Where You Can Find More Information...... 64
Index to Financial Statements............ F-1
</TABLE>
DEALER PROSPECTUS DELIVERY OBLIGATION:
UNTIL , 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
THAT BUY, SELL OR TRADE THESE SHARES OF COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
FREESHOP LOGO
3,200,000 SHARES
COMMON STOCK
DEUTSCHE BANC ALEX. BROWN
DAIN RAUSCHER WESSELS
a division of Dain Rauscher Incorporated
VOLPE BROWN WHELAN
& COMPANY
E*OFFERING
Prospectus
, 1999
<PAGE> 107
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table states the costs and expenses, other than the
underwriting discounts and commissions, payable by the registrant in connection
with the sale of common stock being registered by this registration statement.
All amounts shown are estimates, except the Securities and Exchange Commission
registration fee, the NASD Filing Fee and the Nasdaq National Market listing
Fee.
<TABLE>
<CAPTION>
AMOUNT
--------
<S> <C>
Securities and Exchange Commission Registration Fee......... $ 12,788
NASD Filing Fee............................................. 5,100
Nasdaq National Market Listing Fee.......................... 90,500
Legal Fees and Expenses..................................... 250,000
Accountants' Fees and Expenses.............................. 200,000
Blue Sky Filing and Counsel Fees and Expenses............... 5,000
Printing and Engraving Expenses............................. 170,000
Transfer Agent and Registrar Fees........................... 3,500
Miscellaneous Expenses...................................... 13,112
Total............................................. $750,000
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Sections 23B.08.500 through 23B.08.600 of the Washington Business
Corporation Act (the "Washington Act") authorize a court to award, or a
corporation's board of directors to grant, indemnification to directors and
officers on terms sufficiently broad to permit indemnification under certain
circumstances for liabilities arising under the Securities Act of 1933, as
amended (the "Securities Act"). Article IX of the registrant's Bylaws provide
for indemnification of the registrant's directors, officers, employees and
agents to the maximum extent permitted by Washington law. The registrant has
entered into agreements with its directors and officers arising out of their
service as officers and director, as applicable, and has agreed to advance
expenses to defend claims subject to indemnification. The directors and officers
of the registrant also may be indemnified against liability they may incur for
serving in that capacity pursuant to a liability insurance policy maintained by
the registrant for such purpose.
Section 23B.08.320 of the Washington Act authorizes a corporation to limit
a director's liability to the corporation or its shareholders for monetary
damages for acts or omissions as a director, except in certain circumstances
involving intentional misconduct, self-dealing or illegal corporate loans or
distributions, or any transaction from which the director personally receives a
benefit in money, property or services to which the director is not legally
entitled. Article 6 of the registrant's Articles of Incorporation contains
provisions implementing, to the fullest extent permitted by Washington law, such
limitations on a director's liability to the registrant and its shareholders.
Reference is also made to the Form of Underwriting Agreement to be filed as
Exhibit 1.1 to this Registration Statement for certain provisions regarding the
indemnification of officers and directors of the registrant by the underwriters
in connection with matters specifically provided in writing by the underwriters
for inclusion in the Registration Statement.
II-1
<PAGE> 108
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since the registrant's inception in June 1997, the registrant has issued
and sold the following unregistered securities:
1. On June 30, 1997, the registrant issued 4,600,820 shares of Common Stock
and 774,194 shares of Series A Preferred Stock to Online Interactive, Inc. for
aggregate consideration consisting of the contribution to the Company of the
operating assets and liabilities of the FreeShop Division of Online Interactive,
Inc. The 774,194 shares of Series A Preferred Stock were convertible into the
same number of shares of Common Stock.
2. On July 18, 1997, the registrant issued 387,097 shares of Common Stock
to Timothy C. Choate and 387,097 shares of Common Stock to John Ballantine upon
conversion of Series A Preferred Stock held by each of them.
3. During the period July 1997 through June 1998, the registrant issued an
aggregate of 867,310 shares of Common Stock to twenty-one investors for a
consideration of $1.025 per share, or an aggregate of $889,003.
4. On August 22, 1997, the registrant issued options for 24,391 shares of
Common Stock exercisable at a price of $1.025 per share, expiring February 22,
1998, to each of Othneil D. Palomino and Dwayne Walker. These options were
issued outside of the registrant's 1997 stock option plan.
5. On September 7, 1997, the registrant issued options for 146,340 shares
of Common Stock exercisable at a price of $1.025 per share, expiring October 30,
1997 to Michael Tannen and Johan Liedgren. The expiration of these options was
extended to January 15, 1998. These options were issued outside of the
registrant's 1997 stock option plan.
6. On October 15, 1997, the registrant issued Warrants for 2,400 shares of
Common Stock exercisable at a price of $1.02 per share, expiring October 23,
2002, to HALLCO Leasing Corporation in partial consideration of an equipment
lease.
7. During the period October 1997 through December 1997, the registrant
issued a total of 31,841 shares of Common Stock to its landlord Merrill Place
LLC in lieu of rent payments in the aggregate amount of $32,637.
8. On January 16, 1998, the registrant issued Warrants for 1,300 shares of
Common Stock exercisable at a price of $1.02 per share, expiring January 16,
2002, to Karrie Lee for consulting services.
9. On January 19, 1998, the registrant issued Warrants for 14,000 shares of
Common Stock exercisable at a price of $1.02 per share, expiring January 23,
2003, to HALLCO Leasing Corporation in partial consideration of an equipment
lease.
10. On January 23, 1998, the registrant issued Warrants for 400 shares of
Common Stock exercisable at a price of $1.02 per share, expiring December 31,
2002, to Dennis Green for consulting services.
11. On January 23, 1998, the registrant issued Warrants for 10,000 shares
of Common Stock exercisable at a price of $1.02 per share, expiring January 23,
2002, to EMPLOYCO for consulting services.
12. On March 17, 1998, the registrant issued a $50,000 convertible
promissory note to Oki Enterprises, LLC, with a maturity date March 1, 2000. The
principal balance of the note was convertible in the discretion of the holder at
any time prior to the maturity date into shares of the Company's Preferred Stock
on the same terms at which the Company may then be offering Preferred Stock to
other investors.
II-2
<PAGE> 109
13. On June 30, 1998, the registrant issued 1,456 shares of Common Stock to
Anthony Lee Simonelli in consideration of consulting services valued at $1,492
rendered to the Company.
14. During the period June 1998 through September 1998, the registrant
issued an aggregate of 612,674 shares of Common Stock to twenty-two investors at
$1.50 per share for aggregate consideration of $919,004.
15. On September 18, 1998, the registrant issued Warrants for 10,000 shares
of Common Stock exercisable at a price of $1.50 per share, expiring September
18, 2003, to Imperial Bank in partial consideration of a credit facility.
16. On December 11, 1998, the registrant issued 1,619,387 shares of Common
Stock, and Warrants to purchase 2,935,356 shares of Common Stock at $4.29565 per
share, 716,290 shares at $4.986 per share and 1,572,822 shares at $5.522975 per
share and 13,332 shares of Common Stock at $3.965 per share to Fingerhut for an
aggregate consideration of $4,000,000.
17. In February 1999, the registrant issued an aggregate of 160,000 shares
of Common Stock to a total of ten investors at $2.50 per share for aggregate
consideration of $400,000.
18. On April 5, 1999, the registrant issued 20,000 shares of Common Stock
to Oki Enterprises, LLC, in exchange for the $50,000 convertible promissory note
referenced in item 10 above.
19. On April 8, 1999, the registrant issued 97,562 shares of Common Stock
to Techwave, Inc. at $1.025 per share for aggregate consideration of $100,000.
20. On May 6, 1999, in accordance with an Asset Purchase Agreement among
the registrant, Commonsite, LLC and a shareholder of Commonsite, the registrant
issued 52,920 shares of Common Stock to Commonsite in connection with the
registrant's purchase of certain of Commonsite's assets.
21. On May 24, 1999, the registrant issued 293,536 shares of Series B
Preferred Stock in lieu of Common Stock to Fingerhut for aggregate consideration
of $5,043,704 upon the exercise by Fingerhut of a Warrant identified in item 14
above. Each share of Series B Preferred Stock is convertible into four shares of
Common Stock.
22. On May 25, 1999, the registrant issued 10,000 shares of Common Stock to
EMPLOYCO for aggregate consideration of $15,000 upon the exercise by EMPLOYCO of
Warrants identified in item 9 above.
23. On June 8, 1999, the registrant issued 179,072 shares of Series B
Preferred Stock in lieu of Common Stock to Fingerhut for aggregate consideration
of $3,571,420 upon the exercise by Fingerhut of a warrant identified in item 16
above. Each share of Series B Preferred Stock is convertible into four shares of
Common Stock.
24. Since inception, the registrant has issued an aggregate of 1,648,267
options to purchase Common Stock, with exercise prices ranging from $0.06 to
$1.71 per share, to employees, directors, advisors and service providers under
the registrant's 1997 Stock Option Plan. Of these options, options for 809,992
shares have been canceled without being exercised, options for 73,602 shares
have been exercised and options for 953,289 shares remain outstanding.
The sales and issuances of securities described in paragraphs 3, 14, 16,
17, 20, 21 and 23 were exempt from Securities Act registration pursuant to Rule
506 of Regulation D under the Securities Act. The sales and issuances of
securities described in paragraphs 1, 2, 6-13, 18, 19 and 22 above were exempt
from Securities Act registration under Section 4(2) of the Securities Act, on
the basis that the transactions did not involve a public offering. The sales and
issuances of securities described in paragraphs 4, 5 and 24 above were exempt
from Securities Act registration under Rule 701 under the Securities Act, on the
basis that these option were offered and sold in accordance with a written
compensatory benefit plan or contract.
II-3
<PAGE> 110
No underwriters were used in connection with these sales and issuances.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
A. Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 First Amended and Restated Articles of Incorporation of
registrant.
3.2 Bylaws of registrant.
4.1 Specimen Stock Certificate.
4.2** Form of Common Stock Warrant.
5.1* Opinion of Dorsey & Whitney LLP.
10.1** Form of Indemnification Agreement between the registrant and
each of its directors.
10.2** 1997 Stock Option Plan, as amended.
10.3** Form of Stock Option Agreement.
10.4** Investor Subscription Agreement, dated December 10, 1998,
between registrant and Fingerhut Companies, Inc.
10.5** Warrant Agreement, dated December 10, 1998, between
registrant and Fingerhut Companies, Inc.
10.6** Stockholders Agreement, dated December 10, 1998, among
registrant, Timothy C. Choate, John Ballantine and Fingerhut
Companies, Inc.
10.7** Asset Purchase Agreement, dated May 5, 1999, among
registrant, Travel Companions International, Inc., Jeff Mohr
and Janet Mohr.
10.8** Asset Purchase Agreement, dated May 6, 1999, among
registrant, Commonsite, LLC and Alan Bennett.
10.9** Registration Rights Agreement, dated May 6, 1999, between
registrant and Commonsite, LLC.
10.10** Loan and Security Agreement, dated September 18, 1998,
between registrant and Imperial Bank.
10.11** Lease Agreement, dated September 23, 1997 and amended as of
February 16, 1999, between registrant and Merrill Place LLC.
10.12+** Promotion Agreement, dated May 18, 1998 and amended as of
June 30, 1998 and September 30, 1998, between registrant and
CNET, Inc.
10.13+** Linkshare Network Membership Agreement, dated September 23,
1998, between registrant and Linkshare Corporation.
10.14 Letter Agreement dated June 18, 1999 between registrant and
Fingerhut.
10.15** Escrow Agreement dated June 18, 1999 between registrant and
Fingerhut.
10.16 Common Stock Purchase Warrant dated January 26, 1998 in
favor of Karrie Lee.
10.17 Warrant to Purchase Stock dated September 18, 1998 in favor
of Imperial Bank.
10.18 Common Stock Purchase Warrant dated January 23, 1998 in
favor of Hallco Leasing Corporation.
10.19 Common Stock Purchase Warrant dated December 4, 1997 in
favor of Hallco Leasing Corporation.
</TABLE>
II-4
<PAGE> 111
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.20 Common Stock Purchase Warrant dated January 26, 1998 in
favor of Employco, Inc.
10.21+ Marketing Agreement with NewSub Services, Inc. effective as
of June 1, 1999.
23.1 Consent of PricewaterhouseCoopers LLP, independent auditors.
23.2* Consent of Dorsey & Whitney LLP (included in Exhibit 5.1).
24.1 Power of Attorney (included on the signature page).
27.1 Financial Data Schedule
</TABLE>
- -------------------------
* To be filed by amendment.
** Previously filed.
+ Confidential treatment has been requested as to certain portions of this
exhibit. Omitted portions will be filed separately with the Securities and
Exchange Commission.
B. Financial Statement Schedules.
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions, are inapplicable or not material, or the information
called for thereby is otherwise included in the financial statements and
therefore has been omitted.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names by the underwriter to permit prompt
delivery to each purchaser.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be a part of this
Registration Statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 112
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Seattle,
state of Washington, on August 16, 1999.
FREESHOP.COM, INC.
By: /s/ TIMOTHY C. CHOATE
------------------------------------
Timothy C. Choate
Chairman, President and
Chief Executive Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
/s/ TIMOTHY C. CHOATE Chairman, President and August 16, 1999
- ----------------------------------------------------- Chief Executive Officer
Timothy C. Choate (principal executive officer)
/s/ JOHN A. WADE Secretary, Vice President, August 16, 1999
- ----------------------------------------------------- Finance and Chief Financial
John A. Wade Officer (principal finance and
accounting officer)
* Director August 16, 1999
- -----------------------------------------------------
John P. Ballantine
* Director August 16, 1999
- -----------------------------------------------------
Kirk M. Loevner
* Director August 16, 1999
- -----------------------------------------------------
John B. Balousek
Director
- -----------------------------------------------------
William J. Lansing
* /s/ TIMOTHY C. CHOATE
- -----------------------------------------------------
Attorney-in-fact
</TABLE>
II-6
<PAGE> 113
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 First Amended and Restated Articles of Incorporation of
registrant.
3.2 Bylaws of registrant.
4.1 Specimen Stock Certificate.
4.2** Form of Common Stock Warrant.
5.1* Opinion of Dorsey & Whitney LLP.
10.1** Form of Indemnification Agreement between the registrant and
each of its directors.
10.2** 1997 Stock Option Plan, as amended.
10.3** Form of Stock Option Agreement.
10.4** Investor Subscription Agreement, dated December 10, 1998,
between registrant and Fingerhut Companies, Inc.
10.5** Warrant Agreement, dated December 10, 1998, between
registrant and Fingerhut Companies, Inc.
10.6** Stockholders Agreement, dated December 10, 1998, among
registrant, Timothy C. Choate, John Ballantine and Fingerhut
Companies, Inc.
10.7** Asset Purchase Agreement, dated May 5, 1999, among
registrant, Travel Companions International, Inc., Jeff Mohr
and Janet Mohr.
10.8** Asset Purchase Agreement, dated May 6, 1999, among
registrant, Commonsite, LLC and Alan Bennett.
10.9** Registration Rights Agreement, dated May 6, 1999, between
registrant and Commonsite, LLC.
10.10** Loan and Security Agreement, dated September 18, 1998,
between registrant and Imperial Bank.
10.11** Lease Agreement, dated September 23, 1997 and amended as of
February 16, 1999, between registrant and Merrill Place LLC.
10.12+** Promotion Agreement, dated May 18, 1998 and amended as of
June 30, 1998 and September 30, 1998, between registrant and
CNET, Inc.
10.13+** Linkshare Network Membership Agreement, dated September 23,
1998, between registrant and Linkshare Corporation.
10.14 Letter Agreement dated June 18, 1999 between registrant and
Fingerhut.
10.15** Escrow Agreement dated June 18, 1999 between registrant and
Fingerhut.
10.16 Common Stock Purchase Warrant dated January 26, 1998 in
favor of Karrie Lee.
10.17 Warrant to Purchase Stock dated September 18, 1998 in favor
of Imperial Bank.
10.18 Common Stock Purchase Warrant dated January 23, 1998 in
favor of Hallco Leasing Corporation.
10.19 Common Stock Purchase Warrant dated December 4, 1997 in
favor of Hallco Leasing Corporation.
10.20 Common Stock Purchase Warrant dated January 26, 1998 in
favor of Employco, Inc.
</TABLE>
<PAGE> 114
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
10.21+ Marketing Agreement with NewSub Services, Inc. effective as
of June 1, 1999.
23.1 Consent of PricewaterhouseCoopers LLP, independent auditors
23.2* Consent of Dorsey & Whitney LLP (included in Exhibit 5.1).
24.1 Power of Attorney (included on the signature page).
27.1* Financial Data Schedule
</TABLE>
- -------------------------
* To be filed by amendment.
** Previously filed.
+ Confidential treatment has been requested as to certain portions of this
Exhibit. Omitted portions will be filed separately with the Securities and
Exchange Commission.
<PAGE> 1
EXHIBIT 3.1
CERTIFICATE ACCOMPANYING
FIRST AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
FREESHOP.COM, INC.
Pursuant to RCW 23B.10.070, this Certificate accompanies the First
Amended and Restated Articles of Incorporation of FreeShop.com, Inc., a
Washington corporation (the "Company"). The First Amended and Restated Articles
of Incorporation supersede the Company's original Articles of Incorporation and
all amendments thereto.
The accompanying First Amended and Restated Articles of Incorporation
includes the following amendments:
1. An amendment to Article 2 adding Section 2.4 "DESIGNATION OF SERIES B
CONVERTIBLE PREFERRED STOCK," which creates and sets forth the terms for
1,250,000 shares of a series of convertible Preferred Stock designated as Series
B Stock.
2. An amendment to Article 3 deleting the names and addresses of the
initial directors.
3. Deletion of Article 7 containing the name and address of the initial
registered agent and initial registered office, and renumbering of subsequent
Articles accordingly.
The accompanying First Amended and Restated Articles of Incorporation,
and the amendments included therein, were duly adopted by the Board of Directors
of the Company on March 30, 1999, pursuant to RCW 23B.06.020, RCW 23B.10.020 and
RCW 23B.10.070. Shareholder approval was not required.
This certificate accompanying the Company's First Amended and Restated
Articles of Incorporation is executed by the Company by its duly authorized
officer.
DATED the ____ day of May, 1999.
FREESHOP.COM, INC.
By:_____________________________________
Timothy Choate
President and CEO
<PAGE> 2
FIRST AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
FREESHOP.COM, INC.
ARTICLE 1. NAME
The name of the corporation (the "Corporation") is FreeShop.com, Inc.
ARTICLE 2. CAPITAL STOCK
2.1 AUTHORIZED CAPITAL
The total authorized stock of the Corporation shall consist of
100,000,000 shares of Common Stock, no par value, and 10,000,000 shares of
Preferred Stock, no par value.
2.2 ISSUANCE OF PREFERRED STOCK IN SERIES
The Preferred Stock may be issued from time to time in one or more
series, the shares of each series to have such voting powers, full or limited,
and such designations, preferences and relative, participating, optional or
other special rights and qualifications, limitations or restrictions thereof as
are stated and expressed herein or in the resolution or resolutions providing
for the issue of such series adopted by the Board of Directors.
2.2.1 AUTHORITY OF THE BOARD OF DIRECTORS
Authority is hereby expressly granted to the Board of Directors of the
Corporation, subject to the provisions of this Article 2 and to the limitations
prescribed by law, to authorize the issue of one or more series of Preferred
Stock, and with respect to each such series to fix by resolution or resolutions
providing for the issue of each series the number of shares of such series, the
voting powers, full or limited, if any, of the shares of such series and the
designations, preferences and relative, participating, optional or other special
rights and the qualifications, limitations or restrictions thereof. The
authority of the Board of Directors with respect to each series of Preferred
Stock shall include, but not be limited to, the determination or fixing of the
following:
(a) The number of shares of such series;
(b) The designation of such series;
1
<PAGE> 3
(c) The dividends of such series, the conditions and dates upon
which such dividends shall be payable, the relation which such dividends shall
bear to the dividends payable on any other class or classes of stock and whether
such dividends shall be cumulative or noncumulative;
(d) Whether the shares of such series shall be subject to
redemption by the Corporation and, if made subject to such redemption, the
times, prices, rates, adjustments, and other terms and conditions of such
redemption;
(e) The terms and amounts of any sinking fund provided for the
purchase or redemption of the shares of such series;
(f) Whether or not the shares of such series shall be convertible
into or exchangeable for shares of any other class or classes or of any other
series of any class or classes of stock of the Corporation and, if provision be
made for conversion or exchange, the times, prices, rates, adjustments, and
other terms and conditions of such conversion or exchange;
(g) The extent, if any, to which the holders of the shares of
such series shall be entitled to vote with respect to the election of directors
or otherwise, including the right to elect a specified number or class of
directors, the number or percentage of votes required for certain actions, and
the extent to which a vote by class or series shall be required for certain
actions;
(h) The restrictions, if any, on the issue or reissue of any
Preferred Stock;
(i) The rights of the holders of the shares of such series upon
the dissolution of, or upon the distribution of the assets of, the Corporation;
and
(j) The extent, if any, to which any committee of the Board of
Directors may fix the designations and any of the preferences or rights of the
shares of such series relating to dividends, redemption, dissolution, any
distribution of assets of the Corporation or the conversion into or exchange of
such shares for shares of any other class or classes of stock of the Corporation
or any other series of the same or any other class or classes of stock of the
Corporation, or fix the number of shares of any such series or authorize the
increase or decrease in the shares of such series.
2.2.2 DIVIDENDS
Subject to any preferential rights granted for any series of Preferred
Stock, the holders of shares of the Common Stock shall be entitled to receive
dividends, out of the funds of the Corporation legally available therefor, at
the rate and at the time or times, whether cumulative or noncumulative, as may
be provided by the Board of Directors. The holders of shares of the Preferred
Stock shall be entitled to receive dividends to the extent provided herein or by
the Board of Directors in designating the particular series of Preferred Stock.
The holders of shares of the Common Stock shall not be entitled to receive any
dividends thereon other than the dividends referred to in this section.
2
<PAGE> 4
2.2.3 VOTING
The holders of shares of the Common Stock, on the basis of one vote per
share, shall have the right to vote for the election of members of the Board of
Directors of the Corporation and the right to vote on all other matters, except
those matters on which a separate class of the Corporation's Shareholders vote
by class or series to the exclusion of the holders of the shares of the Common
Stock. To the extent provided herein or by resolution or resolutions of the
Board of Directors providing for the issue of a series of Preferred Stock, the
holders of each such series shall have the right to vote for the election of
members of the Board of Directors of the Corporation and the right to vote on
all other matters, except those matters in which a separate class of the
Corporation's shareholders vote by class or series to the exclusion of the
holders of the shares of such series.
2.2.4 ISSUANCE OF SHARES
The Corporation may from time to time issue and dispose of any of the
authorized and unissued shares of the Common Stock or the Preferred Stock for
such consideration as may be fixed from time to time by the Board of Directors,
without action by the shareholders. The Board of Directors may provide for
payment therefor to be received by the Corporation in cash, property, services
or such other consideration as is approved by the Board of Directors. Any and
all such shares of the Common Stock or the Preferred Stock of the Corporation,
the issuance of which has been so authorized, and for which consideration so
fixed by the Board of Directors has been paid or delivered, shall be deemed
fully paid stock and shall not be liable to any further call or assessment
thereon.
2.3 DESIGNATION OF SERIES A CONVERTIBLE PREFERRED STOCK
The following series of Preferred Stock is hereby designated, which
series shall have the rights, preferences, privileges and limitations as set
forth below in this Section 2.3:
2.3.1 SERIES A PREFERRED STOCK
The series of Series A Convertible Preferred Stock, consisting of
1,935,484 shares, no par value, authorized herein, shall be designated herein as
the Series A Stock and shall be convertible into shares of the Corporation's
Common Stock, as described in Section 4.3.5.
The rights, preferences, restrictions and other matters relating to
Series A Stock are set forth below.
2.3.2 DIVIDENDS
(a) Subject to the rights of the holders, if any, of any
outstanding shares of Preferred Stock of the Corporation having a preferential
right to dividends ranking equal or superior to the rights of the holders of
Series A Stock, holders of shares of Series A Stock, in preference to holders of
shares of Common Stock of the Corporation, shall be entitled to receive out of
funds that are legally available therefor when and as declared by the Board of
Directors noncumulative cash dividends at the rate of
3
<PAGE> 5
$.000006 per annum on each outstanding share of Series A Stock (as adjusted for
any stock dividends, combinations or splits with respect to such shares).
(b) So long as any shares of Series A Stock shall remain
outstanding, no dividend, whether in cash or property, shall be paid or
declared, nor shall any other distribution be made, on any Common Stock until
all declared and unpaid dividends on the Series A Stock have been paid.
(c) No cash dividends shall be declared on the Common Stock or
Preferred Stock having a preferential right to dividends ranking equal to the
Series A Stock unless or until a cash dividend in an amount equal to or greater
than the dividend declared on the Common Stock or such Preferred Stock having a
preferential right to dividends equal to the Series A Stock (dividends shall be
compared on an as-converted-to-Common-Stock basis) shall have been paid to, or
declared and a sum sufficient for the payment thereof set apart for the Series A
Stock.
2.3.3 LIQUIDATION RIGHTS
Upon the voluntary or involuntary dissolution, liquidation or winding up
of the Corporation, the assets of the Corporation available for distribution to
its shareholders shall be distributed in the following order and amounts:
(a) General.
(i) First, the holders, if any, of any outstanding shares
of Preferred Stock of the Corporation having a preferential right to liquidation
payments ranking superior to the rights of the holders of Series A Stock shall
be entitled to receive the full preferential amount per share held by them (the
"Superior Liquidation Amount"). If the assets of the Corporation shall be
insufficient to permit the payment of the full Superior Liquidation Amount, then
the assets of the Corporation available for distribution shall be distributed
ratably among the holders of the shares of such superior Preferred Stock in the
same proportions as the full Superior Liquidation Amount each such holder would
otherwise be entitled to receive bears to the total of the full Superior
Liquidation Amount that would otherwise be payable to all holders of such
superior Preferred Stock.
(ii) If, upon completion of the distribution required by
subsection (i) of this Section 2.3.3(a), assets remain in the Corporation, (A)
the holders of shares of Series A Stock shall be entitled to receive $.086 for
each outstanding share of Series A Stock held by them and (B) the holders, if
any, of any outstanding shares of Preferred Stock of the Corporation having a
preferential right to liquidation payments ranking equal to the rights of the
holders of the Series A Stock shall be entitled to receive the liquidation
payment specified for such shares held by them; in addition, each such holder
shall be entitled to receive any declared and unpaid dividend per share on such
outstanding share of Series A Stock or other parity Preferred Stock
(collectively, such liquidation payment amounts are referred to as the "Parity
Liquidation Amount"). If, upon the occurrence of such event, the assets of the
Corporation shall be insufficient to permit the payment of the full Parity
Liquidation Amount, then the assets of the Corporation available for
distribution shall be distributed ratably among the holders of shares of Series
A Stock and the Preferred Stock, if any, ranking equal to the Series A Stock, in
the same proportions as the aggregate of the Parity Liquidation Amount each such
holder would otherwise
4
<PAGE> 6
be entitled to receive bears to the total of the Parity Liquidation Amount that
would otherwise be payable to all such holders, and no distribution to other
shareholders of the Corporation shall be made.
(b) Limitation. Upon the completion of the distribution of the
distributions contemplated pursuant to Section 2.3.3(a), if assets remain in the
Corporation, such remaining assets shall be distributed to the holders of any
other class or series of Preferred Stock of the Corporation having a liquidation
preference to the extent of, and in accordance with, such preference, and then
the holders of the Common Stock shall be entitled to share ratably in the
remaining assets of the Corporation.
(c) Treatment of Consolidations, Mergers and Sales of Assets. The
sale of all or substantially all of the assets of the Corporation, or the
acquisition of the Corporation by another entity by means of merger,
consolidation, share exchange, reorganization or otherwise pursuant to which
shares of capital stock of the Corporation are converted into cash, securities
or other property of the acquiring entity or any of its affiliates shall be
regarded as a liquidation within the meaning of this Section 2.3.3; provided,
however, that each holder of Series A Stock or other shares of convertible
Preferred Stock of the Corporation shall have the right to elect the benefits of
the provisions of Section 2.3.5 or other applicable conversion provisions in
lieu of receiving payment in the event of the liquidation, dissolution or
winding up of the Corporation pursuant to this Section 2.3.3; provided, further,
that this provision shall not apply if the holders of voting capital stock of
the Corporation immediately prior to such merger, consolidation, share exchange,
reorganization or sale of assets beneficially own, directly or indirectly, 50%
or more of the combined voting power of the capital stock of the surviving
entity resulting from such merger, consolidation, share exchange or
reorganization or the successor corporation in any such sale of assets.
(d) Distributions Other Than Cash. Whenever the distribution
provided for in this Section 2.3.3 shall be payable in property other than cash,
the value of such distribution shall be the fair market value of such property
as determined in good faith by the Board of Directors.
2.3.4 VOTING POWER
(a) General. Each holder of Series A Stock shall be entitled to
vote on all matters submitted to a vote of shareholders and shall be entitled to
that number of votes equal to the largest number of whole shares of Common Stock
into which such holder's shares of Series A Stock could be converted under
Section 2.3.5, at the record date for the determination of shareholders entitled
to vote on such matter, or, if no such record date is established, at the date
on which notice of the meeting of shareholders at which the vote is to be taken
is mailed, or the date any written consent of shareholders is solicited if the
vote is not to be taken at a meeting. Except as otherwise expressly provided
herein or by the Washington Business Corporation Act, the holders of shares of
the Series A Stock and Common Stock shall vote together as a single class on all
matters submitted to a vote of shareholders.
(b) Series A Stock Voting. Without the affirmative consent of the
holders of shares representing at least a majority (unless a greater number is
otherwise required by law) of the voting power of the Series A Stock then
outstanding, acting separately as a class, given by written
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consent or by vote at a meeting called for such purpose for which notice shall
have been given to the holders of the Series A Stock, the Corporation shall not:
(i) authorize or issue (or obligate itself to authorize or
issue) any security of the Corporation having rights, preferences or privileges
senior to the Series A Stock,
(ii) amend its Articles of Incorporation or Bylaws in any
manner that materially adversely affects the preferences, privileges,
restrictions or other rights of the Series A Stock;
(iii) declare or pay any dividends or other distributions
on the Common Stock or Series A Stock, or redeem or repurchase any of the
Corporation's capital stock (unless such shares are repurchased or redeemed
pursuant to the redemption provisions of Section 2.3.7 hereof or from employees,
officers, directors, consultants or other persons performing work for the
Corporation upon termination of the employment, consulting or other relationship
between the Corporation and such person pursuant to an employment or similar
vesting agreement or other stock repurchase agreement where the redemption or
repurchase price does not exceed the fair market value of such shares (as
determined by the Board of Directors, whose determination shall be conclusive)
or, in the case of unvested shares, the cost of such shares to the holder
thereof);
(iv) effect any sale, lease, assignment, transfer or other
conveyance of material assets of the Corporation to any person other than a
wholly owned subsidiary of the Corporation, or any consolidation or merger in
which the holders of the Corporation's equity securities do not hold at least a
majority of the voting securities of the surviving corporation
(v) authorize any increase in the number of authorized
shares of Series A Stock; or
(vi) approve or effect any liquidation or dissolution of
the Corporation.
2.3.5 CONVERSION RIGHTS
The holders of Series A Stock shall have the following rights with
respect to the conversion of Series A Stock into shares of Common Stock:
(a) General.
(i) Voluntary Conversion. Any share of Series A Stock may,
at the option of the holder, be converted at any time into such number of fully
paid and nonassessable shares of Common Stock as is equal to the product
obtained by multiplying the Series A Conversion Rate (determined under Section
2.3.5(b)) by the number of shares of Series A Stock being converted.
(ii) Mandatory Conversion. Each share of Series A Stock
shall be converted automatically, without any action by the holders of such
shares and whether or not the certificates representing such shares are
surrendered to the Corporation or its transfer agent, into the
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number of shares of Common Stock into which such Series A Stock is convertible
pursuant to Section 2.3.5(a)(i) upon the earliest of, (A) immediately prior to
the closing of a firmly underwritten, public offering by the Corporation of
shares of Common Stock, registered under the Securities Act of 1933, as amended,
in which the aggregate gross offering proceeds are in excess of $10,000,000
(before deduction of underwriters' discounts and commissions and expenses of the
offering) and the per share price at which such shares of Common Stock are
offered to the public is at least equal to $5.00 (appropriately adjusted to
reflect the occurrence of any extraordinary Common Stock Event (as defined
below)), or (B) the consent or vote by holders of at least two-thirds of the
Series A Stock then outstanding to such conversion. Any such automatic
conversion shall take precedence over and shall occur irrespective of any notice
of redemption of any shares of Series A Stock if such conversion occurs prior to
the applicable Redemption Date (as defined in Section 2.3.7(d)) for such shares.
(b) Conversion Rate. The conversion rate for Series A Stock in
effect at any time (the "Series A Conversion Rate") shall equal $.086 divided by
the Series A Conversion Price, calculated as provided in Section 2.3.5(c).
(c) Conversion Price. The conversion price for Series A Stock in
effect from time to time shall initially be $.086, subject to adjustment, in
accordance with Section 2.3.5(d) (the "Series A Conversion Price").
(d) Adjustments to Applicable Conversion Price.
(i) Extraordinary Common Stock Event. Upon the happening
of an Extraordinary Common Stock Event (as defined below) after the date of the
initial issuance of any shares of Series A Stock, the Series A Conversion Price
shall, simultaneously with the happening of such Extraordinary Common Stock
Event, be adjusted by multiplying the then effective Series A Conversion Price
by a fraction, the numerator of which shall be the number of shares of Common
Stock outstanding immediately prior to such Extraordinary Common Stock Event and
the denominator of which shall be the number of shares of Common Stock
outstanding immediately after such Extraordinary Common Stock Event, and the
product so obtained shall thereafter be the Series A Conversion Price. The
Series A Conversion Price, as so adjusted, shall be readjusted in the same
manner upon the happening of any successive Extraordinary Common Stock Event or
Events. "Extraordinary Common Stock Event" shall mean (x) the issuance of
additional shares of Common Stock as a dividend or other distribution on
outstanding Common Stock of the Corporation, (y) a subdivision of outstanding
shares of Common Stock into a greater number of shares of Common Stock, or (z) a
combination of outstanding shares of Common Stock into a smaller number of
shares of Common Stock.
(ii) Sale of Shares Below Applicable Conversion Price.
(A) If the Corporation shall issue any Additional
Stock (as defined in Section 2.3.5(d)(iii)) without consideration or for a
consideration per share less than the Series A Conversion Price in effect
immediately before the issuance of such Additional Stock, the Series A
Conversion Price in effect upon issuance (except as otherwise provided in this
Section 2.3.5(d)(ii))
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shall be adjusted to a price equal to the quotient obtained by dividing the
total computed under clause (x) below by the total computed under clause (y)
below as follows:
(x) an amount equal to the sum of (1) the
result obtained by multiplying the number of shares of Common Stock deemed
outstanding immediately prior to such issuance (which shall include the actual
number of shares outstanding plus all shares issuable upon the conversion or
exercise of all outstanding convertible securities, warrants and options) by the
Series A Conversion Price then in effect, and (2) the aggregate consideration,
if any, received by the Corporation upon the issuance of such Additional Stock;
(y) the number of shares of Common Stock of
the Corporation outstanding immediately after each issuance (including the
shares deemed outstanding as provided above).
(B) No adjustment of the Series A Conversion Price
shall be made in an amount less than $.01 per share, provided that any
adjustments that are not required to be made by reason of this sentence shall be
carried forward and shall be taken into account in any subsequent adjustment
made to the Series A Conversion Price. Except as provided in Subsections
2.3.5(d)(i) and 2.3.5(d)(ii)(E)(3) and (4), no adjustment of the Series A
Conversion Price pursuant to this Section 2.3.5(d)(ii) shall have the effect of
increasing the Series A Conversion Price above the Series A Conversion Price in
effect immediately before such adjustment.
(C) In the case of the issuance of Common Stock for
cash, the consideration shall be deemed to be the amount of cash paid therefor
before deducting any discounts, commissions or other expenses allowed, paid or
incurred by the Corporation for any underwriting or otherwise in connection with
the issuance and sale thereof.
(D) In the case of the issuance of Common Stock for
consideration in whole or in part other than cash, the consideration other than
cash shall be deemed to be the fair value thereof as determined by the Board
irrespective of any accounting treatment.
(E) In the case of the issuance of options to
purchase or rights to subscribe for Common Stock, securities by their terms
convertible into or exchangeable for Common Stock, or options to purchase or
rights to subscribe for such convertible or exchangeable securities (which
options, rights, or convertible or exchangeable securities are not excluded from
the definition of Additional Stock), the following provisions shall apply:
(1) the aggregate maximum number of shares
of Common Stock deliverable upon exercise of such options to purchase or rights
to subscribe for Common Stock shall be deemed to have been issued at the time
such options or rights were issued for a consideration equal to the
consideration (determined in the manner provided in Subsections 2.3.5(d)(ii)(C)
and (D)) received by the Corporation upon the issuance of such options or
rights, plus the minimum purchase price provided in such options or rights for
the Common Stock covered thereby, but no further adjustment to the Series A
Conversion Price shall be made for the actual issuance of Common Stock upon the
exercise of such options or rights in accordance with their terms;
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(2) the aggregate maximum number of shares
of Common Stock deliverable upon conversion of or in exchange for any such
convertible or exchangeable securities or upon the exercise of options to
purchase or rights to subscribe for such convertible or exchangeable securities
and subsequent conversion or exchange thereof shall be deemed to have been
issued at the time such securities were issued or such options or rights were
issued for a consideration equal to the consideration received by the
Corporation for any such securities and related options or rights, plus the
additional consideration, if any, to be received by the Corporation upon the
conversion or exchange of such securities or the exercise of any related options
or rights (the consideration in each case to be determined in the manner
provided in Subsections 2.3.5(d)(ii)(C) and (D)), but no further adjustments to
the Series A Conversion Price shall be made for the actual issuance of Common
Stock upon the conversion or exchange of such securities in accordance with
their terms;
(3) if such options, rights, or convertible
or exchangeable securities by their terms provide, with the passage of time or
otherwise, for any increase in the consideration payable to the Corporation, or
decrease in the number of shares of Common Stock issuable, upon the exercise,
conversion or exchange thereof, the Series A Conversion Price computed upon the
original issue thereof, and any subsequent adjustments based thereon, shall,
upon such increase or decrease becoming effective, be recomputed to reflect such
increase or decrease with respect to such options, rights and securities not
already exercised, converted or exchanged before such increase or decrease
became effective, but no further adjustment to the Series A Conversion Price
shall be made for the actual issuance of Common Stock upon the exercise of any
such options or rights or the conversion or exchange of such securities in
accordance with their terms;
(4) upon the expiration of any such options
or rights, the termination of any such rights to convert or exchange, or the
expiration of any options or rights related to such convertible or exchangeable
securities, the Series A Conversion Price shall forthwith be readjusted to such
Series A Conversion Price as would have been obtained had the adjustment that
was made upon the issuance of such options, rights, or securities or options or
rights related to such securities been made upon the basis of the issuance of
only the number of shares of Common Stock actually issued upon the exercise of
such options or rights, upon the conversion or exchange of such securities or
upon the exercise of the options or rights related to such securities; and
(5) if any such options or rights shall be
issued in connection with the issuance and sale of other securities of the
Corporation, together comprising one integral transaction in which no specific
consideration is allocated to such options or rights by the parties thereto,
such options or rights shall be deemed to have been issued for such
consideration as determined in good faith by the Board.
(iii) Additional Stock. "Additional Stock" shall mean any
shares of Common Stock or securities convertible into or exchangeable or
exercisable for shares of Common Stock issued (or deemed to have been issued
pursuant to Subsection 2.3.5(d)(ii)(E)) by the Corporation after the date of
first issuance of Series A Stock other than:
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(A) Common Stock issued pursuant to a transaction
for which the Series A Conversion Price is adjusted under Section 2.3.5(d)(i);
(B) up to 1,500,000 shares of Common Stock issued
or issuable (whether directly or pursuant to stock options or warrants) to
employees, directors, advisors or consultants;
(C) Common Stock issued or issuable upon conversion
of or as a dividend or distribution on Series A Stock;
(D) Common Stock issued or issuable in connection
with: (i) the acquisition of another corporation or entity by the Corporation or
any subsidiary of the Corporation by means of a merger, consolidation, purchase
of assets or other transaction or series of related transactions whereby the
Corporation owns a majority of the voting power of such other entity following
such acquisition; (ii) the acquisition by the Corporation of intellectual
property rights, including intellectual property licenses; or (iii) the creation
of a corporate or other joint venture or any other strategic alliance with any
other corporation or entity; provided, however, that each such transaction shall
have been approved by the Board of Directors and that with respect to each such
transaction or series of related transactions, the number of shares of Common
Stock issued thereunder shall not exceed 10% of the number of shares of Common
Stock outstanding immediately prior to such transaction or series of
transactions.
(e) Capital Reorganization or Reclassification. If the Common
Stock issuable upon the conversion of Series A Stock shall be changed into the
same or different number of shares of any class or classes of stock of the
Corporation, whether by capital reorganization, reclassification or otherwise
(other than a subdivision or combination of shares or stock dividend provided
for in Section 2.3.5(d) or a merger, consolidation, share exchange or
reorganization provided for in Section 2.3.3(c)), then and in each such event
the holder of each share of Series A Stock shall have the right thereafter to
convert such share into the kind and amount of shares of stock and other
securities and property receivable upon such reorganization, reclassification or
other change by holders of the number of shares of Common Stock into which such
share of Series A Stock, respectively, could have been converted immediately
prior to such reorganization, reclassification or change, all subject to further
adjustment as provided herein.
(f) Accountant's Certificate as to Adjustments, Notice by the
Corporation. In each case of an adjustment or readjustment of the Series A
Conversion Rate, the Corporation at its expense will furnish each holder of
Series A Stock, as applicable, with a certificate, prepared by the Chief
Financial Officer of the Corporation, showing such adjustment or readjustment
and stating in detail the facts upon which such adjustment or readjustment is
based.
(g) Exercise of Conversion Privilege.
(i) Generally. Promptly after receiving the certificate
representing shares of any Series A Stock being converted, the Corporation
shall: (A) issue and deliver to the holder of the shares being converted, or, if
permitted by applicable securities laws, to the nominee or nominees of
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such holder, a certificate or certificates as such holder may request for the
number of whole shares of Common Stock that is nearest to the number of shares
of Common Stock issuable in accordance with the provisions of this Section 2.3.5
upon the conversion of such shares of Series A Stock and (B) pay to such holder
or its nominee any declared but unpaid dividends on the shares being converted.
Conversion shall be deemed to have been effected immediately prior to the close
of business on the Conversion Date (as defined below for voluntary conversions
and for mandatory conversions), and at such time, whether or not certificates
representing the shares being converted shall have been received by the
Corporation or its transfer agent in the case of a mandatory conversion, the
rights of the holder as holder of the converted shares of Series A Stock, as
applicable, shall cease and the person or persons in whose name or names any
certificate or certificates for shares of Common Stock shall be issuable upon
such conversion shall be deemed to have become the holder or holders of record
of the shares of Common Stock represented thereby.
(ii) Voluntary Conversion. Before any holder of shares of
Series A Stock shall be entitled to voluntarily convert such shares to Common
Stock pursuant to Section 2.3.5(a)(i), such holder shall surrender the
certificate or certificates therefor, duly endorsed, at the office of the
Corporation or of any transfer agent for such shares and, if appropriate, shall
give written notice by mail, postage prepaid, addressed to the same location at
which the certificate or certificates were or will be surrendered, of the
election to convert such shares and shall state therein the name or names in
which the certificate or certificates for shares of Common Stock are to be
issued. With respect to a voluntary conversion pursuant to Section 2.3.5(a)(i),
the date when written notice of the holder's election to convert is received by
the Corporation or a transfer agent for the shares to be converted, together
with the certificate or certificates representing the shares to be converted,
shall be the "Conversion Date."
(iii) Mandatory Conversion. Holders of shares of Series A
Stock converted pursuant to the mandatory conversion provisions of Section
2.3.5(a)(ii) shall promptly surrender the certificate or certificates therefor,
duly endorsed, at the office of the Corporation or of any transfer agent for
such shares and, if other than the record holder of the converted shares, shall
state the name or names in which the certificate or certificates for shares of
Common Stock are to be issued. Whether or not such certificate or certificates
have been so surrendered, with respect to mandatory conversions pursuant to
Section 2.3.5(a)(ii), the applicable date specified in Section 2.3.5(a)(ii) for
automatic conversion shall be the "Conversion Date."
(h) Partial Conversion. In the event some but not all of the
shares of Series A Stock represented by a certificate or certificates
surrendered by a holder are converted, the Corporation shall execute and deliver
to or on the order of the holder, at the expense of the Corporation, a new
certificate representing the shares of Series A Stock that were not converted.
(i) Reservation of Common Stock. The Corporation shall at all
times reserve and keep available out of its authorized but unissued shares of
Common Stock, solely for the purpose of effecting the conversion of the shares
of the Series A Stock, such number of its shares of Common Stock as shall from
time to time be sufficient to effect the conversion of all outstanding shares of
the Series A Stock and, if at any time the number of authorized but unissued
shares of Common Stock shall not be sufficient to effect the conversion of all
then outstanding shares of the Series A Stock, the
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Corporation shall immediately take such corporate action as may be necessary to
increase its authorized but unissued shares of Common Stock to such number of
shares as shall be sufficient for such purpose.
2.3.6 NO REISSUANCE OF STOCK
No share or shares of Series A Stock converted, purchased or otherwise
acquired by the Corporation shall be reissued, and all such shares shall be
cancelled, retired and eliminated from the shares that the Corporation shall be
authorized to issue. The Corporation may from time to time take such appropriate
corporate action as may be necessary to reduce the authorized number of shares
of Series A Stock accordingly.
2.3.7 REDEMPTION
(a) No Call. The Corporation shall not have the right to call for
redemption all or any part of the Series A Stock, but may, pursuant to the terms
of this Section 2.3.7, have the obligation to redeem Series A Stock.
(b) Option to Require Redemption. On July 1, 2002, the
Corporation shall, upon receipt of at least 60 days' prior written request by
the holders of at least 60% of the Series A Stock then outstanding, redeem up to
one-third of the Series A Stock then outstanding. On July 1, 2003, the
Corporation shall, upon receipt of at least 60 days' prior written request by
the holders of at least 60% of the Series A Stock then outstanding, redeem up to
an additional one-third of the Series A Stock then outstanding. On July 1, 2004,
the Corporation shall, upon receipt of at least 60 days' prior written request
by the holders of at least 60% of the Series A Stock then outstanding, redeem up
to the balance of the Series A Stock then outstanding.
(c) Redemption Price. The redemption price per share of Series A
Stock shall be equal to $.086 plus $.000006 per annum from the date such share
was issued (the "Series A Redemption Price"). The Series A Redemption Price
shall be appropriately adjusted for any stock dividends, splits or combinations
applicable to the Series A Stock.
(d) Notice of Redemption. Upon receiving a notice requesting
redemption pursuant to Section 2.3.7(b), the Corporation shall within five
business days mail by certified or registered mail a written notice (a
"Redemption Notice") to each holder of record of Series A Stock, as applicable,
at the address last shown on the records of the Corporation, with a copy of the
Redemption Notice to each such holder sent by facsimile transmission or by
tested or otherwise authenticated telex. Each Redemption Notice shall state that
a redemption pursuant to this Section 2.3.7 has been requested and shall specify
the date fixed for such redemption (the "Redemption Date"), which date shall be
July 1 of the calendar year in which the redemption is requested or the first
day thereafter on which banks in Seattle, Washington, are not authorized to be
closed, and shall specify the maximum number of shares that could be redeemed
from each Series A holder, and each holder of Series A Stock shall have until
the close of business on the date 10 business days before each Redemption Date
to request the redemption of up to the maximum number of shares of Series A
Stock such holder is entitled to redeem. No defect in the Redemption Notice or
any response thereto or in the mailing or
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publication thereof shall affect the validity of the redemption proceeding with
respect to the Corporation or any holder of Series A Stock; provided, however,
that the Corporation or such holder has timely received actual notice of the
redemption.
(e) Surrender of Stock. On or after the Redemption Date, each
holder of shares of Series A Stock, the redemption of which was requested by the
holder pursuant to Section 2.3.7(d), shall surrender the certificate or
certificates evidencing such shares to the Corporation at any place designated
for such surrender in the Redemption Notice and shall then be entitled to
receive payment in cash, by wire transfer or by bank-certified check of the
Series A Redemption Price for each share of Series A Stock to be redeemed. If
less than all the shares represented by a share certificate are to be redeemed,
the Corporation shall promptly issue a new certificate representing the shares
not redeemed
(f) Failure to Redeem. If the Corporation shall fail to discharge
its obligation to redeem shares of Series A Stock pursuant to this Section 2.3.7
(the "Redemption Obligation"), the Redemption Obligation shall be discharged,
pro rata with respect to each holder based on the number of shares requested to
be redeemed, as soon as the Corporation is permitted by law to discharge such
Redemption Obligation. If and so long as any Redemption Obligation shall not
fully be discharged, the Corporation shall not, directly or indirectly, declare
or pay any dividend or make any distribution on, or purchase, redeem, or satisfy
any mandatory redemption, sinking fund or other similar obligation in respect
of, any securities ranking junior to the Series A Stock with respect to
liquidation preference, redemption rights or warrants, rights or options
exercisable for any such junior securities. If and so long as any Redemption
Obligation shall not fully be discharged, the Corporation shall not, directly or
indirectly, declare or pay any dividend or make any distribution on, or
purchase, redeem, or satisfy any mandatory redemption, sinking fund or other
similar obligation in respect of, any securities ranking on a parity to the
Series A Stock with respect to liquidation preference or redemption rights
("parity securities"), unless such dividends or distributions on the shares of
Series A Stock and the shares of such parity securities are declared and paid on
a pro rata basis, or, in the event any mandatory redemption, sinking fund or
other similar obligation is then undischarged with respect to such parity
securities, unless shares of Series A Stock and such parity securities are
redeemed on a pro rata basis. For purposes of this Section 2.3.7(f), "pro rata
basis" shall refer to the proportion that the distribution payable to holders of
Series A Stock or parity securities, respectively, bears to the aggregate
distribution payable to all holders of Series A Stock and parity securities.
(g) Status of Redeemed Shares. From and after the Redemption
Date, unless default shall be made by the Corporation in paying the Series A
Redemption Price at the time and place specified in the Redemption Notice, all
dividends on shares of Series A Stock to be redeemed on such Redemption Date
shall cease and all rights of holders of such shares shall cease, except the
right of holders of such shares to receive the Series A Redemption Price, as
applicable, against delivery of certificates representing such shares, and such
shares shall cease to be outstanding.
2.3.8 NOTICES OF RECORD DATE
In the event of
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(a) any capital reorganization of the Corporation, any
reclassification or recapitalization of the capital stock of the Corporation,
any merger or consolidation of the Corporation, or any transfer of all or
substantially all of the assets of the Corporation or
(b) any voluntary or involuntary dissolution, liquidation or
winding up of the Corporation,
then and in each such event the Corporation shall mail or deliver or cause to be
mailed or delivered to each holder of Series A Stock a notice specifying (i) the
date on which any such reorganization, reclassification, recapitalization,
merger, consolidation, transfer, dissolution, liquidation or winding up is
expected to become effective and (ii) the time, if any, that is to be fixed, as
to when the holders of record of Common Stock (or other securities) shall be
entitled to exchange their shares of Common Stock (or other securities) for
securities or other property deliverable upon such reorganization,
reclassification, recapitalization, merger, consolidation, transfer,
dissolution, liquidation or winding up. Such notice shall be mailed or delivered
at least 20 days prior to the date specified in such notice on which such action
is to be taken.
2.4 DESIGNATION OF SERIES B CONVERTIBLE PREFERRED STOCK
The following series of Preferred Stock is hereby designated, which
series shall have the rights, preferences, privileges and limitations as set
forth below in this Section 2.4:
2.4.1 SERIES B PREFERRED STOCK
The series of Series B Convertible Preferred Stock, consisting of
1,250,000 shares, authorized herein, is designated in these Articles of
Incorporation as the "Series B Stock" and will be convertible into shares of the
Corporation's Common Stock, as described in Section 2.4.5. The rights,
preferences, restrictions and other matters relating to Series B Stock are set
forth below.
2.4.2 DIVIDENDS
The holders of shares of Series B Stock shall be entitled to receive
dividends, out of the funds of the corporation legally available therefor, at
the rate and at the time or times, whether cumulative or noncumulative, as may
be provided by the Board of Directors. This right to receive dividends shall be
on an equal basis with the holders of shares of Common Stock but subject to any
preferential rights granted for any other series of Preferred Stock.
2.4.3 LIQUIDATION RIGHTS
Upon the voluntary or involuntary dissolution, liquidation or winding up
of the Corporation, the assets of the Corporation available for distribution to
its shareholders shall be distributed in the following order and amounts:
(a) General.
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(i) First, the holders, if any, of any outstanding shares
of Preferred Stock of the corporation having a preferential right to liquidation
payments shall be entitled to receive the full preferential amount per share
held by them (the "Superior Liquidation Amount"). If the assets of the
corporation shall be insufficient to permit the payment of the full Superior
Liquidation Amount, then the assets of the corporation available for
distribution shall be distributed ratably among the holders of the shares of
such superior Preferred Stock in the same proportions as the full Superior
Liquidation Amount each such holder would otherwise be entitled to receive bears
to the total of the full Superior Liquidation Amount that would otherwise be
payable to all holders of such superior Preferred Stock.
(ii) If, upon completion of the distribution required by
subsection (i) of this Section 2.6.3(a), assets remain in the corporation, the
holders of outstanding shares of Series B Stock and Common Stock shall be
entitled to share ratably in the such assets.
(b) Distributions Other Than Cash. Whenever the distribution
provided for in this Section 2.4.3 shall be payable in property other than cash,
the value of such distribution shall be the fair market value of such property
as determined in good faith by the Board of Directors.
2.4.4 VOTING POWER
The holders of Series B Stock will have the right, as a separate voting
group, to elect one director, who must be reasonably acceptable to the other
directors. Except for such right or as otherwise expressly provided by the
Washington Business Corporation Act, the holders of Series B Stock shall not be
entitled to vote on any matter submitted to a vote of shareholders.
2.4.5 CONVERSION RIGHTS
The holders of Series B Stock shall have the following rights with
respect to the conversion of Series B Stock into shares of Common Stock:
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(a) General.
(i) Voluntary Conversion. Any share of Series B Stock may,
at the option of the holder, be converted at any time into such number of fully
paid and nonassessable shares of Common Stock as is equal to the product
obtained by multiplying the Series B Conversion Rate (determined under Section
2.4.5(b)) by the number of shares of Series B Stock being converted.
(ii) Mandatory Conversion. Each share of Series B Stock
shall be converted automatically, without any action by the holders of such
shares and whether or not the certificates representing such shares are
surrendered to the Corporation or its transfer agent, into the number of shares
of Common Stock into which such Series B Stock is convertible pursuant to
Section 2.4.5(a)(i) upon the earlier of (A) the closing of a firmly
underwritten, public offering by the corporation of shares of Common Stock,
registered under the Securities Act of 1933, as amended, on a Form S-1 or
successor form in which the pre-money valuation of the corporation is at least
$75,000,000, or (B) December 31, 2000.
(b) Conversion Rate. The conversion rate for Series B Stock in
effect at any time (the "Series B Conversion Rate") shall equal $1.00 divided by
the Series B Conversion Price, calculated as provided in Section 2.4.5(c).
(c) Conversion Price. The conversion price for Series B Stock in
effect from time to time shall initially be $0.10, subject to adjustment, in
accordance with Section 2.4.5(d) (the "Series B Conversion Price").
(d) Adjustments to Applicable Conversion Price.
(i) Extraordinary Common Stock Event. Upon the happening
of an Extraordinary Common Stock Event (as defined below) after the date of the
initial issuance of any shares of Series B Stock, the Series B Conversion Price
shall, simultaneously with the happening of such Extraordinary Common Stock
Event, be adjusted by multiplying the then effective Series B Conversion Price
by a fraction, the numerator of which shall be the number of shares of Common
Stock outstanding immediately prior to such Extraordinary Common Stock Event and
the denominator of which shall be the number of shares of Common Stock
outstanding immediately after such Extraordinary Common Stock Event, and the
product so obtained shall thereafter be the Series B Conversion Price. The
Series B Conversion Price, as so adjusted, shall be readjusted in the same
manner upon the happening of any successive Extraordinary Common Stock Event or
Events. "Extraordinary Common Stock Event" shall mean (x) the issuance of
additional shares of Common Stock as a dividend or other distribution on
outstanding Common Stock of the Corporation, (y) a subdivision of outstanding
shares of Common Stock into a greater number of shares of Common Stock, or (z) a
combination of outstanding shares of Common Stock into a smaller number of
shares of Common Stock.
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(ii) Other Distributions. In the event this corporation
shall declare a distribution payable in securities of other persons, evidences
of indebtedness issued by this corporation or other persons, assets (excluding
cash dividends), options or rights, then, in each such case for the purpose of
this Subsection 2.4.5(d)(ii), the holders of the Series B Stock shall be
entitled to a proportionate share of any such distribution as though they were
the holders of the number of shares of Common Stock of this corporation into
which their shares of Series B Stock are convertible as of the record date fixed
for the determination of the holders of Common Stock of this corporation
entitled to receive such distribution.
(e) Capital Reorganization or Reclassification. If the Common
Stock issuable upon the conversion of Series B Stock shall be changed into the
same or different number of shares of any class or classes of stock of the
Corporation, whether by capital reorganization, reclassification or otherwise
(other than a subdivision or combination of shares or stock dividend provided
for in Section 2.4.5(d)), then and in each such event the holder of each share
of Series B Stock shall have the right thereafter to convert such share into the
kind and amount of shares of stock and other securities and property receivable
upon such reorganization, reclassification or other change by holders of the
number of shares of Common Stock into which such share of Series B Stock,
respectively, could have been converted immediately prior to such
reorganization, reclassification or change, all subject to further adjustment as
provided herein, and in any such case appropriate provisions shall be made with
respect to the rights and interests of such holder to the end that the
provisions hereof shall thereafter be applicable, as nearly as may be, in
relation to any shares of stock, securities or assets thereafter deliverable
upon the exercise of such conversion rights.
(f) Accountant's Certificate as to Adjustments, Notice by the
Corporation. In each case of an adjustment or readjustment of the Series B
Conversion Rate, the Corporation at its expense will furnish each holder of
Series B Stock, as applicable, with a certificate, prepared by the Chief
Financial Officer of the Corporation, showing such adjustment or readjustment
and stating in detail the facts upon which such adjustment or readjustment is
based.
(g) Exercise of Conversion Privilege.
(i) Generally. Promptly after receiving the certificate
representing shares of any Series B Stock being converted, the Corporation
shall: (A) issue and deliver to the holder of the shares being converted, or, if
permitted by applicable securities laws, to the nominee or nominees of such
holder, a certificate or certificates as such holder may request for the number
of whole shares of Common Stock that is nearest to the number of shares of
Common Stock issuable in accordance with the provisions of this Section 2.4.5
upon the conversion of such shares of Series B Stock and (B) pay to such holder
or its nominee any declared but unpaid dividends on the shares being converted.
Conversion shall be deemed to have been effected immediately prior to the close
of business on the Conversion Date (as defined below for voluntary conversions
and for mandatory conversions), and at such time, whether or not certificates
representing the shares being converted shall have been received by the
Corporation or its transfer agent in the case of a mandatory conversion, the
rights of the holder as holder of the converted shares of Series B Stock, as
applicable, shall cease and the person or persons in whose name or
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names any certificate or certificates for shares of Common Stock shall be
issuable upon such conversion shall be deemed to have become the holder or
holders of record of the shares of Common Stock represented thereby. The
corporation shall not be required to issue any fraction of a share of Common
Stock upon conversion of Series B Stock; if any fraction of a share of Common
Stock would, except for the foregoing clause, be issuable to any holder on the
conversion of any Series B Stock, the Corporation shall pay to the holder of
such converted Series B Stock an amount in cash equal to the then current fair
market value of such fractional interest.
(ii) Voluntary Conversion. Before any holder of shares of
Series B Stock shall be entitled to voluntarily convert such shares to Common
Stock pursuant to Section 2.4.5(a)(i), such holder shall surrender the
certificate or certificates therefor, duly endorsed, at the office of the
Corporation or of any transfer agent for such shares and, if appropriate, shall
give written notice by mail, postage prepaid, addressed to the same location at
which the certificate or certificates were or will be surrendered, of the
election to convert such shares and shall state therein the name or names in
which the certificate or certificates for shares of Common Stock are to be
issued. With respect to a voluntary conversion pursuant to Section 2.4.5(a)(i),
the date when written notice of the holder's election to convert is received by
the Corporation or a transfer agent for the shares to be converted, together
with the certificate or certificates representing the shares to be converted,
shall be the "Conversion Date."
(iii) Mandatory Conversion. Holders of shares of Series B
Stock converted pursuant to the mandatory conversion provisions of Section
2.4.5(a)(ii) shall promptly surrender the certificate or certificates therefor,
duly endorsed, at the office of the Corporation or of any transfer agent for
such shares and, if other than the record holder of the converted shares, shall
state the name or names in which the certificate or certificates for shares of
Common Stock are to be issued. The Corporation will give such holders written
notice at least five days prior to the date on which they are requested to
surrender their certificate or certificates. Whether or not such certificate or
certificates have been so surrendered, with respect to mandatory conversions
pursuant to Section 2.4.5(a)(ii), the applicable date specified in Section
2.4.5(a)(ii) for automatic conversion shall be the "Conversion Date."
(h) Partial Conversion. In the event some but not all of the
shares of Series B Stock represented by a certificate or certificates
surrendered by a holder are converted, the Corporation shall execute and deliver
to or on the order of the holder, at the expense of the Corporation, a new
certificate representing the shares of Series B Stock that were not converted.
(i) Reservation of Common Stock. The Corporation shall at all
times reserve and keep available out of its authorized but unissued shares of
Common Stock, solely for the purpose of effecting the conversion of the shares
of the Series B Stock, such number of its shares of Common Stock as shall from
time to time be sufficient to effect the conversion of all outstanding shares of
the Series B Stock and, if at any time the number of authorized but unissued
shares of Common Stock shall not be sufficient to effect the conversion of all
then outstanding shares of the Series B Stock, the Corporation shall immediately
take such corporate action as may
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be necessary to increase its authorized but unissued shares of Common Stock to
such number of shares as shall be sufficient for such purpose.
The Corporation covenants that all shares of Common Stock which shall be
so issued shall be duly and validly issued and fully paid and nonassessable and
free from all taxes, liens and charges with respect to the issue thereof. The
Corporation will take such action as may be necessary to assure that all such
shares of Common Stock may be so issued without violation of any applicable law
or regulation, or of any requirement of any securities exchange upon which the
Common Stock may be listed.
2.4.6 NO REISSUANCE OF STOCK
No share or shares of Series B Stock converted, purchased or otherwise
acquired by the Corporation shall be reissued, and all such shares shall be
cancelled, retired and eliminated from the shares that the Corporation shall be
authorized to issue. The Corporation may from time to time take such appropriate
corporate action as may be necessary to reduce the authorized number of shares
of Series B Stock accordingly.
2.4.7 NOTICES OF CERTAIN EVENTS
If the Corporation becomes subject to:
(a) any capital reorganization of the Corporation, any
reclassification or recapitalization of the Corporation's capital stock, any
merger or consolidation of the Corporation, or any transfer of all or
substantially all of the assets of the Corporation, or
(b) any voluntary or involuntary dissolution, liquidation or
winding up of the Corporation, then the Corporation will mail or deliver or
cause to be mailed or delivered to each holder of Series B Stock at least twenty
(20) days' prior written notice specifying (i) the expected effective date of
such reorganization, reclassification, recapitalization, merger, consolidation,
transfer, dissolution, liquidation or winding up, and (ii) the time, if any,
that is to be fixed, as to when the holders of record of Common Stock (or other
securities) will be entitled to exchange their shares of Common Stock (or other
securities) for securities or other property deliverable upon such
reorganization, reclassification, recapitalization, merger, consolidation,
transfer, dissolution, liquidation or winding up.
ARTICLE 3. DIRECTORS
The number of directors of the Corporation and the manner in which such
directors are to be elected shall be as set forth in the bylaws. The terms of
the initial directors shall expire at the first shareholders' meeting at which
directors are elected.
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ARTICLE 4. SHAREHOLDERS' RIGHTS
Shareholders of the Corporation have no preemptive rights to acquire
additional shares issued by the Corporation.
ARTICLE 5. VOTING RIGHTS
No cumulative voting for directors shall be permitted.
ARTICLE 6. LIMITATION ON LIABILITY OF DIRECTORS
No director of the Corporation shall be personally liable to the
Corporation or its shareholders for monetary damages for his or her conduct as a
director, which conduct takes place on or after the date this Article becomes
effective, except for (i) acts or omissions that involve intentional misconduct
of a knowing violation of law by the director, (ii) conduct violating RCW
23B.08.310, or (iii) any transaction from which the director will personally
receive a benefit in money, property or services to which the director is not
legally entitled. If, after this Article comes effective, the Washington
Business Corporation Act is amended to authorize corporate action further
eliminating or limiting the personal liability of directors, then the liability
of a director of the Corporation shall be deemed eliminated or limited to the
fullest extent permitted by the Washington Business Corporation Act, as so
amended. Any amendment to or repeal of this Article shall not adversely affect
any right or protection of a director of the Corporation for or with respect to
any acts or omissions of such director occurring prior to such amendment or
repeal. This provision shall not eliminate or limit the liability of a director
for any act or omission occurring prior to the date this Article becomes
effective.
ARTICLE 7. INCORPORATOR
The name and address of the incorporator are:
Name Address
Bryce L. Holland, Jr. Two Union Square
601 Union Street
Seattle, Washington 98101-2346
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ARTICLE 8. AMENDMENT OF ARTICLES
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in these Articles of Incorporation, in the manner now or
hereafter prescribed by law, and all rights and powers conferred herein on
shareholders and directors are subject to this reserved power.
DATED: May __, 1999
FREESHOP.COM, INC.
By _______________________
Timothy Choate
President and CEO
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EXHIBIT 3.2
BYLAWS
OF
FREESHOP INTERNATIONAL, INC.
ARTICLE I
Registered Office and Registered Agent
1. The registered office of the Corporation shall be located in
the State of Washington at such place as may be fixed from time to time by the
Board of Directors upon filing of such notices as may be required by law, and
the registered agent shall have a business office identical with such registered
office. A registered agent so appointed shall consent to appointment in writing
and such consent shall be filed with the Secretary of State of the State of
Washington.
2. If a registered agent changes the street address of the
agent's business office, the registered agent may change the street address of
the registered office of the Corporation by notifying the Corporation in writing
of the change and signing, either manually or in facsimile, and delivering to
the Secretary of State for filing a statement of such change, as required by
law.
3. The Corporation may change its registered agent at any time
upon the filing of an appropriate notice with the Secretary of State, with the
written consent of the new registered agent either included in or attached to
such notice.
ARTICLE II
Shareholders' Meetings
1. Meeting Place. All meetings of the shareholders shall be held,
pursuant to proper notice as set forth in Article II Section 5 of these Bylaws,
at the principal executive office of the Corporation, or at such other place as
shall be determined from time to time by the Board of Directors.
2. Annual Meeting Time. The annual meeting of the shareholders
for the election of directors and for the transaction of such other business as
may properly come before the meeting shall be held each year on such date and at
such hour as may be determined by resolution of the Board of Directors from time
to time. In the absence of such determination, the annual meeting shall be held
each year on the 15th day of March at the hour of 10:00 a.m. if not a Saturday,
Sunday or legal holiday, and if a Saturday, Sunday or legal holiday, then on the
next
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business day following, at the same hour.
3. Annual Meeting - Order of Business. At the annual meeting of
shareholders, the order of business shall be as follows:
(a) Call to order.
(b) Proof of notice of meeting (or filing of waiver).
(c) Reading of minutes of last annual meeting.
(d) Reports of officers.
(e) Reports of committees.
(f) Election of directors.
(g) Other business.
4. Special Meetings. Special meetings of the shareholders for any
purpose may be called at any time by the President, the Board of Directors or
the holders of at least ten percent of all the votes entitled to be cast on any
issue proposed to be considered at such special meeting in accordance with RCW
23B.07.020. Special shareholders' meetings shall be held at the Corporation's
principal executive office or at such other place as shall be identified in the
notice of such meeting.
5. Notice.
(a) Except as provided in subsection (c) hereunder, notice
of the date, time and place of the annual meeting of shareholders shall be given
by delivering personally or by mailing a written or printed notice of the same,
not less than ten (10) days, and not more than sixty (60) days, prior to the
meeting to each shareholder of record entitled to vote at such meeting.
(b) Except as provided in subsection (c) hereunder,
written or printed notice of each special meeting of shareholders shall be given
not less than ten (10) days and not more than sixty (60) days prior to the
meeting. Such notice shall state the date, time and place of such meeting, and
the purpose or purposes for which the meeting is called, and shall be delivered
personally, or mailed to each shareholder of record entitled to vote at such
meeting.
(c) Notice of a shareholders' meeting at which the
shareholders will be called to act on an amendment to the articles of
incorporation, a plan of merger or share exchange, a proposed sale of assets
other than in the regular course of business or the dissolution of the
Corporation shall be given not less than twenty (20) days and not more than
sixty (60) days before the meeting date.
6. Record Date. For the purpose of determining shareholders
entitled to notice of or to vote at any meeting of shareholders, or at any
adjournment thereof, or entitled to
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receive dividends or distributions, the Board of Directors shall fix in advance
a record date for any such determination of shareholders, such date to be not
more than seventy (70) days and, in case of a meeting of shareholders, not less
than ten (10) days prior to the date on which the particular action requiring
such determination of shareholders is to be taken.
7. Shareholders' List. After fixing a record date for a
shareholders' meeting, the Corporation shall prepare an alphabetical list of the
names of all its shareholders on the record date who are entitled to notice of a
shareholders' meeting. Such list shall be arranged by voting group, and within
each voting group by class or series of shares, and show the address of and
number of shares held by each shareholder. The shareholders' list shall be kept
on file at the registered office of the Corporation for a period beginning ten
days prior to such meeting and shall be kept open at the time and place of such
meeting for the inspection by any shareholder, or any shareholder's agent or
attorney.
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8. Quorum. Except as otherwise required by law, a quorum at any
annual or special meeting of shareholders shall consist of shareholders
representing, either in person or by proxy, a majority of the votes entitled to
be cast on the matter by each voting group.
9. Voting.
(a) Except as otherwise provided in the Articles of
Incorporation and subject to the provisions of the laws of the State of
Washington, each outstanding share, regardless of class, is entitled to one vote
on each matter voted on at a shareholders' meeting.
(b) If a quorum exists, action on a matter, other than the
election of directors, is approved by a voting group if the votes cast within
the voting group favoring the action exceed the votes cast within the voting
group opposing the action, unless the question is one which by express provision
of law, of the Articles of Incorporation or of these Bylaws a greater number of
affirmative votes is required.
(c) Unless otherwise provided in the Articles of
Incorporation, in any election of directors the candidates elected are those
receiving the largest numbers of votes cast by the shares entitled to vote in
the election, up to the number of directors to be elected by such shares.
10. Proxies. A shareholder may vote either in person or by
appointing a proxy by signing an appointment form, either personally or by the
shareholder's attorney-in-fact or agent. An appointment of a proxy is effective
when received by the person authorized to tabulate votes for the Corporation. An
appointment of a proxy is valid for eleven months unless a longer period is
expressly provided in the appointment form.
11. Action by Shareholders Without a Meeting. Any action required
or which may be taken at a meeting of shareholders of the Corporation may be
taken without a meeting if the action is taken by all the shareholders entitled
to vote on the action. The action must be evidenced by one or more written
consents describing the action taken, signed by all the shareholders entitled to
vote on the action, and delivered to the Corporation for inclusion in the
minutes or filing with the Corporation's records. Action taken in accordance
with this section shall be effective when all written consents have been
delivered to the Corporation, unless the consent specifies a later effective
date.
12. Waiver of Notice. A written waiver of any notice required to be
given to any shareholder, signed by the person or persons entitled to such
notice, whether before or after the time stated therein for the meeting, shall
be deemed the giving of such notice by the Corporation, provided that such
waiver has been delivered to the Corporation for inclusion in the
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minutes or filing with the Corporation's records. A shareholder's attendance at
a meeting waives any notice required, unless the shareholder at the beginning of
the meeting objects to holding the meeting or transacting business at the
meeting.
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13. Action of Shareholders by Communications Equipment.
Shareholders may participate in any meeting of shareholders by any means of
communication by which all persons participating in the meeting can hear each
other during the meeting. A shareholder participating in a meeting by this means
is deemed to be present in person at the meeting.
ARTICLE III
Shares of Stock
1. Issuance of Shares. No shares of the Corporation shall be
issued unless authorized by the Board of Directors. Such authorization shall
include the number of shares to be issued, the consideration to be received and
a statement regarding the adequacy of the consideration. Shares may but need not
be represented by certificates. Unless otherwise provided by law, the rights and
obligations of shareholders are identical whether or not their shares are
represented by certificates.
2. Certificated Shares. If shares are represented by
certificates, certificates of stock shall be issued in numerical order, and each
shareholder shall be entitled to a certificate signed, either manually or in
facsimile, by the President, or a Vice President, and the Secretary, and such
certificate may bear the seal of the Corporation or a facsimile thereof. If an
officer who has signed or whose facsimile signature has been placed upon such
certificate ceases to be such officer before the certificate is issued, it may
be issued by the Corporation with the same effect as if the person were an
officer on the date of issue.
At a minimum each certificate of stock shall state:
(a) the name of the Corporation;
(b) that the Corporation is organized under the laws of the
State of Washington;
(c) the name of the person to whom the certificate is issued;
(d) the number and class of shares and the designation of the
series, if any, the certificate represents;
(e) if the Corporation is authorized to issue different classes
of shares or different series within a class, the designations, relative rights,
preferences and limitations applicable to each class and the variations in
rights, preferences and limitations determined for each series, and the
authority of the Board of Directors to determine variations for future series,
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must be summarized either on the front or back of the certificate.
Alternatively, the certificate may state conspicuously on its front or back that
the Corporation will furnish the shareholder this information without charge on
request in writing; and
(f) the transfer restrictions on the shares, as provided in
Article III, Section 4 of these Bylaws.
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In case of any mutilation, loss or destruction of any certificate
of stock, another certificate may be issued in its place on proof of such
mutilation, loss or destruction. The Board of Directors may impose conditions on
such issuance and may require the giving of a satisfactory bond or indemnity to
the Corporation in such sum as it might determine or establish such other
procedures as it deems necessary or appropriate.
3. Uncertificated Shares.
(a) Unless the Articles of Incorporation provide otherwise, the
Board of Directors may authorize the issue of any of the Corporation's classes
or series of shares without certificates. This authorization does not affect
shares already represented by certificates until they are surrendered to the
Corporation.
(b) Within a reasonable time after the issuance of shares
without certificates, the Corporation shall send the shareholder a complete
written statement of the information required on certificates as provided in
Article III Section 2 of these Bylaws.
4. Transfers.
(a) Transfers of stock shall be made only upon the stock
transfer records of the Corporation, which records shall be kept at the
registered office of the Corporation or at its principal place of business, or
at the office of its transfer agent or registrar. The Board of Directors may, by
resolution, open a share register in any state of the United States, and may
employ an agent or agents to keep such register and to record transfers of
shares therein.
(b) Shares of certificated stock shall be transferred by
delivery of the certificates therefor, accompanied either by an assignment in
writing on the back of the certificate or an assignment separate from
certificate, or by a written power of attorney to sell, assign and transfer the
same, signed by the holder of said certificate. No shares of certificated stock
shall be transferred on the records of the Corporation until the outstanding
certificates therefor have been surrendered to the Corporation or to its
transfer agent or registrar.
(c) Shares of uncertificated stock shall be transferred upon
receipt by the Corporation of a written request for transfer signed by the
shareholder. Within a reasonable time after the transfer of shares without
certificates, the Corporation shall provide the new shareholder a complete
written statement of the information required on certificates as provided in
Article III, Sections 2 and 4(d) of these Bylaws.
(d) Shares of certificated or uncertificated stock may not be
transferred except for "Permitted Transfers" prior to the time the Corporation
becomes a reporting company
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under the Securities Exchange Act of 1934, as amended. Permitted Transfers are
defined as transfers or assignments (i) to the Corporation or its affiliates;
(ii) to existing shareholders of the Corporation who were shareholders in Online
Interactive, Inc. ("OLI") and received the Corporation's stock (the
"Distribution Stock") in the stock distribution by OLI to OLI's shareholders;
(iii) by gift, bequest or the laws of descent or distribution; (iv) in
connection with a transfer to an unaffiliated third party pursuant to a merger,
consolidation, stock for stock exchange, tender offer or similar transaction;
(v) to a trust for the Corporation's employees established under a qualified
employee benefit plan; (vi) by a trust to the trust's beneficiaries; (vii) in a
transaction which would be exempt from the registration requirements of the
Securities Act of 1933, as amended (the "Securities Act"), by virtue of Section
4(2) of the Securities Act if the transferor were the issuer of the Distribution
Stock, provided that the transferee is an "accredited investor" within the
meaning of Rule 501(a) under the Securities Act; or (viii) pursuant to an
effective registration statement under the Securities Act. Transfers under
clauses (ii), (iii) (vi) and (vii) are subject to the transferees agreeing to be
bound by the same restrictions on transfer. These restrictions on transfer apply
to all shares of the Corporation's stock including any shares issued as a result
of any stock split, stock dividend or similar distribution made in respect of
such shares. These restrictions will be noted conspicuously on the stock
certificates of the Corporation as provided in Article II, Section 2 of these
Bylaws and appropriate instructions will be noted on the stock transfer books of
the Corporation.
5. Fractional Shares or Scrip. The Corporation may:
(a) issue fractions of a share;
(b) arrange for the disposition of fractional interests by
the shareholders;
(c) pay in money the value of fractions of a share; and
(d) issue scrip in registered or bearer form which shall
entitle the holder to receive a certificate for a full share upon the surrender
of enough scrip to equal a full share.
6. Shares of Another Corporation. Shares owned by the Corporation
in another corporation, domestic or foreign, may be voted by such officer, agent
or proxy as the Board of Directors may determine or, in the absence of such
determination, by the President of the Corporation.
ARTICLE IV
Board of Directors
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1. Powers. The management of all the affairs, property and
interests of the Corporation shall be vested in a Board of Directors. In
addition to the powers and authorities expressly conferred upon it by these
Bylaws and by the Articles of Incorporation, the Board of Directors may exercise
all such powers of the Corporation and do all such lawful acts as are not
prohibited by statute or by the Articles of Incorporation or by these Bylaws or
as directed or required to be exercised or done by the shareholders.
2. General Standards for Directors.
(a) A director shall discharge the duties of a director,
including duties as a member of a committee:
(i) in good faith;
(ii) with the care an ordinary prudent person in a
like position would exercise under similar circumstances; and
(iii) in a manner the director reasonably believes
to be in the best interests of the Corporation.
3. Number and Term. The Board of Directors shall consist of four
(4) persons. Directors shall be elected by the shareholders at each annual
shareholders' meeting to hold office until the next annual meeting of the
shareholders and until their respective successors are elected and qualified.
Directors need not be shareholders or residents of the State of Washington.
4. Change of Number. The number of directors may at any time be
increased or decreased by resolution of either the shareholders or directors at
any annual, special or regular meeting; provided, that no decrease in the number
of directors shall have the effect of shortening the term of any incumbent
director, except as provided in Sections 6 and 7 of this Article IV.
5. Vacancies. All vacancies in the Board of Directors, whether
caused by resignation, death or otherwise, may be filled by the affirmative vote
of a majority of the remaining directors in office though less than a quorum of
the Board of Directors. A director elected to fill a vacancy shall hold office
until the next shareholders' meeting at which directors are elected and until
his or her successor is elected and qualified. Any directorship to be filled by
reason of an increase in the number of directors may be filled by the Board of
Directors for a term of office continuing only until the next election of
directors by the shareholders and until his or her successor is elected and
qualified.
6. Resignation. A director may resign at any time by delivering
written notice to the Board of Directors, the President or the Secretary. A
resignation is effective when
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the notice is delivered unless the notice specifies a later effective date.
7. Removal of Directors. At a special meeting of shareholders
called expressly for that purpose, the entire Board of Directors, or any member
thereof, may be removed, with or without cause, by a vote of the holders of a
majority of shares then entitled to vote at an election of such directors. A
director or directors may be removed only if the number of votes cast to remove
the director exceeds the number of votes cast not to remove the director. The
notice of such special meeting must state that the purpose, or one of the
purposes, of the meeting is removal of the director or directors, as the case
may be.
8. Regular Meetings. Regular meetings of the Board of Directors
or any committee may be held without notice at the principal place of business
of the Corporation or at such other place or places, either within or without
the State of Washington, as the Board of Directors or such committee, as the
case may be, may from time to time designate. The annual meeting of the Board of
Directors shall be held without notice immediately after adjournment of the
annual meeting of shareholders.
9. Special Meetings.
(a) Special meetings of the Board of Directors may be
called at any time by the President or by any director, to be held at the
principal place of business of the Corporation or at such other place or places
as the Board of Directors or the person or persons calling such meeting may from
time to time designate. Notice of all special meetings of the Board of
Directors, stating the date, time and place thereof, shall be given at least one
(1) day prior to the date of the meeting, in accordance with the provisions set
forth in Article VII of these Bylaws. Such notice need not specify the business
to be transacted at, or the purpose of, the meeting.
(b) Special meetings of any committee of the Board of
Directors may be called at any time by such person or persons and with such
notice as shall be specified for such committee by the Board of Directors, or in
the absence of such specification, in the manner and with the notice required
for special meetings of the Board of Directors.
10. Waiver of Notice. A director may waive any notice required by
law, by the Articles of Incorporation or by these Bylaws before or after the
time stated for the meeting, and such waiver shall be equivalent to the giving
of such notice. Such waiver must be in writing, signed by the director entitled
to such notice and delivered to the Corporation for inclusion in the minutes or
filing with the corporate records. A director's attendance at or participation
in a meeting shall constitute a waiver of any required notice to the director of
the meeting unless the director at the beginning of the meeting, or promptly
upon the director's arrival, objects to holding the meeting or transacting
business at the meeting and does not thereafter vote for or assent to action
taken at the meeting.
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11. Quorum. A majority of the full Board of Directors shall be
necessary at all meetings to constitute a quorum for the transaction of
business. If a quorum is present when a vote is taken, the affirmative vote of a
majority of directors present is the act of the Board of Directors.
12. Registering Dissent. A director who is present at a meeting of
the Board of Directors at which action on a corporate matter is taken is deemed
to have assented to such action unless:
(a) the director objects at the beginning of the meeting,
or promptly upon the director's arrival, to the holding of, or transaction of
business at, the meeting;
(b) the director's dissent or abstention from the action
is entered in the minutes if the meeting; or
(c) the director delivers written notice of the director's
dissent or abstention to the presiding officer of the meeting before its
adjournment or to the Corporation within a reasonable time after adjournment of
the meeting. The right to dissent or abstain is not available to a director who
voted in favor of the action taken.
13. Action by Directors Without a Meeting.
(a) Any action required or permitted to be taken at a
meeting of the Board of Directors, or of a committee thereof, may be taken
without a meeting if the action is taken by all members of the Board of
Directors. The action must be evidenced by one or more written consents setting
forth the action taken, signed by each of the directors, or by each of the
members of the committee, as the case may be, either before or after the action
taken, and delivered to the Corporation for inclusion in the minutes or filing
with the Corporation's records.
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(b) Action taken under this section is effective when the
last director signs the consent, unless the consent specifies a later effective
date.
14. Participation by Means of Communications Equipment. Any or all
directors may participate in a regular or special meeting of the Board of
Directors (or of a committee thereof) by, or may conduct the meeting through the
use of, any means of communication by which all directors participating can hear
each other during the meeting.
15. Committees.
(a) The Board of Directors, by resolution adopted by a
majority of the full Board of Directors, may create one or more committees of
directors. Each committee must have two or more members who serve at the
pleasure of the Board of Directors. To the extent specified by the Board of
Directors, each committee may exercise the authority of the Board of Directors,
except that no committee shall have the authority to:
(i) authorize or approve a distribution except
according to a general formula or method prescribed by the Board of Directors;
(ii) approve or propose to shareholders action that
by law is required to be approved by shareholders;
(iii) fill vacancies on the Board of Directors or
any of its committees;
(iv) amend the Articles of Incorporation;
(v) adopt, amend or repeal these Bylaws;
(vi) approve a plan of merger not requiring
shareholder approval; or
(vii) authorize or approve the issuance or sale or
contract for sale of shares, or determine the designation and relative rights,
preferences and limitations of a class or series of shares, except that the
Board of Directors may authorize a committee (or a senior executive officer of
the Corporation) to do so within limits specifically prescribed by the Board of
Directors.
(b) The creation of, delegation of authority to or action
by a committee does not alone constitute compliance by a director with the
standards of conduct required by the Washington Business Corporation Act and
these Bylaws.
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16. Remuneration. No stated salary shall be paid directors, as
such, for their service, but by resolution of the Board of Directors, a fixed
sum and expenses of attendance, if any, may be allowed for attendance at each
regular or special meeting of the Board of Directors or of a committee thereof;
provided, that nothing herein contained shall be construed to preclude any
director from serving the Corporation in any other capacity and receiving
compensation therefor.
ARTICLE V
Officers
1. Designations. The officers of the Corporation shall be a
President, a Secretary and, at the discretion of the Board of Directors, one or
more Vice-Presidents and a Treasurer. The Board of Directors shall appoint all
officers. Any two or more offices may be held by the same individual.
The Board of Directors, in its discretion, may elect a Chairman
from among its members to serve as Chairman of the Board of Directors, who, when
present, shall preside at all meetings of the Board of Directors and the
shareholders, and who shall have such other powers as the Board may determine.
2. Appointment and Term of Office. The officers of the
Corporation shall be appointed annually by the Board of Directors at the first
meeting of the Board of Directors held after each annual meeting of the
shareholders. Each officer shall hold office until a successor shall have been
appointed and qualified, or until such officer's earlier death, resignation or
removal.
3. Powers and Duties. If the Board appoints persons to fill the
following positions, such officers shall have the power and duties set forth
below:
(a) The President. The President of the Corporation shall
be the Chief Executive Officer of the Corporation and, subject to the direction
and control of the Board of Directors, shall have general control and management
of the business affairs and policies of the Corporation. The President shall act
as liaison from and as spokesman for the Board of Directors. The President shall
participate in long-range planning for the Corporation and shall be available to
the other officers of the Corporation for consultation. The President shall
possess power to sign all certificates, contracts and other instruments of the
Corporation. Unless a Chairman of the Board of Directors has been appointed and
is present, the President shall preside at all meetings of the shareholders and
of the Board of Directors. The President shall perform all such other duties as
are incident to the office of President or are properly required by the Board of
Directors.
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(b) Vice-Presidents. During the absence or disability of
the President, the Executive or Senior Vice-Presidents, if any, and the
Vice-Presidents, if any, in the order designated by the Board of Directors,
shall exercise all the functions of the President. Each Vice-President shall
have such powers and discharge such duties as may be assigned from time to time
by the Board of Directors.
(c) The Secretary. The Secretary shall issue notices for
all meetings, except for notices for special meetings of the shareholders and
special meetings of the directors which are called by the requisite percentage
of shareholders or number of directors, shall keep minutes of all meetings,
shall have charge of the seal and the Corporation's books, and shall make such
reports and perform such other duties as are incident to the office of
Secretary, or are properly required of him or her by the Board of Directors.
(d) The Treasurer. The Treasurer shall have the custody of
all moneys and securities of the Corporation and shall keep regular books of
account. The Treasurer shall disburse the funds of the Corporation in payment of
the just demands against the Corporation or as may be ordered by the Board of
Directors, taking proper vouchers or receipts for such disbursements, and shall
render to the Board of Directors from time to time as may be required an account
of all transactions as Treasurer and of the financial condition of the
Corporation. The Treasurer shall perform such other duties incident to his or
her office or that are properly required of him or her by the Board of
Directors.
4. Standards of Conduct for Officers.
(a) An officer with discretionary authority shall
discharge such officer's duties under that authority:
(i) in good faith;
(ii) with the care an ordinary prudent person in a
like position would exercise under similar circumstances; and
(iii) in a manner the officer reasonably believes
to be in the best interests of the Corporation.
5. Delegation. In the case of absence or inability to act of any
officer of the Corporation and of any person herein authorized to act in such
officer's place, the Board of Directors may from time to time delegate the
powers or duties of such officer to any other officer or any director or other
person whom it may in its sole discretion select.
6. Vacancies. Vacancies in any office arising from any cause may
be filled
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by the Board of Directors at any regular or special meeting of the Board.
7. Other Officers. The Board of Directors, or a duly appointed
officer to whom such authority has been delegated by Board resolution, may
appoint such other officers and agents as it shall deem necessary or expedient,
who shall hold their offices for such terms and shall exercise such powers and
perform such duties as shall be determined from time to time by the Board of
Directors.
8. Resignation. An officer may resign at any time by delivering
notice to the Corporation. Such notice shall be effective when delivered unless
the notice specifies a later effective date. Any such resignation shall not
affect the Corporation's contract rights, if any, with the officer.
9. Removal. Any officer elected or appointed by the Board of
Directors may be removed at any time, with or without cause, by the affirmative
vote of a majority of the whole Board of Directors, but such removal shall be
without prejudice to the contract rights, if any, of the person so removed.
10. Salaries and Contract Rights. The salaries, if any, of the
officers shall be fixed from time to time by the Board of Directors. The
appointment of an officer shall not of itself create contract rights.
11. Bonds. The Board of Directors may, by resolution, require any
and all of the officers to give bonds to the Corporation, with sufficient surety
or sureties, conditioned for the faithful performance of the duties of their
respective offices, and to comply with such other conditions as may from time to
time be required by the Board of Directors.
ARTICLE VI
Distributions and Finance
1. Distributions. The Board of Directors may authorize and the
Corporation may make distributions to its shareholders; provided that no
distribution may be made if, after giving it effect, either:
(a) The Corporation would not be able to pay its
debts as they become due in the usual course of business; or
(b) The Corporation's total assets would be less
than the sum of its total liabilities plus the amount which would be needed, if
the Corporation were to be dissolved at the time of the distribution, to satisfy
the preferential rights upon dissolution of shareholders whose preferential
rights are superior to those receiving the distribution.
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The Board of Directors may authorize distributions to holders of
record at the close of business on any business day prior to the date on which
the distribution is made. If the Board of Directors does not fix a record date
for determining shareholders entitled to a distribution, the record date shall
be the date on which the Board of Directors authorizes the distribution.
2. Measure of Effect of a Distribution. For purposes of
determining whether a distribution may be authorized by the Board of Directors
and paid by the Corporation under Article VI, Section 1 of these Bylaws, the
effect of the distribution is measured:
(a) In the case of a distribution of indebtedness, the
terms of which provide that payment of principal and interest are made only if
and to the extent that payment of a distribution to shareholders could then be
made under this section, each payment of principal or interest is treated as a
distribution, the effect of which is measured on the date the payment is
actually made; or
(b) In the case of any other distribution:
(i) if the distribution is by purchase, redemption,
or other acquisition of the Corporation's shares, the effect of the distribution
is measured as of the earlier of the date any money or other property is
transferred or debt incurred by the Corporation, or the date the shareholder
ceases to be a shareholder with respect to the acquired shares;
(ii) if the distribution is of an indebtedness
other than described in subsection 2(a) and (b)(i) of this section, the effect
of the distribution is measured as of the date the indebtedness is distributed;
and
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(iii) in all other cases, the effect of the
distribution is measured as of the date the distribution is authorized if
payment occurs within 120 days after the date of authorization, or the date the
payment is made if it occurs more than 120 days after the date of authorization.
3. Depositories. The monies of the Corporation shall be deposited
in the name of the Corporation in such bank or banks or trust company or trust
companies as the Board of Directors shall designate, and shall be drawn out only
by check or other order for payment of money signed by such persons and in such
manner as may be determined by resolution of the Board of Directors.
ARTICLE VII
Notices
Except as may otherwise be required by law, any notice to any
shareholder or director must be in writing and may be transmitted by: mail,
private carrier or personal delivery; telegraph or teletype; or telephone, wire
or wireless equipment which transmits a facsimile of the notice. Written notice
by the Corporation to its shareholders shall be deemed effective when mailed, if
mailed with first-class postage prepaid and correctly addressed to the
shareholder's address shown in the Corporation's current record of shareholders.
Except as set forth in the previous sentence, written notice shall be deemed
effective at the earliest of the following: (i) when received; (ii) five days
after its deposit in the United States mail, as evidenced by the postmark, if
mailed with first-class postage, prepaid and correctly addressed; (iii) on the
date shown on the return receipt, if sent by registered or certified mail,
return receipt requested, and receipt is signed by or on behalf of the
addressee; or (iv) if sent to a shareholder's address, telephone number, or
other number appearing on the records of the Corporation, when dispatched by
telegraph, teletype or facsimile equipment.
ARTICLE VIII
Seal
The Corporation may adopt a corporate seal which seal shall be in
such form and bear such inscription as may be adopted by resolution of the Board
of Directors.
ARTICLE IX
Indemnification of Officers,
Directors, Employees and Agents
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1. Definitions. For purposes of this Article:
(a) "Corporation" includes any domestic or foreign
predecessor entity of the Corporation in a merger or other transaction in which
the predecessor's existence ceased upon consummation of the transaction.
(b) "Director" means an individual who is or was a
director of the Corporation or an individual who, while a director of the
Corporation, is or was serving at the Corporation's request as a director,
officer, partner, trustee, employee, or agent of another foreign or domestic
corporation, partnership, joint venture, trust, employee benefit plan, or other
enterprise. A director is considered to be serving an employee benefit plan at
the Corporation's request if the director's duties to the Corporation also
impose duties on, or otherwise involve services by, the director to the plan or
to participants in or beneficiaries of the plan. "Director" includes, unless the
context requires otherwise, the estate or personal representative of a director.
(c) "Expenses" include counsel fees.
(d) "Liability" means the obligation to pay a judgment,
settlement, penalty, fine, including an excise tax assessed with respect to an
employee benefit plan, or reasonable expenses incurred with respect to a
proceeding.
(e) "Official capacity" means: (i) When used with respect
to a director, the office of director in the Corporation; and (ii) when used
with respect to an individual other than a director, as contemplated in Section
6 of this Article IX, the office in the Corporation held by the officer or the
employment or agency relationship undertaken by the employee or agent on behalf
of the Corporation. "Official capacity" does not include service for any other
foreign or domestic corporation or any partnership, joint venture, trust,
employee benefit plan, or other enterprise.
(f) "Party" includes an individual who was, is, or is
threatened to be made a named defendant or respondent in a proceeding.
(g) "Proceeding" means any threatened, pending, or
completed action, suit, or proceeding, whether civil, criminal, administrative
or investigative and whether formal or informal.
2. Right to Indemnification.
(a) The Corporation shall indemnify any person who was or
is a party to any proceeding, whether or not brought by or in the right of the
Corporation, by reason of the fact that such person is or was a director of the
Corporation, against all reasonable expenses
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incurred by the director in connection with the proceeding.
(b) Except as provided in subsection (e) of this Section
2, the Corporation shall indemnify an individual made a party to a proceeding
because the individual is or was a director against liability incurred in the
proceeding if:
(i) The individual acted in good faith; and
(ii) The individual reasonably believed:
(A) In the case of conduct in the
individual's official capacity with the Corporation, that the individual's
conduct was in the Corporation's best interests; and
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(B) In all other cases, that the
individual's conduct was at least not opposed to the Corporation's best
interests; and
(iii) In the case of any criminal proceeding, the
individual had no reasonable cause to believe the individual's conduct was
unlawful.
(c) A director's conduct with respect to an employee
benefit plan for a purpose the director reasonably believed to be in the
interests of the participants in and beneficiaries of the plan is conduct that
satisfies the requirement of subsection (b)(ii) of this Section 2.
(d) The termination of a proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent is
not, of itself, determinative that the director did not meet the standard of
conduct described in this Section.
(e) The Corporation shall not indemnify a director under
this Section 2:
(i) In connection with a proceeding by or in the
right of the Corporation in which the director was adjudged liable to the
Corporation; or
(ii) In connection with any other proceeding
charging improper personal benefit to the director, whether or not involving
action in the director's official capacity, in which the director was adjudged
liable on the basis that personal benefit was improperly received by the
director.
(f) Indemnification under this Article IX, Section 2 in
connection with a proceeding by or in the right of the Corporation is limited to
reasonable expenses incurred in connection with the proceeding.
3. Advance for Expenses.
(a) The Corporation shall pay for or reimburse the
reasonable expenses incurred by a director who is a party to a proceeding in
advance of final disposition of the proceeding and in advance of any
determination and authorization of indemnification pursuant to Section 5 of this
Article IX if:
(i) The director furnishes the Corporation a
written affirmation of the director's good faith belief that the director has
met the standard of conduct described in Section 2 of this Article IX; and
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(ii) The director furnishes the Corporation a
written undertaking, executed personally or on the director's behalf, to repay
the advance if it is ultimately determined that the director did not meet the
standard of conduct.
(b) The undertaking required by subsection (a)(ii) of this
Section 3 must be an unlimited general obligation of the director but need not
be secured and may be accepted without reference to financial ability to make
repayment.
4. Court-ordered Indemnification. A director of the Corporation
who is a party to a proceeding may apply for indemnification or advance of
expenses to the court conducting the proceeding or to another court of competent
jurisdiction. On receipt of an application, the court after giving any notice
the court considers necessary may order indemnification or advance of expenses
if it determines:
(a) The director is entitled to mandatory indemnification
pursuant to RCW 23B.08.520, in which case the court shall also order the
Corporation to pay the director's reasonable expenses incurred to obtain
court-ordered indemnification;
(b) The director is fairly and reasonably entitled to
indemnification in view of all the relevant circumstances, whether or not the
director met the standard of conduct set forth in Section 2 of this Article IX,
or was adjudged liable as described in Section 2(e) of this Article IX, but if
the director was adjudged so liable, the director's indemnification is limited
to reasonable expenses incurred; or
(c) In the case of an advance of expenses, the director is
entitled pursuant to the Articles of Incorporation, Bylaws, or any applicable
resolution or contract, to payment or reimbursement of the director's reasonable
expenses incurred as a party to the proceeding in advance of final disposition
of the proceeding.
5. Determination and Authorization of Indemnification.
(a) The Corporation shall not indemnify a director under
this Article IX unless authorized in the specific case after a determination has
been made that indemnification of the director is permissible in the
circumstances because the director has met the standard of conduct set forth in
Section 2(b) of this Article IX.
(b) The determination shall be made:
(i) By the Board of Directors by majority vote of a
quorum consisting of directors not at the time parties to the proceeding;
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(ii) If a quorum cannot be obtained under (i) of
this subsection, by majority vote of a committee duly designated by the Board of
Directors, in which designation directors who are parties may participate,
consisting solely of two or more directors not at the time parties to the
proceeding;
(iii) By special legal counsel:
(A) Selected by the Board of Directors or
its committee in the manner prescribed in (i) or (ii) of this subsection; or
(B) If a quorum of the Board of Directors
cannot be obtained under (i) of this subsection and a committee cannot be
designated under (ii) of this subsection, selected by majority vote of the full
Board of Directors, in which selection directors who are parties may
participate; or
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(iv) By the shareholders, but shares owned by or
voted under the control of directors who are at the time parties to the
proceeding may not be voted on the determination.
(c) Authorization of indemnification and evaluation as to
reasonableness of expenses shall be made in the same manner as the determination
that indemnification is permissible, except that if the determination is made by
special legal counsel, authorization of indemnification and evaluation as to
reasonableness of expenses shall be made by those entitled under subsection (b)
(iii) of this Section to select counsel.
6. Indemnification of Officers
(a) An officer of the Corporation who is not a director
shall be indemnified pursuant to RCW 23B.08.520, and is entitled to apply for
court-ordered indemnification under Section 4 of this Article IX, in each case
to the same extent as a director; and
(b) The Corporation shall indemnify and advance expenses
to an officer who is not a director to the same extent as to a director under
this Article IX.
(c) The Corporation may also indemnify and advance
expenses to an officer who is not a director to the extent, consistent with law,
that may be provided by a general or specific action of its Board of Directors,
or contract.
7. Indemnification of Employees and Agents.
(a) The Corporation may indemnify employees and agents of
the Corporation pursuant to RCW 23B.08.520, and may afford the right to such
employees or agents to apply for court-ordered indemnification under Section 4
of this Article IX, in each case to the same extent as a director; and
(b) The Corporation may indemnify and advance expenses to
an employee or agent of the Corporation who is not a director to the same extent
as to a director under this Article IX.
(c) The Corporation may also indemnify and advance
expenses to an employee or agent who is not a director to the extent, consistent
with law, that may be provided by a general or specific action of its Board of
Directors, or contract.
8. Insurance. The Corporation may purchase and maintain insurance
on behalf of an individual who is or was a director, officer, employee, or agent
of the Corporation,
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or who, while a director, officer, employee, or agent of the Corporation, is or
was serving at the request of the Corporation as a director, officer, partner,
trustee, employee, or agent of another foreign or domestic corporation,
partnership, joint venture, trust, employee benefit plan, or other enterprise,
against liability asserted against or incurred by the individual in that
capacity or arising from the individual's status as a director, officer,
employee, or agent, whether or not the Corporation would have power to indemnify
the individual against the same liability under this Article IX.
9. Indemnification as a Witness. This Article IX does not limit a
Corporation's power to pay or reimburse expenses incurred by a director in
connection with the director's appearance as a witness in a proceeding at a time
when the director has not been made a named defendant or respondent to the
proceeding.
10. Report to Shareholders. If the Corporation indemnifies or
advances expenses to a director pursuant to this Article IX in connection with a
proceeding by or in the right of the Corporation, the Corporation shall report
the indemnification or advance in writing to the shareholders with or before the
notice of the next shareholders' meeting.
11. Shareholder Authorized Indemnification.
(a) If authorized by a resolution adopted or ratified,
before or after the event, by the shareholders of the Corporation, the
Corporation shall have the power to indemnify or agree to indemnify a director
made a party to a proceeding, or obligate itself to advance or reimburse
expenses incurred in a proceeding, without regard to the limitations contained
in this Article IX (other than this Section 11); provided that no such indemnity
shall indemnify any director from or on account of:
(i) Acts or omissions of the director finally
adjudged to be intentional misconduct or a knowing violation of law;
(ii) Conduct of the director finally adjudged to be
an unlawful distribution under RCW 23B.08.310; or
(iii) Any transaction with respect to which it was
finally adjudged that such director personally received a benefit in money,
property, or services to which the director was not legally entitled.
(b) Unless a resolution adopted or ratified by the
shareholders of the Corporation provides otherwise, any determination as to any
indemnity or advance of expenses under subsection (a) of this Section 11 shall
be made in accordance with Section 5 of this Article IX.
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12. Validity of Indemnification. A provision addressing the
Corporation's indemnification of or advance for expenses to directors that is
contained in these Bylaws, a resolution of its shareholders or Board of
Directors, or in a contract or otherwise, is valid only if and to the extent the
provision is consistent with RCW 23B.08.500 through 23B.08.580.
13. Interpretation. The provisions contained in this Article IX
shall be interpreted and applied to provide indemnification to directors,
officers, employees and agents of the Corporation to the fullest extent allowed
by applicable law, as such law may be amended, interpreted and applied from time
to time.
14. Savings Clause. If this Article IX or any portion thereof
shall be invalidated on any ground by any court of competent jurisdiction, the
Corporation shall nevertheless indemnify each director as to reasonable expenses
and liabilities with respect to any proceeding, whether or not brought by or in
the right of the Corporation, to the full extent permitted by any applicable
portion of this Article IX that shall not have been invalidated, or by any other
applicable law.
15. Nonexclusivity of Rights. The right to indemnification under
this Article IX for directors, officers, employees and agents shall not be
exclusive of any other right which any person may have, or hereafter acquire,
under any statute, provision of the Articles of Incorporation, Bylaws, other
agreement, vote of shareholders or disinterested directors, insurance policy,
principles of common law or equity, or otherwise.
ARTICLE X
Books and Records
The Corporation shall maintain appropriate accounting records and
shall keep as permanent records minutes of all meetings of its shareholders and
Board of Directors, a record of all actions taken by the shareholders or the
Board of Directors without a meeting and a record of all actions taken by a
committee of the Board of Directors. In addition, the Corporation shall keep at
its registered office or principal place of business, or at the office of its
transfer agent or registrar, a record of its shareholders, giving the names and
addresses of all shareholders in alphabetical order by class of shares showing
the number and class of the shares held by each. Any books, records and minutes
may be in written form or any other form capable of being converted into written
form within a reasonable time.
The Corporation shall keep a copy of the following records at its
principal office:
1. The Articles of Incorporation and all amendments thereto
currently in effect;
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2. The Bylaws and all amendments thereto currently in effect;
3. The minutes of all shareholders' meetings, and records of all
actions taken by shareholders without a meeting, for the past three years;
4. Its financial statements for the past three years, including
balance sheets showing in reasonable detail the financial condition of the
Corporation as of the close of each fiscal year, and an income statement showing
the results of its operations during each fiscal year prepared on the basis of
generally accepted accounting principles or, if not, prepared on a basis
explained therein;
5. All written communications to shareholders generally within
the past three years;
6. A list of the names and business addresses of its current
directors and officers; and
7. Its most recent annual report delivered to the Secretary of
State of Washington.
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ARTICLE XI
Amendments
1. By Shareholders. These Bylaws may be amended or repealed by
the shareholders in the manner set forth in Article II, Section 9 of these
Bylaws at any regular or special meeting of the shareholders.
2. By Directors. The Board of Directors shall have power to amend
or repeal the Bylaws of, or adopt new bylaws for, the Corporation. However, any
such Bylaws, or any alteration, amendment or repeal of the Bylaws, may be
subsequently changed or repealed by the holders of a majority of the stock
entitled to vote at any shareholders' meeting.
3. Emergency Bylaws. The Board of Directors may adopt emergency
Bylaws, subject to repeal or change by action of the shareholders, which shall
be operative during any emergency in the conduct of the business of the
Corporation resulting from an attack on the United States, any state of
emergency declared by the federal government or any subdivision thereof, or any
other catastrophic event.
Adopted by resolution of the Corporation's Board of Directors on
_________, 1997.
-----------------------------------
Secretary
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EXHIBIT 4.1
[FREESHOP LOGO]
FREESHOP
INCORPORATED UNDER THE LAWS OF THE STATE OF WASHINGTON
COMMON STOCK COMMON STOCK
THIS CERTIFICATE IS TRANSFERABLE IN SEE REVERSE FOR CERTAIN DEFINITIONS
NEW YORK, NY OR RIDGEFIELD PARK, NJ AND A STATEMENT AS TO THE RIGHTS
PREFERENCES, PRIVILEGES AND
RESTRICTIONS ON SHARES
CUSIP 356873 10 9
THIS CERTIFIES THAT
is the record holder of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, NO PAR VALUE, OF
FREESHOP.COM, INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid until countersigned by the Transfer
Agent and registered by the Registrar.
WITNESS this facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
/s/ [signature Illegible] /s/ [signature Illegible]
SECRETARY PRESIDENT AND CHIEF EXECUTIVE OFFICER
[CORPORATE SEAL]
COUNTERSIGNED AND REGISTERED:
CHASEMELLON SHAREHOLDER SERVICES, LLC.
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
AMERICAN BANK NOTE COMPANY AUG 3, 1999 fm
3504 ATLANTIC AVENUE
SUITE 12
LONG BEACH, CA 90807 062811fc
(562) 989-2333
FAX (562) 426-7450 7B Proof /s/ [signature Illegible] REV 2
<PAGE> 2
FREESHOP.COM, INC.
A statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights as established, from time to time, by the Articles of
Incorporation of the Corporation, the number of shares constituting each class
and series, and the designations thereof, may be obtained by the holder hereof
upon request and without charge from the Secretary of the Corporation at the
principal office of the Corporation.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - _______________ Custodian _______________
(Cust) (Minor)
TEN ENT - as tenants by the entireties under Uniform Gifts to Minors
Act _________________________
JT TEN - as joint tenants with right of (State)
survivorship and not as tenants UNIF TRF MIN ACT - ________________ Custodian (until age ____)
in common (Cust)
___________________ under Uniform Transfers
COM PROP - as community property (Minor)
to Minors Act _____________________________
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED,_______________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
______________________________________
| |
|____________________________________|
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________ Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated ________________________________
X _______________________________________
X _______________________________________
NOTICE: THE SIGNATURE OF THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN
EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
SIGNATURE GUARANTEED
By _______________________________________________________________________
THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT
TO S.E.C. RULE 17Ad-15.
- ---------------------------------------------------
AMERICAN BANK NOTE COMPANY JUNE 26, 1999 fm
3604 ATLANTIC AVENUE
SUITE 12
LONG BEACH, CA 90807 062811bk
(562) 958-2333
(FAX) (562) 426-7460 Proof ____ REV 1
- ---------------------------------------------------
<PAGE> 1
EXHIBIT 10.14
[Fingerhut Letterhead]
June 18, 1999
Mr. John Wade
Chief Financial Officer
FreeShop.com, Inc.
95 South Jackson, Suite 300
Seattle, WA 98104
Dear John:
This is to confirm that Fingerhut Companies, Inc. ("Fingerhut") will be
exercising its third warrant (the "Third Tranche Investment") pursuant to the
warrant agreement (the "Warrant Agreement") between Fingerhut and FreeShop
International, Inc., now known as FreeShop.com, Inc., (the "Company") dated
December 10, 1998. This also is to confirm that Fingerhut will be exercising its
Anti-Dilution warrants (the "Anti-Dilution Warrants) and its third- party
agreement warrants (the "Third Party Agreement Warrants") all pursuant to the
Warrant Agreement. Concurrently with the exercise of its rights under the
Warrant Agreement, Fingerhut shall also purchase an additional 8,820 shares of
Series B preferred stock ("Series B Stock")(the "Additional Shares"). The
exercise of the Third Tranche Investment, Anti-Dilution Warrants, Third Party
Agreement Warrants and purchase of Additional Shares shall be conditioned upon,
and subject to, the escrow agreement among Grantor, Grantee and Whitman Breed
Abbott & Morgan LLP, solely as escrow agent ("Escrow Agent"), dated June 18,
1999.
Upon exercise of the Third Tranche Investment and payment to Escrow
Agent therefor, the Company will deliver to Escrow Agent 208,918 shares of
Series B preferred stock (the "Series B Stock") in lieu of ten times that number
of shares of common stock. By its terms, each one share of Series B Stock will
be convertible into ten shares of the Company's common stock. The exercise price
for the Third Tranche Investment shall be as specified in the Warrant Agreement.
Upon exercise of the Anti-Dilution Warrants and payment to Escrow Agent
therefor, the Company will deliver to Escrow Agent 184,288 shares of Series B
preferred stock (the "Series B Stock") in lieu of ten times that number of
shares of common stock. By its terms, each one share of Series B Stock will be
convertible into ten shares of the Company's common stock. The exercise price
for the Anti-Dilution Warrants shall be as specified in the Warrant Agreement.
<PAGE> 2
Upon exercise of the Third Party Agreement Warrants and payment to
Escrow Agent therefor, the Company will deliver to Escrow Agent 11,652 shares of
Series B preferred stock (the "Series B Stock") in lieu of ten times that number
of shares of common stock. By its terms, each one share of Series B Stock will
be convertible into ten shares of the Company's common stock. The exercise price
for the Third Party Agreement Warrants shall be as specified in the Warrant
Agreement.
Such Anti-Dilution Warrants and Third Party Agreement Warrants are
determined as of the date hereof, and such conditional exercise shall not affect
any rights Fingerhut may have under the Warrant Agreement with regard to
Anti-Dilution Warrants and Third Party Agreement Warrants, the rights to which
are of the date hereof.
Upon payment of $1.586 per share for the Additional Shares to Escrow
Agent, the Company will deliver to Escrow Agent 8,820 shares of Series B Stock.
By its terms, each one share of Series B Stock will be convertible into ten
shares of the Company's common stock.
Please indicate your agreement to the terms of this letter by signing
below and returning a copy of this letter to my attention at the above address.
Best regards,
Michael P. Sherman, Esq.
- -----------------------------------
John Wade
Chief Financial Officer
FreeShop.com, Inc.
cc: Bryce L. Holland, Jr.
Dorsey & Whitney LLP
U.S. Bank Building Center, Suite 4200
1420 Fifth Avenue
Seattle, Washington 98101
<PAGE> 1
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE
STATE LAWS, AND NO INTEREST THEREIN MAY BE SOLD, DISTRIBUTED, ASSIGNED,
OFFERED, PLEDGED OR OTHERWISE TRANSFERRED UNLESS THERE IS AN EFFECTIVE
REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS
COVERING ANY SUCH TRANSACTION OR SUCH TRANSACTION IS EXEMPT FROM THE
REGISTRATION REQUIREMENTS OF SUCH ACT AND LAWS, SUCH COMPLIANCE, AT THE OPTION
OF THE CORPORATION, TO BE EVIDENCED BY AN OPINION OF WARRANTHOLDER'S COUNSEL,
IN FORM ACCEPTABLE TO THE CORPORATION, THAT NO VIOLATION OF SUCH REGISTRATION
PROVISIONS WOULD RESULT FROM ANY PROPOSED TRANSFER OR ASSIGNMENT.
COMMON STOCK PURCHASE WARRANT
FREESHOP INTERNATIONAL, INC.
THIS CERTIFIES that for good and valuable consideration received, Karrie
Lee, an individual or registered assign(s), is entitled, upon the terms and
subject to the conditions hereinafter set forth, to acquire from FreeShop
International, Inc., a Washington corporation (the "Corporation") up to twenty
three thousand two hundred fifty (3,250) fully paid and nonassessable shares of
common stock, without par value, of the Corporation ("Warrant Stock") at a
purchase price per share (the "Exercise Price") of $0.41.
1. TERM OF WARRANT
Subject to the terms and conditions set forth herein, this Warrant shall
be exercisable, in whole or from time to time part, at any time on or after the
date hereof and at or prior to 11:59 p.m., Pacific Time, on January 16, 2002
(the "Expiration Time"). Notwithstanding the foregoing, at any time the
Corporation shall have the right, except as may be limited by law, other
agreements or herein, to call this Warrant for exercise, in whole or in part,
by mailing written notice by United States mail to the registered holder hereof
if the Corporation completes a private placement or public offering of the
Corporation's common stock for an aggregate offering price of seven million,
five hundred thousand dollars ($7,500,000.00) at a price per share equal to or
greater than five dollars ($5.00) per share, as adjusted pursuant to Section 10
hereof. In such event, this Warrant shall expire and cease to be exercisable at
11:59 p.m. Pacific Time, of the twenty-first day after the date of mailing of
the notice.
2. EXERCISE OF WARRANT
The purchase rights represented by this Warrant are exercisable by the
registered holder hereof, in whole or in part, at any time and from time to
time at or prior to the Expiration Time by the surrender of this Warrant and
the Notice of Exercise form attached hereto duly executed to the office of the
Corporation at 2815 2nd Avenue, Suite 398, Seattle, Washington 98121 (or such
other office or agency of the Corporation as it may designate by notice in
writing to the registered holder hereof at the address of such holder appearing
on the books of the Corporation), and upon payment of the Exercise Price for
the shares thereby purchased (by cash or by check or bank draft payable to the
order of the Corporation or by cancellation of indebtedness of the Corporation
to the holder hereof, if any, at the time of exercise in an amount equal to the
purchase price of the shares thereby purchased): whereupon the holder of this
Warrant shall be entitled to receive from the Corporation a stock certificate
in proper form representing the number of shares of Warrant Stock so purchased.
3. ISSUANCE OF SHARES: NO FRACTIONAL SHARES OF SCRIP
Certificates for shares purchased hereunder shall be delivered to the
holder hereof by the Corporation's transfer agent at the Corporation's expense
within a reasonable time after the date on which this Warrant shall have been
exercised in accordance with the terms hereof. Each certificate so delivered
shall be in such denominations as may be requested by the holder hereof and
shall be registered in the name of such holder or, subject to applicable
-1-
<PAGE> 2
laws, other name as shall be requested by such holder. If, upon exercise of
this Warrant, fewer than all of the shares of Warrant Stock evidenced by this
Warrant are purchased prior to the Expiration Time, one or more new warrants
substantially in the form of, and on the terms in, this Warrant will be issued
for the remaining number of shares of Warrant Stock not purchased upon exercise
of this Warrant. The Corporation hereby represents and warrants that all shares
of Warrant Stock which may be issued upon the exercise of this Warrant will,
upon such exercise, be duly and validly authorized and issued, fully paid and
nonassessable and free from all taxes, liens and charges in respect of the
issuance thereof (other than liens or charges created by or imposed upon the
holder of the Warrant Stock). The Corporation agrees that the shares so issued
shall be and be deemed to be issued to such holder as the record owner of such
shares as of the close of business on the date on which this Warrant shall have
been surrendered for exercise in accordance with the terms hereof. No
fractional shares or scrip representing fractional shares shall be issued upon
the exercise of this Warrant. With respect to any fraction of a share called
for upon the exercise of this Warrant, an amount equal to such fraction
multiplied by the then current price at which each share maybe purchased
hereunder shall be paid in cash to the holder of this Warrant.
4. CHARGES, TAXES AND EXPENSES
Issuance of certificates for shares of Warrant Stock upon the exercise of
this Warrant shall be made without charge to the holder hereof for any issue or
transfer tax or other incidental expense in respect of the issuance of such
certificate, all of which taxes and expenses shall be paid by the Corporation,
and such certificates shall be issued in the name of the holder of this Warrant
or in such name or names as may be directed by the holder of this Warrant;
provided, however, that in the event certificates for shares of Warrant Stock
are to be issued in a name other than the name of the holder of this Warrant,
this Warrant when surrendered for exercise shall be accompanied by the
Assignment Form attached hereto duly executed by the holder hereof.
5. NO RIGHTS AS SHAREHOLDERS
This Warrant does not entitle the holder hereof to any voting rights or
other rights as a shareholder of the Corporation prior to the exercise hereof.
6. EXCHANGE AND REGISTRY OF WARRANT
This Warrant is exchangeable, upon the surrender hereof by the registered
holder at the above-mentioned office or agency of the Corporation, for a new
Warrant of like tenor and dated as of such exchange. The Corporation shall
maintain at the above-mentioned office or agency a registry showing the name
and address of the registered holder of this Warrant. This Warrant may be
surrendered for exchange, transfer or exercise, in accordance with its terms,
at such office or agency of the Corporation, and the Corporation shall be
entitled to rely in all respects, prior to written notice to the contrary, upon
such registry.
7. LOSS, THEFT, DESTRUCTION OR MUTILATION OF WARRANT
Upon receipt by the Corporation of evidence reasonably satisfactory to it
of the loss, theft, destruction or mutilation of this Warrant, and in case of
loss, theft or destruction of indemnity or security reasonably satisfactory to
it, and upon reimbursement to the Corporation of all reasonable expenses
incidental thereto, and upon surrender and cancellation of this Warrant, if
mutilated, the Corporation will make and deliver a new Warrant of like tenor
and dated as of such cancellation, in lieu of this Warrant.
8. SATURDAYS, SUNDAYS AND HOLIDAYS
If the last or appointed day for the taking of any action or the
expiration of any right required or granted herein shall be a Saturday or a
Sunday or shall be a legal holiday, then such action may be taken or such right
may be exercised on the next succeeding day not a Saturday, Sunday or legal
holiday.
-2-
<PAGE> 3
9. MERGER, SALE OF ASSETS, ETC.
If at any time the Corporation proposes to merge or consolidate with or
into any other corporation, effect any reorganization, or sell or convey all or
substantially all of its assets to any other entity, then, as a condition of
such reorganization, consolidation, merger, sale or conveyance, the Corporation
or its successor, as the case may be, shall enter into a supplemental agreement
to make lawful and adequate provision whereby the holder shall have the right
to receive, upon exercise of the Warrant, the kind and amount of equity
securities which would have been received upon such reorganization,
consolidation, merger, sale or conveyance by a holder of a number of shares of
common stock equal to the number of shares issuable upon exercise of the
Warrant immediately prior to such reorganization, consolidation, merger, sale
or conveyance. If the property to be received upon such reorganization,
consolidation, merger, sale or conveyance is not equity securities, the
Corporation shall give the holder of this Warrant ten (10) business days prior
written notice of the proposed effective date of such transaction, and if this
Warrant has not been exercised by or on the effective date of such transaction,
it shall terminate.
10. SUBDIVISION, COMBINATION, RECLASSIFICATION, CONVERSION, ETC.
If the Corporation at any time shall, by subdivision, combination,
reclassification of securities or otherwise, change the Warrant Stock into the
same or a different number of securities of any class or classes, this Warrant
shall thereafter entitle the holder to acquire such number and kind of
securities as would have been issuable in respect of the Warrant Stock (or
other securities which were subject to the purchase rights under this Warrant
immediately prior to such subdivision, combination, reclassification or other
change) as the result of such change if this Warrant had been exercised in full
for cash immediately prior to such change. The Exercise Price hereunder shall
be adjusted if and to the extent necessary to reflect such change. If the
Warrant Stock or other securities issuable upon exercise hereof are subdivided
or combined into a greater or smaller number of shares of such security, the
number of shares issuable hereunder shall be proportionately increased or
decreased, as the case may be, and the Exercise Price shall be proportionately
reduced or increased, as the case may be, in both cases according to the ratio
which the total number of shares of such security to be outstanding immediately
after such even bears to the total number of shares of such security
outstanding immediately prior to such event. The Corporation shall give the
holder prompt written notice of any change in the type of securities issuable
hereunder, any adjustment of the Exercise Price for the securities issuable
hereunder, and any increase or decrease in the number of shares issuable
hereunder.
11. TRANSFERABILITY; COMPLIANCE WITH SECURITIES LAWS
(a) This Warrant may not be transferred or assigned in whole or in part
without compliance with all applicable federal and state securities laws by the
transferor and transferee (including the delivery of investment representation
letters and legal opinions reasonably satisfactory to the Corporation, if
requested by the Corporation). Subject such restrictions, prior to the
Expiration Time, this Warrant and all rights hereunder are transferable by the
holder hereof, in whole or in part, at the office or agency of the Corporation
referred to in Section 1 hereof. Any such transfer shall be made in person or
by the holder's duly authorized attorney, upon surrender of this Warrant
together with the Assignment Form attached hereto properly endorsed.
(b) The Holder of this Warrant, by acceptance hereof, acknowledges that
this Warrant and the Warrant Stock issuable upon exercise hereof are being
acquired solely for the holder's own account and not as a nominee for any other
party, and for investment and that the holder will not offer, sell or otherwise
dispose of this Warrant or any shares of Warrant Stock to be issued upon
exercise hereof except under circumstances that will not result in a violation
of the Securities Act of 1933, as amended, or any state securities laws. Upon
exercise of this Warrant, the holder shall, if requested by the Corporation,
confirm in writing, in a form satisfactory to the Corporation, that the shares
of Warrant Stock so purchased are being acquired solely for holder's own
account and not as a nominee for any other party, for investment and not with a
view toward distribution or resale.
(c) The Warrant Stock has not been and will not be registered under the
Securities Act of 1933, as amended, and this Warrant may not be exercised
except by (i) the original purchaser of this Warrant from the
Corporation or (ii) an "accredited investor" as defined in Rule 501(a) under
the Securities Act of 1933, as amended. Each certificate representing the
Warrant Stock or other securities issued in respect of the Warrant Stock upon
any stock split, stock dividend, recapitalization, merger, consolidation or
similar event, shall be stamped or otherwise
-3-
<PAGE> 4
imprinted with a legend substantially in the following form (in addition to any
legend required under applicable securities laws):
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER UNITED
STATES FEDERAL OR STATE SECURITIES LAWS AND MAY NOT BE OFFERED FOR SALE, SOLD
OR OTHERWISE TRANSFERRED OR ASSIGNED FOR VALUE, DIRECTLY OR INDIRECTLY, NOR MAY
THE SECURITIES BE TRANSFERRED ON THE BOOKS OF THE CORPORATION, WITHOUT
REGISTRATION OF SUCH SECURITIES UNDER ALL APPLICABLE UNITED STATES FEDERAL OR
STATE SECURITIES LAWS OR COMPLIANCE WITH AN APPLICABLE EXEMPTION THEREFROM,
SUCH COMPLIANCE, AT THE OPTION OF THE CORPORATION, TO BE EVIDENCED BY AN
OPINION OF SHAREHOLDER'S COUNSEL, IN FORM ACCEPTABLE TO THE CORPORATION, THAT
NO VIOLATION OF SUCH REGISTRATION PROVISIONS WOULD RESULT FROM ANY PROPOSED
TRANSFER OR ASSIGNMENT.
12. REPRESENTATIONS AND WARRANTIES
The Corporation hereby represents and warrants to the holder hereof that:
(a) during the period this Warrant is outstanding, the Corporation will
reserve from its authorized and unissued common stock a sufficient number of
shares to provide for the issuance of Warrant Stock upon the exercise of this
Warrant;
(b) the issuance of this Warrant shall constitute full authority to the
Corporation's officers who are charged with the duty of executing stock
certificates to execute and issue the necessary certificates for the shares of
Warrant Stock issuable upon exercise of this Warrant;
(c) the Corporation has all requisite legal and corporate power to
execute and deliver this Warrant, to sell and issue the Warrant Stock
hereunder, to issue the common stock issuable upon exercise of the Warrant
Stock and to carry out and perform its obligations under the terms of this
Warrant;
(d) all corporate action on the part of the Corporation, its directors
and shareholders necessary for the authorization, execution, delivery and
performance of this Warrant by the Corporation, the authorization, sale,
issuance and delivery of the Warrant Stock, the grant of registration rights as
provided herein and the performance of the Corporation's obligations hereunder
has been taken.
(e) the Warrant Stock, when issued in compliance with the provisions of
this Warrant and the Corporation's Articles of Incorporation (as they may be
amended from time to time (the "Articles")), will be validly issued, fully paid
and nonassessable, and free of all taxes, liens or encumbrances with respect to
the issue thereof and will be issued in compliance with all applicable federal
and state securities laws; and
(f) the issuance of the Warrant Stock will not be subject to any
preemptive rights, rights of first refusal or similar rights.
13. CORPORATION
The Corporation will not, by amendment of its Articles or through any
reorganization, recapitalization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other action, avoid or seek to
avoid the observance or performance of any of the terms to be observed or
performed hereunder by the Corporation, but will at all times in good faith
assist in the carrying out of all the provisions of this Warrant in the taking
of all such action as may be necessary or appropriate in order to protect the
rights of the holder of the Warrant against impairment.
-4-
<PAGE> 5
14. GOVERNING LAW
This Warrant shall be governed by and construed in accordance with the
laws of the State of Washington.
IN WITNESS WHEREOF, the Corporation has caused this Warrant to be executed
by its duly authorized officers.
Dated: 26 January, 1998
FREESHOP INTERNATIONAL, INC.
/s/ MICHAEL SCHUTZLER
- -----------------------------------
Michael Schutzler
President & CEO
-5-
<PAGE> 6
NOTICE OF EXERCISE
To: FreeShop International, Inc.
(1) The undersigned hereby elects to purchase _________ shares of common
stock of FreeShop International, Inc. pursuant to the terms of the attached
Warrant, and tenders herewith payment of the purchase price in full, together
with all applicable transfer taxes, if any.
(2) In exercising this Warrant, the undersigned hereby confirms and
acknowledges that the shares of common stock to be issued upon exercise hereof
are being acquired solely for the account of the undersigned and not as a
nominee for any other party, and for investment, and that the undersigned will
not offer, sell or otherwise dispose of any such shares of common stock except
under circumstances that will not result in a violation of the Securities Act
of 1933, as amended, or any state securities laws.
(3) Please issue a certificate or certificates representing said shares
of common stock in the name of the undersigned or in such other name as is
specified below:
-------------------------------
(Name)
-------------------------------
(Address)
(3) The undersigned represents that (a) he, she or it is the original
purchaser from the Corporation of the attached Warrant or an "accredited
investor" within the meaning of Rule 501(a) under the Securities Act of 1933,
as amended and (b) the aforesaid shares of common stock are being acquired for
the account of the undersigned for investment and not with a view to, or for
resale in connection with, the distribution thereof and that the undersigned
has no present intention of distributing or reselling such shares.
- --------------------------------- ----------------------------------
(Date) (Signature)
-6-
<PAGE> 7
ASSIGNMENT FORM
(To assign the foregoing Warrant, execute this form and supply required
information. Do not use this form to purchase shares.)
FOR VALUE RECEIVED, the undersigned registered owner of this Warrant
hereby sells, assigns and transfers unto the Assignee named below all of the
rights of the undersigned under the within Warrant, with respect to the number
of shares of common stock of FreeShop International, Inc. set forth below:
Name of Assignee Address No. of Shares
- ---------------- ------- -------------
and does hereby irrevocably constitute and appoint Attorney____________________
to make such transfer on the books of FreeShop International, Inc., maintained
for the purpose, with full power of substitution in the premises.
The undersigned also represents that, by assignment hereof, the Assignee
acknowledges that this Warrant and the shares of stock to be issued upon
exercise hereof are being acquired for investment and that the Assignee will
not offer, sell or otherwise dispose of this Warrant or any shares of stock to
be issued upon exercise hereof except under circumstances which will not result
in a violation of the Securities Act of 1933, as amended, or any state
securities laws. Further, the Assignee shall, if requested by the Corporation,
confirm in writing, in a form satisfactory to the Corporation, that the shares
of stock so purchased are being acquired for investment and not with a view
toward distribution or resale.
Date:
----------------------------------
Holder's Signature:
--------------------
Holder's Address:
---------------------------------------
---------------------------------------
Guaranteed Signature:
NOTE: The signature to this Assignment Form must correspond with the name as it
appears on the face of the Warrant, without alteration or enlargement or any
change whatever, and must be guaranteed by a bank or trust company. Officers of
corporations and those action in a fiduciary or other representative capacity
should file proper evidence of authority to assign the foregoing Warrant.
-7-
<PAGE> 1
THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR
OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT
OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE
CORPORATION AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.
WARRANT TO PURCHASE STOCK
Corporation: FreeShop International, Inc.
Number of Shares: 25,000
Class of Stock: Common
Initial Exercise Price: $0.60
Issue Date: September 18, 1998
Expiration Date: September 18, 2003
THIS WARRANT CERTIFIES THAT, for the agreed upon value of $1.00 and for other
good and valuable consideration, IMPERIAL BANK ("Holder") is entitled to
purchase the number of fully paid and nonassessable shares of Common Stock (the
"Shares") of the corporation (the "Company") at the price per Share (the
"Warrant Price") all as set forth above and as adjusted pursuant to Article 2
of this Warrant, subject to the provisions and upon the terms and conditions
set forth in this Warrant. Upon (i) the occurrence of an Equity Event, as
defined in the Loan and Security Agreement, dated as of the date hereof, by and
between Holder and Company, and (ii) Borrower's election to increase the
Committed Revolving Line from $500,000 to $750,000, Holder may purchase an
additional 12,500 Shares at an Initial Exercise Price of $0.60 per share.
ARTICLE 1. EXERCISE.
1.1 Method of Exercise. Holder may exercise this Warrant by delivering a
duly executed Notice of Exercise in substantially the form attached as Appendix
1 to the principal office of the Company. Unless Holder is exercising the
conversion right set forth in Section 1.2, Holder shall also deliver to the
Company a check for the aggregate Warrant Price for the Shares being purchased.
1.2 Conversion Right. In lieu of exercising this Warrant as specified in
Section 1.1, Holder may from time to time convert this Warrant, in whole or in
part, into a number of Shares determined by dividing (a) the aggregate fair
market value of the Shares or other securities otherwise issuable upon exercise
of this Warrant minus the aggregate Warrant Price of such Shares by (b) the
fair market value of one Share. The fair market value of the Shares shall be
determined pursuant to Section 1.4.
1.3 No Rights of Shareholder. This Warrant does not entitle Holder to any
voting rights as a shareholder of the Company prior to the exercise hereof.
1.4 Fair Market Value. If the Shares are traded in a public market, the
fair market value of the Shares shall be the closing price of the Shares (or
the closing price of the Company's stock into which the Shares are convertible)
reported for the business day immediately before Holder delivers its Notice of
Exercise to the Company. If the Shares are not traded in a public market, the
Board of
1
<PAGE> 2
Directors of the Company shall determine fair market value in its reasonable
good faith judgment. In all other circumstances, such fees and expenses shall
be paid by Holder.
1.5 Delivery of Certificate and New Warrant. Promptly after Holder
exercises or converts this Warrant, the Company shall deliver to Holder
certificates for the Shares acquired and, if this Warrant has not been fully
exercised or converted and has not expired, a new Warrant representing the
Shares not so acquired.
1.6 Replacement of Warrants. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of loss, theft or destruction, on delivery of an
indemnity agreement reasonably satisfactory in form and amount to the Company
or, in the case of mutilation, or surrender and cancellation of this Warrant,
the Company at its expense shall execute and deliver, in lieu of this Warrant, a
new warrant of like tenor.
1.7 Repurchase on Sale, Merger, or Consolidation of the Company.
1.7.1 "Acquisition". For the purpose of this Warrant,
"Acquisition" means any sale, license, or other disposition of all or
substantially all of the assets of the Company, or any reorganization,
consolidation, or merger of the Company where the holders of the Company's
securities before the transaction beneficially own less than 50% of the
outstanding voting securities of the surviving entity after the transaction.
1.7.2 Assumption of Warrant. Upon the closing of any
Acquisition the successor entity shall assume the obligations of this Warrant,
and this Warrant shall be exercisable for the same securities, cash, and
property as would be payable for the Shares issuable upon exercise of the
unexercised portion of this Warrant as if such Shares were outstanding on the
record date for the Acquisition and subsequent closing. The Warrant Price shall
be adjusted accordingly.
1.7.3 Purchase Right. Notwithstanding the foregoing, at the
election of Holder, the Company shall purchase the unexercised portion of this
Warrant for cash upon the closing of any Acquisition for an amount equal to (a)
the fair market value of any consideration that would have been received by
Holder in consideration of the Shares had Holder exercised the unexercised
portion of this Warrant immediately before the record date for determining the
shareholders entitled to participate in the proceeds of the Acquisition, less
(b) the aggregate Warrant Price of the Shares, but in no event less than zero.
ARTICLE 2. ADJUSTMENTS TO THE SHARES.
2.1 Stock Dividends, Splits, Etc. If the Company declares or pays a
dividend on its common stock payable in common stock, or other securities,
subdivides the outstanding common stock into a greater amount of common stock,
then upon exercise of this Warrant, for each Share acquired, Holder shall
receive, without cost to Holder, the total number and kind of securities to
which Holder would have been entitled had Holder owned the Shares of record as
of the date the dividend or subdivision occurred.
2.2 Reclassification, Exchange or Substitution. Upon any
reclassification, exchange, substitution, or other event that results in a
change of the number and or class of the securities issuable upon exercise or
conversion of this Warrant, Holder shall be entitled to receive, upon exercise
or conversion of this Warrant, the number and kind of securities and property
that Holder would have
2
<PAGE> 3
received for the Shares if this Warrant had been exercised immediately before
such reclassification, exchange, substitution, or other event. The Company or
its successor shall promptly issue to Holder a new Warrant for such new
securities or other property. The new Warrant shall provide for adjustments
which shall be as nearly equivalent as may be practicable to the adjustments
provided for in this Article 2 including, without limitation, adjustments to
the Warrant Price and to the number of securities or property issuable upon
exercise of the new Warrant. The provisions of this Section 2.2 shall similarly
apply to successive reclassifications, exchanges, substitutions, or other
events.
2.3 Adjustments for Combinations, Etc. If the outstanding Shares are
combined or consolidated, by reclassification or otherwise, into a lesser
number of shares, the Warrant Price shall be proportionately increased.
2.4 Weighted Average Adjustment. If the Company issues additional common
shares (including shares of common stock ultimately issuable upon conversion of
a security convertible into common stock) after the date of the Warrant and the
consideration per additional common shares is less than the Warrant Price in
effect immediately before such issue shall be reduced, concurrently with such
Issue, to a price determined by multiplying the Warrant Price by a fraction:
(a) the numerator of which is the amount of common stock
outstanding immediately before such Issue plus the amount of common stock that
the aggregate consideration received by the Company for the additional common
shares would purchase at the Warrant Price in effect immediately before such
Issue, and
(b) the denominator of which is the amount of common stock
outstanding immediately before such issue plus the number of such additional
common shares.
Upon each adjustment of the Warrant Price, the number of Shares issuable upon
exercise of the Warrant shall be increased to equal the quotient obtained by
dividing (a) the product resulting from multiplying (i) the number of shares
issuable upon exercise of the Warrant and (ii) the Warrant Price, in each case
as in effect immediately before such adjustment, by (b) the adjusted Warrant
Price.
2.5 No Impairment. The Company shall not, by amendment of its Articles of
Incorporation or through a reorganization, transfer of assets, consolidation,
merger, dissolution, issue, or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed under this Warrant by the Company, but shall at all times
in good faith assist in carrying out of all the provisions of this Article 2 and
in taking all such action as may be necessary or appropriate to protect Holder's
rights under this Article against impairment. If the Company takes any action
affecting the Shares or its common stock other than as described above that
adversely affects Holder's rights under this Warrant, the Warrant Price shall be
adjusted downward and the number of Shares issuable upon exercise of this
Warrant shall be adjusted upward in such a manner that the aggregate Warrant
Price of this Warrant is unchanged.
2.6 Fractional Shares. No fractional Shares shall be issuable upon
exercise or conversion of the Warrant and the number of Shares to be issued
shall be rounded down to the nearest whole Share. If a fractional share
interest arises upon any exercise or conversion of the Warrant, the Company
shall eliminate such fractional share interest by paying Holder the amount
computed by multiplying the fractional interest by the fair market value of a
full Share.
3
<PAGE> 4
2.7 Certificate as to Adjustments. Upon each adjustment of the Warrant
Price, the Company at its expense shall promptly compute such adjustment, and
furnish Holder with a certificate of its Chief Financial Officer setting forth
such adjustment and the facts upon which such adjustment is based. The Company
shall, upon written request, furnish Holder a certificate setting forth the
Warrant Price in effect upon the date thereof and the series of adjustments
leading to such Warrant Price.
ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY.
3.1 Representations and Warranties. The Company hereby represents and
warrants to the Holder that all Shares which may be issued upon the exercise of
the purchase right represented by this Warrant, and all securities, if any,
issuable upon conversion of the Shares, shall, upon issuance, be duly
authorized, validly issued, fully paid and nonassessable, and free of any liens
and encumbrances except for restrictions on transfer provided for herein or
under applicable federal and state securities laws. The Company shall at all
times reserve a sufficient number of shares of common stock for issuance upon
Holder's exercise of its rights hereunder.
3.2 Notice of Certain Events. If the Company proposes at any time (a) to
declare any dividend or distribution upon its common stock, whether in cash,
property, stock, or other securities and whether or not a regular cash
dividend; (b) to offer for subscription pro rata to the holders of any class or
series of its stock any additional shares of stock of any class or series or
other rights; (c) to effect any reclassification or recapitalization of common
stock; (d) to merge or consolidate with or into any other corporation, or sell,
lease, license, or convey to all or substantially all of its assets, or to
liquidate, dissolve or wind up; or (e) offer holders of registration rights the
opportunity to participate in an underwritten public offering of the company's
securities for cash, then, in connection with each such event, the Company
shall give Holder (1) at lease 20 days prior written notice of the date on
which a record will be taken for such dividend, distribution, or subscription
rights (and specifying the date on which the holders of common stock will be
entitled thereto) or for determining rights to vote, if any, in respect of the
matters referred to in (c) and (d) above; (2) in the case of the matters
referred to in (c) and (d) above at lease 20 days prior written notice of the
date when the same will take place (and specifying the date on which the
holders of common stock will be entitled to exchange their common stock for
securities or other property deliverable upon the occurrence of such event);
and (3) in the case of the matter referred to in (e) above, the same notice as
is given to the holders of such registration rights.
3.3 Information Rights. So long as the Holder holds this Warrant and/or
any of the Shares, the Company shall deliver to the Holder (a) promptly after
mailing, copies of all notices or other written communications to the
shareholders of the Company, (b) within ninety (90) days after the end of each
fiscal year of the Company, the annual financial statements of the Company.
3.4 Registration Under Securities Act of 1933, as amended. The Company
hereby grants to Holder the same piggyback registration rights, if any, granted
to the purchasers of Borrower's Common Stocks as outlined in the Company's
private placement memorandum dated May 1, 1998.
ARTICLE 4. MISCELLANEOUS
4.1 Term. This Warrant is exercisable, in whole or in part, at any time
and from time to time on or before the Expiration Date set forth above.
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<PAGE> 5
4.2 Legends. This Warrant and the Shares (and the securities issuable,
directly or indirectly, upon conversion of the Shares, if any) shall be
imprinted with a legend in substantially the following form:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN
EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN
OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS
COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.
4.3 Compliance with Securities Laws on Transfer. This Warrant and the
Shares issuable upon exercise of this Warrant (and the securities issuable,
directly or indirectly, upon conversion of the Shares, if any) may not be
transferred or assigned in whole or in part without compliance with applicable
federal and state securities laws by the transferor and the transferee
(including, without limitation, the delivery of investment representation
letters and legal opinions reasonably satisfactory to the Company, as
reasonably requested by the Company). The Company shall not require Holder to
provide an opinion of counsel if the transfer is to an affiliate of Holder or
if there is no material question as to the availability of current information
as referenced in Rule 144(c), Holder represents that it has complied with Rule
144(d) and (e) in reasonable detail, the selling broker represents that it has
complied with Rule 144(f), and the Company is provided with a copy of Holder's
notice of proposed sale.
4.4 Transfer Procedure. Subject to the provisions of Section 4.2, Holder
may transfer all or part of this Warrant or the Shares issuable upon exercise
of this Warrant (or the securities issuable, directly or indirectly, upon
conversion of the Shares, if any) by giving the Company notice of the portion
of the Warrant being transferred setting forth the name, address and taxpayer
identification number of the transferee and surrendering this Warrant to the
Company for reissuance to the transferee(s)(and Holder if applicable). Unless
the Company is filing financial information with the SEC pursuant to the
Securities Exchange Act of 1934, the Company shall have the right to refuse to
transfer, directly or indirectly, any portion of this Warrant to any person who
directly competes with the Company, which determination shall be made in the
Company's reasonable discretion.
4.5 Notices. All notices and other communications from the Company to the
Holder, or vice versa, shall be deemed delivered and effective when given by
facsimile personally or mailed by first-class registered or certified mail,
postage prepaid, at such address or facsimile numbers as may have been
furnished to the Company or the Holder, as the case may be, in writing by the
Company or such holder from time to time.
4.6 Waiver. This Warrant and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought.
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<PAGE> 6
4.7 Attorneys Fees. In the event of any dispute between the parties
concerning the terms and provisions of this Warrant, the party prevailing in
such dispute shall be entitled to collect from the other party all costs
incurred in such dispute, including reasonable attorney's fees.
4.8 Governing Law. This Warrant shall be governed by and construed in
accordance with the laws of the State of California, without giving effect to
its principles regarding conflicts of law.
FREESHOP INTERNATIONAL, INC.
By: [Signature Illegible]
-----------------------------------
Title: President & CEO
--------------------------------
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<PAGE> 7
APPENDIX 1
NOTICE OF EXERCISE
1. The undersigned hereby elects to purchase ______ shares of the Common
Stock of ___________________________ pursuant to the terms of the attached
Warrant, and tenders herewith payment of the purchase price of such shares in
full.
1. The undersigned hereby elects to convert the attached Warrant into
Shares/cash [strike one] in the manner specified in the Warrant. This
conversion is exercised with respect to ___________________ of the shares
covered by the Warrant.
[Strike paragraph that does not apply.]
2. Please issue a certificate or certificates representing said shares in
the name of the undersigned or in such other name as is specified below:
_____________________________
(Name)
_____________________________
_____________________________
(Address)
3. The undersigned represents it is acquiring the shares solely for its
own account and not as a nominee for any other party and not with a view toward
the resale or distribution thereof except in compliance with applicable
securities laws.
_______________________________________
(Signature)
_______________________
(Date)
7
<PAGE> 1
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE
STATE LAWS, AND NO INTEREST THEREIN MAY BE SOLD, DISTRIBUTED, ASSIGNED,
OFFERED, PLEDGED OR OTHERWISE TRANSFERRED UNLESS THERE IS AN EFFECTIVE
REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS
COVERING ANY SUCH TRANSACTION OR SUCH TRANSACTION IS EXEMPT FROM THE
REGISTRATION REQUIREMENTS OF SUCH ACT AND LAWS, SUCH COMPLIANCE, AT THE OPTION
OF THE CORPORATION, TO BE EVIDENCED BY AN OPINION OF WARRANTHOLDER'S COUNSEL,
IN FORM ACCEPTABLE TO THE CORPORATION, THAT NO VIOLATION OF SUCH REGISTRATION
PROVISIONS WOULD RESULT FROM ANY PROPOSED TRANSFER OR ASSIGNMENT.
COMMON STOCK PURCHASE WARRANT
FREESHOP INTERNATIONAL, INC.
THIS CERTIFIES that for good and valuable consideration received,
Hallco Leasing Corporation, an individual or registered assign(s), is entitled,
upon the terms and subject to the conditions hereinafter set forth, to acquire
from FreeShop International, Inc., a Washington corporation (the "Corporation")
up to thirty-five thousand (35,000) fully paid and nonassessable shares of
common stock, without par value, of the Corporation ("Warrant Stock") at a
purchase price per share (the "Exercise Price") of $0.41.
1. TERM OF WARRANT
Subject to the terms and conditions set forth herein, this Warrant shall
be exercisable, in whole or from time to time part, at any time on or after the
date hereof and at or prior to 11:59 p.m., Pacific Time, on January 23, 2003
(the "Expiration Time"). Notwithstanding the foregoing, at any time the
Corporation shall have the right, except as may be limited by law, other
agreements or herein, to call this Warrant for exercise, in whole or in part,
by mailing written notice by United States mail to the registered holder hereof
if the Corporation completes a private placement or public offering of the
Corporation's common stock for an aggregate offering price of seven million,
five hundred thousand dollars ($7,500,000.00) at a price per share equal to or
greater than five dollars ($5.00) per share, as adjusted pursuant to Section 10
hereof. In such event, this Warrant shall expire and cease to be exercisable at
11:59 p.m. Pacific Time, of the twenty-first day after the date of mailing of
the notice.
2. EXERCISE OF WARRANT
The purchase rights represented by this Warrant are exercisable by the
registered holder hereof, in whole or in part, at any time and from time to
time at or prior to the Expiration Time by the surrender of this Warrant and
the Notice of Exercise form attached hereto duly executed to the office of the
Corporation at 2815 2nd Avenue, Suite 398, Seattle, Washington 98121 (or such
other office or agency of the Corporation as it may designate by notice in
writing to the registered holder hereof at the address of such holder appearing
on the books of the Corporation), and upon payment of the Exercise Price for
the shares thereby purchased (by cash or by check or bank draft payable to the
order of the Corporation or by cancellation of indebtedness of the Corporation
to the holder hereof, if any, at the time of exercise in an amount equal to the
purchase price of the shares thereby purchased): whereupon the holder of this
Warrant shall be entitled to receive from the Corporation a stock certificate
in proper form representing the number of shares of Warrant Stock so purchased.
3. ISSUANCE OF SHARES: NO FRACTIONAL SHARES OF SCRIP
Certificates for shares purchased hereunder shall be delivered to the
holder hereof by the Corporation's transfer agent at the Corporation's expense
within a reasonable time after the date on which this Warrant shall have been
exercised in accordance with the terms hereof. Each certificate so delivered
shall be in such denominations as may be requested by the holder hereof and
shall be registered in the name of such holder or, subject to applicable
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<PAGE> 2
laws, other name as shall be requested by such holder. If, upon exercise of
this Warrant, fewer than all of the shares of Warrant Stock evidenced by this
Warrant are purchased prior to the Expiration Time, one or more new warrants
substantially in the form of, and on the terms in, this Warrant will be issued
for the remaining number of shares of Warrant Stock not purchased upon exercise
of this Warrant. The Corporation hereby represents and warrants that all shares
of Warrant Stock which may be issued upon the exercise of this Warrant will,
upon such exercise, be duly and validly authorized and issued, fully paid and
nonassessable and free from all taxes, liens and charges in respect of the
issuance thereof (other than liens or charges created by or imposed upon the
holder of the Warrant Stock). The Corporation agrees that the shares so issued
shall be and be deemed to be issued to such holder as the record owner of such
shares as of the close of business on the date on which this Warrant shall have
been surrendered for exercise in accordance with the terms hereof. No
fractional shares or scrip representing fractional shares shall be issued upon
the exercise of this Warrant. With respect to any fraction of a share called
for upon the exercise of this Warrant, an amount equal to such fraction
multiplied by the then current price at which each share maybe purchased
hereunder shall be paid in cash to the holder of this Warrant.
4. CHARGES, TAXES AND EXPENSES
Issuance of certificates for shares of Warrant Stock upon the exercise of
this Warrant shall be made without charge to the holder hereof for any issue or
transfer tax or other incidental expense in respect of the issuance of such
certificate, all of which taxes and expenses shall be paid by the Corporation,
and such certificates shall be issued in the name of the holder of this Warrant
or in such name or names as may be directed by the holder of this Warrant;
provided, however, that in the event certificates for shares of Warrant Stock
are to be issued in a name other than the name of the holder of this Warrant,
this Warrant when surrendered for exercise shall be accompanied by the
Assignment Form attached hereto duly executed by the holder hereof.
5. NO RIGHTS AS SHAREHOLDERS
This Warrant does not entitle the holder hereof to any voting rights or
other rights as a shareholder of the Corporation prior to the exercise hereof.
6. EXCHANGE AND REGISTRY OF WARRANT
This Warrant is exchangeable, upon the surrender hereof by the registered
holder at the above-mentioned office or agency of the Corporation, for a new
Warrant of like tenor and dated as of such exchange. The Corporation shall
maintain at the above-mentioned office or agency a registry showing the name
and address of the registered holder of this Warrant. This Warrant may be
surrendered for exchange, transfer or exercise, in accordance with its terms,
at such office or agency of the Corporation, and the Corporation shall be
entitled to rely in all respects, prior to written notice to the contrary, upon
such registry.
7. LOSS, THEFT, DESTRUCTION OR MUTILATION OF WARRANT
Upon receipt by the Corporation of evidence reasonably satisfactory to it
of the loss, theft, destruction or mutilation of this Warrant, and in case of
loss, theft or destruction of indemnity or security reasonably satisfactory to
it, and upon reimbursement to the Corporation of all reasonable expenses
incidental thereto, and upon surrender and cancellation of this Warrant, if
mutilated, the Corporation will make and deliver a new Warrant of like tenor
and dated as of such cancellation, in lieu of this Warrant.
8. SATURDAYS, SUNDAYS AND HOLIDAYS
If the last or appointed day for the taking of any action or the
expiration of any right required or granted herein shall be a Saturday or a
Sunday or shall be a legal holiday, then such action may be taken or such right
may be exercised on the next succeeding day not a Saturday, Sunday or legal
holiday.
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<PAGE> 3
9. MERGER, SALE OF ASSETS, ETC.
If at any time the Corporation proposes to merge or consolidate with or
into any other corporation, effect any reorganization, or sell or convey all or
substantially all of its assets to any other entity, then, as a condition of
such reorganization, consolidation, merger, sale or conveyance, the Corporation
or its successor, as the case may be, shall enter into a supplemental agreement
to make lawful and adequate provision whereby the holder shall have the right
to receive, upon exercise of the Warrant, the kind and amount of equity
securities which would have been received upon such reorganization,
consolidation, merger, sale or conveyance by a holder of a number of shares of
common stock equal to the number of shares issuable upon exercise of the
Warrant immediately prior to such reorganization, consolidation, merger, sale
or conveyance. If the property to be received upon such reorganization,
consolidation, merger, sale or conveyance is not equity securities, the
Corporation shall give the holder of this Warrant ten (10) business days prior
written notice of the proposed effective date of such transaction, and if this
Warrant has not been exercised by or on the effective date of such transaction,
it shall terminate.
10. SUBDIVISION, COMBINATION, RECLASSIFICATION, CONVERSION, ETC.
If the Corporation at any time shall, by subdivision, combination,
reclassification of securities or otherwise, change the Warrant Stock into the
same or a different number of securities of any class or classes, this Warrant
shall thereafter entitle the holder to acquire such number and kind of
securities as would have been issuable in respect of the Warrant Stock (or
other securities which were subject to the purchase rights under this Warrant
immediately prior to such subdivision, combination, reclassification or other
change) as the result of such change if this Warrant had been exercised in full
for cash immediately prior to such change. The Exercise Price hereunder shall
be adjusted if and to the extent necessary to reflect such change. If the
Warrant Stock or other securities issuable upon exercise hereof are subdivided
or combined into a greater or smaller number of shares of such security, the
number of shares issuable hereunder shall be proportionately increased or
decreased, as the case may be, and the Exercise Price shall be proportionately
reduced or increased, as the care may be, in both cases according to the ratio
which the total number of shares of such security to be outstanding immediately
after such even bears to the total number of shares of such security
outstanding immediately prior to such event. The Corporation shall give the
holder prompt written notice of any change in the type of securities issuable
hereunder, any adjustment of the Exercise Price for the securities issuable
hereunder, and any increase or decrease in the number of shares issuable
hereunder.
11. TRANSFERABILITY; COMPLIANCE WITH SECURITIES LAWS
(a) This Warrant may not be transferred or assigned in whole or in part
without compliance with all applicable federal and state securities laws by the
transferor and transferee (including the delivery of investment representation
letters and legal opinions reasonably satisfactory to the Corporation, if
requested by the Corporation). Subject such restrictions, prior to the
Expiration Time, this Warrant and all rights hereunder are transferable by the
holder hereof, in whole or in part, at the office or agency of the Corporation
referred to in Section 1 hereof. Any such transfer shall be made in person or
by the holder's duly authorized attorney, upon surrender of this Warrant
together with the Assignment Form attached hereto properly endorsed.
(b) The Holder of this Warrant, by acceptance hereof, acknowledges that
this Warrant and the Warrant Stock issuable upon exercise hereof are being
acquired solely for the holder's own account and not as a nominee for any other
party, and for investment and that the holder will not offer, sell or otherwise
dispose of this Warrant or any shares of Warrant Stock to be issued upon
exercise hereof except under circumstances that will not result in a violation
of the Securities Act of 1933, as amended, or any state securities laws. Upon
exercise of this Warrant, the holder shall, if requested by the Corporation,
confirm in writing, in a form satisfactory to the Corporation, that the shares
of Warrant Stock so purchased are being acquired solely for holder's own
account and not as a nominee for any other party, for investment and not with a
view toward distribution or resale.
(c) The Warrant Stock has not been and will not be registered under the
Securities Act of 1933, as amended, and this Warrant may not be exercised
except by (i) the original purchaser of this Warrant from the
Corporation or (ii) an "accredited investor" as defined in Rule 501(a) under
the Securities Act of 1933, as amended. Each certificate representing the
Warrant Stock or other securities issued in respect of the Warrant Stock upon
any stock split, stock dividend, recapitalization, merger, consolidation or
similar event, shall be stamped or otherwise
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<PAGE> 4
imprinted with a legend substantially in the following form (in addition to any
legend required under applicable securities laws):
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER UNITED
STATES FEDERAL OR STATE SECURITIES LAWS AND MAY NOT BE OFFERED FOR SALE, SOLD
OR OTHERWISE TRANSFERRED OR ASSIGNED FOR VALUE, DIRECTLY OR INDIRECTLY, NOR MAY
THE SECURITIES BE TRANSFERRED ON THE BOOKS OF THE CORPORATION, WITHOUT
REGISTRATION OF SUCH SECURITIES UNDER ALL APPLICABLE UNITED STATES FEDERAL OR
STATE SECURITIES LAWS OR COMPLIANCE WITH AN APPLICABLE EXEMPTION THEREFROM,
SUCH COMPLIANCE, AT THE OPTION OF THE CORPORATION, TO BE EVIDENCED BY AN
OPINION OF SHAREHOLDER'S COUNSEL, IN FORM ACCEPTABLE TO THE CORPORATION, THAT
NO VIOLATION OF SUCH REGISTRATION PROVISIONS WOULD RESULT FROM ANY PROPOSED
TRANSFER OR ASSIGNMENT.
12. REPRESENTATIONS AND WARRANTIES
The Corporation hereby represents and warrants to the holder hereof that:
(a) during the period this Warrant is outstanding, the Corporation will
reserve from its authorized and unissued common stock a sufficient number of
shares to provide for the issuance of Warrant Stock upon the exercise of this
Warrant;
(b) the issuance of this Warrant shall constitute full authority to the
Corporation's officers who are charged with the duty of executing stock
certificates to execute and issue the necessary certificates for the shares of
Warrant Stock issuable upon exercise of this Warrant;
(c) the Corporation has all requisite legal and corporate power to
execute and deliver this Warrant, to sell and issue the Warrant Stock
hereunder, to issue the common stock issuable upon exercise of the Warrant
Stock and to carry out and perform its obligations under the terms of this
Warrant;
(d) all corporate action on the part of the Corporation, its directors
and shareholders necessary for the authorization, execution, delivery and
performance of this Warrant by the Corporation, the authorization, sale,
issuance and delivery of the Warrant Stock, the grant of registration rights as
provided herein and the performance of the Corporation's obligations hereunder
has been taken;
(e) the Warrant Stock, when issued in compliance with the provisions of
this Warrant and the Corporation's Articles of Incorporation (as they may be
amended from time to time (the "Articles")), will be validly issued, fully paid
and nonassessable, and free of all taxes, liens or encumbrances with respect to
the issue thereof and will be issued in compliance with all applicable federal
and state securities laws; and
(f) the issuance of the Warrant Stock will not be subject to any
preemptive rights, rights of first refusal or similar rights.
13. CORPORATION
The Corporation will not, by amendment of its Articles or through any
reorganization, recapitalization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other action, avoid or seek to
avoid the observance or performance of any of the terms to be observed or
performed hereunder by the Corporation, but will at all times in good faith
assist in the carrying out of all the provisions of this Warrant in the taking
of all such action as may be necessary or appropriate in order to protect the
rights of the holder of the Warrant against impairment.
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14. GOVERNING LAW
This Warrant shall be governed by and construed in accordance with the
laws of the State of Washington.
IN WITNESS WHEREOF, the Corporation has caused this Warrant to be executed
by its duly authorized officers.
Dated: 23rd January, 1998
FREESHOP INTERNATIONAL, INC.
/s/ MICHAEL SCHUTZLER
- -----------------------------------
Michael Schutzler
President & CEO
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<PAGE> 6
NOTICE OF EXERCISE
To: FreeShop International, Inc.
(1) The undersigned hereby elects to purchase _________ shares of common
stock of FreeShop International, Inc. pursuant to the terms of the attached
Warrant, and tenders herewith payment of the purchase price in full, together
with all applicable transfer taxes, if any.
(2) In exercising this Warrant, the undersigned hereby confirms and
acknowledges that the shares of common stock to be issued upon exercise hereof
are being acquired solely for the account of the undersigned and not as a
nominee for any other party, and for investment, and that the undersigned will
not offer, sell or otherwise dispose of any such shares of common stock except
under circumstances that will not result in a violation of the Securities Act
of 1933, as amended, or any state securities laws.
(3) Please issue a certificate or certificates representing said shares
of common stock in the name of the undersigned or in such other name as is
specified below:
-------------------------------
(Name)
-------------------------------
(Address)
(3) The undersigned represents that (a) he, she or it is the original
purchaser from the Corporation of the attached Warrant or an "accredited
investor" within the meaning of Rule 501(a) under the Securities Act of 1933,
as amended and (b) the aforesaid shares of common stock are being acquired for
the account of the undersigned for investment and not with a view to, or for
resale in connection with, the distribution thereof and that the undersigned
has no present intention of distributing or reselling such shares.
- --------------------------------- ----------------------------------
(Date) (Signature)
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<PAGE> 7
ASSIGNMENT FORM
(To assign the foregoing Warrant, execute this form and supply required
information. Do not use this form to purchase shares.)
FOR VALUE RECEIVED, the undersigned registered owner of this Warrant
hereby sells, assigns and transfers unto the Assignee named below all of the
rights of the undersigned under the within Warrant, with respect to the number
of shares of common stock of FreeShop International, Inc. set forth below:
Name of Assignee Address No. of Shares
- ---------------- ------- -------------
and does hereby irrevocably constitute and appoint Attorney____________________
to make such transfer on the books of FreeShop International, Inc., maintained
for the purpose, with full power of substitution in the premises.
The undersigned also represents that, by assignment hereof, the Assignee
acknowledges that this Warrant and the shares of stock to be issued upon
exercise hereof are being acquired for investment and that the Assignee will
not offer, sell or otherwise dispose of this Warrant or any shares of stock to
be issued upon exercise hereof except under circumstances which will not result
in a violation of the Securities Act of 1933, as amended, or any state
securities laws. Further, the Assignee shall, if requested by the Corporation,
confirm in writing, in a form satisfactory to the Corporation, that the shares
of stock so purchased are being acquired for investment and not with a view
toward distribution or resale.
Date:__________________________________
Holder's Signature:____________________
Holder's Address:
_______________________________________
_______________________________________
Guaranteed Signature:
NOTE: The signature to this Assignment Form must correspond with the name as it
appears on the face of the Warrant, without alteration or enlargement or any
change whatever, and must be guaranteed by a bank or trust company. Officers of
corporations and those action in a fiduciary or other representative capacity
should file proper evidence of authority to assign the foregoing Warrant.
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<PAGE> 1
EXHIBIT 10.21
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE
STATE LAWS, AND NO INTEREST THEREIN MAY BE SOLD, DISTRIBUTED, ASSIGNED,
OFFERED, PLEDGED OR OTHERWISE TRANSFERRED UNLESS THERE IS AN EFFECTIVE
REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS
COVERING ANY SUCH TRANSACTION OR SUCH TRANSACTION IS EXEMPT FROM THE
REGISTRATION REQUIREMENTS OF SUCH ACT AND LAWS, SUCH COMPLIANCE, AT THE OPTION
OF THE CORPORATION, TO BE EVIDENCED BY AN OPINION OF WARRANTHOLDER'S COUNSEL,
IN FORM ACCEPTABLE TO THE CORPORATION, THAT NO VIOLATION OF SUCH REGISTRATION
PROVISIONS WOULD RESULT FROM ANY PROPOSED TRANSFER OR ASSIGNMENT.
COMMON STOCK PURCHASE WARRANT
FREESHOP INTERNATIONAL, INC.
THIS CERTIFIES that for good and valuable consideration received, Hallco
Leasing Corporation, a(n) corporation or registered assign(s), is entitled, upon
the terms and subject to the conditions hereinafter set forth, to acquire from
FreeShop International, Inc., a Washington corporation (the "Corporation") up to
6,000 fully paid and nonassessable shares of common stock, without par value, of
the Corporation ("Warrant Stock") at a purchase price per share (the "Exercise
Price") of $0.41.
1. TERM OF WARRANT
Subject to the terms and conditions set forth herein, this Warrant shall be
exercisable, in whole or from time to time part, at any time on or after the
date hereof and at or prior to 11:59 p.m., Pacific Time, on October 23, 2002
(the "Expiration Time"). Notwithstanding the foregoing, at any time the
Corporation shall have the right, except as may be limited by law, other
agreements or herein, to call this Warrant for exercise, in whole or in part, by
mailing written notice by United States mail to the registered holder hereof if
the Corporation completes a private placement or public offering of the
Corporation's common stock for an aggregate offering price of $7,500,000.00 at a
price per share equal to or greater than five dollars $5.00 per share, as
adjusted pursuant to Section 10 hereof. In such event, this Warrant shall expire
and cease to be exercisable at 11:59 p.m. Pacific Time, of the twenty-first day
after the date of mailing of the notice.
2. EXERCISE OF WARRANT
The purchase rights represented by this Warrant are exercisable by the
registered holder hereof, in whole or in part, at any time and from time to
time at or prior to the Expiration Time by the surrender of this Warrant and
the Notice of Exercise form attached hereto duly executed to the office of the
Corporation at 2815 2nd Avenue, Suite 398, Seattle, Washington 98121 (or such
other office or agency of the Corporation as it may designate by notice in
writing to the registered holder hereof at the address of such holder appearing
on the books of the Corporation), and upon payment of the Exercise Price for
the shares thereby purchased (by cash or by check or bank draft payable to the
order of the Corporation or by cancellation of indebtedness of the Corporation
to the holder hereof, if any, at the time of exercise in an amount equal to the
purchase price of the shares thereby purchased); whereupon the holder of this
Warrant shall be entitled to receive from the Corporation a stock certificate
in proper form representing the number of shares of Warrant Stock so purchased.
3. ISSUANCE OF SHARES: NO FRACTIONAL SHARES OF SCRIP
Certificates for shares purchased hereunder shall be delivered to the
holder hereof by the Corporation's transfer agent at the Corporation's expense
within a reasonable time after the date on which this Warrant shall have
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<PAGE> 2
been exercised in accordance with the terms hereof. Each certificate so
delivered shall be in such denominations as may be requested by the holder
hereof and shall be registered in the name of such holder or, subject to
applicable laws, other name as shall be requested by such holder. If, upon
exercise of this Warrant, fewer than all of the shares of Warrant Stock
evidenced by this Warrant are purchased prior to the Expiration Time, one or
more new warrants substantially in the form of, and on the terms in, this
Warrant will be issued for the remaining number of shares of Warrant Stock not
purchased upon exercise of this Warrant. The Corporation hereby represents and
warrants that all shares of Warrant Stock which may be issued upon the exercise
of this Warrant will, upon such exercise, be duly and validly authorized and
issued, fully paid and nonassessable and free from all taxes, liens and charges
in respect of the issuance thereof (other than liens or charges created by or
imposed upon the holder of the Warrant Stock). The Corporation agrees that the
shares so issued shall be and be deemed to be issued to such holder as the
record owner of such shares as of the close of business on the date on which
this Warrant shall have been surrendered for exercise in accordance with the
terms hereof. No fractional shares or scrip representing fractional shares shall
be issued upon the exercise of this Warrant. With respect to any fraction of a
share called for upon the exercise of this Warrant, an amount equal to such
fraction multiplied by the then current price at which each share may be
purchased hereunder shall be paid in cash to the holder of this Warrant.
4. CHARGES, TAXES AND EXPENSES
Issuance of certificates for shares of Warrant Stock upon the exercise of
this Warrant shall be made without charge to the holder hereof for any issue or
transfer tax or other incidental expense in respect of the issuance of such
certificate, all of which taxes and expenses shall be paid by the Corporation,
and such certificates shall be issued in the name of the holder of this Warrant
or in such name as may be directed by the holder of this Warrant; provided,
however, that in the event certificates for shares of Warrant Stock are to be
issued in a name other than the name of the holder of this Warrant, this
Warrant when surrendered for exercise shall be accompanied by the Assignment
Form attached hereto duly executed by the holder hereof.
5. NO RIGHTS AS SHAREHOLDERS
This Warrant does not entitle the holder hereof of any voting rights as a
shareholder of the Corporation prior to the exercise hereof.
6. EXCHANGE AND REGISTRY OF WARRANT
This Warrant is exchangeable, upon the surrender hereof by the registered
holder at the above-mentioned office or agency of the Corporation, for a new
Warrant of like tenor and dated as of such exchange. The Corporation shall
maintain at the above-mentioned office or agency a registry showing the name
and address of the registered holder of this Warrant. This Warrant may be
surrendered for exchange, transfer or exercise, in accordance with its terms,
at such office or agency of the Corporation, and the Corporation shall be
entitled to rely in all respects, prior to written notice to the contrary, upon
such registry.
7. LOSS, THEFT, DESTRUCTION OR MUTILATION OF WARRANT
Upon receipt by the Corporation of evidence reasonably satisfactory to it
of the loss, theft, destruction or mutilation of this Warrant, and in case of
loss, theft or destruction of indemnity or security reasonably satisfactory to
it, and upon reimbursement to the Corporation of all reasonable expenses
incidental thereto, and upon surrender and cancellation of this Warrant, if
mutilated, the Corporation will make and deliver a new Warrant of like tenor
and dated as of such cancellation, in lieu of this Warrant.
8. SATURDAYS, SUNDAYS AND HOLIDAYS
If the last or appointed day for the taking of any action or the
expiration of any right required or granted herein shall be a Saturday or a
Sunday or shall be a legal holiday, then such action may be taken or such right
may be exercised on the next succeeding day not a Saturday, Sunday or legal
holiday.
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<PAGE> 3
9. MERGER, SALE OF ASSETS, ETC.
If at any time the Corporation proposes to merge or consolidate with or
into any other corporation, effect any reorganization, or sell or convey all or
substantially all of its assets to any other entity, then, as a condition of
such reorganization, consolidation, merger, sale or conveyance, the Corporation
or its successor, as the case may be, shall enter into a supplemental agreement
to make lawful and adequate provision whereby the holder shall have the right
to receive, upon exercise of the Warrant, the kind and amount of equity
securities which would have been received upon such reorganization,
consolidation, merger, sale or conveyance by a holder of a number of shares of
common stock equal to the number of shares issuable upon exercise of the
Warrant immediately prior to such reorganization, consolidation, merger, sale
or conveyance. If the property to be received upon such reorganization,
consolidation, merger, sale or conveyance is not equity securities, the
Corporation shall give the holder of this Warrant ten (10) business days prior
written notice of the proposed effective date of such transaction, and if this
Warrant has not been exercised by or on the effective date of such transaction,
it shall terminate.
10. SUBDIVISION, COMBINATION, RECLASSIFICATION, CONVERSION, ETC.
If the Corporation at any time shall, by subdivision, combination,
reclassification of securities or otherwise, change the Warrant Stock into the
same or a different number of securities of any class or classes, this Warrant
shall thereafter entitle the holder to acquire such number and kind of
securities as would have been issuable in respect of the Warrant Stock (or
other securities which were subject to the purchase rights under this Warrant
immediately prior to such subdivision, combination, reclassification or other
change) as the result of such change if this Warrant had been exercised in full
for cash immediately prior to such change. The Exercise Price hereunder shall
be adjusted if and to the extent necessary to reflect such change. If the
Warrant Stock or other securities issuable upon exercise hereof are subdivided
or combined into a greater or smaller number of shares of such security, the
number of shares issuable hereunder shall be proportionately increased or
decreased, as the case may be, and the Exercise Price shall be proportionately
reduced or increased, as the care may be, in both cases according to the ratio
which the total number of shares of such security to be outstanding immediately
after such even bears to the total number of shares of such security
outstanding immediately prior to such event. The Corporation shall give the
holder prompt written notice of any change in the type of securities issuable
hereunder, any adjustment of the Exercise Price for the securities issuable
hereunder, and any increase or decrease in the number of shares issuable
hereunder.
11. TRANSFERABILITY; COMPLIANCE WITH SECURITIES LAWS
(a) This Warrant may not be transferred or assigned in whole or in part
without compliance with all applicable federal and state securities laws by the
transferor and transferee (including the delivery of investment representation
letters and legal opinions reasonably satisfactory to the Corporation, if
requested by the Corporation). Subject such restrictions, prior to the
Expiration Time, this Warrant and all rights hereunder are transferable by the
holder hereof, in whole or in part, at the office or agency of the Corporation
referred to in Section 1 hereof. Any such transfer shall be made in person or
by the holder's duly authorized attorney, upon surrender of this Warrant
together with the Assignment Form attached hereto properly endorsed.
(b) The Holder of this Warrant, by acceptance hereof, acknowledges that
this Warrant and the Warrant Stock issuable upon exercise hereof are being
acquired solely for the holder's own account and not as a nominee for any other
party, and for investment and that the holder will not offer, sell or otherwise
dispose of this Warrant or any shares of Warrant Stock to be issued upon
exercise hereof except under circumstances that will not result in a violation
of the Securities Act of 1933, as amended, or any state securities laws. Upon
exercise of this Warrant, the holder shall, if requested by the Corporation,
confirm in writing, in a form satisfactory to the Corporation, that the shares
of Warrant Stock so purchased are being acquired solely for holder's own
account and not as a nominee for any other party, for investment, and not with a
view toward distribution or resale.
(c) The Warrant Stock has not been and will not be registered under the
Securities Act of 1933, as amended, and this Warrant may not be exercised except
by (i) the original purchaser of this Warrant from the Corporation or (ii) an
"accredited investor" as defined in Rule 501(a) under the Securities Act of
1933, as amended. Each certificate representing the Warrant Stock or other
securities issued in respect of the Warrant Stock upon any
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<PAGE> 4
stock split, stock dividend, recapitalization, merger, consolidation or similar
event, shall be stamped or otherwise imprinted with a legend substantially in
the following form (in addition to any legend required under applicable
securities laws):
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER UNITED
STATES FEDERAL OR STATE SECURITIES LAWS AND MAY NOT BE OFFERED FOR SALE, SOLD
OR OTHERWISE TRANSFERRED OR ASSIGNED FOR VALUE, DIRECTLY OR INDIRECTLY, NOR MAY
THE SECURITIES BE TRANSFERRED ON THE BOOKS OF THE CORPORATION, WITHOUT
REGISTRATION OF SUCH SECURITIES UNDER ALL APPLICABLE UNITED STATES FEDERAL OR
STATE SECURITIES LAWS OR COMPLIANCE WITH AN APPLICABLE EXEMPTION THEREFROM,
SUCH COMPLIANCE, AT THE OPTION OF THE CORPORATION, TO BE EVIDENCED BY AN
OPINION OF SHAREHOLDER'S COUNSEL, IN FORM ACCEPTABLE TO THE CORPORATION, THAT
NO VIOLATION OF SUCH REGISTRATION PROVISIONS WOULD RESULT FROM ANY PROPOSED
TRANSFER OR ASSIGNMENT.
12. REPRESENTATIONS AND WARRANTIES
The Corporation hereby represents and warrants to the holder hereof that:
(a) during the period this Warrant is outstanding, the Corporation will
reserve from its authorized and unissued common stock a sufficient number of
shares to provide for the issuance of Warrant Stock upon the exercise of this
Warrant;
(b) the issuance of this Warrant shall constitute full authority to the
Corporation's officers who are charged with the duty of executing stock
certificates to execute and issue the necessary certificates for the shares of
Warrant Stock issuable upon exercise of this Warrant;
(c) the Corporation has all requisite legal and corporate power to
execute and deliver this Warrant, to sell and issue the Warrant Stock
hereunder, to issue the common stock issuable upon exercise of the Warrant
Stock and to carry out and perform its obligations under the terms of this
Warrant;
(d) all corporate action on the part of the Corporation, its directors
and shareholders necessary for the authorization, execution, delivery and
performance of this Warrant by the Corporation, the authorization, sale,
issuance and delivery of the Warrant Stock, the grant of registration rights as
provided herein and the performance of the Corporation's obligations hereunder
has been taken.
(e) the Warrant Stock, when issued in compliance with the provisions of
this Warrant and the Corporation's Articles of Incorporation (as they may be
amended from time to time (the "Articles")), will be validly issued, fully paid
and nonassessable, and free of all taxes, liens or encumbrances with respect to
the issue thereof and will be issued in compliance with all applicable federal
and state securities laws; and
(f) the issuance of the Warrant Stock will not be subject to any
preemptive rights, rights of first refusal or similar rights.
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<PAGE> 5
13. CORPORATION
The Corporation will not, by amendment of its Articles or through any
reorganization, recapitalization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other action, avoid or seek to
avoid the observance or performance of any of the terms to be observed or
performed hereunder by the Corporation, but will at all times in good faith
assist in the carrying out of all the provisions of this Warrant in the taking
of all such action as may be necessary or appropriate in order to protect the
rights of the holder of the Warrant against impairment.
14. GOVERNING LAW
This Warrant shall be governed by and construed in accordance with the
laws of the State of Washington.
IN WITNESS WHEREOF, the Corporation has caused this Warrant to be executed
by its duly authorized officers.
Dated: December 4, 1997
FREESHOP INTERNATIONAL, INC.
/s/ MICHAEL T. SCHUTZLER
- -----------------------------------
Michael T. Schutzler
President & CEO
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<PAGE> 6
NOTICE OF EXERCISE
To: FreeShop International, Inc.
(1) The undersigned hereby elects to purchase 6,000 shares of common
stock of FreeShop International, Inc. pursuant to the terms of the attached
Warrant, and tenders herewith payment of the purchase price in full, together
with all applicable transfer taxes, if any.
(2) In exercising this Warrant, the undersigned hereby confirms and
acknowledges that the shares of common stock to be issued upon exercise hereof
are being acquired solely for the account of the undersigned and not as a
nominee for any other party, and for investment, and that the undersigned will
not offer, sell or otherwise dispose of any such shares of common stock except
under circumstances that will not result in a violation of the Securities Act
of 1933, as amended, or any state securities laws.
(3) Please issue a certificate or certificates representing said shares
of common stock in the name of the undersigned or in such other name as is
specified below:
Hallco Leasing Corporation
13333 Bel- Red Road, Suite 236
Bellevue, WA, 98005
(3) The undersigned represents that (a) he, she or it is the original
purchaser from the Corporation of the attached Warrant or an "accredited
investor" within the meaning of Rule 501(a) under the Securities Act of 1933,
as amended and (b) the aforesaid shares of common stock are being acquired for
the account of the undersigned for investment and not with a view to, or for
resale in connection with, the distribution thereof and that the undersigned
has no present intention of distributing or reselling such shares.
- --------------------------------- ----------------------------------
(Date) (Signature)
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<PAGE> 7
ASSIGNMENT FORM
(To assign the foregoing Warrant, execute this form and supply required
information. Do not use this form to purchase shares.)
FOR VALUE RECEIVED, the undersigned registered owner of this Warrant
hereby sells, assigns and transfers unto the Assignee named below all of the
rights of the undersigned under the within Warrant, with respect to the number
of shares of common stock of FreeShop International, Inc. set forth below:
Name of Assignee Address No. of Shares
- ---------------- ------- -------------
and does hereby irrevocably constitute and appoint Attorney____________________
to make such transfer on the books of FreeShop International, Inc., maintained
for the purpose, with full power of substitution in the premises.
The undersigned also represents that, by assignment hereof, the Assignee
acknowledges that this Warrant and the shares of stock to be issued upon
exercise hereof are being acquired for investment and that the Assignee will
not offer, sell or otherwise dispose of this Warrant or any shares of stock to
be issued upon exercise hereof except under circumstances which will not result
in a violation of the Securities Act of 1933, as amended, or any state
securities laws. Further, the Assignee shall, if requested by the Corporation,
confirm in writing, in a form satisfactory to the Corporation, that the shares
of stock so purchased are being acquired for investment and not with a view
toward distribution or resale.
Date:__________________________________
Holder's Signature:____________________
Holder's Address:
_______________________________________
_______________________________________
Guaranteed Signature:
NOTE: The signature to this Assignment Form must correspond with the name as it
appears on the face of the Warrant, without alteration or enlargement or any
change whatever, and must be guaranteed by a bank or trust company. Officers of
corporations and those action in a fiduciary or other representative capacity
should file proper evidence of authority to assign the foregoing Warrant.
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<PAGE> 1
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE
STATE LAWS, AND NO INTEREST THEREIN MAY BE SOLD, DISTRIBUTED, ASSIGNED,
OFFERED, PLEDGED OR OTHERWISE TRANSFERRED UNLESS THERE IS AN EFFECTIVE
REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS
COVERING ANY SUCH TRANSACTION OR SUCH TRANSACTION IS EXEMPT FROM THE
REGISTRATION REQUIREMENTS OF SUCH ACT AND LAWS, SUCH COMPLIANCE, AT THE OPTION
OF THE CORPORATION, TO BE EVIDENCED BY AN OPINION OF WARRANTHOLDER'S COUNSEL,
IN FORM ACCEPTABLE TO THE CORPORATION, THAT NO VIOLATION OF SUCH REGISTRATION
PROVISIONS WOULD RESULT FROM ANY PROPOSED TRANSFER OR ASSIGNMENT.
COMMON STOCK PURCHASE WARRANT
FREESHOP INTERNATIONAL, INC.
THIS CERTIFIES that for good and valuable consideration received,
Employco, an individual or corporation or registered assign(s), is entitled,
upon the terms and subject to the conditions hereinafter set forth, to acquire
from FreeShop International, Inc., a Washington corporation (the "Corporation")
up to twenty five thousand (25,000) fully paid and nonassessable shares of
common stock, without par value, of the Corporation ("Warrant Stock") at a
purchase price per share (the "Exercise Price") of $0.41.
1. TERM OF WARRANT
Subject to the terms and conditions set forth herein, this Warrant shall
be exercisable, in whole or from time to time part, at any time on or after the
date hereof and at or prior to 11:59 p.m., Pacific Time, on January 23, 2002
(the "Expiration Time"). Notwithstanding the foregoing, at any time the
Corporation shall have the right, except as may be limited by law, other
agreements or herein, to call this Warrant for exercise, in whole or in part,
by mailing written notice by United States mail to the registered holder hereof
if the Corporation completes a private placement or public offering of the
Corporation's common stock for an aggregate offering price of seven million,
five hundred thousand dollars ($7,500,000.00) at a price per share equal to or
greater than five dollars ($5.00) per share, as adjusted pursuant to Section 10
hereof. In such event, this Warrant shall expire and cease to be exercisable at
11:59 p.m. Pacific Time, of the twenty-first day after the date of mailing of
the notice.
2. EXERCISE OF WARRANT
The purchase rights represented by this Warrant are exercisable by the
registered holder hereof, in whole or in part, at any time and from time to
time at or prior to the Expiration Time by the surrender of this Warrant and
the Notice of Exercise form attached hereto duly executed to the office of the
Corporation at 2815 2nd Avenue, Suite 398, Seattle, Washington 98121 (or such
other office or agency of the Corporation as it may designate by notice in
writing to the registered holder hereof at the address of such holder appearing
on the books of the Corporation), and upon payment of the Exercise Price for
the shares thereby purchased (by cash or by check or bank draft payable to the
order of the Corporation or by cancellation of indebtedness of the Corporation
to the holder hereof, if any, at the time of exercise in an amount equal to the
purchase price of the shares thereby purchased whereupon the holder of this
Warrant shall be entitled to receive from the Corporation a stock certificate
in proper form representing the number of shares of Warrant Stock so purchased.
3. ISSUANCE OF SHARES: NO FRACTIONAL SHARES OF SCRIP
Certificates for shares purchased hereunder shall be delivered to the
holder hereof by the Corporation's transfer agent at the Corporation's expense
within a reasonable time after the date on which this Warrant shall have been
exercised in accordance with the terms hereof. Each certificate so delivered
shall be in such denominations as may be requested by the holder hereof and
shall be registered in the name of such holder or, subject to applicable
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<PAGE> 2
laws, other name as shall be requested by such holder. If, upon exercise of
this Warrant, fewer than all of the shares of Warrant Stock evidenced by this
Warrant are purchased prior to the Expiration Time, one or more new warrants
substantially in the form of, and on the terms in, this Warrant will be issued
for the remaining number of shares of Warrant Stock not purchased upon exercise
of this Warrant. The Corporation hereby represents and warrants that all shares
of Warrant Stock which may be issued upon the exercise of this Warrant will,
upon such exercise, be duly and validly authorized and issued, fully paid and
nonassessable and free from all taxes, liens and charges in respect of the
issuance thereof (other than liens or charges created by or imposed upon the
holder of the Warrant Stock). The Corporation agrees that the shares so issued
shall be and be deemed to be issued to such holder as the record owner of such
shares as of the close of business on the date on which this Warrant shall have
been surrendered for exercise in accordance with the terms hereof. No
fractional shares or scrip representing fractional shares shall be issued upon
the exercise of this Warrant. With respect to any fraction of a share called
for upon the exercise of this Warrant, an amount equal to such fraction
multiplied by the then current price at which each share maybe purchased
hereunder shall be paid in cash to the holder of this Warrant.
4. CHARGES, TAXES AND EXPENSES
Issuance of certificates for shares of Warrant Stock upon the exercise of
this Warrant shall be made without charge to the holder hereof for any issue or
transfer tax or other incidental expense in respect of the issuance of such
certificate, all of which taxes and expenses shall be paid by the Corporation,
and such certificates shall be issued in the name of the holder of this Warrant
or in such name as may be directed by the holder of this Warrant; provided,
however, that in the event certificates for shares of Warrant Stock are to be
issued in a name other than the name of the holder of this Warrant, this
Warrant when surrendered for exercise shall be accompanied by the Assignment
Form attached hereto duly executed by the holder hereof.
5. NO RIGHTS AS SHAREHOLDERS
This Warrant does not entitle the holder hereof of any voting rights as a
shareholder of the Corporation prior to the exercise hereof.
6. EXCHANGE AND REGISTRY OF WARRANT
This Warrant is exchangeable, upon the surrender hereof by the registered
holder at the above-mentioned office or agency of the Corporation, for a new
Warrant of like tenor and dated as of such exchange. The Corporation shall
maintain at the above-mentioned office or agency a registry showing the name
and address of the registered holder of this Warrant. This Warrant may be
surrendered for exchange, transfer or exercise, in accordance with its terms,
at such office or agency of the Corporation, and the Corporation shall be
entitled to rely in all respects, prior to written notice to the contrary, upon
such registry.
7. LOSS, THEFT, DESTRUCTION OR MUTILATION OF WARRANT
Upon receipt by the Corporation of evidence reasonably satisfactory to it
of the loss, theft, destruction or mutilation of this Warrant, and in case of
loss, theft or destruction of indemnity or security reasonably satisfactory to
it, and upon reimbursement to the Corporation of all reasonable expenses
incidental thereto, and upon surrender and cancellation of this Warrant, if
mutilated, the Corporation will make and deliver a new Warrant of like tenor
and dated as of such cancellation, in lieu of this Warrant.
8. SATURDAYS, SUNDAYS AND HOLIDAYS
If the last or appointed day for the taking of any action or the
expiration of any right required or granted herein shall be a Saturday or a
Sunday or shall be a legal holiday, then such action may be taken or such right
may be exercised on the next succeeding day not a Saturday, Sunday or legal
holiday.
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<PAGE> 3
9. MERGER, SALE OF ASSETS, ETC.
If at any time the Corporation proposes to merge or consolidate with or
into any other corporation, effect any reorganization, or sell or convey all or
substantially all of its assets to any other entity, then, as a condition of
such reorganization, consolidation, merger, sale or conveyance, the Corporation
or its successor, as the case may be, shall enter into a supplemental agreement
to make lawful and adequate provision whereby the holder shall have the right
to receive, upon exercise of the Warrant, the kind and amount of equity
securities which would have been received upon such reorganization,
consolidation, merger, sale or conveyance by a holder of a number of shares of
common stock equal to the number of shares issuable upon exercise of the
Warrant immediately prior to such reorganization, consolidation, merger, sale
or conveyance. If the property to be received upon such reorganization,
consolidation, merger, sale or conveyance is not equity securities, the
Corporation shall give the holder of this Warrant ten (10) business days prior
written notice of the proposed effective date of such transaction, and if this
Warrant has not been exercised by or on the effective date of such transaction,
it shall terminate.
10. SUBDIVISION, COMBINATION, RECLASSIFICATION, CONVERSION, ETC.
If the Corporation at any time shall, by subdivision, combination,
reclassification of securities or otherwise, change the Warrant Stock into the
same or a different number of securities of any class or classes, this Warrant
shall thereafter entitle the holder to acquire such number and kind of
securities as would have been issuable in respect of the Warrant Stock (or
other securities which were subject to the purchase rights under this Warrant
immediately prior to such subdivision, combination, reclassification or other
change) as the result of such change if this Warrant had been exercised in full
for cash immediately prior to such change. The Exercise Price hereunder shall
be adjusted if and to the extent necessary to reflect such change. If the
Warrant Stock or other securities issuable upon exercise hereof are subdivided
or combined into a greater or smaller number of shares of such security, the
number of shares issuable hereunder shall be proportionately increased or
decreased, as the case may be, and the Exercise Price shall be proportionately
reduced or increased, as the care may be, in both cases according to the ratio
which the total number of shares of such security to be outstanding immediately
after such even bears to the total number of shares of such security
outstanding immediately prior to such event. The Corporation shall give the
holder prompt written notice of any change in the type of securities issuable
hereunder, any adjustment of the Exercise Price for the securities issuable
hereunder, and any increase or decrease in the number of shares issuable
hereunder.
11. TRANSFERABILITY; COMPLIANCE WITH SECURITIES LAWS
(a) This Warrant may not be transferred or assigned in whole or in part
without compliance with all applicable federal and state securities laws by the
transferor and transferee (including the delivery of investment representation
letters and legal opinions reasonably satisfactory to the Corporation, if
requested by the Corporation). Subject such restrictions, prior to the
Expiration Time, this Warrant and all rights hereunder are transferable by the
holder hereof, in whole or in part, at the office or agency of the Corporation
referred to in Section 1 hereof. Any such transfer shall be made in person or
by the holder's duly authorized attorney, upon surrender of this Warrant
together with the Assignment Form attached hereto properly endorsed.
(b) The Holder of this Warrant, by acceptance hereof, acknowledges that
this Warrant and the Warrant Stock issuable upon exercise hereof are being
acquired solely for the holder's own account and not as a nominee for any other
party, and for investment and that the holder will not offer, sell or otherwise
dispose of this Warrant or any shares of Warrant Stock to be issued upon
exercise hereof except under circumstances that will not result in a violation
of the Securities Act of 1933, as amended, or any state securities laws. Upon
exercise of this Warrant, the holder shall, if requested by the Corporation,
confirm in writing, in a form satisfactory to the Corporation, that the shares
of Warrant Stock so purchased are being acquired solely for holder's own
account and not as a nominee for any other party, for investment and not with a
view toward distribution or resale.
(c) The Warrant Stock has not been and will not be registered under the
Securities Act of 1933, as amended, and this Warrant may not be exercised
except by (i) the original purchaser of this Warrant from the
Corporation or (ii) an "accredited investor" as defined in Rule 501(a) under
the Securities Act of 1933, as amended. Each certificate representing the
Warrant Stock or other securities issued in respect of the Warrant Stock upon
any stock split, stock dividend, recapitalization, merger, consolidation or
similar event, shall be stamped or otherwise
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<PAGE> 4
imprinted with a legend substantially in the following form (in addition to any
legend required under applicable securities laws):
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER UNITED
STATES FEDERAL OR STATE SECURITIES LAWS AND MAY NOT BE OFFERED FOR SALE, SOLD
OR OTHERWISE TRANSFERRED OR ASSIGNED FOR VALUE, DIRECTLY OR INDIRECTLY, NOR MAY
THE SECURITIES BE TRANSFERRED ON THE BOOKS OF THE CORPORATION, WITHOUT
REGISTRATION OF SUCH SECURITIES UNDER ALL APPLICABLE UNITED STATES FEDERAL OR
STATE SECURITIES LAWS OR COMPLIANCE WITH AN APPLICABLE EXEMPTION THEREFROM,
SUCH COMPLIANCE, AT THE OPTION OF THE CORPORATION, TO BE EVIDENCED BY AN
OPINION OF SHAREHOLDER'S COUNSEL, IN FORM ACCEPTABLE TO THE CORPORATION, THAT
NO VIOLATION OF SUCH REGISTRATION PROVISIONS WOULD RESULT FROM ANY PROPOSED
TRANSFER OR ASSIGNMENT.
12. REPRESENTATIONS AND WARRANTIES
The Corporation hereby represents and warrants to the holder hereof that:
(a) during the period this Warrant is outstanding, the Corporation will
reserve from its authorized and unissued common stock a sufficient number of
shares to provide for the issuance of Warrant Stock upon the exercise of this
Warrant;
(b) the issuance of this Warrant shall constitute full authority to the
Corporation's officers who are charged with the duty of executing stock
certificates to execute and issue the necessary certificates for the shares of
Warrant Stock issuable upon exercise of this Warrant;
(c) the Corporation has all requisite legal and corporate power to
execute and deliver this Warrant, to sell and issue the Warrant Stock
hereunder, to issue the common stock issuable upon exercise of the Warrant
Stock and to carry out and perform its obligations under the terms of this
Warrant;
(d) all corporate action on the part of the Corporation, its directors
and shareholders necessary for the authorization, execution, delivery and
performance of this Warrant by the Corporation, the authorization, sale,
issuance and delivery of the Warrant Stock, the grant of registration rights as
provided herein and the performance of the Corporation's obligations hereunder
has been taken.
(e) the Warrant Stock, when issued in compliance with the provisions of
this Warrant and the Corporation's Articles of Incorporation (as they may be
amended from time to time (the "Articles")), will be validly issued, fully paid
and nonassessable, and free of all taxes, liens or encumbrances with respect to
the issue thereof and will be issued in compliance with all applicable federal
and state securities laws; and
(f) the issuance of the Warrant Stock will not be subject to any
preemptive rights, rights of first refusal or similar rights.
13. CORPORATION
The Corporation will not, by amendment of its Articles or through any
reorganization, recapitalization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other action, avoid or seek to
avoid the observance or performance of any of the terms to be observed or
performed hereunder by the Corporation, but will at all times in good faith
assist in the carrying out of all the provisions of this Warrant in the taking
of all such action as may be necessary or appropriate in order to protect the
rights of the holder of the Warrant against impairment.
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<PAGE> 5
14. GOVERNING LAW
This Warrant shall be governed by and construed in accordance with the
laws of the State of Washington.
IN WITNESS WHEREOF, the Corporation has caused this Warrant to be executed
by its duly authorized officers.
Dated: 26 January, 1998
FREESHOP INTERNATIONAL, INC.
/s/ MICHAEL SCHUTZLER
- -----------------------------------
Michael Schutzler
President & CEO
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<PAGE> 6
NOTICE OF EXERCISE
To: FreeShop International, Inc.
(1) The undersigned hereby elects to purchase _________ shares of common
stock of FreeShop International, Inc. pursuant to the terms of the attached
Warrant, and tenders herewith payment of the purchase price in full, together
with all applicable transfer taxes, if any.
(2) In exercising this Warrant, the undersigned hereby confirms and
acknowledges that the shares of common stock to be issued upon exercise hereof
are being acquired solely for the account of the undersigned and not as a
nominee for any other party, and for investment, and that the undersigned will
not offer, sell or otherwise dispose of any such shares of common stock except
under circumstances that will not result in a violation of the Securities Act
of 1933, as amended, or any state securities laws.
(3) Please issue a certificate or certificates representing said shares
of common stock in the name of the undersigned or in such other name as is
specified below:
-------------------------------
(Name)
-------------------------------
(Address)
(3) The undersigned represents that (a) he, she or it is the original
purchaser from the Corporation of the attached Warrant or an "accredited
investor" within the meaning of Rule 501(a) under the Securities Act of 1933,
as amended and (b) the aforesaid shares of common stock are being acquired for
the account of the undersigned for investment and not with a view to, or for
resale in connection with, the distribution thereof and that the undersigned
has no present intention of distributing or reselling such shares.
- --------------------------------- ----------------------------------
(Date) (Signature)
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<PAGE> 7
ASSIGNMENT FORM
(To assign the foregoing Warrant, execute this form and supply required
information. Do not use this form to purchase shares.)
FOR VALUE RECEIVED, the undersigned registered owner of this Warrant
hereby sells, assigns and transfers unto the Assignee named below all of the
rights of the undersigned under the within Warrant, with respect to the number
of shares of common stock of FreeShop International, Inc. set forth below:
Name of Assignee Address No. of Shares
- ---------------- ------- -------------
and does hereby irrevocably constitute and appoint Attorney____________________
to make such transfer on the books of FreeShop International, Inc., maintained
for the purpose, with full power of substitution in the premises.
The undersigned also represents that, by assignment hereof, the Assignee
acknowledges that this Warrant and the shares of stock to be issued upon
exercise hereof are being acquired for investment and that the Assignee will
not offer, sell or otherwise dispose of this Warrant or any shares of stock to
be issued upon exercise hereof except under circumstances which will not result
in a violation of the Securities Act of 1933, as amended, or any state
securities laws. Further, the Assignee shall, if requested by the Corporation,
confirm in writing, in a form satisfactory to the Corporation, that the shares
of stock so purchased are being acquired for investment and not with a view
toward distribution or resale.
Date:__________________________________
Holder's Signature:____________________
Holder's Address:
_______________________________________
_______________________________________
Guaranteed Signature:
NOTE: The signature to this Assignment Form must correspond with the name as it
appears on the face of the Warrant, without alteration or enlargement or any
change whatever, and must be guaranteed by a bank or trust company. Officers of
corporations and those action in a fiduciary or other representative capacity
should file proper evidence of authority to assign the foregoing Warrant.
-7-
<PAGE> 1
EXHIBIT 10.21
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE
STATE LAWS, AND NO INTEREST THEREIN MAY BE SOLD, DISTRIBUTED, ASSIGNED,
OFFERED, PLEDGED OR OTHERWISE TRANSFERRED UNLESS THERE IS AN EFFECTIVE
REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS
COVERING ANY SUCH TRANSACTION OR SUCH TRANSACTION IS EXEMPT FROM THE
REGISTRATION REQUIREMENTS OF SUCH ACT AND LAWS, SUCH COMPLIANCE, AT THE OPTION
OF THE CORPORATION, TO BE EVIDENCED BY AN OPINION OF WARRANTHOLDER'S COUNSEL,
IN FORM ACCEPTABLE TO THE CORPORATION, THAT NO VIOLATION OF SUCH REGISTRATION
PROVISIONS WOULD RESULT FROM ANY PROPOSED TRANSFER OR ASSIGNMENT.
COMMON STOCK PURCHASE WARRANT
FREESHOP INTERNATIONAL, INC.
THIS CERTIFIES that for good and valuable consideration received, Hallco
Leasing Corporation, a(n) corporation or registered assign(s), is entitled, upon
the terms and subject to the conditions hereinafter set forth, to acquire from
FreeShop International, Inc., a Washington corporation (the "Corporation") up to
6,000 fully paid and nonassessable shares of common stock, without par value, of
the Corporation ("Warrant Stock") at a purchase price per share (the "Exercise
Price") of $0.41.
1. TERM OF WARRANT
Subject to the terms and conditions set forth herein, this Warrant shall be
exercisable, in whole or from time to time part, at any time on or after the
date hereof and at or prior to 11:59 p.m., Pacific Time, on October 23, 2002
(the "Expiration Time"). Notwithstanding the foregoing, at any time the
Corporation shall have the right, except as may be limited by law, other
agreements or herein, to call this Warrant for exercise, in whole or in part, by
mailing written notice by United States mail to the registered holder hereof if
the Corporation completes a private placement or public offering of the
Corporation's common stock for an aggregate offering price of $7,500,000.00 at a
price per share equal to or greater than five dollars $5.00 per share, as
adjusted pursuant to Section 10 hereof. In such event, this Warrant shall expire
and cease to be exercisable at 11:59 p.m. Pacific Time, of the twenty-first day
after the date of mailing of the notice.
2. EXERCISE OF WARRANT
The purchase rights represented by this Warrant are exercisable by the
registered holder hereof, in whole or in part, at any time and from time to
time at or prior to the Expiration Time by the surrender of this Warrant and
the Notice of Exercise form attached hereto duly executed to the office of the
Corporation at 2815 2nd Avenue, Suite 398, Seattle, Washington 98121 (or such
other office or agency of the Corporation as it may designate by notice in
writing to the registered holder hereof at the address of such holder appearing
on the books of the Corporation), and upon payment of the Exercise Price for
the shares thereby purchased (by cash or by check or bank draft payable to the
order of the Corporation or by cancellation of indebtedness of the Corporation
to the holder hereof, if any, at the time of exercise in an amount equal to the
purchase price of the shares thereby purchased); whereupon the holder of this
Warrant shall be entitled to receive from the Corporation a stock certificate
in proper form representing the number of shares of Warrant Stock so purchased.
3. ISSUANCE OF SHARES: NO FRACTIONAL SHARES OF SCRIP
Certificates for shares purchased hereunder shall be delivered to the
holder hereof by the Corporation's transfer agent at the Corporation's expense
within a reasonable time after the date on which this Warrant shall have
-1-
<PAGE> 2
been exercised in accordance with the terms hereof. Each certificate so
delivered shall be in such denominations as may be requested by the holder
hereof and shall be registered in the name of such holder or, subject to
applicable laws, other name as shall be requested by such holder. If, upon
exercise of this Warrant, fewer than all of the shares of Warrant Stock
evidenced by this Warrant are purchased prior to the Expiration Time, one or
more new warrants substantially in the form of, and on the terms in, this
Warrant will be issued for the remaining number of shares of Warrant Stock not
purchased upon exercise of this Warrant. The Corporation hereby represents and
warrants that all shares of Warrant Stock which may be issued upon the exercise
of this Warrant will, upon such exercise, be duly and validly authorized and
issued, fully paid and nonassessable and free from all taxes, liens and charges
in respect of the issuance thereof (other than liens or charges created by or
imposed upon the holder of the Warrant Stock). The Corporation agrees that the
shares so issued shall be and be deemed to be issued to such holder as the
record owner of such shares as of the close of business on the date on which
this Warrant shall have been surrendered for exercise in accordance with the
terms hereof. No fractional shares or scrip representing fractional shares shall
be issued upon the exercise of this Warrant. With respect to any fraction of a
share called for upon the exercise of this Warrant, an amount equal to such
fraction multiplied by the then current price at which each share may be
purchased hereunder shall be paid in cash to the holder of this Warrant.
4. CHARGES, TAXES AND EXPENSES
Issuance of certificates for shares of Warrant Stock upon the exercise of
this Warrant shall be made without charge to the holder hereof for any issue or
transfer tax or other incidental expense in respect of the issuance of such
certificate, all of which taxes and expenses shall be paid by the Corporation,
and such certificates shall be issued in the name of the holder of this Warrant
or in such name as may be directed by the holder of this Warrant; provided,
however, that in the event certificates for shares of Warrant Stock are to be
issued in a name other than the name of the holder of this Warrant, this
Warrant when surrendered for exercise shall be accompanied by the Assignment
Form attached hereto duly executed by the holder hereof.
5. NO RIGHTS AS SHAREHOLDERS
This Warrant does not entitle the holder hereof of any voting rights as a
shareholder of the Corporation prior to the exercise hereof.
6. EXCHANGE AND REGISTRY OF WARRANT
This Warrant is exchangeable, upon the surrender hereof by the registered
holder at the above-mentioned office or agency of the Corporation, for a new
Warrant of like tenor and dated as of such exchange. The Corporation shall
maintain at the above-mentioned office or agency a registry showing the name
and address of the registered holder of this Warrant. This Warrant may be
surrendered for exchange, transfer or exercise, in accordance with its terms,
at such office or agency of the Corporation, and the Corporation shall be
entitled to rely in all respects, prior to written notice to the contrary, upon
such registry.
7. LOSS, THEFT, DESTRUCTION OR MUTILATION OF WARRANT
Upon receipt by the Corporation of evidence reasonably satisfactory to it
of the loss, theft, destruction or mutilation of this Warrant, and in case of
loss, theft or destruction of indemnity or security reasonably satisfactory to
it, and upon reimbursement to the Corporation of all reasonable expenses
incidental thereto, and upon surrender and cancellation of this Warrant, if
mutilated, the Corporation will make and deliver a new Warrant of like tenor
and dated as of such cancellation, in lieu of this Warrant.
8. SATURDAYS, SUNDAYS AND HOLIDAYS
If the last or appointed day for the taking of any action or the
expiration of any right required or granted herein shall be a Saturday or a
Sunday or shall be a legal holiday, then such action may be taken or such right
may be exercised on the next succeeding day not a Saturday, Sunday or legal
holiday.
-2-
<PAGE> 3
9. MERGER, SALE OF ASSETS, ETC.
If at any time the Corporation proposes to merge or consolidate with or
into any other corporation, effect any reorganization, or sell or convey all or
substantially all of its assets to any other entity, then, as a condition of
such reorganization, consolidation, merger, sale or conveyance, the Corporation
or its successor, as the case may be, shall enter into a supplemental agreement
to make lawful and adequate provision whereby the holder shall have the right
to receive, upon exercise of the Warrant, the kind and amount of equity
securities which would have been received upon such reorganization,
consolidation, merger, sale or conveyance by a holder of a number of shares of
common stock equal to the number of shares issuable upon exercise of the
Warrant immediately prior to such reorganization, consolidation, merger, sale
or conveyance. If the property to be received upon such reorganization,
consolidation, merger, sale or conveyance is not equity securities, the
Corporation shall give the holder of this Warrant ten (10) business days prior
written notice of the proposed effective date of such transaction, and if this
Warrant has not been exercised by or on the effective date of such transaction,
it shall terminate.
10. SUBDIVISION, COMBINATION, RECLASSIFICATION, CONVERSION, ETC.
If the Corporation at any time shall, by subdivision, combination,
reclassification of securities or otherwise, change the Warrant Stock into the
same or a different number of securities of any class or classes, this Warrant
shall thereafter entitle the holder to acquire such number and kind of
securities as would have been issuable in respect of the Warrant Stock (or
other securities which were subject to the purchase rights under this Warrant
immediately prior to such subdivision, combination, reclassification or other
change) as the result of such change if this Warrant had been exercised in full
for cash immediately prior to such change. The Exercise Price hereunder shall
be adjusted if and to the extent necessary to reflect such change. If the
Warrant Stock or other securities issuable upon exercise hereof are subdivided
or combined into a greater or smaller number of shares of such security, the
number of shares issuable hereunder shall be proportionately increased or
decreased, as the case may be, and the Exercise Price shall be proportionately
reduced or increased, as the care may be, in both cases according to the ratio
which the total number of shares of such security to be outstanding immediately
after such even bears to the total number of shares of such security
outstanding immediately prior to such event. The Corporation shall give the
holder prompt written notice of any change in the type of securities issuable
hereunder, any adjustment of the Exercise Price for the securities issuable
hereunder, and any increase or decrease in the number of shares issuable
hereunder.
11. TRANSFERABILITY; COMPLIANCE WITH SECURITIES LAWS
(a) This Warrant may not be transferred or assigned in whole or in part
without compliance with all applicable federal and state securities laws by the
transferor and transferee (including the delivery of investment representation
letters and legal opinions reasonably satisfactory to the Corporation, if
requested by the Corporation). Subject such restrictions, prior to the
Expiration Time, this Warrant and all rights hereunder are transferable by the
holder hereof, in whole or in part, at the office or agency of the Corporation
referred to in Section 1 hereof. Any such transfer shall be made in person or
by the holder's duly authorized attorney, upon surrender of this Warrant
together with the Assignment Form attached hereto properly endorsed.
(b) The Holder of this Warrant, by acceptance hereof, acknowledges that
this Warrant and the Warrant Stock issuable upon exercise hereof are being
acquired solely for the holder's own account and not as a nominee for any other
party, and for investment and that the holder will not offer, sell or otherwise
dispose of this Warrant or any shares of Warrant Stock to be issued upon
exercise hereof except under circumstances that will not result in a violation
of the Securities Act of 1933, as amended, or any state securities laws. Upon
exercise of this Warrant, the holder shall, if requested by the Corporation,
confirm in writing, in a form satisfactory to the Corporation, that the shares
of Warrant Stock so purchased are being acquired solely for holder's own
account and not as a nominee for any other party, for investment, and not with a
view toward distribution or resale.
(c) The Warrant Stock has not been and will not be registered under the
Securities Act of 1933, as amended, and this Warrant may not be exercised except
by (i) the original purchaser of this Warrant from the Corporation or (ii) an
"accredited investor" as defined in Rule 501(a) under the Securities Act of
1933, as amended. Each certificate representing the Warrant Stock or other
securities issued in respect of the Warrant Stock upon any
-3-
<PAGE> 4
stock split, stock dividend, recapitalization, merger, consolidation or similar
event, shall be stamped or otherwise imprinted with a legend substantially in
the following form (in addition to any legend required under applicable
securities laws):
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER UNITED
STATES FEDERAL OR STATE SECURITIES LAWS AND MAY NOT BE OFFERED FOR SALE, SOLD
OR OTHERWISE TRANSFERRED OR ASSIGNED FOR VALUE, DIRECTLY OR INDIRECTLY, NOR MAY
THE SECURITIES BE TRANSFERRED ON THE BOOKS OF THE CORPORATION, WITHOUT
REGISTRATION OF SUCH SECURITIES UNDER ALL APPLICABLE UNITED STATES FEDERAL OR
STATE SECURITIES LAWS OR COMPLIANCE WITH AN APPLICABLE EXEMPTION THEREFROM,
SUCH COMPLIANCE, AT THE OPTION OF THE CORPORATION, TO BE EVIDENCED BY AN
OPINION OF SHAREHOLDER'S COUNSEL, IN FORM ACCEPTABLE TO THE CORPORATION, THAT
NO VIOLATION OF SUCH REGISTRATION PROVISIONS WOULD RESULT FROM ANY PROPOSED
TRANSFER OR ASSIGNMENT.
12. REPRESENTATIONS AND WARRANTIES
The Corporation hereby represents and warrants to the holder hereof that:
(a) during the period this Warrant is outstanding, the Corporation will
reserve from its authorized and unissued common stock a sufficient number of
shares to provide for the issuance of Warrant Stock upon the exercise of this
Warrant;
(b) the issuance of this Warrant shall constitute full authority to the
Corporation's officers who are charged with the duty of executing stock
certificates to execute and issue the necessary certificates for the shares of
Warrant Stock issuable upon exercise of this Warrant;
(c) the Corporation has all requisite legal and corporate power to
execute and deliver this Warrant, to sell and issue the Warrant Stock
hereunder, to issue the common stock issuable upon exercise of the Warrant
Stock and to carry out and perform its obligations under the terms of this
Warrant;
(d) all corporate action on the part of the Corporation, its directors
and shareholders necessary for the authorization, execution, delivery and
performance of this Warrant by the Corporation, the authorization, sale,
issuance and delivery of the Warrant Stock, the grant of registration rights as
provided herein and the performance of the Corporation's obligations hereunder
has been taken.
(e) the Warrant Stock, when issued in compliance with the provisions of
this Warrant and the Corporation's Articles of Incorporation (as they may be
amended from time to time (the "Articles")), will be validly issued, fully paid
and nonassessable, and free of all taxes, liens or encumbrances with respect to
the issue thereof and will be issued in compliance with all applicable federal
and state securities laws; and
(f) the issuance of the Warrant Stock will not be subject to any
preemptive rights, rights of first refusal or similar rights.
-4-
<PAGE> 5
13. CORPORATION
The Corporation will not, by amendment of its Articles or through any
reorganization, recapitalization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other action, avoid or seek to
avoid the observance or performance of any of the terms to be observed or
performed hereunder by the Corporation, but will at all times in good faith
assist in the carrying out of all the provisions of this Warrant in the taking
of all such action as may be necessary or appropriate in order to protect the
rights of the holder of the Warrant against impairment.
14. GOVERNING LAW
This Warrant shall be governed by and construed in accordance with the
laws of the State of Washington.
IN WITNESS WHEREOF, the Corporation has caused this Warrant to be executed
by its duly authorized officers.
Dated: December 4, 1997
FREESHOP INTERNATIONAL, INC.
/s/ MICHAEL T. SCHUTZLER
- -----------------------------------
Michael T. Schutzler
President & CEO
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<PAGE> 6
NOTICE OF EXERCISE
To: FreeShop International, Inc.
(1) The undersigned hereby elects to purchase 6,000 shares of common
stock of FreeShop International, Inc. pursuant to the terms of the attached
Warrant, and tenders herewith payment of the purchase price in full, together
with all applicable transfer taxes, if any.
(2) In exercising this Warrant, the undersigned hereby confirms and
acknowledges that the shares of common stock to be issued upon exercise hereof
are being acquired solely for the account of the undersigned and not as a
nominee for any other party, and for investment, and that the undersigned will
not offer, sell or otherwise dispose of any such shares of common stock except
under circumstances that will not result in a violation of the Securities Act
of 1933, as amended, or any state securities laws.
(3) Please issue a certificate or certificates representing said shares
of common stock in the name of the undersigned or in such other name as is
specified below:
Hallco Leasing Corporation
13333 Bel- Red Road, Suite 236
Bellevue, WA, 98005
(3) The undersigned represents that (a) he, she or it is the original
purchaser from the Corporation of the attached Warrant or an "accredited
investor" within the meaning of Rule 501(a) under the Securities Act of 1933,
as amended and (b) the aforesaid shares of common stock are being acquired for
the account of the undersigned for investment and not with a view to, or for
resale in connection with, the distribution thereof and that the undersigned
has no present intention of distributing or reselling such shares.
- --------------------------------- ----------------------------------
(Date) (Signature)
-6-
<PAGE> 7
ASSIGNMENT FORM
(To assign the foregoing Warrant, execute this form and supply required
information. Do not use this form to purchase shares.)
FOR VALUE RECEIVED, the undersigned registered owner of this Warrant
hereby sells, assigns and transfers unto the Assignee named below all of the
rights of the undersigned under the within Warrant, with respect to the number
of shares of common stock of FreeShop International, Inc. set forth below:
Name of Assignee Address No. of Shares
- ---------------- ------- -------------
and does hereby irrevocably constitute and appoint Attorney____________________
to make such transfer on the books of FreeShop International, Inc., maintained
for the purpose, with full power of substitution in the premises.
The undersigned also represents that, by assignment hereof, the Assignee
acknowledges that this Warrant and the shares of stock to be issued upon
exercise hereof are being acquired for investment and that the Assignee will
not offer, sell or otherwise dispose of this Warrant or any shares of stock to
be issued upon exercise hereof except under circumstances which will not result
in a violation of the Securities Act of 1933, as amended, or any state
securities laws. Further, the Assignee shall, if requested by the Corporation,
confirm in writing, in a form satisfactory to the Corporation, that the shares
of stock so purchased are being acquired for investment and not with a view
toward distribution or resale.
Date:__________________________________
Holder's Signature:____________________
Holder's Address:
_______________________________________
_______________________________________
Guaranteed Signature:
NOTE: The signature to this Assignment Form must correspond with the name as it
appears on the face of the Warrant, without alteration or enlargement or any
change whatever, and must be guaranteed by a bank or trust company. Officers of
corporations and those action in a fiduciary or other representative capacity
should file proper evidence of authority to assign the foregoing Warrant.
-7-
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1/A of our
report dated April 16, 1999, except for paragraphs three through five of Note
13, as to which the date is June 18, 1999, and paragraph six of Note 13, as to
which the date is August 9, 1999, relating to the financial statements of
FreeShop.com, Inc., of our report dated May 6, 1999, relating to the financial
statements of Commonsite LLC, and of our report dated May 24, 1999, relating to
the financial statements of Travel Companions International, Inc. which appear
in such Registration Statement. We also consent to the references to us under
the heading "Experts," in such Registration Statement.
PricewaterhouseCoopers LLP
Seattle, Washington
August 12, 1999
