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As filed with the Securities and Exchange Commission on June 21, 1999.
File No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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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WASHINGTON 7310 91-1809146
(STATE OR JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
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95 SOUTH JACKSON STREET EVERGREEN CORPORATE SERVICES, INC.
SUITE 300 31635 36TH AVENUE S.W.
SEATTLE, WASHINGTON 98104 FEDERAL WAY, WASHINGTON 98023-2105
(206) 441-9100 (253) 925-9044
(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)
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COPIES TO:
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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
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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,
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. [ ]
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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. [ ]
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If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [X]
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS OF SECURITIES PROPOSED MAXIMUM
TO BE REGISTERED AGGREGATE OFFERING PRICE(1) AMOUNT OF REGISTRATION FEE
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Common Stock, no par value........... $46,000,000 $12,788
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(1) Pursuant to Rule 457(a), the proposed maximum aggregate offering price is
estimated solely for the purpose of calculating the registration fee.
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 , 1999
FREESHOP LOGO
SHARES
COMMON STOCK
This is the initial public offering of FreeShop.com, Inc. and we are offering
shares of our common stock. We anticipate that the initial public
offering price will be between $ and $ 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
7.
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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UNDERWRITING
PUBLIC OFFERING DISCOUNTS AND PROCEEDS TO
PRICE COMMISSIONS FREESHOP
<S> <C> <C> <C>
Per Share $ $ $
Total $ $ $
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We have granted the underwriters the right to purchase up to
additional shares to cover any over-allotments.
DEUTSCHE BANC ALEX. BROWN
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN
RAUSCHER INCORPORATED
VOLPE BROWN WHELAN & COMPANY
The date of this prospectus is , 1999
<PAGE> 3
( DESCRIPTION OF INSIDE COVER COLOR ARTWORK TO BE FILED BY AMENDMENT )
<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, leveraging an innovative consumer-driven approach that changes the
dynamics of direct marketing. Through our FreeShop.com Web site, consumers
seeking to discover, learn about, or try new products can choose among a broad
selection of free, trial and promotional offers in a fun, interactive
environment. 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 high-quality offers from
over 100 companies such as Johnson & Johnson, Inc., The Walt Disney Company,
eBay, Inc., US News & World Report, Inc., Hammacher Schlemmer & Co., Inc. and
The Columbia House Company. 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 visitors view their advertisements. We believe FreeShop's 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
generated more than 5.0 million orders for various offers and promotions. In
April 1999, FreeShop was among the top 20 online shopping sites based on reach,
according to Media Metrix, Inc. Our customer database has grown from
approximately 850,000 customers in January 1998 to more than 1.8 million
customers as of April 1999. In addition, we have over 650,000 members of Club
FreeShop. Members of Club FreeShop regularly receive an email newsletter
informing them of special offers, exclusive contests and other opportunities. We
believe that the number and diversity of our free, trial and promotional offers
attracts an increasing number of consumers. This helps us to continue to grow
our marketer client base and with it our base of offers, resulting in a positive
cycle as an increasing number of marketers are attracted to the increasing
number of consumers visiting our Web site.
The direct marketing industry is large and growing. In 1998, businesses
spent an estimated $80.1 billion marketing directly to consumers through direct
mail, telemarketing and direct response advertising in both online and offline
media. Direct marketing involves any direct communication to a consumer that is
designed to generate a response in the form of an order, a request for further
information or a visit to a place of business. Direct marketing allows marketers
to reach targeted audiences and to quantify and measure the effectiveness of
their campaigns and advertising spending. However, the traditional direct
marketers' targeting process is inefficient because marketers lack specific
information about a consumer's immediate interests and needs. As a result, the
majority of direct mail is discarded and the majority of telemarketing calls are
terminated quickly or ignored.
The Internet is particularly 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
will grow from $603 million in 1998 to $5.5 billion in 2003. We believe online
direct marketing is more attractive than traditional direct marketing media
because it requires lower production costs and provides easier customer response
features. In addition, online direct marketing allows marketers to more
effectively:
- develop one-to-one relationships with consumers;
- interact real-time with consumers;
- collect data and feedback on marketing campaigns; and
- customize marketing campaigns to broad audiences or specific groups.
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Even with these advantages, 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. Even leading brand marketers who
build their own Web sites must find ways to attract a sizeable audience of
visitors. We believe marketers desire a solution that takes advantage of the
effectiveness of direct marketing while overcoming the challenges presented by
both traditional and online marketing methods. FreeShop provides this solution,
fundamentally changing the dynamics of direct marketing by putting consumers in
control of the marketing process.
FreeShop benefits consumers by allowing them to select the offers that most
interest them and meet their unique needs. We provide consumers with offers for
high quality items such as catalogs, magazines, product samples, software,
coupons and consumer goods, covering a variety of interests from travel,
personal finance and entertainment to automobiles and sports. In addition,
because many of our offers are free samples or trial offers, consumers are able
to try new products and services before making purchase decisions. FreeShop
allows new online visitors to sample the experience of online shopping in an
easy, intuitive and risk-free way.
FreeShop benefits marketers by offering a cost-effective way to acquire
customers. We provide a diversity of programs designed to meet marketers'
objectives throughout the entire marketing process, from awareness to interest
to trial to sale. We offer a variety of services to marketers, including lead
generation, banner advertising, site sponsorships and newsletter sponsorships.
We believe our programs are quick and easy to implement relative to traditional
direct marketing programs.
In December 1998, Fingerhut Companies, Inc. became a significant minority
shareholder in FreeShop. Fingerhut is one of the largest direct marketers in the
United States, selling general merchandise through catalogs and various Web
sites. Currently, Fingerhut's database consists of over 30 million consumers,
and, during 1999, Fingerhut expects to distribute over 450 million catalog and
promotional mailings. As a result of our participation in a portion of these
mailings, we believe we can increase our customer base quickly and
cost-effectively. We have recently initiated a direct marketing relationship
with Fingerhut which will include Web site links, package inserts, statement
stuffers and "blow in" cards for catalogs. In March 1999, Fingerhut was acquired
by Federated Department Stores, Inc., which operates over 400 full-line
department stores, including Bloomingdale's, The Bon Marche, Burdines,
Goldsmith's, Lazarus, Macy's, Rich's, and Stern's. Federated also operates
direct mail catalog businesses under the names Bloomingdale's By Mail and Macy's
By Mail, and operates an electronic commerce business which provides goods and
services online under the name macys.com. We are exploring ways to further
develop our relationships with both Fingerhut and Federated in order to improve
our Web site content and enhance our customer database.
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 offline
marketing programs, including our Associates Program of over 14,000
member sites;
- grow our client base by expanding our sales staff, the services we offer
and our relationships with advertising agencies and companies with
national consumer brands;
- enhance FreeShop's brand recognition through aggressive marketing;
- expand the number of categories and increase the number of offers within
each category;
- continue to develop and leverage technology to serve our marketer clients
and make our Web site faster, easier to use and more personalized; and
- further develop our marketing relationships with both Fingerhut and
Federated.
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RECENT ACQUISITIONS
As part of our strategy to deepen and diversify our content and grow our
visitor and client bases, we recently acquired two businesses which greatly
expanded our catalog and travel-related offerings.
Commonsite, LLC. In May 1999, we acquired the Catalog Site Web site and
substantially all of the related assets of Commonsite, LLC for $441,000 and
132,300 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.
Travel Companions International, Inc. In May 1999, we 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 an extensive selection of over 15,000 travel
brochures for locations around the world. The business acquired had revenues of
$220,000 for the fiscal year ended December 31, 1998 and generated 167,000 leads
in the quarter ended March 31, 1999.
THE OFFERING
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Common stock offered by FreeShop............................ shares
Common stock to be outstanding after the offering........... shares(1)
Use of proceeds............................................. For working capital and
general corporate purposes.
See "Use of Proceeds."
Proposed Nasdaq National Market symbol...................... FSHP
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(1) Based on the number of shares actually outstanding as of May 24, 1999.
Includes 293,536 shares of series B convertible preferred stock which will
convert into 2,935,360 shares of common stock not later than the completion
of this offering and warrants to purchase 592,750 shares of series B
convertible preferred stock which will be exercised and converted into
5,927,500 shares of common stock not later than the completion of this
offering. Excludes, as of May 24, 1999, a total of 2,413,530 shares of
common stock issuable upon exercise of outstanding stock options at a
weighted average exercise price of $0.61, and 69,250 shares of common stock
issuable upon exercise of warrants at a weighted average exercise price of
$0.41.
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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 592,750 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
8,862,860 shares of common stock not later than 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 servicemarks 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 site or the Web sites of our
affiliates is not a part of this prospectus.
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SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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 9 to
our 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 and the number of shares used in that computation.
With regard to the following 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 balance sheet data provides a summary at March 31, 1999, (a)
on an actual basis; (b) on a pro forma basis to reflect (1) the authorization of
series B convertible preferred stock, (2) the issuance of series B convertible
preferred stock upon the exercise of warrants, (3) the conversion of all series
B convertible preferred stock into shares of common stock no later than the
completion of this offering, and (4) the acquisition of the Catalog Site and
Worldwide Brochures Web sites and related assets; and (c) on a pro forma as
adjusted basis to reflect the estimated net proceeds from the sale of
shares of common stock in this offering at an assumed initial offering price of
$ per share, after deducting underwriting discounts and commissions and
estimated offering expenses. See "Use of Proceeds," "Capitalization" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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THREE MONTHS ENDED
(UNAUDITED)
YEAR ENDED -----------------------------------------------------------
DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1998 1998 1998 1998 1998 1999
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STATEMENT OF OPERATIONS DATA:
ACTUAL
Revenues......................... $ 1,251 $ 220 $ 209 $ 321 $ 501 $ 667
Gross profit..................... 1,034 182 172 256 425 584
Operating loss................... (3,136) (572) (641) (970) (952) (1,378)
Net loss......................... $ (3,199) $ (584) $ (658) $ (992) $ (963) $ (1,366)
Basic and diluted net loss per
common share................... $ (0.21) $ (0.04) $ (0.04) $ (0.06) $ (0.06) $ (0.07)
Shares used to compute basic and
diluted net loss per common
share.......................... 15,559 14,219 14,887 15,918 17,177 20,377
PRO FORMA (UNAUDITED)
Revenues......................... $ 1,893 $ 838
Gross profit..................... 1,455 707
Operating loss................... (4,233) (1,584)
Net loss......................... $ (4,296) $ (1,571)
Basic and diluted net loss per
common share................... $ (0.27) $ (0.08)
Shares used to compute basic and
diluted net loss per common
share.......................... 15,692 20,509
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AS OF MARCH 31, 1999
(UNAUDITED)
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PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
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BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 1,330 $ 17,115 $
Working capital........................................... 530 16,221
Total assets.............................................. 2,581 21,067
Long-term obligations, less current portion............... 113 113
Total shareholders' equity................................ 1,020 19,381
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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 AND MAY FACE DIFFICULTIES ENCOUNTERED BY
EARLY STAGE COMPANIES IN INTERNET-RELATED BUSINESSES.
Our limited operating history makes predicting our future performance
difficult. From our inception in June 1994 through June 1997, we existed as a
division of Online Interactive. We commenced operations as an independent
company in June 1997. You must consider the risks early stage companies
frequently encounter in new and rapidly evolving markets, including the market
for online direct marketing. 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 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.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
WE HAVE A HISTORY OF LOSSES AND EXPECT FUTURE LOSSES.
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 for the year ended December 31, 1998 and $1.4 million for the three
months ended March 31, 1999. As of March 31, 1999, our accumulated deficit was
$7.2 million. We have recently increased our operating expenses and capital
expenditures in order to accelerate our growth. We expect further increases in
operating and capital expenditures. Although our revenues have grown in recent
quarters, we will need to generate significant increases in 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 ARE SUBJECT TO FLUCTUATIONS AND SEASONALITY.
Our operating results have varied significantly from quarter to quarter in
the past and may continue to fluctuate. We believe period-to-period comparisons
of our operating results are not meaningful. 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.
Numerous factors contribute to the unpredictability of our operating results,
including:
- the demand for online marketing;
- the addition of new or loss of current marketer clients;
- the responsiveness of consumers to the offers contained on our Web site;
- changes in the growth rate of Internet usage and online traffic levels;
- changes in costs we incur to attract and retain marketer clients and
visitors to our Web site;
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- changes in our prices, the prices of our competitors or the prices for
Internet advertising and direct marketing generally;
- the introduction of new services and programs by us or by our
competitors;
- the timing and amount of costs relating to the expansion of our
operations and acquisition of technology or businesses; and
- the occurrence of technical difficulties and system downtime.
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 significant
fluctuations in our quarterly operating results. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
WE MAY BE UNABLE TO MANAGE OUR GROWTH EFFECTIVELY.
We may not be successful in managing our growth. To be successful, we must
continue to expand the size and scope of our business while retaining the
ability to react quickly to the requirements of our marketer clients. We must
also implement new technologies and respond to initiatives by new and existing
competitors. We have grown from 29 employees on July 1, 1997 to 96 employees on
June 15, 1999. We have recently hired key management personnel and added
personnel in connection with our recent business acquisitions. We may not be
successful in integrating our new management personnel and other employees into
our existing operations. In addition, we plan to continue to expand 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. Furthermore, we
expect we will need to continue to improve our financial and managerial controls
and our reporting systems and procedures. These changes in systems and controls
may prove to be ineffective or inadequate.
THE SUCCESS OF OUR BUSINESS WILL DEPEND ON OUR ABILITY TO STRENGTHEN THE
FREESHOP BRAND.
We may not be successful in strengthening our brand. As competitive
pressures in the online direct marketing industry increase, we expect that brand
strength will become increasingly important. We intend to devote substantial
resources to promote the FreeShop brand. The reputation of our brand 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. If
consumers are not satisfied with the quality of their experience with us, they
may stop visiting our Web site or accepting our newsletters. In addition,
negative experiences of consumers or marketers with FreeShop might result in
publicity that could damage our reputation.
WE MAY BE UNABLE TO SECURE SUFFICIENT PROMOTIONAL OFFERS FROM OUR MARKETER
CLIENTS.
The attractiveness of our Web site to consumers is based in part on our
ability to provide a broad variety of high quality offers. A number of other Web
sites give consumers access to similar offers. We face competition from these
Web sites as well as a variety of other online and offline competitors. 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.
As a result, our Web site will become less attractive to marketers and our
ability to generate revenue from marketer clients will be adversely affected.
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WE DEPEND ON KEY PERSONNEL FOR OUR FUTURE SUCCESS.
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 service 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 these
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.
WE MAY BE UNABLE TO INTEGRATE THE OPERATIONS FROM OUR ACQUISITIONS OF THE
CATALOG SITE AND WORLDWIDE BROCHURES WEB SITES OR FROM ANY FUTURE ACQUISITIONS.
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 operations into
our existing 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;
- adverse effects on our reported results of operations from
acquisition-related charges and amortization of goodwill and purchased
technology;
- increased fixed costs, which could cause profits to decrease;
- 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.
WE MAY BE UNABLE TO DEVELOP AND MAINTAIN POSITIVE BUSINESS RELATIONSHIPS WITH
FINGERHUT OR FEDERATED.
Failure to develop and maintain positive relationships with Fingerhut or
Federated could adversely affect our business. We recently initiated a direct
marketing relationship with Fingerhut which will include Web site links, package
inserts, statement stuffers and "blow in" cards for catalogs. Because Fingerhut
only recently invested in us, and because Federated only recently acquired
Fingerhut, we do not know what benefits, if any, we will generate from either or
both of these relationships. 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. Should either Fingerhut or
Federated become dissatisfied with its relationship with us or decide to change
its general business strategy relating to the Internet, our relationships with
these companies could be adversely affected. Further, should either Fingerhut or
Federated decide to discontinue its relationship with us, or our reputation, our
stock price, or both may 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
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<PAGE> 11
continued to increase over time, and we are seeking to further increase traffic
on our Web site. The systems that support our Web site must be able to
accommodate an increased volume of traffic. In the past, our Web site has
experienced slow response times and other systems problems for a variety of
reasons. We may continue to experience these problems in the future. If we do
not effectively address any capacity constraints or system failures, our
business could be adversely affected. 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. Although we
are in the process of obtaining confirmation from 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. 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.
We may be unable to compete successfully with current or future
competitors. We face intense competition from many companies in a number of
categories, both offline and online, to provide marketing and advertising
services for marketer clients. 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 more far-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 market, 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.
10
<PAGE> 12
Our success largely depends on our trademarks and internally developed
technologies, which we seek to protect through a combination of trademark,
copyright and trade secret laws. Despite actions we take to protect our
intellectual property rights, it may be possible for third parties 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. We may
be unable to maintain the value of our intellectual property rights in the
future. See "Business -- Intellectual Property."
We currently hold the Internet domain names "freeshop.com,"
"catalogsite.com" and "wwb.com" as well as various other related names. 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.
Regulatory bodies could establish additional top-level domains, appoint
additional domain name registrars or modify the requirements for holding domain
names. As a result, we may be unable to acquire FreeShop top level domain names
in all of the countries in which we may desire to conduct business in the
future. 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 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 trademark.
We may need 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 if at all. Rights granted pursuant to any licenses
may not be valid and enforceable.
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. Any litigation 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 were able
to 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 states and federal agencies have been
investigating various Internet companies regarding their use of personal
information. We could be subject to investigations and enforcement actions by
these or other agencies.
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 market 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 use to protect their personal information are ineffective. We cannot
predict whether events or developments will result in a compromise or breach of
the technology we use to protect a customer's personal information.
11
<PAGE> 13
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 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.
RISKS RELATED TO OUR INDUSTRY
WE DEPEND ON THE ACCEPTANCE OF ONLINE MARKETING.
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.
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 newsletter in particular.
WE MUST ADAPT TO RAPID CHANGES IN THE ONLINE MARKETING INDUSTRY.
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.
We are not currently subject to direct federal, state or local regulation
in the United States other than regulations applicable to businesses generally
or directly applicable to electronic commerce. The adoption of such laws could
create uncertainty in use of the Internet and reduce the demand for all products
and services. It is possible 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. Furthermore,
the growth of electronic commerce may prompt calls for more stringent consumer
protection laws. The adoption of such consumer protection laws could create
uncertainty in Internet usage and reduce the demand for all products and
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
12
<PAGE> 14
applications of these laws to our business could reduce demand for our service
or increase the cost of doing business as a result of litigation costs or
increased service delivery costs.
Because our services are available over the Internet in multiple states and
foreign countries, other jurisdictions may claim that we are required to qualify
to do business in each state or foreign country. We are qualified to do business
only in Washington, Minnesota and California. Our failure to qualify in other
jurisdictions when we are required to do so could subject us to taxes and
penalties and could restrict our ability to enforce contracts in those
jurisdictions.
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."
RISKS RELATED TO THIS OFFERING
WE WILL HAVE BROAD DISCRETION IN 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
might 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 working capital and for general corporate
purposes, including expansion of sales and marketing activities. 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 that we have not yet identified. See
"Use of Proceeds" and "Business -- Strategy."
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
appropriate. Based on shares outstanding as of May 24, 1999, upon completion of
this offering, we will have shares of common stock outstanding. Of
these shares, the shares being offered in this prospectus will be
freely tradable, and 29,276,309 shares will become eligible for sale in the
public market as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
- ---------------- ----
<C> <S>
At various times after the date of this prospectus pursuant
............. to Rule 144
At various times after 90 days from the date of this
............. prospectus
</TABLE>
Most of these shares are subject to contractual restrictions with the
underwriters that prevent them from being sold until 180 days after the
effective date of the registration statement for this offering 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 6,000,000 shares of common stock reserved for
issuance under the 1997 Stock Option Plan. As of May 24, 1999, options to
purchase 2,413,530 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 and the 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 69,250 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, Mr. Choate nor Mr. Ballantine, who in the aggregate
beneficially own approximately 85.5% of our capital stock as of May 24, 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 representing approximately 13,043,622 shares of common stock
may have the right, subject to
13
<PAGE> 15
conditions, 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. In addition, any demand to
include these shares in our registration statements could have an adverse effect
on our ability to raise additional capital. 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.
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 STOCK AFTER THIS INITIAL PUBLIC OFFERING IS LIKELY TO BE
VOLATILE.
The stock market has experienced significant price and volume fluctuations,
and the market prices of securities of Internet-related companies have been
highly 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.
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 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 "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
EXISTING SHAREHOLDERS WILL BE ABLE TO EXERCISE CONTROL OF OUR COMMON STOCK.
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 % of the outstanding shares of
our common stock. In addition, following this offering our executive officers
and directors will beneficially own or control approximately % of the
outstanding shares of our common stock and our founders, Messrs. Choate and
Ballantine, will beneficially own or control approximately % 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.
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<PAGE> 16
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. We undertake no obligation to update publicly any forward-looking
statements for any reason, even if new information becomes available or other
events occur in the future.
15
<PAGE> 17
USE OF PROCEEDS
The net proceeds from the sale of the shares of common stock
offered hereby at an assumed initial public offering price of $ per
share, after deducting the underwriting discounts and commissions and estimated
offering expenses, are estimated to be $ million, or $ 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 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, capital
expenditures and possible acquisitions of businesses and technologies, although
there are 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.
THE COMPANY
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. Our offices
are located at 95 South Jackson Street, Suite 300, Seattle, Washington 98104.
Our telephone number is (206) 441-9100.
16
<PAGE> 18
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 1999 (a)
on an actual basis; (b) on a pro forma basis to reflect (1) the authorization of
series B convertible preferred stock, (2) the issuance of series B convertible
preferred stock upon the exercise of warrants, (3) the conversion of all series
B convertible preferred stock into shares of common stock not later than the
completion of this offering, and (4) the acquisition of the Catalog Site and
Worldwide Brochures Web sites and related assets; and (c) on a pro forma as
adjusted basis to reflect the estimated net proceeds from the sale of shares of
common stock in this offering at an assumed initial public offering price of
$ per share, after deducting underwriting discounts and commissions and
estimated offering expenses.
<TABLE>
<CAPTION>
AS OF
MARCH 31, 1999
(UNAUDITED)
----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- -------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Current portion of long-term obligations.................... $ 117 $ 117 $
======= ======= =======
Long-term obligations, less current portion................. $ 113 $ 113 $
------- ------- -------
Shareholders' equity:
Preferred stock, undesignated, no par value; 10,000,000
shares authorized and no shares issued or outstanding,
actual; 6,814,516 shares authorized and no shares
issued and outstanding 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; no
shares authorized, issued or outstanding, actual;
1,250,000 shares authorized, no shares issued or
outstanding pro forma and pro forma as adjusted(3)..... -- -- --
Common stock, no par value, 100,000,000 shares authorized;
20,440,874, 29,303,733 and shares issued
and outstanding, actual, pro forma and pro forma as
adjusted, respectively(4).............................. 7,880 26,241
Additional paid-in capital................................ 1,035 1,035
Deferred stock compensation............................... (675) (675)
Accumulated deficit....................................... (7,220) (7,220)
------- ------- -------
Total shareholders' equity............................. 1,020 19,381
------- ------- -------
Total capitalization.............................. $ 1,133 $19,494 $
======= ======= =======
</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. On May 24, 1999, 293,536 shares were issued pursuant to the
exercise of warrants. Prior to the completion of this offering, 592,750
additional shares of series B convertible preferred stock will be issued
pursuant to the exercise of warrants. Upon completion of this offering each
share of series B convertible preferred stock will be converted into 10
shares of common stock.
(4) Based on the number of shares outstanding as of March 31, 1999. Excludes
2,221,490 shares of common stock then issuable upon the exercise of options
then outstanding with a weighted average exercise price of $0.52 per share,
and 192,040 shares of common stock issuable upon exercise of options granted
after March 31, 1999. See "Management -- Stock Option Plan" and Note 10 to
Freeshop's audited financial statements included in this prospectus.
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<PAGE> 19
DILUTION
The pro forma net tangible book value of FreeShop as of March 31, 1999, was
approximately $1,020,000, or $0.03 per share of common stock. Pro forma net
tangible book value per share represents the amount of total tangible assets
less total 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 8,862,860 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 $ per share and after deducting underwriting discounts and
commissions and estimated offering expenses, the pro forma net tangible book
value of FreeShop as of March 31, 1999 would have been $ per share of
common stock. This represents an immediate increase in pro forma net tangible
book value of $ per share to existing shareholders and an immediate
dilution of $ per share to new investors. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share before this
offering............................................... $ 0.03
Increase per share attributable to new investors..........
--------
Pro forma net tangible book value per share after this
offering..................................................
--------
Dilution per share to new investors......................... $
========
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 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..................... 20,440,874 % $7,879,761 % $0.39
New investors.............................
---------- --- ---------- --- -----
Total................................ % $ %
========== === ========== === =====
</TABLE>
The foregoing discussion and tables assume no exercise of any stock options
outstanding as of March 31, 1999. As of March 31, 1999, there were options
outstanding to purchase a total of 2,221,490 shares of common stock with a
weighted average exercise price of $0.52 per share. To the extent that any of
the options 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.
18
<PAGE> 20
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 Note 9 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 THREE MONTHS ENDED
DEC. 31, 1998 MARCH 31, 1999
----------------- ------------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................................. $ 1,893 $ 838
Cost of revenues.......................................... 438 131
----------- -----------
Gross profit........................................... 1,455 707
Operating expenses:
Sales and marketing.................................... 3,429 1,592
Research and development............................... 407 152
General and administrative............................. 711 337
Amortization........................................... 1,141 210
----------- -----------
Total operating expenses.......................... 5,688 2,291
Operating loss............................................ (4,233) (1,584)
Interest expense.......................................... 66 13
Other (income) expense.................................... (3) (26)
----------- -----------
Net loss.................................................. $ (4,296) $ (1,571)
=========== ===========
Basic and diluted net loss per common share............... $ (0.27) $ (0.08)
=========== ===========
Shares used to compute basic and diluted
net loss per common share................................. 15,692 20,509
</TABLE>
19
<PAGE> 21
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 three month periods ended March 31, 1998
and March 31, 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
---------------------------- --------------------------------------------------------------
THREE MONTHS
SIX MONTHS 12 MONTHS YEAR ENDED
YEAR ENDED JUNE 30, ENDED ENDED ENDED MARCH 31,
---------------------------- 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 $ 220 $ 667
Cost of revenues................ 85 310 314 140 259 217 38 83
-------- ------- ------- ------- ------- ------- ------- -------
Gross profit.................. 228 961 884 395 778 1,034 182 584
Operating expenses:
Sales and marketing........... 134 624 1,810 1,192 2,243 3,248 507 1,554
Research and development...... 2 66 137 188 265 407 120 152
General and administrative.... 126 299 381 158 391 515 127 256
-------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses................ 262 989 2,328 1,538 2,899 4,170 754 1,962
Operating loss.................. (34) (28) (1,444) (1,143) (2,121) (3,136) (572) (1,378)
Interest expense................ -- -- -- 6 6 66 12 13
Other (income) expense.......... -- -- -- 0 0 (3) 0 (25)
-------- ------- ------- ------- ------- ------- ------- -------
Net loss........................ $ (34) $ (28) $(1,444) $(1,149) $(2,127) $(3,199) $ (584) $(1,366)
======== ======= ======= ======= ======= ======= ======= =======
Basic and diluted net loss per
common share.................. $ (0.00) $ (0.00) $ (0.13) $ (0.09) $ (0.21) $ (0.04) $ (0.07)
======== ======= ======= ======= ======= ======= =======
Shares used to compute basic and
diluted net loss per common
share......................... 11,502 11,502 11,502 12,972 15,559 14,219 20,377
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF DEC. 31,
---------------------------- --------------------------- AS OF MARCH 31,
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 $1,330
Working capital (deficiency).... 3 80 322 (158) 2,014 530
Total assets.................... 48 207 536 645 3,687 2,581
Long-term obligations, less
current portion............... -- -- 5 160 195 113
Total shareholders' equity...... 8 105 432 82 2,244 1,020
</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.
20
<PAGE> 22
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 Choate and John
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. 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 of Online Interactive. In June 1997, Online
Interactive 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 believed 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 by offering multiple advertising vehicles such as banner
advertising, site sponsorships and sponsorships of our Club FreeShop email
newsletters, in addition to our primary business of lead generation. 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 of the
FreeShop.com Web site to consumers 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.
Revenues are recognized in the period the service is delivered. 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 26.6% of our revenues in the three months ended
March 31, 1999. No single client accounted for more than 5.3% of our revenues in
either the year ended December 31, 1998 or the three months ended March 31,
1999. One client accounted for 9.0% of our revenues for the three months ended
March 31, 1998.
In December 1998, Fingerhut invested $4.0 million in our business and
received common stock and warrants. As of May 24, 1999, Fingerhut had exercised
warrants for an additional investment of $5.0 million. Subsequently, Fingerhut
exercised warrants for an additional investment of $3.6 million. Pursuant to the
terms of an escrow agreement, Fingerhut has agreed to exercise the remainder of
its
21
<PAGE> 23
warrants for an additional investment of $9.0 million, subject to certain
conditions. Assuming the exercise of the warrants and conversion of the series B
convertible preferred stock, Fingerhut will hold approximately 43.5% 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 additional experienced management,
marketing and technical personnel. Apart from the exercise by Fingerhut of these
warrants, however, neither Fingerhut nor Federated has any 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 will include the results of the acquired businesses in our
financial statements from the date we completed the acquisitions. These
acquisitions will result in the allocation of $2.7 million to goodwill and other
intangible assets in the quarter ending June 30, 1999. We will amortize 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 $838,000 for the three months ended March 31, 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 March 31, 1999, we had an accumulated deficit of
approximately $7.2 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.
22
<PAGE> 24
The following table sets forth statement of operations data for the periods
indicated as a percentage of revenues:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED 12 MONTHS YEAR ENDED
JUNE 30, ENDED ENDED MARCH 31,
--------------- 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 17.5 12.5
----- ------ ------ ------ ------ ------
Gross profit................. 75.6 73.8 75.0 82.7 82.5 87.5
Operating expenses:
Sales and marketing.......... 49.1 151.1 216.3 259.7 230.3 233.1
Research and development..... 5.2 11.5 25.5 32.5 54.7 22.8
General and administrative... 23.5 31.8 37.7 41.2 57.7 38.5
----- ------ ------ ------ ------ ------
Total operating
expenses................ 77.8 194.4 279.5 333.4 342.6 294.3
----- ------ ------ ------ ------ ------
Operating loss................. (2.2) (120.5) (204.5) (250.7) (260.0) (206.8)
Interest expense............... 0.0 0.0 0.6 5.2 5.5 2.0
Other (income) expense......... 0.0 0.0 0.0 (0.2) 0.0 (3.8)
----- ------ ------ ------ ------ ------
Net loss....................... (2.2)% (120.5)% (205.2)% (255.7)% (265.5)% (204.9)%
===== ====== ====== ====== ====== ======
</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.
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
Revenues. We derive our revenues primarily from online lead generation and
advertising contracts. Our revenues increased by $447,000, or 203%, to $667,000
in the three months ended March 31, 1999, compared to $220,000 in the three
months ended March 31, 1998. This growth in revenue was primarily attributable
to the introduction of advertising revenue after March 31, 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 $263,000 in the three months ended March 31, 1999
compared to no advertising revenues in the three months ended March 31, 1998.
Over the same period, lead generation revenues increased to $404,000 from
$220,000.
Cost of revenues. Cost of revenues consists of expenses associated with the
production and usage of the FreeShop.com Web site. Such costs consist primarily
of Internet connection charges, banner ad serving fees, equipment and software
depreciation and personnel costs. Cost of revenues increased to $83,000 in the
three months ended March 31, 1999 from $38,000 in the three months ended March
31, 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 87.5% in the three months ended March 31, 1999 from 82.5% in the
three months ended March 31, 1998. This increase in gross margin was primarily
due to leveraging relatively fixed expenses against higher 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 $1.1
million, or 206%, to $1.6 million in the three months ended March 31, 1999,
compared to $507,000 in the three months ended March 31, 1998. The increase was
due to a $619,000, or 652%, increase in advertising and brand awareness spending
and a $445,000, or 504%, increase in personnel costs. We expect to continue to
increase our advertising and brand awareness spending in the future. As a
percentage of revenues, sales and
23
<PAGE> 25
marketing expenses increased to 233.1% in the three months ended March 31, 1999
from 230.3% in the three months ended March 31, 1998.
Research and development. Research and development expenses primarily
include personnel costs relating to maintaining and enhancing the features,
content and functionality of our Web site and related systems. Research and
development expenses increased by $32,000, or 27%, to $152,000 in the three
months ended March 31, 1999, compared to $120,000 in the three months ended
March 31, 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 22.8% in the three months ended March 31, 1999 from 54.7%
in the three months ended March 31, 1998. The decrease was primarily due to
leveraging relatively fixed research and development expenses against higher
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 $129,000, or 102%, to $256,000 in the three months ended March 31,
1999, compared to $127,000 in the three months ended March 31, 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 38.5% in the three months ended March 31,
1999 from 57.7% in the three months ended March 31, 1998. The decrease is
primarily due to leveraging relatively fixed general and administrative expenses
against higher revenues.
Interest expense. Interest expense primarily relates to capital equipment
leases and totaled $13,000 in the three months ended March 31, 1999 and $12,000
in the three months ended March 31, 1998.
Other (income) expense. Other (income) expense consists primarily of
interest income. Interest income increased to $25,000 in the three months ended
March 31, 1999 from no interest income in the three months ended March 31, 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 March 31, 1999, we had approximately $5.5
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 THE 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.
24
<PAGE> 26
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 $1.0
million, or 45%, to $3.2 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. As a percentage of revenues, sales and marketing
expenses increased to 259.7% in 1998 from 216.3% in 1997.
Research and development. Research and development expenses increased by
$142,000, or 54%, to $407,000 in 1998, compared to $265,000 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
32.5% in 1998 from 25.5% in 1997.
General and administrative. General and administrative expenses increased
by $124,000, or 32%, to $515,000 in 1998, compared to $391,000 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 41.2% in 1998 from 37.7% 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 THE 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
$71,000, or 109%, to $137,000 in 1997, compared to $66,000 in 1996. The increase
was primarily due to hiring of additional staff. As a percentage of revenues,
research and development expenses increased to 11.5% in 1997 from 5.2% in 1996.
General and administrative. General and administrative expenses increased
by $82,000, or 27%, to $381,000 in 1997, compared to $299,000 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 31.8% in 1997 from 23.5% in 1996.
25
<PAGE> 27
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth Freeshop's unaudited quarterly statement of
operations data for the five quarters ended March 31, 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, 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,
1998 1998 1998 1998 1999
--------- -------- --------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................ $ 220 $ 209 $ 321 $ 501 $ 667
Cost of revenues.................... 38 37 65 76 83
----- ----- ------ ------ -------
Gross profit..................... 182 172 256 425 584
Operating expenses:
Sales and marketing.............. 507 612 1,030 1,100 1,554
Research and development......... 120 85 90 111 152
General and administrative....... 127 116 106 166 256
----- ----- ------ ------ -------
Total operating expenses....... 754 813 1,226 1,377 1,962
----- ----- ------ ------ -------
Operating loss...................... (572) (641) (970) (952) (1,378)
Interest expense.................... 12 16 16 21 13
Other (income) expense.............. -- 1 6 (10) (25)
----- ----- ------ ------ -------
Net loss............................ $(584) $(658) $ (992) $ (963) $(1,366)
===== ===== ====== ====== =======
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1998 1998 1998 1998 1999
--------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF REVENUES:
Revenues............................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues.................... 17.5 17.8 20.2 15.2 12.5
------ ------ ------ ------ ------
Gross profit..................... 82.5 82.2 79.8 84.8 87.5
Operating expenses:
Sales and marketing.............. 230.3 292.8 320.9 219.6 233.1
Research and development......... 54.7 40.9 28.1 22.2 22.8
General and administrative....... 57.7 55.6 33.0 33.1 38.5
------ ------ ------ ------ ------
Total operating expenses....... 342.6 389.3 382.0 274.9 294.3
------ ------ ------ ------ ------
Operating loss...................... (260.0) (307.1) (302.2) (190.1) (206.8)
Interest expense.................... 5.5 7.8 4.9 4.3 2.0
Other (income) expense.............. 0.0 0.4 2.0 (1.9) (3.8)
------ ------ ------ ------ ------
Net loss............................ (265.5)% (315.3)% (309.1)% (192.4)% (204.9)%
====== ====== ====== ====== ======
</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
26
<PAGE> 28
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 leveraging relatively
fixed expenses against higher revenue.
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. This
resulted from an increase in revenues in the fourth quarter of 1998 without a
corresponding increase in advertising and brand awareness spending.
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.
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 decreased in the third quarter of 1998
primarily due to higher recruiting costs in the second quarter of 1998. General
and administrative expenses have increased steadily since the third quarter of
1998 due primarily to additional personnel costs and professional service fees
necessary to support our growth.
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 March 31, 1999, we granted stock options to
purchase 277,000 shares of common stock under the 1997 Stock Option Plan. These
stock options were granted to employees, directors and service providers at an
exercise price of $1.00 per share which was below the fair market value at the
date of grant. In relation to these grants, we will recognize estimated
compensation expense of approximately $740,000 over the vesting terms of one to
four years. Compensation expense related to the options of approximately
$373,000, $210,000, $104,000, $46,000 and $7,000 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 common stock. Gross
proceeds from the issuance of stock through March 31, 1999 totaled $5.9 million,
including $4.0 million raised in December 1998. As of March 31, 1999 we had a
$500,000 bank line-of-credit available at prime plus 1.5%. As of March 31, 1999
we had approximately $1.3 million in cash and cash equivalents and working
capital of $530,000. Subsequent to March 31, 1999, Fingerhut exercised warrants
to purchase additional capital stock in the amount of $8.6 million.
Net cash used in operating activities was $1.3 million in the three months
ended March 31, 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
27
<PAGE> 29
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 $227,000 in the three months
ended March 31, 1999, $67,000 in the year ended December 31, 1998 and $56,000 in
the six months ended December 31, 1997. Cash used in investing activities was
primarily related to purchases of property and equipment in each period.
Net cash used in financing activities was $13,000 in the three months ended
March 31, 1999. Net cash provided by financing activities was $5.2 million in
the year ended December 31, 1998 and $677,000 in the six months ended December
31, 1997. Net cash used in financing activities in the three months ended March
31, 1999 was primarily due to the payment of lease obligations. Net cash
provided by financing activities in the year ended December 31, 1998 and the six
months ended December 31, 1997 resulted primarily from issuance of common stock,
which was partially offset by principle 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. The majority of our
vendors have responded and either confirmed their compliance or provided patches
for their affected software. We expect to receive replies from our remaining
third-party vendors by June 30, 1999. 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 June 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 third 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
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a limited contingency plan related to the functioning of our Web site and order
processing systems. We are establishing backup servers at a site maintained by
Fingerhut in Minnesota 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 the Company's
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," 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 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, 1999. 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 $5.5 million of federal net operating loss
carryforwards as of March 31, 1999 which may be available to reduce the amount
of United States federal income taxes payable by us in the future. We believe
the exercise of Fingerhut's warrants prior to the completion of this offering
will result 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.
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BUSINESS
OVERVIEW
FreeShop is a leading provider of direct marketing services on the
Internet, leveraging an innovative consumer-driven approach that changes the
dynamics of direct marketing. Through our FreeShop.com Web site, consumers
seeking to discover, learn about, or try new products can choose among a broad
selection of free, trial and promotional offers in a fun, interactive
environment. 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 high-quality offers from
more than 100 companies such as Johnson & Johnson, Walt Disney, eBay, US News &
World Report, Hammacher Schlemmer and Columbia House. 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 visitors view their advertisements. We believe
FreeShop's 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
generated more than 5 million orders for various offers and promotions. In April
1999, FreeShop was among the top 20 online shopping sites based on reach,
according to Media Metrix. Our customer database has grown from approximately
850,000 customers in January 1998 to more than 1.8 million customers as of April
1999. In addition, we have over 650,000 members of Club FreeShop. In April 1999,
over 40% of our orders came from repeat customers. We believe that the number
and diversity of our free, trial and promotional offers attracts an increasing
number of consumers. This helps us to continue to grow our marketer client base
and with it our base of offers, resulting in a positive cycle as an increasing
number of marketers are attracted to the increasing number of consumers visiting
our Web site.
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 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
awareness and create a specific image for a particular company, product or
service. Direct marketing involves any direct communication to a consumer that
is designed to generate a response in the form of an order, a request for
further
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information or a visit to a place of business. These responses can range from
simple replies to consumer registrations to actual purchases. 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
on direct marketing to consumers.
Traditional Direct Marketing. Traditional direct marketing media include
direct mail, telemarketing and direct response advertising in newspapers,
magazines, radio and television. Although traditional direct marketing is
effective and widely used, it presents a number of challenges for marketers and
consumers alike. The traditional direct marketer's targeting process is
inefficient because marketers lack specific and timely information on a
consumer's immediate interests and needs. As a result, marketers spend
considerable resources on communications most consumers don't want or need. For
example, the average response rate to the nearly 3.5 billion mailings of credit
card solicitations in 1998 was only 1.2%, according to BAIGlobal, Inc. Given the
significant costs associated with traditional direct marketing, which include
telecommunications, postage, printing, assembly, labor and facilities, the often
low response rates make the process particularly inefficient.
Online Direct Marketing. Online direct marketing media include banner
advertisements, targeted email solicitations and Web site sponsorships and
promotions. We believe online direct marketing is more attractive than
traditional direct marketing media because it requires lower production costs
and provides easier customer response features. In addition, online direct
marketing allows marketers to more effectively:
- develop one-to-one relationships with consumers;
- interact real-time 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
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.
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 fundamentally changes the dynamics of direct marketing by putting
consumers in control of the process. As a result, we deliver to marketers a cost
effective way to reach customers who are truly interested in their product or
service. Our solution significantly reduces the inefficiencies associated with
traditional and online direct marketing. Consumers benefit from being able to
select offers that most interest them without being inundated with unwanted
communications.
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 broad selection of free, trial and promotional offers from
marketers seeking an audience of potential customers. FreeShop offers a
consumer-directed process, in which consumers select only those offers that are
of immediate interest to them. We then forward those orders to our clients.
FreeShop's solution
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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 a fun, interactive environment. FreeShop has
more than 1,000 high-quality offers from over 100 companies such as Johnson &
Johnson, Walt Disney, eBay, US News & World Report, Hammacher Schlemmer and
Columbia House. The offers include items such as catalogs, magazines, product
samples, software and coupons, covering a variety of interests from travel,
personal finance and entertainment to 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. FreeShop allows new
online visitors to sample the experience of online shopping in an easy,
intuitive and risk-free way.
Benefits to Marketers. FreeShop benefits marketers by offering a
cost-effective and low-risk way to acquire customers. Our clients receive
significant visibility from our large traffic base of new and repeat 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, banner advertising, site
sponsorships and sponsorship of the Club FreeShop newsletter. In addition,
because set-up costs are minimal, marketers can test the FreeShop medium with
little risk. Our programs are quick and easy to implement relative to
traditional direct marketing formats. Most importantly, because the process is
consumer-directed, we believe marketers receive 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 to rapidly increase
consumer traffic to our Web site is focused on both new and repeat visitors. New
visits will be driven primarily by our online and offline advertising programs,
our Associates Program of over 14,000 member sites, other traffic partnerships,
including "Powered By FreeShop" participants, word-of-mouth referrals and our
traffic relationships with companies such as Yahoo! Inc., Excite, Inc., Go2Net,
Inc., Microsoft Corporation and Lycos, Inc. We promote repeat visits through
regular email communications to the over 650,000 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 April 1999, over 40% of our orders came from
repeat visitors. Finally, to ensure that we retain our loyal base of consumers,
we monitor the performance of our client marketers in fulfilling orders
generated through our Web site.
Grow Client Base. We believe FreeShop offers marketers a cost-effective
alternative to traditional direct marketing and, as a result, we have a
significant opportunity to grow the number of clients we serve. In particular,
we believe more and more companies with national consumer brands 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 will continue to build upon 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
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our services to larger advertising agencies as a solution for their client
companies to access the rapid growth of consumers on the Internet.
Continue to Build the FreeShop Brand. We intend to continue to increase
awareness and strength of the FreeShop brand among both consumers and marketers
through site design and focused and aggressive advertising. Because both
consumers and marketers tend to favor well known Web sites, strong brand
presence 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, online advertising and public relations in an effort to
create a leading brand name in our sector. We plan to initiate a major offline
marketing campaign which will include outdoor, radio and print advertising in
key metropolitan markets.
Expand Offers. The number and quality of offers is critical to our ability
to drive visitor traffic and increase revenues from our client marketer base. We
believe that we have a significant competitive advantage in attracting
additional clients with national consumer brands due to our high traffic level
and wide 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 are
expanding our relationship with NewSub Services, Inc. to offer consumers access
to over 600 magazine titles. We have also greatly increased the number and
quality of our offers within the catalog and travel categories through the
recent acquisitions of the Catalog Site and Worldwide Brochures Web sites and
related assets. Other categories which we intend to expand in the near future
include product samples, coupons and personal finance.
Continue to Develop and Leverage Technology. We have designed and
implemented numerous proprietary systems that enable us to rapidly and
cost-effectively process orders from consumers and deliver lead generation
information to marketers. We regularly update our Web site and related system
technologies to encourage consumers to place orders and frequently revisit the
FreeShop.com Web site. 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. In addition, we
are enhancing our technology in an effort to maintain our rapid processing time
as orders increase and to expand marketer options for consumer information
received with each order.
Develop Relationship with Fingerhut and Federated. Fingerhut is one of the
largest direct marketers in the United States, selling general merchandise
through catalogs and various Web sites. Currently, Fingerhut's database consists
of over 30 million consumers, and in 1999, Fingerhut expects to distribute over
450 million catalog and promotional mailings. As a result of our participation
in a portion of these mailings, we believe we can increase our customer base
quickly and cost-effectively. We have recently initiated a direct marketing
relationship with Fingerhut that will include Web site links, package inserts,
statement stuffers and "blow in" cards for catalogs. In March 1999, Fingerhut
was acquired by Federated which operates over 400 full-line department stores,
including Bloomingdale's, The Bon Marche, Burdines, Goldsmith's, Lazarus,
Macy's, Rich's and Stern's. Federated also operates direct mail catalog
businesses under the names Bloomingdale's By Mail and Macy's By Mail, and
operates an electronic commerce business which provides goods and services
online under the name macys.com. We are exploring ways to further develop our
relationship with Fingerhut and Federated in order to improve our Web site
content and enhance our customer database.
OUR WEB SITE
We have designed all aspects of our Web site to ensure our site is fast,
enjoyable and easy to use for our customers, to enhance the FreeShop brand and
to encourage customers to request an offer. The site is organized around
categories, events and promotions. We regularly update the
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site to refresh the content and encourage repeat visits by customers. 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.
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.
After a customer has ordered, we send emails to thank the customer for the order
and, later, to confirm the order has been received. The emails include
information on additional related offers, providing an opportunity to
cross-promote and "upsell" other offers.
Promotions. We combine free offers with items for sale from our clients
organized around seasonal or other events. Promotions run for limited time
periods and include both special offers created solely for individual promotions
as well as offers listed under other categories elsewhere on the site.
Promotions function much like categories, aggregating free and trial offers as
well as products for sale around a central theme.
Highlighted Offers. We have the ability to highlight offers and dynamically
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 order
volume for such offers.
Club FreeShop. We designed Club FreeShop to communicate with our most
valued customers. Club members, totalling over 650,000 as of April 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 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 customer's shopping
experience more comfortable, FreeShop has adopted strong privacy and customer
service policies, which are fully explained on our Web site. Our privacy policy
fully complies with the standards of the Direct Marketing Association and
TRUSTe. 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 provide numerous services to our marketer clients. Our primary business
is generating customer leads for our clients 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. We offer marketers a diversity of programs
designed to meet their objectives along the entire marketing process, from
awareness to interest to trial to sale.
- 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 order 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
inquiry, or lead. Another form of lead generation that we provide to our
clients is the aggregation of commerce opportunities on our Web site. 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 offer advertising opportunities through banner ads, site
sponsorships and sponsorships of the Club FreeShop newsletters. Banner
advertising clients benefit from our high traffic volume of consumers who
are likely to be in a shopping mode. Marketing clients can also receive
high-profile placement on our homepage and on specific category pages
through our site sponsorship program. Club FreeShop newsletter
sponsorships appeal to marketers due to the receptive audience the
newsletters reach.
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 quarter of 1999,
our top ten clients accounted for 26.6% of revenues and no client accounted for
more than 5.3% of revenues.
SALES AND MARKETING
CONSUMER BASE DEVELOPMENT
To drive traffic to our Web site and increase transactions, we must
continue to enhance the recognition of the FreeShop brand and position ourselves
as a leader in the online direct marketing industry. Additional traffic provides
increased opportunities to add members to our consumer base. The primary methods
we use to build our traffic are online advertising, our Associates Program and
other traffic partnerships, offline advertising and Club FreeShop.
Online Advertising. We recognize the importance of well-placed advertising
in building traffic and the strength of our brand. FreeShop has a number of
marketing relationships with 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 optimize our existing ones.
Associates Program and Traffic Partners. We launched our Associates Program
in the fourth quarter of 1998 and, as of June 1999, we had over 14,000
associates. Under the program, we configure a link to our site for an associate
to place on its Web site and pay the associate a fee for traffic and orders
generated from the associate's Web site. In April 1999, the Associates Program
provided over 8.0% of our traffic and 8.7% of our orders. We also offer a
traffic partnership program called "Powered by FreeShop" under which we contract
with larger Web sites, including Go2Net and Excite, to create free-offer content
sites or promotions, which are co-branded with
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the brands of FreeShop and our partners. We share revenues generated from the
co-branded site, but we own any customer information generated. In April 1999,
approximately 11.8% of our traffic and 14.5% of our orders were provided by
other non-Associates Program traffic partnerships, including the "Powered by
FreeShop" program.
Offline Advertising. We plan to supplement our online presence with an
offline 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 inserts, statement
stuffers and "blow in" cards for catalogs.
We also use public relations as a way to create customer awareness of the
FreeShop brand. We have been the subject of newspaper, magazine, and television
stories. Articles about FreeShop have appeared in Wired Magazine, Advertising
Age, PC World and the Washington Post, among other publications. Television
stories featuring us have been aired nationally on CNBC and CNNfn. We believe
ongoing media coverage will be essential to increase general brand awareness and
to drive 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 traffic.
CLIENT BASE DEVELOPMENT
We sell our client services primarily through our direct sales force. The
majority of FreeShop's sales organization, which included ten salespeople as of
May 24, 1999, focuses on small and medium-sized clients. Two of our salespeople
specifically 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 grow 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 to marketers through various trade and
industry publications.
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 April 1999, we received a total of approximately
280,000 orders and transmitted order data in various formats and media to over
80 clients on a regular basis. All order information is integrated with our
customer and Club FreeShop member databases to provide for high levels of
internal data analysis. The sophisticated databases and technology supporting
these systems are not available commercially and were developed over a number of
years, acting as a barrier to entry for 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 provides software and support for our Associates Program, DoubleClick
is used for banner ad serving and reporting, and Marketwave software is used for
Web site traffic analysis. These tools are used in conjunction with in-house
developed tools to optimize 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.
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Web content is posted and modified from our headquarters in Seattle 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.
COMPETITION
We face intense competition from both offline 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 of attributes 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 have
partnerships with these companies and 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 addition, we compete with sites
featuring loyalty programs that reward consumers for taking certain
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 offline 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
We are not currently subject to direct federal, state or local regulation
in the United States other than regulations applicable to businesses generally
or directly applicable to electronic commerce. The adoption of such laws could
create uncertainty in Internet usage and reduce the demand for all products and
services. It is possible 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. Several
states have proposed legislation to limit the use of
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personal user information gathered online or to require online services to
establish privacy policies. In addition, the Federal Trade Commission has
indicated that it may propose legislation on this issue in the near future and
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.
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, because our services are available over the Internet in
multiple states and foreign countries, other jurisdictions may claim that we are
required to qualify to do business in each state or foreign country. We are
qualified to do business only in Washington, Minnesota and California. Our
failure to qualify in other jurisdictions when 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 affect on our business, results of operations and financial
condition.
The European Union has adopted a policy 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 to do 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 privacy directive of the EU.
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 domain names, including: freeshop.com, catalogsite.com,
wwb.com, clubfreeshop.com, and 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. Regulatory bodies could establish
additional top-level domains, appoint additional
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<PAGE> 40
domain name registrars or modify the requirements for holding domain names. As a
result, we may be unable to acquire FreeShop top level domain names in all of
the countries in which we may desire to conduct business in the future. 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.
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 that rights granted by any licenses
will be valid and enforceable.
EMPLOYEES
As of June 15, 1999, FreeShop had a total of 96 employees, including 72 in
sales and marketing, 15 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 meeting 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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<PAGE> 41
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following table sets forth certain information, as of June 15, 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. 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, 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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<PAGE> 42
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 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. 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. 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, 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. in Computer Science from Tufts
University and an MBA in General Management from Harvard University.
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<PAGE> 43
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, 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. 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. 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.
DIRECTOR COMPENSATION
Directors do not currently receive cash compensation from FreeShop for
their service 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
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<PAGE> 44
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
40,000 shares of common stock at an exercise price of $0.41 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 40,000 shares of common stock at an exercise
price of $0.60 per share. In February 1999, we granted to Mr. Balousek an option
to purchase 40,000 shares of common stock at an exercise price of $1.00 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 OPTION COMPENSATION
--------------------------- ------------ ----------------- ------------
<S> <C> <C> <C>
Timothy C. Choate(1)....................... $26,825(2) 40,000 $ 5,085(3)
Chairman, President and Chief Executive
Officer
Mike Schutzler(4).......................... $26,951 340,000 $41,420(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> 45
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)...... 40,000 2.78% $0.41 1/15/08 $10,314 $26,137
Mike Schutzler(4)......... 300,000 20.82% $0.41 3/16/00 $12,608 $25,830
40,000(5) 2.78% $0.41 1/15/08 $10,314 $26,137
</TABLE>
- ---------------
(1) During 1998, 350,000 options were issued as severance compensation, 200,000
options were issued as compensation to members of the board of directors for
their services on the Board and 891,050 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) Mr. Schutzler was the Chief Executive Officer until March 1998.
(5) 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........... -- -- 27,500 12,500 $ 40,700 $18,500
Mike Schutzler.............. 104,250 36,488 300,000 0 $440,000 $ 0
</TABLE>
- ---------------
(1) The value of unexercised in-the-money options at December 31, 1998 is based
on $1.89 per share, the assumed fair market value of the common stock at
such time, less the exercise price per share.
NONCOMPETITION AGREEMENTS
Until July 1999, Messrs. Choate and Ballantine are subject to the terms of
noncompetition agreements with Micro Warehouse. Under the terms of the
agreements, Messrs. Choate and Ballantine cannot engage in any business activity
that directly competes with Micro Warehouse's business. We do not believe that
their current positions with FreeShop violate these agreements.
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 6,000,000
shares of common stock. The plan administrator
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<PAGE> 46
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.
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 plan's 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 March 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.
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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;
- 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 interest and, in all other cases, that their conduct
was at least not opposed to our best interest;
2. in the case of a criminal proceeding, the individual had no
reasonable cause to believe that their conduct was unlawful;
- we may indemnify other employees and agents to the same extent that we
indemnified 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.
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<PAGE> 48
RELATED PARTY TRANSACTIONS
On December 10, 1998, FreeShop issued 4,048,467 shares of its common stock
to Fingerhut Companies Inc. in consideration for $4.0 million ($0.99 per share)
pursuant to an investor subscription agreement. Fingerhut paid $500,000 of the
$4.0 million consideration by converting into common stock the entire principal
balance of a promissory note FreeShop had issued to Fingerhut on December 4,
1998. Immediately following the issuance of such shares, Fingerhut owned 19.9%
of FreeShop's issued and outstanding shares of common stock.
FreeShop also entered into a warrant agreement with Fingerhut under which
FreeShop issued to Fingerhut the following warrants to purchase FreeShop common
stock:
(1) a series of irrevocable "percentage warrants," including
- a warrant to purchase 2,935,356 shares at $1.72 per share;
- a warrant to purchase 1,790,724 shares at $1.99 per share;
- a warrant to purchase 2,089,178 shares at $2.21 per share;
(2) "anti-dilution warrants" to purchase 1,842,877 shares at $2.21 per
share; and
(3) "third party agreement warrants" to purchase 204,720 shares at $1.59
per share.
In May 1999, we agreed to issue to Fingerhut series B convertible preferred
stock on the exercise of their warrants rather than common stock. As of May 24,
1999, Fingerhut exercised percentage warrants for a total of 293,536 shares of
series B convertible preferred stock. These shares will be converted into
2,935,360 shares of common stock upon the completion of this offering.
Subsequently, Fingerhut exercised an additional warrant for a total of 179,072
shares of series B convertible preferred stock. These shares will be converted
into 1,790,720 shares of common stock upon completion of this offering. Any
unexercised warrants held by Fingerhut expire at the completion of this
offering. Pursuant to the terms of an escrow agreement, Fingerhut has agreed to
exercise all of their warrants prior to the completion of this offering, subject
to certain conditions.
FreeShop, Mr. Ballantine and Mr. Choate also entered into a stockholders
agreement with Fingerhut. The stockholders agreement, among other things, grants
Fingerhut a right of first refusal on shares proposed for transfer by Messrs.
Ballantine or Choate, contains agreements among the parties regarding
composition of FreeShop's board of directors, requires approval by the board of
directors of specified actions by FreeShop, grants Fingerhut preemptive rights
to maintain its percentage ownership interest in connection with proposed share
issuances by FreeShop, grants demand and piggyback registration rights to
Fingerhut and provides for drag-along and tag-along rights among the parties
with respect to proposed sales of shares to third parties. The stockholders
agreement terminates generally on the earlier of December 10, 2008 or the
closing of a sale of substantially all of FreeShop's assets or the acquisition
of FreeShop by merger or consolidation. Specific provisions of the stockholders
agreement, including the right of first refusal, right of participation, the
agreements regarding board composition, the special voting requirements, the
preemptive rights and the drag-along and tag-along rights, terminate at the
completion of this offering. In addition, Fingerhut, Mr. Ballantine and Mr.
Choate have entered into a cross-lockup agreement which prevents any of the
parties from selling common stock pursuant to a waiver from Deutsche Bank
Securities Inc. under the lock-up agreements unless the other parties receive
similar waivers.
Recently, Federated purchased Fingerhut. Federated and Fingerhut are
clients of FreeShop. In the first quarter of 1999, we received approximately
$11,000 for services provided to Federated and Fingerhut consisting primarily of
lead generation. William J. Lansing, a member of FreeShop's board of directors,
is the current President and Chief Executive Officer of Fingerhut.
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Mr. Lansing is also a director of BigStar Entertainment, Inc., a client of
FreeShop. In 1998, Bigstar Entertainment paid $42,330 for our services.
In 1988, Messrs. Fritsch and Christiansen founded CF2GS, which was
purchased by True North Communications in April 1994. In March 1998, CF2GS
merged into Bozell Worldwide, another company True North Communications had
purchased in December 1997. Mr. Fritsch ceased his employment with Bozell in
December 1998, and Mr. Christiansen ceased his employment with Bozell in March
1998. In consideration for services provided to FreeShop by Bozell during 1999,
FreeShop issued to Bozell and three Bozell employees options to purchase a total
of 30,000 shares of FreeShop common stock at an exercise price of $1.00 per
share.
During January and February of 1998, Mr. Choate advanced a series of three
loans to FreeShop for a total principal amount of $55,000, each at a 10%
interest rate. Also during this period, Mr. Ballantine advanced two loans to
FreeShop for a total principal amount of $30,000, each at a 10% interest rate.
FreeShop repaid all five of these loans in full in September 1998.
During the period from May 1998 through August 1998, Mr. Ballantine
transferred 115,000 shares of his FreeShop common stock, with an estimated value
of $69,000, and Mr. Choate transferred 25,000 shares of his FreeShop common
stock, with an estimated value of $15,000, to employees of FreeShop as
compensation for services.
In January 1999, we repurchased 125,000 shares of our common stock from Mr.
Ballantine for a total purchase price of $125,000.
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 directions, 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."
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<PAGE> 50
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information concerning the
beneficial ownership of our outstanding common stock as of May 24, 1999 and as
adjusted to reflect the sale of the shares of common stock in this offering:
- 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.
Certain rules of the Securities and Exchange Commission define the term
"beneficial ownership." Under these rules, the term 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 20,608,174 shares of common stock outstanding as of May 24, 1999,
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
NUMBER OF SHARES OUTSTANDING
SHARES --------------------
NAME AND ADDRESS BENEFICIALLY BEFORE AFTER
OF BENEFICIAL OWNER OWNED OFFERING OFFERING
------------------- ------------------ -------- --------
<S> <C> <C> <C>
Fingerhut Companies, Inc.(1)....................... 12,739,937 43.5%
4400 Baker Road
Minnetonka, Minnesota 55343
Timothy C. Choate(2)............................... 4,522,420 21.9%
95 South Jackson Street, Ste. 300
Seattle, WA 98104
John P. Ballantine(3).............................. 4,139,347 20.1%
95 South Jackson Street, Ste. 300
Seattle, WA 98104
Kirk M. Loevner(4)................................. 210,427 1.0%
John B. Balousek(5)................................ 125,000 *
John A. Wade(6).................................... 95,500 *
William H. Fritsch(7).............................. 64,417 *
William J. Lansing................................. -- *
All directors and officers as a group
(11 persons)(8).................................. 9,387,122 44.4%
</TABLE>
- ---------------
* Less than one percent of the outstanding shares of common stock.
(1) Represents 6,983,827 shares (including 293,536 shares of series B preferred
stock, which will be converted into 2,935,360 shares of common stock upon
the completion of this offering) held by Fingerhut directly and 5,756,110
shares of common stock that Fingerhut has a right to acquire pursuant to
warrants exercisable into series B convertible preferred stock within sixty
days of May 24, 1999. Fingerhut is a wholly-owned subsidiary of Federated
Department Stores, Inc. and, as such, our capital stock owned by Fingerhut
may also be deemed to be beneficially owned by Federated.
49
<PAGE> 51
(2) Represents 4,457,420 shares held by Mr. Choate directly, 30,000 shares held
by a trust established for Mr. Choate's children and 35,000 shares that Mr.
Choate has a right to acquire pursuant to options exercisable within sixty
days of May 24, 1999.
(3) Represents 4,104,347 shares held by Mr. Ballantine directly and 35,000
shares that Mr. Ballantine has a right to acquire pursuant to options
exercisable within sixty days of May 24, 1999.
(4) Represents 182,927 shares held by Kirk Loevner Trust w/d/t dated 8/5/96
directly and 27,500 shares that Mr. Loevner has a right to acquire pursuant
to options exercisable within sixty days of May 24, 1999.
(5) Represents 75,000 shares held by the Balousek Family Limited Partnership
and 25,000 shares held by the Balousek 1994 Irrevocable Trust and 25,000
shares that Mr. Balousek has a right to acquire pursuant to options
exercisable within sixty days of May 24, 1999.
(6) Represents 50,000 shares held by Mr. Wade directly and 45,500 shares that
the Mr. Wade has a right to acquire pursuant to options exercisable within
sixty days of May 24, 1999.
(7) Represents 41,667 shares held by Mr. Fritsch directly and 22,750 shares
that Mr. Fritsch has a right to acquire pursuant to options exercisable
within sixty days of May 24, 1999.
(8) Represents 9,149,661 shares listed as to all current directors and
executive officers and includes 237,461 shares issuable within sixty days
of May 24, 1999 upon the exercise of outstanding options.
50
<PAGE> 52
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 100,000,000 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 May 24, 1999, there were 23,543,534 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 May 24, 1999, we had outstanding 293,536
shares of series B convertible preferred stock. 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 ten 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 May 24, 1999, Fingerhut held irrevocable "percentage warrants" to
purchase 387,990 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 20,472 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 an escrow agreement, Fingerhut has agreed to exercise the remainder of
their warrants prior to the completion of this offering, subject to certain
conditions. See "Related Party Transactions."
In addition to the warrants held by Fingerhut, as of May 24, 1999 we had
warrants outstanding to purchase 69,250 shares of common stock. Generally, each
warrant contains
51
<PAGE> 53
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, 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 132,300 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 the success of 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;
- 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.
52
<PAGE> 54
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 May 24, 1999, we will have outstanding an aggregate of
shares of our common stock, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options. Of these shares,
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 20,608,174 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 26,938,486 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.
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, shares will be
immediately available for sale in the public market.
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<PAGE> 55
- Beginning 90 days after the effective date of the offering, approximately
shares will be eligible for sale pursuant to Rules 144 and 701.
- An additional 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 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 certain
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 6,000,000 shares
of common stock reserved for issuance under our 1997 Stock Option Plan. As of
May 24, 1999, options to purchase 2,413,530 shares of common stock were issued
and outstanding. Upon the expiration of the lock-up agreements described above,
at least shares of common stock will be subject to vested options (based on
options outstanding as of May 24, 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.
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<PAGE> 56
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, and Volpe
Brown Whelan & Company, LLC 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...........................
--------
Total.............................................
</TABLE>
The underwriting agreement provides that the obligations of the
underwriters are subject to certain conditions and 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.
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.
We have granted to the underwriters an option, exercisable not later than
30 days after the date of this prospectus, to purchase up to 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 shares are being offered.
The following table summarizes the compensation that we will pay to the
underwriters 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.... $ $ $
</TABLE>
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act, and to contribute to payments
the underwriters may be required to make with respect to such liabilities.
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<PAGE> 57
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.
We estimate that the total expenses of the offering, excluding underwriting
discounts and commissions, will be approximately $ .
The underwriters, at our request, have reserved for sale at the initial
public offering price up to shares of common stock for visitors to our
Web site and users of our services who express an interest in purchasing these
shares. Any reserved shares not so purchased will be offered by the underwriters
on the same basis as the other shares offered by this prospectus.
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 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,
will pass upon certain legal matters for the underwriters. A partner of Dorsey &
Whitney LLP owns an aggregate of 28,080 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
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<PAGE> 58
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.
57
<PAGE> 59
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 March 31, 1999 (unaudited).......... F-3
Statement of Operations for the periods ended June 30, 1996,
June 30, 1997, December 31, 1997, December 31, 1998, March
31, 1998 (unaudited) and March 31, 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 March 31, 1999 (unaudited).... F-5
Statement of Cash Flows for the periods ended June 30, 1996,
June 30, 1997, December 31, 1997, December 31, 1998, March
31, 1998 (unaudited) and March 31, 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..... F-21
Statement of Operations and Members' Deficit for the year
ended December 31, 1998................................... F-22
Statement of Cash Flows for the year ended December 31,
1998...................................................... F-23
Notes to Financial Statements............................... F-24
TRAVEL COMPANIONS INTERNATIONAL, INC.
FINANCIAL STATEMENTS
Report of Independent Accountants........................... F-27
Balance Sheet as of December 31, 1998....................... F-28
Statement of Income for the year ended December 31, 1998.... F-29
Statement of Stockholders' Deficit for the year ended
December 31, 1998......................................... F-30
Statement of Cash Flows for the year ended December 31,
1998...................................................... F-31
Notes to Financial Statements............................... F-32
FREESHOP.COM, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
Unaudited Pro Forma Combined Financial Information.......... F-35
Unaudited Pro Forma Combined Balance Sheet as of March 31,
1999...................................................... F-36
Unaudited Pro Forma Combined Statement of Operations for the
year ended December 31, 1998 and the three months ended
March 31, 1999............................................ F-37
Notes to Unaudited Pro Forma Combined Financial
Statements................................................ F-38
</TABLE>
F-1
<PAGE> 60
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 two through four
of Note 13 which are as of June 18, 1999.
F-2
<PAGE> 61
FREESHOP.COM, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------- -----------
1997 1998 1999
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents......................... $ 26,329 $ 2,892,144 $ 1,330,482
Accounts receivable, net.......................... 204,691 339,179 484,648
Prepaid expenses.................................. 13,598 30,497 163,686
----------- ----------- -----------
Total current assets......................... 244,618 3,261,820 1,978,816
Property and equipment, net....................... 354,496 381,296 558,970
Other assets and deposits......................... 45,818 43,454 43,454
----------- ----------- -----------
$ 644,932 $ 3,686,570 $ 2,581,240
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable.................................. $ 247,491 $ 464,872 $ 510,132
Accrued and other liabilities..................... 68,966 670,857 820,847
Payable to Online Interactive, Inc................ 27,269
Current portion of capital lease obligations...... 59,081 112,327 117,386
----------- ----------- -----------
Total current liabilities.................... 402,807 1,248,056 1,448,365
----------- ----------- -----------
Long-term convertible debt........................ 50,000
Capital lease obligations, net of current
portion......................................... 159,757 144,727 113,413
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 March 31, 1999,
liquidation value $0.086........................
Shareholders' equity
Common stock, no par value; 100,000,000 shares
authorized, 13,993,970 issued and outstanding
at December 31, 1997, 20,352,354 issued and
outstanding at December 31, 1998 and
20,440,874 issued and outstanding at March
31, 1999 (unaudited)......................... 2,699,518 7,816,328 7,879,761
Additional paid-in capital...................... 62,968 294,529 1,034,976
Note receivable from shareholder................ (25,000)
Deferred stock compensation..................... (12,927) (675,054)
Accumulated deficit............................. (2,655,118) (5,854,143) (7,220,221)
----------- ----------- -----------
Total shareholders' equity................... 82,368 2,243,787 1,019,462
----------- ----------- -----------
$ 644,932 $ 3,686,570 $ 2,581,240
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 62
FREESHOP.COM, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS THREE MONTHS ENDED
YEAR ENDED JUNE 30, ENDED YEAR ENDED MARCH 31,
------------------------ 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 $ 220,136 $ 666,579
Cost of revenues..... 310,308 313,672 139,451 216,557 38,420 83,106
---------- ----------- ----------- ----------- ----------- -----------
Gross profit......... 960,641 884,085 395,282 1,034,383 181,716 583,473
---------- ----------- ----------- ----------- ----------- -----------
Operating expenses
Sales and
marketing........ 624,560 1,809,912 1,192,062 3,248,429 506,885 1,553,810
Research and
development...... 65,694 137,226 187,534 407,053 120,307 151,783
General and
administrative... 298,808 380,829 158,334 514,854 126,935 256,368
---------- ----------- ----------- ----------- ----------- -----------
Total operating
expenses...... 989,062 2,327,967 1,537,930 4,170,336 754,127 1,961,961
---------- ----------- ----------- ----------- ----------- -----------
Operating loss....... (28,421) (1,443,882) (1,142,648) (3,135,953) (572,411) (1,378,488)
Interest expense..... 6,226 65,654 12,152 13,048
Other (income)
expense............ (2,582) (25,458)
---------- ----------- ----------- ----------- ----------- -----------
Loss before income
tax expense........ (28,421) (1,443,882) (1,148,874) (3,199,025) (584,563) (1,366,078)
Income tax expense...
---------- ----------- ----------- ----------- ----------- -----------
Net loss............. $ (28,421) $(1,443,882) $(1,148,874) $(3,199,025) $ (584,563) $(1,366,078)
========== =========== =========== =========== =========== ===========
Basic and diluted net
loss per share..... $ (0.00) $ (0.13) $ (0.09) $ (0.21) $ (0.04) $ (0.07)
========== =========== =========== =========== =========== ===========
Weighted-average
shares used in
computing net loss
per share.......... 11,502,050 11,502,050 12,972,275 15,559,315 14,218,990 20,376,622
========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 63
FREESHOP.COM, INC.
STATEMENT OF CHANGES IN MANDATORILY REDEEMABLE PREFERRED STOCK AND
SHAREHOLDERS' EQUITY/DIVISION EQUITY
<TABLE>
<CAPTION>
MANDATORILY
REDEEMABLE
CONVERTIBLE NOTE
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE
---------------------- ----------------------- PAID-IN FROM DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL SHAREHOLDER COMPENSATION
---------- --------- ---------- ---------- ---------- ----------- ------------
<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 11,502,050 1,659,182
Net loss.........................
---------- --------- ---------- ---------- ---------- -------- -----------
Balance at June 30, 1997......... 1,935,484 279,196 11,502,050 1,659,182 -- -- --
Forfeiture of common stock....... (1,300,000)
Conversion of preferred stock.... (1,935,484) (279,196) 1,935,484 279,196
Issuance of common stock......... 1,795,461 736,140
Common stock issued in exchange
for a note receivable........... 60,975 25,000 (25,000)
Stock options issued to third
parties......................... 62,968
Net loss.........................
---------- --------- ---------- ---------- ---------- -------- -----------
Balance at December 31, 1997..... -- -- 13,993,970 2,699,518 62,968 (25,000) --
Issuance of common stock, net of
offering expenses of $36,563.... 6,219,249 5,108,150
Exercise of stock options........ 139,135 8,660
Repayment of note receivable from
shareholder..................... 25,000
Stock options and warrants issued
to third parties................ 147,561 (22,677)
Shares transferred to employees
by principal shareholders....... 84,000
Amortization of deferred
compensation.................... 9,750
Net loss.........................
---------- --------- ---------- ---------- ---------- -------- -----------
Balance at December 31, 1998..... -- -- 20,352,354 7,816,328 294,529 -- (12,927)
Issuance of common stock upon
conversion of promissory note
(unaudited)..................... 50,000 50,000
Exercise of stock options
(unaudited)..................... 38,520 13,433
Stock options and warrants issued
to third parties (unaudited).... 740,447 (740,447)
Amortization of deferred
compensation (unaudited)........ 78,320
Net loss (unaudited).............
---------- --------- ---------- ---------- ---------- -------- -----------
Balance at March 31, 1999
(unaudited)..................... -- $ -- 20,440,874 $7,879,761 $1,034,976 $ -- $ (675,054)
========== ========= ========== ========== ========== ======== ===========
<CAPTION>
TOTAL
SHAREHOLDERS'
DIVISION ACCUMULATED EQUITY/
EQUITY DEFICIT DIVISION EQUITY
----------- ----------- ---------------
<S> <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........... --
Stock options issued to third
parties......................... 62,968
Net loss......................... (1,148,874) (1,148,874)
----------- ----------- -----------
Balance at December 31, 1997..... -- (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
Stock options and warrants issued
to third parties................ 124,884
Shares transferred to employees
by principal shareholders....... 84,000
Amortization of deferred
compensation.................... 9,750
Net loss......................... (3,199,025) (3,199,025)
----------- ----------- -----------
Balance at December 31, 1998..... -- (5,854,143) 2,243,787
Issuance of common stock upon
conversion of promissory note
(unaudited)..................... 50,000
Exercise of stock options
(unaudited)..................... 13,433
Stock options and warrants issued
to third parties (unaudited).... --
Amortization of deferred
compensation (unaudited)........ 78,320
Net loss (unaudited)............. (1,366,078) (1,366,078)
----------- ----------- -----------
Balance at March 31, 1999
(unaudited)..................... $ -- $(7,220,221) $ 1,019,462
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 64
FREESHOP.COM, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS THREE MONTHS ENDED
YEAR ENDED JUNE 30, ENDED YEAR ENDED MARCH 31,
----------------------- 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) $(584,563) $(1,366,078)
Adjustments to reconcile net
loss to net cash used in
operating activities
Depreciation and
amortization........... 5,566 33,659 47,617 140,710 32,338 48,840
Bad debt expense.......... 58,907 146,310 122,485 56,551 10,816 16,261
Amortization of deferred
compensation........... 9,750 78,320
Shares transferred to
employees by principal
shareholders........... 84,000
Issuance of stock options
and warrants for
services............... 62,968 88,321 69,496
Issuance of stock for
office rent............ 32,637
Loss on disposal of
property and
equipment.............. 8,624 896
Changes in assets and
liabilities:
Accounts receivable.... (198,548) (94,449) (196,560) (191,039) (13,961) (161,730)
Prepaid expenses and
other assets......... (17,280) (43,559) (21,074) 4,640 (133,189)
Accounts payable....... 11,873 43,044 192,402 217,381 89,550 45,260
Accrued and other
liabilities.......... 50,502 (48,957) 27,545 601,891 43,132 149,990
Payable to Online
Interactive, Inc..... (280,918) 308,187 (27,269) (27,269)
--------- ----------- ----------- ----------- --------- -----------
Net cash used in
operating
activities........... (100,121) (1,662,473) (595,152) (2,231,179) (375,821) (1,321,430)
--------- ----------- ----------- ----------- --------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchase of property and
equipment................... (25,077) (108,894) (55,902) (67,428) (10,116) (227,410)
--------- ----------- ----------- ----------- --------- -----------
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) (26,255)
Proceeds from Shareholder Note
Receivable.................. 25,000 25,000
Issuance of common stock, net
of issuance costs........... 703,503 5,153,373 213,096 13,433
--------- ----------- ----------- ----------- --------- -----------
Net cash provided by
(used in) financing
activities........... 125,198 1,771,492 677,258 5,164,422 373,096 (12,822)
--------- ----------- ----------- ----------- --------- -----------
Net increase (decrease) in cash
and cash equivalents.......... -- 125 26,204 2,865,815 (12,841) (1,561,662)
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 $ 13,488 $ 1,330,482
========= =========== =========== =========== ========= ===========
Cash paid during the period for
Interest...................... $ -- $ -- $ 6,226 $ 65,654 $ 12,152 $ 13,048
========= =========== =========== =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 65
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> 66
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 one year, are recognized ratably over the term of the agreement,
provided that no significant
F-8
<PAGE> 67
FREESHOP.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Company obligations remain. Revenue from impressions or click through based
contracts is recognized in the period in which the services are provided.
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 three months
ended March 31, 1999, the Company recognized approximately $83,000 and $90,000,
respectively, of revenue and advertising expense 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 three
months ended March 31, 1999, was $13,179, $148,543, $242,919, $1,190,811 and
$667,053, 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
In 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share". SFAS No.
128 replaced primary and fully diluted earnings per share with basic and diluted
earnings per share. Unlike primary earnings per share, basic earnings per share
excludes any dilutive effects of options, warrants and convertible securities.
Basic earnings per share is computed using the weighted-average number of common
shares outstanding during the period. Diluted earnings per share is computed
using the weighted-average number of common and common stock equivalent shares
outstanding during the period. Common stock equivalent shares are excluded from
the computation if their effect is antidilutive. Examples of common stock
equivalents, are warrants, stock options and convertible promissory notes.
F-9
<PAGE> 68
FREESHOP.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Stock options to purchase 1,321,332, 2,507,109, 2,037,550 and 2,221,490
shares of common stock at an average exercise price of $0.06, $0.23, $0.45 and
$0.52 per share and warrants to purchase 0, 6,000, 6,909,508 and 6,909,508
shares of common stock at an average price of $0, $0.41, $1.92 and $1.92 per
share have not been included in the computation of diluted net loss per share
for the year ended June 30, 1997, the six months ended December 31, 1997, the
year ended December 31, 1998 and the three months ended March 31, 1999
(unaudited) respectively, as their effect would have been antidilutive.
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
March 31, 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.
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.
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
F-10
<PAGE> 69
FREESHOP.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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, 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 results of operations, financial
position or cash flows.
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1997 1998 1999
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Accounts receivable..................................... $284,410 $381,830 $523,868
Less: Allowance for doubtful accounts................... (79,719) (42,651) (39,220)
-------- -------- --------
$204,691 $339,179 $484,648
======== ======== ========
</TABLE>
F-11
<PAGE> 70
FREESHOP.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1997 1998 1999
-------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Computer hardware and software........................ $310,595 $ 468,483 $ 655,480
Office furniture and equipment........................ 129,517 129,517 164,515
-------- --------- ---------
440,112 598,000 819,995
Less: Accumulated depreciation and amortization....... (85,616) (216,704) (261,025)
-------- --------- ---------
$354,496 $ 381,296 $ 558,970
======== ========= =========
</TABLE>
5. ACCRUED AND OTHER LIABILITIES
Accrued and other liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ MARCH 31,
1997 1998 1999
------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred revenue............................................ $20,000 $ 1,129 $ 29,750
Accrued advertising expense................................. 488,451 552,913
List rental deposit......................................... 74,538 29,824
Accrued vacation............................................ 12,802 37,169 49,977
Accrued commissions......................................... 3,313 13,918 50,048
Accrued commerce expense.................................... 78,904
Other....................................................... 32,851 55,652 29,431
------- -------- --------
$68,966 $670,857 $820,847
======= ======== ========
</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 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
140,000 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.
F-12
<PAGE> 71
FREESHOP.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-13
<PAGE> 72
FREESHOP.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 on a one-for-one basis.
COMMON STOCK
On December 10, 1998, FreeShop issued 4,048,467 shares of the Company's
common stock to Fingerhut Companies Inc. (Fingerhut) at a price of $0.99 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.
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 2,935,356 shares at $1.72 per
share; a warrant to purchase 1,790,724 shares at $1.99 per share; a warrant to
purchase 2,089,178 shares at $2.21 per share; warrants to purchase from time to
time at $2.21 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 $.99 per
share to $2.21 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 41,000 shares of common
stock. The warrants are exercisable at a price equal to $0.41 per share and
expire from October 2002 to January 2003.
F-14
<PAGE> 73
FREESHOP.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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
28,250 shares of common stock in January 1998. The warrants are exercisable at a
price equal to $0.41 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 25,000 shares of the Company's common stock at an
exercise price of $0.60 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, 2,660,765
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 623,215 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.
During the three month period ended March 31, 1999 (unaudited), the Company
granted options to purchase 277,000 shares of common stock to employees and
service providers at an average exercise price of $1.00. The Company recorded
$740,447 of deferred compensation based upon the average deemed fair value of
$2.67 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
F-15
<PAGE> 74
FREESHOP.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.............................. $ (0.09) $ (0.21)
Pro forma................................ $ (0.09) $ (0.21)
</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.................... 1,321,332 $0.06 2,507,109 $0.23
Granted..................... 1,321,332 $0.06 1,185,777 0.41 1,613,550 0.52
Exercised................... 139,235 0.06
Forfeited................... 1,943,874 0.24
--------- --------- ---------
Outstanding at end of
period.................... 1,321,332 $0.06 2,507,109 $0.23 2,037,550 $0.45
========= ========= =========
Weighted-average fair value
of options granted during
the period................ $0.01 $0.14 $0.13
</TABLE>
The following table summarizes information about stock options outstanding
under the Plan at December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED-
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
RANGE OF OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
PRICES 1998 LIFE PRICE 1998 PRICE
- -------- -------------- ----------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C>
0$.06.. 252,333 8.5 $0.06 126,150 $0.60
0.41.. 919,167 6.0 0.41 605,983 0.41
0.60.. 856,050 9.0 0.60 148,264 0.60
1.00.. 10,000 10.0 1.00 1.00
--------- -------
2,037,550 7.6 $0.45 880,397 $0.45
========= =======
</TABLE>
During the six months ended December 31, 1997, the Company granted options
to purchase 487,802 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 522,500 shares of common stock to
consultants, advisors and investment managers and as severance to certain
employees.
F-16
<PAGE> 75
FREESHOP.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 $0.33 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.
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 may have occurred as a result of the
equity issuances as described in Note 13.
F-17
<PAGE> 76
FREESHOP.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
12. SUPPLEMENTAL CASH FLOW INFORMATION
The following items are supplemental information of noncash investing and
financing activities:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED SIX MONTHS ENDED
JUNE 30, ENDED YEAR ENDED MARCH 31,
--------------- 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 $ -- $ -- $ --
====== ====== ======== ======== ====== =======
Conversion of preferred stock... $ -- $ -- $279,196 $ -- $ -- $ --
====== ====== ======== ======== ====== =======
Conversion of note payable...... $ -- $ -- $ -- $ -- $ -- $50,000
====== ====== ======== ======== ====== =======
</TABLE>
13. SUBSEQUENT EVENTS
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 50,000 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 ten shares of
common stock. Each share of series B convertible preferred stock has similar
rights and obligations as 10 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 132,300 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 $1,383,000 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............................... $ 1,331,660
Cash paid................................................... (1,841,000)
Common stock issued......................................... (736,000)
Cost in excess of net assets acquired....................... 1,383,000
-----------
Liabilities assumed......................................... $ 137,660
===========
</TABLE>
F-18
<PAGE> 77
FREESHOP.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1998 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
Revenues.................................................... $ 1,893,267 $ 837,901
Pro forma net loss.......................................... (4,295,661) (1,571,027)
Pro forma basic and diluted net loss per share.............. $ (0.27) $ (0.08)
</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.
F-19
<PAGE> 78
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> 79
COMMONSITE, LLC
STATEMENT OF FINANCIAL POSITION
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
ASSETS
Cash........................................................ $ 12,811
Accounts receivable, net.................................... 42,358
--------
Total current assets................................... 55,169
Property and equipment, net................................. 9,728
--------
Total assets........................................... $ 64,897
========
LIABILITIES AND MEMBERS' DEFICIT
Accounts payable............................................ $ 6,536
Related party payable....................................... 16,245
Accrued liabilities......................................... 6,609
Deferred revenue............................................ 109,337
--------
Total current liabilities.............................. 138,727
--------
Members' deficit............................................ (73,830)
--------
Total liabilities and members' deficit................. $ 64,897
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE> 80
COMMONSITE, LLC
STATEMENT OF OPERATIONS AND MEMBERS' DEFICIT
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
Revenues.................................................... $540,114
Cost of revenues............................................ 180,244
--------
Gross profit................................................ 359,870
--------
Operating expenses
Sales and marketing....................................... 276,378
General and administrative................................ 72,290
--------
Total operating expenses.......................... 348,668
--------
Net income.................................................. 11,202
Members' deficit, December 31, 1997......................... (85,032)
--------
Members' deficit, December 31, 1998......................... $(73,830)
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE> 81
COMMONSITE, LLC
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 11,202
Adjustments to reconcile net income to net cash used in
operating activities
Depreciation........................................... 6,525
Bad debt expense....................................... 9,999
Increase in accounts receivable........................ (35,846)
Decrease in accounts payable........................... (9,005)
Increase in related party payable...................... 16,245
Decrease in accrued liabilities........................ (6,449)
Increase in unearned revenue........................... 2,272
--------
Net cash used in operating activities............. (5,057)
--------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from member contributions........................ 5,000
--------
Net cash provided by financing activities......... 5,000
--------
Net decrease in cash and cash equivalents................... (57)
Cash and cash equivalents, beginning of year................ 12,868
--------
Cash and cash equivalents, end of year...................... $ 12,811
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE> 82
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 impressions or click through based
F-24
<PAGE> 83
COMMONSITE, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
contracts is recognized in the period in which the services are provided.
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.
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.
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.
F-25
<PAGE> 84
COMMONSITE, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 for the year ended December 31, 1998 is
as follows:
<TABLE>
<S> <C>
Salaries.................................................... $230,979
Equipment................................................... 16,236
Connectivity................................................ 22,957
Rent........................................................ 12,637
Internet marketing.......................................... 26,134
Other....................................................... 5,848
--------
$314,791
========
</TABLE>
4. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
Accounts receivable......................................... $ 66,866
Less: Allowance for doubtful accounts....................... (24,508)
--------
$ 42,358
========
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
Computer hardware and software.............................. $19,578
Less: Accumulated depreciation.............................. (9,850)
-------
$ 9,728
=======
</TABLE>
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 132,300 shares of common stock.
F-26
<PAGE> 85
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-27
<PAGE> 86
TRAVEL COMPANIONS INTERNATIONAL, INC.
BALANCE SHEET
AS OF DECEMBER 31, 1998
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash...................................................... $ 5,091
Accounts receivable....................................... 8,772
Prepaid expenses.......................................... 700
---------
Total current assets................................... 14,563
Property and equipment, net................................. 3,050
---------
Total assets........................................... $ 17,613
=========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Liabilities:
Current liabilities:
Debt................................................... $ 52,603
Accounts payable....................................... 4,600
Accrued expenses....................................... 3,038
Deferred revenue....................................... 11,299
---------
Total current liabilities.............................. 71,540
Notes payable to stockholders............................. 459,678
---------
Total liabilities...................................... 531,218
---------
Stockholders' deficit:
Common stock, no par value; 5,000 shares authorized, 5,000
shares issued and outstanding.......................... 5,000
Accumulated deficit....................................... (518,605)
---------
Total stockholders' deficit............................ (513,605)
---------
Total liabilities and stockholders' deficit............ $ 17,613
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE> 87
TRAVEL COMPANIONS INTERNATIONAL, INC.
STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
Revenues.................................................... $219,813
Cost of revenues............................................ 94,875
--------
124,938
--------
Operating expenses:
Sales and marketing....................................... 9,393
General and administrative................................ 92,645
--------
Total operating expenses............................... 102,038
--------
Operating income............................................ 22,900
--------
Interest expense............................................ 4,287
--------
Net income.................................................. $ 18,613
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE> 88
TRAVEL COMPANIONS INTERNATIONAL, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1998
<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)
===== ====== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE> 89
TRAVEL COMPANIONS INTERNATIONAL, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 18,613
Adjustments to reconcile net income to net cash provided
by operations:
Depreciation and amortization.......................... 2,790
Changes in assets and liabilities:
Accounts receivable.................................. 4,159
Prepaid expenses..................................... 78
Inventory............................................ 300
Deferred revenue..................................... (40)
Accrued and other liabilities........................ 1,230
--------
Net cash provided by operating activities......... 27,130
--------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment....................... (1,139)
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of debt................................ (3,209)
Principal payments of notes payable to stockholders....... (19,700)
--------
Net cash provided by financing activities......... (22,909)
--------
Net increase in cash........................................ 3,082
Cash at beginning of period................................. 2,009
--------
Cash at end of period....................................... $ 5,091
========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest............................................... $ 4,323
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-31
<PAGE> 90
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. 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. Receivables from these same two
customers accounted for approximately 68% and 32% of total receivables at
December 31, 1998, respectively.
F-32
<PAGE> 91
TRAVEL COMPANIONS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
2. PROPERTY AND EQUIPMENT
<TABLE>
<S> <C>
Property and equipment:
Computer equipment........................................ $23,488
Furniture and office equipment............................ 23,881
Leasehold improvements.................................... 878
-------
48,247
Less accumulated depreciation and amortization.............. 45,197
-------
$ 3,050
=======
</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.
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
as of December 31, 1998. 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.
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
F-33
<PAGE> 92
TRAVEL COMPANIONS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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-34
<PAGE> 93
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 132,300 shares of common stock. The unaudited pro forma
condensed combined balance sheet is based on the individual unaudited balance
sheets of FreeShop, Commonsite and Travel appearing elsewhere in this prospectus
and has been prepared to reflect the acquisitions by FreeShop of the assets of
Commonsite and Travel as of March 31, 1999. The unaudited pro forma condensed
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 three months ended March 31, 1999 after giving effect to the
acquisitions of Commonsite and Travel as if they had occurred at the beginning
of each of the periods presented.
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 pro forma condensed 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 dates assumed.
F-35
<PAGE> 94
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF MARCH 31, 1999
<TABLE>
<CAPTION>
PRO FORMA
FREESHOP COMMONSITE TRAVEL COMBINED ADJUSTMENTS PRO FORMA
----------- ---------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............ $ 1,330,482 $ 23,652 $ 3,545 $ 1,357,679 $ (27,197)(4) $ (510,518)
(1,841,000)(1)
Accounts receivable, net............. 484,648 29,151 5,200 518,999 (5,200)(4) 513,799
Prepaid expenses and other current
assets............................. 163,686 820 164,506 (820)(4) 163,686
----------- --------- --------- ----------- ----------- -----------
Total current assets............... 1,978,816 52,803 9,565 2,041,184 (1,874,217) 166,967
Property and equipment, net............ 558,970 8,097 2,265 569,332 3,638(4) 572,970
Other assets and deposits.............. 43,454 43,454 43,454
Goodwill and other..................... -- 2,657,503(1) 2,657,503
----------- --------- --------- ----------- ----------- -----------
Total assets....................... $ 2,581,240 $ 60,900 $ 11,830 $ 2,653,970 $ 786,924 $ 3,440,894
=========== ========= ========= =========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities
Debt obligation, current portion..... $ 51,668 $ 51,668 $ (51,668)(4)
Accounts payable..................... $ 510,132 $ 567 4,600 515,299 (5,167)(4) $ 510,132
Current portion of capital lease
obligations........................ 117,386 117,386 117,386
Accrued liabilities.................. 791,097 17,992 3,296 812,385 (21,288)(4) 791,097
Deferred revenue..................... 29,750 120,422 3,232 153,404 153,404
----------- --------- --------- ----------- ----------- -----------
Total current liabilities...... 1,448,365 138,981 62,796 1,650,142 (78,123) 1,572,019
Capital lease obligations, net of
current portion...................... 113,413 113,413 113,413
Notes payable to shareholders.......... 454,678 454,678 (454,678)(4) --
Shareholders' equity (deficit) Common
stock................................ 7,879,761 5,000 7,884,761 736,000(2) 8,615,761
(5,000)(10)
Additional paid-in capital........... 1,034,976 153,432 1,188,408 (153,432)(10) 1,034,976
Deferred stock compensation.......... (675,054) (675,054) (675,054)
Accumulated deficit.................. (7,220,221) (231,513) (510,644) (7,962,378) 742,157(10) (7,220,221)
----------- --------- --------- ----------- ----------- -----------
Total shareholders' equity
(deficit)........................ 1,019,462 (78,081) (505,644) 435,737 1,319,725 1,755,462
----------- --------- --------- ----------- ----------- -----------
Total liabilities and shareholders'
equity (deficit)................. $ 2,581,240 $ 60,900 $ 11,830 $ 2,653,970 $ 786,924 $ 3,440,894
=========== ========= ========= =========== =========== ===========
</TABLE>
F-36
<PAGE> 95
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)(5) $ 1,893,267
Cost of revenues................ 216,557 180,244 61,872 458,673 (20,547)(6) 438,126
----------- -------- -------- ----------- ----------- -----------
Gross profit.................... 1,034,383 359,870 157,941 1,552,194 (97,053) 1,455,141
Operating expenses
Sales and marketing........... 3,248,429 276,378 9,393 3,534,200 (105,000)(6) 3,429,200
Research and development...... 407,053 407,053 407,053
General and administrative.... 514,854 72,290 125,648 712,792 (2,315)(8) 710,477
Amortization.................. 1,141,000(3) 1,141,000
----------- -------- -------- ----------- ----------- -----------
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)(7) (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......................... $ (0.21) $ (0.27)(9)
=========== ===========
Weighted average shares of
common stock outstanding used
in computing basic and diluted
net loss per share............ 15,559,315 132,300(2) 15,691,615(9)
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999
--------------------------------------------------------------------------------
PRO FORMA
FREESHOP COMMONSITE TRAVEL COMBINED ADJUSTMENTS PRO FORMA
----------- ---------- -------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net revenues.................... $ 666,579 $106,435 $ 64,887 $ 837,901 $ 837,901
Cost of revenues................ 83,106 21,492 25,866 130,464 130,464
----------- -------- -------- ----------- -----------
Gross profit.................... 583,473 84,943 39,021 707,437 707,437
Operating expenses
Sales and marketing........... 1,553,810 36,463 1,950 1,592,223 1,592,223
Research and development...... 151,783 151,783 151,783
General and administrative.... 256,368 52,731 28,000 337,099 $ (481)(8) 336,618
Amortization.................. 210,250(3) 210,250
----------- -------- -------- ----------- ----------- -----------
Total operating expenses........ 1,961,961 89,194 29,950 2,081,105 209,769 2,290,874
----------- -------- -------- ----------- ----------- -----------
Loss from operations............ (1,378,488) (4,251) 9,071 (1,373,668) (209,769) (1,583,437)
Interest expense................ 13,048 1,110 14,158 (1,110)(7) 13,048
Other (income) expense.......... (25,458) (25,458) (25,458)
----------- -------- -------- ----------- ----------- -----------
Net (loss) income............... $(1,366,078) $ (4,251) $ 7,961 $(1,362,368) $ (208,659) $(1,571,027)
=========== ======== ======== =========== =========== ===========
Basic and diluted net loss per
share......................... $ (0.07) $ (0.08)(9)
=========== ===========
Weighted average shares of
common stock outstanding used
in computing basic and diluted
net loss per share............ 20,376,622 132,300(2) 20,508,922(9)
=========== =========== ===========
</TABLE>
F-37
<PAGE> 96
NOTES TO UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS
1. Reflects the preliminary allocation of the purchase price and the
amortization of the cost of intangible assets and goodwill acquired in
the Commonsite and Travel acquisitions. The preliminary allocation has
resulted in intangible assets, including client and customer lists,
database content, and covenants not to compete, estimated at
approximately $1,285,000 and estimated goodwill of approximately
$1,383,000, which is being amortized over periods of one to five years.
The total estimated purchase price for the Commonsite and Travel
acquisitions has been allocated on a preliminary basis to assets and
liabilities based on management's best estimates of their fair value
with the excess costs over the net assets acquired allocated to
intangible assets and goodwill. This allocation is subject to change
pending a final analysis of the value of the assets acquired and,
liabilities assumed, upon closure of the acquisition. The impact of
such changes could be material.
2. Reflects the issuance of 132,300 shares of FreeShop Common Stock in
connection with the Commonsite acquisition.
3. Reflects the amortization of the intangible assets and goodwill
referred to in note 1 above.
4. Reflects elimination of assets and liabilities not purchased in the
Commonsite and Travel acquisitions and the increase in value of the
property and equipment acquired in the Travel acquisition.
5. Represents a revenue stream discontinued after December 31, 1998.
6. Represents additional programming and management service fees of
Commonsite that FreeShop would not have required due to the similarity
in business operations.
7. Represents elimination of interest expense for debt not assumed in the
acquisitions.
8. 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.
9. Pro forma net loss reflects the impact of the adjustments above. Basic
and diluted net loss per share (pro forma) 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.
10. Reflects elimination of Commonsite and Travel members' and
stockholders' equity.
F-38
<PAGE> 97
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............................. 7
Forward-Looking Statements............... 15
Use of Proceeds.......................... 16
Dividend Policy.......................... 16
The Company.............................. 16
Capitalization........................... 17
Dilution................................. 18
Selected Unaudited Pro Forma Financial
Data................................... 19
Selected Actual Financial Data........... 20
Management's Discussion And Analysis of
Financial Condition and Results of
Operations............................. 21
Business................................. 30
Management............................... 40
Related Party Transactions............... 47
Principal Shareholders................... 49
Description of Capital Stock............. 51
Shares Eligible for Future Sale.......... 53
Underwriting............................. 55
Legal Matters............................ 56
Experts.................................. 56
Where You Can Find More Information...... 57
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
SHARES
COMMON STOCK
DEUTSCHE BANC ALEX. BROWN
DAIN RAUSCHER WESSELS
a division of Dain Rauscher Incorporated
VOLPE BROWN WHELAN
& COMPANY
Prospectus
, 1999
<PAGE> 98
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..........................
Legal Fees and Expenses.....................................
Accountants' Fees and Expenses..............................
Blue Sky Filing and Counsel Fees and Expenses...............
Printing and Engraving Expenses.............................
Transfer Agent and Registrar Fees...........................
Miscellaneous Expenses......................................
Total.............................................
</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> 99
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 11,502,050 shares of Common
Stock and 1,935,484 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 1,935,484 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 967,742 shares of Common Stock
to Timothy C. Choate and 967,742 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 2,168,301 shares of Common Stock to twenty-one investors for a
consideration of $0.41 per share, or an aggregate of $889,003.
4. On October 15, 1997, the registrant issued Warrants for 6,000 shares of
Common Stock exercisable at a price of $0.41 per share, expiring October 23,
2002, to HALLCO in partial consideration of an equipment lease.
5. During the period October 1997 through December 1997, the registrant
issued a total of 79,602 shares of Common Stock to its landlord Merrill Place
LLC in lieu of rent payments in the aggregate amount of $32,637.
6. On January 16, 1998, the registrant issued Warrants for 3,250 shares of
Common Stock exercisable at a price of $0.41 per share, expiring January 16,
2002, to Karrie Lee for consulting services.
7. On January 19, 1998, the registrant issued Warrants for 35,000 shares of
Common Stock exercisable at a price of $0.41 per share, expiring January 23,
2003, to HALLCO in partial consideration of an equipment lease.
8. On January 23, 1998, the registrant issued Warrants for 1,000 shares of
Common Stock exercisable at a price of $0.41 per share, expiring December 31,
2002, to Dennis Green for consulting services.
9. On January 23, 1998, the registrant issued Warrants for 25,000 shares of
Common Stock exercisable at a price of $0.41 per share, expiring January 23,
2002, to EMPLOYCO for consulting services.
10. 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.
11. On June 30, 1998, the registrant issued 3,639 shares of Common Stock to
Anthony Lee Simonelli in consideration of consulting services valued at $1,492
rendered to the Company.
12. During the period June 1998 through September 1998, the registrant
issued an aggregate of 1,531,673 shares of Common Stock to twenty-two investors
at $0.60 per share for aggregate consideration of $919,004.
13. On September 18, 1998, the registrant issued Warrants for 25,000 shares
of Common Stock exercisable at a price of $0.60 per share, expiring September
18, 2003, to Imperial Bank in partial consideration of a credit facility.
II-2
<PAGE> 100
14. On December 11, 1998, the registrant issued 4,048,467 shares of Common
Stock, and Warrants to purchase 2,935,356 shares of Common Stock at $1.71826 per
share, 1,790,724 shares at $1.99440 per share and 3,932,055 shares at $2.20919
per share, to Fingerhut for an aggregate consideration of $4,000,000.
15. In February 1999, the registrant issued an aggregate of 400,000 shares
of Common Stock to a total of ten investors at $1.00 per share for aggregate
consideration of $400,000.
16. On April 5, 1999, the registrant issued 50,000 shares of Common Stock
to Oki Enterprises, LLC, in exchange for the $50,000 convertible promissory note
referenced in item 10 above.
17. On April 8, 1999, the registrant issued 243,903 shares of Common Stock
to Techwave, Inc. at $0.41 per share for aggregate consideration of $100,000.
18. On May 6, 1999, in accordance with an Asset Purchase Agreement among
the registrant, Commonsite, LLC and a shareholder of Commonsite, the registrant
issued 132,300 shares of Common Stock to Commonsite in connection with the
registrant's purchase of certain of Commonsite's assets.
19. 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 Warrants identified in item 14
above. Each share of Series B Preferred Stock is convertible into ten shares of
Common Stock.
20. On May 25, 1999, the registrant issued 25,000 shares of Common Stock to
EMPLOYCO for aggregate consideration of $15,000 upon the exercise by EMPLOYCO of
Warrants identified in item 9 above.
21. Since inception, the registrant has issued an aggregate of 5,190,641
options to purchase Common Stock, with exercise prices ranging from $0.06 to
$1.71 per share, to employees under the registrant's 1997 Stock Option Plan. Of
these options, options for 2,599,446 shares have been canceled without being
exercised, options for 187,975 shares have been exercised and options for
2,403,220 shares remain outstanding.
The sales and issuances of securities described in paragraphs 1 through 14
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 paragraph 15 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.
No underwriters were used in connection with these sales and issuances.
II-3
<PAGE> 101
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
A. Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1* Second Amended and Restated Articles of Incorporation of
registrant.
3.2* First Amended and Restated 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 Escrow Agreement dated June 18, 1999 between registrant and
Fingerhut.
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.
+ Confidential treatment has been requested as to certain portions of this
exhibit. Omitted portions will be filed separately with the Securities and
Exchange Commission.
II-4
<PAGE> 102
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> 103
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 June 18, 1999.
FREESHOP.COM, INC.
By: /s/ TIMOTHY C. CHOATE
------------------------------------
Timothy C. Choate
Chairman, President and
Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints each of
Timothy C. Choate and John A. Wade his or her attorney-in-fact and agent, with
the full power of substitution and resubstitution and full power to act without
the other, for them in any and all capacities, to sign any and all amendments,
including post-effective amendments, and any registration statement relating to
the same offering as this registration that is to be effective upon filing
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, to this
registration statement, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that said attorneys-in-fact, or their
substitute or substitutes, may do or cause to be done by virtue hereof.
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 June 18, 1999
- ----------------------------------------------------- Chief Executive Officer
Timothy C. Choate (principal executive officer)
/s/ JOHN A. WADE Secretary, Vice President, June 18, 1999
- ----------------------------------------------------- Finance and Chief Financial
John A. Wade Officer (principal finance and
accounting officer)
/s/ JOHN P. BALLANTINE Director June 18, 1999
- -----------------------------------------------------
John P. Ballantine
/s/ KIRK M. LOEVNER Director June 18, 1999
- -----------------------------------------------------
Kirk M. Loevner
/s/ JOHN B. BALOUSEK Director June 18, 1999
- -----------------------------------------------------
John B. Balousek
Director
- -----------------------------------------------------
William J. Lansing
</TABLE>
II-6
<PAGE> 104
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1* Second Amended and Restated Articles of Incorporation of
registrant.
3.2* First Amended and Restated 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 Escrow Agreement dated June 18, 1999 between registrant and
Fingerhut.
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.
+ 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 4.2
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.COM, INC.
THIS CERTIFIES that for good and valuable consideration received,
___________________ a(n) ___________________________ or registered assigns, is
entitled, upon the terms and subject to the conditions hereinafter set forth, to
acquire from FreeShop.com, Inc., a Washington corporation (the "Corporation") up
to 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 _____.
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
_________________________ (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 $______ at a price per share equal to or greater than __________ 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 95 South Jackson, Suite #300, Seattle, Washington 98104 (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 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
2
<PAGE> 3
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.
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 chance 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 I hereof. Any such transfer shall be made in person or by
the holder's duty 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
3
<PAGE> 4
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 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 and 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: _____________________________
FreeShop.com, Inc.
By: ________________________________
________________________________
________________________________
5
<PAGE> 6
NOTICE OF EXERCISE
To: FreeShop.com, Inc.
(1) The undersigned hereby elects to purchase ____________ shares of
common stock of FreeShop.com, 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.com, 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.com,
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.
Dated: ____________________________________
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 10.1
INDEMNIFICATION AGREEMENT
This Agreement is made as of ____________ by and between FreeShop.com,
Inc., a Washington corporation, (the "Corporation") and ____________ (the
"Indemnitee") with reference to the following facts:
RECITALS
A. The Indemnitee is currently serving as a Director or Officer of the
Corporation and the Corporation wishes the Indemnitee to continue in such
capacity at this time. The Indemnitee is willing, under certain circumstances,
to continue in such capacity.
B. In order to induce and encourage experienced and capable persons such
as the Indemnitee to continue to serve as a Director or Officer of the
Corporation, the Board of Directors has determined, after due consideration and
investigation of the terms and provisions of this Agreement and the various
other options available to the Corporation and the Indemnitee in lieu hereof,
that this Agreement is not only reasonable and prudent but necessary to promote
and ensure the best interests of the Corporation and its shareholders.
AGREEMENT
NOW, THEREFORE, in consideration of the continued services of the
Indemnitee and in order to induce the Indemnitee to continue to serve as a
Director or Officer of the Corporation, the Corporation and the Indemnitee agree
as follows:
1. Definitions. For purposes of this Agreement:
(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) "Officer" means an individual who is or was an officer of the
Corporation or an individual who, while an officer 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. An officer is
considered to be serving an employee benefit plan at the Corporation's request
if the officer's duties to the Corporation also impose duties on, or otherwise
involve services by, the officer to the plan or to participants in or
beneficiaries of the plan. "Officer" includes, unless the context requires
otherwise, the estate or personal representative of an officer.
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<PAGE> 2
(f) "Official capacity" means, when used with respect to a Director,
the office of director in the Corporation and, when used with respect to an
Officer, the office in the Corporation held by the Officer. "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.
(g) "Party" includes an individual who was, is, or is threatened to
be made a named defendant or respondent in a proceeding.
(h) "Proceeding" means any threatened, pending, or completed action,
suit, or proceeding, whether civil, criminal, administrative or investigative
and whether formal or informal.
2. Indemnification by the Corporation.
(a) The Corporation shall indemnify the Indemnitee in the defense of
any proceeding, whether or not brought by or in the right of the Corporation, to
which the Indemnitee was a party because of being a director or officer of the
Corporation against all reasonable expenses incurred by the Indemnitee in
connection with the proceeding.
(b) Except as provided in subsection (e) of this Section 2, the
Corporation shall indemnify the Indemnitee made a party to a proceeding, because
the Indemnitee is or was a director or officer of the Corporation, against
liability incurred in the proceeding if:
(i) The Indemnitee acted in good faith; and
(ii) The Indemnitee reasonably believed:
(A) In the case of conduct in the Indemnitee's official
capacity with the Corporation, that the Indemnitee's conduct was in the
Corporation's best interests; and
(B) In all other cases, that the Indemnitee's conduct was
at least not opposed to the Corporation's best interests; and
(iii) In the case of any criminal proceeding, the Indemnitee had
no reasonable cause to believe the Indemnitee's conduct was unlawful.
(c) The Indemnitee's conduct with respect to an employee benefit plan
for a purpose the Indemnitee 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 Indemnitee did not meet the standard of conduct
described in this Section.
(e) The Corporation shall not indemnify the Indemnitee under Section
2 of this Agreement:
(i) In connection with a proceeding by or in the right of the
Corporation in which the Indemnitee was adjudged liable to the Corporation; or
(ii) In connection with any other proceeding charging improper
personal benefit to the Indemnitee whether or not involving action in the
Indemnitee's official capacity, in which the Indemnitee was adjudged liable on
the basis that the Indemnitee improperly received personal benefit.
(f) Indemnification under this Agreement in connection with a
proceeding by or in the right of the Corporation is limited to reasonable
expenses incurred in connection with the proceeding.
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<PAGE> 3
3. Advance for Expenses.
(a) The Corporation shall pay for or reimburse the reasonable
expenses incurred by the Indemnitee 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 4 of this Agreement if:
(i) The Indemnitee furnishes the Corporation a written
affirmation of the Indemnitee's good faith belief that the Indemnitee has met
the standard of conduct described in Section 2 of this Agreement; and
(ii) The Indemnitee furnishes the Corporation a written
undertaking, executed personally or on the Indemnitee's behalf, to repay the
advance if it is ultimately determined that the Indemnitee did not meet the
standard of conduct.
(b) The undertaking required by subsection (a)(i) of this Section 3
must be an unlimited general obligation of the Indemnitee but need not be
secured and may be accepted without reference to financial ability to make
repayment.
4. Determination and Authorization of Indemnification.
(a) The Corporation shall not indemnify the Indemnitee under this
Agreement unless authorized in the specific case after a determination has been
made that indemnification of the Indemnitee is permissible in the circumstances
because the Indemnitee has met the standard of conduct set forth in Section 2(b)
of this Agreement.
(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;
(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
(iv) By the shareholders, but shares owned by or voted under the
control of directors or officers 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.
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<PAGE> 4
5. Right of the Indemnitee to Bring Suit: If a claim under this Agreement
is not paid in full by the Corporation within 60 days after a written claim has
been received by the Corporation, except in the case of a claim for expenses
incurred in defending a proceeding in advance of its final disposition, in which
case the applicable period shall be 20 days, the Indemnitee may at any time
thereafter bring suit against the Corporation to recover the unpaid amount of
the claim and, to the extent successful in whole or in part, the Indemnitee
shall be entitled to be paid also the expense of prosecuting such claim. Neither
the failure of the Corporation (including its Board of Directors, its
shareholders or special legal counsel) to have made a determination prior to the
commencement of such action that indemnification of or reimbursement or
advancement of expenses to the claimant is proper in the circumstances, nor an
actual determination by the Corporation (including its Board of Directors, its
shareholders or special legal counsel) that the Indemnitee is not entitled to
indemnification or to the reimbursement or advancement of expenses, shall be a
defense to the action or create a presumption that the Indemnitee is not so
entitled.
6. Nonexclusivity of Rights: The right to indemnification under this
Agreement 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.
7. Continuation of Rights: Rights of indemnification under this Agreement
shall continue as to an Indemnitee who has ceased to be a Director or Officer
and shall inure to the benefit of his heirs, executors and administrators.
8. Savings Clause: If any provision of this Agreement or any portion
thereof shall be invalidated on any ground by any court of competent
jurisdiction, the Corporation shall nevertheless indemnify each director and
officer 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 Agreement that shall not
have been invalidated, or by any other applicable law.
9. Gender: Whenever the context requires, the gender of all words used
herein shall include the masculine, feminine and neuter.
10. Governing Law: This Agreement shall be governed by and construed in
accordance with the laws of the State of Washington.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed as of the date first written above.
INDEMNITEE
- -------------------------------
- -------------------
FreeShop.com, Inc.
By_____________________________
Timothy C. Choate, CEO
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<PAGE> 5
EXHIBIT A
STATEMENT OF REQUEST FOR INDEMNIFICATION
STATE OF __________ )
) ss.
COUNTY OF _________ )
I, NAME , being first duly sworn, do depose and say as follows:
1. This Statement is submitted pursuant to the Indemnification Agreement
(the "Agreement") dated ___________, between FreeShop.com, Inc., a Washington
corporation, (the "Corporation") and the undersigned.
2. I am requesting indemnification against expenses (including attorneys'
and others' fees and expenses), judgments, fines and amounts paid in settlement,
all of which (collectively, "Liabilities") have been or will be actually and
reasonably incurred by me in connection with the defense of a proceeding to
which I was or am a party.
3. With respect to all matters related to any such action or proceeding,
I am entitled to be indemnified as herein contemplated pursuant to the aforesaid
Indemnification Agreement.
4. Without limiting any other rights that I have or may have, I am
requesting indemnification against Liabilities that have arisen or may arise out
of ___________________________________________________________________________.
Dated: _______________, ____.
___________________________________
______________
Subscribed and sworn to before me this ____ day of _____________, ____.
___________________________________
(Seal) Notary Public in and for the State
of __________, residing at ________
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<PAGE> 6
EXHIBIT B
STATEMENT OF UNDERTAKING
STATE OF __________ )
) ss.
COUNTY OF _________ )
I, ____________, being first duly sworn, do depose and say as follows:
1. This Statement of Undertaking is submitted pursuant to the
Indemnification Agreement dated _____________, between FreeShop.com, a
Washington corporation, (the "Corporation") and the undersigned.
2. I am requesting advancement of certain expenses (including attorneys'
and others' fees and expenses) which I have incurred or will incur in defending
a civil or criminal action or proceeding.
3. It is my good faith belief that I have met the standard of conduct
necessary for indemnification by the Corporation under the terms of the
aforesaid Indemnification Agreement.
4. I hereby undertake to repay this advancement of expenses if it shall
be ultimately determined that I am not entitled to be indemnified by the
Corporation under the aforesaid Indemnification Agreement or otherwise.
5. The expenses for which advancement is requested are, in general, all
expenses related to ________________________________________________________.
Dated: ______________, ____.
___________________________________
______________
Subscribed and sworn to before me this ____ day of _____________, ____.
___________________________________
(Seal) Notary Public in and for the State
of __________, residing at ________
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<PAGE> 1
EXHIBIT 10.2
FREESHOP INTERNATIONAL, INC.
1997 STOCK OPTION PLAN
This Stock Option Plan (the "Plan") provides for the grant of options to
acquire shares of Common Stock, no par value (the "Common Stock"), of FreeShop
International, Inc., a Washington corporation (the "Company"). Stock options
granted under this Plan that qualify under Section 422 of the Internal Revenue
Code of 1986, as amended, (the "Code") are referred to in this Plan as
"Incentive Stock Options." Incentive Stock Options and stock options that do not
qualify under Section 422 of the Code ("Non-Qualified Stock Options") granted
under this Plan are referred to as "Options."
1. PURPOSES.
The purposes of this Plan are to retain the services of valued key
employees, directors and consultants of the Company and such other persons as
the Plan Administrator shall select in accordance with Section 3 below, to
encourage such persons to acquire a greater proprietary interest in the Company,
thereby strengthening their incentive to achieve the objectives of the
shareholders of the Company, and to serve as an aid and inducement in the hiring
of new employees, consultants and other persons selected by the Plan
Administrator.
2. ADMINISTRATION.
(a) This Plan shall be administered initially by the Board of
Directors of the Company (the "Board"). If the Board so desires, the Plan shall
be administered by the full Board or a committee of the Board composed solely of
two or more directors, which committee (the "Committee") may be an executive,
compensation or other committee, including a separate committee especially
created for this purpose. The Board, or any committee thereof appointed to
administer the Plan in accordance with Paragraph (b) below, is referred to
herein as the "Plan Administrator."
(b) At such time as the Company becomes subject to the reporting
obligations of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), the Plan shall be administered by the full Board or a Committee composed
solely of two or more "non-employee directors," as defined in Rule 16b-3 (as
amended from time to time) promulgated under the Exchange Act or any successor
rule or regulatory requirement (the "Rule"). The Committee shall have the powers
and authority vested in the Board hereunder (including the power and authority
to interpret any provision of this Plan or of any Option). The members of any
such Committee shall serve at the pleasure of the Board. A majority of the
members of the Committee shall constitute a quorum, and all actions of the
Committee shall be taken by a majority of the members present. Any action may be
taken by a written instrument signed by all of the members of the Committee and
any action so taken shall be fully effective as if it had been taken at a
meeting.
(c) Subject to the provisions of this Plan, and with a view to
effecting its purpose, the Plan Administrator shall have sole authority, in its
absolute discretion, to (i) construe
FreeShop International, Inc.
1997 Stock Option Plan
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<PAGE> 2
and interpret this Plan; (ii) define the terms used in this Plan; (iii)
prescribe, amend and rescind rules and regulations relating to this Plan; (iv)
correct any defect, supply any omission or reconcile any inconsistency in this
Plan; (v) grant Options under this Plan; (vi) determine the individuals to whom
Options shall be granted under this Plan and whether the Option is an Incentive
Stock Option or a Non-Qualified Stock Option; (vii) determine the time or times
at which Options shall be granted under this Plan; (viii) determine the number
of shares of Common Stock subject to each Option, the exercise price of each
Option, the duration of each Option and the times at which each Option shall
become exercisable; (ix) determine all other terms and conditions of Options;
and (x) make all other determinations necessary or advisable for the
administration of this Plan. All decisions, determinations and interpretations
made by the Plan Administrator shall be binding and conclusive on all
participants in this Plan and on their legal representatives, heirs and
beneficiaries.
(d) The Board or the Committee may delegate to one or more executive
officers of the Company the authority to grant Options under this Plan to
employees of the Company who, on the Date of Grant, are not subjected to Section
16(b) of the Exchange Act with respect to the Common Stock ("Non-Insiders"), and
are not "covered employees" as such term is defined for purposes of Section
162(m) of the Code ("Non-Covered Employees"), and in connection therewith the
authority to determine: (i) the number of shares of Common Stock subject to such
Option; (ii) the duration of the Option; (iii) the vesting schedule for
determining the times at which such Option shall become exercisable; and (iv)
all other terms and conditions of such Options. The exercise price for any
Option granted by action of an executive officer or officers pursuant to such
delegation of authority shall not be less than the fair market value per share
of the Common Stock on the Date of Grant. Unless expressly approved in advance
by the Board or the Committee, such delegation of authority shall not include
the authority to accelerate the vesting, extend the period for exercise or
otherwise alter the terms of outstanding Options. The term "Plan Administrator"
when used in any provision of this Plan other than Sections 2, 5(m), and 11
shall be deemed to refer to the Board or the Committee, as the case may be, and
an executive officer who has been authorized to grant Options pursuant thereto,
insofar as such provisions may be applied to persons that are Non-Insiders and
Non-Covered Employees and Options granted to such persons.
3. ELIGIBILITY.
Incentive Stock Options may be granted to any individual who, at the
time the Option is granted, is a full-time employee of the Company or any
Related Corporation (as defined below) ("Employees") or who is a non-Employee
director of the Company. Non-Qualified Stock Options may be granted to
Employees, directors and such other persons as the Plan Administrator shall
select. Options may be granted in substitution for outstanding Options of
another corporation in connection with the merger, consolidation, acquisition of
property or stock or other reorganization between such other corporation and the
Company or any subsidiary of the Company. Options also may be granted in
exchange for outstanding Options. Any person to whom an Option is granted under
this Plan is referred to as an "Optionee."
As used in this Plan, the term "Related Corporation," when referring to
a subsidiary corporation, shall mean any corporation (other than the Company) in
an unbroken chain of corporations beginning with the Company if, at the time of
the granting of the Option, each of the corporations other than the last
corporation in the unbroken chain owns stock
FreeShop International, Inc.
1997 Stock Option Plan
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<PAGE> 3
possessing fifty percent (50%) or more of the total combined voting power of all
classes of stock of one of the other corporations in such chain. When referring
to a parent corporation, the term "Related Corporation" shall mean any
corporation (other than the Company) in an unbroken chain of corporations ending
with the Company if, at the time of granting of the Option, each of the
corporations other than the Company owns stock possessing fifty percent (50%) or
more of the total combined voting power of all classes of stock of one of the
other corporations in such chain.
4.* STOCK.
The Plan Administrator is authorized to grant Options to acquire up to a
total of 1,600,000 shares of the Company's authorized but unissued, or
reacquired, Common Stock. The number of shares with respect to which Options may
be granted hereunder is subject to adjustment as set forth in Section 5(m)
hereof. In the event that any outstanding Option expires or is terminated for
any reason, the shares of Common Stock allocable to the unexercised portion of
such Option may again be subject to an Option to the same Optionee or to a
different person eligible under Section 3 of this Plan.
5. TERMS AND CONDITIONS OF OPTIONS.
Each Option granted under this Plan shall be evidenced by a written
agreement approved by the Plan Administrator (the "Agreement"). Agreements may
contain such additional provisions, not inconsistent with this Plan, as the Plan
Administrator in its discretion may deem advisable. All Options also shall
comply with the following requirements:
(a) Number of Shares and Type of Option.
Each Agreement shall state the number of shares of Common Stock to which
it pertains and whether the Option is intended to be an Incentive Stock Option
or a Non-Qualified Stock Option. In the absence of action to the contrary by the
Plan Administrator in connection with the grant of an Option, all Options shall
be Non-Qualified Stock Options. The aggregate fair market value (determined at
the Date of Grant, as defined below) of the stock with respect to which
Incentive Stock Options are exercisable for the first time by the Optionee
during any calendar year (granted under this Plan and all other Incentive Stock
Option plans of the Company, a Related Corporation or a predecessor corporation)
shall not exceed $100,000, or such other limit as may be prescribed by the Code
as it may be amended from time to time. Any Option which exceeds the annual
limit shall not be void but rather shall be a Non-Qualified Stock Option.
- --------
* This section was amended and restated by the Third Amendment to 1997 Stock
Option Plan pursuant to a resolution of the Board of Directors dated January 21,
1998 and later amended and restated by the Fourth Amendment to 1997 Stock Option
Agreement pursuant to a resolution of the Board of Directors dated May 24, 1999.
FreeShop International, Inc.
1997 Stock Option Plan
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<PAGE> 4
(b) Date of Grant.
Each Agreement shall state the date the Plan Administrator has deemed to
be the effective date of the Option for purposes of this Plan (the "Date of
Grant").
(c) Exercise Price.
Each Agreement shall state the price per share of Common Stock at which
it is exercisable. The exercise price shall be fixed by the Plan Administrator
at whatever price the Plan Administrator may determine in the exercise of its
sole discretion in good faith; provided, that with respect to Incentive Stock
Options granted to greater-than-10 percent (>10%) shareholders of the Company
(as determined with reference to Section 424(d) of the Code), the exercise price
per share shall not be less than 110 percent (110%) of the fair market value per
share of the Common Stock at the Date of Grant.
(d) Duration of Options.
At the time of the grant of the Option, the Plan Administrator shall
designate, subject to paragraph 5(g) below, the expiration date of the Option,
which date shall not be later than ten (10) years from the Date of Grant in the
case of Incentive Stock Options; provided, that the expiration date of any
Incentive Stock Option granted to a greater-than-10 percent (>10%) shareholder
of the Company (as determined with reference to Section 424(d) of the Code)
shall not be later than five (5) years from the Date of Grant. In the absence of
action to the contrary by the Plan Administrator in connection with the grant of
a particular Option, and except in the case of Incentive Stock Options as
described above, all Options granted under this Plan shall expire ten (10) years
from the Date of Grant.
(e)** Vesting Schedule.
No Option shall be exercisable until it has vested. The vesting schedule
for each Option shall be specified by the Plan Administrator at the time of
grant of the Option; provided, that if no vesting schedule is specified at the
time of grant, the Option shall vest according to the following schedule:
<TABLE>
<CAPTION>
Number of Months Following Percentage of Total
Date Employment or Services Commence Option Vested
<S> <C>
12 25%
15 31.25%
18 37.50%
21 43.75%
24 50%
27 56.25%
30 62.50%
33 68.75%
36 75%
39 81.25%
42 87.50%
45 93.75%
48 100%
</TABLE>
- --------------
** This section was amended and restated by the First Amendment to 1997 Stock
Option Plan pursuant to a resolution of the Board of Directors dated July 1,
1997 and later amended and restated by the Second Amendment to 1997 Stock Option
Plan pursuant to a resolution of the Board of Directors dated August 22, 1997.
FreeShop International, Inc.
1997 Stock Option Plan
-4-
<PAGE> 5
(f) Acceleration of Vesting.
The vesting of one or more outstanding Options may be accelerated by the
Plan Administrator at such times and in such amounts as it shall determine in
its sole discretion. The vesting of Options also shall be accelerated under the
circumstances described in Sections 5(m) below and under such other
circumstances, if any, as may be described in individual Agreements.
(g) Term of Option.
Vested Options shall terminate, to the extent not previously exercised,
upon the occurrence of the first of the following events: (i) the expiration of
the Option, as designated by the Plan Administrator in accordance with Section
5(d) above; (ii) the expiration of ninety (90) days from the date of an
Optionee's termination of employment or contractual relationship with the
Company or any Related Corporation for any reason whatsoever other than death or
Disability (as defined below) unless, in the case of a Non-Qualified Stock
Option, the exercise period is extended by the Plan Administrator until a date
not later than the expiration date of the Option; or (iii) the expiration of one
(1) year from (A) the date of death of the Optionee or (B) cessation of an
Optionee's employment or contractual relationship by reason of Disability (as
defined below) unless, in the case of a Non-Qualified Stock Option, the exercise
period is extended by the Plan Administrator until a date not later than the
expiration date of the Option. If an Optionee's employment or contractual
relationship is terminated by death, any Option then held by the Optionee shall
be exercisable only by the person or persons to whom such Optionee's rights
under such Option shall pass by the Optionee's will or by the laws of descent
and distribution of the state or county of the Optionee's domicile at the time
of death. For purposes of the Plan, unless otherwise defined in the Agreement,
"Disability" shall mean any physical, mental or other health condition which
substantially impairs the Optionee's ability to perform her or his assigned
duties for one hundred twenty (120) days or more in any two hundred forty (240)
day period or that can be expected to result in death. The Plan Administrator
shall determine whether an Optionee has incurred a Disability on the basis of
medical evidence acceptable to the Plan Administrator. Upon making a
determination of Disability, the Plan Administrator shall, for purposes of the
Plan, determine the date of an Optionee's termination of employment or
contractual relationship.
Unless accelerated in accordance with Section 5(f) above, unvested
Options shall terminate immediately upon termination of employment or
contractual relationship of the Optionee by the Company for any reason
whatsoever, including death or Disability.
FreeShop International, Inc.
1997 Stock Option Plan
-5-
<PAGE> 6
For purposes of this Plan, transfer of employment or contractual
relationship between or among the Company and/or any Related Corporation shall
not be deemed to constitute a termination of employment with the Company or any
Related Corporations. For purposes of this Plan, if an Employee Optionee's
relationship with the Company changes (e.g., from an Employee to a non-Employee,
such as a part-time employee or a consultant, or by reason of military leave,
sick leave or other leave of absence), such change shall be deemed to constitute
a termination of employment unless otherwise determined by the Plan
Administrator; provided, that if, in the case of an Incentive Stock Option, the
Plan Administrator determines that for purposes hereof a change from an Employee
to a part-time employee or consultant shall not constitute a termination of the
Optionee's employment with the Company, then the Optionee's Incentive Stock
Option shall automatically be converted into a Non-Qualified Stock Option; and
provided further, that with respect to Incentive Stock Options, employment shall
in no event be deemed to continue beyond the first ninety (90) days of any leave
of absence unless the Optionee's re-employment rights are guaranteed by statute
or by contract.
(h) Exercise of Options.
Options shall be exercisable, either all or in part, at any time after
vesting, until termination; provided, that after registration of any of the
Company's securities under Section 12 of the Exchange Act and regardless of when
the Option is exercised, any Optionee who is an Insider shall be precluded from
selling or transferring any Common Stock or other security underlying an Option
during the six (6) months immediately following the grant of that Option. If
less than all of the shares included in the vested portion of any Option are
purchased, the remainder may be purchased at any subsequent time prior to the
expiration of the Option term. No portion of any Option for less than five (5)
shares (as adjusted pursuant to Section 5(m) below) may be exercised; provided,
that if the vested portion of any Option is less than five (5) shares, it may be
exercised with respect to all shares for which it is vested. Only whole shares
may be issued pursuant to an Option, and to the extent that an Option covers
less than one (1) share, it is unexercisable. Options or portions thereof may be
exercised by giving written notice to the Company, which notice shall specify
the number of shares to be purchased, and be accompanied by payment in the
amount of the aggregate exercise price for the Common Stock so purchased, which
payment shall be in the form specified in Section 5(i) below. The Company shall
not be obligated to issue, transfer or deliver a certificate of Common Stock to
any Optionee, or to his personal representative, until the aggregate exercise
price has been paid for all shares for which the Option shall have been
exercised and adequate provision has been made by the Optionee for satisfaction
of any tax withholding obligations associated with such exercise. During the
lifetime of an Optionee, Options are exercisable only by the Optionee.
(i) Payment upon Exercise of Option.
Upon the exercise of any Option, the aggregate exercise price shall be
paid to the Company in cash or by certified or cashier's check. In addition,
upon approval of the Plan Administrator, an Optionee may pay for all or any
portion of the aggregate exercise price (1) by delivering to the Company shares
of Common Stock previously held by such Optionee, (2) by having shares withheld
from the amount of shares of Common Stock to be received by Optionee or (3) by
complying with any other payment mechanism approved by the Plan Administrator
FreeShop International, Inc.
1997 Stock Option Plan
-6-
<PAGE> 7
from time to time. The shares of Common Stock received or withheld by the
Company as payment for shares of Common Stock purchased upon the exercise of
Options shall have a fair market value at the date of exercise (as determined by
the Plan Administrator) equal to the aggregate exercise price (or portion
thereof) to be paid by the Optionee upon such exercise.
(j) Rights as a Shareholder.
An Optionee shall have no rights as a shareholder with respect to any
shares covered by an Option until such Optionee becomes a record holder of such
shares, irrespective of whether such Optionee has given notice of exercise.
Subject to the provisions of Section 5(m) hereof, no rights shall accrue to an
Optionee and no adjustments shall be made on account of dividends (ordinary or
extraordinary, whether in cash, securities or other property) or distributions
or other rights declared on, or created in, the Common Stock for which the
record date is prior to the date the Optionee becomes a record holder of the
shares of Common Stock covered by the Option, irrespective of whether such
Optionee has given notice of exercise.
(k) Transfer of Option.
Unless otherwise specified in the Agreement or by the Plan
Administrator, Options granted under this Plan and the rights and privileges
conferred by this Plan may not be transferred, assigned, pledged or hypothecated
in any manner (whether by operation of law or otherwise) other than by will, by
applicable laws of descent and distribution, or (except in the case of an
Incentive Stock Option) pursuant to a qualified domestic relations order, and
shall not be subject to execution, attachment or similar process; provided
however, that any Agreement may provide or be amended to provide that a
Non-Qualified Stock Option to which it relates is transferable during the
Optionee's lifetime without payment of consideration to immediate family members
of the Optionee or to trusts or partnerships established exclusively for the
benefit of the Optionee and the Optionee's immediate family members. Upon any
attempt to transfer, assign, pledge, hypothecate or otherwise dispose of any
Option or of any right or privilege conferred by this Plan contrary to the
provisions hereof, or upon the sale, levy or any attachment or similar process
upon the rights and privileges conferred by this Plan, such Option shall
thereupon terminate and become null and void.
(l) Securities Regulation and Tax Withholding.
(1) Shares shall not be issued with respect to an
Option unless the exercise of such Option and the issuance and delivery of such
shares shall comply with all relevant provisions of law, including, without
limitation, any applicable state securities laws, the Securities Act of 1933, as
amended, (the "Securities Act"), the Exchange Act, the rules and regulations
thereunder and the requirements of any stock exchange upon which such shares may
then be listed, and such issuance shall be further subject to the approval of
counsel for the Company with respect to such compliance, including the
availability of an exemption from registration for the issuance and sale of such
shares. The inability of the Company to obtain from any regulatory body the
authority deemed by the Company to be necessary for the lawful issuance and sale
of any shares under this Plan, or the unavailability of an exemption from
FreeShop International, Inc.
1997 Stock Option Plan
-7-
<PAGE> 8
registration for the issuance and sale of any shares under this Plan, shall
relieve the Company of any liability with respect to the non-issuance or sale of
such shares.
As a condition to the exercise of an Option, the Plan Administrator may
require the Optionee to represent and warrant in writing at the time of such
exercise that the shares are being purchased only for investment and without any
then-present intention to sell or distribute such shares. At the option of the
Plan Administrator, a stop-transfer order against such shares may be placed on
the stock books and records of the Company, and a legend indicating that the
stock may not be pledged, sold or otherwise transferred unless an opinion of
counsel is provided stating that such transfer is not in violation of any
applicable law or regulation, may be stamped on the certificates representing
such shares in order to assure an exemption from registration. The Plan
Administrator also may require such other documentation as may from time to time
be necessary to comply with federal and state securities laws. It is the intent
of the Company to register the shares issuable upon exercise of the Option as
soon as reasonably practical after such time, if ever, as the Company registers
any of its other shares of common stock under the Securities Act, but THE
COMPANY HAS NO OBLIGATION TO UNDERTAKE REGISTRATION OF OPTIONS OR THE SHARES OF
STOCK ISSUABLE UPON THE EXERCISE OF OPTIONS.
(2) As a condition to the exercise of any Option granted
under this Plan, the Optionee shall make such arrangements as the Plan
Administrator may require for the satisfaction of any federal, state or local
withholding tax obligations that may arise in connection with such exercise.
(3) The issuance, transfer or delivery of certificates of
Common Stock pursuant to the exercise of Options may be delayed, at the
discretion of the Plan Administrator, until the Plan Administrator is satisfied
that the applicable requirements of the federal and state securities laws and
the withholding provisions of the Code have been met.
(m) Stock Dividend, Reorganization or Liquidation.
(1) If (i) the Company shall at any time be involved in a
transaction described in Section 424(a) of the Code (or any successor provision)
or any "corporate transaction" described in the regulations thereunder; (ii) the
Company shall declare a dividend payable in, or shall subdivide or combine, its
Common Stock; or (iii) any other event with substantially the same effect shall
occur, the Plan Administrator shall, with respect to each outstanding Option,
proportionately adjust the number of shares of Common Stock and/or the exercise
price per share so as to preserve the rights of the Optionee substantially
proportionate to the rights of the Optionee prior to such event, and to the
extent that such action shall include an increase or decrease in the number of
shares of Common Stock subject to outstanding Options, the number of shares
available under Section 4 of this Plan shall automatically be increased or
decreased, as the case may be, proportionately, without further action on the
part of the Plan Administrator, the Company or the Company's shareholders.
FreeShop International, Inc.
1997 Stock Option Plan
-8-
<PAGE> 9
(2) If the Company is liquidated or dissolved, the Plan
Administrator may allow the holders of any outstanding Options to exercise all
or any part of the unvested portion of the Options held by them; provided, that
such Options must be exercised prior to the effective date of such liquidation
or dissolution. If the Option holders do not exercise their Options prior to
such effective date, each outstanding Option shall terminate as of the effective
date of the liquidation or dissolution.
(3) The foregoing adjustments in the shares subject to
Options shall be made by the Plan Administrator, or by any successor
administrator of this Plan, or by the applicable terms of any assumption or
substitution document.
(4) The grant of an Option shall not affect in any way the
right or power of the Company to make adjustments, reclassifications,
reorganizations or changes of its capital or business structure, to merge,
consolidate or dissolve, to liquidate or to sell or transfer all or any part of
its business or assets.
6. EFFECTIVE DATE; TERM.
This Plan shall be effective as of June 30, 1997. Incentive Stock
Options may be granted by the Plan Administrator from time to time thereafter
through and until June 30, 2007. Non-Qualified Stock Options may be granted
until this Plan is terminated by the Board in its sole discretion. Termination
of this Plan shall not terminate any Option granted prior to such termination.
Any Options granted by the Plan Administrator prior to the approval of this Plan
by a majority of the shareholders of the Company shall be granted subject to
ratification of this Plan by the shareholders of the Company within twelve (12)
months after this Plan is adopted by the Board, and if shareholder ratification
is not obtained, each and every Option granted under this Plan shall be null and
void and shall convey no rights to the holder thereof.
7. NO OBLIGATIONS TO EXERCISE OPTION.
The grant of an Option shall impose no obligation upon the Optionee to
exercise such Option.
8. NO RIGHT TO OPTIONS OR TO EMPLOYMENT.
Whether or not any Options are to be granted under this Plan shall be
exclusively within the discretion of the Plan Administrator, and nothing
contained in this Plan shall be construed as giving any person any right to
participate under this Plan. The grant of an Option shall in no way constitute
any form of agreement or understanding binding on the Company or any Related
Company, express or implied, that the Company or any Related Company will employ
or contract with an Optionee for any length of time, nor shall it interfere in
any way with the Company's or, where applicable, a Related Company's right to
terminate Optionee's employment at any time, which right is hereby reserved.
FreeShop International, Inc.
1997 Stock Option Plan
-9-
<PAGE> 10
9. APPLICATION OF FUNDS.
The proceeds received by the Company from the sale of Common Stock
issued upon the exercise of Options shall be used for general corporate
purposes, unless otherwise directed by the Board.
10. INDEMNIFICATION OF PLAN ADMINISTRATOR.
In addition to all other rights of indemnification they may have as
members of the Board, members of the Plan Administrator shall be indemnified by
the Company for all reasonable expenses and liabilities of any type or nature,
including attorneys' fees, incurred in connection with any action, suit or
proceeding to which they or any of them are a party by reason of, or in
connection with, this Plan or any Option granted under this Plan, and against
all amounts paid by them in settlement thereof (provided that such settlement is
approved by independent legal counsel selected by the Company), except to the
extent that such expenses relate to matters for which it is adjudged that such
Plan Administrator member is liable for willful misconduct; provided, that
within fifteen (15) days after the institution of any such action, suit or
proceeding, the Plan Administrator member involved therein shall, in writing,
notify the Company of such action, suit or proceeding, so that the Company may
have the opportunity to make appropriate arrangements to prosecute or defend the
same.
11. AMENDMENT OF PLAN.
The Plan Administrator may, at any time, modify, amend or terminate this
Plan and Options granted under this Plan, including, without limitation, such
modifications or amendments as are necessary to maintain compliance with
applicable statutes, rules or regulations; provided, that any amendment for
which shareholder approval is required by the Rule in order for the Plan to be
eligible or continue to qualify for the benefits of the Rule shall be subject to
approval of the requisite percentage of the shareholders of the Company in
accordance with the Rule. Without limiting the generality of the foregoing, the
Plan Administrator may modify grants to persons who are eligible to receive
Options under this Plan who are foreign nationals or employed outside the United
States to recognize differences in local law, tax policy or custom.
Date Approved by Board of Directors of Company: June 30, 1997.
Date Approved by Shareholders of Company: June 30, 1997.
FreeShop International, Inc.
1997 Stock Option Plan
-10-
<PAGE> 11
FREESHOP INTERNATIONAL, INC.
FIRST AMENDMENT TO 1997 STOCK OPTION PLAN
This First Amendment (the "First Amendment") to 1997 Stock Option Plan
(the "Plan") is dated to be effective as of July 1, 1997. On June 30, 1997,
FreeShop International, Inc. (the "Company") adopted the Plan. Capitalized terms
used in this First Amendment and not otherwise defined have the meanings
assigned to such terms in the Plan.
By resolution adopted by the Board of Directors of the Company on July
1, 1997, the Company hereby amends Section 5(e) of the Plan and restates such
section in its entirety as follows:
"(e) Vesting Schedule.
No Option shall be exercisable until it has vested. The vesting schedule
for each Option shall be specified by the Plan Administrator at the time of
grant of the Option; provided, that if no vesting schedule is specified at the
time of grant, the Option shall vest according to the following schedule:
<TABLE>
<CAPTION>
Number of Months Following
Date Employment or Services Commence Percentage of Total
(Date of Grant: After 7/01/97) Option Vested
<S> <C>
0 0.0%
3 0.0%
6 9.1%
9 9.1%
12 9.1%
15 9.1%
18 9.1%
21 9.1%
24 9.1%
27 9.1%
30 9.1%
33 9.1%
36 9.0%"
</TABLE>
<PAGE> 12
FREESHOP INTERNATIONAL, INC.
SECOND AMENDMENT TO 1997 STOCK OPTION PLAN
This Second Amendment (the "Second Amendment") to 1997 Stock Option Plan
(the "Plan") is dated to be effective as of August 22, 1997. On June 30, 1997,
FreeShop International, Inc. (the "Company") adopted the Plan. Capitalized terms
used in this Second Amendment and not otherwise defined have the meanings
assigned to such terms in the Plan.
By resolution adopted by the Board of Directors of the Company on August
22, 1997, the Company hereby amends Section 5(e) of the Plan and restates such
section in its entirety as follows:
"(e) Vesting Schedule.
No Option shall be exercisable until it has vested. The vesting schedule
for each Option shall be specified by the Plan Administrator at the time of
grant of the Option; provided, that if no vesting schedule is specified at the
time of grant, the Option shall vest according to the following schedule:
<TABLE>
<CAPTION>
Number of Months Following
Date Employment or Services Commence Percentage of Total
(Date of Grant: After 7/01/97) Option Vested
<S> <C>
0 0.0%
3 0.0%
6 0.0%
9 0.0%
12 20.0%
15 6.7%
18 6.7%
21 6.7%
24 6.7%
27 6.7%
30 6.7%
33 6.7%
36 6.7%
39 6.7%
42 6.7%
45 6.7%
48 6.3%"
</TABLE>
<PAGE> 13
FREESHOP INTERNATIONAL, INC.
THIRD AMENDMENT TO 1997 STOCK OPTION PLAN
This Third Amendment (the "Third Amendment") to 1997 Stock Option Plan
(the "Plan") is dated to be effective as of January 21, 1998. On June 30, 1997,
FreeShop International, Inc. (the "Company") adopted the Plan. Capitalized terms
used in this Third Amendment and not otherwise defined have the meanings
assigned to such terms in the Plan.
By resolution adopted by the Board of Directors of the Company on
January 21, 1998, the Company hereby amends Section 4 of the Plan and restates
such section in its entirety as follows:
"4. STOCK.
The Plan Administrator is authorized to grant Options to acquire up to a
total of 2,800,000 shares of the Company's authorized but unissued, or
reacquired, Common Stock. The number of shares with respect to which Options may
be granted hereunder is subject to adjustment as set forth in Section 5(m)
hereof. In the event that any outstanding Option expires or is terminated for
any reason, the shares of Common Stock allocable to the unexercised portion of
such option may again be subject to an Option to the same Optionee or to a
different person eligible under Section 3 of this Plan."
<PAGE> 14
FREESHOP.COM, INC.
(FORMERLY "FREESHOP INTERNATIONAL, INC.")
FOURTH AMENDMENT TO 1997 STOCK OPTION PLAN
This Fourth Amendment (the "Fourth Amendment") to 1997 Stock Option Plan
(the "Plan") is dated to be effective as of May 24, 1999. On June 30, 1997,
FreeShop.com, Inc. (formerly "FreeShop International, Inc." and herein referred
to as the "Company") adopted the Plan. Capitalized terms used in this Fourth
Amendment and not otherwise defined have the meanings assigned to such terms in
the Plan.
By resolution adopted by the Board of Directors of the Company on May
24, 1999, the Company hereby amends Section 4 of the Plan and restates such
section in its entirety as follows:
"4. STOCK.
The Plan Administrator is authorized to grant Options to acquire up to a
total of 6,000,000 shares of the Company's authorized but unissued, or
reacquired, Common Stock. The number of shares with respect to which Options may
be granted hereunder is subject to adjustment as set forth in Section 5(m)
hereof. In the event that any outstanding Option expires or is terminated for
any reason, the shares of Common Stock allocable to the unexercised portion of
such option may again be subject to an Option to the same Optionee or to a
different person eligible under Section 3 of this Plan."
<PAGE> 1
EXHIBIT 10.3
**OPTIONEE COPY**
FREESHOP.COM, INC.
1997 STOCK OPTION PLAN
STOCK OPTION AGREEMENT
THIS AGREEMENT is entered into this GRANT DATE ("Date of Grant") between
FreeShop.com, Inc., a Washington corporation (the "Company"), and NAME (the
"Optionee").
WHEREAS, the Board of Directors of the Company (the "Board") has approved
and adopted the 1997 Stock Option Plan, as amended (the "Plan"), pursuant to
which the Board is authorized to grant to employees and other selected persons
stock options to purchase common stock, no par value, of the Company (the
"Common Stock");
WHEREAS, the Plan provides for the granting of stock options that either
(i) are intended to qualify as "Incentive Stock Options" within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or
(ii) do not qualify under Section 422 of the Code ("Non-Qualified Stock
Options");
WHEREAS, the Board has authorized the grant to Optionee of options to
purchase a total of NUMBER OF OPTIONS shares of Common Stock (the "Options"),
which Options are intended to be:
Non-Qualified Stock Options
NOW, THEREFORE, the Company agrees to offer to the Optionee the option to
purchase, upon the terms and conditions set forth herein and in the Plan, NUMBER
OF OPTIONS shares of Common Stock. Capitalized terms not otherwise defined
herein shall have the meanings ascribed thereto in the Plan.
1. Exercise Price. The exercise price of the options shall be PRICE per
share.
2. Limitation on the Number of Shares. If the Options granted hereby are
Incentive Stock Options, the number of shares which may be acquired upon
exercise thereof is subject to the limitations set forth in Section 5(a) of the
Plan.
3. Vesting Schedule. The Options are exercisable in accordance with the
following vesting schedule:
<TABLE>
<CAPTION>
Number of Months Following Start Date Percentage of Total
VEST DATE Option Vested
- -------------------------------------------------------------------------------
<S> <C>
0 0.0%
3 0.0%
6 0.0%
9 20.0%
12 6.7%
15 6.7%
18 6.7%
21 6.7%
24 6.7%
27 6.7%
30 6.7%
33 6.7%
36 6.7%
39 6.7%
42 6.7%
45 6.7%
48 6.3%
</TABLE>
<PAGE> 2
FreeShop.com, Inc. -- 1997 Stock Option Plan **OPTIONEE COPY**
Stock Option Agreement
Page 2
4. Options not Transferable. This Option may not be transferred,
assigned, pledged or hypothecated in any manner (whether by operation of law or
otherwise) other than by will, by applicable laws of descent and distribution or
(except in the case of an Incentive Stock Option) pursuant to a qualified
domestic relations order, and shall not be subject to execution, attachment or
similar process; provided, however, that if this Option represents a
Non-Qualified Stock Option, such Option is transferable without payment of
consideration to immediate family members of the Optionee or to trusts or
partnerships established exclusively for the benefit of the Optionee and the
Optionee's immediate family members. Upon any attempt to transfer, pledge,
hypothecate or otherwise dispose of any Option or of any right or privilege
conferred by the Plan contrary to the provisions thereof, or upon the sale, levy
or attachment or similar process upon the rights and privileges conferred by the
Plan, such Option shall thereupon terminate and become null and void.
5. Investment Intent. By accepting the option, the Optionee represents
and agrees that none of the shares of Common Stock purchased upon exercise of
the Option will be distributed in violation of applicable federal and state laws
and regulations. In addition, the Company may require, as a condition of
exercising the Options, that the Optionee execute an undertaking, in such a form
as the Company shall reasonably specify, that the Stock is being purchased only
for investment and without any then-present intention to sell or distribute such
shares.
6. Termination of Employment and Options. Vested Options shall terminate,
to the extent not previously exercised, upon the occurrence of the first of the
following events:
(i) Expiration: The expiration of ten (10) years from the Date of Grant
(EXPIRY DATE); except, that the expiration date of any Incentive Stock
Option granted to a greater-than-10 percent (>10%) shareholder of the
Company shall not be later than five (5) years from the Date of Grant.
(ii) Termination Due to Death or Disability: The expiration of one (1) year
from the date of the death of the Optionee or cessation of an Optionee's
employment or contractual relationship by reason of Disability (as defined
in Section 5(g) of the Plan). If an Optionee's employment or contractual
relationship is terminated by death, any Option held by the Optionee shall
be exercisable only by the person or persons to whom such Optionee's rights
under such Option shall pass by the Optionee's will or by the laws of
descent and distribution.
(iii) Termination for Any Other Reason: The expiration of ninety (90) days
from the date of an Optionee's termination of employment or contractual
relationship with the Company or any Related Corporation for any reason
whatsoever other than death or Disability (as defined in Section 5(g) of
the Plan).
Each unvested Option granted pursuant hereto shall terminate immediately upon
termination of the Optionee's employment or contractual relationship with the
Company for any reason whatsoever, including death or Disability unless vesting
is accelerated in accordance with Section 5(f) of the Plan.
7. Stock. In the case of any stock split, stock dividend or like change
in the nature of shares of Stock covered by this Agreement, the number of shares
and exercise price shall be proportionately adjusted as set forth in Section
5(m) of the Plan.
8. Exercise of Option. Options shall be exercisable, in full or in part,
at any time after vesting, until termination; provided, however, that any
Optionee who is subject to the reporting and liability provisions of Section 16
of the Securities and Exchange Act of 1934, as amended, with respect to the
Common Stock shall be precluded from selling or transferring any Common Stock or
other security underlying an Option during the six (6) months immediately
following the grant of that Option. If less than all of the shares included in
the vested portion of any Option are purchased, the remainder may be purchased
at any subsequent time prior to the expiration of the Option term. No portion of
any Option for less than five (5) shares (as adjusted pursuant to Section 5(m)
of the Plan) may be exercised; provided, that if the vested portion of any
Option is less than five (5) shares, it may be exercised with respect to all
shares for which it is vested. Only whole shares may be issued pursuant to an
Option, and to the extent that an Option covers less than one (1) share, it is
unexercisable.
Each exercise of the Option shall be by means of delivery of a notice of
election to exercise (which may
<PAGE> 3
FreeShop.com, Inc. -- 1997 Stock Option Plan **OPTIONEE COPY**
Stock Option Agreement
Page 3
be in the form attached hereto as Exhibit A) to the Secretary of the Company at
its principal executive office, specifying the number of shares of Common Stock
to be purchased and accompanied by payment in cash by certified check or
cashier's check in the amount of the full exercise price for the Common Stock to
be purchased. In addition to payment in cash by certified check or cashier's
check, an Optionee or transferee of an Option may pay for all or any portion of
the aggregate exercise price by complying with one or more of the following
alternatives:
(i) by delivering to the Company shares of Common Stock previously held by
such person or by the Company withholding shares of Common Stock otherwise
deliverable pursuant to exercise of the Option, which shares of Common
Stock received or withheld shall have a fair market value at the date of
exercise (as determined by the Plan Administrator) equal to the aggregate
purchase price to be paid by the Optionee upon such exercise; or
(ii) by complying with any other payment mechanism approved by the Plan
Administrator at the time of exercise.
9. Holding Period for Incentive Stock Options. In order to obtain the tax
treatment provided for Incentive Stock Options by Section 422 of the Code, the
shares of Common Stock received upon exercising any Incentive Stock Options
received pursuant to this Agreement must be sold, if at all, after a date which
is later of two (2) years from the date of this agreement is entered into or one
(1) year from the date upon which the Options are exercised. The Optionee agrees
to report sales of such shares prior to the above determined date to the Company
within one (1) business day after such sale is concluded. The Optionee also
agrees to pay to the Company, within five (5) business days after such sale is
concluded, the amount necessary for the Company to satisfy its withholding
requirement required by the Code in the manner specified in Section 5(l)(2) of
the Plan. Nothing in this Section 9 is intended as a representation that Common
Stock may be sold without registration under state and federal securities laws
or an exemption therefrom, or that such registration or exemption will be
available at any specified time.
10. Subject to 1997 Stock Option Plan. The terms of the Options are
subject to the provisions of the Plan, as the same may from time to time be
amended, and any inconsistencies between this Agreement and the Plan, as the
same may be from time to time amended, shall be governed by the provisions of
the Plan, a copy of which has been delivered to the Optionee, and which is
available for inspection at the principal offices of the Company
11. Professional Advice. The acceptance of the Options and the sale of
Common Stock issued pursuant to the exercise of Options may have consequences
under federal and state tax and securities laws which may vary depending upon
the individual circumstances of the Optionee. Accordingly, the Optionee
acknowledges that he or she has been advised to consult his or her personal
legal and tax advisor in connection with this Agreement and his or her dealings
with respect to Options for the Common Stock. Without limiting other matters to
be considered, the Optionee should consider whether upon the exercise of
Options, the Optionee will file an election with the Internal Revenue Service
pursuant to Section 83(b) of the Code.
12. No Employment Relationship. Whether or not any Options are to be
granted under this Plan shall be exclusively within the discretion of the Plan
Administrator, and nothing contained in this Plan shall be construed as giving
any person any right to participate under this Plan. The grant of an Option
shall in no way constitute any form of agreement or understanding binding on the
Company or any Related Company, express or implied, that the Company or any
Related Company will employ or contract with an Optionee for any length of time,
nor shall it interfere in any way with the Company's or, where applicable, a
Related Company's right to terminate Optionee's employment at any time, which
right is hereby reserved.
13. Entire Agreement. This Agreement is the only agreement between the
Optionee and the Company with respect to the Options, and this Agreement and the
Plan supersede all prior and contemporaneous oral and written statements and
representations and contain the entire agreement between the parties with
respect to the Options
<PAGE> 4
FreeShop.com, Inc. -- 1997 Stock Option Plan **OPTIONEE COPY**
Stock Option Agreement
Page 4
14. Notices. Any notice required or permitted to be made or given
hereunder shall be mailed or delivered personally to the addresses set forth
below, or as changed from time to time by written notice to the other:
The Company: FreeShop.com, Inc.
95 South Jackson, Suite 300
Seattle, Washington 98104
Attention: Tim Choate
President & CEO
The Optionee: ___________________________
___________________________
___________________________
FREESHOP.COM, INC. OPTIONEE
By: _____________________________ _______________________________
Signature
of NAME
Its: _____________________________ Printed Name
THERE MAY NOT BE PRESENTLY AVAILABLE EXEMPTIONS FROM THE REGISTRATION
REQUIREMENTS OF APPLICABLE FEDERAL AND STATE SECURITIES LAWS FOR THE ISSUANCE OF
SHARES OF STOCK UPON EXERCISE OF THESE OPTIONS. ACCORDINGLY, THESE OPTIONS
CANNOT BE EXERCISED UNLESS THESE OPTIONS AND THE SHARES OF STOCK TO BE ISSUED
UPON EXERCISE OF THESE OPTIONS ARE REGISTERED OR AN EXEMPTION FROM SUCH
REGISTRATION REQUIREMENTS IS AVAILABLE.
THE SHARES OF STOCK ISSUED PURSUANT TO THE EXERCISE OF OPTIONS WILL BE
"RESTRICTED SECURITIES" AS DEFINED IN RULE 144 UNDER THE SECURITIES ACT OF 1933
AND WILL BEAR A LEGEND RESTRICTING RESALE UNLESS THEY ARE REGISTERED UNDER STATE
AND FEDERAL SECURITIES LAWS OR AN EXEMPTION FROM REGISTRATION IS AVAILABLE. THE
COMPANY IS NOT OBLIGATED TO REGISTER THE SHARES OF STOCK OR TO MAKE AVAILABLE
ANY EXEMPTION FROM REGISTRATION.
<PAGE> 5
EXHIBIT A
Notice of Election to Exercise
This Notice of Election to Exercise shall constitute proper notice pursuant
to Section 5(h) of the FreeShop.com, Inc. 1997 Stock Option Plan (the "Plan")
and Section 8 of that certain Stock Option Agreement (the "Agreement") dated as
of the ____ day of _____________, 19____ between FreeShop.coml, Inc. (the
"Company") and the undersigned.
The undersigned hereby elects to exercise Optionee's option to purchase
__________ shares of the common stock of the Company at a purchase price of
$_______ per share, for aggregate consideration of $_____, on the terms and
conditions set forth in the Agreement and the Plan. Such aggregate
consideration, in the form specified in Section 8 of the Agreement, accompanies
this notice.
The undersigned has executed this Notice this ____ day of ____________,
19____.
----------------------------------
Signature
----------------------------------
Name (typed or printed)
<PAGE> 1
EXHIBIT 10.4
INVESTOR SUBSCRIPTION AGREEMENT
THIS AGREEMENT, made as of December 10, 1998, by and between
FREESHOP INTERNATIONAL, INC., a Washington corporation (the "Corporation"), and
FINGERHUT COMPANIES, INC., a Minnesota corporation (the "Investor").
W I T N E S S E T H :
WHEREAS, the Corporation and the Investor desire to enter into
this Investor Subscription Agreement (this "Agreement") pursuant to which the
Investor will purchase, and the Corporation will sell, 4,048,467 shares of the
Corporation's common stock, without par value (the "Common Stock"), and the
Corporation will, pursuant to the Warrant Agreement dated as of the date hereof
between the Corporation and Investor (the "Warrant Agreement"), grant to the
Investor warrants to purchase a number of shares which together with the shares
of Common Stock issued to the Investor pursuant to this Agreement will represent
40.0% of the outstanding Common Stock (subject to adjustment as provided in the
Warrant Agreement);
WHEREAS, in order to induce the Investor to enter into this
Agreement, the Corporation has also entered into a Stockholders Agreement dated
as of the date hereof (the "Stockholders Agreement") (the transactions
contemplated by this Agreement, the Stockholders Agreement and the Warrant
Agreement being referred to herein as the "Transaction");
NOW THEREFORE, in consideration of the mutual covenants and
agreements set forth below, the parties hereto hereby agree as follows:
ARTICLE I
Section I.1. Issuance of the Subscription Stock. Upon the
execution of this Agreement, the Investor shall purchase, and the Corporation
shall issue to the Investor, 4,048,467 shares of Common Stock (the "Investor
Stock"), which following such issuance will be 19.9% of the issued and
outstanding shares of Common Stock, at a price of $.98803 per share, for
aggregate consideration of $4,000,000.00, $500,000 of which shall be paid by the
surrender and cancellation of a Convertible Promissory Note, dated as of
December 4, 1998, issued by the Corporation to the Investor. The Corporation
shall deliver to the Investor a certificate representing such Investor Stock.
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<PAGE> 2
ARTICLE II
Section II.1. Investor Representations and Warranties. In
connection with the purchase and sale of the Investor Stock hereunder and the
warrants pursuant to the Warrant Agreement, the Investor represents and warrants
to the Corporation that:
(i) The Investor is aware that the Investor Stock, the Warrants
and the shares of Common Stock issuable upon exercise of the Warrants
(collectively, the "Investor Securities") have not been registered under
the Securities Act of 1933, as amended (the "Securities Act"), or any
state securities laws, in reliance on exemptions from such registration.
It is understood that reliance by the Corporation on such exemptions is
predicated in part upon the truth and accuracy of the statements made by
the Investor in this Agreement.
(ii) The Investor's duly authorized representatives, either
alone or with the assistance of the Investor's professional advisors,
have such knowledge and experience in financial and business matters
that they are capable of evaluating the merits and risks of Investor's
purchase of the Investor Securities.
(iii) The Investor has sufficient financial resources to be able
to bear the risk of the Investor's investment in the Investor
Securities.
(iv) The duly authorized representatives of the Investor have
either spoken or met with, or been given reasonable opportunity to speak
with or meet with, representatives of the Corporation for the purpose of
asking questions of, and receiving answers and information from, such
representatives concerning the Investor's investment in the Investor
Securities.
(v) The Investor is purchasing the Investor Securities for its
own account for investment purposes and not with a view toward the sale
or distribution of all or any part of such securities. No one other than
the Investor has any beneficial interest in the Investor Securities.
(vi) It is understood that, because the Investor Securities have
not been registered under the Securities Act, (a) the Investor
Securities have the status of securities acquired in a transaction under
Section 4(2) of the Securities Act; and (b) the Investor Securities
cannot be sold unless such stock is subsequently registered or an
exemption from registration is available.
(vii) Investor will in no event sell or distribute all or any
part of the Investor Securities unless (a) there is an effective
registration statement under the Securities Act and applicable state
securities laws covering any such transaction involving such stock, or
(b) the Corporation receives an opinion of the Investor's legal counsel,
in form acceptable to the Corporation, stating that such transaction is
exempt from registration.
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<PAGE> 3
(viii) Investor understands that at the present time Rule 144
promulgated under the Securities Act may not be relied upon for the
resale or distribution of the Investor Securities because the
Corporation does not file the reports or make information about the
Corporation publicly available nor is there a public market for the
Investor Securities. Moreover, there can be no assurance that the
Corporation will in the future file such reports or make publicly
available such information, or that a public market for the Investor
Securities will develop.
(ix) This Agreement has been duly executed and delivered by the
Investor, and constitutes the legal, valid and binding obligation of the
Investor, enforceable in accordance with its terms, except as limited by
(a) bankruptcy, insolvency or similar laws of general application
affecting the enforcement of creditors' rights, and (b) the availability
of equitable remedies.
(x) The execution, delivery and performance of this Agreement by
the Investor does not and will not conflict with, violate or cause a
breach of any agreement, contract or instrument to which the Investor is
a party or any judgment, order or decree to which the Investor is
subject.
ARTICLE III
In connection with the transactions contemplated hereunder, the
Corporation represents and warrants to the Investor that:
Section III.1. Corporate Organization, Etc. The Corporation is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Washington with full corporate power and authority to carry on
its business as it is now being conducted, and to own, operate and lease its
properties and assets. The Corporation is duly qualified or licensed to do
business and is in corporate and tax good standing in those jurisdictions set
forth in Schedule 3.1, which sets forth every jurisdiction in which the conduct
of its business, the ownership or lease of its properties, the proposed conduct
of its business or ownership or lease of its properties, or the sale of its
capital stock to the Investor at the closing of the Transaction require it to be
so qualified or licensed, unless the failure to be so qualified would not have a
material adverse effect upon the Corporation or the ability of the Corporation
to meet its obligations hereunder. The Corporation has no subsidiaries.
Section III.2. Authorization, Etc. The Corporation has full power
and authority to enter into and consummate the Transaction. The execution,
delivery and performance of this Agreement, the issuance of the Investor Stock
and all other agreements and transactions which are part of the Transaction have
been duly authorized by the board of directors of the Corporation and no other
corporate proceedings, including authorization by the stockholders of the
Corporation, on its part are necessary to authorize this Agreement, the issuance
of the Investor Stock or the Transaction. This Agreement constitutes a legal,
valid
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<PAGE> 4
and binding obligation of the Corporation enforceable against the Corporation in
accordance with its terms.
Section III.3. Capitalization. (i) Set forth in Schedule 3.3 is a
description of the indebtedness of the Corporation, outstanding as of the date
hereof. (ii) Set forth in Schedule 3.3 is (A) a list of the shareholders of the
Corporation and the number of shares of Common Stock held by each, (B) a
description of the authorized capital stock of the Corporation, and (C) a
description of all rights to acquire shares of capital stock of the Corporation,
the terms thereof, and the persons holding such rights. The Corporation has
reserved for issuance the total number of shares deliverable upon exercise of
the warrants pursuant to the Warrant Agreement. The issuance of the Investor
Stock has been duly and validly authorized and, when issued in accordance with
the terms hereof, the Investor Stock will be duly and validly issued, fully paid
and nonassessable and free of preemptive rights.
Section III.4. No Violation. The execution, delivery and
performance by the Corporation of this Agreement, and all other agreements which
are part of the Transaction, and the fulfillment of and compliance with the
respective terms hereof and thereof by the Corporation, do not and will not (a)
conflict with or result in a breach of the terms, conditions or provisions of,
(b) constitute a default or event of default under (with due notice, lapse of
time or both), (c) result in the creation of any lien upon the Corporation's
capital stock or assets pursuant to, (d) give any third party the right to
accelerate any obligation under, (e) result in a violation of, or (f) require
any authorization, consent, approval, exemption or other action by, notice to,
or filing with any authority pursuant to, the articles of incorporation, bylaws
of the Corporation or any applicable regulation, order or contract to which the
Corporation or its respective properties are subject.
Section III.5. Binding Obligation. This Agreement constitutes a
valid and binding obligation of the Corporation, enforceable in accordance with
its respective terms, except to the extent enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
generally affecting creditors' rights and by equitable principles (regardless of
whether the enforcement is sought in equity or at law).
Section III.6. Financial Statements. The Corporation has
delivered to the Investor its audited financial statements for the year ended
December 31, 1997. Attached hereto as Schedule 3.6 is the Corporation's
unaudited balance sheet as at October 31, 1998 (the "Balance Sheet"). Also set
forth in Schedule 3.6 is the unaudited statement of operations for the ten-month
period ended October 31, 1998. Each of such financial statements was prepared in
accordance with GAAP consistently applied, and fairly presents in all material
respects the financial condition of the Corporation at the date thereof, and
reflects the assets and liabilities of the Corporation as of the date hereof
except as set forth in Schedule 3.6. Since October 31, 1998, there has been no
material adverse change in the business, operations, properties, prospects or
condition (financial or otherwise) of the Corporation, except that the
Corporation has continued to experience losses consistent with the results of
previous months during 1998.
Section III.7. Litigation. Except as set forth in Schedule 3.7
hereto, there is no action, suit, proceeding or investigation pending, or, to
the best knowledge of the Corporation,
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<PAGE> 5
threatened against the Corporation which might result in any adverse change in
the business, operations, conditions, prospects, properties or assets of the
Corporation or the ability of the Corporation to perform the Transaction. There
is no judgment, order, writ, injunction, or decree outstanding against the
Corporation.
Section III.8. Ownership of Property, Liens. On and as of the
date hereof, the Corporation is the lawful owner of, has good and marketable
title to and is in lawful possession of, or has valid leasehold interests in,
all properties and other assets, real or personal, tangible, intangible or
mixed, purported to be owned or leased, as the case may be, by the Corporation
on the Balance Sheet and none of its properties and assets is subject to any
Liens, except as set forth in Schedule 3.8. The Corporation conducts its
business without infringement or claim of infringement of any material license,
patent, trademark, trade name, service mark, copyright, trade secret or other
intellectual property right of others, and there is no infringement or claim of
infringement by others of any material license, patent, trademark, trade name,
service mark, copyright, trade secret or other intellectual property right of
the Corporation.
Section III.9. No Default. Except as set forth in Schedule 3.9
and except for the fact that certain accounts payable of the Corporation are
past due, the Corporation is not in default under or with respect to any
material contract, agreement, lease or other instrument to which it is a party
or by which its property is bound or affected.
Section III.10. No Burdensome Restrictions. There presently
exists no condition, event or act under any contract, lease, agreement or other
instrument to which the Corporation is a party or by which any of its property
is bound or affected, and no charge, corporate restriction, judgment, decree or
order and no provision of applicable law or governmental regulation to which the
Corporation is subject, which could have a material adverse effect on the
Corporation.
Section III.11. Tax Matters. All Federal, state and local tax
returns, reports and statements required to be filed by or on behalf of the
Corporation have been filed with the appropriate governmental agencies in all
jurisdictions in which such returns, reports and statements are required to be
filed, and all taxes (including real property taxes) and other charges shown to
be due and payable have been or will be timely paid prior to the date on which
any fine, penalty, interest, late charge or loss may be added thereto for
nonpayment thereof, except such taxes as are being contested in good faith by
appropriate proceedings for which adequate reserves have been established. All
state and local sales and use taxes required to be paid by the Corporation have
been paid except to the extent where the failure to so pay would not have a
material adverse effect. All federal and state returns have been filed by the
Corporation for all periods for which returns were due with respect to employee
tax withholding, social security and unemployment taxes, and the amounts shown
thereon to be due and payable have been paid in full or adequate provisions
therefor have been made.
Section III.12. Compliance with Law and Applicable Government
Regulations. The Corporation is presently in material compliance with regard to
its operations, practices, real property, plants, structures, machinery,
equipment and other property, and all other aspects of its business, with all
applicable statutes, rules, regulations and orders, including, but
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<PAGE> 6
not limited to, all regulations relating to the safe conduct of business,
environmental protection, quality and labeling, antitrust, taxes, consumer
protection, equal opportunity, discrimination, health, sanitation, fire, zoning,
building and occupational safety.
Section III.13. ERISA and Related Matters; Benefit Plans;
Obligations to Employees. Except as set forth in Schedule 3.13 hereto, neither
the Corporation, nor any ERISA Affiliate of the Corporation, is a party to or
participates in or has any liability or contingent liability with respect to:
(i) any "employee welfare benefit plan" or "employee pension benefit plan" or
"multiemployer plan" (as those terms are respectively defined in Sections 3(1),
3(2) and 3(37) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA")); (ii) any retirement or deferred compensation plan, incentive
compensation plan, stock plan, unemployment compensation plan, vacation pay,
severance pay, bonus or benefit arrangement, insurance or hospitalization
program or any other fringe benefit arrangements for any employee, director,
consultant or agent, whether pursuant to contract, arrangement, custom or
informal understanding, which does not constitute an "employee benefit plan" (as
defined in Section 3(3) of ERISA); or (iii) any employment agreement not
terminable on 30 days' or less written notice, without further liability. Any
plan, arrangement or agreement required to be listed on Schedule 3.13 for which
the Corporation or any ERISA Affiliate of the Corporation may have any liability
or contingent liability is sometimes hereinafter referred to as a "Benefit
Plan". For purposes of this Section, the term "ERISA Affiliate" shall mean any
trade or business, whether or not incorporated, that together with the
Corporation would be deemed a "single employer" within the meaning of Section
4001(b)(i) of ERISA.
Section III.14. Brokerage. There are no claims for brokerage
commissions, finders' fees or similar compensation in connection with the
Transaction based on any arrangement or agreement binding upon the Corporation.
Section III.15. Employment, Shareholders and Subscription
Agreements. Except for the agreements described in Schedule 3.15, there are no
(i) employment agreements covering the management of the Corporation, (ii)
collective bargaining agreements or other labor agreements covering any
employees of the Corporation, (iii) agreements for managerial, consulting or
similar services to which the Corporation is a party or by which it is bound or
(iv) agreements regarding the Corporation, its assets or operations or any
investment therein to which any of its stockholders is a party or by which it is
bound, including without limitation any stock option plan or stock appreciation
right plan.
Section III.16. Environmental Laws. The Corporation is not aware
of, and the Corporation has not received any written notice, notification,
demand, request for information, complaint, citation, summons, investigation,
administrative order, consent order, agreement, litigation or settlement arising
under or relating to Environmental Laws nor, to the Corporation's knowledge, are
any of the foregoing threatened, with respect to or in connection with the
Corporation or any properties now or previously owned, leased or operated by the
Corporation. All uses by the Corporation of any now or previously owned, leased
or operated property comply and at all times have complied with applicable
Environmental Laws. The prior uses of all now or previously owned, leased or
operated properties have at all times
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<PAGE> 7
complied with applicable Environmental Laws. No property now or previously
owned, leased or operated by the Corporation or any Subsidiary of the
Corporation, no property to which any materials originating at or from the
Corporation or any Subsidiary of the Corporation have been sent, and no property
on which the Corporation or any Subsidiary or the Corporation has transported or
arranged for the transportation of any material is listed or, to the
Corporation's knowledge, proposed for listing on the National Priorities List
promulgated pursuant to CERCLA, on CERCLIS (as defined in CERCLA) or on any
similar federal, state or foreign list of sites requiring investigation or
cleanup, nor, to the knowledge of the Corporation, is any such property
threatened to be placed on any such list. Other than in compliance with all
applicable Environmental Laws, no Hazardous Materials are located on any
properties now or previously owned, leased or operated by the Corporation or
have been released into the environment, or deposited, discharged, placed or
disposed of at, on, or under any of such properties. No portion of any such
property is being used, or has been used at any previous time, for the disposal,
storage, treatments processing or other handling of Hazardous Materials (other
than processing or handling or generation of Hazardous Materials in compliance
with all applicable Environmental Laws), nor is any such property affected by
any Hazardous Materials Contamination.
Section III.17. Full Disclosure. None of the information
(financial or otherwise) furnished by or on behalf of the Corporation in
connection with the consummation of the transactions contemplated hereby
contains any untrue statement of a material fact or omits to state a material
fact necessary to make the statements contained herein or therein not misleading
in the light of the circumstances under which such statements were made.
Section III.18. Employees. Schedule 3.18 sets forth a list of all
officers, directors, employees and consultants of the Corporation earning more
than $25,000 annually. The Corporation is in compliance with all Federal, state
and local statutes, rules and regulations or orders affecting employment and
employment practices of the Corporation, including terms and conditions of
employment and wages and hours except for such circumstances, which,
individually or in the aggregate, if enforced would not materially impair the
ability of the Corporation to meet its obligations under the Transaction or
conduct its business as presently conducted. Except as set forth in Schedule
3.18, the Corporation does not have any liability to any of its employees,
officers or directors other than for the payment of salaries and director fees
to be paid for current periods in the ordinary course of business except as
reflected on the Balance Sheet.
Section III.19. Contracts. The Corporation has delivered to the
Investor true and complete copies of all the contracts and documents listed in
the schedules to this Agreement. Set forth in Schedule 3.19 is a list of
contracts to which the Corporation is a party which are not terminable by the
Corporation without liability on less than 60 days notice.
Section III.20. Intellectual Property.
(a) Schedule 3.20(a). Set forth in Schedule 3.20(a) is a list of
the Intellectual Property (as hereinafter defined) owned or used by the
Corporation and material to its business, and there is no additional such
Intellectual Property used in the business of the
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<PAGE> 8
Corporation. All such Intellectual Property either is owned by the Corporation
or used pursuant to a valid license which is not currently terminable due to any
breach or noncompliance by the Corporation and which shall not be adversely
affected by the transactions contemplated herein. Schedule 3.20(a) indicates
which such Intellectual Property is owned by the Corporation and which of such
Intellectual Property is covered by a license. None of the Corporation's rights
in or to any such Intellectual Property shall be adversely affected by its
execution or delivery of this Agreement or by the performance of its obligations
hereunder.
"Intellectual Property": means: (i) any and all domain names,
trademarks, service marks, brand names, certification marks, trade dress,
assumed names, trade names, logos and other indications of origin, sponsorship
or affiliation, together with the goodwill associated therewith (whether the
foregoing are registered or unregistered); registrations thereof in any
jurisdiction and applications to register any of the foregoing in any
jurisdiction, and any extension, modification or renewal of any such
registration or application; (ii) any and all inventions, developments,
improvements, discoveries, know how, concepts and ideas, whether patentable or
not in any jurisdiction; (iii) any and all patents, revalidations, industrial
designs, industrial models and utility models, patent applications (including
reissues, continuations, divisions, continuations-in-part and extensions) and
patent disclosures; (iv) any and all non-public information, trade secrets and
proprietary or confidential information and rights in any jurisdiction to limit
the use or disclosure thereof by any person; (v) any and all writings and other
works, whether copyrighted, copyrightable or not in any jurisdiction, such works
including computer programs and software (including source code, object code,
data and databases); (vi) any and all copyrights, copyright registrations and
applications for registration of copyrights in any jurisdiction, and any
renewals or extensions thereof; (vii) any and all other intellectual property or
proprietary rights; and (viii) any and all agreements, licenses, immunities,
covenants not to sue and the like relating to any of the foregoing.
(b) Except as set forth in Schedule 3.20(b), the Corporation owns
all right, title and interest in, or has the right to use, the Intellectual
Property used in the conduct of its business, and there are no claims or causes
of action arising out of or related to any infringement or misappropriation of
any of the Intellectual Property. Except as set forth in Schedule 3.20(b), each
employee of the Corporation and each independent contractor or outside
consultant or other agent who has worked or is working for the Corporation and
who has participated or is participating in the design or development of any
Intellectual Property for, on behalf of or at the request of the Corporation,
has assigned all of his/her/its right, title and interest in and to such
Intellectual Property to the Corporation. Each such assignment agreement is in
full force and effect and has not been in any respect breached, waived or
modified.
(c) No claims with respect to any Intellectual Property have been
asserted or, to the Corporation's knowledge, threatened (i) against the
Corporation, or (ii) to the Corporation's knowledge, against any other person
based on its use of any of the Corporation's Intellectual Property. To the
Corporation's knowledge, no use of any of the Corporation's Intellectual
Property by any person (including the Corporation) constitutes an unauthorized
use, infringement, misappropriation or other violation of the Intellectual
Property of any other
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<PAGE> 9
person. Without limiting the generality of the foregoing, no person ever
employed or otherwise engaged by the Corporation has asserted or, to the
Corporation's knowledge, threatened any claim against the Corporation relating
to any Intellectual Property. All granted and issued patents, copyright
registrations, and registered trademarks and service marks listed on Schedule
3.20(a) and all copyrights held by the Corporation are valid, enforceable and
subsisting. To the knowledge of the Corporation, there has not been, nor is
there presently, any unauthorized use, infringement, misappropriation or
violation of any of its Intellectual Property by any person. To the
Corporation's knowledge, except as set forth in Schedule 3.20(c), the
Corporation has the full right to possess, use, copy, distribute, display,
transfer and license all Intellectual Property used in the business of the
Corporation.
(d) Except as set forth in Schedule 3.20(d), no Intellectual
Property of the Corporation is subject to any outstanding order, award,
decision, injunction, judgment, decree, stipulation or agreement in any manner
restricting the transfer, use, enforcement or licensing thereof by the
Corporation. Except as set forth in Schedule 3.20(d), the Corporation has not
entered into any agreement to indemnify any other person against any charge of
infringement of any Intellectual Property. The Corporation has not entered into
any agreement granting any third party the right to bring infringement actions
with respect to, or otherwise to enforce rights with respect to, any of the
Corporation's Intellectual Property. The Corporation has the exclusive right to
file, prosecute and maintain all applications and registrations with respect to
its Intellectual Property.
(e) Except as set forth in Schedule 3.20(e), to the knowledge of
the Corporation, the Corporation has taken all reasonable and necessary steps to
obtain, maintain, enforce and protect its Intellectual Property and its rights
thereunder. The Corporation has paid all fees, annuities and all other payments
which have heretofore become due to any governmental or regional authority with
respect to the Corporation's Intellectual Property.
(f) Except as set forth in Schedule 3.20(f), the Corporation has
not transferred title in or to any copy of any computer program or software. No
computer program or software has been supplied by the Corporation to any person.
Section III.21. Customer Warranties. There are no pending, nor to
the best knowledge of the Corporation, threatened, any claims under or pursuant
to any warranty, whether expressed or implied, on products or services sold
prior to the date hereof by the Corporation which are not set forth in Schedule
3.21.
Section III.22. Insurance. All of the insurance policies of the
Corporation are in full force and effect, all premiums with respect thereto
covering all periods up to and including the date hereof have been paid or
accrued therefor, and no notice of cancellation or termination has been received
with respect to any such policy. Schedule 3.22 hereto sets forth a complete and
accurate summary of all policies, including name of insurer, the types and
amounts of coverage. The Corporation has not breached or otherwise failed to
perform in any material respects its obligations under any of such policies nor
has the Corporation received any adverse notice or communication from any of the
insurers party to the policies with respect to any such alleged breach or
failure in connection with any of the policies. Except as set forth
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<PAGE> 10
in Schedule 3.22, all of such policies remain in full force and effect through
30 days after the date hereof. Except as set forth in Schedule 3.22, the
Corporation has never been refused any insurance with respect to its assets or
operations, nor has coverage ever been limited by any insurance carrier to which
the Corporation has applied for any insurance policy or with which it has
carried an insurance policy.
Section III.23. Accounts Receivable; Inventories. The accounts
receivable of the Corporation reflected in the Balance Sheet and such additional
accounts receivable as are reflected on the books of the Corporation on the date
hereof are good and collectible except to the extent reserved against thereon
(which reserves have been determined based upon actual prior experience and are
consistent with prior practices) or except as collected in the ordinary course
after the date of the Balance Sheet. All such accounts receivable (except to the
extent so reserved against) are valid, genuine and subsisting, arise out of bona
fide sales and deliveries of goods, performance of services or other business
transactions and are not subject to defenses, set-offs or counterclaims. Except
as set forth in Schedule 3.23 hereto, the Corporation is not aware of any
material adverse conditions affecting the supply of materials available to the
Corporation, and the consummation of the Transaction will not adversely affect
any such supply.
Section III.24. Accredited Investors. All issuances of securities
by the Corporation have been in accordance with all applicable federal and state
laws.
ARTICLE IV
Section IV.1. Restrictions on Transfer. The Investor shall not
sell, transfer, assign, encumber or otherwise dispose of any interest (a
"Transfer") in any shares of the Investor Stock except as permitted under the
Stockholders Agreement.
Section IV.2. Additional Restrictions on Transfer. The
certificates representing the Investor Stock shall bear the legends set forth in
the Stockholders Agreement.
ARTICLE V
Section V.1. Survival of Representations and Warranties. The
representations and warranties shall survive the consummation of the
Transaction. The representations and warranties in Sections III.2 and III.20
shall not terminate. All other representations and warranties shall terminate on
the earlier to occur of (i) January 1, 2000 or (ii) the occurrence of a
Qualified Public Offering as such term is defined in the Stockholders Agreement.
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<PAGE> 11
Section V.2. Indemnification of the Investor by the Corporation.
The Corporation shall reimburse, indemnify and hold harmless the Investor from,
against and in respect of the following ("Claim(s)"): (i) any and all damage,
loss, liability, claim or deficiency resulting from, or which exists or arises
due to any untruth, inaccuracy, breach or omission of, from or in, the
representations and warranties made in Article III hereof as long as such
representations and warranties shall survive, or from any untruth, inaccuracy,
breach or omission of, from or in, any representation or warranty, or any
nonfulfillment of any covenant or agreement made in any other agreement which is
part of the Transaction; and (ii) any and all actions, suits, claims,
proceedings, investigations, audits, demands, assessments, fines, judgments,
costs and other expenses (including, without limitation, reasonable audit and
legal fees) resulting from the circumstances described in clause (i) of this
Section. The obligations of the Corporation under this Section V.2 shall
terminate upon the consummation of a Qualified Public Offering as such term is
defined in the Stockholders Agreement.
ARTICLE VI
Section VI.1. Definitions. For purposes of this Agreement the
following terms shall have the following meanings:
"Environmental Laws" means any and all applicable federal, state,
local and foreign statutes, laws, judicial decisions, regulations, ordinances,
rules, judgments, orders, decrees, codes, plans, injunctions, permits,
concessions, grants, franchises, licenses, agreements and governmental
restrictions, whether now or hereafter in effect, relating to pollution or
protection of human health, the environment or to emissions, discharges or
releases of pollutants, contaminants, Hazardous Materials or wastes into the
environment, including ambient air, surface water, ground water or land, or
otherwise relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of pollutants, contaminants, Hazardous
Materials or wastes or the clean-up or other remediation thereof.
"GAAP": United States generally accepted accounting principles,
consistently applied.
"Hazardous Materials" means (i) any "hazardous substance" as
defined in CERCLA; (ii) asbestos; (iii) polychlorinated biphenyls; (iv)
petroleum, its derivatives, by-products and other hydrocarbons; and (v) any
other toxic, radioactive, caustic or otherwise hazardous substance regulated
under Environmental Laws.
"Hazardous Materials Contamination" means contamination which is
subject to clean-up, remediation, removal, permitting or other regulation under
any Environmental Law (a) of the improvements, buildings, facilities,
personalty, soil, groundwater, air or other elements on or of the relevant
property by Hazardous Materials, or any derivatives thereof, or (b) on or of any
other property as a result of Hazardous Materials, or any derivatives thereof,
generated on, emanating from or disposed of in connection with the relevant
property.
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<PAGE> 12
"Lien": any mortgage, deed of trust, pledge, security interest,
encumbrance, lien or charge of any kind whatsoever.
"Transaction": the related set of transactions which dated as of
the date of this Agreement between the Corporation and the Investor relating to
the proposed purchase of shares of Common Stock and warrants by the Investor.
"Transaction Closing": the closing of the Transaction.
ARTICLE VII
The parties further agree as follows:
Section VII.1. Agreement to Defend. In the event any action,
suit, proceeding or investigation which would prevent the consummation of the
transactions contemplated hereby is commenced, all the parties hereto agree to
cooperate and use their best efforts to defend against and respond thereto.
Section VII.2. Further Assurances. Subject to the terms and
conditions of this Agreement, the parties hereto shall use their best efforts to
take, or cause to be taken, all action, and to do, or cause to be done, all
things necessary, proper or advisable under applicable laws and regulations to
consummate and make effective as promptly as possible the Transaction
contemplated by this Agreement, and to cooperate with each other in connection
with the foregoing.
Section VII.3. Technology License Agreement. Promptly after the
Transaction, the parties agree to negotiate in good faith a Technology License
Agreement to provide for the licensing of technology by either or both parties
on an arms-length basis and for most favored nation status for each party.
Section VII.4. Issuance of Additional Shares. In the event the
parties learn after the closing that there are additional securities, options or
warrants issued to third parties and outstanding as of the date of this
Agreement which have not been taken into account in calculating the number of
shares of Common Stock sold to Investor pursuant to this Agreement, the
Corporation shall issue to Investor without charge additional shares of Common
Stock so that Investor shall hold a number of shares which represent 19.9% of
the issued and outstanding shares of the Corporation's Common Stock as of the
date of this Agreement.
Section VII.5. Deliveries After Closing. From time to time after
the date hereof, at the Investor's request and without further consideration
from the Investor, the Corporation shall execute and deliver such other
instruments of conveyance and transfer and take such other action as the
Investor reasonably may require to convey, transfer to and vest in
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<PAGE> 13
the Investor and to put the Investor in possession of any rights or property to
be sold, conveyed, transferred and delivered hereunder.
Section VII.6. Public Announcements. The form, content and timing
of all press releases, public announcements or publicity statements with respect
to this Agreement and transactions contemplated hereby shall be subject to the
prior approval of both the Corporation and the Investor, which approval shall
not be unreasonably withheld. No press releases, public announcements or
publicity statements shall be released by either party without such prior mutual
agreement.
ARTICLE VIII
Section VIII.1. Notices. All notices, requests, other
communications and distributions to any party hereunder shall be in writing
(including prepaid overnight courier, telex, facsimile transmission or similar
writing) and shall be given to such party at its address or telecopy number set
forth below or at such other address or telecopy number as such party may
hereafter specify for the purpose by notice to the other parties.
If to the Corporation:
FreeShop International, Inc.
95 South Jackson, Suite 300
Seattle, Washington 98104
Attn: Mr. Timothy C. Choate
If to the Investor:
Fingerhut Companies, Inc.
4400 Baker Road
Minnetonka, MN 55343
Attn: Michael P. Sherman, Esq.
Each such notice, request or other communication shall be effective (i) if given
by telex or telecopy, when such telex or telecopy is transmitted to the telex or
telecopy number specified on the signature pages hereof and the appropriate
answer back is received (in the case of telex) or telephonic confirmation of
receipt thereof is obtained (in the case of telecopy) or (ii) if given by mail,
prepaid overnight courier or any other means, when received at the address
specified on the signature pages hereof or when delivery at such address is
refused.
Section VIII.2. Severability. Whenever possible, each provision
of this Agreement will be interpreted in such manner as to be effective and
valid under applicable law, but if any provision of this Agreement is held to be
invalid, illegal or unenforceable in any respect under any applicable law or
rule in any jurisdiction, such invalidity, illegality or unenforceability will
not affect any other provision of any other jurisdiction, but this
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<PAGE> 14
Agreement will be reformed, construed and enforced in such jurisdiction as if
such invalid, illegal or unenforceable provision had never been contained
herein.
Section VIII.3. Complete Agreement. This Agreement and the other
agreements which are part of the Transaction embody the complete agreement and
understanding among the parties and supersede and preempt any prior
understandings, agreements or representations by or among the parties, written
or oral, which may have related to the subject matter hereof in any way.
Section VIII.4. Counterparts. This Agreement may be executed in
separate counterparts, each of which is deemed to be an original and all of
which taken together constitute one and the same agreement.
Section VIII.5. Successors and Assigns. Except as otherwise
provided herein, this Agreement shall bind and inure to the benefit of and be
enforceable by the Corporation and the Investor and their respective successors
and assigns.
Section VIII.6. Remedies. Each of the parties to this Agreement
will be entitled to enforce its rights under this Agreement specifically, to
recover damages and costs (including reasonable attorney's fees) caused by any
breach of any provision of this Agreement and to exercise all other rights
existing in its favor. The parties hereto agree to acknowledge that money
damages may not be an adequate remedy for any breach of the provisions of this
Agreement and that any party may in its sole discretion apply to any court of
law or equity of competent jurisdiction (without posting any bond or deposit)
for specific performance and/or other injunctive relief in order to enforce or
prevent any violations of the provisions of this Agreement.
Section VIII.7. Applicable Law. The provisions of this Agreement
shall be construed in accordance with the laws of the State of Washington and
all rights and remedies shall be governed by such laws without regard to
principles of conflict of laws.
Section VIII.8. Amendment and Waiver. The provisions of this
Agreement may be amended and waived only with the prior written consent of the
Corporation and the Investor.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on the date first written above.
FREESHOP INTERNATIONAL, INC.
By /s/ TIM CHOATE
---------------------------------
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<PAGE> 15
FINGERHUT COMPANIES, INC.
By /s/ MICHAEL SHERMAN
-------------------------------
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<PAGE> 1
EXHIBIT 10.5
WARRANT AGREEMENT
WARRANT AGREEMENT (this "Agreement"), dated as of December 10, 1998, by
and between FREESHOP INTERNATIONAL, INC., a Washington corporation (the
"Grantor"), and FINGERHUT COMPANIES, INC., a Minnesota corporation (the
"Grantee").
W I T N E S S E T H:
WHEREAS, Grantor and Grantee are parties to an Investor Subscription
Agreement of even date herewith (as the same may be amended from time to time,
the "Investment Agreement") pursuant to which Grantee is purchasing 4,048,467
shares of Common Stock of Grantor, without par value ("Common Stock");
WHEREAS, Grantor has agreed to issue to Grantee Warrants to purchase
that number of shares of Common Stock which together with such 4,048,467 shares
of Common Stock and the purchase by Grantee of all additional shares of Common
Stock available pursuant to certain anti-dilution rights also to be granted to
Grantee will represent forty percent (40.0%) of the outstanding Common Stock of
Grantor.
NOW, THEREFORE, in consideration of the execution of the Investment
Agreement and the transactions contemplated thereby and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
SECTION 1. Grant of Warrant.
(a) Grantor hereby grants to Grantee, at a warrant purchase
price of $1.00 each, a series of irrevocable warrants (the "Percentage
Warrants," and each individually, a "Percentage Warrant"), to purchase at the
exercise price per share specified in the table below up to that number of
shares of Common Stock which, together with 4,048,467 shares of Common Stock to
be issued to Grantee on the date hereof pursuant to the Investment Agreement,
will represent forty percent (40.0%) of the outstanding Common Stock of Grantor
as of the date hereof (subject to adjustment as provided in this Agreement). The
percent of outstanding shares represented by each Percentage Warrant (prior to
exercise of the Anti-Dilution Warrants and the Third Party Agreement Warrants
and based upon the number of shares of Common Stock outstanding as of the date
hereof), the number of shares to be purchased upon exercise of each Percentage
Warrant, the aggregate percent of outstanding shares owned after exercise of
each Percentage Warrant (prior to exercise of any Anti-Dilution Warrants or
Third Party Agreement Warrants and based upon the number of shares of Common
Stock outstanding as of the date hereof) (the "Percentage Ownership"), the
purchase price per share upon exercise of each Percentage Warrant, the
expiration date of each
<PAGE> 2
Percentage Warrant and the purchase price for each Percentage Warrant are as
follows (except as otherwise specified in this Agreement):
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<PAGE> 3
<TABLE>
<CAPTION>
Purchase Price
Percent of Number of Shares Aggregate Percent per Share
Shares to be Purchased of Outstanding Shares upon Exercise Expiration Date
Represented by upon Exercise of Owned after Exercise of each of Each Percentage
each Percentage each Percentage of each Percentage Percentage Percentage Warrant
Warrant Warrant Warrant Warrant Warrant Purchase Price
- ------- ------- -------- ------- ------- --------------
<S> <C> <C> <C> <C> <C>
10.1% 2,935,356 30.0% $1.71826 12/31/2000 $1.00
5.0% 1,790,724 35.0% $1.99440 12/31/2000 $1.00
5.0% 2,089,178 40.0% $2.20919 12/31/2000 $1.00
</TABLE>
The Percentage Warrants representing the 10.1%, 5% and 5% investments
shall be referred to herein as the "First Tranche Investment," the "Second
Tranche Investment," and the "Third Tranche Investment," respectively. The
"Applicable Percentage," as used herein, means 19.9% plus that percentage or
percentages set forth in the first column of the table with respect to which
Percentage Warrants have been exercised from time to time.
(b) Grantor also hereby grants to Grantee warrants (the
"Anti-Dilution Warrants") to purchase from time to time on or before December
31, 2000, at a purchase price of $2.20919 per share, in the aggregate up to such
number of shares of Common Stock as is equal to the Applicable Percentage of the
total number of shares of Common Stock then issued and outstanding solely as a
result of exercise of (i) options and warrants outstanding at the date of this
Agreement and (ii) options remaining available at the date of this Agreement for
grant pursuant to Grantor's 1997 Stock Option Plan (such options and warrants
being collectively, the "Additional Shares"). Grantor represents that the total
number of Additional Shares is 2,764,315.
(c) Grantor also hereby grants to Grantee warrants (the "Third
Party Agreement Warrants") to purchase from time to time on or before December
31, 2000, in the event that shares of Common Stock are issued pursuant to that
certain Convertible Promissory Note made March 17, 1998, by Grantor in favor of
Oki Enterprises, LLC ("Oki") and/or that certain Promotion Agreement dated as of
May 18, 1998, between Grantor and CNET, Inc. ("CNET"), as amended to date
(collectively, the "Third Party Agreements," and such shares being the "Third
Party Shares"), in the aggregate up to such number of shares of Common Stock as
is equal to the Applicable Percentage of the Third Party Shares. The exercise
prices for Third Party Agreement Warrants are $.98803 per share for such shares
as are necessary to maintain Grantee's initial 19.9% interest, $1.71826 per
share for such shares as are necessary to maintain Grantee's next 10.1%
interest, $1.99440 per share for such shares as are necessary to maintain
Grantee's next 5% interest and $2.20919 per share for such shares as are
necessary to maintain Grantee's final 5% interest (as any or all such percentage
interests may be adjusted pursuant to this Agreement).
(d) The Percentage Warrants, the Anti-Dilution Warrants and the
Third Party Agreement Warrants are referred to collectively as the "Warrants,"
and each individually, a "Warrant," and the shares of Common Stock issuable upon
exercise of the
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<PAGE> 4
Warrants are referred to as the "Warrant Shares." Grantee's rights to exercise
the Warrants shall be independent of rights granted to Grantee to purchase
shares of Common Stock pursuant to the Stockholders Agreement dated as of the
date hereof among Grantor, Grantee, Tim Choate and John Ballantine (the
"Stockholders Agreement").
(e) Notwithstanding anything to the contrary in this Agreement,
the Warrants shall expire at the closing of a Qualified Public Offering if they
are not exercised at or before such time. For purposes of this Agreement
"Qualified Public Offering" shall have the meaning set forth in the Stockholders
Agreement.
(f) In determining the number of shares to be issued to Grantee
upon exercise of a Warrant, there shall be included in the number of shares
owned by Grantee prior to such issuance only those shares acquired by Grantee
through (i) the purchase of shares pursuant to the Investment Agreement and (ii)
the exercise of the Warrants.
(g) The Percentage Ownership numbers set forth in Section 1(a)
and the percentage set forth in Section 1(b) are subject to adjustment as set
forth in Section 3(c) below.
(h) In lieu of receiving shares of Common Stock upon exercise of
the Percentage Warrant for the First Tranche Investment, Grantee may elect to
receive a zero coupon convertible subordinated note, convertible into the same
number of shares of Common Stock as are issuable upon exercise of the Percentage
Warrant for the First Tranche Investment, in form similar to the Convertible
Promissory Note made as of December 4, 1998 by Grantor in favor of Grantee but
maturing on the earlier to occur of a Qualified Public Offering and December 31,
2001, which is otherwise acceptable in form and terms to Grantor.
SECTION 2. Exercise of Warrants.
(a) Grantee may exercise the Warrants, in whole or in part (but,
with respect to Percentage Warrants exercisable at the same Exercise Price, all
Percentage Warrants at such Exercise Price), by giving to Grantor notice to such
effect, specifying a date not later than ten business days from the date such
notice is given for the closing of the purchase. Percentage Warrants may only be
exercised in the order shown in the above table. Such closing may be by mail or
by transfer of funds as specified on such notice.
(b) Upon notice from Grantor that it intends to file a
registration statement with respect to a Qualified Public Offering, Grantee will
promptly advise Grantor as to its intentions with respect to exercise of
Grantee's rights under this Agreement.
(c) Grantor shall make any request that Grantee exercise its
Warrants pursuant to this Section 2 or otherwise by providing written notice of
its request to Grantee by overnight mail or by facsimile.
SECTION 3. Investments.
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<PAGE> 5
(a) Upon a determination by Grantor's Board of Directors that
additional equity funds are needed for the operations of Grantor's business, on
or after February 1, 1999, Grantor may request in writing that Grantee exercise
its Percentage Warrant for the First Tranche Investment. Within ten days
following receipt of such written request, Grantee shall advise Grantor in
writing whether: (i) it will exercise its Percentage Warrant for the First
Tranche Investment; (ii) it will offer to purchase a zero coupon convertible
note, maturing on December 31, 2001, but otherwise consistent with the terms of
the note specified in Section 1(g) above, subject to Grantee's acceptance of the
form and terms of such convertible note; or (iii) it will participate in a
private placement of Grantor's stock (the "First Private Placement") as
hereinafter described. If Grantee does not choose to exercise its Percentage
Warrant for the First Tranche Investment and no convertible note is purchased,
Grantor may seek to raise funds in an amount of up to $10 million in the First
Private Placement. Grantee shall subscribe for 19.9% of the shares offered in
such First Private Placement on the same terms and conditions offered to and
accepted by all other potential investors in the First Private Placement. If the
deemed valuation of Grantor is $40 million or less immediately following the
closing of the First Private Placement, Grantee shall continue to have all
rights granted under this Agreement with respect to the Percentage Warrant for
the First Tranche Investment. If the deemed valuation of Grantor is in excess of
$40 million immediately following the closing of the First Private Placement,
Grantee's rights under this Agreement with respect to the Percentage Warrant for
the First Tranche Investment shall expire.
(b) In the event that Grantor seeks to raise funds in a private
placement subsequent to the First Private Placement (the "Subsequent Private
Placement"), Grantor may request in writing that Grantee exercise any or all of
its remaining Warrant(s) and/or subscribe for shares in the Subsequent Private
Placement. Within ten days following receipt of such written request, Grantee
shall advise Grantor in writing whether Grantee wishes to exercise such
Warrant(s) or subscribe for such shares. If Grantee declines to exercise such
Warrant(s) and subscribe for shares in the Subsequent Private Placement, Grantee
shall use its reasonable best efforts (other than exercise of such Warrant(s))
to assist Grantor in the Subsequent Private Placement.
(c) In the event Grantee's Percentage Ownership is diluted as a
result of Grantee's decision not to exercise any or all of its rights to
purchase shares under this Agreement or under the Stockholders Agreement, (i) if
Grantee subsequently exercises its Percentage Warrants for the First Tranche
Investment, the Second Tranche Investment and/or the Third Tranche Investment,
Grantee shall have the right to purchase in connection with each such exercise
only such number of shares of Common Stock, at the respective purchase price per
share specified in the table at Section 1(a) above, as will result in Grantee's
Percentage Ownership after the First Tranche Investment being 10.1% higher than
Grantee's Percentage Ownership immediately prior to such First Tranche
Investment, Grantee's Percentage Ownership after the Second Tranche Investment
being 5% higher than Grantee's Percentage Ownership immediately prior to such
Second Tranche Investment and Grantee's Percentage Ownership after the Third
Tranche Investment being 5% higher than Grantee's Percentage Ownership
immediately prior to such Third Tranche Investment and (ii) if Grantee
subsequently exercises its Anti-Dilution Warrants, Grantee shall have the right
to purchase in
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<PAGE> 6
connection with such exercise only up to such number of shares of Common Stock,
at the purchase price of $2.20919 per share, as is equal to a percentage of the
Additional Shares equal to Grantee's Percentage Ownership immediately prior to
exercise of the Anti-Dilution Warrants.
SECTION 4. Adjustment of Warrant Shares Issuable.
(a) In case at any time or from time to time after the date of
this Agreement Grantor shall (i) declare or pay any dividend or make any other
distribution upon any capital stock of Grantor which is payable in Common Stock
or securities convertible into Common Stock ("Convertible Securities"), or (ii)
effect a subdivision of the outstanding shares of Common Stock into a greater
number of shares of Common Stock (by reclassification or otherwise than by
payment of a dividend in Common Stock), then, in any such event, the total
number of additional shares of Common Stock, or (in the case of any such
dividend or distribution payable in Convertible Securities) Convertible
Securities, issuable in payment of such dividend or distribution or to give
effect to such subdivision shall be deemed to have been issued immediately after
the close of business on the record date (or other date) for the determination
of holders of any class of securities in connection with such subdivision.
(b) In case the outstanding shares of Common Stock shall be
combined or consolidated, by reclassification or otherwise, into a lesser number
of shares of Common Stock, the purchase price per share in effect for each
Warrant immediately prior to such combination or consolidation shall,
concurrently with the effectiveness of such combination or consolidation, be
proportionately increased.
(c) In case Grantor shall take any of the actions set forth in
Sections 4(a) and (b) above, the number of Warrant Shares purchasable upon
exercise of each Warrant immediately prior thereto shall be adjusted so that
Grantee shall be entitled to receive the kind and number of Warrant Shares which
it would have owned or have been entitled to receive after any of the events
described above, had each such Warrant been exercised immediately prior to such
event or any record date with respect thereto. An adjustment made pursuant to
this clause (c) shall become effective immediately after the effective date of
such event retroactive to the record date, if any for such event.
(d) This Section 4 shall not be applicable to the Third Party
Agreement Warrants.
SECTION 5. Payment and Delivery of Warrant Shares. At any closing
hereunder, (a) Grantee shall make payment to Grantor of the purchase price per
share, and (b) Grantor shall issue the Warrant Shares to Grantee and register
such issuance on Grantor's stock ledger.
SECTION 6. Representations and Warranties of Grantor.
(a) Organization. Grantor is a corporation duly incorporated,
validly existing and in good standing under the laws of Washington.
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<PAGE> 7
(b) Authorization; No Contravention. The execution, delivery and
performance by Grantor of this Agreement are within Grantor's corporate powers,
have been duly authorized by all necessary corporate action, require no action
by or in respect of, or filing with, any governmental body, agency or official
(other than as may be required by state and federal securities laws) and do not
contravene, or constitute a default under, any provision of applicable law or
regulation or of the certificate of incorporation or bylaws of Grantor or of any
other agreement, judgment, injunction, order, decree or other instrument binding
upon Grantor.
(c) Binding Effect. This Agreement constitutes a valid and
binding agreement of Grantor, enforceable in accordance with its terms.
(d) Private Offering. Neither Grantor nor any person acting on
its behalf has offered the Warrant Shares or any similar securities for sale, or
solicited any offer to buy any of the same from, or otherwise approached or
negotiated in respect thereof with, any persons. Neither Grantor nor any person
acting on its behalf has taken, or will take, any action which would subject the
issuance or sale of the Warrant Shares to the registration requirements of
Section 5 of the Securities Act of 1933, as amended (the "Securities Act").
(e) Issuance of Shares. Upon the exercise of the Warrants
pursuant to this Agreement, the Warrant Shares reserved for issuance hereunder
will be duly and validly authorized, issued, fully paid and non-assessable, free
of preemptive rights and free and clear of any lien and any other limitation or
restriction (including any restriction on the right to vote, sell or otherwise
dispose of the Warrant Shares), other than such limitations or restrictions
imposed by the Stockholders Agreement and by the Securities Act.
(f) Capital Stock. On the date hereof, the authorized capital
stock of Grantor consists of 100,000,000 shares of Common Stock, of which
16,295,587 shares of Common Stock are outstanding, and 10,000,000 shares of
Preferred Stock, of which 1,935,484 shares were previously designated and issued
as Series A Convertible Preferred Stock and have been converted into outstanding
shares of Common Stock. Assuming all Warrants are exercised, the Warrant Shares
and the 4,048,467 shares of Common Stock to be issued to Grantee on the date
hereof pursuant to the Investment Agreement will represent 40.0% of Grantor's
outstanding Common Stock on a fully diluted basis, after the issuance of the
Warrant Shares (subject to adjustment as provided in this Agreement).
SECTION 7. Covenants of Grantor. Grantor will at all times reserve and
keep available, solely for issuance pursuant to the exercise of the Warrant, the
number of shares of Common Stock which from time to time shall be issuable to
Grantee upon the exercise of the Warrant. Grantor shall take all action to
assure that all such shares shall be duly authorized and, when issued pursuant
to the exercise of the Warrant, shall be validly issued, fully paid and
non-assessable with no liability on the part of the holders thereof.
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<PAGE> 8
SECTION 8. Miscellaneous.
(a) Grantee understands that the Warrant Shares are being
offered only in a transaction not involving any public offering within the
meaning of the Securities Act, and that, if in the future Grantee decides to
resell, pledge or otherwise transfer any of the Warrant Shares, such Warrant
Shares may be resold, pledged or transferred only (i) in accordance with the
terms of the Stockholders Agreement or (ii) pursuant to an exemption from
registration under the Securities Act.
(b) Grantee understands that the Warrant Shares will, unless
otherwise agreed by Grantor thereof, bear a legend to the following effect:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT") AND MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR AN EXEMPTION
FROM REGISTRATION THEREUNDER. THE SECURITIES REPRESENTED BY THIS
CERTIFICATE ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON
TRANSFER, CERTAIN REPURCHASE OPTIONS AND CERTAIN OTHER
AGREEMENTS SET FORTH IN A STOCKHOLDERS AGREEMENT. A COPY OF SUCH
AGREEMENT MAY BE OBTAINED BY THE HOLDER HEREOF AT THE
CORPORATION'S PRINCIPAL PLACE OF BUSINESS WITHOUT CHARGE.
(c) Amendments. This Agreement may not be modified, amended,
altered or supplemented, except upon the execution and delivery of a written
agreement executed by the parties hereto.
(d) Notices. All notices, requests, other communications and
distributions to any party hereunder shall be in writing (including prepaid
overnight courier, telex, facsimile transmission or similar writing) and shall
be given to such party at its address or telecopy number set forth below or at
such other address or telecopy number as such party may hereafter specify for
the purpose by notice to the other parties.
If to Grantor:
FreeShop International, Inc.
95 South Jackson - Suite 300
Seattle, Washington 98104
Attn: Mr. Tim Choate
If to Grantee:
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Fingerhut Companies, Inc.
4400 Baker Road
Minnetonka, MN 55343
Attn: Michael P. Sherman, Esq.
Each such notice, request or other communication shall be effective (i) if given
by telex or telecopy, when such telex or telecopy is transmitted to the telex or
telecopy number specified on the signature pages hereof and the appropriate
answerback is received (in the case of telex) or telephonic confirmation of
receipt thereof is obtained (in the case of telecopy) or (ii) if given by mail,
prepaid overnight courier or any other means, when received at the address
specified on the signature pages hereof or when delivery at such address is
refused.
(e) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Washington and all rights
and remedies shall be governed by such laws without regard to principles of
conflict of laws.
(f) Counterparts. This Agreement may be executed in
counterparts, each of which shall be an original, but all of which together
shall constitute one and the same Warrant.
(g) Headings. The paragraph headings herein are for convenience
only and shall not affect the construction hereof.
(h) Assignment. This Agreement shall not be assignable by either
party.
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IN WITNESS WHEREOF, Grantor and Grantee have caused this Agreement to be
duly executed as of the day and year first above written.
FREESHOP INTERNATIONAL, INC.
By: /s/ TIM CHOATE
-------------------------------
FINGERHUT COMPANIES, INC.
By: /s/ MICHAEL SHERMAN
-------------------------------
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EXHIBIT 10.6
FREESHOP INTERNATIONAL, INC.
STOCKHOLDERS AGREEMENT
THIS AGREEMENT is made as of December 10, 1998, by and among FreeShop
International, Inc., a Washington corporation (the "Corporation"), Timothy C.
Choate and John Ballantine, each a stockholder of the Corporation (each an
"Initial Stockholder" and collectively the "Initial Stockholders" and Fingerhut
Companies, Inc., a Minnesota corporation ("Fingerhut"). The Initial Stockholders
and Fingerhut are sometimes collectively referred to as the "Stockholders" and
individually as a "Stockholder." Capitalized terms used herein are defined in
Section 19.
Contemporaneously with the execution of this Stockholders Agreement,
Fingerhut will purchase shares of the Corporation's Common Stock, without par
value (the "Common Stock"), pursuant to an Investor Subscription Agreement
between Fingerhut and the Corporation dated as of the date hereof (the
"Investment Agreement") and the Corporation is entering into a Warrant Agreement
with Fingerhut dated as of the date hereof (the "Warrant Agreement") pursuant to
which Fingerhut has the right to purchase additional shares of Common Stock
(collectively, the "Transaction").
The Corporation and the Stockholders desire to enter into this Agreement
for the purposes, among others, of (i) describing the composition of the Board
of Directors in accordance with ownership of the Corporation, (ii) limiting the
manner and terms by which the Stockholder Shares may be transferred and (iii)
providing Fingerhut with certain demand registration rights and piggyback
rights. The execution and delivery of this Agreement is a condition to
Fingerhut's purchase of the Common Stock pursuant to the Investment Agreement.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties to this Agreement hereby agree as
follows:
1. Restrictions on Transfer of Stockholder Shares. The restrictions set
forth in this Section 1 shall apply to all Stockholder Shares until the closing
of a Qualified Public Offering or an Approved Sale of the Corporation (but shall
not apply to such Qualified Public Offering or Approved Sale) or the date on
which such Stockholder Shares have been transferred in a Public Sale.
(a) Prohibition Against Transfer of Stockholder Shares. No
Stockholder shall sell, transfer, assign, pledge, hypothecate, encumber or
otherwise dispose of (collectively, a "Transfer") any interest in any
Stockholder Shares unless pursuant to either (i) a Public Sale or (ii) the
provisions of Sections 1(b) through l(d) hereof.
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(b) Right of First Refusal. At least fifteen (15) days prior to
making any Transfer of any Stockholder Shares (other than through l(a)(i), or
(ii) or a Permitted Transfer), the transferring Stockholder (the "Transferring
Stockholder") shall deliver an Offer Notice to Fingerhut, with a copy to the
other Stockholder. The Offer Notice shall be deemed to be an offer of the
subject Stockholder Shares to Fingerhut on the same terms and conditions as
proposed by the third party. Fingerhut may elect to purchase all or a portion of
the Stockholder Shares specified in the Offer Notice at the price and on the
terms specified therein by delivering written notice of such election to the
Transferring Stockholder ("Right of First Refusal") within ten (10) days after
the delivery of the Offer Notice (the "Election Period"). Fingerhut may also
assign its right to purchase all or a part of the Stockholder Shares subject to
the Offer Notice to the other Stockholder pursuant to the procedures in Section
1(c) hereof. The purchase of the subject Stockholder Shares shall be made in
accordance with Section l(c) hereof.
(c) Procedures for Acquiring Stockholder Shares. If Fingerhut
(or the other Stockholder) has elected to purchase Stockholder Shares from the
Transferring Stockholder, the Transfer of such shares shall be consummated as
soon as practical after the delivery of the election notices, but in any event
within fifteen (15) days after the expiration of the Election Period. To the
extent that Fingerhut has not elected to purchase all of the Stockholder Shares
being offered, the Transferring Stockholder may, within sixty (60) days after
the expiration of the Election Period, transfer the Shares subject to such
notice to one or more third parties at a price no less than the price per share
specified in the Offer Notice and on other terms no more favorable to the
transferees than offered to Fingerhut in the Offer Notice, and such purchases
shall be conditioned upon all purchasers of Stockholder Shares executing a
counterpart of this Section 1. In the event the Offer Notice provides for any
noncash consideration for the Stockholder Shares, Fingerhut and the Transferring
Stockholder shall negotiate in good faith to determine the all cash equivalent
of the consideration proposed in the Offer Notice. Fingerhut and/or the other
Stockholder shall only be required to pay cash for the Stockholder Shares
acquired from the Transferring Stockholder. At the closing of the purchase of
Stockholder Shares, the Transferring Stockholder shall provide representations
and warranties as to his title to such securities and that there are no liens or
encumbrances on such securities and shall sign such stock powers and other
documents as may reasonably be requested by Fingerhut.
(d) Permitted Transfers. The restrictions contained in this
Section 1 shall not apply to any Transfer of Stockholder Shares (i) pursuant to
applicable laws of descent and distribution, (ii) pursuant to gifts or to
pledges in connection with an extension of credit, and (iii) as part of the
Company's repurchase prior to February 28, 1999, of shares of Common Stock from
current stockholders of the Company for an aggregate payment not in excess of
$400,000 and simultaneous issuance of shares of Common Stock in an aggregate
number less than or equal to the number so repurchased for an aggregate cash
consideration paid at such time greater than or equal to the amount paid for the
shares of Common Stock repurchased (each such Transfer being a "Permitted
Transfer").
2. Composition of the Board of Directors. The Board of Directors (the
"Board") shall consist of four (4) members immediately prior to closing of the
Transaction. Promptly thereafter, the size of the Board shall be increased by
one and one person nominated by
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Fingerhut shall be elected to the Board. Upon the exercise by Fingerhut of the
Percentage Warrant in connection with the First Tranche Investment, as such
terms are defined in the Warrant Agreement, the size of the Board shall again be
increased by one and another person nominated by Fingerhut shall be elected to
the Board. A third additional person not nominated by Fingerhut but reasonably
acceptable to Fingerhut may be elected to the Board at any time (before or after
the election of the second additional director nominated by Fingerhut) but not
later than promptly following the exercise of all the Percentage Warrants, with
the size of the Board first being increased to allow such additional person. In
each instance the persons nominated by Fingerhut shall be reasonably acceptable
to the Board. Promptly after closing of the Transaction, the Corporation shall
cause its Bylaws to be amended to be consistent with the provisions of this
Section 2. The provisions of this Section 2 shall expire upon the Corporation's
consummation of a Qualified Public Offering.
3. Special Voting Requirements.
(a) From and after the date hereof and until the consummation of
a Qualified Public Offering, approval by the Board is required for each of the
following:
(i) Entering into any Material Contracts.
(ii) Incurring debt for borrowed money, except for
draw downs under credit facilities from
financial institutions not exceeding $750,000 in
the aggregate.
(iii) Material Expenditures by the Corporation.
(iv) Compensation of directors and officers who are
vice presidents and senior thereto, treasurers
and the chief financial officer.
(v) Issuance of shares of Common Stock or other
securities or rights to purchase securities.
(b) From the date of the exercise by Fingerhut of all of its
Percentage Warrants (as defined in the Warrant Agreement) until the consummation
of a Qualified Public Offering, in addition to any stockholder approval required
by applicable law, the following actions must be approved by Fingerhut (subject
to Section 12 below), with such approval not to be unreasonably withheld:
(i) Pledging all or substantially all of the
Corporation's assets.
(ii) Amending the articles of incorporation or the
by-laws of the Corporation.
(iii) Merger or sale of substantially all of the
assets of the Corporation.
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(c) Actions Consistent with Agreement. The Corporation shall not
circumvent this Agreement by taking any action through a subsidiary or affiliate
that would be prohibited under this Agreement.
4. Right of Participation.
(a) Each time after closing of the Transaction the Corporation
proposes to issue securities, including stock to be issued in a private
placement, or upon the exercise of warrants or options or upon the conversion of
convertible securities (excluding only (i) the issuance of securities to
Fingerhut, (ii) the issuance of securities in connection with which Fingerhut is
granted rights to purchase shares of Common Stock pursuant to the Warrant
Agreement (including without limitation, the Additional Shares (as defined in
the Warrant Agreement), and (iii) the issuance of securities pursuant to
warrants, options or convertible securities where the right of participation set
forth herein was offered upon the issuance of the particular warrant, option or
convertible security), the Corporation shall give written notice ("Issue
Notice") to Fingerhut within a reasonable time prior to the closing of such
proposed issuance. The Issue Notice shall describe in reasonable detail the
proposed issuance of securities, including, without limitation the number and
type of securities proposed to be sold, the consideration to be paid, and the
names of proposed offerees, if known. Fingerhut shall have the right,
exercisable upon written notice to the Corporation within fifteen (15) business
days after receipt of the Issue Notice, to purchase the securities to be issued
on the same terms and conditions as those being proposed. Fingerhut may elect to
purchase pursuant to the Issue Notice up to that amount of securities which,
when taken together with the other shares of Common Stock owned by Fingerhut,
gives Fingerhut the same percentage of the outstanding Common Stock and
securities convertible into Common Stock as Fingerhut shall have immediately
prior to such issuance of such securities.
(b) Fingerhut shall effect its participation in the issuance by
delivering to the Corporation at closing of such sale payment in the per share
amount set forth in the Issue Notice to purchase the securities determined in
accordance with Section 4(a) above.
(c) The exercise or non-exercise of the rights to participate in
one or more sales of securities made by the Corporation shall not adversely
affect Fingerhut's right to participate in subsequent sales of securities
pursuant to this Section 4.
(d) Upon compliance with the terms of this Agreement and absent
any material changes in the terms or conditions of sale from the terms or
conditions specified in the Issue Notice, the Corporation shall have the right
to sell securities with respect to which such right of participation was not
exercised upon substantially the terms and conditions (including, without
limitation, the purchase price) specified in the Issue Notice.
(e) This Section 4 shall terminate upon the consummation of a
Qualified Public Offering (but shall not apply to such Qualified Public
Offering).
5. Demand Registrations.
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(a) Requests for Registration. At any one time Fingerhut may
request registration under the Securities Act of all or part of its Stockholder
Shares. A registration requested pursuant to this Section 5(a) is referred to
herein as the "Demand Registration." The request for a Demand Registration shall
specify the approximate number of Stockholder Shares requested to be registered
and the requested per share price range, if any, for such offering.
(b) Restrictions on the Demand Registration. The Corporation
shall not be obligated to effect any Demand Registration until June 30, 2001.
The Corporation may postpone for up to one hundred eighty (180) days following
the receipt of a request for a Demand Registration the filing of a registration
statement for a Demand Registration for bona fide business reasons but only if
the Corporation notifies Fingerhut that such Demand Registration would
reasonably be expected to have an adverse effect on any business plan of the
Corporation or any of its subsidiaries; provided that in such event, Fingerhut
will be entitled to withdraw such request and, if such request is withdrawn,
such Demand Registration will not count as the permitted Demand Registration
hereunder and the Corporation shall pay all Registration Expenses in connection
with such registration.
(c) Selection of Underwriters. The Corporation will have the
right to select the investment banker(s) and manager(s) to administer any
offerings.
6. Piggyback Registrations.
(a) Right to Piggyback. Fingerhut shall have the right to demand
on two (2) separate occasions a "Piggyback Registration." Whenever the
Corporation proposes to register any of its Common Stock under the Securities
Act (other than the initial public offering, pursuant to a Demand Registration,
an acquisition of or a merger with another entity including, without limitation,
a purchase of stock or assets or a transaction described under Rule 145 of the
Securities Act, a transaction registering securities convertible into Common
Stock or pursuant to Form S-8 or its successor forms) and the registration form
to be used may be used for the registration of the Stockholder Shares of
Fingerhut (a "Piggyback Registration"), the Corporation shall give prompt
written notice to the Stockholders of its intention to effect such a
registration and will include in such registration the Stockholder Shares of
Fingerhut with respect to which the Corporation has received written requests
for inclusion therein within fifteen (15) days after the receipt of the
Corporation's notice, subject to the underwriter's discretion as to the number
of Stockholder Shares which may be included in the offering.
(b) Piggyback Expenses. The Registration Expenses of Fingerhut
shall be paid by the Corporation in all Piggyback Registrations.
(c) Proration of Eligible Shares. In the event of any
registration pursuant to this Section 6 the full amount of the Stockholder
Shares requested to be included in such registration cannot be included in full,
then the number of Stockholder Shares available for registration shall be
allocated among such group pro rata based upon the number of Stockholder Shares
requested to be included in such registration.
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(d) Piggyback Rights Restored. In the event the underwriter
determines that the shares Fingerhut has requested be included in the Piggyback
Registration cannot be sold in the offering, then the requested Piggyback Right
shall be restored.
7. Lockup Agreement.
Each Stockholder agrees not to effect any public sale or
distribution (including sales pursuant to Rule 144) of equity securities of the
Corporation, or any securities convertible into or exchangeable or exercisable
for such securities, during the 30-day period prior to and the 180-day period
beginning on the effective date of any (i) underwritten Demand Registration or
any underwritten Piggyback Registration in which Stockholder Shares are included
(except as part of such underwritten registration) or (ii) the initial public
offering, in each case unless the underwriters managing the registered public
offering and the Corporation otherwise agree.
8. Registration Procedures. Whenever Fingerhut has requested that any
securities be registered pursuant to this Agreement, the Corporation shall use
its best efforts to effect the registration and the sale of such securities in
accordance with the intended method of disposition thereof, and pursuant thereto
the Corporation shall as expeditiously as possible:
(a) prepare and file with the Securities and Exchange Commission
a registration statement with respect to such securities and use its best
efforts to cause such registration statement to become effective (provided that
before filing a registration statement or prospectus or any amendments or
supplements thereto, the Corporation shall furnish to the counsel selected by
Fingerhut copies of all such documents proposed to be filed, which documents
will be subject to the review and comment of such counsel);
(b) prepare and file with the Securities and Exchange Commission
such amendments and supplements to such registration statement and the
prospectus used in connection therewith as may be necessary to keep such
registration statement effective for a period of not less than six months and
comply with the provisions of the Securities Act with respect to the disposition
of all securities covered by such registration statement during such period in
accordance with the intended methods of disposition by the sellers thereof set
forth in such registration statement;
(c) keep Fingerhut fully informed and provide copies of all
material correspondence and drafts of documents related to such registration and
furnish to each seller of securities such number of copies of such registration
statement, each amendment and supplement thereto, the prospectus included in
such registration statement (including each preliminary prospectus) and such
other documents as such seller may reasonably request in order to facilitate the
disposition of the securities owned by such seller;
(d) use its best efforts to register or qualify such securities
under such other securities or blue sky laws of such jurisdictions as any seller
reasonably requests and do any and all other acts and things which may be
reasonably necessary or advisable to enable such
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seller to consummate the disposition in such jurisdictions of the securities
owned by such seller (provided that the Corporation shall not be required to (i)
qualify generally to do business in any jurisdiction where it would not
otherwise be required to qualify but for this subparagraph, (ii) subject itself
to taxation in any such jurisdiction, or (iii) consent to general service of
process in any such jurisdiction);
(e) notify each seller of Stockholder Shares, at any time when a
prospectus relating thereto is required to be delivered under the Securities
Act, of the happening of any event as a result of which the prospectus included
in such registration statement contains an untrue statement of a material fact
or omits any fact necessary to make the statements therein not misleading, and,
at the request of any such seller, the Corporation shall prepare a supplement or
amendment to such prospectus so that, as thereafter delivered to the purchasers
of such Stockholder Shares, such prospectus will not contain an untrue statement
of a material fact or omit to state any fact necessary to make the statements
therein not misleading;
(f) provide a transfer agent and registrar for all such
securities not later than the effective date of such registration statement;
(g) enter into such customary agreements (including underwriting
agreements in customary form) and take all such other actions as the Investor or
the underwriters, if any, reasonably request in order to expedite or facilitate
the disposition of such securities (including, without limitation, effecting a
stock split or a combination of shares);
(h) make available for inspection by any seller of securities,
any underwriter participating in any disposition pursuant to such registration
statement and any attorney, accountant or other agent retained by any such
seller or underwriter, all financial and other records, pertinent corporate
documents and properties of the Corporation, and cause the Corporation's
officers, directors, employees and independent accountants to supply all
information reasonably requested by any such seller, underwriter, attorney,
accountant or agent in connection with such registration statement;
(i) otherwise use its reasonable efforts to comply with all
applicable rules and regulations of the Securities and Exchange Commission, and
make available to its security holders, as soon as reasonably practicable, an
earnings statement covering the period of at least twelve months beginning with
the first day of the Corporation's first full calendar quarter after the
effective date of the registration statement, which earnings statement shall
satisfy the provisions of Section 11(a) of the Securities Act and Rule 158
thereunder;
(j) in the event of the issuance of any stop order suspending
the effectiveness of a registration statement, or of any order suspending or
preventing the use of any related prospectus or suspending the qualification of
any Common Stock included in such registration statement for sale in any
jurisdiction, the Corporation shall use its best efforts promptly to obtain the
withdrawal of such order; and
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(k) obtain a cold comfort letter from the Corporation's
independent public accountants in customary form and covering such matters of
the type customarily covered by cold comfort letters.
9. Registration Expenses.
(a) All expenses incident to the Corporation's performance of or
compliance with Sections 5, 6 and 8 of this Agreement, including without
limitation all registration and filing fees, fees and expenses of compliance
with securities or blue sky laws, printing expenses, messenger and delivery
expenses, and fees and disbursements of counsel for the Corporation and all
independent certified public accountants, underwriters (excluding discounts and
commissions) and other persons retained by the Corporation (all such expenses
being herein called "Registration Expenses"), shall be borne as provided in this
Agreement, except that the Corporation shall, in any event, pay its internal
expenses (including, without limitation, all salaries and expenses of its
officers and employees performing legal or accounting duties), the expense of
any annual audit or quarterly review, the expense of any liability insurance and
the expenses and fees for listing the securities to be registered on each
securities exchange on which similar securities issued by the Corporation are
then listed or on the Nasdaq-related system.
(b) To the extent Registration Expenses are not required to be
paid by the Corporation, each holder of securities included in any registration
hereunder shall pay those Registration Expenses allocable to the registration of
such holder's securities so included, and Registration Expenses not so allocable
shall be borne by all sellers of securities included in such registration in
proportion to the aggregate selling price of the securities to be so registered.
10. Indemnification.
(a) The Corporation agrees to indemnify Fingerhut, to the extent
permitted by law, against all losses, claims, damages, liabilities and expenses
caused by any untrue or alleged untrue statement of material fact contained in
any registration statement, prospectus or preliminary prospectus or any
amendment thereof or supplement thereto or any omission or alleged omission of a
material fact required to be stated therein or necessary to make the statements
therein not misleading.
(b) Fingerhut agrees to indemnify the Corporation, to the extent
permitted by law, against all losses, claims, damages, liabilities and expenses
caused by any untrue or alleged untrue statement of material fact made by
Fingerhut expressly for use in connection with any registration statement,
prospectus or preliminary prospectus and relied upon by the Corporation in such
document or any amendment thereof or supplement thereto, or any omission or
alleged omission of a material fact by Fingerhut required to be stated therein
or necessary to make the statements therein not misleading.
(c) Any person entitled to indemnification hereunder shall (i)
give prompt written notice to the indemnifying party of any claim with respect
to which it seeks
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indemnification and (ii) unless in such indemnified party's reasonable judgment
a conflict of interest between such indemnified and indemnifying parties may
exist with respect to such claim, permit such indemnifying party to assume the
defense of such claim with counsel reasonably satisfactory to the indemnified
party. If such defense is assumed, the indemnifying party shall not be subject
to any liability for any settlement made by the indemnified party without its
consent (but such consent shall not be unreasonably withheld). An indemnifying
party who is not entitled to, or elects not to, assume the defense of a claim
shall not be obligated to pay the fees and expenses of more than one counsel for
all parties indemnified by such indemnifying party with respect to such claim,
unless in the reasonable judgment of any indemnified party a conflict of
interest may exist between such indemnified party and any other of such
indemnified parties with respect to such claim.
(d) The indemnification provided for under this Agreement shall
remain in full force and effect regardless of any investigation made by or on
behalf of the indemnified party or any officer, director or controlling person
of such indemnified party and shall survive the transfer of securities. The
indemnifying parties also agree to make such provisions, as are reasonably
requested by any indemnified party, for contribution to such party in the event
the Corporation's indemnification is unavailable for any reason.
11. Participation in Underwritten Registrations. No person may
participate in any registration hereunder which is underwritten unless such
person (i) agrees to sell such person's securities on the basis provided in any
underwriting arrangements approved by the person or persons entitled hereunder
to approve such arrangements and (ii) completes and executes all questionnaires,
powers of attorney, indemnities, underwriting agreements and other documents
required under the terms of such underwriting arrangements; provided that no
holder of securities included in any underwritten registration shall be required
to make any representations or warranties to the Corporation or the underwriters
other than representations and warranties regarding such holder and such
holder's intended method of distribution.
12. Drag-Along Rights.
(a) In the event an Approved Sale is agreed to by at least two
Stockholders, who on the date such Approved Sale is agreed to by them own, in
the aggregate, more shares of the outstanding Common Stock than are then owned
by the third Stockholder, the Corporation shall deliver twenty (20) days' prior
written notice of the Approved Sale to each Stockholder. Each Stockholder shall
vote for and consent to and shall raise no objections to, bring a claim against
or contest such Approved Sale. If such Approved Sale is structured as (i) a
merger or consolidation, each Stockholder shall waive any dissenters rights,
appraisal rights or similar rights in connection with such merger or
consolidation; or (ii) a sale of stock, each Stockholder shall sell his
Stockholder Shares on the terms and conditions approved by the Board and the
holders of a majority of the Stockholder Shares then outstanding. Each
Stockholder shall take such other necessary or desirable actions in connection
with the consummation of the Approved Sale as reasonably requested by the
Corporation.
(b) The obligations of the Stockholders with respect to the
Approved Sale of the Corporation described in Section 12(a) are subject to the
satisfaction of the following
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conditions: (i) upon the consummation of the Approved Sale, each Stockholder
shall receive for each of his Stockholder Shares the same form of consideration
and the same amount of consideration as the holders of a majority of the
Stockholder Shares receive for each of their Stockholder Shares; (ii) if any
holders of a class of Common Stock are given an option as to the form and amount
of consideration to be received, each holder of such class of Common Stock shall
be given the same option; and (iii) each holder of then currently exercisable
rights to acquire shares of a class of Common Stock shall be given an
opportunity to either (A) exercise such rights prior to the consummation of the
Approved Sale or (B) receive in exchange for such rights consideration equal to
the amount determined by multiplying (1) the same amount of consideration per
share of a class of Common Stock received by holders of such class of Common
Stock in connection with the Approved Sale less the exercise price per share of
such class of Common Stock of such rights to acquire such class of Common Stock
by (2) the number of shares of such class of Common Stock represented by such
rights.
(c) The provisions of this Section 12 shall terminate (i) with
respect to a Stockholder at such time as such Stockholder ceases to hold in
excess of 10% of the outstanding Common Stock and (ii) upon the consummation of
a Qualified Public Offering.
13. Tag-Along Rights.
(a) If (i) any Stockholder proposes to Transfer (other than
pursuant to a Public Sale or pursuant to Section 1(d)) at any time any of its
shares of Common Stock to any Independent Third Party and (ii) neither Fingerhut
nor the other Stockholder has exercised any rights pursuant to Section 1(b),
then the Transferring Stockholder may transfer its Stockholder Shares provided
that it complies with the provisions of this Section 13. The Transferring
Stockholder (which may include Fingerhut) shall deliver an Offer Notice to the
other Stockholders. The other Stockholders shall have the right to participate
in the Transfer of shares of Common Stock to the Independent Third Party, upon
the same terms and for the same per share consideration as are specified in the
Offer Notice. Each Stockholder shall have the right to participate in the
Transfer, exercisable by delivering a written notice to the Transferring
Stockholder and the other Stockholder within 15 days after delivery of the Offer
Notice, stating therein the number of shares of Common Stock (which may be the
number of shares set forth in the Offer Notice or a portion thereof) which such
Stockholder desires to sell to the Independent Third Party. Prior to the earlier
of (x) the end of such 15-day period or (y) the acceptance or rejection by each
Stockholder of the right to participate in the Transfer, as the case may be, no
sale of shares of Common Stock to the Independent Third Party shall be
completed.
(b) At the end of such 15-day period, the Corporation shall
calculate the total number of Stockholder Shares that are proposed to be sold by
all Stockholders. Each Stockholder exercising the right to participate shall be
entitled to sell to the Independent Third Party that number of Stockholder
Shares (or if such number is not an integral number, the next integral number
which is greater than such number) which shall be the product of (x) the
aggregate number of Stockholder Shares proposed to be sold by such Stockholder
and (y) a fraction, the numerator of which shall be the number of shares of
Common Stock indicated in the Offer Notice as subject to purchase by the
Independent Third Party and the denominator of
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<PAGE> 11
which shall be the total number of Stockholder Shares proposed to be sold by all
participating Stockholders. Thereafter, the participating Stockholders may sell
to the Independent Third Party, for the consideration stated and on terms no
more favorable to the Independent Third Party than those set forth in the Offer
Notice, their respective number of the shares of Common Stock stated in the
Offer Notice as subject to purchase by the Independent Third Party.
(c) The provisions of this Section 13 shall terminate (i) with
respect to a Stockholder at such time as such Stockholder ceases to hold in
excess of 10% of the outstanding Common Stock and (ii) upon the consummation of
a Qualified Public Offering.
14. Legend. Each certificate evidencing Stockholder Shares and each
certificate issued in exchange for or upon the Transfer of any Stockholder
Shares (if such shares remain Stockholder Shares as defined herein after such
transfer) shall be stamped or otherwise imprinted with a legend in substantially
the following form:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"),
AND MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACT OR AN EXEMPTION FROM REGISTRATION
THEREUNDER. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE ALSO
SUBJECT TO ADDITIONAL RESTRICTIONS ON TRANSFER, CERTAIN REPURCHASE
OPTIONS AND CERTAIN OTHER AGREEMENTS SET FORTH IN AN INVESTOR
SUBSCRIPTION AGREEMENT AND/OR A STOCKHOLDERS AGREEMENT. A COPY OF SUCH
AGREEMENTS MAY BE OBTAINED BY THE HOLDER HEREOF AT THE CORPORATION'S
PRINCIPAL PLACE OF BUSINESS WITHOUT CHARGE.
"
The Corporation shall imprint such legend on certificates evidencing
outstanding Stockholder Shares. The legend set forth above shall be removed from
the certificates evidencing any shares which cease to be Stockholder Shares
pursuant to a Public Sale.
15. Confidentiality. All materials and information obtained by any
Stockholder pursuant to this Agreement or otherwise delivered by the Corporation
to any Stockholders shall be kept confidential and shall not be disclosed to any
third party except (a) as has become generally available to the public (other
than through disclosure by such Stockholder in contravention of this Agreement),
(b) to such Stockholder's directors, officers, trustees, partners, employees,
agents and professional consultants on a need to know basis, (c) to any other
holder of Common Stock, (d) to any person to which such Stockholder offers to
sell or transfer any shares of Common Stock, provided, that the prospective
transferee shall agree to be bound by the provisions of this Section 15, (e) in
any report, statement, testimony or other submission to any governmental
authority having or claiming to have jurisdiction over such Stockholder, or (f)
in order to comply with any law, rule, regulation or order applicable to such
Stockholder, or in response to any summons, subpoena or other legal process or
formal
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<PAGE> 12
or informal investigative demand issued to such Stockholder in the course of any
litigation, investigation or administrative proceeding.
16. Conflicting Agreements. Each Stockholder represents that it has not
granted and is not a party to any proxy, voting trust or other agreement which
is inconsistent with or conflicts with the provisions of this Agreement, and no
Stockholder shall grant any proxy or become party to any voting trust or other
agreement which is inconsistent with or conflicts with the provisions of this
Agreement. No Stockholder shall act, for any reason, as a member of a group or
in concert or enter into any agreement or arrangement with any other person in
connection with the acquisition, disposition or voting of Stockholder Shares in
any manner which is inconsistent with the provisions of this Agreement. The
provisions of this Section 16 shall terminate upon the consummation by the
Corporation of a Qualified Public Offering (but shall not apply to such
Qualified Public Offering).
17. Actions Consistent with Agreement. The Corporation shall not
circumvent this Agreement by taking any action through a subsidiary or affiliate
that would be prohibited under this Agreement. The articles of incorporation and
bylaws of the Corporation may be amended in any manner permitted thereunder,
except that neither the certificate nor the bylaws shall be amended in any
manner that would conflict with, or be inconsistent with, the provisions of this
Agreement.
18. Transfer. Prior to Transferring any Stockholder Shares (other than
in a Public Sale) to any person or entity pursuant to the terms of this
Agreement, the Transferring Stockholder shall cause the prospective transferee
to execute and deliver to the Corporation and the other Stockholders a
counterpart of this Agreement. If as a result of such Transfer there would be
more than three persons holding the Stockholder Shares held as of the date
hereof by the Stockholders, then this Agreement shall at such time also be
amended in such respects as the Stockholders reasonably agree are necessary to
adapt the terms hereof for application to more than the Stockholders alone. Each
such counterpart shall be deemed to be an original part of this Agreement as
though executed on the date hereof.
19. Definitions.
"Approved Sale" means a disposition of the Corporation, whether
pursuant to a merger, consolidation or sale of the Common Stock, to an
Independent Third Party, which disposition is approved by the Board and the
holders of a majority of the outstanding shares of Common Stock.
"Common Stock" is defined in the preamble to the Agreement.
"Corporation" is defined in the preamble and shall include all
of the Corporation's subsidiaries.
"Demand Registration" is defined in Section 5(a).
"Election Period" is defined in Section l(b).
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<PAGE> 13
"Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time.
"Fingerhut" is defined in the preamble.
"Independent Third Party" means any person who, immediately
prior to the contemplated transaction, does not directly or indirectly own in
excess of 5% of the Corporation's Common Stock on a fully-diluted basis (a "5%
Owner)", who is not controlling, controlled by or under common control with any
such 5% Owner and who is not the spouse or descendent (by birth or adoption) of
any such 5% Owner or a trust for the benefit of such 5% Owner and/or such other
persons.
"Initial Stockholder" is defined in the preamble.
"Investment Agreement" is defined in the preamble.
"Issue Notice" is defined in Section 4(a).
"Material Contract" means any contract which requires the
Corporation to make aggregate payments in excess of $250,000 and which is not
unilaterally terminable by the Corporation prior to the payment of $250,000, or
any contract of lesser amount which the Board has deemed to be material.
"Material Expenditures" means any single expenditure in excess
of $250,000 or any other single expenditure of lesser amount which the Board has
deemed material.
"Nasdaq" is the National Association of Securities Dealers
Automated Quotations system.
"Offer Notice" means the notice required to be given by a
Transferring Stockholder to the Corporation and/or the other Stockholder
describing a proposed Transfer. At a minimum, the Offer Notice shall be in
writing and shall contain (i) the number of shares of Common Stock that the
Transferring Stockholder proposes to sell; (ii) the name and address of the
proposed transferee; (iii) the proposed purchase price, terms of payment and
other material terms and conditions of such proposed transfer; and (iv) an
estimate, in the Transferring Stockholder's reasonable judgment, of the fair
market value of any non-cash offered by the proposed transferee.
"Option" means any right, warrant, option or arrangement which
allows a person to acquire securities of the Corporation or requires the
Corporation to issue any securities to a Person.
"Permitted Transfer" is defined in Section l(d).
"Piggyback Registration" is defined in Section 5(a).
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<PAGE> 14
"Public Sale" means any sale of Stockholder Shares to the public
pursuant to an offering registered under the Securities Act or to the public
through a broker, dealer or market maker pursuant to the provisions of Rule 144
adopted under the Securities Act.
"Qualified Public Offering" means an underwritten offering of
Common Stock registered with the Securities and Exchange Commission in which the
deemed market capitalization of the Company in connection with the offering is
at least $75 million.
"Registration Expenses" is defined in Section 8(a).
"Sale of the Corporation" means the sale of the Corporation to
an Independent Third Party or group of Independent Third Parties pursuant to
which such party or parties acquire (i) capital stock of the Corporation
possessing the voting power under normal circumstances to elect a majority of
the Corporation's Board (whether by merger, consolidation or sale or transfer of
the Corporation's capital stock) or (ii) all or substantially all of the
Corporation's assets determined on a consolidated basis.
"Securities Act" means the Securities Act of 1933, as amended
from time to time.
"Stockholder" is defined in the preamble and includes permitted
successors and assigns.
"Stockholders" is defined in the preamble.
"Stockholder Shares" means (i) any Common Stock purchased or
otherwise acquired by any Stockholder, (ii) any equity securities issued or
issuable directly or indirectly with respect to the Common Stock referred to in
clause (i) above by way of stock dividend or stock split or in connection with a
combination of shares, recapitalization, merger, consolidation or other
reorganization, and (iii) any other shares of any class or series of capital
stock of the Corporation held by a Stockholder. As to any particular shares
constituting Stockholder Shares, such shares shall cease to be Stockholder
Shares when they have been sold to the public through a Public Sale even if
thereafter they are reacquired by a Stockholder.
"Transfer" is defined in Section l(a).
"Transferring Stockholder" is defined in Section l(b).
"Warrant Agreement" is defined in the preamble.
20. Transfers in Violation of Agreement. Any Transfer or attempted
Transfer of any Stockholder Shares in violation of any provision of this
Agreement shall be void, and the Corporation shall not record such Transfer on
its books or treat any purported transferee of such Stockholder Shares as the
owner of such shares for any purpose.
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<PAGE> 15
21. Amendment and Waiver. Except as otherwise provided herein, no
modification, amendment or waiver of any provision of this Agreement shall be
effective against the Corporation, Fingerhut or the Initial Stockholders unless
such modification, amendment, termination or waiver is approved in writing by
the Corporation, Fingerhut and the Initial Stockholders; provided, however, that
the Corporation may from time to time add additional shareholders of the
Corporation to this Agreement without the consent or additional signatures of
the parties hereto (and amend and/or restate the Agreement to reflect such
additions) and upon the Corporation's receipt of such additional stockholders'
signature pages, such additional stockholders shall be deemed to be a party
hereto and such additional signature pages shall be a part of this Agreement.
The failure of any party to enforce any of the provisions of this Agreement
shall in no way be construed as a waiver of such provisions and shall not affect
the right of such party thereafter to enforce each and every provision of this
Agreement in accordance with its terms.
22. Severability. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
any other provision or any other jurisdiction, but this Agreement shall be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
23. Entire Agreement. This document embodies the complete agreement and
understanding among the parties hereto with respect to the subject matter hereof
and supersedes and preempts any prior understandings, agreements or
representations by or among the parties, written or oral, which may have related
to the subject matter hereof in any way.
24. Successors and Assigns. Except as otherwise provided herein, this
Agreement shall bind and inure to the benefit of and be enforceable by the
Corporation and its successors and assigns and the Stockholders and any
permitted subsequent holders of Stockholder Shares and the respective successors
and permitted assigns of each of them, so long as they hold Stockholder Shares.
25. Counterparts. This Agreement may be executed in separate
counterparts each of which shall be an original and all of which taken together
shall constitute one and the same agreement.
26. Remedies. The Corporation, Fingerhut and the Initial Stockholders
shall be entitled to enforce their rights under this Agreement specifically, to
recover damages by reason of any breach of any provision of this Agreement and
to exercise all other rights existing in their favor. The parties hereto agree
and acknowledge that money damages may not be an adequate remedy for any breach
of the provisions of this Agreement and that each of the parties may in their
sole discretion apply to any court of law or equity of competent jurisdiction
for specific performance and/or injunctive relief (without posting a bond or
other security) in order to enforce or prevent any violation of the provisions
of this Agreement.
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<PAGE> 16
27. Notices. Any notice provided for in this Agreement shall be in
writing and shall be either personally delivered, or mailed first class mail
(postage prepaid) or sent by reputable overnight courier service (charges
prepaid) to the Corporation at the address set forth below and to any other
recipient at the address indicated on Schedule 1 hereto and to any subsequent
holder of Stockholder Shares subject to this Agreement at such address as
indicated by the Corporation's records, or at such address or to the attention
of such other person as the recipient party has specified by prior written
notice to the sending party. Notices will be deemed to have been given hereunder
when delivered personally, three days after deposit in the U.S. mail and one day
after deposit with a reputable overnight courier service. The Corporation's
address is:
FreeShop International, Inc.
95 South Jackson, Suite 300
Seattle, Washington 98104
Attn: Mr. Tim Choate
28. Governing Law. This Agreement will be construed and interpreted in
accordance with and governed by the laws of the State of Washington and all
rights and remedies shall be governed by such laws without regard to principles
of conflicts of laws.
29. Termination. Except to the extent an earlier termination of a
specific section of this Agreement is provided for in such section, this
Agreement shall expire on the earlier of (i) the tenth anniversary of the date
of this Agreement; or (ii) the closing of the sale of all or substantially all
of the Corporation's assets or the acquisition of the Corporation by another
entity by means of merger or consolidation resulting in the exchange of the
outstanding shares of the Corporation for securities or consideration issued, or
caused to be issued, by the acquiring entity or its subsidiary.
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<PAGE> 17
IN WITNESS WHEREOF, the parties hereto have executed this Stockholders
Agreement on the day and year first above written.
FINGERHUT COMPANIES, INC.
By: /s/
--------------------------------
Its: EVP
--------------------------------
FREESHOP INTERNATIONAL, INC.
By: /s/ TIM CHOATE
--------------------------------
Its: President & CEO
--------------------------------
/s/ TIM CHOATE
------------------------------------
Tim Choate
/s/ JOHN BALLANTINE
------------------------------------
John Ballantine
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<PAGE> 18
SCHEDULE 1
List of Stockholders (other than Fingerhut Companies, Inc.)
<TABLE>
<CAPTION>
Name Address
- ---- -------
<S> <C>
Timothy C. Choate 117 Madrona Place East
Seattle, WA 98112
John Ballantine 714 Lakeside Ave. S.
No. 404
Seattle, WA 98144
</TABLE>
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<PAGE> 1
EXHIBIT 10.7
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT ("Agreement") is made as of May 5, 1999,
by and among FREESHOP.COM, INC., a Washington corporation ("Purchaser"), Travel
Companions International, Inc., a Minnesota corporation ("Seller"), and Jeff
Mohr and Janet Mohr, significant shareholders of Seller (together, "Mohr").
WHEREAS, Seller owns and operates web-based, electronic commerce
businesses known as Worldwide Brochures and Travel Companions (the
"Businesses");
WHEREAS, Seller desires to sell and assign to Purchaser, and Purchaser
desires to purchase and assume from Seller, all of Seller's right, title and
interest in substantially all the assets of the Businesses upon the terms and
subject to the conditions set forth in this Agreement; and
WHEREAS, in order to induce Purchaser to enter into the purchase
transaction, Mohr is willing to join in the representations and warranties of
Seller hereunder and to make certain other convenants;
NOW, THEREFORE, in consideration of the mutual representations,
warranties, covenants and agreements set forth in this Agreement, the parties
hereto agree as follows:
ARTICLE 1
DEFINITIONS
1.1 Definitions. (a) In addition to the terms defined above, the
following capitalized terms, as used herein, have the following meanings (such
meanings to be equally applicable to both the singular and plural forms of the
terms defined):
"Closing Date" means the date of the Closing.
"Encumbrance" means any charge, claim, community property interest,
condition, equitable or beneficial interest, lien, option, pledge, security
interest, right of first refusal, or restriction of any kind, including without
limitation restrictions on transfer, receipt of income or exercise of any other
attribute of ownership.
"Marks" means each registered or unregistered trademark, service mark
and tradename used by Seller as described in Schedule A.
"Employment and Noncompetition Agreement" means the Employment and
Noncompetition Agreement attached as Exhibit A.
"Section" means a section or subsection of this Agreement.
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<PAGE> 2
(b) Each of the following terms is defined in the Section below set
forth opposite such term:
<TABLE>
<CAPTION>
Term Section
---- -------
<S> <C>
Apportioned Obligations 8.1
Assumed Liabilities 2.4
Closing 2.8
Consideration 2.6
Distributor Contracts 2.2
Excluded Assets 2.3
Excluded Liabilities 2.5
Financial Statements 3.5
Holdback Amount 2.7
Indemnified Party 10.3
Indemnifying Party 10.3
Losses 10.2
Purchased Assets 2.2
Securities Act 3.4
</TABLE>
1.2 References. Unless stated otherwise in this Agreement, references in
this Agreement to Sections, Schedules and Exhibits are references to Sections of
and Schedules and Exhibits attached to this Agreement. Each Schedule to this
Agreement is by this reference incorporated into this Agreement.
ARTICLE 2
PURCHASE AND SALE
2.1 Purchase and Sale. Upon the terms and subject to the conditions of
this Agreement, the parties agree to consummate the following transactions at
the Closing: (a) Seller will sell, transfer and assign to Purchaser, and
Purchaser will purchase from Seller, all of the Purchased Assets; and (b) Seller
will assign to Purchaser, and Purchaser will assume, and become directly
responsible for the performance of all obligations with respect to, the Assumed
Liabilities; and (c) Purchaser will pay to Seller the Consideration as provided
herein. Notwithstanding the foregoing, Seller will remain obligated to discharge
the Excluded Liabilities without any responsibility therefor on the part of
Purchaser.
2.2 Purchased Assets. For purposes hereof, the term "Purchased Assets"
means, to the extent not specifically included in the Excluded Assets, all
assets, powers and rights held by Seller as of the Closing Date, or in which
Seller has a right, title or interest as of the Closing Date, and which are
used, were acquired for use or are held for use by Seller primarily in
connection with the Businesses, of whatever kind, tangible and intangible, and
wherever located, including, without limitation:
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<PAGE> 3
(a) the servers, software, content and data to run the
Businesses;
(b) all intellectual property related to the Businesses,
including without limitation all Marks.
(c) the database of registered consumer subscribers, including
the software system holding the data and third-party licenses for such software;
(d) all contracts between the Businesses and their respective
clients (collectively the "Merchant Contracts");
(e) all distribution contracts with portals or other world wide
web sites (the "Distribution Contracts");
(f) all equipment, property and assets of the fulfillment
facility;
(g) all other user lists and other books, records, lists, files
and papers, whether in hard copy or electronic format; and
(h) all goodwill associated with the Businesses or the Purchased
Assets.
2.3 Excluded Assets. For purposes hereof, the term "Excluded Assets"
means the following rights, properties and assets of Seller which are used, were
acquired for use or are held for use by Seller primarily in connection with the
Businesses, which shall not be included as part of the Purchased Assets and
shall not be conveyed to Purchaser at the Closing:
(a) all cash; and
(b) all accounts, notes and other receivables;
2.4 Assumed Liabilities. Upon the terms and subject to the conditions of
this Agreement, Purchaser agrees, effective at the time of Closing, to assume
only the following liabilities of Seller ("Assumed Liabilities") arising out of
the conduct of the Businesses:
(a) the obligations of the Businesses under the Merchant
Contracts.
2.5 Excluded Liabilities. For purposes hereof, the term "Excluded
Liabilities" means all liabilities of Seller, whether known or unknown, whether
relating to the operation of the Businesses or otherwise, now existing or
arising and created by Seller hereafter, except the Assumed Liabilities.
2.6 Consideration. The consideration (the "Consideration") for the
Purchased Assets shall be cash in the amount of one million four hundred
thousand Dollars ($1,400,000.00). The Consideration, net of the Holdback Amount,
shall be delivered to Seller at Closing.
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<PAGE> 4
2.7 Holdback. Purchaser shall retain the sum of $150,000 (the "Holdback
Amount") for a period of 180 days after Closing, at the expiration of which
period Purchaser shall promptly pay the Holdback Amount, subject to any offsets
in accordance with Section 10.2(c) below, to Seller. During Holdback period,
without limitation, Seller shall transfer the Purchased Assets, excluding
fulfillment business, to Purchaser's Seattle offices and provide education and
training to Purchaser in the operation of such Purchased Assets prior to
Closing.
2.8 Closing. Provided that all conditions have been satisfied, and
unless the parties agree in writing to an extension, closing (the "Closing")
shall occur at a time, date and place mutually agreeable to the parties, but not
later than June 15, 1999. Purchaser shall be entitled to sole possession of the
Purchased Assets on and after the Closing Date.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller and Mohr hereby jointly and severally represent and warrant to
Purchaser that:
3.1 Status of Seller. Seller is a corporation, validly existing and in
good standing under the laws of the State of Minnesota, and has all corporate
powers and all governmental licenses, authorizations, consents and approvals
required to carry on its business as now conducted. Seller is not required to
qualify to do business in any other state or jurisdiction.
3.2 Authorization. The execution, delivery and performance by Seller of
this Agreement and all other documents and instruments to be delivered by Seller
hereunder, and the consummation by Seller of the transactions contemplated
hereby, are within the corporate powers of Seller and have been duly authorized
by all necessary action on the part of Seller. This Agreement has been duly
executed and delivered by a duly authorized officer of Seller and constitutes a
valid and binding agreement of Seller. All other documents and instruments to be
delivered by Seller under this Agreement, when executed and delivered, will
constitute valid and binding obligations of Seller.
3.3 Approvals. Neither the execution of this Agreement, the consummation
of the sale of the Purchased Assets nor the assumption of the Assumed
Liabilities hereunder requires the approval or consent of any governmental body,
agency, official or authority having jurisdiction over the Businesses.
3.4 Financial Statements. Seller has provided Purchaser with true,
correct, and complete copies of Seller's income statement and balance sheet for
the period ending December 31, 1998, and the interim income statement for the
three months ended March 31, 1999 (collectively, "Financial Statements"). To the
best of Seller's knowledge, the Financial Statements are correct and complete
and fairly present the results of operations and financial condition of Seller
for the period or as at the date specified, and were prepared on an income tax
basis, applied on a consistent basis throughout the periods involved, subject to
any comments
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<PAGE> 5
noted therein. The books of account from which the Financial Statements were
prepared accurately reflect all of the items of income and expense, all assets
and liabilities, and all accruals of Seller.
3.5 Liabilities. There are no liabilities or obligations of any nature
or of any amount whatsoever, whether accrued or unaccrued, absolute or
contingent, liquidated or unliquidated, unmatured, unasserted, potential or
otherwise, related to the Purchased Assets or the Businesses except:
(a) to the extent reflected in the Financial Statements and not
already paid or discharged; and
(b) those that have been or will be incurred in or as a result
of the normal and ordinary course of business after March 31, 1999.
3.6 Litigation. There are no actions, suits, claims, proceedings or
investigations pending or, to the best of Seller's knowledge, threatened against
or affecting the Purchased Assets or the Businesses at law or in equity or
before or by any federal, state, municipal or other governmental court,
department, commission, board, bureau, agency or instrumentality. To the best of
Seller's knowledge, no event has occurred or circumstance exists that may give
rise to or serve as a basis for the commencement of any such action, suit, claim
proceeding or investigation. Seller has fully complied with all laws and
regulations applicable to the Purchased Assets and the Businesses. There are no
awards, decisions, injunctions, judgment, orders, rulings, subpoenas or verdicts
entered, issued, made or rendered by any court, administrative agency,
governmental body, or arbitrator to which the Purchased Assets or the Businesses
are subject.
3.7 Employee Claims. No employee of Seller involved in the operations of
the Businesses has any claim against Seller, and Seller is not obligated or
liable to any such person in any way or for any amounts except compensation due
to employees in the ordinary course of business.
3.8 Taxes.
(a) Seller has filed with the appropriate governmental
authorities all tax and related returns required to be filed by it, and such
returns accurately reflect the taxes payable;
(b) all federal, state, local, county, franchise, sales, use,
excise, property, and other taxes which are due and payable have been duly paid;
(c) no reserves for unpaid taxes have been set up or are
required on the basis of the facts and in accordance with generally accepted
accounting principles, except as reflected in the Financial Statements;
5
<PAGE> 6
(d) there are no unpaid assessments or proposed assessments of
federal, state or local taxes pending against Seller; and
(e) there are no federal, state, or local tax audits pending or,
to the best of Seller's knowledge, threatened, concerning Seller.
3.9 Title to Personal Property. Seller owns good and marketable title to
all personal property and assets of every type and description purported to be
owned or used by it as part of the Businesses, including those properties and
assets reflected on its Financial Statements, free and clear of any and all
Encumbrances of every kind, nature, and description; and all of Seller's
operating assets are in good operating condition and repair, not in need of
non-routine maintenance and are adequate and sufficient for the uses to which
they are being put and for the continued conduct of the Businesses by Purchaser.
3.11 Intellectual Properties.
(a) Seller has no patents or patent rights, and requires no such
rights in connection with the conduct of its business as presently conducted.
Seller is not infringing or otherwise acting adversely to the right of any
person under or in respect to any patent or patent rights.
(b) Schedule A contains a complete and accurate list of all
Marks owned or claimed by Seller and material to its business as presently
conducted. Seller is the owner of all right, title, and interest in and to each
of these Marks, free and clear of all Encumbrances or other adverse claims. None
of the Marks infringe or violate any trademark, service mark, tradename or other
proprietary right of any other person. Seller does not license any of the Marks
from any third party. The Marks constitute all those necessary for the operation
of Seller's business as currently conducted.
3.12 Employees and Benefits. Seller is not a party to any pension or
other employee benefit plan and has no outstanding withdrawal liability (or
other obligation) with respect to any such plan; is not a party to any
collective bargaining or union agreement; and has no written or oral employment
agreements with any of its employees. Seller has timely paid all withholding,
FICA, and other taxes required to be paid on behalf of its employees
3.13 Employment Practices. Seller has been and is in compliance with all
federal or state law respecting employment or employment practices, including
without limitation terms and conditions of employment, wages and hours, equal
employment opportunity, non-discrimination, immigration, collective bargaining
and occupation safety and health. There is no labor or employment problem or
dispute pending or threatened against or affecting Seller with respect to the
Businesses or the Purchased Assets. Notwithstanding the foregoing, it is not
intended that this Agreement shall in any way require Purchaser to assume any
obligations or liabilities of Seller with respect to labor or employment
matters.
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<PAGE> 7
3.14 Brokers. Seller has not employed any broker, finder, or agent, or
otherwise become in any way obligated for any broker's, finder's or agent's (or
similar) fee with respect to the transaction contemplated by this Agreement.
3.15 Insurance. Seller is adequately insured with respect to all risks
normally insured against by companies similarly situated. Seller has paid all
premiums and otherwise performed all its obligations under all its insurance
policies and will keep all such insurance policies in full force and effect
through the Closing Date.
3.16 Absence of Certain Events, Circumstances, Etc. Since March 31,
1999, Seller has conducted the Businesses only in the ordinary course and there
has not been any material adverse change in the Businesses or in the assets,
properties, prospects or condition of the Businesses, and no event has occurred
or circumstances exists that may result in such a material adverse change, and
Seller has not:
(a) incurred any obligation or liability related to the
Businesses, whether absolute or contingent, except obligations and liabilities
incurred in the ordinary course of Seller's business;
(b) discharged or satisfied any Encumbrance or paid any
obligation or liability related to the Businesses, whether absolute or
contingent, other than current liabilities having become due and payable since
that date in the ordinary course;
(c) sold or transferred any of its tangible or intangible assets
or properties or cancelled any debts or claims related to the Businesses,
except, in each case, in the ordinary course;
(d) sold, assigned, or transferred any Mark;
(e) suffered any losses that would have a materially adverse
effect on the business or financial condition of the Businesses or waived any
rights of substantial value;
(f) suffered any loss, damage, or destruction to any of its
properties due to fire or other casualty whether or not insured, which loss,
damage, or destruction materially and adversely affects its business, properties
or operations;
(g) mortgaged, pledged, or subjected to any Encumbrance any of
its tangible or intangible assets related to the Businesses, except the lien of
current personal property taxes not yet due and payable; or
(h) conducted the Businesses otherwise than in its ordinary,
normal and usual manner.
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3.17 Disclosure.
(a) No representation or warranty of Seller and/or Mohr in this
Agreement omits to state a material fact necessary to make the statements
herein, in light of the circumstances in which they were made, not misleading;
and
(b) No notice given pursuant to Section 5.3 will contain any
untrue statement or omit to state a material fact necessary to make the
statement therein or in this Agreement, in light of the circumstances in which
they were made, not misleading.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser hereby represents and warrants to Seller that:
4.1 Organization and Existence. Purchaser is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Washington and has all corporate powers required to carry on its business as
now conducted.
4.2 Corporate Authorization. The execution, delivery and performance by
Purchaser of this Agreement and all other documents and instruments to be
delivered by Purchaser hereunder, and the consummation by Purchaser of the
transactions contemplated hereby, are within the corporate powers of Purchaser
and have been duly authorized by all necessary corporate action on the part of
Purchaser. This Agreement has been duly executed and delivered by a duly
authorized officer of Purchaser and constitutes a valid and binding agreement of
Purchaser. All other documents and instruments to be delivered by Purchaser
under this Agreement, when executed and delivered, will constitute valid and
binding obligations of Purchaser.
4.3 Governmental Authorization. The execution, delivery and performance
by Purchaser of this Agreement require no action by or in respect of, or filing
with, any governmental body, agency, official or authority.
4.4 Non-Contravention. The execution, delivery and performance by
Purchaser of this Agreement do not and will not (a) contravene or conflict with
the articles of incorporation or bylaws of Purchaser or (b) to the knowledge of
Purchaser contravene or conflict with any provision of any law, regulation,
judgment, injunction, order or decree binding upon Purchaser.
4.5 Litigation. There is no action, suit, investigation or proceeding
pending against, or to the knowledge of Purchaser, threatened against or
affecting, Purchaser before any court or arbitrator or any governmental body,
agency or official which in any matter challenges or seeks to prevent, enjoin,
alter or materially delay the transactions contemplated hereby.
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ARTICLE 5
COVENANTS OF SELLER
Seller agrees that:
5.1 Conduct of the Businesses. Except as Purchaser otherwise expressly
agrees in writing, Seller covenants that, prior to the Closing Date, Seller
will:
(a) conduct the Businesses only in the ordinary and usual
course, without material change in the nature of its operations, and not
otherwise sell, mortgage, lease or dispose of any portion of its assets or
acquire any property or assets;
(b) not incur any debts, liabilities or contract obligations
related to the Businesses, except in the ordinary course or with the prior
approval of Purchaser, which involve total consideration in excess of $5,000 and
cannot be canceled by Seller on 30 days' notice;
(c) not do or cause to be done anything that would cause any
representation or warranty to be untrue or inaccurate if made at the time,
except as otherwise permitted by this Agreement;
(d) maintain the Purchased Assets, and the insurance with
respect thereto, in accordance with good business practice;
(e) make no change with respect to management or supervisory
personnel or its auditors or other major consultants;
(f) use its best efforts to preserve its business organization
intact, keep available the services of its present management, and preserve the
goodwill of its suppliers, customers, and others having business relationships
with it; and
(g) permit no increase in the compensation payable or to become
payable by it to any of its employees or consultants, or other employees except
as required under Seller's established policies and consistent with past
practice.
5.2 Access to Information. During the period from the date hereof to the
Closing Date, Purchaser and its duly authorized representatives shall have full
and free access to the offices, records, files, and books of account of Seller
related to the Businesses; provided, however, that such access shall not
unreasonably interfere with Seller's normal operations and employee
relationships. Purchaser and its representatives shall treat all information
obtained from such access and not otherwise in the public domain as
confidential, and if this transaction does not close, Purchaser shall return all
books, records and documents made available to it.
5.3 Notices of Certain Events. Between the date of this Agreement and
the Closing Date, Seller will promptly notify Purchaser in writing if Seller
becomes aware of any fact or condition that causes or constitutes a breach of
any of Seller's representations and warranties as
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<PAGE> 10
of the date of this Agreement, or if Seller becomes aware of the occurrence
after the date of this Agreement of any fact or condition that would (except as
expressly contemplated by this Agreement) cause or constitute a breach of any
representation or warranty had such representation or warranty been made as of
the time of occurrence or delivery of such fact or condition.
5.4 Employee Matters. Seller shall terminate all employees of the
Businesses as of the Closing Date. Seller will be responsible for accrued wages,
vacation, pension, termination pay and all benefits (including all matters
related to COBRA rights) arising from Seller's employment or termination of all
personnel involved with the Businesses.
ARTICLE 6
COVENANTS OF PURCHASER
Purchaser agrees that:
6.1 Confidentiality. Prior to the Closing Date and after any termination
of this Agreement, Purchaser will hold all confidential documents and
information concerning Seller furnished to Purchaser in connection with the
transactions contemplated by this Agreement in confidence, except to the extent
that such information can be shown to have been (i) previously known on a
nonconfidential basis by Purchaser, (ii) in the public domain through no fault
of Purchaser or (iii) later lawfully acquired by Purchaser from sources other
than Seller; provided that Purchaser may disclose such information to its
officers, directors, employees, accountants, counsel, consultants, advisors and
agents in connection with the transactions contemplated by this Agreement so
long as such persons are informed by Purchaser of the confidential nature of
such information and are directed by Purchaser to treat such information
confidentially. The obligation of Purchaser to hold any such information in
confidence shall be satisfied if they exercise the same care with respect to
such information as they would take to preserve the confidentiality of their own
similar information. If this Agreement is terminated, Purchaser will cause its
officers, directors, employees, accountants, counsel, consultants, advisors,
auditors and agents to, destroy or deliver to Seller, upon written request, all
documents and other materials, and all copies thereof, obtained by Purchaser or
on its behalf from Seller in connection with this Agreement that are subject to
such confidence.
6.2 Hiring of Employees. Purchaser will offer the three current
employees of Businesses employment with Purchaser. These employees will be
offered compensation at a level not less than that which they are currently
receiving.
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ARTICLE 7
COVENANTS OF BOTH PARTIES
The parties hereto agree that:
7.1 Reasonable Efforts; Further Assurances. Subject to the terms and
conditions of this Agreement, each party will use its best efforts (exclusive of
litigation) to take, or cause to be taken, all actions and to do, or cause to be
done, all things necessary or desirable under applicable laws and regulations to
consummate the transactions contemplated by this Agreement. Seller and Purchaser
each agree to execute and deliver such other documents, certificates, agreements
and other writings and to take such other actions as may be necessary or
desirable to consummate or implement expeditiously the transactions contemplated
by this Agreement and to vest in Purchaser good and marketable title to the
Purchased Assets. Prior to Closing, Seller will cause the American Express and
Norvista contracts to be transferred to Purchase and shall provide Purchaser
with evidence of such transfers reasonably satisfactory to Purchaser.
7.2 Certain Filings. Seller and Purchaser shall cooperate with one
another (a) in determining whether any action by or in respect of, or filing
with, any governmental body, agency, official or authority is required, or any
actions, consents, approvals or waivers are required to be obtained from parties
to any material contracts, in connection with the consummation of the
transactions contemplated by this Agreement and (b) in taking such actions or
making any such filings, furnishing information required in connection therewith
and seeking timely to obtain any such actions, consents, approvals or waivers.
7.3 Confidentiality of Agreement. Seller and Purchaser will hold, and
will use their best efforts to cause their respective officers, directors,
employees, accountants, counsel, consultants, advisors and agents to hold the
terms of this Agreement in confidence, unless compelled to disclose such terms
by judicial or administrative process or by other requirements of law.
ARTICLE 8
TAX MATTERS
8.1 Tax Cooperation; Allocation of Taxes.
(a) Purchaser and Seller agree to furnish or cause to be
furnished to each other, upon request, as promptly as practicable, such
information and assistance relating to the Purchased Assets and the Businesses
as is reasonably necessary for the filing of all Tax returns, and making of any
election related to Taxes, the preparation for any audit by any taxing
authority, and the prosecution or defense of any claim, suit or proceeding
relating to any Tax return. Seller and Purchaser shall cooperate with each other
in the conduct of any audit or other proceeding related to Taxes involving the
Businesses and each shall execute and deliver such powers of attorney and other
documents as are necessary to carry out the intent of this Section 8.1(a).
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(b) All personal property taxes due and payable in 1999 with
respect to the Purchased Assets shall be apportioned between Seller and
Purchaser as of the Closing Date based on the number of days of such taxable
period included in the Pre-Closing Tax Period and the number of days of such
taxable period included in the Post-Closing Tax Period. Seller shall be liable
for the proportionate amount of such taxes that is attributable to the
Pre-Closing Tax Period, and Purchaser shall be liable for the proportionate
amount of such taxes that is attributable to the Post-Closing Tax Period. Within
90 days after the Closing, Seller and Purchaser shall present a statement to the
other setting forth the amount of reimbursement to which each is entitled under
this Section 8.1(b) together with such supporting evidence as is reasonably
necessary to calculate the proration amount. The proration amount shall be paid
by the party owing it to the other within 10 days after delivery of such
statement. Thereafter, Seller shall notify Purchaser upon receipt of any bill
for personal property taxes relating to the Purchased Assets, part or all of
which are attributable to the Post-Closing Tax Period, and shall promptly
deliver such bill to Purchaser who shall pay the same to the appropriate taxing
authority, provided that if such bill covers the Pre-Closing Tax Period, Seller
shall also remit prior to the due date of assessment to Purchaser payment for
the proportionate amount of such bill that is attributable to the Pre-Closing
Tax Period. In the event that either Seller or Purchaser shall thereafter make a
payment for which it is entitled to reimbursement under this Section 8.1(b), the
other party shall make such reimbursement promptly but in no event later than 30
days after the presentation of a statement setting forth the amount of
reimbursement to which the presenting party is entitled along with such
supporting evidence as is reasonably necessary to calculate the amount of
reimbursement. Any payment required under this Section and not made within 10
days of delivery of the statement shall bear interest at the rate of 12% per
annum for each day until paid.
(c) All transfer, documentary, sales, use and other Taxes
assessed upon or with respect to the transfer of the Purchased Assets to
Purchaser (exclusive of Taxes imposed upon or measured by Seller's net income or
gross receipts) shall be the responsibility of Purchaser.
ARTICLE 9
CONDITIONS TO CLOSING
9.1 Conditions to the Obligations of Each Party. The obligations of
Purchaser and Seller to consummate the Closing are subject to the satisfaction
of the following conditions:
(a) no action or proceeding shall have been instituted in which
an order has been entered restraining or prohibiting or invalidating the
transactions contemplated by this Agreement, or affecting the right of Purchaser
to own the Purchased Assets after the Closing Date; and
(b) all actions by or in respect of or filings with any
governmental body, agency, official or authority required to permit the
consummation of the Closing shall have been
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obtained.
9.2 Conditions to Obligation of Purchaser. The obligation of Purchaser
to consummate the Closing is subject to the satisfaction of the following
further conditions:
(a) Purchaser shall have completed its due diligence review of
Seller, the Businesses and the Purchased Assets, and the results of such review
shall be to Purchaser's satisfaction in its sole discretion;
(b) Seller shall have performed in all material respects all of
its obligations hereunder required to be performed by it at or prior to the
Closing Date;
(c) The Purchased Assets, including but not limited to all
servers and databases, shall have been transferred to Purchaser's Seattle
offices and otherwise delivered to the satisfaction of Purchaser in its sole
discretion;
(d) The representations and warranties of Seller contained in
this Agreement and in any certificate or other writing delivered by Seller
pursuant hereto shall be true in all material respects at and as of the Closing
Date, as if made at and as of such time;
(e) The Employment and Noncompetition Agreement shall have been
duly executed by Jeff Mohr;
(f) Purchaser shall have received:
(i) a bill of sale for the Purchased Assets, duly
executed by the Seller, in form reasonably satisfactory to Purchaser and its
legal counsel; and
(ii) assignment and assumption agreements for the
Merchant Contracts and the Distributor Contracts, duly executed by Seller, in
form reasonably satisfactory to Purchaser and its legal counsel, and all
necessary consents from the other parties to such contracts;
(iii) such other approvals or documents as Purchaser may
reasonably request including without limitation written consents to transfer of
the American Express and Norvista contracts.
9.3 Conditions to Obligation of Seller. The obligation of Seller to
consummate the Closing is subject to the satisfaction of the following
conditions:
(a) Purchaser shall have performed in all material respects all
of its obligations hereunder required to be performed by it at or prior to the
Closing Date;
(b) The representations and warranties of Purchaser contained in
this Agreement and in any certificate or other writing delivered by Purchaser
pursuant hereto shall be
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true in all material respects at and as of the Closing Date, as if made at and
as of such time;
(c) Seller shall have received:
(i) payment of the Consideration, as provided in Section
2.6;
(ii) assignment and assumption agreements for the
Merchant Contracts and the Distributor Contracts, duly executed by Purchaser, in
form reasonably satisfactory to Seller and its legal counsel, and all necessary
consents from the other parties to such contracts; and
(iii) such other approvals or documents as Seller may
reasonably request.
ARTICLE 10
SURVIVAL; INDEMNIFICATION
10.1 Survival. The representations and warranties of the parties hereto
contained in this Agreement or in any certificate or other writing delivered
pursuant hereto or in connection herewith shall survive the Closing for a period
of one year. The right to indemnification, payment of damages or other remedy
based on such representation and warranties or other covenants and obligations
will not be affected by any investigation conducted with respect to any
knowledge acquired (or capable of being acquired) at any time, whether before or
after the execution and delivery of this Agreement or the Closing Date, with
respect to the accuracy or inaccuracy of or compliance with any such
representation, warranty, covenant or obligation. The waiver of any condition
based on the accuracy of any representation or warranty, or on the performance
of or compliance with any covenant or obligation, will not affect the right to
indemnification, payment of damages or other remedy based on such
representation, warranties, covenants and obligations.
10.2 Indemnification. (a) Seller and Mohr each hereby agrees to
indemnify Purchaser against and agrees to hold it harmless from any and all
damage, loss, liability and expense (including, without limitation, reasonable
expenses of investigation and reasonable attorneys' fees and expenses in
connection with any action, suit or proceeding) (collectively, "Losses")
incurred or suffered by Purchaser in any way related to or arising out of (i)
any misrepresentation or breach of warranty, covenant or agreement made or to be
performed by Seller pursuant to this Agreement, or (ii) Seller's ownership of
the Purchased Assets or operation of the Businesses prior to the Closing Date.
(b) Purchaser hereby indemnifies Seller and Mohr against and
agrees to hold each of them harmless from any and all Losses incurred or
suffered by Seller or Mohr in any way related to or arising out of (i) any
misrepresentation or breach of warranty, covenant or agreement made or to be
performed by Purchaser pursuant to this Agreement or (ii) Purchaser's ownership
of the Purchased Assets or operation of the Businesses on or after the Closing
Date.
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(c) In addition to any other legal or equitable remedies
available to Purchaser for Seller's and/or Mohr's breach of any representation,
warranty, covenant or agreement contained in this Agreement, and in addition to
pursuing indemnification rights for Losses covered under Section 10.2(a) above,
Purchaser may, as a nonexclusive remedy, offset against the Holdback Amount the
amount of any loss that it shall have suffered as a result of such breach or the
amount of any Losses for which Purchaser is to be indemnified pursuant to
Section 10.2(a) above.
10.3 Procedures. The party seeking indemnification under Section 10.2
(the "Indemnified Party") agrees to give prompt notice to the party against whom
indemnity is sought (the "Indemnifying Party") of the assertion of any claim, or
the commencement of any suit, action or proceeding in respect of which indemnity
may be sought under such Section. The Indemnifying Party may, at its own
expense, participate in and control the defense of any such suit, action or
proceeding; provided, the Indemnifying Party's counsel is reasonably
satisfactory to the Indemnified Party and the Indemnifying Party thereafter
consults with the Indemnified Party upon the Indemnified Party's reasonable
request from time to time with respect to such suit, action or proceeding. The
parties shall in any event cooperate in the defense or prosecution of any such
suit, action or proceeding. The Indemnifying Party shall not be liable under
Section 10.2 for any settlement effected without its consent of any claim,
litigation or proceeding in respect of which indemnity may be sought hereunder.
ARTICLE 11
TERMINATION
11.1 Grounds for Termination. This Agreement may be terminated at any
time prior to the Closing:
(a) by Purchaser if the results of Purchaser's due diligence
review of Seller, the Businesses and the Purchased Assets are not satisfactory
to Purchaser in its sole discretion;
(b) by mutual written agreement of Seller and Purchaser;
(c) by either Seller or Purchaser if the Closing shall not have
been consummated on or before June 15, 1999;
(d) by either Seller or Purchaser if there shall be any law or
regulation that makes the consummation of the transaction contemplated hereby
illegal or otherwise prohibited or if consummation of the transactions
contemplated hereby would violate any nonappealable final order, decree or
judgment of any court or governmental body having competent jurisdiction; or
(e) by either Seller or Purchaser, in the event of any material
breach by the other party to this Agreement.
The party desiring to terminate this Agreement shall give prompt notice
of such
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termination to the other party.
11.2 Effect of Termination. If this Agreement is terminated as permitted
by Section 11.1, such termination shall be without liability of either party (or
any shareholder, director, officer, employee, agent, consultant or
representative of such party) to the other party to this Agreement; provided
that if such termination shall result from the willful failure of either party
to fulfill a condition to the performance of the obligations of the other party
or to perform a covenant of this Agreement or from a willful breach by either
party to this Agreement, such party shall be fully liable for any and all Losses
incurred or suffered by the other party as a result of such failure or breach.
The provisions of Section 12.3 shall survive any termination hereof pursuant to
Section 11.1.
ARTICLE 12
MISCELLANEOUS
12.1 Notices. All notices, requests and other communications to either
party hereunder shall be in writing (including facsimile or similar writing) and
shall be given,
if to Purchaser, to:
FreeShop.com, Inc.
95 South Jackson St., Suite 300
Seattle, WA 98104
Fax: (206) 441-9661
Attn: Timothy Choate, President and CEO
if to Seller, to:
Travel Companions International, Inc.
1227 Kenneth Street
Detroit Lakes, MN 56501
Fax: (218) 847 7090
Attn: Jeff Mohr
or to such other address as such party shall have designated by notice so given
to each other party.
12.2 Amendments; No Waivers. Any provision of this Agreement may be
amended or waived prior to the Closing Date if, and only if, such amendment or
waiver is in writing and signed, in the case of an amendment, by Purchaser and
Seller, or in the case of a waiver, by the party against whom the waiver is to
be effective. No failure or delay by either party in exercising any right, power
or privilege hereunder shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies herein
provided shall be cumulative and not
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exclusive of any rights or remedies provided by law.
12.3 Expenses. Except as otherwise specified herein, Purchaser and
Seller will each be solely responsible for and bear all of its own respective
expenses, including, without limitation, expenses of legal counsel, accountants,
and other advisors, incurred at any time in connection with pursuing or
consummating this Agreement and the transactions contemplated hereby.
12.4 Successors and Assigns. The provisions of this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns.
12.5 Governing Law. This Agreement shall be construed in accordance with
and governed by the law of the State of Washington, without regard to the
conflicts of law rules of such state.
12.6 Consent to Jurisdiction; Attorneys' Fees. For purposes of any
litigation arising out of or in connection with this Agreement, the parties
hereby consent to the jurisdiction of State and Federal Courts sitting in King
County, Washington. In the event of any such litigation, the prevailing party
shall be entitled to recover from the other party all of its attorneys' fees and
other expenses incurred in connection with such litigation.
12.7 Counterparts; Effectiveness. This Agreement may be signed in any
number of counterparts, each of which shall be an original, with the same effect
as if the signatures thereto and hereto were upon the same instrument. This
Agreement shall become effective when each party hereto shall have received a
counterpart hereof signed by the other party hereto.
12.8 Entire Agreement. This Agreement constitutes the entire agreement
between the parties with respect to the subject matter hereof and supersedes all
prior agreements, understandings and negotiations, both written and oral,
between the parties with respect to the subject matter of this Agreement. No
representation, inducement, promise, understanding, condition or warranty not
set forth herein has been made or relied upon by either party hereto. Neither
this Agreement nor any provision hereof is intended to confer upon any person
other than the parties hereto any rights or remedies hereunder.
12.9 Captions. The captions herein are included for convenience of
reference only and shall be ignored in the construction or interpretation
hereof.
12.10 Severability. Unless otherwise provided herein, if any provision
of this Agreement shall be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining portions shall not in any way be
affected or impaired thereby.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
FREESHOP.COM, INC.
By________________________________
Name: Tim Choate
Title: CEO
TRAVEL COMPANIONS INTERNATIONAL,
INC.
By: _______________________________
Name: Janet Mohr
Title: Chief Executive Officer
By_______________________________
Name: Jeff Mohr
Title: Chief Operating Officer
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SCHEDULE A
MARKS
- WORLDWIDE BROCHURES
- THE OFFICIAL TRAVEL BROCHURE DIRECTORY
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<PAGE> 20
EXHIBIT A
---------
Employment and Noncompetition Agreement
20
<PAGE> 1
EXHIBIT 10.8
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT ("Agreement") is made as of May 6, 1999,
by and among FREESHOP.COM, INC., a Washington corporation ("Purchaser"), and
COMMONSITE, LLC, a California limited liability company ("Seller"), and Alan
Bennett, an owner of Seller ("Bennett").
WHEREAS, Seller owns and operates web-based, electronic commerce
businesses known as Catalog Site and Catalog Channel (the "Businesses");
WHEREAS, Seller desires to sell and assign to Purchaser, and Purchaser
desires to purchase and assume from Seller, all of Seller's right, title and
interest in substantially all the assets of the Businesses upon the terms and
subject to the conditions set forth in this Agreement; and
WHEREAS, in order to induce Purchaser to enter into the purchase
transaction, Bennett is willing to join in the representations and warranties of
Seller hereunder and to make certain other covenant;
NOW, THEREFORE, in consideration of the mutual representations,
warranties, covenants and agreements set forth in this Agreement, the parties
hereto agree as follows:
ARTICLE 1
DEFINITIONS
1.1 Definitions. (a) In addition to the terms defined above, the
following capitalized terms, as used herein, have the following meanings (such
meanings to be equally applicable to both the singular and plural forms of the
terms defined):
"Closing Date" means the date of the Closing.
"Encumbrance" means any charge, claim, community property interest,
condition, equitable or beneficial interest, lien, option, pledge, security
interest, right of first refusal, or restriction of any kind, including without
limitation restrictions on transfer, receipt of income or exercise of any other
attribute of ownership.
"Marks" means each registered or unregistered trademark, service mark
and tradename used by Seller as described in Schedule C.
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"Noncompetition Agreement" means the Noncompetition Agreement attached
as Exhibit A.
"Registration Rights Agreement" means the Registration Rights Agreement
attached as Exhibit B.
"Section" means a section or subsection of this Agreement.
"Software License Agreement" means the Software License Agreement
attached hereto as Exhibit C.
(b) Each of the following terms is defined in the Section below
set forth opposite such term:
<TABLE>
<CAPTION>
Term Section
---- -------
<S> <C>
Assumed Liabilities 2.4
Closing 2.9
Commerce Solution Purchaser 5.5
Consideration 2.6
Excluded Assets 2.3
Excluded Liabilities 2.5
Financial Statements 3.5
Holdback Amount 2.8
Indemnified Party 10.3
Indemnifying Party 10.3
Losses 10.2
Merchant Contracts 2.2
Purchased Assets 2.2
Securities Act 3.4
Shares 2.6
</TABLE>
1.2 References. Unless stated otherwise in this Agreement, references in
this Agreement to Sections, Schedules and Exhibits are references to Sections of
and Schedules and Exhibits attached to this Agreement. Each Schedule to this
Agreement is by this reference incorporated into this Agreement.
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<PAGE> 3
ARTICLE 2
PURCHASE AND SALE
2.1 Purchase and Sale. Upon the terms and subject to the conditions of
this Agreement, the parties agree to consummate the following transactions at
the Closing: (a) Seller will sell, transfer and assign to Purchaser, and
Purchaser will purchase from Seller, all of the Purchased Assets; and (b) Seller
will assign to Purchaser, and Purchaser will assume, and become directly
responsible for the performance of all obligations with respect to, the Assumed
Liabilities; and (c) Purchaser will pay to Seller the Consideration as provided
herein. Notwithstanding the foregoing, Seller will remain obligated to discharge
the Excluded Liabilities without any responsibility therefor on the part of
Purchaser.
2.2 Purchased Assets. For purposes hereof, the term "Purchased Assets"
means, to the extent not specifically included in the Excluded Assets, all
assets, powers and rights held by Seller as of the Closing Date, or in which
Seller has a right, title or interest as of the Closing Date, and which are
used, were acquired for use or are held for use by Seller primarily in
connection with the Businesses, of whatever kind, tangible and intangible, and
wherever located, including, without limitation:
(a) the servers, software, content and data to run the
Businesses;
(b) the URL's shown on Schedule A and all other intellectual
property related to the Businesses, including without limitation all Marks.
(c) the database of registered catalogsite.com newsletter
subscribers, including the software system holding the data and third-party
licenses for such software;
(d) the database of users who have ordered catalogs through
Catalog Site, including the software system holding the data and third-party
licenses for such software;
(e) all contracts between Catalog Site and its clients (the
"Merchant Contracts"), including without limitation those merchants listed in
Schedule B, and all accounts receivable arising from the Merchant Contracts;
(f) all servers, software and other data used in the operation
of Catalog Channel;
(g) all other user lists and other books, records, lists, files
and papers, whether in hard copy or electronic format; and
(h) all goodwill associated with the Businesses or the Purchased
Assets.
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2.3 Excluded Assets. For purposes hereof, the term "Excluded Assets"
means the following rights, properties and assets of Seller which are used, were
acquired for use or are held for use by Seller primarily in connection with the
Businesses, which shall not be included as part of the Purchased Assets and
shall not be conveyed to Purchaser at the Closing:
(a) all cash;
(b) all accounts, notes and other receivables except accounts
receivable arising from the Merchant Contracts;
(c) the Commerce Solution affiliate software and intellectual
property related thereto;
(d) affiliate marketing agreements other than with companies
identified in Schedule B; and
(e) contracts with merchants other than the Merchant Contracts.
2.4 Assumed Liabilities. Upon the terms and subject to the conditions of
this Agreement, Purchaser agrees, effective at the time of Closing, to assume
only the following liabilities of Seller ("Assumed Liabilities") arising out of
the conduct of the Businesses:
(a) the obligations of Catalog Site under the Merchant
Contracts.
2.5 Excluded Liabilities. For purposes hereof, the term "Excluded
Liabilities" means all liabilities of Seller, whether known or unknown, whether
relating to the operation of the Businesses or otherwise, now existing or
arising and created by Seller hereafter, except the Assumed Liabilities.
2.6 Consideration. The consideration (the "Consideration") for the
Purchased Assets and for the execution and delivery of the Non-Competition
Agreement (Exhibit A hereto) shall be (a) cash in the amount of four hundred
forty one thousand dollars ($441,000) ("Cash Portion"), and (b) 132,300 shares
of the common stock of Purchaser (the "Shares") to be issued to Seller. The Cash
Portion, net of the Holdback Amount, and the Shares shall be delivered to Seller
at Closing. Three hundred ninety-one thousand dollars ($391,000) of the Cash
Portion is consideration for the Purchased Assets, and Fifty thousand dollars
($50,000) of the Cash Portion is consideration paid for the execution and
delivery of the Non-Competition Agreement. The Shares shall be issued in the
name of Seller; upon request by Seller, and in compliance with the relevant
securities laws, Purchaser shall reissue the Shares to the persons as directed
by Seller.
2.7 Reserved.
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2.8 Holdback. Purchaser shall retain the sum of $50,000 (the "Holdback
Amount") for a period of 30 days after date (the "Start Date") upon which (i)
the Purchased Assets are in the possession of Purchaser at their Seattle offices
and (ii) the software, data and other content necessary to run the Businesses
have been installed and are performing in a manner substantially similar to the
performance of the Businesses as of the date of this Agreement. At such time as
the Seller determines that items (i) and (ii) above have occurred, Seller shall
notify Purchaser in writing of such fact, stating the date which Seller believes
is the Start Date. Within five (5) business days after receipt of Seller's
notice, if Purchaser reasonably determines that the Start Date has not yet
occurred, Purchaser shall notify Seller in writing of its disagreement and state
with specificity the reasons for its disagreement. Thereafter, Seller shall use
its best efforts to accomplish items (i) and (ii) above as expeditiously as
possible, and again shall notify Purchaser in writing when the Start Date has
occurred. Within thirty (30) days after the Start Date, Purchaser shall promptly
pay to Seller the Holdback Amount.
2.9 Closing. Provided that all conditions have been satisfied, and
unless the parties agree in writing to an extension, closing (the "Closing")
shall occur at a time, date and place mutually agreeable to the parties, but not
later than May 7, 1999. Purchaser shall be entitled to sole possession of the
Purchased Assets on and after the Closing Date in accordance with the following
procedures.
A. On or prior to the Closing Date, Purchaser shall
deliver by wire transfer the Cash Portion (net of the Holdback
Amount) of the Purchase Price to the Trust Account of King,
Weiser, Bazar & Jacobs ("KWBJ"), and shall deliver by overnight
courier a certificate for the Shares to KWBJ at 2049 Century
Park East, Suite 900, Los Angeles, California 90067, Attn:
Michael Allderdice. The Cash Portion (net of the Holdback
Amount) and the Shares are to be held by KWBJ for disposition in
accordance with this Section 2.9.
Wire Transfer Information:
Wells Fargo & Co.
2020 Avenue of the Stars, #P138-00
Los Angeles, California 90067
ABA # (or Routing #): 121000248
Account # 0359-222379
B. KWBJ is authorized to release the Cash Portion (net of the
Holdback Amount) and the Shares to Company upon its receipt from
Purchaser of written notice that:
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1. Ownership of all of the URL's listed on
Schedule A has been transferred to Purchaser via
Internic.
2. A copy of all current and archive order
bases has been transferred to Purchaser.
3. A copy of all web site databases and
content has been transferred to Purchaser.
4. A copy of all source code and
documentation for Commerce Solution has been
transferred to Purchaser.
C. Upon delivery of the above-listed items, Purchaser shall
notify KWBJ of such fact in writing or by facsimile
transmission, signed by Lisa Wolff or an officer of Purchaser.
D. Purchaser acknowledges that the Cash Portion and the Shares
may be transferred to Seller prior to the time that Catalog Site
and Catalog Channel are operational at Purchaser's offices in
Seattle; that is, the installation and operation of Catalog Site
and Catalog Channel are not conditions precedent to the release
of the Cash Portion and the Shares to Seller.
E. Purchaser and Seller shall each indemnify and hold KWBJ
harmless from and against any and all claims, loss, damage, or
liability (including attorney's fees and costs) arising out of
KWBJ's actions or failure to act under this Section 2.9,
excepting only its gross negligence or willful misconduct in
carrying out the instructions set forth in this Section. KWBJ
shall not be responsible for verifying the validity of any
signature and may therefor assume that any correspondence
received by it was validly signed by the person identified as
the signator.
F. Notwithstanding any other provisions of this Agreement, if
KWBJ has not received written authorization to release the Cash
Portion (net of the Holdback Amount) and the Shares to Seller
within 45 days after KWBJ's receipt of the Cash Portion (net of
the Holdback Amount) and the Shares, KWBJ has the absolute right
at its election to file an action in interpleader in the
Superior Court of Los Angeles County, California, requiring
Purchaser and Seller to answer and litigate their several claims
and rights among themselves, and to deposit the Cash Portion
(net of the Holdback Amount) and the Shares with the clerk of
that court. In the event such action is filed, Purchaser and
Seller jointly and severally agree to pay KWBJ's costs, expenses
and reasonable attorney's fees which are required to file and
prosecute such interpleader action, the amount thereof to be
fixed and judgment therefor to be rendered by the court. Upon
the filing of such action, KWBJ shall be fully released and
discharged from all obligations imposed on it by this Section.
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G. Upon receipt of any conflicting instructions, KWBJ shall take
no action in connection with its responsibilities hereunder
(other than as set forth at paragraph F above) until
non-conflicting instruction are received from both Purchaser and
Seller.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller and Bennett hereby jointly and severally represent and warrant to
Purchaser that:
3.1 Status of Seller. Seller is a limited liability company, validly
existing and in good standing under the laws of the State of California, and has
all powers and all governmental licenses, authorizations, consents and approvals
required to carry on its business as now conducted. Seller is not required to
qualify to do business in any other state or jurisdiction.
3.2 Authorization. The execution, delivery and performance by Seller of
this Agreement and all other documents and instruments to be delivered by Seller
hereunder, and the consummation by Seller of the transactions contemplated
hereby, are within the limited liability company powers of Seller and have been
duly authorized by all necessary action on the part of Seller. This Agreement
has been duly executed and delivered by a duly authorized representative of
Seller and constitutes a valid and binding agreement of Seller. All other
documents and instruments to be delivered by Seller under this Agreement, when
executed and delivered, will constitute valid and binding obligations of Seller.
3.3 Approvals. Neither the execution of this Agreement, the consummation
of the sale of the Purchased Assets nor the assumption of the Assumed
Liabilities hereunder requires the approval or consent of any governmental body,
agency, official or authority having jurisdiction over the Businesses.
3.4 Investment Representations.
(a) Seller is aware that the Shares have not been registered
under the Securities Act of 1933, as amended (the "Securities Act"), or any
state securities laws, in reliance on exemptions from such registration. It is
understood that reliance by Purchaser on such exemptions is predicated in part
upon the truth and accuracy of the statements made by Seller in this Agreement.
(b) Seller's duly authorized representatives, either alone or
with the assistance of Seller's professional advisors, have such knowledge and
experience in financial and business matters that they are capable of evaluating
the merits and risks of Seller's purchase of the Shares.
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(c) Seller has sufficient financial resources to be able to bear
the risk of Seller's investment in the Shares.
(d) The duly authorized representatives of Seller have either
spoken or met with, or been given reasonable opportunity to speak with or meet
with, representatives of Purchaser for the purpose of asking questions of, and
receiving answers and information from, such representatives concerning Seller's
investment in the Shares.
(e) Seller is purchasing the Shares for its own account for
investment purposes and not with a view toward the sale or distribution of all
or any part of such securities. No one other than Seller will have any
beneficial interest in the Shares.
(f) Seller understands that, because the Shares have not been
registered under the Securities Act, (i) the Shares have the status of
securities acquired in a transaction under Section 4(2) of the Securities Act;
and (ii) the Shares cannot be sold unless they are subsequently registered or an
exemption from registration is available.
(g) Seller will in no event sell or distribute all or any part
of the Shares unless (i) there is an effective registration statement under the
Securities Act and applicable state securities laws covering any such
transaction involving such stock, or (ii) Purchaser receives an opinion from
Seller's legal counsel, in form acceptable to Purchaser, stating that such
transaction is exempt from registration.
(h) Seller understands that at the present time Rule 144
promulgated under the Securities Act may not be relied upon for the resale or
distribution of the Shares because Purchaser does not file the reports or make
information about Purchaser publicly available nor is there a public market for
the Shares. Moreover, there can be no assurance that Purchaser will in the
future file such reports or make publicly available such information, or that a
public market for the Shares will develop.
(i) Seller is an accredited investor under the Securities Act
because it is (i) an entity not formed for the specific purpose of acquiring the
Shares, with total assets in excess of $5,000,000 or (ii) an entity in which all
of the equity owners are themselves natural persons who either (A) each had an
individual income in excess of $200,000 in each of the two most recent years or
joint income with that person's spouse in excess of $300,000 in each of those
years and a reasonable expectation of reaching the same income level in the
current year or (B) each have an individual net worth, or a joint net worth with
that person's spouse, in excess of $1,000,000.
3.5 Financial Statements. Seller has provided Purchaser with true,
correct, and complete copies of Seller's income statement and balance sheet for
the period ending December 31, 1998, and the interim income statement and
balance sheet for the three months ended March 31, 1999 (collectively,
"Financial Statements"). To the best of Seller's knowledge, the Financial
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Statements are correct and complete and fairly present the results of operations
and financial condition of Seller for the period or as at the date specified,
and were prepared on an income tax basis, applied on a consistent basis
throughout the periods involved, subject to any comments noted therein. The
books of account from which the Financial Statements were prepared accurately
reflect all of the items of income and expense, all assets and liabilities, and
all accruals of Seller.
3.6 Liabilities. There are no liabilities or obligations of any nature
or of any amount whatsoever, whether accrued or unaccrued, absolute or
contingent, liquidated or unliquidated, unmatured, unasserted, potential or
otherwise, related to the Purchased Assets or the Businesses except:
(a) to the extent reflected in the Financial Statements and not
already paid or discharged; and
(b) those that have been or will be incurred in or as a result
of the normal and ordinary course of business after March 31, 1999.
3.7 Litigation. There are no actions, suits, claims, proceedings or
investigations pending or, to the best of Seller's knowledge, threatened against
or affecting the Purchased Assets or the Businesses at law or in equity or
before or by any federal, state, municipal or other governmental court,
department, commission, board, bureau, agency or instrumentality. To the best of
Seller's knowledge, no event has occurred or circumstance exists that may give
rise to or serve as a basis for the commencement of any such action, suit, claim
proceeding or investigation. Seller has fully complied with all laws and
regulations applicable to the Purchased Assets and the Businesses. There are no
awards, decisions, injunctions, judgment, orders, rulings, subpoenas or verdicts
entered, issued, made or rendered by any court, administrative agency,
governmental body, or arbitrator to which the Purchased Assets or the Businesses
are subject.
3.8 Employee Claims. To the best of Seller's knowledge, no employee of
Seller involved in the operations of the Businesses has any claim against
Seller, and Seller is not obligated or liable to any such person in any way or
for any amounts except compensation due to employees in the ordinary course of
business.
3.9 Taxes.
(a) Seller has filed with the appropriate governmental
authorities all tax and related returns required to be filed by it, and such
returns accurately reflect the taxes payable;
(b) all federal, state, local, county, franchise, sales, use,
excise, property, and other taxes which are due and payable have been duly paid;
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(c) no reserves for unpaid taxes have been set up or are
required on the basis of the facts and in accordance with generally accepted
accounting principles, except as reflected in the Financial Statements;
(d) there are no unpaid assessments or proposed assessments of
federal, state or local taxes pending against Seller; and
(e) there are no federal, state, or local tax audits pending or,
to the best of Seller's knowledge, threatened, concerning Seller.
3.10 Title to Personal Property. Seller owns good and marketable title
to all personal property and assets of every type and description purported to
be owned or used by it as part of the Businesses, including those properties and
assets reflected on its Financial Statements, free and clear of any and all
Encumbrances of every kind, nature, and description; and all of Seller's
operating assets are in good operating condition and repair, not in need of
non-routine maintenance and are adequate and sufficient for the uses to which
they are being put and for the continued conduct of the Businesses by Purchaser.
3.11 Accounts Receivable. All the accounts receivable of Seller
reflected in the Financial Statements and to be acquired by Purchaser represent
valid obligations arising from sales actually made in the ordinary course of
business and have been collected or are good and collectible in the aggregate
recorded amounts thereof (less the reasonable amount for doubtful accounts as
reflected in the Financial Statements) and can reasonably be anticipated to be
paid in full, without set off, within 90 days after the day on which it first
becomes due.
3.12 Intellectual Properties.
(a) Seller has no patents or patent rights, and requires no such
rights in connection with the conduct of its business as presently conducted. To
the best of Seller's knowledge, Seller is not infringing or otherwise acting
adversely to the right of any person under or in respect to any patent or patent
rights.
(b) Schedule C contains a complete and accurate list of all
Marks owned or claimed by Seller and material to its business as presently
conducted. Seller is the owner of all right, title, and interest in and to each
of these Marks, free and clear of all Encumbrances or other adverse claims. To
the best of Seller's knowledge, none of the Marks infringe or violate any
trademark, service mark, tradename or other proprietary right of any other
person. Seller does not license any of the Marks from any third party. The Marks
constitute all those necessary for the operation of Seller's business as
currently conducted.
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3.13 Employees and Benefits. Seller is not a party to any pension or
other employee benefit plan and has no outstanding withdrawal liability (or
other obligation) with respect to any such plan; is not a party to any
collective bargaining or union agreement; and has no written or oral employment
agreements with any of its employees. Seller has timely paid all withholding,
FICA, and other taxes required to be paid on behalf of its employees.
3.14 Employment Practices. To the best of Seller's knowledge, Seller has
been and is in compliance with all federal or state law respecting employment or
employment practices, including without limitation terms and conditions of
employment, wages and hours, equal employment opportunity, non-discrimination,
immigration, collective bargaining and occupation safety and health.
3.15 Brokers. Except for Dan Ambrose of DeSilva & Phillips, Inc., Seller
has not employed any broker, finder, or agent, or otherwise become in any way
obligated for any broker's, finder's or agent's (or similar) fee with respect to
the transaction contemplated by this Agreement.
3.16 Insurance. Seller is adequately insured with respect to all risks
normally insured against by companies similarly situated. Seller has paid all
premiums and otherwise performed all its obligations under all its insurance
policies and will keep all such insurance policies in full force and effect
through the Closing Date.
3.17 Absence of Certain Events, Circumstances, Etc. Since March 31,
1999, Seller has conducted the Businesses only in the ordinary course and there
has not been any material adverse change in the Businesses or in the assets,
properties, prospects or condition of the Businesses, and no event has occurred
or circumstances exists that may result in such a material adverse change, and
Seller has not:
(a) incurred any obligation or liability related to the
Businesses, whether absolute or contingent, except obligations and liabilities
incurred in the ordinary course of Seller's business;
(b) discharged or satisfied any Encumbrance or paid any
obligation or liability related to the Businesses, whether absolute or
contingent, other than current liabilities having become due and payable since
that date in the ordinary course;
(c) sold or transferred any of its tangible or intangible assets
or properties or cancelled any debts or claims related to the Businesses,
except, in each case, in the ordinary course;
(d) sold, assigned, or transferred any Mark;
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(e) suffered any losses that would have a materially adverse
effect on the business or financial condition of the Businesses or waived any
rights of substantial value;
(f) suffered any loss, damage, or destruction to any of its
properties due to fire or other casualty whether or not insured, which loss,
damage, or destruction materially and adversely affects its business, properties
or operations;
(g) mortgaged, pledged, or subjected to any Encumbrance any of
its tangible or intangible assets related to the Businesses, except the lien of
current personal property taxes not yet due and payable; or
(h) conducted the Businesses otherwise than in their ordinary,
normal and usual manner.
3.18 Disclosure.
(a) No representation or warranty of Seller and/or Bennett in
this Agreement omits to state a material fact necessary to make the statements
herein, in light of the circumstances in which they were made, not misleading;
and
(b) No notice given pursuant to Section 5.3 will contain any
untrue statement or omit to state a material fact necessary to make the
statement therein or in this Agreement, in light of the circumstances in which
they were made, not misleading.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser hereby represents and warrants to Seller that:
4.1 Organization and Existence. Purchaser is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Washington and has all corporate powers required to carry on its business as
now conducted.
4.2 Corporate Authorization. The execution, delivery and performance by
Purchaser of this Agreement and all other documents and instruments to be
delivered by Purchaser hereunder, and the consummation by Purchaser of the
transactions contemplated hereby, are within the corporate powers of Purchaser
and have been duly authorized by all necessary corporate action on the part of
Purchaser. This Agreement has been duly executed and delivered by a duly
authorized officer of Purchaser and constitutes a valid and binding agreement of
Purchaser. All other documents and instruments to be delivered by Purchaser
under this
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Agreement, when executed and delivered, will constitute valid and binding
obligations of Purchaser.
4.3 Governmental Authorization. The execution, delivery and performance
by Purchaser of this Agreement require no action by or in respect of, or filing
with, any governmental body, agency, official or authority.
4.4 Non-Contravention. The execution, delivery and performance by
Purchaser of this Agreement do not and will not (a) contravene or conflict with
the articles of incorporation or bylaws of Purchaser or (b) to the knowledge of
Purchaser contravene or conflict with any provision of any law, regulation,
judgment, injunction, order or decree binding upon Purchaser.
4.5 Litigation. There is no action, suit, investigation or proceeding
pending against, or to the knowledge of Purchaser, threatened against or
affecting, Purchaser before any court or arbitrator or any governmental body,
agency or official which in any matter challenges or seeks to prevent, enjoin,
alter or materially delay the transactions contemplated hereby.
ARTICLE 5
COVENANTS OF SELLER
Seller agrees that:
5.1 Conduct of the Businesses. Except as Purchaser otherwise expressly
agrees in writing, Seller covenants that, prior to the Closing Date, Seller
will:
(a) conduct the Businesses only in the ordinary and usual
course, without material change in the nature of its operations, and not
otherwise sell, mortgage, lease or dispose of any portion of its assets or
acquire any property or assets;
(b) not incur any debts, liabilities or contract obligations
related to the Businesses, except in the ordinary course or with the prior
approval of Purchaser, which involve total consideration in excess of $5,000 and
cannot be canceled by Seller on 30 days' notice;
(c) not do or cause to be done anything that would cause any
representation or warranty to be untrue or inaccurate if made at the time,
except as otherwise permitted by this Agreement;
(d) maintain the Purchased Assets, and the insurance with
respect thereto, in accordance with good business practice;
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(e) make no change with respect to management or supervisory
personnel or its auditors or other major consultants;
(f) use its best efforts to preserve its business organization
intact, keep available the services of its present management, and preserve the
goodwill of its suppliers, customers, and others having business relationships
with it; and
(g) permit no increase in the compensation payable or to become
payable by it to any of its employees or consultants, or other employees except
as required under Seller's established policies and consistent with past
practice.
5.2 Access to Information. During the period from the date hereof to the
Closing Date, Purchaser and its duly authorized representatives shall have full
and free access to the offices, records, files, and books of account of Seller
related to the Businesses; provided, however, that such access shall not
unreasonably interfere with Seller's normal operations and employee
relationships. Purchaser and its representatives shall treat all information
obtained from such access and not otherwise in the public domain as
confidential, and if this transaction does not close, Purchaser shall return all
books, records and documents made available to it.
5.3 Notices of Certain Events. Between the date of this Agreement and
the Closing Date, Seller will promptly notify Purchaser in writing if Seller
becomes aware of any fact or condition that causes or constitutes a breach of
any of Seller's representations and warranties as of the date of this Agreement,
or if Seller becomes aware of the occurrence after the date of this Agreement of
any fact or condition that would (except as expressly contemplated by this
Agreement) cause or constitute a breach of any representation or warranty had
such representation or warranty been made as of the time of occurrence or
delivery of such fact or condition.
5.4 Employee Matters. Seller will be responsible for accrued wages,
vacation, pension, termination pay and all benefits (including all matters
related to COBRA rights) arising from Seller's employment or termination of all
personnel involved with the Businesses.
5.5 Future Prohibition. If Seller, within twelve (12) months after the
date of this Agreement, sells the assets that comprise its Commerce Solution
business, Seller will require that the purchaser of such assets (the "Commerce
Solution Purchaser") agree at the time of such purchase that the Commerce
Solution Purchaser will not, for a period which will terminate on the first
anniversary of the date of this Agreement, sell or license the Commerce Solution
software to a buyer in the same type of business as FreeShop.com, Catalog Site
or Catalog Channel. Purchaser acknowledges that Seller will sell or license the
Commerce Solution software for use in e-commerce activity that might involve the
aggregation of multiple merchants and products, and that such sale or license
will not be a breach of this Agreement.
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5.6 Post-Closing Assistance. Seller shall use it best efforts to make
available to Purchaser the developer services of David Milby for a period of one
week after Closing at no cost to Purchaser for the purpose of establishing the
Business at Purchaser's offices in Seattle. The one week period shall commence
on a date selected by Buyer, but not later than thirty (30) days after the date
hereof. Seller shall be responsible to pay the airfare and living expenses of
one trip to Seattle by Milby. Thereafter, and for a period of 12 weeks after
Closing, Seller shall use its best efforts to make available to Purchaser the
services of Milby for up to 10 hours per week at a cost of $50 per hour, plus
travel and living expenses, if required. Seller is not aware of any reason why
Milby would not be available to perform these services.
ARTICLE 6
COVENANTS OF PURCHASER
Purchaser agrees that:
6.1 Confidentiality. Prior to the Closing Date and after any termination
of this Agreement, Purchaser will hold all confidential documents and
information concerning Seller furnished to Purchaser in connection with the
transactions contemplated by this Agreement in confidence, except to the extent
that such information can be shown to have been (i) previously known on a
nonconfidential basis by Purchaser, (ii) in the public domain through no fault
of Purchaser or (iii) later lawfully acquired by Purchaser from sources other
than Seller; provided that Purchaser may disclose such information to its
officers, directors, employees, accountants, counsel, consultants, advisors and
agents in connection with the transactions contemplated by this Agreement so
long as such persons are informed by Purchaser of the confidential nature of
such information and are directed by Purchaser to treat such information
confidentially. The obligation of Purchaser to hold any such information in
confidence shall be satisfied if they exercise the same care with respect to
such information as they would take to preserve the confidentiality of their own
similar information. If this Agreement is terminated, Purchaser will cause its
officers, directors, employees, accountants, counsel, consultants, advisors,
auditors and agents to, destroy or deliver to Seller, upon written request, all
documents and other materials, and all copies thereof, obtained by Purchaser or
on its behalf from Seller in connection with this Agreement that are subject to
such confidence.
ARTICLE 7
COVENANTS OF BOTH PARTIES
The parties hereto agree that:
7.1 Reasonable Efforts; Further Assurances. Subject to the terms and
conditions of this Agreement, each party will use its best efforts (exclusive of
litigation) to take, or cause to be
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taken, all actions and to do, or cause to be done, all things necessary or
desirable under applicable laws and regulations to consummate the transactions
contemplated by this Agreement. Without limitation, Seller shall transfer the
Purchased Assets to Purchaser's Seattle offices and provide education and
training to Purchaser in the operation of such Purchased Assets prior to
Closing. Seller and Purchaser each agree to execute and deliver such other
documents, certificates, agreements and other writings and to take such other
actions as may be necessary or desirable to consummate or implement
expeditiously the transactions contemplated by this Agreement and to vest in
Purchaser good and marketable title to the Purchased Assets.
7.2 Certain Filings. Seller and Purchaser shall cooperate with one
another (a) in determining whether any action by or in respect of, or filing
with, any governmental body, agency, official or authority is required, or any
actions, consents, approvals or waivers are required to be obtained from parties
to any material contracts, in connection with the consummation of the
transactions contemplated by this Agreement and (b) in taking such actions or
making any such filings, furnishing information required in connection therewith
and seeking timely to obtain any such actions, consents, approvals or waivers.
7.3 Confidentiality of Agreement. Seller and Purchaser will hold, and
will use their best efforts to cause their respective officers, directors,
employees, accountants, counsel, consultants, advisors and agents to hold the
terms of this Agreement in confidence, unless compelled to disclose such terms
by judicial or administrative process or by other requirements of law.
ARTICLE 8
TAX MATTERS
8.1 Tax Cooperation; Allocation of Taxes.
(a) Purchaser and Seller agree to furnish or cause to be
furnished to each other, upon request, as promptly as practicable, such
information and assistance relating to the Purchased Assets and the Businesses
as is reasonably necessary for the filing of all Tax returns, and making of any
election related to Taxes, the preparation for any audit by any taxing
authority, and the prosecution or defense of any claim, suit or proceeding
relating to any Tax return. Seller and Purchaser shall cooperate with each other
in the conduct of any audit or other proceeding related to Taxes involving the
Businesses and each shall execute and deliver such powers of attorney and other
documents as are necessary to carry out the intent of this Section 8.1(a).
(b) All personal property taxes due payable in 1999 with respect
to the Purchased Assets shall be apportioned between Seller and Purchaser as of
the Closing Date based on the number of days of such taxable period included in
the Pre-Closing Tax Period and
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the number of days of such taxable period included in the Post-Closing Tax
Period. Seller shall be liable for the proportionate amount of such taxes that
is attributable to the Pre-Closing Tax Period, and Purchaser shall be liable for
the proportionate amount of such taxes that is attributable to the Post-Closing
Tax Period. Within 90 days after the Closing, Seller and Purchaser shall present
a statement to the other setting forth the amount of reimbursement to which each
is entitled under this Section 8.1(b) together with such supporting evidence as
is reasonably necessary to calculate the proration amount. The proration amount
shall be paid by the party owing it to the other within 10 days after delivery
of such statement. Thereafter, Seller shall notify Purchaser upon receipt of any
bill for personal property taxes relating to the Purchased Assets, part or all
of which are attributable to the Post-Closing Tax Period, and shall promptly
deliver such bill to Purchaser who shall pay the same to the appropriate taxing
authority, provided that if such bill covers the Pre-Closing Tax Period, Seller
shall also remit prior to the due date of assessment to Purchaser payment for
the proportionate amount of such bill that is attributable to the Pre-Closing
Tax Period. In the event that either Seller or Purchaser shall thereafter make a
payment for which it is entitled to reimbursement under this Section 8.1(b), the
other party shall make such reimbursement promptly but in no event later than 30
days after the presentation of a statement setting forth the amount of
reimbursement to which the presenting party is entitled along with such
supporting evidence as is reasonably necessary to calculate the amount of
reimbursement. Any payment required under this Section and not made within 10
days of delivery of the statement shall bear interest at the rate of 12% per
annum (but in no event higher than the maximum legal rate) for each day until
paid.
(c) All transfer, documentary, sales, use and other Taxes
assessed upon or with respect to the transfer of the Purchased Assets to
Purchaser (exclusive of Taxes imposed upon or measured by Seller's net income or
gross receipts) shall be the responsibility of Purchaser.
ARTICLE 9
CONDITIONS TO CLOSING
9.1 Conditions to the Obligations of Each Party. The obligations of
Purchaser and Seller to consummate the Closing are subject to the satisfaction
of the following conditions:
(a) no action or proceeding shall have been instituted in which
an order has been entered restraining or prohibiting or invalidating the
transactions contemplated by this Agreement, or affecting the right of Purchaser
to own the Purchased Assets after the Closing Date; and
(b) all actions by or in respect of or filings with any
governmental body, agency, official or authority required to permit the
consummation of the Closing shall have been obtained.
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9.2 Conditions to Obligation of Purchaser. The obligation of Purchaser
to consummate the Closing is subject to the satisfaction of the following
further conditions:
(a) Purchaser shall have completed its due diligence review of
Seller, the Businesses and the Purchased Assets, and the results of such review
shall be to Purchaser's reasonable satisfaction. As of the date of this
Agreement, Purchaser's due diligence review is substantially complete. Purchaser
has had full and free access to inspect and audit Seller's books relating to the
Business, to observe and inspect the operation of the Business, and to discuss
all phases of the Business with Bennett and employees of the Business.
(b) Seller shall have performed in all material respects all of
its obligations hereunder required to be performed by it at or prior to the
Closing Date;
(c) The Purchased Assets, including but not limited to all
servers and databases, shall have been transferred to Purchaser's Seattle
offices and otherwise delivered to the satisfaction of Purchaser;
(d) The representations and warranties of Seller contained in
this Agreement and in any certificate or other writing delivered by Seller
pursuant hereto shall be true in all material respects at and as of the Closing
Date, as if made at and as of such time;
(e) The Noncompetition Agreement shall have been duly executed
by Bennett;
(f) The Registration Rights Agreement shall have been duly
executed by Seller;
(g) The Software License Agreement shall have been duly executed
by Seller; and
(h) Purchaser shall have received:
(i) a bill of sale for the Purchased Assets, duly executed by
the Seller, in form reasonably satisfactory to Purchaser and its legal counsel;
and
(ii) assignment and assumption agreements for the Merchant
Contracts, duly executed by Seller, in form reasonably satisfactory to Purchaser
and its legal counsel, and all necessary consents from the other parties to such
contracts;
(iii) such other approvals or documents as Purchaser may
reasonably request.
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9.3 Conditions to Obligation of Seller. The obligation of Seller to
consummate the Closing is subject to the satisfaction of the following
conditions:
(a) Purchaser shall have performed in all material respects all
of its obligations hereunder required to be performed by it at or prior to the
Closing Date;
(b) The representations and warranties of Purchaser contained in
this Agreement and in any certificate or other writing delivered by Purchaser
pursuant hereto shall be true in all material respects at and as of the Closing
Date, as if made at and as of such time;
(c) The Registration Rights Agreement shall have been duly
executed by Purchaser;
(d) The Software License Agreement shall have been duly executed
by Purchaser; and
(e) Seller shall have received:
(i) payment of the Consideration, including delivery of
the Shares, as provided in Section 2.6;
(ii) assignment and assumption agreements for the
Merchant Contracts and the Distributor Contracts, duly executed by Purchaser, in
form reasonably satisfactory to Seller and its legal counsel, and all necessary
consents from the other parties to such contracts; and
(iii) such other approvals or documents as Seller may
reasonably request.
ARTICLE 10
SURVIVAL; INDEMNIFICATION
10.1 Survival. The representations and warranties of the parties hereto
contained in this Agreement or in any certificate or other writing delivered
pursuant hereto or in connection herewith shall survive the Closing for a period
of one year. The right to indemnification, payment of damages or other remedy
based on such representation and warranties or other covenants and obligations
will not be affected by any investigation conducted with respect to any
knowledge acquired (or capable of being acquired) at any time, whether before or
after the execution and delivery of this Agreement or the Closing Date, with
respect to the accuracy or inaccuracy of or compliance with any such
representation, warranty, covenant or obligation. The waiver of any condition
based on the accuracy of any representation or warranty, or on the
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performance of or compliance with any covenant or obligation, will not affect
the right to indemnification, payment of damages or other remedy based on such
representation, warranties, covenants and obligations.
10.2 Indemnification.
(a) Seller and Bennett each hereby agrees to indemnify Purchaser
against and agrees to hold it harmless from any and all damage, loss, liability
and expense (including, without limitation, reasonable expenses of investigation
and reasonable attorneys' fees and expenses in connection with any action, suit
or proceeding) (collectively, "Losses") incurred or suffered by Purchaser in any
way related to or arising out of (i) any misrepresentation or breach of
warranty, covenant or agreement made or to be performed by Seller pursuant to
this Agreement, or (ii) Seller's ownership of the Purchased Assets or operation
of the Businesses prior to the Closing Date.
(b) Purchaser hereby indemnifies Seller and Bennett against and
agrees to hold each of them harmless from any and all Losses incurred or
suffered by Seller or Bennett in any way related to or arising out of (i) any
misrepresentation or breach of warranty, covenant or agreement made or to be
performed by Purchaser pursuant to this Agreement or (ii) Purchaser's ownership
of the Purchased Assets or operation of the Businesses on or after the Closing
Date.
(c) In addition to any other legal or equitable remedies
available to Purchaser for Seller's and/or Bennett's breach of any
representation, warranty, covenant or agreement contained in this Agreement, and
in addition to pursuing indemnification rights for Losses covered under Section
10.2(a) above, Purchaser may, as a nonexclusive remedy, offset against the
Holdback Amount the amount of any loss that it shall have suffered as a result
of such breach or the amount of any Losses for which Purchaser is to be
indemnified pursuant to Section 10.2(a) above.
10.3 Procedures. The party seeking indemnification under Section 10.2
(the "Indemnified Party") agrees to give prompt notice to the party against whom
indemnity is sought (the "Indemnifying Party") of the assertion of any claim, or
the commencement of any suit, action or proceeding in respect of which indemnity
may be sought under such Section. The Indemnifying Party may, at its own
expense, participate in and control the defense of any such suit, action or
proceeding; provided, the Indemnifying Party's counsel is reasonably
satisfactory to the Indemnified Party and the Indemnifying Party thereafter
consults with the Indemnified Party upon the Indemnified Party's reasonable
request from time to time with respect to such suit, action or proceeding. The
parties shall in any event cooperate in the defense or prosecution of any such
suit, action or proceeding. The Indemnifying Party shall not be liable under
Section 10.2 for any settlement effected without its consent of any claim,
litigation or proceeding in respect of which indemnity may be sought hereunder.
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ARTICLE 11
TERMINATION
11.1 Grounds for Termination. This Agreement may be terminated at any
time prior to the Closing:
(a) by Purchaser if the results of Purchaser's due diligence
review of Seller, the Businesses and the Purchased Assets are not satisfactory
to Purchaser in its sole discretion;
(b) by mutual written agreement of Seller and Purchaser;
(c) by either Seller or Purchaser if the Closing shall not have
been consummated on or before May 7, 1999;
(d) by either Seller or Purchaser if there shall be any law or
regulation that makes the consummation of the transaction contemplated hereby
illegal or otherwise prohibited or if consummation of the transactions
contemplated hereby would violate any nonappealable final order, decree or
judgment of any court or governmental body having competent jurisdiction; or
(e) by either Seller or Purchaser, in the event of any material
breach by the other party to this Agreement.
The party desiring to terminate this Agreement shall give promptly
notice of such termination to the other party.
11.2 Effect of Termination. If this Agreement is terminated as permitted
by Section 11.1, such termination shall be without liability of either party (or
any shareholder, director, officer, employee, agent, consultant or
representative of such party) to the other party to this Agreement; provided
that if such termination shall result from the willful failure of either party
to fulfill a condition to the performance of the obligations of the other party
or to perform a covenant of this Agreement or from a willful breach by either
party to this Agreement, such party shall be fully liable for any and all Losses
incurred or suffered by the other party as a result of such failure or breach.
The provisions of Section 12.3 shall survive any termination hereof pursuant to
Section 11.1.
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ARTICLE 12
MISCELLANEOUS
12.1 Notices. All notices, requests and other communications to either
party hereunder shall be in writing (including facsimile or similar writing) and
shall be given,
if to Purchaser, to:
FreeShop.com, Inc.
95 South Jackson St., Suite 300
Seattle, WA 98104
Fax: (206) 441-9661
Attn: Timothy Choate, President and CEO
if to Seller, to:
Commonsite, LLC
3000 Ocean Park
Suite 3010
Santa Monica, California 90405
Fax: (310) 656-5729
Attn: Alan Bennett
or to such other address as such party shall have designated by notice so given
to each other party.
12.2 Amendments; No Waivers. Any provision of this Agreement may be
amended or waived prior to the Closing Date if, and only if, such amendment or
waiver is in writing and signed, in the case of an amendment, by Purchaser and
Seller, or in the case of a waiver, by the party against whom the waiver is to
be effective. No failure or delay by either party in exercising any right, power
or privilege hereunder shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies herein
provided shall be cumulative and not exclusive of any rights or remedies
provided by law.
12.3 Expenses. Except as otherwise specified herein, Purchaser and
Seller will each be solely responsible for and bear all of its own respective
expenses, including, without limitation, expenses of legal counsel, accountants,
and other advisors, incurred at any time in connection with pursuing or
consummating this Agreement and the transactions contemplated hereby.
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12.4 Successors and Assigns. The provisions of this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns.
12.5 Governing Law. This Agreement shall be construed in accordance with
and governed by the law of the State of Washington, without regard to the
conflicts of law rules of such state.
12.6 Consent to Jurisdiction; Attorneys' Fees. For purposes of any
litigation arising out of or in connection with this Agreement, the parties
hereby consent to the jurisdiction of State and Federal Courts sitting in King
County, Washington. In the event of any such litigation, the prevailing party
shall be entitled to recover from the other party all of its attorneys' fees and
other expenses incurred in connection with such litigation.
12.7 Counterparts; Effectiveness. This Agreement may be signed in any
number of counterparts, each of which shall be an original, with the same effect
as if the signatures thereto and hereto were upon the same instrument. This
Agreement shall become effective when each party hereto shall have received a
counterpart hereof signed by the other party hereto.
12.8 Entire Agreement. This Agreement constitutes the entire agreement
between the parties with respect to the subject matter hereof and supersedes all
prior agreements, understandings and negotiations, both written and oral,
between the parties with respect to the subject matter of this Agreement. No
representation, inducement, promise, understanding, condition or warranty not
set forth herein has been made or relied upon by either party hereto. Neither
this Agreement nor any provision hereof is intended to confer upon any person
other than the parties hereto any rights or remedies hereunder.
12.9 Captions. The captions herein are included for convenience of
reference only and shall be ignored in the construction or interpretation
hereof.
12.10 Severability. Unless otherwise provided herein, if any provision
of this Agreement shall be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining portions shall not in any way be
affected or impaired thereby.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
FREESHOP.COM, INC.
By________________________________
Name: Tim Choate
Title: Chief Executive Officer
COMMONSITE, LLC
By_______________________________
Name: Alan Bennett
Title: Chief Executive Officer
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SCHEDULE A
URL's
www.catalogsite.com
www.catalogchannel.com
www.apparelcatalogs.com
www.b2bcatalogs.com
www.businesscatalogs.com
www.catalogshop.com
www.funcatalogs.com
www.giftcatalogs.com
www.giftplace.com
www.gardencatalogs.com
www.gourmetcatalogs.com
www.homecatalogs.com
www.recreationcatalogs.com
www.salesite.com
www.saleplace.com
www.sportcatalogs.com
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SCHEDULE B
MERCHANTS
A1 Books
American Frame
Cake & Candle Cassettes
Cents Off
Corona Cigar Company
Debonair
Del Sol of Santa Rosa
Edutainco (The Edutainment Catalog)
Eskimo Joe's
Felissimo
Flowers USA
Mobile Office Outfitter
Stash Tea Co.
Walkabout Travel Gear
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SCHEDULE C
MARKS
Catalog Site
The Catalog Site
Catalog Channel
The Catalog Channel
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EXHIBIT A
Noncompetition Agreement
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EXHIBIT B
Registration Rights Agreement
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EXHIBIT C
Software License Agreement
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EXHIBIT 10.9
REGISTRATION RIGHTS AGREEMENT
THIS AGREEMENT is entered into as of May 6, 1999, by and between
FreeShop.com, Inc., a Washington corporation (the "Company"), and Commonsite,
LLC, a California limited liability company (the "Investor").
RECITALS
A. Concurrently with the execution of this Agreement, the Company has
proposed to sell and issue 132,300 shares (the "Shares") of its common stock to
the Investor pursuant to that certain Asset Purchase Agreement of even date
herewith between the Company and the Investor (the "Asset Purchase Agreement").
B. By this Agreement, the Investor and the Company desire to set forth
the registration rights of the Shares.
NOW, THEREFORE, in consideration of the mutual promises,
representations, warranties, covenants and conditions set forth in this
Agreement, the parties hereto mutually agree as follows:
1. Registration Rights. The Company covenants and agrees as follows:
1.1 Definitions. For purposes of this Section 1:
(a) The term "register," "registered," and
"registration" refer to a registration effected by preparing and filing a
registration statement or similar document in compliance with the Securities Act
of 1933, as amended (the "Securities Act"), and the declaration or ordering of
effectiveness of such registration statement or document.
(b) The term "Registrable Securities" means (i) the
Shares and (ii) any common stock of the Company issued as (or issuable upon the
conversion or exercise of any warrant, right or other security which is issued
as) a dividend or other distribution with respect to, or in exchange for or in
replacement of, the Shares.
(c) The terms "Holder" or "Holders" means the Investor
or qualifying transferees under subsection 1.8 hereof who hold Registrable
Securities.
(d) The term "SEC" means the Securities and Exchange
Commission.
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1.2 Company Registration.
(a) Registration. If at any time or from time to time,
after the effective date of the first registration statement for a public
offering of securities of the Company to the general public (the "Initial Public
Offering"), the Company shall determine to register any of its securities, for
its own account or the account of any of its shareholders, other than a
registration on Form S-1 or S-8 relating solely to employee stock option or
purchase plans, or a registration on Form S-4 relating solely to an SEC rule 145
transaction, or a registration on any other form (other than Form S-1, S-2, S-3,
S-18, or their successor forms) or any successor to such forms, which does not
include substantially the same information as would be required to be included
in a registration statement covering the sale of Registrable Securities, the
Company will:
(i) promptly give to each Holder written notice
thereof (which shall include a list of the jurisdictions in which the Company
intends to attempt to qualify such securities under the applicable blue sky or
other state securities laws); and
(ii) include in such registration (and
compliance), and in any underwriting involved therein, all the Registrable
Securities specified in a written request or requests, made within 30 days after
receipt of such written notice from the Company, by any Holder or Holders,
except as set forth in subsection 1.2(b) below.
(b) Underwriting. If the registration of which the
Company gives notice is for a registered public offering involving an
underwriting, the Company shall so advise the Holders as a part of the written
notice given pursuant to subsection 1.2(a)(i). In such an event the right of any
Holder to registration pursuant to this subsection 1.2 shall be conditioned upon
such Holder's participation in such underwriting and the inclusion of such
Holder's Registrable Securities in the underwriting to the extent provided
herein. All Holders proposing to distribute their securities through such
underwriting shall (together with the Company and the other shareholders
distributing their securities through such underwriting) enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for such underwriting by the Company.
(c) Apportionment. If the underwriters advise the
Company that marketing factors require a limitation on the number of shares,
including Registrable Securities, to be included in such offering, then the
Company shall so advise all Holders of Registrable Securities that would
otherwise have been underwritten pursuant to this Section 1.2, and the number of
shares, including Registrable Securities, that may be included in the
registration shall be apportioned first to the Company, then pro rata among the
selling Holders according to the total amount of Registrable Securities
requested to be sold in such registration by such Holders,
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and then pro rata among any other selling shareholders according to the total
amount of securities otherwise entitled to be included therein owned by each
such other selling shareholder, or in such other proportions as shall mutually
be agreed to by such selling shareholders.
(d) Delay of Registration. No Holder shall have any
right to obtain or seek an injunction restraining or otherwise delaying any such
registration as the result of any controversy that might arise with respect to
the interpretation or implementation of this Agreement.
1.3 Expenses of Registration. All expenses incurred in
connection with any registration, qualification or compliance pursuant to this
Section 1 including without limitation, all registration, filing and
qualification fees, printing expenses, fees and disbursements of counsel for the
Company and expenses of any special audits incidental to or required by such
registration, shall be borne by the Company, except the Company shall not be
required to pay underwriters' fees, discounts or commissions relating to
Registrable Securities. All expenses of any registered offering not otherwise
borne by the Company shall be borne pro rata among the Holders participating in
the offering and the Company.
1.4 Registration Procedures. In the case of each registration,
qualification or compliance effected by the Company pursuant to this
Registration Rights Agreement, the Company will keep each Holder participating
therein advised in writing as to the initiation of each registration,
qualification and compliance and as to the completion thereof. Except as
otherwise provided in subsection 1.3, at its expense the Company will:
(a) Prepare and file with the SEC a registration
statement with respect to such Registrable Securities and use its best efforts
to cause such registration statement to become effective, and, upon the request
of the Holders of a majority of the Registrable Securities registered
thereunder, keep such registration statement effective for up to 120 days.
(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement.
(c) Furnish to the Holders such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents as they reasonable
request in order to facilitate the disposition of Registrable Securities owned
by them.
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(d) Use its best efforts to register and qualify the
securities covered by such registration statement under such other securities or
Blue Sky laws of such jurisdictions as shall be reasonably requested by the
Holders, provided that the Company shall not be required in connection therewith
or as a condition thereto to qualify to do business or to file a general consent
to service of process in any such states or jurisdictions.
(e) In the event of any underwritten public offering,
enter into and perform its obligations under an underwriting agreement, in usual
and customary form, with the managing underwriter of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
(f) Notify each Holder of Registrable Securities covered
by such registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act or the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing.
1.5 Indemnification.
(a) The Company will indemnify each Holder of
Registrable Securities and each of its officers, directors and partners, and
each person controlling such Holder, with respect to which such registration,
qualification or compliance has been effected pursuant to this Rights Agreement,
and each underwriter, if any, and each person who controls any underwriter of
the Registrable Securities held by or issuable to such Holder, against all
claims, losses, expenses, damages and liabilities (or actions in respect
thereto) arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any prospectus, offering circular or
other document (including any related registration statement, notification or
the like) incident to any such registration, qualification or compliance, or
based on any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statement therein not
misleading, or any violation or alleged violation by the Company of the
Securities Act, the Securities Exchange Act of 1934, as amended, (Exchange Act)
or any state securities law applicable to the Company or any rule or regulation
promulgated under the Securities Act, the Exchange Act or any such state law and
relating to action or inaction required of the Company in connection with any
such registration, qualification of compliance, and will reimburse each such
Holder, each of its officers, directors and partners, and each person
controlling such Holder, each such underwriter and each person who controls any
such underwriter, within a reasonable amount of time after incurred for any
reasonable legal and any other expenses incurred in connection with
investigating, defending or settling any such claim loss damage, liability or
action, provided, however, that the indemnity agreement
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contained in this subsection 1.5(a) shall not apply to amounts paid in
settlement of any such claim, loss, damage, liability, or action if such
settlement is effected without the consent of the company (which consent shall
not be unreasonably withheld); and provided further, that the company will not
be liable in any such case to the extent that any such claim, loss, damage or
liability arises out of or is based on any untrue statement or omission based
upon written information furnished to the Company by an instrument duly executed
by such Holder or underwriter specifically for use therein
(b) Each Holder will, if Registrable Securities held by
or issuable to such Holder are included in the Securities as to which such
registration, qualification or compliance is being effected, indemnify the
company, each of its directors and officers, each underwriter, if any, of the
Company's securities covered by such a registration statement, each person who
controls the Company within the meaning of the Securities Act, and each other
such Holder, each of its officers, directors and partners and each person
controlling such Holder, against all claims, losses, expenses, damages and
liabilities )or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
an such registration statement, prospectus, offering circular or other document,
or any omission (or alleged omission) to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
and will reimburse the Company such Holders, such directors, officers, partners,
persons or underwriters for any reasonable legal or any other expenses incurred
in connection with investigating, defending or settling any such claim, loss,
damage, liability or action, in each case to the extent, but only to the extent,
that such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering circular
or other document in reliance upon and in conformity with written information
furnished to the Company by an instrument duly executed by such Holder
specifically for use therein; provided, however, that the indemnity agreement
contained in this subsection 1.5(b) shall not apply to amounts paid in
settlement of any such claim, loss damage, liability or action if such
settlement is effected without the consent of the Holder, (which consent shall
not be unreasonably withheld); and provided further, that the total amount for
which any Holder shall be liable under this subsection 1.5(b) shall not in any
event exceed the aggregate proceeds received by such Holder from the sale of
Registrable Securities held by such Holder in such registration.
(c) Each party entitled to indemnification under this
subsection 1.5 (the "Indemnified Party") shall give notice to the party required
to provide indemnification (the "Indemnifying Party") promptly after such
Indemnified Party has actual knowledge of any claim as to which indemnity may be
sought, and shall permit the Indemnifying Party to assume the defense of any
such claim or any litigation resulting therefrom; provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or litigation,
shall be approved by the Indemnified Party (whose approval shall not be
unreasonably withheld), and the
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Indemnified Party may participate in such defense at such party's expense, and
provided further, that the failure of any Indemnified Party to give notice as
provided herein shall not relieve the Indemnifying Party of its obligations
thereunder, unless such failure resulted in prejudice to the Indemnifying Party;
and provided further, that an Indemnified Party (together with all other
Indemnified Parties which may be represented without conflict by one counsel)
shall have the right to retain one separate counsel, with the fees and expenses
to be paid by the Indemnifying Party, if representation of such Indemnified
Party by the counsel retained by the Indemnifying Party would be inappropriate
due to actual or potential differing interests between such Indemnified Party
and any other party represented by such counsel in such proceeding. No
Indemnifying Party, in the defense of any such claim or litigation, shall,
except with the consent of each Indemnified Party, consent to entry of any
judgment or enter into any settlement which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such Indemnified Party
of a release from all liability to respect to such claim or litigation.
1.6 Information by Holder. Any Holder or Holders of Registrable
Securities included in any registration shall promptly furnish to the Company
such information regarding such Holder or Holders and the distribution proposed
by such Holder or Holders as the Company may request in writing and as shall be
required in connection with any registration, qualification or compliance
referred to herein.
1.7 Rule 144 Reporting. With a view to making available to
Holders the benefits of certain rules and regulations of the SEC which may
permit the sale of the Registrable Securities to the public without
registration, the Company agrees to use commercially reasonable efforts to
(a) make and keep public information available as those
terms are understood and defined in SEC Rule 144, after 90 days after the
effective date of the first registration filed by the Company for an offering of
its securities to the general public;
(b) file with the SEC in a timely manner all reports and
other documents required of the Company under the Securities Act and the
Exchange Act (at any time after it has become subject to such reporting
requirements); and
(c) so long as a Holder owns any Registrable Securities
to furnish to such Holder forthwith upon request a written statement by the
Company as to its compliance with the reporting requirements of said Rule 144
(at any time after 90 days after the effective date of the first registration
statement filed by the Company for an offering of its securities to the general
public), and of the Securities Act and the Exchange Act (at any time after it
has become subject to such reporting requirements), a copy of the most recent
annual or quarterly report of the Company, and such other reports and documents
so filed by the Company as the Holder may
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reasonably request in complying with any rule or regulation of the SEC allowing
the Holder to sell any such securities without registration.
1.8 Transfer of Registration Rights. Holders' right to cause the
Company to register their securities and keep information available granted to
them by the Company under subsections 1.2 and 1.7 may be assigned to a
transferee or assignee of a Holder's Registrable Securities not sold to the
public provided, that the Company is given written notice by such Holder at the
time of or within a reasonable time after said transfer, stating the name and
address of said transferee or assignee and identifying the securities with
respect to which such registration rights are being assigned. The Company may
prohibit the transfer of any Holders' right under this subsection 1.8 to any
proposed transferee or assignee who the Company reasonably believes is a
competitor of the Company.
1.9 "Market Stand-Off" Agreement. The Holders hereby agree that
they shall not, to the extent requested by the Company and an underwriter of
Common Stock (or other securities) of the Company, (other than to persons who
agree to be similarly bound) sell or otherwise transfer or dispose of any
Registrable Securities for 180 days following the effective date of a
registration statement of the Company filed under the Securities Act. In order
to enforce the foregoing covenant, the Company may impose stop-transfer
instructions with respect to the Registrable Securities of the Holders (and the
shares or securities of every other person subject to the foregoing restriction)
until the end of such period
1.10 Single Use Only. Notwithstanding anything to the contrary
in this Agreement, each Holder may exercise only one time its right to cause the
Company to register any or all of such Holder's securities.
2. General.
2.1 Waivers and Amendments. With the written consent of the
record or beneficial holders of at least a majority of the Registrable
Securities, the obligations of the Company and the rights of the Holders of the
Registrable Securities under this agreement may be waived (either generally or
in a particular instance, either retroactively or prospectively, and either for
a specified period of time or indefinitely), and with the same consent the
Company, when authorized by resolution of its Board of Directors, may enter into
a supplementary agreement for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of this Agreement,
provided, however, that no such modification, amendment or waiver shall reduce
the aforesaid percentage of Registrable Securities without the consent of all of
the Holders of the Registrable Securities. Upon the effectuation of each such
waiver, consent, agreement of amendment or modification, the Company shall
promptly give written notice thereof to the record holders of the Registrable
Securities who have not previously
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consented thereto in writing. This Agreement or any provision hereof may be
changed, waived, discharged or terminated only by a statement in writing signed
by the party against which enforcement of the change, waiver, discharge or
termination is sought, except to the extent provided in this subsection 2.1.
2.2 Termination of Registration Rights. The registration rights
granted pursuant to this Agreement shall terminate as to all Holders on the
fifth anniversary of the closing of the Company's Initial Public Offering (the
"Fifth Anniversary") provided, however, such termination shall be postponed
until the later of (i) that number of days following such Fifth Anniversary
equal to the number of days, if any, between the date of such first public
offering and the Fifth Anniversary that the Common Stock of the Company is not
traded on a national stock exchange or the Nasdaq National Market System (or any
successor organization) and (ii) if as of the Fifth Anniversary, the Company is
not so traded, then, one year following such date as the Company first resumes
trading on a national stock exchange or the Nasdaq National Market System (or
any successor organization).
2.3 Governing Law. This Agreement shall be governed in all
respects by the laws of the State of Washington.
2.4 Successors and Assigns. Except as otherwise expressly
provided herein, the provisions hereof shall inure to the benefit of and be
binding upon, the successors assigns, heirs, executors and administrators of the
parties hereto.
2.5 Entire Agreement. Except as set forth below, this Agreement
and the other documents delivered pursuant hereto constitute the full and entire
understanding and Agreement between the parties with regard to the subjects
hereof and thereof.
2.6 Notices, etc. All notices and other communications required
or permitted hereunder shall be in writing and shall be mailed by first class
mail, postage prepaid, certified or registered mail, return receipt requested,
addressed (a) if to Holder, at such Holder's address as set forth below, or at
such other address as such Holder shall have furnished to the Company in
writing, or (b) if to the company, at the Company's address set forth below, or
at such other address as the Company shall have furnished to the Holder in
writing.
2.7 Severability. In case any provision of this Agreement shall
be invalid, illegal, or unenforceable, the validity, legality and enforceability
of the remaining provisions of this Agreement or any provisions of the other
Agreement shall not in any way be affected or impaired thereby.
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2.8 Titles and Subtitles. The titles of the sections and
subsections of this Agreement are for convenience of reference only and are not
to be considered in construing this Agreement.
2.9 Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
INVESTOR COMPANY
COMMONSITE, LLC FREESHOP.COM, INC.
By /s/ ALAN BENNETT By /s/ TIM CHOATE
------------------------------- ------------------------------
Name: Alan Bennett Name: Tim Choate
Title: CEO Title: CEO
Address: 3000 Ocean Park Address: 95 South Jackson
Suite 3010 Suite 300
Santa Monica, California 90405 Seattle, WA 98104
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<PAGE> 1
EXHIBIT 10.10
- --------------------------------------------------------------------------------
FREESHOP INTERNATIONAL, INC.
LOAN AND SECURITY AGREEMENT
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<PAGE> 2
This LOAN AND SECURITY AGREEMENT is entered into as of September 18,
1998, by and between IMPERIAL BANK ("Bank") and FREESHOP INTERNATIONAL, INC.
("Borrower").
RECITALS
Borrower wishes to obtain credit from time to time from Bank, and Bank
desires to extend credit to Borrower. This Agreement sets forth the terms on
which Bank will advance credit to Borrower, and Borrower will repay the amounts
owing to Bank.
AGREEMENT
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION.
1.1 Definitions. As used in this Agreement, the following terms shall
have the following definitions:
"Accounts" means all presently existing and hereafter arising
accounts, contract rights, and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods (including, without limitation, the
licensing of software and other technology) or the rendering of services by
Borrower, whether or not earned by performance, and any and all credit
insurance, guaranties, and other security therefor, as well as all merchandise
returned to or reclaimed by Borrower and Borrower's Books relating to any of the
foregoing.
"Advance" or "Advances" means a cash advance under the Revolving
Facility.
"Affiliate" means, with respect to any Person, any Person that
owns or controls directly or indirectly such Person, any Person that controls or
is controlled by or is under common control with such Person.
"Bank Expenses" means all: reasonable costs or expenses
(including reasonable attorneys' fees and expenses) incurred in connection with
the preparation, negotiation, administration, and enforcement of the Loan
Documents; reasonable Collateral audit fees; and Bank's reasonable attorneys'
fees and expenses incurred in amending, enforcing or defending the Loan
Documents (including fees and expenses of appeal), incurred before, during and
after an Insolvency Proceeding, whether or not suit is brought.
"Borrower's Books" means all of Borrower's books and records
including: ledgers; records concerning Borrower's assets or liabilities, the
Collateral, business operations or financial condition; and all computer
programs, or tape files, and the equipment, containing such information.
"Business Day" means any day that is not a Saturday, Sunday, or
other day on which banks in the State of California or Washington are authorized
or required to close.
"Closing Date" means the date of this Agreement.
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"Code" means the California Uniform Commercial Code.
"Collateral" means the property described on Exhibit A attached
hereto.
"Committed Revolving Line" means a credit extension of up to Five
Hundred Thousand Dollars ($500,000), increasing to Seven Hundred Fifty Thousand
Dollars ($750,000) upon the occurrence of an Equity Event and Borrower's
election to do so.
"Contingent Obligation" means, as applied to any Person, any
direct or indirect liability, contingent or otherwise, of that Person with
respect to (i) any indebtedness, lease, dividend, letter of credit or other
obligation of another, including, without limitation, any such obligation
directly or indirectly guaranteed, endorsed, co-made or discounted or sold with
recourse by that Person, or in respect of which that Person is otherwise
directly or indirectly liable; (ii) any obligations with respect to undrawn
letters of credit issued for the account of that Person; and (iii) all
obligations arising under any interest rate, currency or commodity swap
agreement, interest rate cap agreement, interest rate collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; provided, however,
that the term "Contingent Obligation" shall not include endorsements for
collection or deposit in the ordinary course of business. The amount of any
Contingent Obligation shall be deemed to be an amount equal to the stated or
determined amount of the primary obligation in respect of which such Contingent
Obligation is made or, if not stated or determinable, the maximum reasonably
anticipated liability in respect thereof as determined by such Person in good
faith; provided, however, that such amount shall not in any event exceed the
maximum amount of the obligations under the guarantee or other support
arrangement.
"Copyrights" means any and all copyright rights, copyright
applications, copyright registrations and like protections in each work or
authorship and derivative work thereof, whether published or unpublished and
whether or not the same also constitutes a trade secret, now or hereafter
existing, created, acquired or held.
"Credit Extension" means each Advance, Equipment Advance, or any
other extension of credit by Bank for the benefit of Borrower hereunder.
"Current Assets" means, as of any applicable date, all amounts
that should, in accordance with GAAP, be included as current assets on the
consolidated balance sheet of Borrower and its Subsidiaries as at such date.
"Current Liabilities" means, as of any applicable date, all
amounts that should, in accordance with GAAP, be included as current liabilities
on the consolidated balance sheet of Borrower and its Subsidiaries, as at such
date, plus, to the extent not already included therein, all outstanding Advances
made under this Agreement, including all Indebtedness that is payable upon
demand or within one year from the date of determination thereof unless such
Indebtedness is renewable or extendible at the option of Borrower or any
Subsidiary to a date more than one year from the date of determination.
"Daily Balance" means the amount of the Obligations owed at the
end of a given day.
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"Equipment" means all present and future machinery, equipment,
tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments
in which Borrower has any interest.
"Equipment Advance" has the meaning set forth in Section 2.1.1.
"Equity Event" means the sale or issuance by Borrower of its
equity securities in which Borrower receives net cash proceeds of not less than
Two Million Five Hundred Thousand Dollars ($2,500,000) from investors acceptable
to Bank in its sole discretion or before December 31, 1998.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended, and the regulations thereunder.
"Event of Default" has the meaning assigned in Article 8.
"GAAP" means generally accepted accounting principles as in
effect from time to time.
"Indebtedness" means (a) all indebtedness for borrowed money or
the deferred purchase price of property or services, including without
limitation reimbursement and other obligations with respect to surety bonds and
letters of credit, (b) all obligations evidenced by notes, bonds, debentures or
similar instruments, (c) all capital lease obligations and (d) all Contingent
Obligations.
"Insolvency Proceeding" means any proceeding commenced by or
against any person or entity under any provision of the United States Bankruptcy
Code, as amended, or under any other bankruptcy or insolvency law, including
assignments for the benefit of creditors, formal or informal moratoria,
compositions, extension generally with its creditors, or proceedings seeking
reorganization, arrangement, or other relief.
"Intellectual Property Collateral" means:
(a) Copyrights, Trademarks and Patents;
(b) Any and all trade secrets, and any and all intellectual
property rights in computer software and computer software products now or
hereafter existing, created, acquired or held;
(c) Any and all design rights which may be available to
Borrower now or hereafter existing, created, acquired or held;
(d) Any and all claims for damages by way of past, present
and future infringement of any of the rights included above, with the right, but
not the obligation, to sue for and collect such damages for said use or
infringement of the intellectual property rights identified above;
(e) All licenses or other rights to use any of the
Copyrights, Patents or Trademarks, and all license fees and royalties arising
from such use to the extent permitted by such license or rights;
(f) All amendments, renewals and extensions of any of the
Copyrights, Trademarks or Patents; and
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(g) All proceeds and products of the foregoing, including
without limitation all payments under insurance or any indemnity or warranty
payable in respect of any of the foregoing.
"Inventory" means all present and future inventory in which
Borrower has any interest, including merchandise, raw materials, parts,
supplies, packing and shipping materials, work in process and finished products
intended for sale or lease or to be furnished under a contract of service, of
every kind and description now or at any time hereafter owned by or in the
custody or possession, actual or constructive, of Borrower, including such
inventory as is temporarily out of its custody or possession or in transit and
including any returns upon any accounts or other proceeds, including insurance
proceeds, resulting from the sale or disposition of any of the foregoing and any
documents of title representing any of the above, and Borrower's Books relating
to any of the foregoing.
"Investment" means any beneficial ownership of (including stock,
partnership interest or other securities) any Person, or any loan, advance or
capital contribution to any Person.
"IRC" means the Internal Revenue Code of 1986, as amended, and
the regulations thereunder.
"Lien" means any mortgage, lien, deed of trust, charge, pledge,
security interest or other encumbrance.
"Loan Documents" means, collectively, this Agreement, any note or
notes executed by Borrower, and any other agreement entered into between
Borrower and Bank in connection with this Agreement, all as amended or extended
from time to time.
"Material Adverse Effect" means a material adverse effect on (i)
the business operations or condition (financial or otherwise) of Borrower and
its Subsidiaries taken as a whole or (ii) the ability of Borrower to repay the
Obligations or otherwise perform its obligations under the Loan Documents.
"Negotiable Collateral" means all of Borrower's present and
future letters of credit of which it is a beneficiary, notes, drafts,
instruments, securities, documents of title, and chattel paper, and Borrower's
Books relating to any of the foregoing.
"Obligations" means all debt, principal, interest, Bank Expenses
and other amounts owed to Bank by Borrower pursuant to this Agreement or any
other agreement, whether absolute or contingent, due or to become due, now
existing or hereafter arising, including any interest that accrues after the
commencement of an Insolvency Proceeding and including any debt, liability, or
obligation owing from Borrower to others that Bank may have obtained by
assignment or otherwise.
"Patents" means all patents, patent applications and like
protections including without limitation improvements, divisions, continuations,
renewals, reissues, extensions and continuations-in-part of the same.
"Periodic Payments" means all installments or similar recurring
payments that Borrower may now or hereafter become obligated to pay to Bank
pursuant to the terms and provisions of any instrument, or agreement now or
hereafter in existence between Borrower and Bank.
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"Permitted Indebtedness" means:
(a) Indebtedness of Borrower in favor of Bank arising under
this Agreement or any other Loan Document;
(b) Indebtedness existing on the Closing Date and disclosed
in the Schedule;
(c) Indebtedness secured by a lien described in clause (c)
of the defined term "Permitted Liens," provided such Indebtedness does not
exceed the lesser of the cost or fair market value of the equipment financed
with such Indebtedness;
(d) Subordinated Debt;
(e) Indebtedness to trade creditors incurred in the ordinary
course of business; and
(f) Indebtedness (other than (a) through (e)) at any time
outstanding in an amount not exceeding $100,000.
"Permitted Investment" means:
(a) Investments existing on the Closing Date disclosed in
the Schedule;
(b) (i) marketable direct obligations issued or
unconditionally guaranteed by the United States of America or any agency or any
State thereof maturing within one (1) year from the date of acquisition thereof,
(ii) commercial paper maturing no more than one (1) year from the date of
creation thereof and currently having rating of at least A-2 or P-2 from either
Standard & Poor's Corporation or Moody's Investors Service, Inc., (iii)
certificates of deposit maturing no more than one (1) year from the date of
investment therein issued by Bank, (iv) Bank's money market accounts and (v)
Investments made in connection with transactions permitted under Section 7.3;
and
(c) Loans to employees to purchase Borrower's capital stock.
"Permitted Liens" means the following:
(a) Any Liens existing on the Closing Date and disclosed in
the Schedule or arising under this Agreement or the other Loan Documents;
(b) Liens for taxes, fees, assessments or other governmental
charges or levies, either not delinquent or being contested in good faith by
appropriate proceedings, provided the same have no priority over any of Bank's
security interests;
(c) Liens (i) upon or in any equipment acquired or held by
Borrower or any of its Subsidiaries to secure the purchase price of such
equipment or indebtedness incurred solely for the purpose of financing the
acquisition of such equipment, or (ii) existing on such equipment at the time of
its acquisition, provided that the Lien is confined solely to the property so
acquired and improvements thereon, and the proceeds of such equipment;
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(d) Liens incurred in connection with the extension, renewal
or refinancing of the indebtedness secured by Liens of the type described in
clauses (a) through (c) above, provided that any extension, renewal or
replacement Lien shall be limited to the property encumbered by the existing
Lien and the principal amount of the indebtedness being extended, renewed or
refinanced does not increase.
"Person" means any individual, sole proprietorship, partnership,
limited liability company, joint venture, trust, unincorporated organization,
association, corporation, institution, public benefit corporation, firm, joint
stock company, estate, entity or governmental agency.
"Prime Rate" means the variable rate of interest, per annum, most
recently announced by Bank, as its "prime rate," whether or not such announced
rate is the lowest rate available from Bank.
"Quick Assets" means, at any date as of which the amount thereof
shall be determined, the consolidated cash, cash-equivalents, accounts
receivable and investments, with maturities not to exceed 90 days, of Borrower
determined in accordance with GAAP.
"Responsible Officer" means each of the Chief Executive Officer,
the Chief Operating Officer, the Chief Financial Officer and the Controller of
Borrower.
"Revolving Maturity Date" means September 17, 1999.
"Revolving Facility" means the facility under which Borrower may
request Bank to issue Advances, as specified in Section 2.1.1 hereof.
"Schedule" means the schedule of exceptions attached hereto, if
any.
"Subordinated Debt" means any debt incurred by Borrower that is
subordinated to the debt owing by Borrower to Bank on terms reasonably
acceptable to Bank (and identified as being such by Borrower and Bank).
"Subsidiary" means any corporation or partnership in which (i)
any general partnership interest or (ii) more than 50% of the stock of which by
the terms thereof ordinary voting power to elect the Board of Directors,
managers or trustees of the entity shall, at the time as of which any
determination is being made, be owned by Borrower, either directly or through an
Affiliate.
"Trademarks" means any trademark and servicemark rights, whether
registered or not, applications to register and registrations of the same and
like protections, and the entire goodwill of the business of Borrower connected
with and symbolized by such trademarks.
1.2 Accounting Terms. All accounting terms not specifically defined
herein shall be construed in accordance with GAAP and all calculations made
hereunder shall be made in accordance with GAAP. When used herein, the terms
"financial statements" shall include the notes and schedules thereto.
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2. LOAN AND TERMS OF PAYMENT.
2.1 Credit Extensions.
Borrower promises to pay to the order of Bank, in lawful money of
the United States of America, the aggregate unpaid principal amount of all
Credit Extensions made by Bank to Borrower hereunder. Borrower shall also pay
interest on the unpaid principal amount of such Credit Extensions at rates in
accordance with the terms hereof.
2.1.1 Revolving Advances
(a) Subject to and upon the terms and conditions of this
Agreement, Borrower may request Advances in an aggregate outstanding amount not
to exceed the Committed Revolving Line. Borrower may elect to use any Advances
for the purchase of Equipment (each an "Equipment Advance" and, collectively,
the "Equipment Advances") Each Equipment Advance shall not exceed one hundred
percent (100%) of the invoice amount of equipment, software and corporate
purposes approved by Bank from time to time (which Borrower shall, in any case,
have purchased within 180 days of the date of the corresponding Equipment
Advance) , excluding taxes, shipping, warranty charges, freight discounts and
installation expense.
Subject to the terms and conditions of this Agreement,
amounts borrowed pursuant to this Section may be repaid and reborrowed at any
time prior to the Revolving Maturity Date, at which time all Advances under this
Section shall be immediately due and payable. Borrower may prepay any Advances
without penalty or premium.
(b) Effective as of the Revolving Maturity Date, Borrower
may elect to convert any outstanding Equipment Advances into a term loan. Such
amount shall be payable in thirty-six (36) equal monthly installments of
principal, plus all accrued interest, beginning on October 17, 1999, and
continuing on the same day of each month thereafter through October 17, 2002, at
which time all amounts due under this Section 2.1.1 and any other amounts due
under this Agreement shall be immediately due and payable. Equipment Advances,
once repaid, may not be reborrowed. Borrower may prepay any Equipment Advances
without penalty or premium.
(c) When Borrower desires to obtain an Advance or an
Equipment Advance, Borrower shall notify Bank (which notice shall be
irrevocable) by facsimile transmission to be received no later than 3:00 p.m.
Pacific time one (1) Business Day before the day on which the Advance or
Equipment Advance is to be made. Such notice shall be substantially in the form
of Exhibit B. Any Equipment Advance notice shall be signed by a Responsible
Officer or its designee and include a copy of the invoice for any Equipment to
be financed.
Bank is authorized to make Advances under this
Agreement, based upon instructions received from a Responsible Officer or a
designee of a Responsible Officer, or without instructions if in Bank's
discretion such Advances are necessary to meet Obligations which have become due
and remain unpaid. Bank shall be entitled to rely on any telephonic notice given
by a person who Bank reasonably believes to be a Responsible Officer or a
designee thereof, and Borrower shall indemnify and hold Bank harmless for any
damages or loss suffered by Bank as a result of such reliance. Bank will credit
the amount of Advances made under this Section to Borrower's deposit account.
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2.2 Overadvances. If any Advances and Equipment Advances hereunder
exceed the Committed Revolving Line, Borrower, upon written notice from Bank,
shall immediately pay to Bank, in cash, the amount of such excess.
2.3 Interest Rates, Payments, and Calculations.
(a) Interest Rates. Except as set forth in Section 2.3((b)), the
Advances and Equipment Advances shall bear interest, on the outstanding daily
balance thereof, at a rate equal to One and One-half Percent (1.5%) above the
Prime Rate.
(b) Late Fee; Default Rate. If any payment is not made within ten
(10) days after the date such payment is due, Borrower shall pay Bank a late fee
equal to the lesser of (i) five percent (5%) of the amount of such unpaid amount
or (ii) the maximum amount permitted to be charged under applicable law. All
Obligations shall bear interest, from and after the occurrence and during the
continuance of an Event of Default, at a rate equal to five (5) percentage
points above the interest rate applicable immediately prior to the occurrence of
an Event of Default.
(c) Payments. Interest on Advances and Equipment Advances shall
be due and payable on the seventeenth calendar day of each month during the term
hereof. Bank shall, at its option, charge such interest, all Bank Expenses, and
all Periodic Payments against any of Borrower's deposit accounts or against the
Committed Revolving Line, in which case those amounts shall thereafter accrue
interest at the rate then applicable hereunder. Any interest not paid when due
shall be compounded by becoming a part of the Obligations, and such interest
shall thereafter accrue interest at the rate then applicable hereunder. Bank
shall deliver to Borrower statements of account in the ordinary course of
business reflecting charges made hereunder.
(d) Computation. In the event the Prime Rate is changed from time
to time hereafter, the applicable rate of interest hereunder shall be increased
or decreased effective as of the day the Prime Rate is changed, by an amount
equal to such change in the Prime Rate. All interest chargeable under the Loan
Documents shall be computed on the basis of a three hundred sixty (360) day year
for the actual number of days elapsed.
2.4 Crediting Payments. Prior to the occurrence of an Event of
Default, Bank shall credit a wire transfer of funds, check or other item of
payment to such deposit account or Obligation as Borrower specifies. After the
occurrence of an Event of Default, the receipt by Bank of any wire transfer of
funds, check, or other item of payment shall be immediately applied to
conditionally reduce Obligations, but shall not be considered a payment on
account unless such payment is of immediately available federal funds or unless
and until such check or other item of payment is honored when presented for
payment. Notwithstanding anything to the contrary contained herein, any wire
transfer or payment received by Bank after 12:00 noon Pacific time shall be
deemed to have been received by Bank as of the opening of business on the
immediately following Business Day. Whenever any payment to Bank under the Loan
Documents would otherwise be due (except by reason of acceleration) on a date
that is not a Business Day, such payment shall instead be due on the next
Business Day, and additional fees or interest, as the case may be, shall accrue
and be payable for the period of such extension.
2.5 Fees. Borrower shall pay to Bank the following:
(a) Facility Fee. On the Closing Date, a Facility Fee equal to
One Thousand Two Hundred Fifty Dollars ($1,250) which shall be nonrefundable;
upon the occurrence of an Equity
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Event, and at Borrower's election, as a condition to increasing the Committed
Revolving Line to $750,000, an additional Facility Fee of One Thousand Two
Hundred Fifty Dollars ($1,250) which shall be non-refundable.
(b) Bank Expenses. On the Closing Date, all Bank Expenses
incurred through the Closing Date, including reasonable attorneys' fees and
expenses and, after the Closing Date, all Bank Expenses, including reasonable
attorneys' fees and expenses, as and when they become due.
2.6 Term. This Agreement shall become effective on the Closing Date
and, subject to Section 12.7, shall continue in full force and effect for a term
ending on the Term Maturity Date. Notwithstanding the foregoing, Bank shall have
the right to terminate its obligation to make Credit Extensions under this
Agreement immediately and without notice upon the occurrence and during the
continuance of an Event of Default. Notwithstanding termination, Bank's Lien on
the Collateral shall remain in effect for so long as any Obligations are
outstanding.
3. CONDITIONS OF LOANS.
3.1 Conditions Precedent to Initial Credit Extension. The obligation
of Bank to make the initial Credit Extension is subject to the condition
precedent that Bank shall have received, in form and substance satisfactory to
Bank, the following:
(a) this Agreement;
(b) a certificate of the Secretary of Borrower with respect to
incumbency and resolutions authorizing the execution and delivery of this
Agreement;
(c) a financing statement (Form UCC-1);
(d) an intellectual property security agreement;
(e) a warrant;
(f) a guaranty executed by Persons acceptable to Bank; and
(g) such other documents, and completion of such other matters,
as Bank may reasonably deem necessary or appropriate.
3.2 Conditions Precedent to all Credit Extensions. The obligation of
Bank to make each Credit Extension, including the initial Credit Extension, is
further subject to the following conditions:
(a) timely receipt by Bank of the Payment/Advance Form as
provided in Section 2.1; and
(b) the representations and warranties contained in Section 5
shall be true and correct in all material respects on and as of the date of such
Payment/Advance Form and on the effective date of each Credit Extension as
though made at and as of each such date, and no Event of Default shall have
occurred and be continuing, or would result from such Credit Extension
(provided, however, that those representations and warranties expressly
referring to another date shall be true, correct and complete in all material
respects as of such date). The making of each Credit Extension shall
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be deemed to be a representation and warranty by Borrower on the date of such
Credit Extension as to the accuracy of the facts referred to in this Section
3.2((b)).
4. CREATION OF SECURITY INTEREST.
4.1 Grant of Security Interest. Borrower grants and pledges to Bank a
continuing security interest in all presently existing and hereafter acquired or
arising Collateral in order to secure prompt repayment of any and all
Obligations and in order to secure prompt performance by Borrower of each of its
covenants and duties under the Loan Documents. Except as set forth in the
Schedule and for Permitted Liens, such security interest constitutes a valid,
first priority security interest in the presently existing Collateral, and will
constitute a valid, first priority security interest in Collateral acquired
after the date hereof.
4.2 Delivery of Additional Documentation Required. Borrower shall
from time to time execute and deliver to Bank, at the request of Bank, all
Negotiable Collateral, all financing statements and other documents that Bank
may reasonably request, in form satisfactory to Bank, to perfect and continue
perfected Bank's security interests in the Collateral and in order to fully
consummate all of the transactions contemplated under the Loan Documents.
4.3 Right to Inspect. Bank (through any of its officers, employees,
or agents) shall have the right, upon reasonable prior notice, from time to time
during Borrower's usual business hours but no more than once a year (unless an
Event of Default has occurred and is continuing), to inspect Borrower's Books
and to make copies thereof and to check, test, and appraise the Collateral in
order to verify Borrower's financial condition or the amount, condition of, or
any other matter relating to, the Collateral.
5. REPRESENTATIONS AND WARRANTIES.
Borrower represents and warrants as follows:
5.1 Due Organization and Qualification. Borrower and each Subsidiary
is a corporation duly existing under the laws of its state of incorporation and
qualified and licensed to do business in any state in which the conduct of its
business or its ownership of property requires that it be so qualified, except
where failure to so qualify would not have a Material Adverse Effect.
5.2 Due Authorization; No Conflict. The execution, delivery, and
performance of the Loan Documents are within Borrower's powers, have been duly
authorized, and are not in conflict with nor constitute a breach of any
provision contained in Borrower's Certificate of Incorporation or Bylaws, nor
will they constitute an event of default under any material agreement to which
Borrower is a party or by which Borrower is bound. Borrower is not in default
under any agreement to which it is a party or by which it is bound, which
default could have a Material Adverse Effect.
5.3 No Prior Encumbrances. Borrower has good and indefeasible title
to the Collateral, free and clear of Liens, except for Permitted Liens.
5.4 Bona Fide Eligible Accounts. The Eligible Accounts are bona fide
existing obligations. The services giving rise to such Eligible Accounts have
been performed and the account debtor has an unconditional obligation to pay
Borrower for such services. Borrower has not received notice of actual or
imminent Insolvency Proceeding of any account debtor that is included in any
Borrowing Base Certificate as an Eligible Account.
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5.5 Merchantable Inventory. All Inventory is in all material respects
of good and marketable quality, free from all material defects, except for
Inventory for which adequate reserves have been made.
5.6 Name; Location of Chief Executive Office. Borrower has not done
business under any name other than that specified on the signature page hereof.
The chief executive office of Borrower is located at the address indicated in
Section 10 hereof.
5.7 Litigation. Except as set forth in the Schedule, there are no
actions or proceedings pending by or against Borrower or any Subsidiary before
any court or administrative agency in which an adverse decision could have a
Material Adverse Effect or a material adverse effect on Borrower's interest or
Bank's security interest in the Collateral.
5.8 No Material Adverse Change in Financial Statements. All
consolidated financial statements related to Borrower and any Subsidiary that
are delivered by Borrower to Bank fairly present in all material respects
Borrower's consolidated financial condition as of the date thereof and
Borrower's consolidated results of operations for the period then ended. There
has not been a material adverse change in the consolidated financial condition
of Borrower since the date of the most recent of such financial statements
submitted to Bank.
5.9 Solvency, Payment of Debts. Borrower is solvent and able to pay
its debts (including trade debts) as they mature.
5.10 Regulatory Compliance. Borrower and each Subsidiary have met the
minimum funding requirements of ERISA with respect to any employee benefit plans
subject to ERISA. No event has occurred resulting from Borrower's failure to
comply with ERISA that is reasonably likely to result in Borrower's incurring
any liability that could have a Material Adverse Effect. Borrower is not an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the Investment Company Act of 1940. Borrower is not engaged
principally, or as one of the important activities, in the business of extending
credit for the purpose of purchasing or carrying margin stock (within the
meaning of Regulations G, T and U of the Board of Governors of the Federal
Reserve System). Borrower has complied with all the provisions of the Federal
Fair Labor Standards Act. Borrower has not violated any statutes, laws,
ordinances or rules applicable to it, violation of which could have a Material
Adverse Effect.
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5.11 Environmental Condition. Except as disclosed in the Schedule,
none of Borrower's or any Subsidiary's properties or assets has ever been used
by Borrower or any Subsidiary or, to the best of Borrower's knowledge, by
previous owners or operators, in the disposal of, or to produce, store, handle,
treat, release, or transport, any hazardous waste or hazardous substance other
than in accordance with applicable law; to the best of Borrower's knowledge,
none of Borrower's properties or assets has ever been designated or identified
in any manner pursuant to any environmental protection statute as a hazardous
waste or hazardous substance disposal site, or a candidate for closure pursuant
to any environmental protection statute; to the best of Borrower's knowledge, no
lien arising under any environmental protection statute has attached to any
revenues or to any real or personal property owned by Borrower or any
Subsidiary; and to the best of Borrower's knowledge, neither Borrower nor any
Subsidiary has received a summons, citation, notice, or directive from the
Environmental Protection Agency or any other federal, state or other
governmental agency concerning any action or omission by Borrower or any
Subsidiary resulting in the releasing, or otherwise disposing of hazardous waste
or hazardous substances into the environment.
5.12 Taxes. Borrower and each Subsidiary has filed or caused to be
filed all tax returns required to be filed, and has paid, or has made adequate
provision for the payment of, all taxes reflected therein.
5.13 Subsidiaries. Borrower does not own any stock, partnership
interest or other equity securities of any Person, except for Permitted
Investments.
5.14 Government Consents. Borrower and each Subsidiary has obtained
all consents, approvals and authorizations of, made all declarations or filings
with, and given all notices to, all governmental authorities that are necessary
for the continued operation of Borrower's business as currently conducted, the
failure to obtain which could have a Material Adverse Effect.
5.15 Full Disclosure. No representation, warranty or other statement
made by Borrower in any certificate or written statement furnished to Bank
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements contained in such certificates or
statements not misleading.
6. AFFIRMATIVE COVENANTS.
Borrower covenants and agrees that, until payment in full of all
outstanding Obligations, and for so long as Bank may have any commitment to make
a Credit Extension hereunder, Borrower shall do all of the following:
6.1 Good Standing. Borrower shall maintain its and each of its
Subsidiaries' corporate existence in its jurisdiction of incorporation and
maintain qualification in each jurisdiction in which the failure to so qualify
could have a Material Adverse Effect. Borrower shall maintain, and shall cause
each of its Subsidiaries to maintain in force all licenses, approvals and
agreements, the loss of which could have a Material Adverse Effect.
6.2 Government Compliance. Borrower shall meet, and shall cause each
Subsidiary to meet, the minimum funding requirements of ERISA with respect to
any employee benefit plans subject to ERISA. Borrower shall comply, and shall
cause each Subsidiary to comply, with all statutes, laws, ordinances and
government rules and regulations to which it is subject, noncompliance with
which
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could have a Material Adverse Effect or a material adverse effect on the
Collateral or the priority of Bank's Lien on the Collateral.
6.3 Financial Statements, Reports, Certificates. Borrower shall
deliver to Bank: (a) as soon as available, but in any event within thirty (30)
days after the end of each calendar month, a Borrower prepared consolidated
balance sheet and income statement covering Borrower's consolidated operations
during such period, in a form and certified by a Responsible Officer; (b) as
soon as available, but in any event within one hundred twenty (120) days after
the end of Borrower's fiscal year, audited consolidated financial statements of
Borrower prepared in accordance with GAAP, consistently applied; (c) promptly
upon receipt of notice thereof, a report of any legal actions pending or
threatened against Borrower or any Subsidiary that could result in damages or
costs to Borrower or any Subsidiary of Fifty Thousand Dollars ($50,000) or more;
and (d) such budgets, sales projections, operating plans or other financial
information as Bank may reasonably request from time to time generally prepared
by Borrower in the ordinary course of business.
Borrower shall deliver to Bank with the monthly financial
statements a Compliance Certificate signed by a Responsible Officer in
substantially the form of Exhibit C hereto.
6.4 Inventory; Returns. Borrower shall keep all Inventory in good and
marketable condition, free from all material defects except for Inventory for
which adequate reserves have been made. Returns and allowances, if any, as
between Borrower and its account debtors shall be on the same basis and in
accordance with the usual customary practices of Borrower, as they exist at the
time of the execution and delivery of this Agreement. Borrower shall promptly
notify Bank of all returns and recoveries and of all disputes and claims, where
the return, recovery, dispute or claim involves more than Fifty Thousand Dollars
($50,000).
6.5 Taxes. Borrower shall make, and shall cause each Subsidiary to
make, due and timely payment or deposit of all material federal, state, and
local taxes, assessments, or contributions required of it by law, and will
execute and deliver to Bank, on demand, appropriate certificates attesting to
the payment or deposit thereof; and Borrower will make, and will cause each
Subsidiary to make, timely payment or deposit of all material tax payments and
withholding taxes required of it by applicable laws, including, but not limited
to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local,
state, and federal income taxes, and will, upon request, furnish Bank with proof
satisfactory to Bank indicating that Borrower or a Subsidiary has made such
payments or deposits; provided that Borrower or a Subsidiary need not make any
payment if the amount or validity of such payment is contested in good faith by
appropriate proceedings and is reserved against (to the extent required by GAAP)
by Borrower.
6.6 Insurance.
(a) Borrower, at its expense, shall keep the Collateral insured
against loss or damage by fire, theft, explosion, sprinklers, and all other
hazards and risks, and in such amounts, as ordinarily insured against by other
owners in similar businesses conducted in the locations where Borrower's
business is conducted on the date hereof. Borrower shall also maintain insurance
relating to Borrower's ownership and use of the Collateral in amounts and of a
type that are customary to businesses similar to Borrower's.
(b) All such policies of insurance shall be in such form, with
such companies, and in such amounts as reasonably satisfactory to Bank. All such
policies of property insurance shall contain a lender's loss payable
endorsement, in a form satisfactory to Bank, showing Bank as an additional loss
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payee thereof and all liability insurance policies shall show the Bank as an
additional insured, and shall specify that the insurer must give at least twenty
(20) days notice to Bank before canceling its policy for any reason. Upon Bank's
request, Borrower shall deliver to Bank certified copies of such policies of
insurance and evidence of the payments of all premiums therefor. All proceeds
over $50,000 payable under any such policy shall, at the option of Bank, be
payable to Bank to be applied on account of the Obligations.
6.7 Principal Depository. Borrower shall maintain its principal
banking and investment accounts with Bank.
6.8 Quick Ratio. Beginning as of January 31, 1999, Borrower shall
maintain, as of the last day of each calendar month, a ratio of Quick Assets to
Current Liabilities, less deferred revenue of at least .80 to 1.00.
6.9 Equity Infusion. On or before December 31, 1998, Borrower shall
receive no less than Two Million Five Hundred Thousand Dollars ($2,500,000) in
cash proceeds from investors acceptable to Bank.
6.10 Registration of Intellectual Property Rights.
(a) Borrower shall register or cause to be registered on an
expedited basis (to the extent not already registered) with the United States
Patent and Trademark Office or the United States Copyright Office, as
applicable, those intellectual property rights listed on Exhibits A, B and C to
the Intellectual Property Security Agreement delivered to Bank by Borrower in
connection with this Agreement within thirty (30) days of the date of this
Agreement. Borrower shall register or cause to be registered with the United
States Patent and Trademark Office or the United States Copyright Office, as
applicable, those additional intellectual property rights developed or acquired
by Borrower from time to time in connection with any product prior to the sale
or licensing of such product to any third party, including without limitation
major revisions or additions to the intellectual property rights listed on such
Exhibits A, B and C.
(b) Borrower shall execute and deliver such additional
instruments and documents from time to time as Bank shall reasonably request to
perfect Bank's security interest in the Intellectual Property Collateral.
(c) Borrower shall (i) protect, defend and maintain the validity
and enforceability of the Trademarks, Patents and Copyrights, (ii) use its best
efforts to detect infringements of the Trademarks, Patents and Copyrights and
promptly advise Bank in writing of material infringements detected and (iii) not
allow any material Trademarks, Patents or Copyrights to be abandoned, forfeited
or dedicated to the public without the written consent of Bank, which shall not
be unreasonably withheld.
(d) Bank may audit Borrower's Intellectual Property Collateral
to confirm compliance with this Section 6.10, provided such audit may not occur
more often than once per year, unless an Event of Default has occurred and is
continuing. Bank shall have the right, but not the obligation, to take, at
Borrower's sole expense, any actions that Borrower is required under this
Section 6.10 to take but which Borrower fails to take, after fifteen (15) days'
notice to Borrower. Borrower shall reimburse and indemnify Bank for all
reasonable costs and reasonable expenses incurred in the reasonable exercise of
its rights under this Section 6.10.
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6.11 Further Assurances. At any time and from time to time Borrower
shall execute and deliver such further instruments and take such further action
as may reasonably be requested by Bank to effect the purposes of this Agreement.
7. NEGATIVE COVENANTS.
Borrower covenants and agrees that, so long as any credit
hereunder shall be available and until payment in full of the outstanding
Obligations or for so long as Bank may have any commitment to make any Credit
Extensions, Borrower will not do any of the following:
7.1 Dispositions. Convey, sell, lease, transfer or otherwise dispose
of (collectively, a "Transfer"), or permit any of its Subsidiaries to Transfer,
all or any part of its business or property, other than: (i) Transfers of
Inventory in the ordinary course of business; (ii) Transfers of non-exclusive
licenses and similar arrangements for the use of the property of Borrower or its
Subsidiaries; (iii) Transfers of surplus, worn-out or obsolete Equipment; or
(iv) Transfers of immaterial assets other than Accounts ($50,000 or less
individually and $100,000 in the aggregate in each fiscal year) outside the
ordinary course of business.
7.2 Change in Business. Engage in any business, or permit any of its
Subsidiaries to engage in any business, other than the businesses currently
engaged in by Borrower and any business substantially similar or related thereto
(or incidental thereto). Borrower will not, without thirty (30) days prior
written notification to Bank, relocate its chief executive office.
7.3 Mergers or Acquisitions. Merge or consolidate, or permit any of
its Subsidiaries to merge or consolidate, with or into any other business
organization, or acquire, or permit any of its Subsidiaries to acquire, all or
substantially all of the capital stock or property of another Person in any
transaction involving consideration of more than $100,000; provided, however,
that Borrower or any Subsidiary may merge, consolidate or reorganize with or
into another entity as long as Borrower or such Subsidiary is the surviving
corporation and an Event of Default does not exist before or after giving effect
to such transaction.
7.4 Indebtedness. Create, incur, assume or be or remain liable with
respect to any Indebtedness, or permit any Subsidiary so to do, other than
Permitted Indebtedness.
7.5 Encumbrances. Create, incur, assume or suffer to exist any Lien
with respect to any of its property, or assign or otherwise convey any right to
receive income, including the sale of any Accounts, or permit any of its
Subsidiaries so to do, except for Permitted Liens.
7.6 Distributions. Pay any dividends or make any other distribution
or payment on account of or in redemption, retirement or purchase of any capital
stock, except that Borrower may (i) repurchase the stock of former employees
pursuant to stock repurchase agreements and (ii) pay cash dividends relating to
federal and state income taxes incurred by its shareholders as a result of
Borrower's operations, as long as an Event of Default does not exist or would
not exist after giving effect to such action.
7.7 Investments. Directly or indirectly acquire or own, or make any
Investment in or to any Person, or permit any of its Subsidiaries so to do,
other than Permitted Investments.
7.8 Transactions with Affiliates. Directly or indirectly enter into
or permit to exist any material transaction with any Affiliate of Borrower
except for transactions that are in the ordinary
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course of Borrower's business, upon fair and reasonable terms that are no less
favorable to Borrower than would be obtained in an arm's length transaction with
a nonaffiliated Person.
7.9 Subordinated Debt. Make any payment in respect of any
Subordinated Debt, or permit any of its Subsidiaries to make any such payment,
except in compliance with the terms of such Subordinated Debt, or amend any
provision contained in any documentation relating to the Subordinated Debt
without Bank's prior written consent.
7.10 Inventory. Store the Inventory with a bailee, warehouseman, or
similar party unless Bank has received a pledge of the warehouse receipt
covering such Inventory; provided, however, that Borrower may deposit software
code in escrow for customers in the ordinary course of business. Except for
Inventory sold in the ordinary course of business and except for such other
locations as Bank may approve in writing, Borrower shall keep the Inventory only
at the location set forth in Section 10 hereof and such other locations of which
Borrower gives Bank prior written notice and as to which Borrower signs and
files a financing statement where needed to perfect Bank's security interest.
7.11 Compliance. Become an "investment company" or be controlled by
an "investment company," within the meaning of the Investment Company Act of
1940, or become principally engaged in, or undertake as one of its important
activities, the business of extending credit for the purpose of purchasing or
carrying margin stock, or use the proceeds of any Credit Extension for such
purpose. Fail to meet the minimum funding requirements of ERISA, permit a
Reportable Event or Prohibited Transaction, as defined in ERISA, to occur, fail
to comply with the Federal Fair Labor Standards Act or violate any law or
regulation, which violation could have a Material Adverse Effect or a material
adverse effect on the Collateral or the priority of Bank's Lien on the
Collateral, or permit any of its Subsidiaries to do any of the foregoing.
8. EVENTS OF DEFAULT.
Any one or more of the following events shall constitute an Event of
Default by Borrower under this Agreement:
8.1 Payment Default. If Borrower fails to pay, when due, any of the
Obligations;
8.2 Covenant Default. If Borrower fails to perform any obligation
under Article 6 or violates any of the covenants contained in Article 7 of this
Agreement, or fails or neglects to perform, keep, or observe any other material
term, provision, condition, covenant, or agreement contained in this Agreement,
in any of the Loan Documents, or in any other present or future written
agreement between Borrower and Bank and as to any default under such other term,
provision, condition, covenant or agreement that can be cured, has failed to
cure such default within twenty (20) days after Borrower receives written notice
thereof or any officer of Borrower becomes aware thereof; provided, however,
that if the default cannot by its nature be cured within the twenty (20) day
period or cannot after diligent attempts by Borrower be cured within such twenty
(20) day period, and such default is likely to be cured within a reasonable
time, then Borrower shall have an additional reasonable period (which shall not
in any case exceed forty-five (45) days) to attempt to cure such default, and
within such reasonable time period the failure to have cured such default shall
not be deemed an Event of Default (provided that no Credit Extensions will be
required to be made during such cure period);
8.3 Material Adverse Change. If there occurs a material adverse
change in Borrower's business or financial condition, or if there is a material
impairment of the prospect of
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repayment of any portion of the Obligations or a material impairment of the
value or priority of Bank's security interests in the Collateral;
8.4 Attachment. If any material portion of Borrower's assets is
attached, seized, subjected to a writ or distress warrant, or is levied upon, or
comes into the possession of any trustee, receiver or person acting in a similar
capacity and such attachment, seizure, writ or distress warrant or levy has not
been removed, discharged or rescinded within twenty (20) days, or if Borrower is
enjoined, restrained, or in any way prevented by court order from continuing to
conduct all or any material part of its business affairs, or if a judgment or
other claim becomes a lien or encumbrance upon any material portion of
Borrower's assets, or if a notice of lien, levy, or assessment is filed of
record with respect to any of Borrower's assets by the United States Government,
or any department, agency, and the same is not paid within twenty (20) days
after Borrower receives notice thereof, provided that note of the foregoing
shall constitute an Event of Default where such action or event is stayed or an
adequate bond has been posted pending a good faith contest by Borrower (provided
that no Credit Extensions will be required to be made during such cure period);
8.5 Insolvency. If Borrower becomes insolvent, or if an Insolvency
Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced
against Borrower and is not dismissed or stayed within forty-five (45) days
(provided that no Credit Extensions will be made prior to the dismissal of such
Insolvency Proceeding);
8.6 Other Agreements. If there is a default in any agreement to which
Borrower is a party with a third party or parties resulting in a right by such
third party or parties, whether or not exercised, to accelerate the maturity of
any Indebtedness in an amount in excess of One Hundred Thousand Dollars
($100,000) or that could have a Material Adverse Effect;
8.7 Subordinated Debt. If Borrower makes any payment on account of
Subordinated Debt, except to the extent such payment is allowed under any
subordination agreement entered into with Bank or otherwise consented to in
writing by Bank;
8.8 Judgments. If a judgment or judgments for the payment of money in
an amount, individually or in the aggregate, of at least Fifty Thousand Dollars
($50,000) shall be rendered against Borrower and shall remain unsatisfied and
unstayed for a period of thirty (30) days (provided that no Credit Extensions
will be made prior to the satisfaction or stay of such judgment); or
8.9 Misrepresentations. If any material misrepresentation or material
misstatement exists now or hereafter in any warranty or representation set forth
herein or in any certificate delivered to Bank by any Responsible Officer
pursuant to this Agreement or to induce Bank to enter into this Agreement or any
other Loan Document.
9. BANK'S RIGHTS AND REMEDIES.
9.1 Rights and Remedies. Upon the occurrence and during the
continuance of an Event of Default, Bank may, at its election, without notice of
its election and without demand, do any one or more of the following, all of
which are authorized by Borrower:
(a) Declare all Obligations, whether evidenced by this Agreement,
by any of the other Loan Documents, or otherwise, immediately due and payable
(provided that upon the occurrence of
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an Event of Default described in Section 8.5 all Obligations shall become
immediately due and payable without any action by Bank);
(b) Cease advancing money or extending credit to or for the
benefit of Borrower under this Agreement or under any other agreement between
Borrower and Bank;
(c) Settle or adjust disputes and claims directly with account
debtors for amounts, upon terms and in whatever order that Bank reasonably
considers advisable;
(d) Make such payments and do such acts as Bank considers
necessary or reasonable to protect its security interest in the Collateral.
Borrower agrees to assemble the Collateral if Bank so requires, and to make the
Collateral available to Bank as Bank may designate. Borrower authorizes Bank to
enter the premises where the Collateral is located, to take and maintain
possession of the Collateral, or any part of it, and to pay, purchase, contest,
or compromise any encumbrance, charge, or lien which in Bank's determination
appears to be prior or superior to its security interest and to pay all expenses
incurred in connection therewith. With respect to any of Borrower's owned
premises, Borrower hereby grants Bank a license to enter into possession of such
premises and to occupy the same, without charge, in order to exercise any of
Bank's rights or remedies provided herein, at law, in equity, or otherwise;
(e) Set off and apply to the Obligations any and all (i) balances
and deposits of Borrower held by Bank, or (ii) indebtedness at any time owing to
or for the credit or the account of Borrower held by Bank;
(f) Ship, reclaim, recover, store, finish, maintain, repair,
prepare for sale, advertise for sale, and sell (in the manner provided for
herein) the Collateral. Bank is hereby granted a license or other right, solely
pursuant to the provisions of this Section 9.1, to use, without charge,
Borrower's labels, patents, copyrights, rights of use of any name, trade
secrets, trade names, trademarks, service marks, and advertising matter, or any
property of a similar nature, as it pertains to the Collateral, in completing
production of, advertising for sale, and selling any Collateral and, in
connection with Bank's exercise of its rights under this Section 9.1, Borrower's
rights under all licenses and all franchise agreements shall inure to Bank's
benefit;
(g) Sell the Collateral at either a public or private sale, or
both, by way of one or more contracts or transactions, for cash or on terms, in
such manner and at such places (including Borrower's premises) as Bank
determines is commercially reasonable, and apply any proceeds to the Obligations
in whatever manner or order Bank deems appropriate;
(h) Bank may credit bid and purchase at any public sale; and
(i) Any deficiency that exists after disposition of the
Collateral as provided above will be paid immediately by Borrower.
9.2 Power of Attorney. Effective only upon the occurrence and during
the continuance of an Event of Default, Borrower hereby irrevocably appoints
Bank (and any of Bank's designated officers, or employees) as Borrower's true
and lawful attorney to: (a) send requests for verification of Accounts or notify
account debtors of Bank's security interest in the Accounts; (b) endorse
Borrower's name on any checks or other forms of payment or security that may
come into Bank's possession; (c) sign Borrower's name on any invoice or bill of
lading relating to any Account,
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drafts against account debtors, schedules and assignments of Accounts,
verifications of Accounts, and notices to account debtors; (d) dispose of any
Collateral; (e) make, settle, and adjust all claims under and decisions with
respect to Borrower's policies of insurance; and (f) settle and adjust disputes
and claims respecting the accounts directly with account debtors, for amounts
and upon terms which Bank determines to be reasonable; provided Bank may
exercise such power of attorney to sign the name of Borrower on any of the
documents described in Section 4.2 regardless of whether an Event of Default has
occurred. The appointment of Bank as Borrower's attorney in fact, and each and
every one of Bank's rights and powers, being coupled with an interest, is
irrevocable until all of the Obligations have been fully repaid and performed
and Bank's obligation to provide advances hereunder is terminated.
9.3 Accounts Collection. Upon the occurrence and during the
continuance of an Event of Default, Bank may notify any Person owing funds to
Borrower of Bank's security interest in such funds and verify the amount of such
Account. Borrower shall collect all amounts owing to Borrower for Bank, receive
in trust all payments as Bank's trustee, and immediately deliver such payments
to Bank in their original form as received from the account debtor, with proper
endorsements for deposit.
9.4 Bank Expenses. If Borrower fails to pay any amounts or furnish
any required proof of payment due to third persons or entities, as required
under the terms of this Agreement, then Bank may do any or all of the following
after reasonable notice to Borrower: (a) make payment of the same or any part
thereof; (b) set up such reserves under the Revolving Facility as Bank deems
necessary to protect Bank from the exposure created by such failure; or (c)
obtain and maintain insurance policies of the type discussed in Section 6.6 of
this Agreement, and take any action with respect to such policies as Bank deems
prudent. Any amounts so paid or deposited by Bank shall constitute Bank
Expenses, shall be immediately due and payable, and shall bear interest at the
then applicable rate hereinabove provided, and shall be secured by the
Collateral. Any payments made by Bank shall not constitute an agreement by Bank
to make similar payments in the future or a waiver by Bank of any Event of
Default under this Agreement.
9.5 Bank's Liability for Collateral. So long as Bank complies with
reasonable banking practices, Bank shall not in any way or manner be liable or
responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage
thereto occurring or arising in any manner or fashion from any cause; (c) any
diminution in the value thereof; or (d) any act or default of any carrier,
warehouseman, bailee, forwarding agency, or other person whomsoever. All risk of
loss, damage or destruction of the Collateral shall be borne by Borrower.
9.6 Remedies Cumulative. Bank's rights and remedies under this
Agreement, the Loan Documents, and all other agreements shall be cumulative.
Bank shall have all other rights and remedies not inconsistent herewith as
provided under the Code, by law, or in equity. No exercise by Bank of one right
or remedy shall be deemed an election, and no waiver by Bank of any Event of
Default on Borrower's part shall be deemed a continuing waiver. No delay by Bank
shall constitute a waiver, election, or acquiescence by it. No waiver by Bank
shall be effective unless made in a written document signed on behalf of Bank
and then shall be effective only in the specific instance and for the specific
purpose for which it was given.
9.7 Demand; Protest. Borrower waives demand, protest, notice of
protest, notice of default or dishonor, notice of payment and nonpayment, notice
of any default, nonpayment at maturity, release, compromise, settlement,
extension, or renewal of accounts, documents, instruments, chattel paper, and
guarantees at any time held by Bank on which Borrower may in any way be liable.
20
<PAGE> 21
10. NOTICES.
Unless otherwise provided in this Agreement, all notices or demands
by any party relating to this Agreement or any other agreement entered into in
connection herewith shall be in writing and (except for financial statements and
other informational documents which may be sent by first-class mail, postage
prepaid) shall be personally delivered or sent by a recognized overnight
delivery service, certified mail, postage prepaid, return receipt requested, or
by telefacsimile to Borrower or to Bank, as the case may be, at its addresses
set forth below:
If to Borrower: FreeShop International, Inc.
95 South Jackson, Suite 300
Seattle, WA 98104
Attn: John A. Wade
FAX: (206) 441-9661
If to Bank: Imperial Bank
226 Airport Parkway
San Jose, CA 95110-1024
Attn: Corporate Banking Center
FAX: (408) 451-8523
with a copy to: Imperial Bank
777 108th Avenue NE, Suite 1670
Bellevue, WA 98004
Attn: J. P. Michael
FAX: (425) 454-6224
Any notice received by Borrower shall be effective notwithstanding the
lack of receipt by Borrower's counsel. The parties hereto may change the address
at which they are to receive notices hereunder, by notice in writing in the
foregoing manner given to the other.
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.
This Agreement shall be governed by, and construed in accordance
with, the internal laws of the State of California, without regard to principles
of conflicts of law. Each of Borrower and Bank hereby submits to the
nonexclusive jurisdiction of the state and Federal courts located in the County
of Santa Clara, State of California. BORROWER AND BANK EACH HEREBY WAIVE THEIR
RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR
ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED
THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL
OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE
FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS
AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER
WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY
TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
21
<PAGE> 22
12. GENERAL PROVISIONS.
12.1 Successors and Assigns. This Agreement shall bind and inure to
the benefit of the respective successors and permitted assigns of each of the
parties; provided, however, that neither this Agreement nor any rights hereunder
may be assigned by Borrower without Bank's prior written consent, which consent
may be granted or withheld in Bank's sole discretion. Bank shall have the right
without the consent of or notice to Borrower to sell, transfer, negotiate, or
grant participation in all or any part of, or any interest in, Bank's
obligations, rights and benefits hereunder.
12.2 Indemnification. Borrower shall defend, indemnify and hold
harmless Bank and its officers, employees, and agents against: (a) all
obligations, demands, claims, and liabilities claimed or asserted by any other
party in connection with the transactions contemplated by this Agreement; and
(b) all losses or Bank Expenses in any way suffered, incurred, or paid by Bank
as a result of or in any way arising out of, following, or consequential to
transactions between Bank and Borrower whether under this Agreement, or
otherwise (including without limitation reasonable attorneys fees and expenses),
except for losses caused by Bank's gross negligence or willful misconduct.
12.3 Time of Essence. Time is of the essence for the performance of
all obligations set forth in this Agreement.
12.4 Severability of Provisions. Each provision of this Agreement
shall be severable from every other provision of this Agreement for the purpose
of determining the legal enforceability of any specific provision.
12.5 Amendments in Writing, Integration. This Agreement cannot be
amended or terminated orally. All prior agreements, understandings,
representations, warranties, and negotiations between the parties hereto with
respect to the subject matter of this Agreement, if any, are merged into this
Agreement and the Loan Documents.
12.6 Counterparts. This Agreement may be executed in any number of
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, shall be deemed to be an original, and all of
which, when taken together, shall constitute but one and the same Agreement.
12.7 Survival. All covenants, representations and warranties made in
this Agreement shall continue in full force and effect so long as any
Obligations remain outstanding. The obligations of Borrower to indemnify Bank
with respect to the expenses, damages, losses, costs and liabilities described
in Section 12.2 shall survive until all applicable statute of limitations
periods with respect to actions that may be brought against Bank have run.
13. JUDICIAL REFERENCE.
(a) Other than (i) nonjudicial foreclosure and all matters in
connection therewith regarding security interests in real or personal property;
or (ii) the appointment of a receiver, or the exercise of other provisional
remedies (any and all of which may be initiated pursuant to applicable law),
each controversy, dispute or claim between the parties arising out of or
relating to this Agreement, which controversy, dispute or claim is not settled
in writing within thirty (30) days after the "Claim Date" (defined as the date
on which a party subject to this Agreement gives written notice to all other
parties that a controversy, dispute or claim exists), will be settled by a
reference proceeding in California
22
<PAGE> 23
in accordance with the provisions of Section 638 et seq. of the California Code
of Civil Procedure, or their successor section ("CCP"), which shall constitute
the exclusive remedy for the settlement of any controversy, dispute or claim
concerning this Agreement, including whether such controversy, dispute or claim
is subject to the reference proceeding and except as set forth above, the
parties waive their rights to initiate any legal proceedings against each other
in any court or jurisdiction other than the Superior Court in the County where
the Real Property, if any, is located or Santa Clara County if none (the
"Court"). The referee shall be a retired Judge of the Court selected by mutual
agreement of the parties, and if they cannot so agree within forty-five (45)
days after the Claim Date, the referee shall be promptly selected by the
Presiding Judge of the Court (or his representative). The referee shall be
appointed to sit as a temporary judge, with all of the powers for a temporary
judge, as authorized by law, and upon selection should take and subscribe to the
oath of office as provided for in Rule 244 of the California Rules of the Court
(or any subsequently enacted Rule). Each party shall have one peremptory
challenge pursuant to CCP Section 170.6. The referee shall (a) be requested to
set the matter for hearing within sixty (60) days after the date of selection of
the referee and (b) try any and all issues of law or fact and report a statement
of decision upon them, if possible, within ninety (90) days of the Claim Date.
Any decision rendered by the referee will be final, binding and conclusive and
judgment shall be entered pursuant to CCP Section 644 in any court in the State
of California having jurisdiction. Any party may apply for a reference
proceeding at any time after thirty (30) days following notice to any other
party of the nature of the controversy, dispute or claim, by filing a petition
for a hearing and/or trial. All discovery permitted by this Agreement shall be
completed no later than fifteen (15) days before the first hearing date
established by the referee. The referee may extend such period in the event of a
party's refusal to provide requested discovery or unavailability of a witness
due to absence or illness. No party shall be entitled to "priority" in
conducting discovery. Depositions may be taken by either party upon seven (7)
days written notice, and request for production or inspection of documents which
cannot be resolved by the parties shall be submitted to the referee as provided
herein. The Superior Court is empowered to issue temporary and/or provisions
remedies, as appropriate.
(b) Except as expressly set forth in this Agreement, the
referee shall determine the manner in which the reference proceeding is
conducted including the time and place of all hearings, the order of
presentation of evidence, and all other questions that arise with respect to the
course of the reference proceeding. All proceedings and hearings conducted
before the referee, except for trial, shall be conducted without a court
reporter except that when any party so requests, a court reporter will be used
at any hearing conducted before the referee. The party making such a request
shall have the obligation to arrange for and pay for the court reporter. The
costs of the court reporter at the trial shall be borne equally by the parties.
(c) The referee shall be required to determine all issues in
accordance with existing case law and the statutory laws of the State of
California. The rules of evidence applicable to proceedings at law in the State
of California will be applicable to the reference proceeding. The referee shall
be empowered to enter equitable as well as legal relief, to provide all
temporary and/or provisional remedies and to enter equitable orders that will be
binding upon the parties. The referee shall issue a single judgment at the close
of the reference proceeding which shall dispose of all of the claims of the
parties that are the subject of the reference. The parties hereto expressly
reserve the right to contest or appeal from the final judgment or any appealable
order or appealable judgment entered by the referee. The parties hereto
expressly reserve the right to findings of fact, conclusions of laws, a written
statement of decision, and the right to move for a new trial or a different
judgment, which new trial, if granted, is also to be a reference proceeding
under this provisions.
23
<PAGE> 24
(d) In the event that the enabling legislation which provides
for appointment of a referee is repealed (and no successor statute is enacted),
any dispute between the parties that would otherwise be determined by the
reference procedure herein described will be resolved and determined by
arbitration. The arbitration will be conducted by a retired judge of the Court,
in accordance with the California Arbitration Act, Section 1280 through
Section 1294.2 of the CCP as amended from time to time. The limitations with
respect to discovery as set forth hereinabove shall apply to any such
arbitration proceeding.
14. CONFIDENTIALITY.
In handling any confidential information Bank shall exercise the
same degree of care that it exercises with respect to its own proprietary
information of the same types to maintain the confidentiality of any non-public
information thereby received or received pursuant to this Agreement except that
disclosure of such information may be made (i) to the Subsidiaries or Affiliates
of Bank in connection with their present or prospective business relations with
Borrower, (ii) to prospective transferees or purchasers of any interest in the
Advances or Term Advances, provided that they have entered into a comparable
confidentiality agreement in favor of Borrower and have delivered a copy to
Borrower, (iii) as required by law, regulations, rule or order, subpoena,
judicial order or similar order, (iv) as may be required in connection with the
examination, audit or similar investigation of Bank and (v) as Bank may
determine in connection with the enforcement of any remedies hereunder.
Confidential information hereunder shall not include information that either:
(a) is in the public domain or in the knowledge or possession of Bank when
disclosed to Bank, as evidenced by Bank's records in existence at the time of
such disclosure, or becomes part of the public domain after disclosure to Bank
through no fault of Bank; or (b) is disclosed to Bank by a third party, provided
Bank does not have actual knowledge that such third party is prohibited from
disclosing such information and provided such disclosure is not otherwise in
violation of Borrower's rights.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
FREESHOP INTERNATIONAL, INC.
By: ____________________________________
Title: _________________________________
IMPERIAL BANK
By: ____________________________________
Title: _________________________________
24
<PAGE> 25
EXHIBIT A
COLLATERAL DESCRIPTION ATTACHMENT
TO LOAN AND SECURITY AGREEMENT
All personal property of Borrower (herein referred to as "Borrower" or
"Debtor") whether presently existing or hereafter created, written, produced or
acquired, including, but not limited to:
(i) all accounts receivable, accounts, chattel paper, contract rights
(including, without limitation, royalty agreements, license agreements and
distribution agreements), documents, instruments, money, deposit accounts and
general intangibles, including, without limitation, returns, repossessions,
books and records relating thereto, and equipment containing said books and
records, all investment property, including securities and securities
entitlements;
(ii) all software, computer source codes and other computer programs
(collectively, the "Software Products"), and all common law and statutory
copyrights and copyright registrations, applications for registration, now
existing or hereafter arising, United States of America and foreign, obtained or
to be obtained on or in connection with the Software Products, or any parts
thereof or any underlying or component elements of the Software Products
together with the right to copyright and all rights to renew or extend such
copyrights and the right (but not the obligation) of Bank (herein referred to as
"Bank" or "Secured Party") to sue in its own name and/or the name of the Debtor
for past, present and future infringements of copyright;
(iii) all goods, including, without limitation, equipment and
inventory (including, without limitation, all export inventory);
(iv) all guarantees and other security therefor;
(v) all trademarks, service marks, trade names and service names and
the goodwill associated therewith;
(vi) (a) all patents and patent applications filed in the United
States Patent and Trademark Office or any similar office of any foreign
jurisdiction, and interests under patent license agreements, including, without
limitation, the inventions and improvements described and claimed therein, (b)
licenses pertaining to any patent whether Debtor is licensor or licensee, (c)
all income, royalties, damages, payments, accounts and accounts receivable now
or hereafter due and/or payable under and with respect thereto, including,
without limitation, damages and payments for past, present or future
infringements thereof, (d) the right (but not the obligation) to sue for past,
present and future infringements thereof, (e) all rights corresponding thereto
throughout the world in all jurisdictions in which such patents have been issued
or applied for, and (f) the reissues, divisions, continuations, renewals,
extensions and continuations-in-part with any of the foregoing (all of the
foregoing patents and applications and interests under patent license
agreements, together with the items described in clauses (a) through (f) in this
paragraph are sometimes herein individually and collectively referred to as the
"Patents"); and
(vii) all products and proceeds, including, without limitation,
insurance proceeds, of any of the foregoing.
<PAGE> 26
EXHIBIT B
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., Pacific Time
TO: EMERGING GROWTH INDUSTRIES DATE: ______________________________
FAX#: (425) 454-6224 TIME: ______________________________
________________________________________________________________________________
FROM: __________________________________________________________________________
CLIENT NAME (BORROWER)
REQUESTED BY: __________________________________________________________________
AUTHORIZED SIGNER'S NAME
AUTHORIZED SIGNATURE: __________________________________________________________
PHONE NUMBER: __________________________________________________________________
FROM ACCOUNT # ___________________ TO ACCOUNT # ________________________________
REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT
- -------------------------- ---------------------
PRINCIPAL INCREASE (ADVANCE) $____________________________
PRINCIPAL PAYMENT (ONLY) $____________________________
INTEREST PAYMENT (ONLY) $____________________________
PRINCIPAL AND INTEREST (PAYMENT) $____________________________
OTHER INSTRUCTIONS: ____________________________________________________________
________________________________________________________________________________
All representations and warranties of Borrower stated in the Loan
Agreement are true, correct and complete in all material respects as of the date
of the telephone request for and Advance confirmed by this Borrowing
Certificate; provided, however, that those representations and warranties
expressly referring to another date shall be true, correct and complete in all
material respects as of such date.
BANK USE ONLY
TELEPHONE REQUEST:
- ------------------
The following person is authorized to request the loan payment transfer/loan
advance on the advance designated account and is known to me.
___________________________________________ ______________________________
Authorized Requester Phone #
___________________________________________ ______________________________
Authorized Requester Phone #
________________________________________________________________________________
Authorized Signature (Bank)
<PAGE> 27
EXHIBIT C
COMPLIANCE CERTIFICATE
TO: IMPERIAL BANK
FROM: FreeShop International, Inc.
The undersigned authorized officer of FreeShop International, Inc.
hereby certifies that in accordance with the terms and conditions of the Loan
and Security Agreement between Borrower and Bank (the "Agreement"), (i) Borrower
is in complete compliance for the period ending __________ with all required
covenants except as noted below and (ii) all representations and warranties of
Borrower stated in the Agreement are true and correct in all material respects
as of the date hereof. Attached herewith are the required documents supporting
the above certification. The Officer further certifies that these are prepared
in accordance with Generally Accepted Accounting Principles (GAAP) and are
consistently applied from one period to the next except as explained in an
accompanying letter or footnotes.
PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES" COLUMN.
<TABLE>
<CAPTION>
REPORTING COVENANT REQUIRED COMPLIES
------------------ -------- --------
<S> <C> <C> <C>
Monthly financial statements Monthly within 30 days Yes No
Annual (CPA Audited) FYE within 120 days Yes No
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES
------------------ -------- ------ ---------
Maintain on a Monthly Basis:
Minimum Quick Ratio(1) .80:1.00(2) _____:1.00 Yes No
Equity Infusion(3) $2,500,000 $________ Yes No
</TABLE>
1 Less deferred revenue
2 Beginning 01/31/99
3 No later than 12/31/98
--------------------------------------------
COMMENTS REGARDING EXCEPTIONS: BANK USE ONLY
See Attached.
Sincerely, Received by: _____________________________
AUTHORIZED SIGNER
________________________________ Date: ____________________________________
SIGNATURE
Verified: ________________________________
AUTHORIZED SIGNER
________________________________ Date: ____________________________________
TITLE
________________________________ Compliance Status: Yes No
DATE
--------------------------------------------
25
<PAGE> 28
CORPORATE RESOLUTIONS TO BORROW
________________________________________________________________________________
BORROWER: FreeShop International, Inc.
________________________________________________________________________________
I, the undersigned Secretary or Assistant Secretary of FreeShop
International, Inc. (the "Corporation"), HEREBY CERTIFY that the Corporation is
organized and existing under and by virtue of the laws of the State of
Washington.
I FURTHER CERTIFY that attached hereto as Attachments 1 and 2 are true
and complete copies of the Articles of Incorporation, as amended and the
Restated Bylaws of the Corporation, each of which is in full force and effect on
the date hereof.
I FURTHER CERTIFY that at a meeting of the Directors of the Corporation,
duly called and held, at which a quorum was present and voting (or by other duly
authorized corporate action in lieu of a meeting), the following resolutions
were adopted.
BE IT RESOLVED, that ANY ONE (1) of the following named officers,
employees, or agents of this Corporation, whose actual signatures are shown
below:
NAMES POSITIONS ACTUAL SIGNATURES
________________________ ________________________ ________________________
________________________ ________________________ ________________________
________________________ ________________________ ________________________
________________________ ________________________ ________________________
________________________ ________________________ ________________________
acting for an on behalf of this Corporation and as its act and deed be, and they
hereby are, authorized and empowered:
BORROW MONEY. To borrow from time to time from Imperial Bank ("Bank"),
on such terms as may be agreed upon between the officers, employees, or agents
and Bank, such sum or sums of money as in their judgment should be borrowed,
without limitation, including such sums as are specified in that certain Loan
and Security Agreement dated as of September 18, 1998 (the "Loan Agreement").
EXECUTE LOAN AGREEMENT. To execute and deliver to Bank the Loan
Agreement, and also to execute and deliver to Bank one or more renewals,
extensions, modifications, refinancings, consolidations, or substitutions for
one or more of the notes, or any portion of the notes.
GRANT SECURITY. To grant a security interest to Bank in the Collateral
described in the Loan Agreement, which security interest shall secure all of the
Corporation's Obligations, as described in the Loan Agreement.
NEGOTIATE ITEMS. To draw, endorse, and discount with Bank all drafts,
trade acceptances, promissory notes, or other evidences of indebtedness payable
to or belonging to the Corporation or in which the Corporation may have an
interest, and either to receive cash for the same or to cause such proceeds to
be credited to the account of the Corporation with Bank, or to cause such other
disposition of the proceeds derived therefrom as they may deem advisable.
<PAGE> 29
WARRANTS. To issue a warrant to purchase the Corporation's capital
stock.
FURTHER ACTS. In the case of lines of credit, to designate additional or
alternate individuals as being authorized to request advances thereunder, and in
all cases, to do and perform such other acts and things, to pay any and all fees
and costs, and to execute and deliver such other documents and agreements as
they may in their discretion deem reasonably necessary or proper in order to
carry into effect the provisions of these Resolutions.
BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to
these resolutions and performed prior to the passage of these resolutions are
hereby ratified and approved, that these Resolutions shall remain in full force
and effect and Bank may rely on these Resolutions until written notice of their
revocation shall have been delivered to and received by Bank. Any such notice
shall not affect any of the Corporation's agreements or commitments in effect at
the time notice is given.
I FURTHER CERTIFY that the officers, employees, and agents named above
are duly elected, appointed, or employed by or for the Corporation, as the case
may be, and occupy the positions set forth opposite their respective names; that
the foregoing Resolutions now stand of record on the books of the Corporation;
and that the Resolutions are in full force and effect and have not been modified
or revoked in any manner whatsoever.
IN WITNESS WHEREOF, I have hereunto set my hand on _______________,
19___ and attest that the signatures set opposite the names listed above are
their genuine signatures.
CERTIFIED TO AND ATTESTED BY:
X___________________________________
================================================================================
<PAGE> 30
IMPERIAL BANK
MEMBER FDIC
ITEMIZATION OF AMOUNT FINANCED
DISBURSEMENT INSTRUCTIONS
(REVOLVER)
<TABLE>
<S> <C>
Name(s): Date:
$ paid to you directly by Cashiers Check No.
$ credited to deposit account No. ____________ when Advances are requested
$ amounts paid to Bank for Amounts paid to others on your behalf:
$1,250.00 to Imperial Bank for Loan Fee
$ to Imperial Bank for Document Fee
$ to Imperial Bank for accounts receivable audit (estimate)
$ to Bank counsel fees and expenses
$ to
$ to
$ TOTAL (AMOUNT FINANCED)
</TABLE>
Upon consummation of this transaction, this document will also serve as the
authorization for Imperial Bank to disburse the loan proceeds as stated above.
_____________________________________ _____________________________________
Signature Signature
<PAGE> 31
AGREEMENT TO PROVIDE INSURANCE
TO: IMPERIAL BANK Date: September 18, 1998
226 Airport Parkway Borrower: FreeShop International, Inc.
San Jose, California 95110
In consideration of a loan in the amount of up to $750,000, secured by
all tangible personal property including inventory and equipment.
I/We agree to obtain adequate insurance coverage to remain in force
during the term of the loan.
I/We also agree to advise the below named agent to add Imperial Bank as
loss payee on the new or existing insurance policy, and to furnish Bank at above
address with a copy of said policy/endorsements and any subsequent renewal
policies.
I/We understand that the policy must contain:
1. Fire and extended coverage in an amount sufficient to cover:
(a) The amount of the loan, OR
(b) All existing encumbrances, whichever is greater,
But not in excess of the replacement value of the improvements on the
real property.
2. Lender's "Loss Payable" Endorsement Form 438 BFU in favor of Imperial
Bank, or any other form acceptable to Bank.
INSURANCE INFORMATION
Insurance Co./Agent Telephone No.:
Agent's Address:
Signature of Obligor: _______________________________________
Signature of Obligor: _______________________________________
________________________________________________________________________________
- --------------------------------------------------
FOR BANK USE ONLY
INSURANCE VERIFICATION: Date: _________________
Person Spoken to: _____________________________
Policy Number: ________________________________
Effective Form: __________ To: ________________
Verified By: __________________________________
- --------------------------------------------------
<PAGE> 32
- --------------------------------------------------------------------------------
IMPERIAL BANK
CALIFORNIA'S BUSINESS BANKS AUTOMATIC DEBIT AUTHORIZATION
MEMBER FDIC
________________________________________________________________________________
________________________________________________________________________________
To: IMPERIAL BANK
Re: LOAN # ___________________________________
You are hereby authorized and instructed to charge account No. _________________
in the name of FREESHOP INTERNATIONAL, INC. for principal and interest payments
due on above referenced loan as set forth below and credit the loan referenced
above.
[SYMBOL] 3 Debit each interest payment as it becomes due according to
the terms of the note and any renewals or amendments thereof.
[SYMBOL] 4 Debit each principal payment is at becomes due according to
the terms of the note and any renewals or amendments thereof.
This Authorization is to remain in full force and effect until revoked in
writing.
________________________________________________________________________________
- --------------------------------------------------------------------------------
Borrower Signature Date
________________________________________________________________________________
________________________________________________________________________________
- --------------------------------------------------------------------------------
<PAGE> 33
TABLE OF CONTENTS
(continued)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. DEFINITIONS AND CONSTRUCTION........................................................1
1.1 Definitions..................................................................1
1.2 Accounting Terms.............................................................8
2. LOAN AND TERMS OF PAYMENT...........................................................8
2.1 Credit Extensions............................................................8
2.2 Overadvances.................................................................9
2.3 Interest Rates, Payments, and Calculations...................................9
2.4 Crediting Payments..........................................................10
2.5 Fees........................................................................10
2.6 Term........................................................................10
3. CONDITIONS OF LOANS................................................................10
3.1 Conditions Precedent to Initial Credit Extension............................10
3.2 Conditions Precedent to all Credit Extensions...............................11
4. CREATION OF SECURITY INTEREST......................................................11
4.1 Grant of Security Interest..................................................11
4.2 Delivery of Additional Documentation Required...............................11
4.3 Right to Inspect............................................................11
5. REPRESENTATIONS AND WARRANTIES.....................................................12
5.1 Due Organization and Qualification..........................................12
5.2 Due Authorization; No Conflict..............................................12
5.3 No Prior Encumbrances.......................................................12
5.4 Bona Fide Eligible Accounts.................................................12
5.5 Merchantable Inventory......................................................12
5.6 Name; Location of Chief Executive Office....................................12
5.7 Litigation..................................................................12
5.8 No Material Adverse Change in Financial Statements..........................12
5.9 Solvency, Payment of Debts..................................................12
5.10 Regulatory Compliance.......................................................13
5.11 Environmental Condition.....................................................13
5.12 Taxes.......................................................................13
5.13 Subsidiaries................................................................13
5.14 Government Consents.........................................................13
5.15 Full Disclosure.............................................................13
6. AFFIRMATIVE COVENANTS..............................................................13
6.1 Good Standing...............................................................14
6.2 Government Compliance.......................................................14
6.3 Financial Statements, Reports, Certificates.................................14
6.4 Inventory; Returns..........................................................14
6.5 Taxes.......................................................................14
</TABLE>
i
<PAGE> 34
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
6.6 Insurance...................................................................15
6.7 Principal Depository........................................................15
6.8 Adjusted Quick Ratio........................................................15
6.9 Profitability...............................................................15
6.10 Liquidity; Debt Service Coverage............................................15
6.11 Registration of Intellectual Property Rights................................16
6.12 Further Assurances..........................................................16
7. NEGATIVE COVENANTS.................................................................16
7.1 Dispositions................................................................16
7.2 Change in Business..........................................................17
7.3 Mergers or Acquisitions.....................................................17
7.4 Indebtedness................................................................17
7.5 Encumbrances................................................................17
7.6 Distributions...............................................................17
7.7 Investments.................................................................17
7.8 Transactions with Affiliates................................................17
7.9 Subordinated Debt...........................................................17
7.10 Inventory...................................................................17
7.11 Compliance..................................................................17
8. EVENTS OF DEFAULT..................................................................18
8.1 Payment Default.............................................................18
8.2 Covenant Default............................................................18
8.3 Material Adverse Change.....................................................18
8.4 Attachment..................................................................18
8.5 Insolvency..................................................................18
8.6 Other Agreements............................................................19
8.7 Subordinated Debt...........................................................19
8.8 Judgments...................................................................19
8.9 Misrepresentations..........................................................19
9. BANK'S RIGHTS AND REMEDIES.........................................................19
9.1 Rights and Remedies.........................................................19
9.2 Power of Attorney...........................................................20
9.3 Accounts Collection.........................................................20
9.4 Bank Expenses...............................................................20
9.5 Bank's Liability for Collateral.............................................21
9.6 Remedies Cumulative.........................................................21
9.7 Demand; Protest.............................................................21
10. NOTICES............................................................................21
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.........................................22
</TABLE>
ii
<PAGE> 35
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
12. GENERAL PROVISIONS.................................................................22
12.1 Successors and Assigns......................................................22
12.2 Indemnification.............................................................22
12.3 Time of Essence.............................................................23
12.4 Severability of Provisions..................................................23
12.5 Amendments in Writing, Integration..........................................23
12.6 Counterparts................................................................23
12.7 Survival....................................................................23
13. JUDICIAL REFERENCE.................................................................23
14. CONFIDENTIALITY....................................................................24
</TABLE>
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<PAGE> 36
Debtor: FreeShop International, Inc.
EXHIBIT A
COLLATERAL DESCRIPTION ATTACHMENT
TO LOAN AND SECURITY AGREEMENT
All personal property of Borrower (herein referred to as "Borrower" or
"Debtor") whether presently existing or hereafter created, written, produced or
acquired, including, but not limited to:
(i) all accounts receivable, accounts, chattel paper, contract
rights (including, without limitation, royalty agreements, license agreements
and distribution agreements), documents, instruments, money, deposit accounts
and general intangibles, including, without limitation, returns, repossessions,
books and records relating thereto, and equipment containing said books and
records, all investment property, including securities and securities
entitlements;
(ii) all software, computer source codes and other computer
programs (collectively, the "Software Products"), and all common law and
statutory copyrights and copyright registrations, applications for registration,
now existing or hereafter arising, United States of America and foreign,
obtained or to be obtained on or in connection with the Software Products, or
any parts thereof or any underlying or component elements of the Software
Products together with the right to copyright and all rights to renew or extend
such copyrights and the right (but not the obligation) of Bank (herein referred
to as "Bank" or "Secured Party") to sue in its own name and/or the name of the
Debtor for past, present and future infringements of copyright;
(iii) all goods, including, without limitation, equipment and
inventory (including, without limitation, all export inventory);
(iv) all guarantees and other security therefor;
(v) all trademarks, service marks, trade names and service names
and the goodwill associated therewith;
(vi) (a) all patents and patent applications filed in the United
States Patent and Trademark Office or any similar office of any foreign
jurisdiction, and interests under patent license agreements, including, without
limitation, the inventions and improvements described and claimed therein, (b)
licenses pertaining to any patent whether Debtor is licensor or licensee, (c)
all income, royalties, damages, payments, accounts and accounts receivable now
or hereafter due and/or payable under and with respect thereto, including,
without limitation, damages and payments for past, present or future
infringements thereof, (d) the right (but not the obligation) to sue for past,
present and future infringements thereof, (e) all rights corresponding thereto
throughout the world in all jurisdictions in which such patents have been issued
or applied for, and (f) the reissues, divisions, continuations, renewals,
extensions and continuations-in-part with any of the foregoing (all of the
foregoing patents and applications and interests under patent license
agreements, together with the items described in clauses (a) through (f) in this
paragraph are sometimes herein individually and collectively referred to as the
"Patents"); and
(vii) all products and proceeds, including, without limitation,
insurance proceeds, of any of the foregoing.
<PAGE> 1
EXHIBIT 10.11
================================================================================
95 SOUTH JACKSON
Seattle, Washington 98104
------------------
LEASE AGREEMENT
BETWEEN
MERRILL PLACE, LLC
Landlord
And
FREESHOP INTERNATIONAL, INC.
Tenant
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
1. LEASE DATA AND EXHIBITS............................................... 1
(a) BUILDING......................................................... 1
(b) PREMISES......................................................... 1
(c) TENANT'S PERCENTAGE OF THE BUILDING.............................. 1
(d) COMMENCEMENT DATE................................................ 1
(e) EXPIRATION DATE.................................................. 1
(f) RENT............................................................. 1
(g) SECURITY DEPOSIT................................................. 2
(h) PARKING.......................................................... 2
(i) NOTICE ADDRESSES................................................. 2
(j) EXHIBITS......................................................... 2
2. PREMISES.............................................................. 2
3. COMMENCEMENT AND EXPIRATION DATES..................................... 2
(a) COMMENCEMENT DATE................................................ 2
(b) TENANT OBLIGATIONS............................................... 2
(c) TENANT TERMINATION RIGHT......................................... 3
(d) CONFIRMATION OF COMMENCEMENT DATE................................ 3
(e) EXPIRATION DATE.................................................. 3
4. RENT.................................................................. 3
5. SECURITY DEPOSIT...................................................... 3
6. USES.................................................................. 3
7. SERVICES AND UTILITIES................................................ 4
(a) STANDARD SERVICES................................................ 4
(b) INTERRUPTION OF SERVICES......................................... 4
(c) ADDITIONAL SERVICES.............................................. 4
(d) SECURITY SERVICES................................................ 5
8. COSTS OF OPERATIONS AND REAL ESTATE TAXES............................. 4
(a) DEFINITIONS...................................................... 5
(b) BASE AMOUNTS..................................................... 6
(c) ADDITIONAL RENT FOR SERVICE AND UTILITY COSTS.................... 7
(d) ADDITIONAL RENT FOR REAL PROPERTY TAXES.......................... 7
</TABLE>
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<PAGE> 3
<TABLE>
<S> <C> <C> <C>
(e) CALCULATIONS.......................................................8
(f) FURTHER ADJUSTMENT.................................................8
(g) BASE RENT..........................................................8
(i) PERSONAL PROPERTY TAXES............................................8
9. TENANT IMPROVEMENTS AND ALTERATIONS.....................................8
(a) TENANT IMPROVEMENTS................................................8
(b) ALTERATIONS........................................................8
10. CARE OF PREMISES........................................................9
(a) TENANT'S MAINTENANCE...............................................9
(b) LANDLORD'S MAINTENANCE.............................................9
11. ACCEPTANCE OF PREMISES..................................................9
12. ACCESS.................................................................10
13. DAMAGE OR DESTRUCTION..................................................10
(a) DAMAGE AND REPAIR.................................................10
(b) DESTRUCTION DURING LAST YEAR OF TERM..............................10
(c) BUSINESS INTERRUPTION.............................................10
(d) TENANT IMPROVEMENTS...............................................10
(e) EXPRESS AGREEMENT.................................................11
14. WAIVER OF SUBROGATION..................................................11
15. INDEMNIFICATION........................................................11
16. INSURANCE..............................................................11
(a) LIABILITY INSURANCE...............................................11
(b) PROPERTY INSURANCE................................................11
(c) INSURANCE POLICY REQUIREMENTS.....................................11
17. ASSIGNMENT AND SUBLETTING..............................................12
(a) ASSIGNMENT OR SUBLEASE............................................12
(b) ASSIGNEE OBLIGATIONS..............................................13
(c) SUBLESSEE OBLIGATIONS.............................................13
18. SIGNS..................................................................13
</TABLE>
-ii-
<PAGE> 4
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
19. LIENS AND INSOLVENCY ............................................... 13
(a) LIENS ......................................................... 13
(b) INSOLVENCY....................................................... 13
20. DEFAULT .............................................................. 13
(a) CUMULATIVE REMEDIES.............................................. 13
(b) TENANT'S RIGHT TO CURE........................................... 13
(c) VACATION AND ABANDONMENT......................................... 14
(d) LANDLORDS RE-ENTRY............................................... 14
(e) RELETTING THE PREMISES........................................... 14
(f) WAIVER OF REDEMPTION RIGHTS...................................... 14
(g) NONPAYMENT OF ADDITIONAL RENT.................................... 15
21. PRIORITY.............................................................. 15
22. SURRENDER OF POSSESSION............................................... 15
23. REMOVAL OF PROPERTY................................................... 15
(a) SIGNS AND PERSONAL PROPERTY...................................... 15
(b) ALTERATIONS...................................................... 15
24. NON-WAIVER............................................................ 15
25. HOLDOVER.............................................................. 16
26. CONDEMNATION.......................................................... 16
(a) ENTIRE TAKING.................................................... 16
(b) CONSTRUCTIVE TAKING OF ENTIRE PREMISES........................... 16
(c) PARTIAL TAKING................................................... 16
(d) AWARDS AND DAMAGES............................................... 16
27. NOTICES............................................................... 16
28. COSTS AND ATTORNEYS' FEES............................................. 17
29. LANDLORD'S LIABILITY.................................................. 17
30. LANDLORD'S CONSENT.................................................... 17
</TABLE>
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<PAGE> 5
<TABLE>
<S> <C> <C>
31. ESTOPPEL CERTIFICATES..................................................17
32. TRANSFER OF LANDLORD'S INTEREST........................................17
33. RIGHT TO PERFORM.......................................................17
34. AUTHORITY..............................................................18
(a) CORPORATE AUTHORITY...............................................18
(b) PARTNERSHIP AUTHORITY.............................................18
35. OPTION TO RENEW........................................................18
36. RIGHT OF FIRST OPPORTUNITY.............................................18
37. GENERAL................................................................18
(a) HEADINGS..........................................................18
(b) HEIRS AND ASSIGNS.................................................18
(c) NO BROKERS........................................................18
(d) ENTIRE AGREEMENT..................................................19
(e) SEVERABILITY......................................................19
(f) OVERDUE PAYMENTS..................................................19
(g) FORCE MAJEURE.....................................................19
(h) RIGHT TO CHANGE PUBLIC SPACES.....................................19
(i) GOVERNING LAW.....................................................19
(j) BUILDING DIRECTORY................................................19
(k) BUILDING NAME.....................................................20
</TABLE>
-iv-
<PAGE> 6
LEASE AGREEMENT
95 SOUTH JACKSON
THIS LEASE made this 23rd day of September, 1997, between MERRILL PLACE
LLC, a Washington limited liability company ("Landlord"), and FREESHOP
INTERNATIONAL, INC. ("Tenant").
As parties hereto, Landlord and Tenant agree:
1. LEASE DATA AND EXHIBITS. The following terms as used herein shall
have the meanings provided in this Section 1, unless otherwise specifically
modified by provisions of this Lease.
(a) BUILDING. The improvements situated on a portion of the real
property (the "Property") more particularly described on Exhibit A attached
hereto and incorporated herein by reference, with a postal address of 95 South
Jackson, Seattle, Washington 98104. All of the structures on the property are
referred to herein as the "Building."
(b) PREMISES. Consisting of the 9,670 square feet of office floor
area on the third floor and 2,117 square feet of balcony floor area of the
Schwabacher Warehouse Building, as outlined on the floor plan(s) attached
hereto as Exhibit B, attached hereto and incorporated herein by reference,
including tenant improvements, if any, as described in Exhibit C, attached
hereto and incorporated herein by reference.
(c) TENANT'S PERCENTAGE OF THE BUILDING. _____% calculated by
dividing the area of the Premises (________ net rentable square feet) by the
area of the Building utilized for office space (______ net rentable square
feet). In the event the rentable area of the Premises or the rentable area of
the Building is altered, Landlord shall adjust "Tenant's Percentage of the
Building" to properly reflect such event.
(d) COMMENCEMENT DATE. The earlier of October 15, 1997, or the date
Tenant occupies the Premises.
(e) EXPIRATION DATE. September 30, 2000.
(f) RENT. The rental per month set forth below which is payable on
or before the first day of each month. Additional Rent shall be adjusted from
time to time as provided in Section 7 and Section 8 hereof. Tenant has
deposited with Landlord on the date hereof $5,238.00 to be applied to the first
Rent payment due hereunder.
Office Space:
<TABLE>
<CAPTION>
Months Monthly Rate $/RSF/Year
------ ------------ ----------
<S> <C> <C>
1-3 $ 5,238.00 $ 6.50
4-12 $16,117.00 $20.00
13-24 $16,923.00 $21.00
25-36 $17,728.00 $22.00
</TABLE>
Tenant will pay to Landlord in addition to the monthly rate above of
$5,238.00 for months 1-3, an amount equal to $10,879.00 per month for months 1-3
totaling $32,637.00 in Tenant's common stock valued at today's value of $0.41
per share or 79,602 shares.
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<PAGE> 7
Balcony Space:
<TABLE>
<CAPTION>
Months Monthly Rate $/RSF/Year
------ ------------ ----------
<S> <C> <C>
1-36 $705.66 $4.00
</TABLE>
(g) SECURITY DEPOSIT. $17,728.00.
(h) PARKING. Tenant shall have the right to lease ten (10) parking
stalls in the parking garage portion of the Building on an unassigned basis at
the prevailing monthly rates as established by Landlord from time to time. The
leasing of parking stalls by Tenant shall be subject to such rules and
regulations as Landlord or its parking operator may adopt from time to time. In
addition to the above-referenced ten (10) parking stalls, Landlord will provide
up to twenty-five (25) parking stalls on a month-to-month basis at market
rates; until such time that Landlord, at Landlord's sole discretion, needs up
to said twenty-five (25) parking stalls for other building purposes. Landlord
agrees that such time will not be prior to August 31, 1998. If Landlord needs
such stalls for other building purposes, Landlord agrees to use its best
efforts to assist Tenant in securing, at Tenant's sole cost and expense,
additional parking stalls in the immediate vicinity of the Building.
(i) NOTICE ADDRESSES.
Landlord: 95 South Jackson
Suite 100
Seattle, WA 98104
______________________________
Tenant: ______________________________
______________________________
______________________________
(j) EXHIBITS. The following exhibits or riders are made a part of
this Lease:
Exhibit A - Legal Description of the Property
Exhibit B - Floor Plan of Premises
Exhibit C - Tenant Improvements
Exhibit D - Memorandum of Lease
Exhibit E - Additional Terms of Lease
2. PREMISES. Landlord does hereby lease to Tenant, and Tenant does
hereby lease from Landlord, upon the terms and conditions herein set forth, the
Premises described in Section 1(b) hereof as shown on Exhibit B, together with
the appurtenances, including without limitation the right to use, in common
with others, the lobbies, elevators and other common areas in the Building
located on the Property.
3. COMMENCEMENT AND EXPIRATION DATES.
(a) COMMENCEMENT DATE. The Commencement Date shall be the earlier of
the date specified in Section 1(d) or the date Tenant occupies the Premises.
(b) TENANT OBLIGATIONS. If Tenant's tenant improvements are not
completed on the Commencement Date due to the failure of Tenant to fulfill any
obligation pursuant to the terms of this Lease or any exhibit hereto, the Lease
shall be deemed to have commenced upon the Commencement Date.
-2-
<PAGE> 8
(c) TENANT TERMINATION RIGHT. In the event, due to delays from any
cause other than Tenant's failure to comply with the terms of this Lease, the
Premises are not available for occupancy by Tenant within ninety (90) days
following the date specified in Section 1(d), Tenant may terminate this Lease
by written notice. Termination under this Section 3(c) shall be Tenant's sole
remedy for such delay and Tenant shall have no other rights or claims hereunder
at law or in equity.
(d) CONFIRMATION OF COMMENCEMENT DATE. In the event the Commencement
Date is established as a later or earlier date than the date provided in
Section 1(d) hereof, Landlord shall confirm the Commencement Date to Tenant in
writing and, at Landlord's request the parties will execute a Memorandum of
Lease in the form attached hereto as Exhibit D.
(e) EXPIRATION DATE. The Lease shall expire on the date specified in
Section 1(e).
4. RENT. Tenant shall pay Landlord without notice the Rent stated in
Section 1(f) hereof and Additional Rent as provided in Section 7 and Section 8
and any other additional payments due under this Lease without deduction or
offset in lawful money of the United States in advance on or before the first
day of each month at Landlord's Notice Address set forth in Section 1(i)
hereof, or to such other party at such other place as Landlord may hereafter
from time to time designate in writing. Rent and Addition Rent for any partial
month at the beginning or end of the Lease term shall be adjusted for the
proportionate fraction of the month.
5. SECURITY DEPOSIT. As security for the full and faithful performance
of every covenant and condition of this Lease to be performed by Tenant, Tenant
has paid to Landlord the Security Deposit as specified in Section 1(g) hereof,
receipt of which is hereby acknowledged. If Tenant shall default with respect
to any material covenant or condition of this Lease, including but not limited
to the payment of Rent, Additional Rent or any other payment due under this
Lease, Landlord may apply all or any part of the Security Deposit to the
payment of any sum in default or any other sum which Landlord may be required
or may in its reasonable discretion deem necessary to spend or incur by reason
of Tenant's default. In such event, Tenant shall, within five (5) days of
written demand therefor by Landlord, deposit with Landlord the amount so
applied. If Tenant shall have fully complied with all of the covenants and
conditions of this Lease, but not otherwise, the amount of the Security Deposit
then held by Landlord shall be repaid to Tenant (or, at Landlord's option, to
the last assignee of Tenant's interest hereunder) within thirty (30) days after
the expiration or sooner termination of this Lease. In the event of Tenant's
default under this Lease, Landlord's right to retain the Security Deposit shall
be deemed to be in addition to any and all other rights and remedies at law or
in equity available to Landlord. Landlord shall not be required to keep any
Security Deposit separate from its general funds and Tenant shall not be
entitled to any interest thereon.
6. USES. The third floor office portion of the Premises are to be used
only for general office purposes, and the balcony portion of the Premises may
only be used for storage and related business purposes ("Permitted Uses"), and
for no other business or purpose without the prior written consent of Landlord,
which consent may be reasonably withheld if Landlord, in its sole discretion,
determines that any proposed use is inconsistent with or detrimental to the
maintenance and operation of the Building as a first-class office building in
Seattle, Washington or is inconsistent with any restriction on use of the
Premises, the Building or the Property contained in any lease, mortgage or other
agreement or instrument by which the Landlord is bound or to which any of such
property is subject. Tenant shall not commit any act that will increase the then
existing rate of insurance on the Building without Landlord's consent. Tenant
shall promptly pay upon demand the amount of any increase in insurance rates
caused by any act or acts of Tenant. Tenant shall not commit or allow to be
committed any waste upon the Premises, or any public or nuisance or other act
which disturbs the quiet enjoyment of any other tenant in the Building or which
is unlawful. Tenant shall not, without the written consent of Landlord, use any
apparatus, machinery or device in or about the Premises which will cause any
substantial noise, vibration or fumes. If any of Tenant's office machines or
equipment should disturb the quiet enjoyment of any other tenant in the
Building, then Tenant shall provide adequate insulation or take other action as
may be necessary to eliminate the disturbance.
-3-
<PAGE> 9
Tenant shall comply with all laws relating to its use or occupancy of the
Premises and shall observe such reasonable rules and regulations (not
inconsistent with the terms of this Lease) as may be adopted and made available
to Tenant by Landlord from time to time for the safety, care and cleanliness of
the Premises or the Building, and for the preservation of good order therein.
7. SERVICES AND UTILITIES.
(a) STANDARD SERVICES. Landlord shall cause to be maintained the
Premises and the public and common areas of the Building, such as lobbies,
elevators, stairs, corridors and restrooms, in reasonably good order and
condition consistent with the operation and maintenance of the Building as a
first-class office building in Seattle, Washington, except for damage
occasioned by any act or omission of Tenant or Tenant's officers, contractors,
agents, invitees, licensees or employees, the repair of which damage shall be
paid by Tenant. Landlord shall furnish the Premises with electricity for normal
office use, including lighting and operation of personal computers, low power
usage office machines, water and elevator service at all times during the term
of the Lease. Landlord shall also provide lamp replacement service for
building standard light fixtures, toilet room supplies, window washing at
reasonable intervals and customary building janitorial service five (5) days
each week. No janitorial service shall be provided Saturdays, Sundays or legal
holidays. The Rent stated in Section 1(f) hereof does not include the costs of
any janitorial or other services provided or caused to be provided by Landlord
to Tenant which are in addition to the services ordinarily provided Building
tenants and such costs for additional services, if any, shall be paid by Tenant
as Additional Rent on the first day of the month following the month in which
such additional services are provided.
From 7:00 a.m. to 6:00 p.m. on weekdays and from 8:00 a.m. to 1:00
p.m. on Saturdays, excluding legal holidays ("Normal Business Hours"), Landlord
shall furnish to the Premises heat and air conditioning at times other than
Normal Business Hours and the cost of such services as established by Landlord
shall be paid by Tenant as Additional Rent. During other than Normal Business
Hours, Landlord may restrict access to the Building in accordance with the
Building's security system, provided that Tenant shall have at all times during
the term of this Lease (24 hours of all days) reasonable access to the Premises.
(b) INTERRUPTION OF SERVICES. Landlord shall not be liable for any
loss, injury or damage to person or property caused by or resulting from any
variation, interruption, or failure of such service due to any cause whatsoever,
unless such loss, injury or damage is caused by Landlord's negligence. No
temporary interruption or failure of such services incident to the making of
repair, alterations or improvements for a reasonable duration, or due to
accident, strike or conditions or events beyond Landlord's reasonable control
shall be deemed an eviction of Tenant or relieve Tenant from any Tenant's
obligations hereunder.
(c) ADDITIONAL SERVICES. The Building Standard mechanical system is
designed to accommodate heating loads generated by lights and equipment using
up to 3.0 watts per square foot. Before installing lights and equipment in the
Premises which in the aggregate exceed such amount, Tenant shall obtain the
written permission of Landlord. Landlord may refuse to grant such permission
unless Tenant shall agree to pay the costs of Landlord for installation of
supplementary air conditioning capacity or electrical systems as necessitated by
such equipment or lights. In addition, Tenant shall in advance, on the first day
of each month during the Lease term, pay Landlord the reasonable amount
estimated by Landlord as the cost of furnishing electricity for the operation of
such equipment or lights and the reasonable amount estimated by Landlord as the
cost of operation and maintenance of supplementary air conditioning units
necessitated by Tenant's use of such equipment or lights. The Rent stated in
Section 1(f) hereof does not include any amount to cover the cost of furnishing
electricity or such additional air conditioning for such purposes and such costs
shall be paid by Tenant as Additional Rent. Landlord shall be entitled to
install and operate at Tenant's cost a monitoring/metering system in the
Premises to measure the added demands on electrical, heating, ventilation and
air conditioning systems
-4-
<PAGE> 10
resulting from such equipment and lights and from Tenant's after-hours heating,
ventilation and air conditioning service requirements. Landlord and Tenant
shall mutually agree upon the cost of a monitoring/metering system in the
Premises prior to installation. Tenant shall comply with Landlord's
instructions for the use of thermostats in the Building.
(d) SECURITY SERVICES. Landlord will provide security guards to
patrol the Building and parking garage 24 hours per day. In addition, such
security guards will be available to escort personnel to and from the Building
upon request at any time of day or night. Entrance to the Building after hours
will be controlled by a computerized cardkey entry/exit system which
electronically records who enters and exits the Building, and also the date and
time of entry. Landlord will provide CATV cameras to monitor the access points
of the Building.
8. COSTS OF OPERATIONS AND REAL ESTATE TAXES.
(a) DEFINITIONS. In addition to the Rent provided in Section 1(f) of
this Lease, Tenant shall pay to Landlord increases under this Section 8 as
"Additional Rent," utilizing the following definitions.
(i) "OPERATING COSTS" shall include Real Property Taxes,
Services and Utility Costs.
(1) "REAL PROPERTY TAXES" shall mean taxes on real
property and personal property; charges and assessments (or any installments
thereof due during the Lease Year) levied with respect to the Property, the
Building, any improvements, fixtures and equipment, and all other property of
Landlord, real or personal, used directly in the operation of the Building and
located in or on the Building; and any taxes levied or assessed (or any
installment thereof due during the Lease Year) in addition to or in lieu of, in
whole or in part, such real property or personal property taxes, or any other
tax upon leasing of the Building or rents collected, but not including any
federal or state income, estate, inheritance or franchise tax.
(2) "SERVICE AND UTILITY COSTS" shall mean all other
expenses paid or incurred by Landlord for obtaining services and products for
maintaining, operating and repairing the Building and the personal property used
in conjunction therewith, including, without limitation, the costs of refuse
collection, water, sewer and other utilities services, electricity, gas and
other similar energy sources, supplies, janitorial and cleaning services, window
washing, landscape maintenance, services of independent contractors,
compensation (including employment taxes and fringe benefits) of all persons who
perform duties in connection with the operation, maintenance and repair of the
Building, its equipment and the Property upon which it is situated, insurance
premiums, licenses, permits, and inspection fees, customary management fees,
legal and accounting expenses and any other reasonable expenses or charges
whether or not hereinabove described, which in accordance with generally
accepted accounting and management practices would be considered an expense of
maintaining, operating or repairing the Building, excluding or deducting, as
appropriate:
(A) Costs of any special services rendered to individual
tenants (including Tenant);
(B) Depreciation or amortization of costs required to be
capitalized in accordance with generally accepted accounting practices (except
other Operating Costs shall include amortization of capital improvements made
subsequent to the initial development of the Building which are designed with a
reasonable probability of improving the operating efficiency of the Premises or
the Building, provided that such amortization expense shall not exceed
reasonably expected savings in operating costs resulting from such capital
improvements).
(C) Expenses incurred in leasing to or procuring new
tenants;
-5-
<PAGE> 11
(D) Interest or amortization payments on any mortgage
on the Premises or the Building;
(E) Expenses for repairs or other work occasioned by
fire, windstorm or other insured casualty; and
(F) Legal expenses incurred in enforcing the terms of
any lease.
(ii) "LEASE YEAR" shall mean the twelve month period
commencing January 1 and ending December 31.
(iii) ACTUAL OPERATING COSTS.
(A) "ACTUAL SERVICE AND UTILITY COSTS" shall mean the
actual expenses paid or incurred by Landlord for Service and Utility Costs
during any Lease Year of the term hereof.
(B) "ACTUAL REAL PROPERTY TAXES" shall mean the
amount of Real Property Tax paid or incurred by Landlord during any Lease Year
of the term hereof.
(iv) ACTUAL OPERATING COSTS ALLOCABLE TO THE PREMISES.
(A) "ACTUAL SERVICE AND UTILITY COSTS ALLOCABLE TO
THE PREMISES" shall mean the Tenant's share of the Actual Service and Utility
Costs determined by multiplying Tenant's Percentage of the Building described
in Section 1(c) by the Actual Service and Utility Costs except that, to the
extent such costs vary depending upon occupancy of the areas served, the
variable portion shall be allocated in accordance with Tenant's share of the
weighted average leased area of the Building during the Lease Year.
(B) "ACTUAL REAL PROPERTY TAXES ALLOCABLE TO THE
PREMISES" shall mean the Tenant's share of the Actual Real Property Taxes
determined by multiplying Tenant's Percentage of the Building described in
Section 1(c) by the Actual Real Property Taxes.
(v) ESTIMATED OPERATING COSTS ALLOCABLE TO THE PREMISES.
(A) "ESTIMATED SERVICE AND UTILITY COSTS ALLOCABLE TO
THE PREMISES" shall mean Landlord's estimate of Actual Service and Utility
Costs Allocable to the Premises for the following Lease Year to be given by
Landlord to Tenant pursuant to Section 8(c)(i) below.
(B) "ESTIMATED REAL PROPERTY TAXES ALLOCABLE TO THE
PREMISES" shall mean Landlord's estimate of Real Property Taxes Allocable to
the Premises for the following Lease Year to be given by Landlord to Tenant
pursuant to Section 8(c)(ii) below.
(vi) "BASE SERVICE YEAR" shall mean 1997.
(b) BASE AMOUNTS
(i) REAL PROPERTY TAXES BASE AMOUNT. For purposes of this
Section 8, the Real Property Taxes Base Amount for the initial lease term shall
be the Actual Real Property Taxes Allocable to the Premises for the Base
Service Year.
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(ii) SERVICE AND UTILITY COSTS BASE AMOUNT. For purposes of
this Section 8, the Service and Utility Costs Base Amount for the initial lease
term shall be an annualized amount equal to the Actual Service and Utility
Costs Allocable to the Premises for the Base Service Year.
(c) ADDITIONAL RENT FOR SERVICE AND UTILITY COSTS.
(i) ADDITIONAL RENT FOR ESTIMATED INCREASES IN SERVICE AND
UTILITY COSTS. At the beginning of each Lease Year after the Base Service Year,
during the term hereof, Landlord shall furnish Tenant a written statement of
the Estimated Service and Utility Costs Allocable to the Premises, for such
Lease Year, and a calculation of the Additional Rent as follows: One-Twelfth
(1/12) of the amount, if any, by which such amount exceeds the Service and
Utility Costs Base Amount shall be Additional Rent payable by Tenant as
provided in Section 4 for each month during such Lease Year. If at any time or
times during such Lease Year, it appears to Landlord that the Actual Service
and Utility Costs Allocable to the Premises will vary from the Estimated
Service and Utility Costs Allocable to the Premises by more than five percent
(5%) on an annual basis, Landlord may, by written notice to Tenant, revise its
estimate for such Lease Year and Additional Rent payments by Tenant for the
remainder of such Lease Year shall be based on such revised estimate.
(ii) ACTUAL SERVICE AND UTILITY COSTS. Within ninety (90)
days after the close of each Lease Year during the term hereof for which an
estimated statement was delivered to Tenant pursuant to subsection (c)(i), or
as soon thereafter as practicable, Landlord shall deliver to Tenant a written
statement setting forth the Actual Service and Utility Costs Allocable to the
Premises during the preceding Lease Year or such prorated portion thereof if
this Lease commences or terminates on a day other than the first or last day of
a Lease Year (based on a 365-day Lease Year). If such costs for any Lease Year
exceed Estimated Service and Utility Costs Allocable to the Premises paid by
Tenant to Landlord pursuant to subsection (c)(i), Tenant shall pay the amount
of such excess to Landlord as Additional Rent within thirty (30) days after
receipt of such statement by Tenant. If such statement shows such costs to be
less than the amount paid by Tenant to Landlord pursuant to subsection (c)(i),
then the amount of such overpayment by Tenant shall be credited by Landlord to
the next Rent payable by Tenant or, if the Lease has terminated, will be paid
to Tenant.
(d) ADDITIONAL RENT FOR REAL PROPERTY TAXES.
(i) ADDITIONAL RENT FOR ESTIMATED INCREASES IN REAL
PROPERTY TAXES. At the beginning of each Lease Year during the term hereof,
Landlord shall furnish Tenant a written statement of the Estimated Real
Property Taxes Allocable to the Premises, for such Lease Year, and a
calculation of the Additional Rent as follows: One-twelfth (1/12) of the
amount, if any, by which such amount exceeds the Real Property Taxes Base
Amount shall be Additional Rent payable by Tenant as provided in Section 4 for
each month during such Lease Year. If at any time or times during such Lease
Year it appears to Landlord that the Actual Real Property Taxes Allocable to
the Premises will vary from the Estimated Real Property Taxes Allocable to the
Premises by more than five percent (5%) on an annual basis, Landlord shall, by
written notice to Tenant, revise its estimate for such Lease Year and
Additional Rent payments by Tenant for the remainder of such Lease Year shall
be based on such revised estimate.
(ii) ACTUAL REAL PROPERTY TAXES. Within ninety (90) days
after the close of each Lease Year during the term hereof for which an
estimated statement was delivered to Tenant pursuant to subsection (d)(i), or
as soon thereafter as practicable, Landlord shall deliver to Tenant a written
statement setting forth the Actual Real Property Taxes Allocable to the
Premises during the preceding Lease Year or such prorated portion thereof if
this Lease commences or terminates on a day other than the first or last day of
a Lease Year (based on a 365-day Lease Year). If such taxes for any Lease Year
exceed Estimated Real Property Taxes Allocable to the Premises paid by Tenant
to Landlord pursuant to subsection (d)(i), Tenant shall pay the amount of such
excess to Landlord as Additional Rent within thirty (30) days after receipt of
such statement by tenant. If
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such statement shows such cost to be less than the amount paid by Tenant to
Landlord pursuant to subsection (d)(i), then the amount of such overpayment by
Tenant shall be credited by Landlord to the next Rent payable by Tenant or, if
the Lease has terminated, will be paid to Tenant.
(e) CALCULATIONS. The calculation of Actual Costs and Taxes and
Estimated Costs and Taxes Allocable to the Premises shall be made by Landlord.
Landlord or its agent shall keep records in reasonable detail showing and
supporting all expenditures made for the items enumerated above, which records
and receipts shall be available for inspection by Tenant at any reasonable time.
(f) FURTHER ADJUSTMENT. In the event the Building for any Lease Year
is not fully occupied then the Estimated Costs and Actual Costs for such year
shall be proportionately adjusted by Landlord to reflect those costs which would
have occurred had the Building been fully occupied during such year.
(g) BASE RENT. Notwithstanding anything to the contrary in this
Section 8, the Rent payable by Tenant shall in no event be less than the Rent
specified in Section 1(f) of this Lease.
(i) PERSONAL PROPERTY TAXES. Tenant shall pay, prior to delinquency,
all Personal Property Taxes payable with respect to all personal property of
Tenant located on the Premises or the Building and promptly, upon request of
Landlord, shall provide written proof of such payment. As used herein, "personal
property of Tenant" shall include all improvements which are paid for by Tenant.
"Personal Property Taxes" shall include all property taxes assessed against the
property of Tenant, whether assessed as real or personal property.
9. TENANT IMPROVEMENTS AND ALTERATIONS. Prior to the Commencement Date,
Landlord will, at its sole expense, paint the office space and clean the carpet
in the Premises. In addition to this work, Landlord will provide Tenant with a
tenant improvement allowance of $6.00 per rentable square feet of office space
leased or $58,020.00. Said allowance is to be used solely for the improvement of
the Premises and must be used within the first eighteen (18) months of the Lease
term after which it becomes null and void. To utilize such allowance, Tenant
will provide Landlord with written notice of the specific improvements Tenant
desires to be made. It is agreed that Landlord, or a contractor reasonably
approved in good faith by Landlord, will construct all such improvements, and
Tenant will pay the cost of any improvements in excess of the tenant improvement
allowance.
(a) TENANT IMPROVEMENTS. Landlord shall deliver the Premises to
Tenant with the improvements shown and/or described in Exhibit C, and will
provide an allowance for additional improvements as described in Exhibit C.
All of the work to be performed by Landlord shall be completed in a
workman-like manner in conformance with all applicable building codes, laws,
rules and regulations. Tenant shall, subject to the provisions of paragraph (b)
below, also have the right to construct and install at its sole cost and expense
such additional tenant improvements as are in its judgment necessary or
convenient for its use of the Premises.
(b) ALTERATIONS. Tenant shall not make any structural alterations or
improvements in or additions ("Alterations") to the Premises or make any changes
to locks on doors or add to, disturb or in any way change any of the wiring or
plumbing in the Premises or the Building, without first obtaining the written
consent of Landlord, and, when appropriate, in accordance with plans and
specifications approved by Landlord, which consent shall not be unreasonably
withheld. All such Alterations shall be at the sole cost and expense of Tenant
and shall be performed by contractors or mechanics approved by Landlord, which
consent shall not be unreasonably withheld. All work with respect to any such
Alterations shall be done in good and workmanlike manner, shall be of a quality
equal to or exceeding the then existing construction standards for the Building
and must be of a type, and the floors and ceilings must be finished in a manner,
customary for general office use and
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other uses common to similar office buildings in the vicinity. Such Alterations
shall be diligently prosecuted to completion. All such Alterations shall be
made strictly in accordance with all laws, regulations and ordinances relating
thereto, and no interior improvements installed by Landlord in the Premises
(including Tenant's Work) may be removed unless the same are promptly restored
to a condition similar or better. Landlord hereby reserves the right to require
any contractor or mechanic working the Premises to provide lien waivers and
liability insurance covering such Alterations to the Premises. Tenant shall
give Landlord ten (10) days' written notice of the commencement of any
Alterations and agrees to allow Landlord and its Lender to enter the Premises
at reasonable times and post appropriate notices to avoid liability to
contractors or material suppliers for payment for such Alterations.
Notwithstanding anything contained herein to the contrary. Tenant may make any
nonstructural interior Alterations that do not adversely affect the value of
the Premises, the structural integrity of the Building or any Building system
without Landlord's consent.
No Alterations shall adversely affect either the strength or exterior
appearance, or the mechanical, electric or plumbing services of the Building.
Tenant shall reimburse Landlord for any reasonable sums expended by Landlord
for examinations and approval of architectural or mechanical plans and
specifications of the Alterations. Tenant shall also reimburse Landlord for
reasonable direct costs incurred during any inspection of the Alterations. All
damages or injury done to the Premises or Building by Tenant or by any persons
who may be in or upon the Premises or Building with the express or implied
consent of Tenant, including but not limited to the cracking or breaking of any
glass of windows and doors, shall be paid for by Tenant and Tenant shall pay
for all damage to the Building caused by negligent acts or omissions of Tenant
or Tenant's officers, contractors, agents, invitees, licenses, or employees.
10. CARE OF PREMISES.
(a) TENANT'S MAINTENANCE. Tenant shall take good care of the
Premises throughout the term of the Lease.
(b) LANDLORD'S MAINTENANCE. Landlord shall make, at its sole cost
and expense, all repairs and replacements and perform all maintenance necessary
to keep the Premises, the Building and the common areas in good working order
and repair and to maintain the Building and Premises in a clean, safe and
tenantable condition comparable to other first class office buildings in
Seattle, Washington. This maintenance and repair shall include without
limitation the roof, foundation, exterior walls, interior walls, all structural
components, utility lines, all systems, equipment and facilities serving the
Premises and the Building, such as mechanical, electrical, HVAC, plumbing and
sewer, replacement of lighting tubes, lamp ballasts and bulbs, and
extermination and pest control when necessary, and snow and ice removal, unless
such repair is Tenant's responsibility pursuant to Section 10(a). Landlord's
work under this Section 10 shall be accomplished with the least possible amount
of interference with the conduct of Tenant's business and, to the extent
practicable, shall be done after normal business hours.
11. ACCEPTANCE OF PREMISES. If this Lease shall be entered into prior
to the completion of tenant improvements in the Premises, the acceptance of the
Premises by Tenant shall be deferred until Landlord informs Tenant of the
completion of such construction. Within ten (10) days ("Inspection Period")
after Landlord informs Tenant of such completion, Tenant shall make such
inspection of the Premises as Tenant deems appropriate. Except as otherwise
specified by Tenant in writing to Landlord within the Inspection Period, Tenant
shall be deemed to have accepted the Premises in their then condition. If, as a
result of such inspection, Tenant discovers minor deviations or variations from
the plans and specifications for Tenant's improvements of a nature commonly
found on a "punch list" (as the term is used in the construction industry),
Tenant shall during the Inspection Period, notify Landlord of such deviations.
Landlord shall promptly repair all punch list items. The existence of such
punch list items, provided the correction thereof does not unreasonably
interfere with Tenant's
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<PAGE> 15
use of the Premises, shall not postpone the Commencement Date of this Lease or
the obligation of Tenant to pay Rent.
12. ACCESS. Tenant shall permit Landlord and its agents to enter into
and upon the Premises at all reasonable times upon timely notice to Tenant,
except in emergencies, for the purpose of inspecting the same or for the
purpose of cleaning, repairing, altering or improving the Premises or the
Building. Nothing contained in this Section 12 shall be deemed to impose any
obligation upon Landlord not expressly stated elsewhere in this Lease. When
reasonably necessary Landlord may temporarily close entrances, doors,
corridors, elevators or other facilities for a reasonable duration, without
liability to Tenant by reason of such closure and without such action by
Landlord being construed as an eviction of Tenant or release of Tenant from the
duty of observing and performing any of the provisions of this Lease. Landlord
shall have the right to enter the Premises upon timely notice to Tenant, except
in emergencies, for the purpose of showing the Premises to prospective tenants
within the period of one hundred eighty (180) days prior to the expiration or
sooner termination of the Lease term. Landlord will use its best efforts to
minimize the impact on Tenant's business of any entry by Landlord on the
Premises.
13. DAMAGE OR DESTRUCTION.
(a) DAMAGE AND REPAIR. If the Building or the Premises are
damaged by fire or any other cause to such extent that the cost of restoration,
as reasonably estimated by Landlord, will equal or exceed thirty percent (30%)
of the replacement value of the Building (exclusive of foundations) just prior
to the occurrence of the damage, or if insurance proceeds sufficient for
restoration are for any reason unavailable, then Landlord may no later than the
sixtieth day following the damage, give Tenant a notice of Landlord's election
to terminate this Lease. In the event of such election this Lease shall be
deemed to terminate on the third day after the giving of such notice, and
Tenant shall surrender possession of the Premises within a reasonable time
thereafter, and the Rent and Additional Rent shall be apportioned as of the
date of Tenant's surrender and any Rent paid for any period beyond such date
shall be repaid to Tenant. If the cost of restoration as estimated by Landlord
shall amount to be less than thirty percent (30%) of said replacement value of
the Building and insurance proceeds sufficient for restoration are available,
or if Landlord does not elect to terminate this Lease, Landlord shall restore
the Building and the Premises (to a functional unit similar to the Premises
prior to such damages) with reasonable promptness, subject to delays beyond
Landlord's control and delays in making of insurance adjustments by Landlord,
and Tenant shall have no right to terminate this Lease except as provided in
this Section 13. If the Premises are to be restored, the Rent shall be reduced,
based on the proportion of the square footage of the Premises rendered
untenantable, except in the event such damage resulted from or was contributed
to, directly or indirectly, by the act, fault or neglect of Tenant, Tenant's
officers, contractors, agents, employees, invitees or licensees, in which event
Rent shall abate only to the extent Landlord receives proceeds from any rental
income insurance policy to compensate Landlord for loss of Rent hereunder.
(b) DESTRUCTION DURING LAST YEAR OF TERM. In case the Building
shall be substantially destroyed by fire or other cause at any time during the
last Lease Year of this Lease, either Landlord or Tenant may terminate this
Lease by written notice to the other party.
(c) BUSINESS INTERRUPTION. No damages, compensation or claim
shall be payable by Landlord for inconvenience, loss of business or annoyance
arising from any repair or restoration of any portion of the Premises or the
Building. Landlord shall use its best efforts to effect such repairs promptly.
(d) TENANT IMPROVEMENTS. Landlord will not be required to carry
insurance of any kind for any improvement paid for by Tenant as provided in
Exhibit C or for Tenant's furniture, furnishings, fixtures, equipment or
appurtenances of Tenant under this Lease and Landlord shall not be obligated to
repair any damage thereto or replace the same, unless such damage is caused by
Landlord's negligence.
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<PAGE> 16
(e) EXPRESS AGREEMENT. The provisions of this Section 13 shall be
considered an express agreement governing any case of damage or destruction of
the Building or Premises by fire or other casualty.
14. WAIVER OF SUBROGATION. Whether any loss or damage to the Premises,
the Building, or any property therein, is due to the negligence of either
Landlord or Tenant, their agents or employees, or any other cause, Landlord and
Tenant do each hereby waive any rights each may have against the other on
account of any loss or damage arising from any risk actually covered by
insurance policies held by the damaged party. Each party shall use best efforts
to cause its insurance carriers to consent to the foregoing waiver of rights of
subrogation against the other party. This clause shall be effective if, and
only to the extent, that it does not impair any insurance carried by either
party, only if the required waiver of subrogation endorsements can be obtained
at a commercially reasonable cost, and only to the extent of proceeds actually
received.
15. INDEMNIFICATION. Each party shall indemnify and hold the other
harmless from and against all common law or statutory liabilities, damages,
injuries, obligations, losses, claims, civil actions, costs, or expenses,
including attorneys fees, arising with respect to Tenant, from any act,
omission, or negligence of Tenant or its officers, contractors, licensees,
agents, servants, employees, guests, or invitees, in or about the Building or
the Premises, with respect to Landlord, from any act, omission or negligence of
Landlord or its officers, agents and employees, occurring in or about the
Building or the Premises or with respect to either party arising from any
breach or default under this Lease. As part of such indemnity, each party
waives its immunity from suit under the provisions of RCW 51, et seq.
Neither party shall be liable for any loss or damage to persons or
property sustained by the other party or other persons, which may be caused by
theft, or by any act or neglect of any tenant or occupant of the Building or
any other third parties unless such loss or damage is due to the other party's
negligence.
16. INSURANCE.
(a) LIABILITY INSURANCE. Tenant shall, throughout the term of this
Lease and any renewal hereof, at its own expense, keep and maintain in full
force and effect, a policy of comprehensive general liability insurance
including a contractual liability endorsement covering Tenant obligations under
Section 15, insuring Tenant's activities upon, in or about the Premise, the
Building, or the Property, against claims of bodily injury or death or property
damage or loss with a limit of not less than One Million Dollars ($1,000,000)
combined single limit.
(b) PROPERTY INSURANCE. Tenant shall throughout the term of this
Lease and any renewal hereof at its own expense, keep and maintain in full
force and effect, what is commonly referred to as "all risk" coverage insurance
(but excluding earthquake and flood) on the leasehold improvements constructed
by Tenant in the Premises and on the personal property of Tenant in the
Premises in an amount not less than the current one hundred percent (100%)
replacement value thereof.
(c) INSURANCE POLICY REQUIREMENTS. All insurance required under this
Section 16 shall be with companies reasonably approved by Landlord. No
insurance policy required under this Section 16 shall be cancelled or reduced
in coverage and each insurance policy shall provide that it is not subject to
cancellation or a reduction in coverage except after thirty (30) days prior
written notice to Landlord.
Tenant shall deliver to Landlord on or before the Commencement Date
and from time to time thereafter, copies of policies of such insurance or
certificates evidencing the existence and amounts of same and naming Landlord
as additional insured thereunder. In no event shall the Limits of any insurance
policy required under Section 16 be considered as limiting the liability of
Tenant under this Lease.
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<PAGE> 17
17. ASSIGNMENT AND SUBLETTING.
(a) ASSIGNMENT OR SUBLEASE. Tenant shall not assign, mortgage,
encumber or otherwise transfer this Lease or sublet the whole or any part of
the Premises without in each case first obtaining Landlord's prior written
consent. Such consent shall not be withheld except, (1) Landlord may withhold
its consent if in Landlord's judgment occupancy by any proposed assignee,
subtenant or other transferee; (i) is not consistent with the maintenance and
operation of a first-class office building due to the proposed occupant's
nature or manner of conducting business, (ii) is likely to cause disturbance to
the customary use and occupancy of the Building by other tenants, their
employees, customers, clients or other guests or visitors, or (iii) is not
reasonably deemed by Landlord to be financially responsible, (2) Landlord may
withhold, in its absolute and sole discretion, consent to any mortgage,
hypothecation, pledge or other encumbrance of any interest in this Lease by
Tenant or any subtenant, whereby this Lease or any interest therein becomes
collateral for any obligation of Tenant or any other person; and (3) Landlord
may withhold its consent to the extent Landlord determines necessary to comply
with a restriction on use of the Premises, the Building or the Property
contained in any lease, mortgage, or other agreement or instrument by which the
Landlord is bound or to which any of such property is subject. No such
assignment, subletting or other transfer shall relieve Tenant of any liability
under this Lease. Consent to any such assignment, subletting or transfer shall
not operate as a waiver of the necessity for consent to any subsequent
assignment, subletting or transfer. Landlord reserves the right to terminate
this Lease in the event of a requested assignment, subletting or transfer of
this Lease by Tenant. In the event less than the entire Premises are to be
subleased, Landlord retains the right to terminate this Lease with respect to
the portion of the Premises for which such consent is requested, at the proposed
effective date of such subletting, in which event Landlord shall enter into the
relationship of Landlord and Tenant with any such subtenant or assignee as to
the subleased portion, based on the rent (and/or other compensation) and the
term agreed to by such subtenant or assignee and otherwise upon the terms and
conditions of this Lease. In connection with an assignment or subletting, Tenant
shall pay the reasonable cost of processing such assignment or subletting,
including attorneys fees, upon demand of Landlord. Tenant shall provide Landlord
with copies of all assignments, subleases and assumption instruments.
If Tenant is a corporation, any transfer of this Lease by merger,
consolidation or liquidation, or any change in the ownership of, a majority of
its outstanding voting stock shall constitute an assignment for the purpose of
this Section 17.
Notwithstanding anything herein to the contrary, Landlord shall not
reasonably withhold its consent to the following transfers:
(i) the issuance and private placement of additional shares of
Tenant's corporate stock for the sole purpose of infusing venture capital
monies into the Tenant; or
(ii) any transfer of shares of stock of Tenant which are
publicly traded or listed or which constitute an initial public offering; or
(iii) any sale or merger by Tenant with a corporation which is
publicly traded; or
(iv) any sale or transfer of shares of Tenant's stock which
does not result in a change in the present control of Tenant by the person(s)
now owning a majority of the Tenant's shares.
If Tenant is a partnership, any transfer of this Lease by merger,
consolidation liquidation, dissolution, or any change in the ownership of a
majority of the partnership interests shall constitute an assignment for the
purpose of this Section 17.
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<PAGE> 18
(b) ASSIGNEE OBLIGATIONS. As a condition to Landlord's approval
of any assignment, any potential assignee otherwise approved by Landlord shall
assume in writing all obligations of Tenant under this Lease and shall be
jointly and severally liable with Tenant for the payment of Rent and
performance of all terms, covenants and conditions of this Lease.
(c) SUBLESSEE OBLIGATIONS. Any sublessee shall assume all
obligations of Tenant as to the portion of the Premises which is subleased to
such sublessee and shall be jointly and severally liable with Tenant for rental
and other payments and performance of all terms, covenants and conditions of
such approved sublease.
18. SIGNS. Tenant shall not inscribe any inscription, or post, place,
or in any manner display any sign, graphics, notice, picture, placard or
poster, or any advertising matter whatsoever upon the glass panes or supports
of the windows and doors, or upon the exterior walls of the Premises or the
Building, or at any places visible (either directly or indirectly as an outline
or shadow on a glass pane) from anywhere outside the Premises without first
obtaining Landlord's written consent thereto, such consent to be at Landlord's
sole discretion. Any such consent by Landlord shall be upon the understanding
and condition that Tenant shall remove the same at the expiration or sooner
termination of this Lease and Tenant shall repair any damage to the Premises or
the Building caused thereby.
19. LIENS AND INSOLVENCY.
(a) LIENS. Tenant shall keep its interest in this Lease and any
property of Tenant in the Premises (other than unattached personal property),
the Premises, the Property and the Building free from all liens arising out of
any work performed or materials ordered or obligations incurred or on behalf of
Tenant and Tenant hereby indemnifies and holds Landlord harmless from any
liability from any such lien. In the event any lien is filed against the
Building, the Property or the Premises by any person claiming by, through or
under Tenant, Tenant shall, upon request of Landlord, at Tenant's expense,
immediately either cause such lien to be released of record or furnish to
Landlord a bond in form and amount and issued by a surety satisfactory to
Landlord, indemnifying Landlord, the Property and the Building against all
liability, costs and expenses, including attorneys fees, which Landlord may
incur as a result thereof. Provided that such bond has been furnished to
Landlord, Tenant, at its sole cost and expense and after written notice to
Landlord, may contest, by appropriate proceedings conducted in good faith and
with due diligence, any lien, encumbrance or charge against the Premises, the
Property or the Building arising from work done or materials provided to and for
Tenant, provided such proceedings suspend the collection thereof against
Landlord, and the Premises, Building and Property, and neither the Premises, the
Building, the Property nor any part thereof or interest therein is or will be in
any danger of being sold, forfeited or lost.
(b) INSOLVENCY. If Tenant becomes insolvent or voluntarily or
involuntarily bankrupt, or if a receiver, assignee or other liquidating officer
is appointed for the business of Tenant, Landlord at its option may terminate
this Lease and Tenant's right of possession under this Lease and in no event
shall this Lease or any rights or privileges hereunder be an asset of Tenant in
any bankruptcy, insolvency or reorganization proceeding.
20. DEFAULT.
(a) CUMULATIVE REMEDIES. All rights of Landlord and Tenant herein
enumerated shall be cumulative, and none shall exclude any other right or
remedy allowed by law. In addition to the other remedies in this Lease
provided, either party shall be entitled to restrain by injunction the
violation or attempted violation by the other party of any of the covenants,
agreements or conditions of this Lease.
(b) TENANT'S RIGHT TO CURE. Tenant shall have a period of ten
(10) business days from the day of written notice from Landlord to Tenant
within which to cure any default in the payment of Rent, Additional
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<PAGE> 19
Rent or other sums due hereunder. Each party shall have a period of ten (10)
days from the date of written notice from the other party within which to cure
any other default hereunder, provided, however, that with respect to any such
default which cannot be cured within ten (10) days, the default shall not be
deemed to be uncured if the defaulting party commences to cure within ten (10)
days and for so long as such party is diligently prosecuting the cure thereof.
(c) VACATION AND ABANDONMENT. Vacation shall be defined as a
prolonged absence from the Premises. Abandonment shall be defined as an absence
from the Premises of five (5) business days or more while Tenant is in default
after the expiration of all cure periods. Any vacation or abandonment by Tenant
shall be considered a default with no right to cure, allowing Landlord to
re-enter the Premises under Section 20(d).
(d) LANDLORDS RE-ENTRY. Upon an uncured default of this Lease by
Tenant, Landlord, besides other rights or remedies it may have, at its option,
may enter the Premises or any part thereof, either with or without process of
law, and expel, remove or put out Tenant or any other persons who may be
thereon, together with all personal property found therein; and Landlord may
terminate this Lease, or it may from time to time, without terminating this
Lease and as agent of Tenant, rent the Premises or any part thereof for such
term or terms (which may be for a term less than or extending beyond the term
hereof), and at such rental or rentals and upon such other reasonable terms and
conditions as Landlord in its sole discretion may deem advisable, with the
right to repair, renovate, remodel, redecorate, alter and change the Premises,
Tenant remaining liable for any deficiency computed as hereinafter set forth.
In the case of any default, re-entry and/or dispossession, by summary
proceedings or otherwise, all Rent and Additional Rent shall become due
thereupon and be paid up to the time of such re-entry or dispossession together
with such expenses as Landlord may reasonably incur for attorneys fees,
advertising expenses, brokerage fees and/or putting the Premises in good order
or preparing the same for re-rental together with interest thereon as provided
in Section 35(f) hereof, accruing from the date of any such expenditure by
Landlord.
(e) RELETTING THE PREMISES. At the option of Landlord, rents
received by Landlord from such reletting shall be applied first to the payment
of any indebtedness from Tenant to Landlord other than Rent and Additional Rent
due hereunder; second, to the payment of any costs and expenses of such
reletting and including, but not limited to, attorneys fees and brokerage fees,
and to the payment of any repairs, reasonable renovations, reasonable
remodeling, reasonable redecoration, reasonable alterations and changes in the
Premises; third, to the payment of Rent and Additional Rent due and to become
due hereunder, and if after so applying said rents there is any deficiency in
the Rent or Additional Rent to be part by Tenant under this Lease, Tenant shall
pay any deficiency to Landlord monthly on the dates specified herein and any
payment made or suits brought to collect the amount of the deficiency for any
month shall not prejudice in any way the right of Landlord to collect the
deficiency for any subsequent month. The failure of Landlord to relet the
Premises or any part or parts thereof shall not release or affect Tenant's
ability hereunder. In no event shall Tenant be entitled to receive any excess
of net rents collected over sums payable by Tenant to Landlord hereunder. No
such re-entry or taking possession of the Premises shall be construed as an
election on Landlord's part to terminate this Lease unless a written notice of
such intention be given to Tenant. Notwithstanding any such reletting without
termination, Landlord may at any time thereafter elect to terminate this Lease
for such pervious breach and default. Should Landlord at any time terminate
this Lease by reason of any default, in addition to any other remedy it may
have, it may recover from Tenant any deficiency in the Rent and Additional Rent
reserved in this Lease for the balance of the Term, plus all court costs and
attorneys fees incurred by Landlord in the collection of the same.
(f) WAIVER OF REDEMPTION RIGHTS. Tenant, for itself, and on
behalf of any and all persons claiming through or under it, including creditors
of all kinds, does hereby waive and surrender all rights and privilege which
they or any of them might have under or by reason of any present or future law,
to redeem the Premises or to have a continuance of this Lease for the term
hereof, as it may have been extended, after having
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<PAGE> 20
been dispossessed or ejected therefrom by process of law or under the terms of
this Lease or after the termination of this Lease as herein provided.
(g) NONPAYMENT OF ADDITIONAL RENT. All costs and expenses which
Tenant assumes or agrees to pay to Landlord pursuant to this Lease shall be
deemed Additional Rent and, in the event of nonpayment thereof, Landlord shall
have all the rights and remedies herein provided for in case of nonpayment of
Rent.
21. PRIORITY. This Lease shall be subordinate to any first mortgage or
deed of trust (and any other mortgage or deed of trust upon the written
election of Landlord) now existing or hereafter placed upon the Property, the
Building or the Premises, created by or at the instance of Landlord, and to any
and all advances to be made thereunder and to interest thereon and all
modifications, renewals and replacements or extensions thereof ("Landlord's
Mortgage"), provided that, so long as Tenant is not in default under this
Lease, Tenant's peaceable possession of the Premises and its rights under this
Lease will not be disturbed on account thereof. In the event of any foreclosure
or sale pursuant to the Landlord's Mortgage, Tenant agrees to attorn to such
beneficiary or purchaser. Tenant shall properly execute, acknowledge and
deliver documents which the holder of any Landlord's Mortgage may require to
effectuate the provisions of this Section 21.
22. SURRENDER OF POSSESSION. Subject to the terms of Section 13
relating to damage and destruction, upon expiration of the term of this Lease,
whether by lapse of time or otherwise Tenant shall promptly and peacefully
surrender the Premises to Landlord in as good condition as when received by
Tenant from Landlord or as thereafter improved, reasonable use, wear and tear
and damage by casualty, described in Section 13 excepted.
23. REMOVAL OF PROPERTY.
(a) SIGNS AND PERSONAL PROPERTY. Tenant shall remove (i) all
identifying insignia and design elements which are unique to Tenant's business
and installed by Tenant in or on the Premises, and (ii) all articles of
personal property and all business and trade fixtures, machinery and equipment,
furniture and movable partitions owned by Tenant or installed by Tenant at its
expense in the Premises which can be removed without damage to the Premises at
the expiration or sooner termination of this Lease. Tenant shall pay Landlord
for any damages for injury to the Premises or Building resulting from such
removal. If Tenant shall fail to remove any of its property of any nature
whatsoever from the Premises or the Building within five (5) business days
after the expiration or earlier termination of this Lease, Landlord may remove
and store said property without liability for loss thereof or damage thereto,
such storage to be for the account and at the expense of Tenant. If Tenant
shall not pay the cost of storing any such property after it has been stored
for a period of thirty (30) days or more, Landlord may, at its option, sell, or
permit to be sold, any or all such property at public or sale, in such manner
and at such times and places as Landlord in its sole discretion may deem proper,
without notice to Tenant, unless notice is required under applicable statutes,
and shall apply the proceeds of such sale: first, to the cost and expense of
such sale, including reasonable attorneys fees actually incurred; second, to the
payment of the costs or charges for storing any such property; third, to the
payment of any other sums of money which may then be or thereafter become due
Landlord from Tenant under any of the terms hereof; and, fourth, the balance, if
any, to Tenant.
(b) ALTERATIONS. All Alterations shall remain in and be
surrendered with the Premises as a part thereof at the expiration or earlier
termination of this Lease, without disturbance, molestation or injury, provided
that Landlord may, together with the written notice consenting to the
construction of any such Alterations notify Tenant that they be removed upon
the expiration or earlier termination of this Lease. In such event, all expense
to remove such Alterations and to restore the Premises to standards, prior to
such Alterations, less normal wear and tear, shall be borne by Tenant.
24. NON-WAIVER. Waiver by either party of any term, covenant or
condition herein contained any breach thereof shall not be deemed to be a
waiver of such term, covenant, or condition or of any subsequent
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<PAGE> 21
breach of the same or any other term, covenant, or condition herein
contained. In addition, the subsequent acceptance of Rent or Additional Rent
hereunder by Landlord shall not be deemed to be a waiver of any preceding breach
by Tenant of any term, covenant or condition of this Lease, other than the
failure of Tenant to pay the particular Rent or Additional Rent so accepted,
regardless of Landlord's knowledge of such preceding breach at the time of
acceptance of such Rent or Additional Rent.
25. HOLDOVER. If Tenant shall, with the written consent of Landlord, hold
over after the expiration of the term of this Lease, such tenancy shall be
deemed a month-to-month tenancy which may be terminated as provided by
applicable state law. During such tenancy, Tenant shall be bound by all of the
terms, covenants and conditions herein so far as applicable, except rental which
shall be greater of (a) the ten quoted rates for similar space in the Building,
or (b) the Rent and Additional Rent stated herein.
26. CONDEMNATION.
(a) ENTIRE TAKING. If all of the Premises or such portions of the
Building as may be required for the reasonable use by Tenant of the Premises,
are taken by eminent domain, this Lease shall automatically terminate as of the
date title vests in the condemning authority and all Rent, Additional Rent and
other payments shall be paid to or reimbursed as of that date.
(b) CONSTRUCTIVE TAKING OF ENTIRE PREMISES. In the event of a taking
of a material part of but less than all of the Building, where Landlord shall
determine that the remaining portions of the Building cannot be economically and
effectively used by it (whether on account of physical, economic, aesthetic or
other reasons) or where the Landlord determines the Building should be restored
in such a way as to materially alter the Premises, Landlord shall forward a
written notice to Tenant of such determination not more than sixty (60) days
after the date of taking. The terms of this Lease shall expire upon such date as
Landlord shall specify in such notice but not earlier than sixty (60) days after
the date of such notice. In the event of a taking of a material part, but less
than all, of the Premises, Tenant shall have the right to terminate this Lease
as of the date of such taking.
(c) PARTIAL TAKING. Subject to the provisions of the preceding
Section 26(b), in case of taking of a thirty percent (30%) or less of the square
footage of the Premises, or a portion of the Building not required for the
reasonable use of the Premises, than this Lease shall continue in full force and
effect and the Rent shall be equitably reduced based on the proportion by which
the square footage of the Premises is reduced, such Rent reduction to be
effective as of the date title to such portion vests in the condemning
authority.
(d) AWARDS AND DAMAGES. Landlord reserves all rights to damages to
the Premises for any partial, constructive, or entire taking by eminent domain,
and Tenant hereby assigns to Landlord any right Tenant may have to such damages
or award and Tenant shall make no claim against Landlord or the condemning
authority for damages for termination of the leasehold interest. Tenant shall
have the right, however, to claim and recover from the condemning authority
compensation for any loss to which Tenant may be put for Tenant's moving
expenses, business interruption or taking of Tenant's personal property (not
including Tenant's leasehold interest) provided that such damages may be claimed
only if they are awarded separately in the eminent domain proceedings and not
out of or as part of the damages recoverable by Landlord.
27. NOTICES. All notices under this Lease shall be in writing and
delivered in person or sent by registered or certified mail, postage prepaid, to
Landlord and to Tenant at the Notice Addresses provided in Section 1(j)
(provided that after the Commencement Date any such notice shall be mailed or
delivered by hand to Tenant at the Premises) and to the holder of any Landlord's
Mortgage at such place as such holder shall specify to Tenant in writing, or
such other addresses as may from time to time be designated by any such party in
writing. Notices mailed as aforesaid shall be deemed given on the date of such
mailing.
-16-
<PAGE> 22
28. COSTS AND ATTORNEYS' FEES. If Tenant or Landlord shall bring any
action for any relief against the other, declaratory or otherwise, arising out
of this Lease, including any suit by Landlord for the recovery of Rent,
Additional Rent or other payments hereunder or possession of the Premises, the
losing party shall pay the prevailing party a reasonable sum for attorney's and
paralegal's fees in such suit, at trial and on appeal, and such attorneys fees
shall be deemed to have accrued on the commencement of such action.
29. LANDLORD'S LIABILITY. Anything in this Lease to the contrary
notwithstanding, covenants, undertakings and agreements herein made on the part
of Landlord are made and intended not as personal covenants, undertakings and
agreements for the purpose of binding Landlord personally or the assets of
Landlord but are made and intended for the purpose of binding only the
Landlord's interest in the Premises, the Building, and the Property, as the
same may from time to time be encumbered. No personal liability or personal
responsibility is assumed by, nor shall at any time be asserted or enforceable
against Landlord or its members or their respective heirs, legal
representatives, successors or assigns on account of the Lease or on account of
any covenant, undertaking or agreement of Landlord in this Lease contained.
30. LANDLORD'S CONSENT. Except as specified in other provisions of this
Lease, whenever Landlord's consent is required under the terms hereof, such
consent shall not be unreasonably withheld, provided, the withholding of
Landlord's consent due to any mortgagee's refusal to grant its consent, shall
not be deemed unreasonable.
31. ESTOPPEL CERTIFICATES. Tenant shall, from time to time, upon written
request of Landlord, execute, acknowledge and deliver to Landlord or its
designee a written statement stating the date this Lease was executed and the
date it expires; the date the term commenced and the date Tenant accepted the
Premises; the amount of minimum monthly Rent and the date to which such Rent
has been paid; and certifying; that this Lease is in full force and effect and
has not been assigned, ratified, supplemented or amended in any way (or
specifying the date and terms of agreement so affecting this Lease); that this
Lease represents the entire agreement between the parties as to this leasing;
that all conditions under this Lease to be performed by the Landlord have been
satisfied; that all required contributions by Landlord to Tenant on account of
Tenant's improvements have been received; that on this date there are no
existing claims, defenses or offsets which the Tenant has against the
enforcement of this Lease by the Landlord; that no Rent has been paid more than
one month in advance; and that no security has been deposited with Landlord
(or, if so, the amount thereof). It is intended that any such statement
delivered pursuant to this paragraph may be relied upon by a prospective
purchaser of Landlord's interest or assignee of any mortgage upon Landlord's
interest in the Building. If Tenant shall fail to respond within ten (10) days
of receipt by Tenant of a written request by Landlord as herein provided,
Tenant shall be deemed to have given such certificate as above provided without
modification and shall be deemed to have admitted the accuracy of any
information supplied by Landlord to a prospective purchaser or mortgagee and
to have certified that this Lease is in full force and effect, that there are
no uncured defaults in Landlord's performance, that the security deposit is as
stated in the Lease, and that not more than one month's Rent has been paid in
advance.
32. TRANSFER OF LANDLORD'S INTEREST. In the event of any transfer or
transfers of Landlord's interest in the Premises, the Building, or the Property
other than a transfer for security purposes only, the transferor shall be
automatically relieved of any and all obligations and liabilities on the part
of Landlord accruing from and after the date of such transfer, provided the
transferee accepts the obligations of Landlord under the Lease, and such
transferee shall have no obligation or liability with respect to any matter
occurring or arising prior to the date of such transfer. Tenant agrees to
attorn to the transferee.
33. RIGHT TO PERFORM. If Tenant shall fail to pay any sum of money
required to be paid by it hereunder, or shall fail to perform any other act on
its part to be performed hereunder, and such failure shall continue for ten
(10) days after notice thereof by Landlord, Landlord may, but shall not be
obligated so to do, and
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<PAGE> 23
by any such broker, finder or other person on the basis of any arrangements or
agreement made or alleged to have been made by or on behalf of Tenant. The
provisions of this Section 37(c) shall not apply to brokers with whom Landlord
has an express written broker agreement.
(d) ENTIRE AGREEMENT. This Lease contains all covenants and
agreements between Landlord and Tenant relating in any manner to the leasing,
use and occupancy of the Premises, and to Tenant's use of the Building and
other manners set forth in this Lease. No prior agreements or understanding
pertaining to the same shall be valid or of any force or effect. The covenants
and agreements of this Lease shall not be altered, modified or added to except
in writing signed by Landlord and Tenant.
(e) SEVERABILITY. Any provision of this Lease which shall prove
to be invalid, void or illegal shall in no way affect, impair or invalidate any
other provision hereof and the remaining provisions hereof shall nevertheless
remain in full force and effect.
(f) OVERDUE PAYMENTS. Any Rent, Additional Rent or other sums
payable by Tenant to Landlord under this Lease which shall not be paid upon the
due date thereof, shall bear interest at a rate equal to three percentage
points above the prime rate of interest stated from time to time by
Seattle-First National Bank or its successor, or, in the absence of an
established prime rate, five percentage points over that bank's rate for one
year certificates of deposit, but not in excess of the highest lawful rate
permitted under applicable laws, calculated from the original due date thereof
to the date of payment.
(g) FORCE MAJEURE. Except for the payment of Rent, Additional
Rent or other sums payable by Tenant to Landlord, time periods for Tenant's or
Landlord's performance under any provision, of this Lease shall be extended for
periods of time during which Tenant's or Landlord's performance is prevented
due to circumstances beyond Tenant's or Landlord's control, including without
limitation, strikes, embargoes, shortages of labor or materials, governmental
regulations, acts of God, war or other strife.
(h) RIGHT TO CHANGE PUBLIC SPACES. Landlord shall have the right
at any time after the completion of the Building, without thereby creating an
actual or constructive eviction or incurring any liability to Tenant therefor,
to change the arrangement or location of such of the following as are not
contained within the Premises or any part thereof: entrances, passageways, doors
and doorways, corridors, stairs, toilets, and other like public service
portions of the Building. Nevertheless, in no event shall Landlord diminish any
service, change the arrangement or location of the elevators serving the
Premises, make any change which shall diminish the area of the Premises, or
make any change which shall change the character of the Building from that of a
first-class office building.
(i) GOVERNING LAW. This Lease shall be governed by and construed
in accordance with the laws of the state of Washington.
(j) BUILDING DIRECTORY. Landlord shall maintain in the lobby of
Building a directory which shall include the name of Tenant and any other names
reasonably requested by Tenant in proportion to the number of listings given to
comparable tenants of the Building.
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<PAGE> 24
(k) BUILDING NAME. The Building will be known by such name as
Landlord may designate from time to time.
IN WITNESS WHEREOF this Lease has been executed the day and year first
above set forth.
LANDLORD: MERRILL PLACE, LLC, a Washington limited
liability company
By /s/ [SIGNATURE ILLEGIBLE]
------------------------------------------
Its Manager
---------------------------------------
TENANT: FREESHOP INTERNATIONAL, INC.
By /s/ [SIGNATURE ILLEGIBLE]
------------------------------------------
Its President & CEO
---------------------------------------
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
I certify that I know or have satisfactory evidence that Kevin Daniels is
the person who appeared before me and said person acknowledged that he/she
signed this instrument, on oath stated that he/she was authorized to execute
the instrument as the Manager of MERRILL PLACE, LLC to be the free and
voluntary act and deed of said limited liability company, for the uses and
purposes mentioned in the instrument.
WITNESS my hand and official seal hereto affixed this 23rd date of
September, 1997.
/s/ LINDA PIERATT
--------------------------------------
(Print name) LINDA PIERATT
--------------------------
Notary Public in and for the State of
Washington.
My appointment expires 8-19-00
----------------
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
I certify that I know or have satisfactory evidence that Michael
Schutzler is the person who appeared before me and said person acknowledged
that he/she signed this instrument, on oath stated that he/she was authorized
to execute the instrument as the President & CEO of
-20-
<PAGE> 25
FREESHOP INTERNATIONAL, INC. to be the free and voluntary act and deed of said
corporation, for the uses and purposes mentioned in the instrument.
WITNESS my hand and official seal hereto affixed this 23 day of September,
1997.
/s/ JOAN MCCLAFLIN
----------------------------------------
(Print Name) Joan McClaflin
Notary Public in and for the State of
Washington.
My appointment expires 1-10-99
-21-
<PAGE> 26
EXHIBIT A
LEGAL DESCRIPTION OF PROPERTY
<PAGE> 27
EXHIBIT A
LEGAL DESCRIPTION
LEGAL DESCRIPTION:
PARCEL 1:
THAT PORTION OF BLOCK 4 OF D. S. MAYNARD'S PLAT OF SEATTLE, AS PER PLAT RECORDED
IN VOLUME 1 OF PLATS, PAGE 23, RECORDS OF KING COUNTY, AND OF VACATED ALLEY IN
SAID BLOCK, AND OF AN UNPLATTED STRIP OF LAND IN SECTION 6, TOWNSHIP 24 NORTH,
RANGE 4 EAST W.M., DESCRIBED AS FOLLOWS:
BEGINNING ON THE NORTHERLY LINE OF LOT 8 IN SAID BLOCK AT A POINT 9.0 FEET
WESTERLY OF THE NORTHEAST CORNER THEREOF; THENCE SOUTHERLY PARALLEL WITH THE
EASTERLY LINE OF SAID BLOCK, A DISTANCE OF 75.00 FEET; THENCE WESTERLY PARALLEL
WITH THE NORTHERLY LINE OF SAID BLOCK, A DISTANCE OF 119.00 FEET TO THE
CENTERLINE OF THE ALLEY THEREIN; THENCE SOUTHERLY ALONG THE CENTERLINE OF SAID
ALLEY, 165.00 FEET TO THE EASTERLY PRODUCTION OF THE SOUTHERLY LINE OF SAID LOT
4 IN SAID BLOCK; THENCE CONTINUING SOUTHERLY ALONG THE PRODUCTION OF THE
CENTERLINE OF SAID ALLEY, A DISTANCE OF 16.716 FEET TO THE GOVERNMENT MEANDER
LINE, THENCE WEST ALONG SAID MEANDER LINE, 150.408 FEET TO AN ANGLE POINT IN
SAID MEANDER LINE; THENCE NORTHERLY ALONG SAID MEANDER LINE TO A POINT DUE WEST
OF THE NORTHWEST CORNER OF LOT 1 IN SAID BLOCK; THENCE EAST TO THE NORTHWEST
CORNER OF SAID LOT 1; THENCE EASTERLY ALONG THE NORTHERLY LINE OF SAID BLOCK, A
DISTANCE OF 247.00 FEET TO THE POINT OF BEGINNING;
EXCEPT ALL COAL AND MINERALS AND THE RIGHT TO EXPLORE FOR AND MINE THE SAME, AS
EXCEPTED BY DEED RECORDED UNDER KING COUNTY RECORDING NO. 3528837, COVERING THE
SOUTH 45 FEET OF LOT 2, ALL OF LOTS 3 AND 4, THAT PORTION OF THE WEST 1/2 OF
VACATED ALLEY ADJOINING, AND THOSE PORTIONS OF THE UNPLATTED STRIP IN SECTION 6
ADJOINING;
SITUATE IN THE CITY OF SEATTLE, COUNTY OF KING, STATE OF WASHINGTON.
PARCEL 2:
THE WEST 111 FEET OF LOT 5 IN BLOCK 4 OF D. S. MAYNARD'S PLAT OF SEATTLE, AS PER
PLAT RECORDED IN VOLUME 1 OF PLATS, PAGE 23, RECORDS OF KING COUNTY;
TOGETHER WITH THAT PORTION OF UNPLATTED STRIP OF LAND IN SECTION 6, TOWNSHIP 24
NORTH, RANGE 4 EAST W.M., LYING BETWEEN THE WEST 111 FEET OF LOT 5 IN BLOCK 4 OF
D. S. MAYNARD'S PLAT OF SEATTLE, AS PER PLAT RECORDED IN VOLUME 1 OF PLATS, PAGE
23, RECORDS OF KING COUNTY, AND THE GOVERNMENT MEANDER LINE, DESCRIBED AS
FOLLOWS:
BEGINNING AT THE SOUTHWEST CORNER OF SAID LOT 5; THENCE SOUTHERLY 16.801 FEET TO
THE SAID MEANDER LINE;
-16-
<PAGE> 28
THENCE EASTERLY ALONG THE SAID MEANDER LINE 111.00 FEET, MORE OR LESS TO THE
WEST MARGINAL LINE OF FIRST AVENUE SOUTH; THENCE NORTHERLY ALONG THE WEST
MARGINAL LINE OF FIRST AVENUE SOUTH 17.971 FEET TO THE SOUTH MARGINAL LINE OF
SAID LOT 5; THENCE WESTERLY 111.00 FEET TO THE POINT OF BEGINNING;
AND TOGETHER WITH THAT PORTION OF THE EASTERLY 1/2 OF THE VACATED ALLEY IN
BLOCK 4 OF D. S. MAYNARD'S PLAT OF SEATTLE, AS PER PLAT RECORDED IN VOLUME 1 OF
PLATS, PAGE 23, RECORDS OF KING COUNTY, DESCRIBED AS FOLLOWS:
BEGINNING AT THE NORTHWEST CORNER OF LOT 5 IN BLOCK 4 OF SAID PLAT; THENCE WEST
8 FEET; THENCE SOUTHERLY ALONG THE CENTERLINE OF SAID VACATED ALLEY 76.716 FEET
TO THE GOVERNMENT MEANDER LINE; THENCE EASTERLY ALONG THE SAID MEANDER LINE 8
FEET, MORE OR LESS, TO THE EASTERLY MARGINAL LINE OF SAID VACATED ALLEY PRODUCED
SOUTH; THENCE NORTHERLY 76.801 FEET TO THE POINT OF BEGINNING;
SITUATE IN THE CITY OF SEATTLE, COUNTY OF KING, STATE OF WASHINGTON.
PARCEL 3:
THE WEST 111 FEET OF LOT 6 AND THE WEST 111 FEET OF THE SOUTH 45 FEET OF LOT 7
IN BLOCK 4 OF D. S. MAYNARD'S PLAT OF SEATTLE, AS PER PLAT RECORDED IN VOLUME 1
OF PLATS, PAGE 23, RECORDS OF KING COUNTY;
TOGETHER WITH THE EAST 1/2 OF VACATED ALLEY ADJOINING;
SITUATE IN THE CITY OF SEATTLE, COUNTY OF KING, STATE OF WASHINGTON.
<PAGE> 29
EXHIBIT B
FLOOR PLAN OF PREMISES
<PAGE> 30
EXHIBIT B
[OVERALL & DEMOLITION 3RD FLOOR PLAN]
<PAGE> 31
EXHIBIT C
TENANT IMPROVEMENTS
<PAGE> 32
To be attached
<PAGE> 33
EXHIBIT D
MEMORANDUM OF LEASE
<PAGE> 34
MEMORANDUM OF LEASE
THIS MEMORANDUM OF LEASE, made as of 9/23, 1997, by and between MERRILL
PLACE, LLC, a Washington limited liability company ("Landlord") and FREESHOP
INTERNATIONAL, INC. ("Tenant").
WITNESSETH:
IN CONSIDERATION of the rents reserved in that certain Lease Agreement
between the parties dated September 23, 1997, and of the terms, covenants,
conditions and agreements on the part of Tenant therein, Landlord leases to
Tenant certain real property located in the City of Seattle, County of King,
State of Washington, upon which Landlord owns a building to be used for
Tenant's offices, which property is designated in said Lease Agreement and
located on a portion of the real property described on Exhibit A attached
hereto and made a part hereof; together with all and singular the building or
buildings, privileges and advantages, with any and all appurtenances belonging
or in any way appertaining to the real property hereby leased, including the
right in Tenant, its successors, assigns, subtenants, employees, customers,
licensees and invitees or use the sidewalks, common areas and access areas to
and from public streets and highways.
TO HAVE AND TO HOLD the premises for the initial term of three (3) years,
ending September 30, 2000, with one option to extend the term for one (1)
additional period of three (3) years each, upon the terms, covenants and
conditions specified in the Lease Agreement.
IN WITNESS WHEREOF, the parties executed this instrument the date first
above written.
"LANDLORD" MERRILL PLACE LLC
By NSD, LLC, its Manager
By: /s/ KEVIN DANIELS
------------------------------
Member
"TENANT" FREESHOP INTERNATIONAL, INC.
By: /s/ MICHAEL SCHUTZLER
-----------------------------
Its President & CEO
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
I certify that I know or have satisfactory evidence that Kevin Daniels is
the person who appeared before me and said person acknowledged that he/she
signed this instrument, on oath stated that he/she was authorized to execute
the instrument as the Manager of MERRILL PLACE, LLC to be the free and
voluntary act and deed of said limited liability company, for the uses and
purposes mentioned in the instrument.
<PAGE> 35
WITNESS my hand and official seal hereto affixed this 23rd day of
September, 1997.
/s/ LINDA PIERATT
----------------------------------------
(Print name) Linda Pieratt
Notary Public in and for the State of
Washington
My appointment expires 8-19-00
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
I certify that I know or have satisfactory evidence that Michael Schutzler
is the person who appeared before me and said person acknowledged that he/she
signed this instrument, on oath stated that he/she was authorized to execute
the instrument as the President & CEO of FREESHOP INTERNATIONAL, INC. to be the
free and voluntary act and deed of said corporation, for the uses and purposes
mentioned in the instrument.
WITNESS my hand and official seal hereto affixed this 23 day of September,
1997.
/s/ JOANN MCCLAFLIN
----------------------------------------
(Print name) Joann McClaflin
Notary Public in and for the State of
Washington.
My appointment expires 1-10-99
<PAGE> 36
EXHIBIT E
ADDITIONAL TERMS OF LEASE
<PAGE> 37
None
<PAGE> 38
AMENDMENT TO LEASE
THIS AMENDMENT TO LEASE (the "Amendment") is made and entered into this
_____ day of February, 1999, by and between MERRILL PLACE, LLC, a Washington
limited liability company ("Landlord"), and FREESHOP INTERNATIONAL, INC.
("Tenant").
RECITALS:
A. On the 23rd day of September, 1997, Landlord and Tenant entered into
a Lease Agreement (the "Lease"), which Lease provides for the lease by Landlord
to Tenant of certain premises consisting of 9,670 square feet of office floor
area on the third floor and 2,117 square feet of balcony floor area (the
"Original Premises") of the Schwabacher Warehouse Building located at 95 South
Jackson Street, Seattle, King County, Washington (the "Warehouse Building").
B. Tenant has exercised its right of first opportunity to lease
additional space in the Building pursuant to Paragraph 36 of the Lease.
C. The parties hereto desire by these presents to amend the Lease in
certain respects to reflect the lease of such additional space by Landlord to
Tenant.
NOW, THEREFORE, for and in consideration of the recitals, which are
incorporated herein, and other good and valuable consideration, the parties
hereto agree that the Lease shall be, and the same is hereby amended as follows:
1. Additional Space. Landlord hereby leases to Tenant, and Tenant hereby
leases from Landlord, approximately 900 rentable square feet of floor area on
the first floor and approximately 8,233 rentable square feet of floor area on
the second floor of the Warehouse Building (the "Additional Space") (hereinafter
the Original Premises and Additional Space are collectively called the
"Premises"), upon the same terms and conditions contained in the Lease, except
as provided otherwise herein. The Additional Space is shown on the drawing
attached hereto as Exhibit A and incorporated herein by this reference.
2. Rentable Area. The exact measurement of the Additional Space will be
computed by an AIA architect based upon BOMA standards and, upon completion, the
parties will execute an addendum to this Amendment setting forth the actual
square footage of the Premises and the percentage of square footage of the
Premises compared to the area of the Building utilized for office space.
3. Pocket Space. Tenant will be allowed to pocket up to 4,000 rentable
square feet of the Additional Space shown on the drawing attached hereto as
Exhibit B and incorporated herein by this reference (the "Pocket Space") through
December 31, 1999, upon written notice to Landlord. The Pocket Space can be
occupied by Tenant at any time but must be taken in increments of a minimum of
1,000 square feet. Tenant will commence paying rent for the Pocket Space upon
the earlier to occur of the date of its occupancy of the Pocket Space or
December 31, 1999.
-1-
<PAGE> 39
4. Commencement Date for Additional Space. The Lease commencement date
for the Additional Space (the "Commencement Date for the Additional Space")
shall be the later to occur of June 1, 1999, or the date of substantial
completion of the Tenant Improvements (defined below); provided that if Tenant
causes delays in the construction schedule set forth in paragraph 12 below, the
Commencement Date for the Additional Space will be June 1, 1999.
5. Expiration Date. The expiration date of the Lease is hereby extended
from September 30, 2000, to May 31, 2003 (the "Termination Date"). All of
Tenant's rights to lease the Premises will terminate on the Termination Date.
6. No Further Options to Renew. Paragraph 35 of the Lease (Option to
Renew) is hereby deleted in its entirety, and Tenant shall have no option to
renew the Lease term after the Termination Date.
7. Early Termination. Tenant may terminate the Lease upon the second and
third anniversary of the Commencement Date for the Additional Space, at no
additional cost to Tenant, provided that Tenant gives at least 270 days prior
written notice to Landlord. Notwithstanding the foregoing, this early
termination right is contingent upon Landlord not being able to provide Tenant
with additional expansion space within Merrill Place to meet Tenant's expansion
requirements noted to in its termination notice.
8. Rent for Additional Space. Tenant shall pay Landlord rent based on
the following schedule for all occupied office space commencing on the
Commencement Date for the Additional Space:
<TABLE>
<CAPTION>
ADDITIONAL SPACE ORIGINAL PREMISES
MONTHS $/RSF/YEAR $/RSF/YEAR
<S> <C> <C>
1-12 $18.50 $21.00
13-24 $19.50 $22.00
25-36 $20.50 $23.00
37-48 $21.50 $24.00
</TABLE>
Rent for the balcony space shall remain at $4.00 per square foot per year
throughout the term of the Lease.
9. Right of First Opportunity. Paragraph 36 is hereby amended to read as
follows:
36. RIGHT OF FIRST OPPORTUNITY. During the term of the Lease,
provided Tenant is not in default, Tenant shall have the right of first
opportunity to lease all office space in the Building (the "Expansion
Space") when the same becomes available, prior to the Expansion Space
being offered to a third party. Landlord will notify Tenant in writing
of the availability of the Expansion Space, and Tenant shall have five
(5) business days to accept the space. The Expansion Space will be
leased on the terms and conditions to be negotiated by Landlord and
Tenant prior to Tenant's occupancy of the Expansion Space.
-2-
<PAGE> 40
10. Operating Expenses. Paragraph 8(vi) of the Lease is hereby amended
to read as follows:
"Base Service Year" shall mean 1997 for the Original Premises and 1999
for the Additional Space.
11. Landlord Improvements. Landlord agrees to make the following
improvements to or for the Additional Space and its systems (the "Landlord
Improvements"):
a. Landlord will provide adequate electrical capacity for normal
office use to the main distribution panel. Distribution throughout the
Additional Space is part of Tenant Improvement costs.
b. Landlord will upgrade and add new HVAC equipment into the
Additional Space at its sole cost, but distribution from each heat pump unit is
part of the Tenant Improvement costs.
c. Landlord will contribute up to a maximum of $20,000 for the
installation of new windows on the south exterior of the Premises (either floor)
or for improvements or repairs to the current windows. Any additional costs
above $20,000 will be borne by Tenant as part of the Tenant Improvements.
12. Tenant Improvements. Landlord will construct all improvements to the
Premises requested by Tenant (the "Tenant Improvements") according to plans and
specifications approved by Landlord and Tenant. The Commencement Date for the
Additional Space of June 1, 1999, is contingent upon Landlord and Tenant meeting
the following construction schedule:
FEBRUARY 15, 1999. Tenant's architect will deliver to Landlord an
approved set of permit ready construction documents initialed by Tenant.
Landlord will review said documents for completeness and then submit them to the
City of Seattle for building permits immediately upon Landlord's approval of the
drawings.
MARCH 1, 1999. Demolition of the Additional Space commences. Tenant
acknowledges that demolition and construction of the Tenant Improvements to the
Additional Space could cause some inconvenience to its current occupancy of the
Original Premises.
MARCH 15, 1999. Anticipated date that building permit will be issued.
Upon issuance of the building permit, construction of the Tenant Improvements
will begin.
JUNE 1, 1999. Anticipated delivery date of Additional Space.
Landlord agrees to obtain a minimum of two (2) construction bids from
qualified contractors, and to select the lowest bid, subject to bid
qualification by Landlord.
-3-
<PAGE> 41
13. Tenant Improvement Allowance. Landlord will provide Tenant with an
improvement allowance for the Tenant Improvements in the Additional Space of
$13.00 per rentable square feet of Additional Space. Tenant agrees to pay, on or
before the Commencement Date for the Additional Space, for all costs of the
Tenant Improvements in excess of this tenant improvement allowance.
14. Parking. Paragraph 1(h) of the Lease is hereby amended to read as
follows:
(h) PARKING. During the term of this Lease, Landlord will provide
parking stalls for up to eighteen (18) cars on a nonreserved basis for
ninety percent (90%) of the posted market rental rate. This rental rate
will commence on the date this Amendment is fully executed, but in any
event, not later than March 1, 1999. Landlord will also provide Tenant
with one Executive Reserved parking space at the same rental rate.
Additional monthly parking stalls may be available to Tenant's employees
and visitors on a first come, first served basis.
15. Counterparts. This Amendment may be executed in one or more
counterparts, and all of the counterparts shall constitute but one and the same
agreement, notwithstanding that all parties hereto are not signatories to the
same or original counterpart.
16. All Other Terms Remain Unchanged. Except as amended herein, all
other terms and conditions of the Lease shall remain unchanged and in full force
and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first above written.
"LANDLORD" MERRILL PLACE, LLC,
a Washington limited liability company
By: NSD, LLC, a Washington limited liability
company, its manager
By: /s/ KEVIN DANIELS
-----------------------------------
Kevin Daniels, Member
"TENANT" FREESHOP INTERNATIONAL, INC.
By: /s/ JOHN WADE
-----------------------------------
Its: Chief Financial Officer
-----------------------------------
-4-
<PAGE> 42
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
I certify that I know or have satisfactory evidence that KEVIN DANIELS
is the person who appeared before me, and said person acknowledged that he
signed this instrument, on oath stated that he was authorized to execute the
instrument and acknowledged it as a Member of NSD, LLC, in its capacity as the
Manager of MERRILL PLACE LLC, to be the free and voluntary act and deed of each
of said limited liability companies, for the uses and purposes mentioned in the
instrument.
WITNESS my hand and official seal hereto affixed this 10th day of
February, 1999.
/s/ LINDA PIERATT
---------------------------------------
(Signature of Notary)
Linda Pieratt
---------------------------------------
(Print or stamp name of Notary)
NOTARY PUBLIC in and for the State
of Washington
My Appointment Expires: 8-19-00
---------------
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
I certify that I know or have satisfactory evidence that John Wade is
the person who appeared before me, and said person acknowledged that he/she
signed this instrument, on oath stated that he/she was authorized to execute the
instrument and acknowledged it as the Chief Financial Officer of FREESHOP
INTERNATIONAL, INC., to be the free and voluntary act and deed of said
corporation, for the uses and purposes mentioned in the instrument.
WITNESS my hand and official seal hereto affixed this 16th day of
February, 1999.
/s/ KAREN LEATHERS
---------------------------------------
(Signature of Notary)
Karen Leathers
---------------------------------------
(Print or stamp name of Notary)
NOTARY PUBLIC in and for the State
of Washington
My Appointment Expires: Oct. 2, 2002
--------------
-5-
<PAGE> 43
EXHIBIT A
(DRAWING OF ADDITIONAL SPACE)
<PAGE> 44
EXHIBIT B
(DRAWING OF POCKET SPACE)
<PAGE> 1
EXHIBIT 10.12
PROMOTION AGREEMENT
1. This Promotion Agreement (the "Agreement") is dated as of May 18, 1998
between CNET, Inc. ("CNET") and FreeShop International, Inc. (the
"Company"). Pursuant to this Agreement, CNET will provide various
links, placements and other online promotions (collectively, the
"Promotions") from Snap! Online and SEARCH.COM and will provide
advertising media ("Advertising") to the Company to assist the Company
in promoting its products and services and facilitating the sale of
products to potential buyers through its Internet site. CNET will be
compensated by the Company for providing the Promotions and
Advertising. Accordingly, the parties hereby agree as follows:
2. Background.
2.1 The Company. The Company operates an electronic retailing
operation through its Internet site located at
www.freeshop.com (together with any successors or derivatives
to such site, the "Company Site"). Through the Company Site,
the Company distributes and sells or facilitates the
distribution and sale of various products and services, either
directly or as an agent for third party vendors. All products
and services offered for distribution or sale through the
Company Site are referred to as the "Products."
2.2 CNET. CNET produces television programs and operates a network
of Internet sites on the World Wide Web. For purposes of this
Agreement, the "CNET Sites" refer to the sites referenced in
Section 3.3 and Exhibit A.
3. CNET's Obligations.
3.1 Advertising media. CNET will provide Advertising media to the
Company during the Term on the CNET Sites and at the rates
described in Exhibit A.
3.2 Retail Promotions. CNET will provide various retail Promotions
on Snap! Online and SEARCH.COM, which may include text/HTML or
graphical Promotions that include embedded links to co-branded
pages on CNET Sites or the Company Site.
3.3 Placement of Promotions. CNET will determine the location and
type of each Promotion displayed on Snap! Online and
SEARCH.COM and may phase in certain types of Promotions as
they are developed. CNET currently intends to display
Promotions consisting of text/HTML links, pre-filled with an
appropriate query string or link ("Pre-Filled Links"), as set
forth in this Section.
3.3.1 On SEARCH.COM, CNET intends to display a Pre-Filled
Link on all category doors and on the search query
pages as appropriate and mutually agreed upon.
3.3.2 On the home version of Snap! Online and all partner
versions with partner approval, CNET intends to
display a Pre-Filled Link to Snap! Shopping's Free
Stuff page above the fold on the front door at least
25%
1
<PAGE> 2
of the time and on pages related to Snap! Shopping as
appropriate and mutually agreed upon. The Company
will also serve as the sole "Anchor Tenant" for Snap!
Shopping's Free Stuff! page (or equivalent page if
subsequently renamed). As Anchor Tenant, the Company
will receive prominent Graphical Promotions above the
"fold" on the Free Stuff! page. For the purposes of
clarity, the "fold" is defined as the visible portion
of the screen on a standard 640 x 480 screen size.
3.4 Design and Production of Promotions. The Company will design
any graphics required for the Promotions and provide
pre-filled query strings or links for all of the Pre-Filled
Links, with reasonable assistance from CNET, and the Company
will supply digital copies of such graphics and other
materials to CNET. CNET will be responsible for incorporating
the Promotions into the CNET Sites and for ensuring that the
Promotions are accessible to users of the CNET Sites
("Users").
3.5 Reporting. Within 30 days after the end of each month during
the Term, CNET will provide a report to the Company indicating
the number of impressions of Promotions displayed on the CNET
Sites during such month. CNET will also provide standard
"real-time" reporting for media Advertising.
3.6 Investment. One hundred twenty days after the date of this
Agreement and on the first scheduled closing date of each
subsequent equity financing by the Company (each such date
being an "Investment Date"), CNET will purchase a
Participating Amount (as defined below) of the Company's
equity securities on the same terms and conditions, including
price, as the Company is then closing the sale of such
securities to other investors; provided, that if an Investment
Date does not occur within nine months after the immediately
prior Investment Date (a "Prior Investment Date"), then one
business day after the end of the nine month period CNET will
purchase a Participating Amount of the same type of equity
securities as were sold to CNET on the Prior Investment Date
at the same price per share (subject to adjustment for stock
dividends, combinations or splits with respect to such
securities) at which the Company last sold securities. For
purposes of this Section 3.6, "Participating Amount" means
such dollar amount as will bring CNET's aggregate purchases of
the Company's equity securities, after its then current
purchase, to an amount equal to 20% of all amounts paid or
payable to CNET by the Company under the terms of this
Agreement on or before the end of the calendar month which
includes the Investment Date. CNET will execute the same
purchase documentation as other investors in connection with
each purchase. The Company will have no obligation to sell
equity securities to CNET on an Investment Date unless the
Company reasonably determines that such sale to CNET is in
compliance with all applicable state and federal securities
laws.
4. The Company's Obligations:
4.1 Operation of Company Site. The Company will be responsible for
ensuring that each link embedded within a Promotion takes the
User to the appropriate area within the Company Site, and that
the Company Site functions with reasonable
2
<PAGE> 3
reliability and in a commercially reasonable manner throughout
the Term. In particular, the Company agrees that the Company
Site will comply with the performance standards set forth in
Exhibit B throughout the Term. Any failure by the Company to
comply with this paragraph will be deemed to be a material
breach of this Agreement.
4.2 Reporting. Within 30 days after the end of each month during
the Term, the Company will provide a report to CNET indicating
the aggregate number of referrals from Promotions on the CNET
Sites to the Company Site during such month and the resulting
number of buyers for which the Company has received payment
("CNET Sales"). CNET Sales includes lead generation offers for
which FreeShop receives a "per lead" fee and excludes any
advertising including banners, promotions or other advertising
fees received by the Company. CNET and the Company will agree
on technical procedures to allow the easy and accurate
tracking and reporting of CNET Sales. The Company will make
this information available in a manner that allows CNET and
the Company to understand the performance of the various
Promotions.
4.3 Cash Consideration.
4.3.1 For each month during the Term, the Company will
purchase at least $100,000 of Advertising media on
the CNET Sites identified in Exhibit A, at the rates
(expressed as Net CPM) identified for such CNET Sites
in Exhibit A. CNET will guarantee the availability of
at least $100,000 worth of this media at these rates.
Payments under this paragraph for a particular month
will be due within 30 days after the end of such
month.
4.3.2 For each month of the Term, the Company will pay CNET
$[***] for each CNET Sale except CNET Sales for which
the Company receives less than $[***] per sale. In
the case that the revenue to Company from a CNET Sale
is less than $[***], Company will instead pay CNET
[***]% of lead generation revenue received on that
CNET Sale. Such payments will be based on the reports
prepared by the Company under Section 4.2 (although
CNET may challenge such reports as contemplated by
Section 10.5). Payments under this paragraph for a
particular month will be due within 30 days after the
end of such month.
4.4 User Information. At least once each calendar quarter, the
Company will deliver to CNET aggregate data collected as a
result of the CNET Sales, including but not limited to,
demographic data, buying behavior as measured by conversion to
sale, frequency of purchasing, and average order size, and a
comparison to the average for the Company to the extent such
information is collected by the Company. The Company and CNET
agree to best efforts to evaluate the possible transfer of
additional per user information to CNET on such terms and for
such purposes as the parties may agree. To the extent
provided, all such information will be provided by the Company
to CNET at no charge. Additionally, the Company and CNET will
conduct a review at least once per quarter to discuss the
Company's business model and the way in which leads are
collected and sold in order to ensure that the CNET Sales is
an accurate reflection of the usage
*** confidential material omitted
3
<PAGE> 4
of the leads.
5. Term and Termination. The term of this Agreement (the "Term") will
begin on May 18, 1998 and end on the first anniversary of the date of
this Agreement; provided that (a) either party may terminate this
Agreement, effective at any time after the first three months of the
Term, by giving 30 days' written notice of termination to the other
party, and (b) either party may terminate this Agreement at any time by
giving written notice of termination to the other party, if the other
party commits a material breach of its obligations hereunder that is
not cured within 30 days after notice thereof from the non-breaching
party. The provisions of Sections 8, 9 and 10, as well as any
obligations arising prior to expiration or termination, will survive
any expiration or termination of the Term.
6. Exclusivity. For purposes of this agreement "Competing Free Product
Retailer " means any company (other than the Company and CNET and their
respective affiliates) that is engaged primarily in the retail
distribution and sale, through the Internet, of products and services
that are offered without any initial payment required with the
exclusion of software products and classifieds. During the Term, CNET
will not enter into any agreements under which CNET receives
consideration from a Competing Free Product Retailer for displaying
permanent links to or other fixed promotions for such Competing Free
Product Retailer on any CNET Site provided that the foregoing will not
restrict the display of standard advertisements for any Competing Free
Product Retailer. The parties acknowledge that the foregoing will not
prevent CNET from displaying text links and other references to
Competing Free Product Retailers as reasonably necessary to provide
appropriate editorial and search related services on the CNET Sites or
within the context of standard advertising promotions.
7. Trademark Licenses.
7.1 The Company hereby grants to CNET a non-exclusive, revocable,
royalty-free license, effective as long as this Agreement is
in effect, to use, display and publish any of the Company's
trademarks, tradenames, service marks and logos ("Company
Marks") that may be delivered by the Company to CNET expressly
for inclusion in the Promotions, solely for use in connection
with the Promotions. Any use of the Company Marks by CNET must
comply with any reasonable usage guidelines communicated by
the Company to CNET from time to time. Nothing contained in
this Agreement will give CNET any right, title or interest in
or to the Company Marks or the goodwill associated therewith,
except for the limited usage rights expressly provided above.
CNET acknowledges and agrees that, as between the Company and
CNET, the Company is the sole owner of all rights in and to
the Company Marks.
7.2 CNET hereby grants to Company a non-exclusive, revocable,
royalty-free license, effective as long as this Agreement is
in effect, to use, display and publish any of the CNET's
trademarks, tradenames, service marks and logos ("CNET Marks")
that may be delivered by CNET to the Company expressly for
inclusion in the Snap! co-branded Company store. Any use of
the CNET Marks by Company must comply with any reasonable
usage guidelines communicated by CNET to the Company from time
to time. Nothing contained in this
4
<PAGE> 5
Agreement will give the Company any right, title or interest
in or to the CNET Marks or the goodwill associated therewith,
except for the limited usage rights expressly provided above.
The Company acknowledges and agrees that, as between the
Company and CNET, CNET is the sole owner of all rights in and
to the CNET Marks.
7.3 The Company hereby represents and warrants to CNET that the
Company has, and will have throughout the Term, all necessary
rights in and to the Company Marks to grant CNET the licenses
and usage rights contemplated by this Agreement without
violating the rights of any third party. CNET hereby
represents and warrants to the Company that CNET has, and will
have throughout the Term, all necessary rights in and to the
CNET Marks to grant the Company the licenses and usage rights
contemplated by this Agreement without violating the rights of
any third party.
8. Responsibility for the Company Products. The Company acknowledges and
agrees that, as between the Company and CNET, the Company will be
solely responsible for any claims or other losses associated with or
resulting from the marketing or operation of the Company Site or the
offer, distribution or sale of any Products by the Company or in
connection with the Company Site. CNET is not authorized to make, and
agrees not to make, any representations or warranties concerning the
Products, except to the extent (if any) contained within Promotions
delivered to CNET by the Company.
9. Mutual Indemnification.
9.1 Indemnification by CNET. CNET shall indemnify and hold the
Company harmless from and against any costs, losses,
liabilities and expenses, including all court costs,
reasonable expenses and reasonable attorney's fees
(collectively, "Losses") that the Company may suffer, incur or
be subjected to by reason of any legal action, proceeding,
arbitration or other claim by a third party, whether commenced
or threatened, arising out of or as a result of (a) any breach
or alleged breach by CNET of its representations, warranties
or covenants hereunder; or (b) the operation of the CNET Sites
(except in cases where the Company is required to indemnify
CNET under the following paragraph), including claims of
infringement or misappropriation of intellectual property
rights.
9.2 Indemnification by the Company. The Company shall indemnify
and hold CNET harmless from and against any Losses that CNET
may suffer, incur or be subjected to by reason of any legal
action, proceeding, arbitration or other claim by a third
party, whether commenced or threatened, arising out of or as a
result of (a) any breach or alleged breach by the Company of
its representations, warranties or covenants hereunder; (b)
the use by CNET of the Company Marks or any content provided
by the Company to CNET expressly for display in connection
with or as part of the Promotions, including claims of
infringement or misappropriation of intellectual property
rights; or (c) the operation of the Company Site or the offer,
distribution or sale of the Products by the Company or in
connection with the Company Site.
5
<PAGE> 6
9.3 Indemnification Procedures. If any party entitled to
indemnification under this section (an "Indemnified Party")
makes an indemnification request to the other, the Indemnified
Party shall permit the other party (the "Indemnifying Party")
to control the defense, disposition or settlement of the
matter at its own expense; provided that the Indemnifying
Party shall not, without the consent of the Indemnified Party
enter into any settlement or agree to any disposition that
imposes an obligation on the Indemnified Party that is not
wholly discharged or dischargeable by the Indemnifying Party,
or imposes any conditions or obligations on the Indemnified
Party other than the payment of monies that are readily
measurable for purposes of determining the monetary
indemnification or reimbursement obligations of Indemnifying
Party. The Indemnified Party shall notify Indemnifying Party
promptly of any claim for which Indemnifying Party is
responsible and shall cooperate with Indemnifying Party in
every commercially reasonable way to facilitate defense of any
such claim; provided that the Indemnified Party's failure to
notify Indemnifying Party shall not diminish Indemnifying
Party's obligations under this Section except to the extent
that Indemnifying Party is materially prejudiced as a result
of such failure. An Indemnified Party shall at all times have
the option to participate in any matter or litigation through
counsel of its own selection and at its own expense.
10. Miscellaneous.
10.1 LIMITATION OF DAMAGES. NEITHER PARTY WILL BE LIABLE FOR ANY
SPECIAL, INDIRECT, CONSEQUENTIAL OR INCIDENTAL DAMAGES ARISING
OUT OF OR RELATED TO THIS AGREEMENT, HOWEVER CAUSED AND ON ANY
THEORY OF LIABILITY (INCLUDING NEGLIGENCE), AND EVEN IF SUCH
PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
10.2 Assignment. This Agreement may not be assigned by either
party, except (a) to the transferee of substantially all of
the business operations of such party (whether by asset sale,
stock sale, merger or otherwise) or (b) to any entity that
controls, is controlled by or is under common control with
such party.
10.3 Relationship of Parties. This Agreement will not be construed
to create a joint venture, partnership or the relationship of
principal and agent between the parties hereto, nor to impose
upon either party any obligations for any losses, debts or
other obligations incurred by the other party except as
expressly set forth herein.
10.4 Entire Agreement. This Agreement constitutes and contains the
entire agreement between the parties with respect to the
subject matter hereof and supersedes any prior oral or written
agreements. This Agreement may not be amended except in
writing signed by both parties. Each party acknowledges and
agrees that the other has not made any representations,
warranties or agreements of any kind, except as expressly set
forth herein.
10.5 Audit Rights. Each party will have the right to engage an
independent third party to audit the books and records of the
other party relevant to the calculation of
6
<PAGE> 7
Retail Impressions or CNET Sales, upon reasonable notice and
during normal business hours, and the other party will provide
reasonable cooperation in connection with any such audit. The
party requesting the audit will pay all expenses of the
auditor unless the audit reveals an underpayment by the other
party of more than 5%, in which case the other party will
reimburse all reasonable expenses of the auditor.
10.6 Applicable Law. This Agreement will be construed in accordance
with and governed by the laws of the State of California,
without regard to principles of conflicts of law.
10.7 Press Release. Each party may issue a press release concerning
the business relationship contemplated by this Agreement, and
each party will provide an appropriate quote from one of its
senior executive officers for use in the other party's
release. The Company agrees that CNET's press release may
disclose the total consideration payable to CNET hereunder.
Each party will provide the other with a reasonable
opportunity to review and comment on its press release.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their duly authorized representatives as of the date first written above.
CNET, INC. FreeShop International, Inc.
By: /s/ MARTIN GREEN By: /s/ TIM CHOATE
--------------------------------- -------------------------------
Martin Green Tim Choate
Title: Vice President Title: President & CEO
------------------------------ ----------------------------
7
<PAGE> 8
EXHIBIT A
ADVERTISING MEDIA
For each of the first 12 calendar months of the Term, the Company will purchase
a minimum of $100,000 of Advertising media on the following sites, and CNET will
sell such Advertising media at the Net CPM's indicated for such sites:
<TABLE>
<CAPTION>
CNET ADVERTISING MEDIA NET CPM
<S> <C>
DOWNLOAD.COM business banners $ [***]
DOWNLOAD.COM business window $ [***]
DOWNLOAD.COM business title download $ [***]
DOWNLOAD.COM development tools banners $ [***]
DOWNLOAD.COM development tools window $ [***]
DOWNLOAD.COM development tools title download $ [***]
DOWNLOAD.COM education banners $ [***]
DOWNLOAD.COM education window $ [***]
DOWNLOAD.COM education title download $ [***]
DOWNLOAD.COM games banners $ [***]
DOWNLOAD.COM games window $ [***]
DOWNLOAD.COM games title download $ [***]
DOWNLOAD.COM home & personal banners $ [***]
DOWNLOAD.COM home & personal window $ [***]
DOWNLOAD.COM home & personal title download $ [***]
DOWNLOAD.COM Internet banners $ [***]
DOWNLOAD.COM Internet window $ [***]
DOWNLOAD.COM Internet title download $ [***]
DOWNLOAD.COM multimedia & design banners $ [***]
DOWNLOAD.COM multimedia & design window $ [***]
DOWNLOAD.COM multimedia & design title download $ [***]
DOWNLOAD.COM utilities banners $ [***]
DOWNLOAD.COM utilities window $ [***]
DOWNLOAD.COM utilities title download $ [***]
Snap! Run-of-site banners $ [***]
Snap! Shopping banners $ [***]
Snap! Keyword search $ [***]
SEARCH.COM frontdoor portal $ [***]
SEARCH.COM keywords $ [***]
</TABLE>
*** confidential material omitted
8
<PAGE> 9
Additionally, for each of the first 12 calendar months of the Term, CNET will
provide the following Advertising media to the Company at no cost:
<TABLE>
<CAPTION>
CNET ADVERTISING MEDIA IMPRESSIONS PER MONTH
<S> <C>
DOWNLOAD.COM run-of-site banners [***]
Snap! run-of-site banners [***]
SEARCH.COM run-of-site banners [***]
</TABLE>
*** confidential material omitted
9
<PAGE> 10
EXHIBIT B
PERFORMANCE STANDARDS
The Company Site and the Company's related operations must comply with the
following performance standards throughout the Term
1. The Company Site will be operational and functional in all material
respects (i.e. capable of displaying information, receiving purchases
and conducting transactions as contemplated in the ordinary course of
business). The Company shall use commercially reasonable efforts to
maintain the functionality of the Site. Should, the Company Site fail
to be operational and functional in all material respects, then for the
period of time during such failure, CNET may remove the Retail
Promotions without breaching the terms of this agreement and without
any negative financial consequence to CNET.
2. Without limiting the effect of 1, the Company shall provide to Users
coming to the Company Site from the Promotions at least the same level
of service as is offered to users coming directly to the Company Site
or from agreements with other distribution partners.
10
<PAGE> 11
AMENDMENT TO PROMOTION AGREEMENT
This Amendment to Promotion Agreement (the "Amendment") is dated to be effective
as of June 30, 1998 between CNET, Inc. ("CNET") and FreeShop International, Inc.
(the "Company"). CNET and the Company entered into a Promotion Agreement dated
as of May 18, 1998 (the "Original Agreement" and, as amended hereby, the
"Agreement"). Capitalization terms used in this Amendment and not otherwise
defined have the meanings assigned to such terms in the Original Agreement.
CNET and the Company desire to amend the Original Agreement as set forth in this
Amendment. According, CNET and the Company hereby agree as follows:
1. Section 4.3.1 of the Original Agreement is hereby amended and restated
in its entirety as follows:
"4.3.1 During June, July, August, September, October, November and
December of 1998, the Company will purchase at least $100,000,
$50,000, $200,000, $100,000, $100,000 and $100,000, respectively,
of Advertising media on the CNET Sites identified in Exhibit A.
During January 1999 and for each subsequent month of the Term,
the Company will purchase at least $100,000 of Advertising media
on the CNET Sites identified in Exhibit A. The foregoing
Advertising media will be purchased at the rates (expressed as
Net CPM) identified for such CNET Sites in Exhibit A. CNET will
guarantee the availability of at least these minimum amounts of
media at these rates. Payments under this paragraph for a
particular month will be due within 30 days after the end of such
month."
2. The first sentence of Section 3.6 of the Original Agreement is hereby
amended by replacing the phrase "One hundred twenty days after the date
of this Agreement" with the phrase "On September 30, 1998".
3. Section 3 of the Original Agreement is hereby amended by replacing
clause (a) thereof with the following: "(a) either party may terminate
this Agreement, effective at any time on or after October 1, 1998, by
giving 30 days' written notice of termination to the other party".
4. Except as expressly set forth in this Agreement, the Original Agreement
remains in full force and effect in accordance with its terms.
References in the Original Agreement to the "Agreement" are hereby
amended to refer to the Original Agreement, as amended by this
Amendment. This Amendment and the Original Agreement constitute and
contain the entire agreement between the parties with respect to the
subject matter hereof and thereof and supersede any prior oral or
written agreements. This Amendment will be construed in accordance with
and governed by the laws of the State of California, without regard to
principles of conflicts of law.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their duly authorized representatives as of the date first written above.
CNET, INC. FREESHOP INTERNATIONAL, INC.
<PAGE> 12
By: /s/ MARTIN GREEN By: /s/ TIM CHOATE
------------------------------ ----------------------------
Title: Vice President Title: President & CEO
--------------------------- -------------------------
<PAGE> 13
SECOND AMENDMENT TO PROMOTION AGREEMENT
This Second Amendment to Promotion Agreement (the "Amendment") is dated to be
effective as of September 30, 1998 between CNET Inc. ("CNET") and FreeShop
International, Inc. (the "Company"). CNET and the Company entered into a
Promotion Agreement dated as of May 18, 1998, which was amended pursuant to an
Amendment to Promotion Agreement dated as of June 30, 1998 (as so amended, the
"Original Agreement" and, as further amended hereby, the "Agreement").
Capitalized terms used in this Amendment and not otherwise defined have the
meanings assigned to such terms in the Original Agreement.
CNET and the Company desire to amend the Original Agreement as set forth in this
Amendment. Accordingly, CNET and the Company hereby agree as follows:
1. Section 4.3.1 of the Original Agreement is hereby amended and restated
in its entirety as follows:
"4.3.1 During June, July, August and September of 1998, the Company will
purchase at least $100,000, $50,000, $50,000 and $200,000, respectively,
of Advertising media on the CNET Sites identified in Exhibit A. During
October 1998 and for each subsequent month of the Term, the Company will
purchase at least $50,000 of Advertising media on the CNET Sites
identified in Exhibit A. The foregoing Advertising media will be
purchased at the rates (expressed as Net CPM) identified for such CNET
Sites in Exhibit A. CNET will guarantee the availability of at least
these minimum amounts of media at these rates. Payments under this
paragraph for a particular month will be due within 30 days after the
end of such month."
2. Section 5 of the Original Agreement is hereby amended by replacing
clause (a) thereof with the following: "(a) either party may terminate
this Agreement, effective at any time on or after January 1, 1999, by
giving 30 days' written notice of termination to the other party".
3. The last paragraph of Exhibit A of the Original Agreement, which relates
to Advertising to be provided to the Company at no cost, is hereby
amended and restated in its entirety as follows:
"Additionally, for each of the first 12 calendar months of the
Term, CNET will provide the following Advertising media to the
Company at no cost:
<TABLE>
<CAPTION>
CNET ADVERTISING MEDIA IMPRESSIONS PER MONTH
<S> <C>
DOWNLOAD.COM run-of-site banners [***]
Snap! Run-of-site banners [***]
SEARCH.COM run-of-site banners [***]"
</TABLE>
4. Except as expressly set forth in this Amendment, the Original Agreement
remains in full force and effect in accordance with its terms.
References in the Original Agreement to the "Agreement" are hereby
amended to refer to the Original Agreement, as amended by this
Amendment. This Amendment and the Original Agreement constitute and
contain the entire agreement between the parties with respect to the
subject matter hereof and thereof and supersede any prior oral or
written agreements. This Amendment will be construed in accordance with
and governed by the laws of the State of California, without regard to
principles of conflicts of law.
*** confidential material omitted
<PAGE> 14
CNET, INC. FREESHOP INTERNATIONAL, INC.
By: /s/ MARTIN GREEN By: /s/ TIM CHOATE
------------------------------ ----------------------------
Title: Vice President Title: President & CEO
--------------------------- -------------------------
<PAGE> 1
EXHIBIT 10.13
LINKSHARE NETWORK(TM) MEMBERSHIP AGREEMENT FOR MERCHANTS
This Network Membership Agreement (the "Agreement") is dated September
23, 1998 and is made by and between LinkShare Corporation, a Delaware
corporation ("We," "Us" or "LinkShare"), and FreeShop International, Inc., a
Washington corporation and a merchant participant in The LinkShare Network(TM)
("You" or "Licensee").
In consideration of the mutual promises and covenants set forth below,
LinkShare and Licensee agree as follows:
Section 1. The Service
1.1 The LinkShare Network(TM) is an on-line service designed to
facilitate collaboration by owners of sites on the World Wide Web (the "Web")
and merchants in the marketing of goods and services on the Web. The LinkShare
Network(TM) is based on use of our proprietary LinkShare Synergy(TM) software.
1.2 This Agreement is appropriate for You if You own a site on the Web
through which You offer merchandise or services to customers and want
third-party Web site owners who are participants in the LinkShare Network(TM)
under separate agreements ("Owner/Participants") to include on their Web sites
icons, buttons, textual links, advertisements or other links (collectively,
"links") to Your Web site. You and other Web site merchants who enter into
Agreements with us ("Participating Merchants") gain access to the LinkShare
Network(TM) and the services, software, content and other products and items
described in this Agreement (collectively, the "Service").
1.3 For the sake of convenience (and because lawyers have a bizarre
inability to write without using the things), this Agreement uses a number of
defined terms, including the following:
When the term "Network" is used, it means the electronic commerce Web
site known as The LinkShare Network(TM) operated by LinkShare on the
Internet and the network of relationships that exist between the users
of that Web site.
When the term "LinkShare Software" is used, it means all the LinkShare
Synergy(TM) operating system files and software downloaded from the
Internet and additional LinkShare Synergy(TM) files and software and new
versions or upgrades (if any) provided to You by LinkShare, including
without limitation, the executable code, installation guide, user guides
and manuals; however, that term does not include any software licensed
by LinkShare under a different name, even if such software contains
portions of the functionality or code contained in LinkShare Synergy(TM)
files and software.
As part of the Service, You will have access to information,
communications, software, photos, text, video, graphics, music, sounds,
images and other material and services posted onto the Service or
otherwise provided by LinkShare, You, and Network participants or other
third parties. We sometimes refer to such items collectively as
"Content".
We use the term "LinkShare Product" to refer to any LinkShare Software,
the Content and any associated media or printed material, any images,
photographs, animations, video, audio, music, text, "applets"
incorporated into software, any "on-line" or electronic documentation
and any other related or associated materials and any copies of any of
those items, regardless of the manner or medium of expression or
embodiment and whether now existing or hereafter created, published or
acquired.
<PAGE> 2
The word "person" is intended to be broadly construed and includes
natural persons and trusts, corporations, organizations, associations
and similar legal entities or persons.
1.4 To facilitate establishment of links between Owner/Participants and
Participating Merchants, You, as a Participating Merchant, will be entitled to
post (on a bulletin board or similar on-line site maintained as part of the
Service) offers and counter-offers ("Offers") to pay Owner/Participants a
specified commission for each sale (a "Transaction") to an ultimate purchaser (a
"Customer") of your merchandise or services covered by a Qualifying Link. You
agree not to publicly post Offers on Your Site (as defined in Attachment A
referred to below) that compete with the Offers You post on the Network.
A "Qualifying Link" is a link from an Owner/Participant's site to Your
site using a code as generated by a URL provided by You for use in the
Service and the tracking code generated by the LinkShare Software, if it
is the last link to Your site that the Customer uses during a Session
where a sale of a produce or a service to that Customer occurs.
A "Session" is the period of time beginning from a Customer's initial
contact with a Participating Merchant's site via a link from an
Owner/Participant's site and terminating when the Customer either
returns to Your site via a link form a site other than the originating
Owner/Participant's site or the expiration or termination of the
applicable agreements between You and that Owner/Participant.
1.5 Owner/Participants may elect, in their sole discretion to respond to
any of Your Offers by accepting that Offer or making counter-offers. Similarly,
You may accept a counter-offer made by an Owner/Participant or propose your own
counter-offer.
Unless and until an Offer is accepted in the manner established in the
Network Bylaws (as defined below), that Offer may be withdrawn or
changed by the Network participant who made it, in its sole discretion.
Each Offer You make will be an offer by You that may be accepted by an
Owner/Participant in the manner established in the Network Bylaws, and
if so accepted You will no longer have the option of withdrawing or
changing that Offer.
Your Acceptance of an Offer by an Owner/Participant, and an Owner/Participant's
acceptance of an Offer You make, will in each case create a binding contract
between You and such Owner/Participant (an "Engagement"). For convenience, We
use the term "Your Participating Owner/Participant" to refer to any
Owner/Participant with whom You establish a Qualifying Link.
1.6 Subject to the specific terms and conditions of the applicable
Engagement and this Agreement, once You have established a Qualifying Link with
an Owner/Participant and so long as such Qualifying Link is maintained,
LinkShare will send You monthly reports ("Basic Reports") showing
(a) the commission due to that Owner/Participant for that month
under the applicable Engagement (assuming the commissions
payable under such Engagements are based on gross sales), and
(b) the payment due to LinkShare under this Agreement
<PAGE> 3
Basic Reports will be sent to You as part of the Service, and ordinarily
will be provided within ten business days after the end of each calendar
month. Basic Reports will be sent by e-mail or postal mail to the most
recent e-mail or postal mail address You furnish to Us by the same
means, by posting on LinkShare's Web Site or by any other reliable
available method.
The form, content and frequency of the reports may vary from time to
time in LinkShare's discretion.
To permit accurate tracking, reporting and fee accrual, You and each of
Your Owner/Participants must ensure that the special links between Your
site and that Owner/Participant's site are properly established,
formatted and maintained, and our obligation to provide Basic Reports or
other reports is conditioned on satisfaction of that requirement.
Upon Your written request, LinkShare will provide monthly reports
containing registration information submitted by Your
Owner/Participants.
You also will have the option of ordering additional reports made
available by the Network for additional fees ("Additional Reports").
Unless We otherwise agree in writing, any Additional Reports will be
furnished to you as provided above for Basic Reports.
1.7 As a Participating Merchant, You agree to pay each of Your
Owner/Participants the commissions due not less frequently than every January 31
and July 31 during each year, unless either (i) You and such Owner/Participant
otherwise agree as provided below or (ii) You and We otherwise agree in writing.
In addition, if We are notified that the Qualifying Link between You and
any of Your Owner/Participants has expired or been terminated, You and
that Owner/Participant will receive a final report for Transactions
through the date of expiration or termination. You agree to pay such
Owner/Participant all commissions due through the date of expiration or
termination not later than 30 days after the final report is furnished
by us.
You and any of Your Owner/Participants can agree, in Your Engagement,
for more frequent reports and payments or for different payment
arrangements. LinkShare will accommodate commercially reasonable
non-standard payment terms and furnish Basic Reports consistent with
those terms, provided that You and Your Participating Merchant give us
reasonable advance notice and that You and We agree those terms will not
impose any unreasonable burdens on Us and You pay Us any applicable
additional fees.
Unless We otherwise agree in writing, if you enter into an Engagement
providing that payment of commissions to an Owner/Participant will not
be due unless and until the total amount earned under that particular
Engagement exceeds a specified threshold amount, then unless such
Owner/Participant and You otherwise agree and so notify Us, You agree
that You will in any event pay, on every January 31 and July 31, all
commissions earned by that Owner/Participant under that Engagement but
not paid during the period ending on the preceding December 31 and June
30, respectively, even if those accrued commissions total less than the
specified threshold amount.
You agree that each of Your Owner/Participants is a "third party
beneficiary" of Your agreements in this Section 1.7 and, as such, is given the
right to enforce those agreements directly against You.
1.8 A link between You and an Owner/Participant may be established and
maintained only if and so long as You and such Owner/Participant mutually agree,
only if and so long as this Agreement
<PAGE> 4
between LinkShare and You continues in effect and You continue to abide by its
terms; and only if and so long as separate agreement between LinkShare and such
Owner/Participant remains in effect and such Owner/Participant continues to
abide by its terms.
1.9 LINKSHARE IS THE NEUTRAL HOST OF THE NETWORK AND HAS NO
RESPONSIBILITY OR LIABILITY IN RELATION TO THE ENGAGEMENTS OR ANY OTHER
ARRANGEMENTS AND AGREEMENTS THAT YOU ENTER INTO WITH OTHER PARTICIPANTS AS PART
OF YOUR USE OF THE NETWORK. LINKSHARE'S OBLIGATIONS TO YOU ARE LIMITED TO MAKING
THE NETWORK AVAILABLE AND ACCESSIBLE VIA THE INTERNET, PROVIDING THE BASIC
REPORTS REFERRED TO ABOVE AND PROVIDING THE TELEPHONE SUPPORT REFERRED TO BELOW,
IN EACH CASE ON THE TERMS AND SUBJECT TO THE CONDITIONS STATED IN THIS AGREEMENT
AND FOR SO LONG AS THIS AGREEMENT REMAINS IN EFFECT AND YOU ABIDE BY ITS TERMS.
1.10 All determinations of whether Qualifying Links have been
established and maintained, the number or amount of Sessions or Transactions,
the commissions and other payments due from You to any or all of Your
Owner/Participants or LinkShare and any other matters regarding Your rights and
obligations as a Participating Merchant or otherwise relating to the Services
that are made by LinkShare in good faith will be final and binding on You and
Your Owner/Participants.
Section 2. Telephone Support.
LinkShare will provide reasonable telephone support as indicated on its
Web site for the Service.
SECTION 3. WHAT THE SERVICE DOES NOT INCLUDE.
YOU UNDERSTAND AND AGREE THAT YOUR AND LINKSHARE'S RIGHTS AND
OBLIGATIONS ARE THOSE EXPRESSLY STATED IN THIS AGREEMENT. PLEASE BE AWARE, IN
PARTICULAR, THAT THE FOLLOWING DO NOT FORM PART OF THE SERVICE:
INSTALLATION AND OPERATION OF ANY LINKSHARE PRODUCT.
COLLECTING ANY PAYMENTS DUE TO YOU FROM ANOTHER MERCHANT OR ANY
OWNER/PARTICIPANT OR CUSTOMER.
ALL ASPECTS OF ORDER PROCESSING, CANCELLATIONS, RETURNS, CUSTOMER
SERVICE AND FULFILLMENT.
THE OFFERS, CONTENT, INFORMATION OR OTHER COMMUNICATIONS OR SUBMISSIONS
FROM OTHER PARTICIPANTS IN THE NETWORK OR OTHER THIRD PARTIES.
RESOLUTION OF DISPUTES BETWEEN PARTICIPANTS IN THE NETWORK, INCLUDING,
BUT LIMITED TO, THOSE RELATING TO ENGAGEMENTS.
Section 4. Registration; Additional Terms and Conditions; Network Bylaws.
4.1 As part of the registration process, You will select a password, a
user name and provide the other registration information reasonably requested by
LinkShare. You agree to provide Us with accurate, complete and updated
registration information. As is the case for all other Owner/Participants, You
may not select a screen name of another person with the intent to impersonate
that person.
4.2 THE GENERAL TERMS AND CONDITIONS IN ATTACHMENT A TO THIS AGREEMENT
(THE "GT&CS") ARE INCORPORATED INTO THIS AGREEMENT BY REFERENCE AND ARE AN
INTEGRAL PART OF THIS AGREEMENT. BY ACCEPTING THIS AGREEMENT, YOU ALSO ACCEPT
THOSE TERMS AND CONDITIONS, AND
<PAGE> 5
REFERENCES IN THIS DOCUMENT OR THE GT&CS TO "THIS AGREEMENT" ARE TO "YOUR
CONTRACT" AS DEFINED IN THE GT&CS.
4.3 Your rights and obligations as an Owner/Participant are subject to
regulations governing the use of The LinkShare Network(TM) adopted from time to
time by LinkShare (the "Network Bylaws"), as well as by this Agreement
(including the GT&Cs incorporated into this Agreement) and the Engagements that
are entered into by You. The Bylaws will be posted on The LinkShare Network(TM)
and may be accessed by clicking on the "LinkShare Network(TM) Bylaws" button.
You agree that LinkShare is and will be a third party beneficiary of Your
promises and covenants in Your Engagements.
4.4 LinkShare reserves the right, at its sole discretion and at any time
and from time to time change, add to, remove, suspend, discontinue or otherwise
modify any of the Network Bylaws or aspect of the Service, including the
availability to You or any of Your Participating Merchants of any Service
feature, database or content.
IF ANY SUCH FUTURE MODIFICATIONS OR OTHER ACTIONS RESULT IN A FUNDAMENTAL CHANGE
IN THE SERVICE THAT ADVERSELY AFFECTS YOUR RIGHTS AS A PARTICIPATING MERCHANT,
YOU MAY TERMINATE YOUR PARTICIPATION IN THE LINKSHARE NETWORK (TM) BY SENDING
AN E-MAIL TO [email protected] WITHIN TEN (10) BUSINESS DAYS AFTER WE POST
THE CHANGE NOTICE REFERRED TO BELOW. IF ANY MODIFICATION IS UNACCEPTABLE TO YOU,
YOUR ONLY RECOURSE IS SUCH TERMINATION. YOUR CONTINUED PARTICIPATION IN THE
LINKSHARE NETWORK FOLLOWING THAT TEN-DAY PERIOD OF OUR POSTING OF A CHANGE
NOTICE OR NEW AGREEMENT ON OUR SITE WILL CONSTITUTE BINDING ACCEPTANCE OF THE
CHANGE.
5. Payments to LinkShare.
5.1 Promptly after execution of this Agreement, You agree to pay
LinkShare the license fee set forth on the Pricing Schedule attached hereto in
consideration of the license to use the LinkShare Product granted to You. On
each anniversary of the date of this Agreement while this Agreement is in
effect, you will pay the recurring license fee as provided on the Pricing
Schedule. Each additional license to use the LinkShare Product for an additional
server or otherwise will require You to execute another agreement and pay an
additional fee.
5.2 In consideration of our provision of the Service, for each
Transaction where You are the Participating Merchant and there has been a
Qualifying Link as determined by LinkShare, You agree to pay to LinkShare the
fees set forth on the Pricing Schedule attached hereto. Each such payment is not
refundable or subject to offset or reduction in whole or part under any
circumstances and is in addition to any commission arrangements You agree to
with Owner/Participants and is exclusive of any taxes, duties and the like,
which You also agree to pay. You further agree to indemnify LinkShare and its
affiliates, officers, directors, employees and agents from any and all claims,
costs and liabilities (including reasonable attorneys' fees) arising from any
commission arrangements or taxes, duties or the like related to Your Site or
Your sale of products and/or services.
5.3 In addition to the above, You agree to pay LinkShare, at its
then-current rates, all additional fees, if any, contemplated by Section 1.6
above.
5.4 All payments to LinkShare will be made monthly in U.S. Dollars and
will be due and payable upon LinkShare providing notice to You of the amounts
due and You agree to make payments to LinkShare no later than thirty (30) days
after such notice. Late payments will bear interest at the rate of 1.5% per
month or, if lower, the maximum rate allowed by law.
<PAGE> 6
5.5 LinkShare shall have the right to audit Your books and records as
they relate to LinkShare and your relationship to Owner/Participants, at Your
offices or any other place of keeping, during the term of this agreement and for
one year thereafter. You will maintain accurate and complete books and records
relating to such matters. Such audits shall be made during normal business hours
of normal business and shall be at LinkShare's sole expense and may be made from
time to time upon not less than 10 days prior notice. LinkShare and LinkShare's
representatives, if any, shall observe reasonable restrictions imposed by You in
order to maintain the confidentiality of such books and records. If We discover,
through an audit or other method, errors and omissions of ten percent (10%) or
more or the unauthorized modification of LinkShare Software or by-pass of its
Transaction monitoring features caused or performed by You or Your agents or
otherwise on Your behalf, You agree to pay us the reasonable cost of that audit
or other investigation, as well as paying us the additional amounts due plus
interest as provided above.
5.6 You shall have the right to audit LinkShare's books and records as
they relate solely to You and your relationship to Owner/Participants at
LinkShare's offices or any other place of keeping during the term of this
agreement and for one year thereafter. LinkShare will maintain accurate and
complete books and records relating to such matters. Such audits shall be made
during normal business hours of normal business and shall be at Your sole
expense and may be made from time to time by an independent certified accountant
upon not less than 10 days prior notice. You and Your representatives, if any,
shall observe reasonable restrictions imposed by LinkShare in order to maintain
the confidentiality of such books and records. If You discover, through an audit
or other method, errors and omissions of ten percent (10%) or more caused by
LinkShare's actions, LinkShare agrees to pay You the reasonable cost of that
audit or other investigation, as well as paying You the additional amounts due
plus interest as provided above.
Section 6. Term; Termination; Effects of Termination.
6.1 Unless terminated sooner in accordance with this Section 6, this
Agreement will remain in effect for an initial term of twelve consecutive months
beginning as of the date of this Agreement and, unless We give You or You give
Us written notice of termination no later than ten business days prior to the
expiration date of the prior Term, this Agreement will automatically renew for
consecutive twelve month terms (the twelve months from the date this Agreement
and each subsequent twelve month renewal period, a "Term").
6.2 Either party may terminate this Agreement upon ten business days
prior written notice (which notice must set forth reasonable details of the
breach) for a material breach of this Agreement by the other, unless the other
party cures such breach within the ten business day notice period.
6.3 LinkShare may, in its sole discretion and with cause (including
without limitation utilization of the Service to disparage LinkShare, the
Network or any of Web Site Owners participating in the Network) upon no less
than ten (10) business days prior notice, terminate or suspend Your access to
all or part of the Service by sending an e-mail to the last e-mail address You
provide to LinkShare or by any other lawful means of delivery.
6.4 You also agree that if We terminate this Agreement pursuant to
Section 6.2, You will continue to be subject to the protective provisions of
Section 6.5 for a period equal to the balance of the Term.
6.5 You agree to be subject to the following provisions at all times
during each Term and at all times during any applicable period under Section
6.4:
<PAGE> 7
(a) You will not directly or indirectly (whether through
third parties such as affiliates, consultants, agents or
otherwise) provide any transaction-based advertising
link verification products or services,
(b) You will not enter into any transaction-based
advertising arrangements with any Web site owners or
operators who have contacted You through the Network
(whether or not You entered into an Engagement with any
such owner or operator), other than any such owner or
operator with whom You had a then-current trading or
advertising arrangement or other link prior to the first
day of the first full month prior to the date of this
Agreement (as evidenced by a contemporaneous written
agreement or arrangement with that owner or operator).
(c) You will not utilize a system, software, technology,
network or service that competes with the Network, any
of the LinkShare Product or the Service, and
(d) You will not, directly or indirectly (whether through
third parties such as affiliates, consultants, agents or
otherwise) develop or actively assist a third party in
the development of a system, software, technology,
network or service that competes with the Network or the
Services.
6.6 Upon expiration or termination,
Your access to the Service will be suspended within ten days. You are
responsible for all actions and charges incurred up to the time that the account
is deactivated.
Upon termination and during any period of suspension, You will no longer
be entitled to use the Service or any of its components (including, but not
limited to the LinkShare Synergy(TM) software), and the licenses granted under
this Agreement will terminate and You will immediately return or destroy all
LinkShare Product and all Proprietary Information (as defined in the GT&C's) in
Your possession or control (regardless of medium of expression), all full or
partial copies thereof and all other documents, notes, computer files and other
materials based on or referring to any of the foregoing or any extracts thereof.
The provisions of this Section 6.6 and Sections 1.7, 1.9, 1.10, 4 and 5
of this Agreement and all of the provisions of the GT&C's will survive
indefinitely.
Without limiting the generality of the immediately preceding sentence,
Your payment obligations under Section 5 accruing before or after termination
will survive.
All rights or remedies arising out of a breach or violation of any terms
of this Agreement will survive.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, as of the day and year first above written.
LINKSHARE CORPORATION
By: /s/ HEIDI MESSER
-----------------------
Name: Heidi Messer
Title: President
<PAGE> 8
FREESHOP INTERNATIONS, INC.
By: /s/ TIM CHOATE
--------------------------
Name: Tim Choate
Title: President and CEO
<PAGE> 9
PRICING SCHEDULE
For the licensing to you of the LinkShare Software for use on a single
URL hosted on a single server as stated in Your Contract with Us and membership
in The LinkShare NetworkTM:
Software Fees:
<TABLE>
<S> <C>
LICENSE FEE: $[***] payable in eighteen (18) equal installments of
$[***] per month payable on the first day of the first
month following the execution and delivery of Your
Contract with Us
SOFTWARE INSTALLATION CHARGES: 4 hours of free technical support
ADDITIONAL SUPPORT CHARGES: $75 / hour
Service Fees:
BASIC SERVICE CHARGE: $[***] per Order. (An "Order" is an offer in FreeShop
that generates paid lead fees less any other fees that
FreeShop is required at law to withhold and excludes,
fraudulent, redundant or incomplete orders).
MONTHLY MINIMUM: $[***]/month (calculated including all license and
service fees paid to LinkShare in a given month)
BASIC REPORTS: Included with LinkShare NetworkTM membership
MONTHLY INVOICE FEES: Included with LinkShare NetworkTM membership
Optional Service Charges:
Pay-per-CPM (image)*: $ [***] per CPM (image)
Pay-per-CPM (text)*: $ [***] per CPM (text)
Pay-per-Click through Charges*: $ [***] per click through
Pay-per-Form Charges: $ [***] per form submitted
Check Disbursement Fees: $ [***]/check per Owner Participant
</TABLE>
* Service charges apply only to image or textual links served by LinkShare.
*** confidential material omitted
<PAGE> 10
ATTACHMENT A
TO
LINKSHARE NETWORK(TM) MEMBERSHIP AGREEMENT FOR SITE OWNERS
AND
LINKSHARE NETWORK(TM) MEMBERSHIP AGREEMENT FOR MERCHANTS
GENERAL TERMS AND CONDITIONS
1. Capitalized Terms. Capitalized terms used, but not defined in this Attachment
have the meanings assigned to them in Your Contract.
When we refer to "Your Contract," we mean Your LINKSHARE NETWORK(TM)
MEMBERSHIP AGREEMENT FOR SITE OWNERS or Your LINKSHARE NETWORK (TM)
MEMBERSHIP AGREEMENT FOR MERCHANTS, as the case may be, including this
Attachment and any other attachments, as amended from time to time.
2. Ownership. LinkShare's software, know-how and other intellectual property is
its most important asset; therefore, we require You and all other participants
in the Network as a condition to that participation, to agree to the following
protective provisions:
You agree that as between LinkShare and You and Your employees, agents,
affiliates, successors and assigns, LinkShare Corporation is and will
continue to be the sole owner of the Service as a whole and its
components and associated materials and all intellectual property and
proprietary rights that have been or may be acquired with respect to
such items, including the Network and the LinkShare Product, as well as
any LinkShare Software or materials to which you may gain access by
reason of participating in the Network. You also similarly agree with
respect to any of the LinkShare Product that is owned by a third-party
licensor or supplier of LinkShare's.
In addition, LinkShare Synergy(TM) and The LinkShare Network(TM) are
trademarks of LinkShare Corporation. Other product and company names
mentioned in the Service may be the trademarks of third parties.
Use of the LinkShare Product and the Service and other dealings between
You and LinkShare will not confer upon You any right to or interest in
any LinkShare Product, except for the licenses specifically granted in
Section 3 below.
3. Limited Licenses. As long as Your Contract is in effect and You are complying
with its terms, LinkShare grants to You a personal, non-sublicensable,
nonexclusive and revocable license to participate in the Service, subject to the
following and all applicable provisions in Your Contract:
If you are a Participating Merchant, You may download and use one copy
of the LinkShare Synergy(TM) software and any other software that is or
becomes LinkShare Software solely for your own use, only on a single URL
hosted on up to three servers located in the United States or Canada
("Your Server") and solely for purposes of just one Web site operated by
You ("Your Site") and through which You, participating in the Network,
are engaged, as a merchant or commission agent for a merchant, in the
sale of goods or services over the Internet, and for no other purpose.
Such downloading and use is authorized only if done in accordance with
Your Contract, the Bylaws and the documentation supplied by LinkShare.
That license is for object code versions only and not for source code.
<PAGE> 11
If you need information about any LinkShare Software in order to achieve
interoperability, any such information we do provide will constitute
Proprietary Information (as defined below). If so requested, We will use
reasonable efforts to provide such information and assistance, all at
LinkShare's then standard rates for such services. You acknowledge that
notwithstanding such information and assistance from LinkShare, You will
remain solely responsible and liable for installation of the Product.
You may also download one copy of Content from the Service to a single
computer for use in creating Qualifying Links or otherwise participating
in the Network in accordance with your Contract and the Bylaws, and for
no other purpose. Such license, however, extends only to such part of
the Content that is intellectual property of LinkShare or that it
otherwise is authorized to license to You. LinkShare is not responsible
if any third party posts or provides Content that it does not own or
have the right to license to LinkShare or You.
The licenses given to You in this paragraph are personal,
non-sublicensable, nonexclusive and revocable.
You will not disassemble, decompile, reverse engineer, or copy or modify
any LinkShare Software or other LinkShare Product or otherwise attempt
to discover any LinkShare Software source code or underlying Proprietary
Information (as that term is defined below), or otherwise tamper with
the LinkShare Product, the Network or the data produced by the
foregoing.
You may not rent, sell, lease, or otherwise transfer the Service or any
LinkShare Product to or for the benefit of a third party by operation of
law or otherwise.
All copying, distribution or transfer, use or other exploitation of any
Content or any other LinkShare Product not expressly permitted by Your
Contract are prohibited. Also prohibited are modifications of any
LinkShare Product or its use to create derivative works, to mirror the
Service or to offer any other service.
4. LinkShare Proprietary Information. In using the Service, You will obtain
information relating to the Service and/or to LinkShare ("Proprietary
Information," which term includes but is not limited to LinkShare Software and
other LinkShare Product). Such Proprietary Information will belong solely to
LinkShare and includes, but is not limited to, the features and mode of
operation of the Service. You agree not to use (except as expressly authorized
by Your Contract) or disclose Proprietary Information without the prior written
consent of LinkShare, or unless such Proprietary Information becomes part of the
public domain without breach of this Agreement by You or anyone acting for You
or to whom You disclose such Proprietary Information.
5. Required Terms of Engagements. You agree that LinkShare is an intended
third-party beneficiary of (but not obligated with respect to) each of Your
Engagements. In addition, unless as otherwise expressly agreed by LinkShare, You
agree that all Engagements You enter into with any Participating Merchant or
Owner/Participant (as the case may be) will include the following provisions
(with references to "Merchant" and to "Owner/Participant" being references to
the Participating Merchant and the Owner/Participant that are parties to the
particular Engagement, respectively).
"Merchant and Owner/Participant jointly and severally agree to
indemnify, defend, and hold harmless the Network and LinkShare
Corporation and its affiliates, officers, directors, employees, and
agents collectively, ("LinkShare) from and against any and all
liability, claims, losses, damages, injuries or expenses (including
reasonable attorneys' fees) directly or indirectly arising from or
relating to installation or use of any LinkShare Software, any Offer,
Response or
<PAGE> 12
Engagement or any other matter relating to our respective agreements
with LinkShare or our participation in the Network, and any dispute
relating thereto."
You further agree that even if, despite this paragraph, such provision
is not so included, it nonetheless will fully apply with the same force
and effect as if so included. You also agree that such provision will
bind You even if, for any reason, it does not bind any of Your
Participating Merchants or Your Owner/Participants, as the case may be.
6. Dealings With Third Parties. Links in the Service lead to sites maintained by
individuals or organizations other than LinkShare and over whom LinkShare has no
control. LinkShare is the neutral host of the Service and provides links merely
as a convenience to You, and the inclusion of any link does not imply any
endorsement by or liability or responsibility of LinkShare for the linked sites,
their contents or owners. You also understand that participation in the Service
involves You establishing contractual arrangements with third parties and
LinkShare will not be responsible for acts or omissions of those third parties.
It is up to You to take precautions to ensure that whatever You select
for Your use is free of such items as viruses, worms, trojan horses and
other items of a destructive nature.
LinkShare will not have any liability or responsibility with respect to
any Offer, Acceptance, Counter-Offer or Engagement or any breaches of
contract or other acts or omissions of any Owner/Participant,
Participating Merchant or other third party with whom You deal,
including any liability or responsibility for any failure by the other
party to a Qualifying Link to pay You commissions or other sums due or
claimed to be due.
You will not have any liability or responsibility with respect to any
failure of the Service directly attributable to LinkShare's actions.
You agree to indemnify, defend, and hold harmless the Network
and LinkShare Corporation and its affiliates, officers, directors,
employees and agents from and against any and all liability, claims,
losses, damages, injuries or expenses (including reasonable attorneys'
fees) directly or indirectly arising from or relating to any Offer,
Acceptance, Counter-Offer, Engagement, and any dispute relating thereto.
7. "Cookies". The Service does not currently provide Participation Merchants or
Owner/Participants with identifiers, tracers or other tracking tools for
monitoring Internet usage by Customers (so-called "cookies"), except in the
"Return" feature. If, however, you are a Participating Merchant, at your
request, we may include other "cookies" if your site participating in the
Network already uses a "cookie." The "cookie": in the "Return" feature, and any
other "cookies" that the Service may include, can be disabled by Customers or
other users. You should assume, therefore, that the Service does not itself
incorporate any such identifiers or tracing or tracking tools available for Your
use. You agree, however, that the Service may include one or more "cookies" that
LinkShare itself uses for profiling and tracking.
8. Periodic Reports. Our ability and obligation to prepare and furnish the
periodic reports referred to in Your Contract is subject to You and the parties
with whom You establish Qualifying Links using the LinkShare Synergy((TM)
)software correctly, establishing a link coded in accordance with Your Contract
and documentation provided by LinkShare and complying with the Bylaws and the
terms of the applicable Engagement.
<PAGE> 13
9. Our Rights to Information About You. You grant LinkShare permission to obtain
information from Your Server or any other source that is necessary to operate
the Service, allow You to use the Network, to verify that You are operating the
Product correctly or otherwise obtain information for purposes related to the
Service and Your participation in the Network. You further agree that LinkShare
will own any such data it obtains or develops.
10. Data You Provide. LinkShare, of course, cannot economically and practically
review or police all Content and other messages uploaded to the Service, so we
must rely on Service users to ensure that the Content and messages they
originate will not violate law or third-party rights. You agree to remain solely
responsible for the Content or messages originated by You or on Your behalf, and
to indemnify and defend LinkShare and the other participants in the Service if
any Content or other items that are uploaded or posted to or otherwise published
or made available on or through the Service or their use as contemplated by Your
Contract is libelous, defamatory, obscene, pornographic, infringes any
third-party's intellectual property rights or otherwise violates any law or any
third-party's rights.
By uploading or otherwise providing Content to the Service, You will
represent to us that you own it or are authorized to provide it by the
owner, as well as that such Content and its use by LinkShare and other
participants in the Network does not infringe upon any other person's
rights.
By submitting Content to any "Public Area" (e.g. public chat rooms,
bulletin boards, etc.), You (individually and for any other owners for
whom You are authorized to act) automatically grant to LinkShare a
royalty-free, perpetual, irrevocable, non-exclusive right and license to
use, reproduce, sell, modify, adapt, publish, translate, create
derivative works from, distribute, perform and display such Content in
whole or in part worldwide and/or to incorporate it in other works in
any form, media, or technology now known or later developed for the full
term of any rights that may exist in such Content.
LinkShare provides some encryption to protect certain personal
information that is transmitted, but You should act as though Your
uploads and transmissions are susceptible to interception and use by
others. You agree that all the risk associated therewith is solely Yours
and that LinkShare will have no liability for any breach of the security
of your account.
You agree that LinkShare and each of the other participants in the
Network may rely on any information, notice or other communication
furnished by You or on Your behalf which is reasonably believed by the
recipient to be genuine and to have been sent or presented by You or a
person reasonably believed by the recipient to be authorized to act on
Your behalf.
You agree that You will not disparage (whether on any Web site or
otherwise) LinkShare, the Network, the LinkShare Software or any
component of the Service
11. Unsolicited Submissions. LinkShare welcomes comments regarding the Service;
however, LinkShare's policy is not to accept or consider creative ideas,
suggestions or other submissions in addition to those it may specifically
request. LinkShare requests that You be specific with any of your comments on
the Service You may wish to make and not submit any such item.
We hope that You will understand that it is the intent of this policy to
avoid misunderstandings when projects developed by LinkShare's very
productive staff are similar to someone else's creative work.
If, despite our request, You do submit any such creative ideas,
suggestions or other submissions, we will not be subject to any
confidentiality obligation or restriction on our use of those
<PAGE> 14
submissions and we will be free to copy, use, disclose, distribute,
publish, sell, modify, create derivative works from, exploit or
otherwise deal with those submissions without liability or
accountability to You or any third-party source.
12. Certain Notices From You. You agree to notify LinkShare at
[email protected] of any known or suspected unauthorized uses of Your
account, or any known or suspected breach of security, including loss, theft or
unauthorized disclosure of Your password. You agree that LinkShare does not have
any liability or responsibility for any unauthorized use of Your account or
loss, theft or unauthorized use of Your password.
Maintaining the confidentiality of Your password is your responsibility,
and You also are responsible for all usage and activity on Your account,
including use of the account by a third party authorized by You to use
Your account.
13. Privacy. You agree that You and Your Participating Merchants or
Owner/Participants, as the case may be, will comply with all applicable
requirements of law relating to privacy and will also comply with LinkShare's
reasonable requirements relating to privacy as posted from time to time at
LinkShare's Web site.
14. Off-Network Dealings. If You are a Website owner and You contact any
Merchant through the Network or become aware of any Offer by any Merchant
through the Network, You will not enter into any revenue-sharing advertising,
collaborations or other commercial arrangements with that Merchant or any of its
affiliates or related parties in connection with any of your or their respective
sites on the Web except via the Network. If You are a Participating Merchant,
You agree that You will not knowingly enter into any such arrangements with any
Website owner or any of its affiliates or related parties. You also agree that
you will not participate in any advertising collaborations or other arrangements
or scheme that is intended to reduce payments to which LinkShare otherwise would
be entitled or to otherwise take unfair advantage of the Service provided by
LinkShare or that has any such effect. You also agree to promptly notify Us if
asked to do so by a Merchant or Owner/Participant You have contacted through the
Service.
We hope that You understand our reason for including these provisions.
We get paid on the basis of Transactions concluded using Qualifying
Links. We necessarily depend on fair dealing by Owner/Participants and
Participating Merchants.
15. No Warranties. The Service, its components, its and their use of the results
of such use are provided "as is." TO THE FULLEST EXTENT PERMISSIBLE PURSUANT TO
APPLICABLE LAW, LINKSHARE DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED, IN
RELATION TO THE SERVICE, ITS COMPONENTS, ITS USE, THE RESULTS OF SUCH USE, LINKS
AND LINKED SITES (INCLUDING, WITHOUT LIMITATION, WARRANTIES OF FITNESS FOR A
PARTICULAR PURPOSE, MERCHANTABILITY OR NON-INFRINGEMENT OR ANY IMPLIED
WARRANTIES WHATSOEVER ARISING OUT OF A COURSE OF PERFORMANCE, DEALING OR TRADE
USAGE). Without limiting the foregoing, LinkShare specifically disclaims any
warranty that the Service, or any LinkShare Software, Content or other Service
component will be uninterrupted, error-free, accurate or correct, that defects
will be corrected or that there are no viruses or other harmful components, and
we will not be liable for the consequences for interruptions, errors,
inaccuracies, viruses, or other harmful components. Applicable law may not allow
the exclusion of implied warranties so the above exclusion may not apply to you.
In such jurisdictions, LinkShare's liability is limited to the greatest extent
permitted by law.
<PAGE> 15
16. Limitation of Remedies and Liability. The obligations of LinkShare are
solely corporate obligations, no affiliate, stockholder, director, officer,
employee, consultant or agent of LinkShare shall be subject to any personal
liability whatsoever to You or any of its affiliates, stockholders or creditors
or any other person or entity, nor will any such claim be asserted (directly, or
derivatively or otherwise) by or on behalf of You or any of Your successors and
assigns.
THE MAXIMUM AGGREGATE LIABLE OF LINKSHARE WITH RESPECT TO THE SERVICE,
YOUR USE AND THE RESULTS OF YOUR USE UNDER ANY CONTRACT, NEGLIGENCE,
STRICT LIABILITY OR OTHER THEORY WILL BE LIMITED EXCLUSIVELY TO REPAIR
OR REPLACEMENT OR, IF REPLACEMENT IS INADEQUATE AS A REMEDY OR, IN
LINKSHARE' S OPINION, IMPRACTICAL, TO A REFUND OF PAYMENTS RECEIVED FROM
YOU DURING THE THIRTY DAY PERIOD PRIOR TO THE DATE THE LIABILITY AROSE.
If the SERVICE omits any of your information or if your INFORMATION
contains any error, your sole remedy for such error or omission shall be
for linkshare to CORRECT such errors or omissions.
LINKSHARE SHALL NOT BE LIABLE FOR (1) ANY INDIRECT, SPECIAL, INCIDENTAL
OR CONSEQUENTIAL DAMAGES ARISING OUT OF OR IN CONNECTION WITH YOUR
CONTRACT OR THE USE OF OR INABILITY TO USE THE LINKSHARE WEBSITE,
SERVICE OR ANY INFORMATION PROVIDED ON LINKSHARE'S WEBSITE OR ANY OTHER
HYPERLINKED WEBSITE, INCLUDING WITHOUT LIMITATION, ANY LOST PROFITS.
bUSINESS INTERRUPTION, LOSS OF PROGRAMS OR OTHER DATA ON YOUR
INFORMATION HANDLING SYSTEM OR OTHERWISE, EVEN IF LINKSHARE HAS BEEN
ADVISED OF the POSSIBILITY OF SUCH DAMAGES OR OF ANY CLAIM ATTRIBUTABLE
TO ERRORS, OMISSIONS OR OTHER INACCURACIES IN ANY CONTENT OR LINKSHARE'S
SOFTWARE OR WEBSITE OR ANY HYPERLINKED WEBSITE. BECAUSE SOME
JURISDICTIONS DO NOT ALLOW THE EXCLUSION OR LIMITATION OF INCIDENTAL OR
CONSEQUENTIAL DAMAGES, THE ABOVE EXCLUSION MAY NOT APPLY TO YOU. THIS
PARAGRAPH WILL SURVIVE THE FAILURE OF ANY EXCLUSIVE OR LIMITED REMEDY.
Each party recognizes and agrees that the warranty disclaimers and
liability and remedy limitations in this Agreement are material
bargained for basis of this Agreement and that they have been taken into
account and reflected in determining the consideration to be given by
each party and in the decision by each party to enter into Your
Contract.
The obligations of LinkShare are solely corporate obligations, no
affiliate, stockholder, director, officer, employee, consultant or agent
of LinkShare shall be subject to any personal liability whatsoever to
You or any of Your owners, affiliates, creditors, customers or World
Wide Web site visitors, any Participating Owner or Participation
Merchant with whom you establish a link or other relationship or any
other person or entity, nor will any such claim be asserted (directly,
derivatively or otherwise) by or on behalf of You, any of the other
persons referred to above or any of Your or their heirs, legal
representatives, successors or assignees.
17. Payments. LinkShare reserves the right to charge of any services available
on the Network that You request in addition to the Service provided. LinkShare,
however, will not be obligated to provide such additional service.
18. Governing Law. Except as provided below, You agree that Your Contract and
its interpretation and enforcement, any claims arising out of the relationships
You establish with Us and other participants
<PAGE> 16
in the Network, the LinkShare Website, any Content or other matters are governed
by the internal laws of the State of New York and the Federal laws of the Unites
Sates of America applicable therein.
You and We each attorns to the jurisdiction of the Federal and New York
State courts sitting in New York County, New York (and the appellate
courts to which judgments or orders of such Federal and State courts may
be appealed), and agrees to commence any litigation which may arise
hereunder in one of those courts.
If You are based in Canada, the internal laws of the Province of
Ontario, Canada will govern, and each of us attorns to the jurisdiction
of the courts of the courts of the Province of Ontario, and further
agrees to commence any litigation which may arise hereunder in the
courts located in the Judicial District of York, Province of Ontario.
LinkShare controls and operates its site from its offices in the state
of New York, United States of America and makes no representations or
warranties that these materials are appropriate or available for use in
other locations, and access to them from territories where their
contents are illegal is prohibited.
You are responsible for reinsuring that Your participation in the
Network complies with applicable laws, including those of the
jurisdiction in which You are located.
19. Notices. All notices and communications under this Agreement shall be in
writing (except where otherwise stated) by confirmed facsimile, electronic mail,
or similar communication, by Express Mail, Federal Express or similar confirmed
delivery service, or by certified or registered mail. Communications may be made
orally between the parties when the nature of the communication does not require
written notice. Except as otherwise expressly provided in Your Contract, notices
and the official correspondence intended for LinkShare must be sent via
certified or registered postal mail to: LinkShare Corporation, 165 West 46th,
Suite 810, New York, NY 10036, USA.
20. Export Laws. You acknowledge that laws and regulations in the United States
and elsewhere regulate the export and re-export of certain products, services,
information and other items. You agree that You will not remove or export from
the United States or re-export from anywhere any part of the Service or any part
or product thereof in violation of any applicable law or regulation.
21. U.S. Government Restricted Rights. If the Service or any component of the
Service, including any LinkShare Software is used by or for the U.S. Federal
Government or any of its agencies, departments, bureaus or other
instrumentalities or divisions (in each and every case, the "Government"), the
Government hereby agrees as follows:
The LinkShare software (including, but not limited to, documentation)
qualifies as "commercial computer software" as that term is used in the
applicable acquisition regulation, except that none of the LinkShare
Software may be acquired by the Government in a contract incorporating
clauses prescribed by DFARS Subpart 227.4, and in the case of any such
contract the Government will not acquire such LinkShare Software.
To the maximum extent permitted under applicable law, rules and
regulations, the Government shall be bound by the commercial terms of
the LINKSHARE NETWORK((TM) )MEMBERSHIP AGREEMENT FOR SITE OWNERS, or the
LINKSHARE NETWORK((TM) ) MEMBERSHIP AGREEMENT FOR MERCHANTS, as the case
may be, including this Attachment and any other attachments, as amended
from time to time.
<PAGE> 17
The LINKSHARE SOFTWARE (including, but not limited to, documentation) is
provided with RESTRICTED RIGHTS. Use, duplication, or disclosure by the
Government is subject to restrictions as set forth in subparagraph
(c)(1)(ii) of the Rights in Technical Data and Computer Software clause
as DFARS 252.227.7023 or subparagraphs (c)(1) and (2) of the Commercial
Computer Software - Restricted Rights at 48 CFR 52.227-19, as
applicable.
If the Government is unable to agree to the foregoing or believes that
any provisions applicable to the LINKSHARE SOFTWARE violate applicable
Federal laws, rules or regulations, the Service (including the LINKSHARE
SOFTWARE) should not be used by the Government. The Government may, in
those circumstances, contact Us at LinkShare Corporation, 165 West 46th
Street, Suite 107, New York, New York 10036 (212) 221-8100, Fax (212)
221-8341.
22. Miscellaneous.
LinkShare may disclose information about You furnished to Us and about
Your usage of the Service and the Internet in aggregate industry reports
or for purposes related to the Service or as otherwise agreed to in
writing by You.
Nothing contained in Your Contract and no course of dealing between us
will confer upon You any exclusive rights with respect to the Service or
prevent us from contracting and dealing with any and all other persons
(including Your competitors) to provide products and services (including
any identical or similar to those provided to You) or in any other
manner, in our sole discretion.
You, We and other persons with whom you deal through the Network are
independent contractors. Your Contract, any other agreements between Us
and any other participants in the Network, any Engagements You enter
into and any dealings among and between You, Us and other participants
do and will not establish the relationship of a partnership, joint
venture, principal and agent or employer/employee. You agree that You do
not have any authority to, and You will not, incur obligations, make or
accept offers or take other actions on behalf of LinkShare. You agree
not to make any statements or take any action (on your Web site or
otherwise) that reasonably could have the effect of creating the
appearance of any such relationship or authority.
None of Your rights or obligations under Your Contract are assignable or
transferable by You without LinkShare's prior written consent except in
the case of the sales of substantially all or all of Your assets.
Subject to that restriction, Your Contract will be binding, inure to the
benefit of and be enforceable by the parties and their respective
successors and assigns.
In the event that any of the provisions of this Agreement shall be held
by a court or other tribunal of competent jurisdiction to be
unenforceable, such provisions shall be limited or eliminated to the
maximum extent necessary so that this Agreement shall otherwise remain
in full force and effect and enforceable.
Except as otherwise expressly provided in Your Contract, any
modifications to Your Contract must be in writing and signed by You and
LinkShare.
This Agreement is the entire agreement between LinkShare and You
pertaining to its subject matter, and all written or oral agreements, if
any, previously existing between us are cancelled. Except if and to the
extent expressly set forth in Your Contract, neither You nor We makes
any representation, warranty, covenant, or agreement whatsoever. The
statements about and
<PAGE> 18
descriptions of the Service or any of its components made by LinkShare
on its Web site or otherwise do not constitute representations,
warranties or other contractual obligations.
Neither party will be liable to the other by reason of any failure or
delay in the performance eof its obligations hereunder on account of
strikes, shortages, riots, insurrection, fires, flood, storm,
explosions, acts of God, war governmental action labor conditions,
earthquakes or any other cause which is beyond the reasonable control of
such party.
The section, paragraph and other headings in Your Contract are for
reference only and shall not affect in any way the meaning of your
interpretation of Your Contract.
<PAGE> 1
EXHIBIT 10.14
EXECUTION COPY
ESCROW AGREEMENT
This ESCROW AGREEMENT, dated as of June 18, 1999 (this "Agreement"), by
and among FREESHOP.COM, INC., a Washington corporation ("Grantor"), FINGERHUT
COMPANIES, INC., a Minnesota corporation ("Grantee"), and WHITMAN BREED ABBOTT &
MORGAN LLP, solely in the capacity as escrow agent (the "Escrow Agent").
W I T N E S S E T H:
WHEREAS, Grantee and Grantor have executed and delivered a Warrant
Agreement, dated as of December 10, 1998 (the "Warrant Agreement"), as modified
by a letter agreement dated June 18, 1999, between Grantee and Grantor (the
"Letter Agreement") pursuant to which, and subject to the terms and conditions
thereof, Grantee has elected to exercise its Third Tranche Investment Percentage
Warrants, Anti-Dilution Warrants and Third Party Agreement Warrants (all as
defined in the Warrant Agreement) for 404,858 shares (the "Warrant Shares") of
Grantor's Series B convertible preferred stock ("Preferred Stock"); and
WHEREAS, pursuant to the Letter Agreement Grantee has elected to purchase
an additional 8,820 shares of Preferred Stock ("Additional Shares"); and
WHEREAS, Grantor intends to file a registration statement (the
"Registration Statement") in connection with the sale of shares of common stock
in a proposed Qualified Public Offering, as such term is defined in the Warrant
Agreement, with the Securities and Exchange Commission under the Securities Act
of 1933;
WHEREAS, Grantor intends to file such Registration Statement on or about
June 18, 1999 and represents therein that Grantee intends to exercise certain of
its Warrants and purchase the Additional Shares not later than the completion of
the Qualified Public Offering;
WHEREAS, Grantee and Grantor have agreed that on or about the date hereof
Grantee shall cause to be deposited with the Escrow Agent $9,011,348 in cash
(the Exercise Price") to be held in escrow by the Escrow Agent in accordance
with the terms of this Agreement at the request of and as an accommodation to
Grantee and Grantor;
WHEREAS, Grantor and Grantee have agreed that on or about the date hereof
Grantor shall cause to be deposited with the Escrow Agent a certificate for the
Warrant Shares acquired in connection with the payment of the Exercise Price
(the "Certificate");
NOW, THEREFORE, in consideration of the premises, the mutual covenants
contained herein and in the Warrant Agreement and other valuable consideration,
the receipt and sufficiency of which is hereby acknowledged, the parties hereto
agree as follows (capitalized terms used herein without definition shall have
the meaning attributed thereto in the Warrant Agreement):
<PAGE> 2
1. Escrow Funds and Shares. (a) On the date hereof, Grantee shall deliver
to the Escrow Agent the amount of the Exercise Price (the "Escrow Funds") by
wire transfer to the Whitman Breed Abbott & Morgan LLP Attorney Trust Account at
Citibank, N.A. (153 East 53rd Street, New York, New York 10043) (ABA No. 021 000
089) (Account No. 43220732) (Attention: John Gunther at 212-559-8647) (the
"Escrow Account").
(b) On the date hereof, Grantor shall deliver to the Escrow Agent the
Certificate.
(c) The Escrow Funds shall be held, invested and applied by the Escrow
Agent pursuant to the terms of this Agreement.
2. Investment of Funds. As soon as practicable after the receipt thereof,
the Escrow Agent shall cause the Escrow Funds to be invested in the Citibank
Citiescrow Account or such other investment available to the Escrow Account at
Citibank N.A. as Grantee may request. The Grantee shall bear and retain the sole
responsibility for the selection of the investment hereunder and all risk of
loss from such investment. All net interest earned on the Escrow Funds from
investment as provided in this Section 2 shall be payable to Grantee at the time
the Escrow Funds are disbursed in accordance with Section 3 hereof.
3. Disbursement of Escrow Funds. (a) Upon receipt of a notice from Grantee
substantially in the form of Annex I hereto (the "Notice of Satisfaction of
Grantee Conditions"), the Escrow Agent shall and is hereby directed to withdraw
from the Escrow Account and pay to Grantor the Escrow Funds and to withdraw from
the Escrow Account and pay to Grantee all net interest earned on the Escrow
Funds. Receipt by the Escrow Agent of the Notice of Satisfaction of Grantee
Conditions shall be deemed exercise by Grantee of the Third Tranche Investment
Percentage Warrants, Anti-Dilution Warrants and Third Party Agreement Warrants.
Grantee agrees that if closing of the Qualified Public Offering occurs not later
than October 31, 1999, Grantee will send a Notice of Satisfaction of Grantee
Conditions to the Escrow Agent not later than the date of such closing.
(b) Upon payment of Escrow Funds by the Escrow Agent to Grantor, and
payment of interest earned thereon by the Escrow Agent to Grantee, Escrow Agent
shall deliver the Certificate to Grantee.
(c) If the Escrow Agent does not receive from Grantee, on or before
October 31, 1999, a duly executed Notice of Satisfaction of Grantee Conditions,
the Escrow Agent shall withdraw from the Escrow Account and pay to Grantee the
Escrow Funds and all net interest earned thereon promptly after October 31,
1999, and deliver the Certificate to Grantor.
(d) Payments of Escrow Funds and interest earned thereon by the Escrow
Agent shall, if Grantee so requests and provides appropriate instructions, be
effected by wire transfer of immediately available funds and, absent such
request or instructions, by check.
4. Escrow Agent's Duties and Fees. (a) The Escrow Agent shall be obligated
to perform only such duties as are expressly set forth in this Agreement. The
Escrow Agent may rely upon, and shall be protected in acting or refraining from
acting upon, any written notice, instruction or request furnished to it under
this Agreement and believed by it to be genuine and to have been signed or
presented by the proper party or parties, provided that, as set forth below,
-2-
<PAGE> 3
any modification of this Agreement shall be required to be signed by each of the
parties to this Agreement. The Escrow Agent acts under this Agreement as a
depositary only and is not a party to or bound by any agreement or undertaking
which may be evidenced by or arise out of any items deposited with or delivered
to it pursuant to this Agreement and is not responsible or liable in any manner
for the sufficiency, correctness, genuineness or validity of any such items and
undertakes no responsibility or liability for the form of execution of such
items or the identity, authority, title or rights of any person executing or
depositing same. The Escrow Agent shall not be liable to Grantee or Grantor or
their respective successors and assigns for any action taken or omitted to be
taken hereunder in good faith; provided, however, that the Escrow Agent shall be
and remain liable for any damages arising as a result of its willful misconduct
or gross negligence.
(b) Grantee and Grantor, jointly and severally, shall indemnify the Escrow
Agent for and hold the Escrow Agent harmless against, any loss, damage,
liability or expense incurred by the Escrow Agent not caused by its gross
negligence or willful misconduct, arising out of or in connection with its
entering into this Agreement and the performance of its duties under this
Agreement, including the costs and expenses of defending itself against any
claim or liability in any legal proceeding in connection with this Agreement
(including reasonable attorneys' fees). The Escrow Agent may consult with
counsel of its choice and shall have full and complete authorization and
protection for any action taken or suffered by it under this Agreement in good
faith and in accordance with the opinion of such counsel.
(c) Grantee shall pay the reasonable compensation of the Escrow Agent for
the services to the rendered by the Escrow Agent hereunder and shall pay to or
reimburse the Escrow Agent for all expenses, disbursements and advances,
including reasonable attorneys' fees, incurred or made by the Escrow Agent in
connection with the performance of its duties hereunder.
(d) Grantee and Grantor warrant to the Escrow Agent that, except as
provided in Section 4(e), there are no Federal, state or local tax liability or
filing requirements concerning the Escrow Agent's actions contemplated hereunder
and warrants and represents to the Escrow Agent that the Escrow Agent has no
duty to withhold or file any report or any tax liability under any Federal or
state income tax, local or state property tax, local or state sales or use
taxes, or any other tax by any taxing authority. Grantee and Grantor, jointly
and severally, agree to indemnify the Escrow Agent fully for any tax liability,
penalties or interest incurred by the Escrow Agent arising hereunder and agrees
to pay in full any such tax liability together with penalty and interest if any
is ultimately assessed against the Escrow Agent for any reason as a result of
its action hereunder (except for the Escrow Agent's individual income tax
liability).
(e) Due to the requirement that all trust accounts have Taxpayer
Identification Numbers documented by appropriate W-8 and W-9 forms, Escrow Agent
shall promptly provide such forms to Grantee and Grantor, and Grantee and
Grantor shall return such forms to the Escrow Agent, duly completed and signed,
within five days of receipt thereof. Grantee and Grantor acknowledge that
failure to provide such forms may prevent or delay disbursement of Escrow Funds
hereunder.
-3-
<PAGE> 4
5. Notices. All notices, consents, requests, instruction, approvals and
other communications provided for in this Agreement shall be in writing and
shall become effective when delivered at the following addresses:
(a) if to Grantee:
Fingerhut Companies, Inc.
4400 Baker Road, #181
Minnetonka, MN 55343
Attention: Michael P. Sherman, Esq.
(b) if to Grantor:
FreeShop.com, Inc. Inc.
95 South Jackson Street, Suite 300
Seattle, WA 98104
Attention:Timothy C. Choate
With a copy to:
Bryce L. Holland, Jr.
Dorsey & Whitney LLP
U.S. Bank Building Center, Suite 4200
1420 Fifth Avenue
Seattle, WA 98101
(c) if to the Escrow Agent:
Whitman Breed Abbott & Morgan LLP
200 Park Avenue
New York, New York 10166
Attention: David F. Kroenlein, Esq.
6. Miscellaneous Provisions. (a) This Agreement shall be governed by and
construed in accordance with the internal, substantive laws of the State of New
York without giving effect to the conflict of law rules thereof.
(b) This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one in the same instrument.
(c) This Agreement may not be assigned by Grantee or Grantor in any manner
whatsoever.
(d) Grantee and Grantor shall cooperate with the Escrow Agent and deliver
to the Escrow Agent such additional information and documents as the Escrow
Agent shall reasonably request in the performance of its obligations under this
Agreement, including such documents as
-4-
<PAGE> 5
it shall reasonably request to evidence termination of this Agreement and to
evidence consent to the final payment of the Escrow Funds and interest on the
Escrow Funds in accordance with the terms of the Agreement.
-5-
<PAGE> 6
IN WITNESS WHEREOF, the parties to this Agreement have caused this
Agreement to be duly executed as of the day and year first above written.
By:
-------------------------------------
Title:
By:
-------------------------------------
Title:
WHITMAN BREED ABBOTT & MORGAN LLP
By:
-------------------------------------
A Partner
-6-
<PAGE> 7
Annex I
to
Escrow Agreement
[Grantor's Letterhead]
__, 1999
Notice of Satisfaction of Grantee's Condition
Whitman Breed Abbott & Morgan LLP
200 Park Avenue
New York, New York 10166
Attn: David F. Kroenlein, Esq.
Re: Disbursement of Escrow Funds
Dear Sirs:
Pursuant to Section 3(a) of the Escrow Agreement, dated as of June 18,
1999 (the "Escrow Agreement"), among FreeShop.com, Inc. ("Grantor"), Fingerhut
Companies, Inc. ("Grantee"), and Whitman Breed Abbott & Morgan LLP, solely in
its capacity as escrow agent (the "Escrow Agent"), you are hereby notified that
the condition that the closing of the Qualified Public Offering (as defined in
the Escrow Agreement) has occurred on or before October 31, 1999 has been
satisfied.
Accordingly you are hereby directed to pay to Grantor the Escrow Funds and
to Grantee all net interest earned thereon as provided in Section 3(a) of the
Escrow Agreement and to deliver the Certificate to Grantee as provided in
Section 3(e) of the Escrow Agreement.
IN WITNESS WHEREOF, Grantee has duly caused this Notice to be delivered to
you in accordance with the terms of the Escrow Agreement.
By:
-------------------------------------
Name:
Title:
-7-
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of our
report dated April 16, 1999, except for paragraphs two through four of Note 13,
as to which the date is June 18, 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
June 18, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 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 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FORM S-1.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,892,144
<SECURITIES> 0
<RECEIVABLES> 381,830
<ALLOWANCES> 42,651
<INVENTORY> 0
<CURRENT-ASSETS> 3,261,820
<PP&E> 598,000
<DEPRECIATION> 216,704
<TOTAL-ASSETS> 3,686,570
<CURRENT-LIABILITIES> 1,248,056
<BONDS> 0
0
0
<COMMON> 7,816,328
<OTHER-SE> (5,572,541)
<TOTAL-LIABILITY-AND-EQUITY> 3,686,570
<SALES> 0
<TOTAL-REVENUES> 1,250,940
<CGS> 0
<TOTAL-COSTS> 216,557
<OTHER-EXPENSES> 4,111,203
<LOSS-PROVISION> 56,551
<INTEREST-EXPENSE> 65,654
<INCOME-PRETAX> (3,199,025)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,199,025)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,199,025)
<EPS-BASIC> (0.21)
<EPS-DILUTED> (0.21)
</TABLE>
