<PAGE> 1
As filed with the Securities and Exchange Commission on February 10, 2000.
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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<S> <C> <C>
WASHINGTON 7310 91-1809146
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
<TABLE>
<S> <C>
JOHN WADE
CHIEF FINANCIAL OFFICER
FREESHOP.COM, INC.
95 SOUTH JACKSON STREET 95 SOUTH JACKSON STREET
SUITE 300 SUITE 300
SEATTLE, WASHINGTON 98104 SEATTLE, WASHINGTON 98104
(206) 441-9100 (206) 441-9100
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE (NAME, ADDRESS, INCLUDING ZIP CODE, AND
NUMBER, TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL FOR SERVICE)
EXECUTIVE OFFICES)
</TABLE>
COPIES TO:
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<S> <C>
CHRISTOPHER J. BARRY STEPHEN M. GRAHAM
BRYCE L. HOLLAND, JR. PERKINS COIE LLP
DORSEY & WHITNEY LLP 1201 THIRD AVENUE, 48TH FLOOR
U.S. BANK CENTRE, SUITE 4200 SEATTLE, WASHINGTON 98101
1420 FIFTH AVENUE (206) 583-8888
SEATTLE, WASHINGTON 98101
(206) 903-8800
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
- ---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ---------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SHARES AMOUNT TO BE OFFERING AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED(1) PRICE PER SHARE(2) PRICE(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
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Common Stock, no par
value............... 3,450,000 $35.625 $122,906,250 $32,448
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</TABLE>
(1) Includes 450,000 shares which the underwriters have the option to purchase
to cover over-allotments, if any.
(2) Determined in accordance with Rule 457(c) under the Securities Act of 1933,
as amended, based upon the average of the high and low sales prices of our
common stock reported on the Nasdaq National Market on February 3, 2000.
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, DATED FEBRUARY 10, 2000
FREESHOP LOGO
3,000,000 SHARES
COMMON STOCK
Of the 3,000,000 shares of our common stock being sold in this offering, we are
selling 1,000,000 shares and the selling shareholders are selling 2,000,000
shares. We will not receive any of the proceeds from the sale of shares by the
selling shareholders.
Our common stock is quoted on the Nasdaq National Market under the symbol FSHP.
On February 8, 2000, the last reported sale price of our common stock was $36.00
per share.
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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<CAPTION>
UNDERWRITING PROCEEDS TO
PUBLIC OFFERING DISCOUNTS AND PROCEEDS TO SELLING
PRICE COMMISSIONS FREESHOP SHAREHOLDERS
<S> <C> <C> <C> <C>
Per Share $ $ $ $
Total $ $ $ $
</TABLE>
FreeShop and some of the selling shareholders have granted the underwriters the
right to purchase up to 450,000 additional shares to cover any over-allotments.
DEUTSCHE BANC ALEX. BROWN
DAIN RAUSCHER WESSELS
THOMAS WEISEL PARTNERS LLC
PRUDENTIAL VOLPE TECHNOLOGY
a unit of Prudential Securities
E*OFFERING
The date of this prospectus is , 2000
<PAGE> 3
[ON INSIDE COVER]
[At the top center of the page is the FreeShop logo with the phrase "PUTTING
CONSUMERS IN CONTROL OF THE DIRECT MARKETING PROCESS" set forth underneath the
logo. In the middle of the page is a color depiction of the home page from the
FreeShop.com Web site. Beneath the picture of the home page is the following
text: "The traditional world of direct marketing is based on contacting a broad
range of consumers through mail, telephone, and other solicitations in the hope
of generating responses from a small percentage of those consumers. Unlike the
traditional direct marketing process, FreeShop aggregates over a thousand free,
trial, and promotional offers from marketers in a single place where consumers
can easily choose the offers that meet their specific needs."]
[ON FOLD OUT FLAP INSIDE THE FRONT COVER]
[The phrase "Putting consumers in control of the direct marketing process"
appears across the top of the two pages. Underneath the heading, three blocks of
text appear across the page. The left block states "OVER SIX MILLION ORDERS TO
DATE FreeShop connects millions of consumers with over a thousand offers
covering major consumer interest areas. To date, FreeShop has generated more
than six million orders." The center block states "OUR BUSINESS MODEL FreeShop
generates revenue in multiple ways. Our core business is lead generation, where
marketers pay us a fee per lead, or customer request for an offer. In addition,
we generate revenue through advertising on our site and in our Club FreeShop
newsletters." The right block states "CLUB FREESHOP: OVER 1.5 MILLION EMAIL
MEMBERS Club FreeShop is a free membership program through which we communicate
with our most valued customers. Members regularly receive email newsletters
informing them of special offers, exclusive contests and other promotional
opportunities." In the middle of the page is a picture of the FreeShop logo with
rectangle banners labeled "SHOPPERS" and "MARKETERS" on either side of the logo,
with arrows pointing from the banners toward the FreeShop logo. At the bottom
left of the page, three color pictures of category screens from the FreeShop.com
Web site appear descending diagonally from left to right. A fourth category
screen appears to the right of the top category screen. The caption next to the
screens reads "FreeShop is organized by category to make the site easy for
customers to find what they want." centered on the bottom of the page are three
graphics from the FreeShop.com Web site arranged vertically depicting graphics
representing the themes of "Got kids?" "Live Longer" and "Back to School!" The
"Got Kids?" graphic includes the text "100% free laughs, puzzles, pets, advice .
. . and more!" The "Live Longer" graphic includes the text "100% free for a
healthier glow, super wellness, tips and secrets . . . and more!" The "Back to
School" graphic includes the text "100% free for high school, college, grad
students . . . and more!" The caption next to the graphics reads "Offers are
also organized using seasonal and interest-oriented themes." On the bottom right
side of the page, three color pictures of screens from the FreeShop.com Web site
appear descending diagonally from left to right, including the home page,
magazine category page and Join Club FreeShop page. FreeShop's Privacy Pledge
screen appears to the right of the home page screen. The caption next to the
screens reads "The FreeShop site is designed to make it easy for customers to
get comfortable shopping on the Internet."]
<PAGE> 4
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding FreeShop and our financial statements and accompanying
notes appearing in this prospectus.
FREESHOP.COM, INC.
FreeShop provides online direct marketing services, giving consumers access
to over 1,000 free, trial and promotional offers through our Web sites and email
newsletters. Consumers seeking to discover, learn about or try new products and
services can choose from a collection of offers from over 300 companies.
FreeShop enables consumers to seek new products and services of specific
interest to them, unlike the traditional direct marketing model, in which
marketers communicate to broad audiences in search of new customers.
FreeShop currently has more than 1,000 offers for items such as catalogs,
magazines, product samples, software, brochures, coupons and consumer goods. To
assist consumers in locating offers that interest them most, we arrange offers
by category, such as travel, personal finance, entertainment and sports. Our
primary source of revenue is lead generation, for which marketers pay us fees
based on the number of customer requests for the marketers' offers. We also
receive revenues from advertisements placed on our Web sites and in our email
newsletters. We believe our Internet-based, consumer-directed process creates a
highly effective method of direct marketing in terms of cost, targeting,
efficiency and consumer satisfaction.
We have received and transmitted to marketer clients more than 10.0 million
orders, which are requests by consumers for various offers. Our customer
database has grown from approximately 850,000 customers in January 1998 to more
than 3.0 million customers as of January 2000. In addition, email newsletters
are regularly sent to the 2.2 million Club FreeShop members and our other email
newsletter subscribers, informing them of special offers, exclusive contests and
other opportunities.
In December 1998, Fingerhut Companies, Inc. became a FreeShop shareholder
and, as of December 31, 1999, owned approximately 33.1% of our common stock.
Fingerhut is a selling shareholder in this offering and will own approximately
22.8% of our common stock at the completion of this offering. Fingerhut is the
second largest general merchandise cataloger and the eighth largest cataloger
overall in the United States.
As part of our strategy to increase the number and types of offers
available for our consumers and increase to our visitor and client bases, in May
1999, we acquired the Catalog Site and the Worldwide Brochures Web sites, which
greatly expanded our catalog and travel-related offerings. These sites have been
maintained as independent Web sites within the FreeShop network.
OUR OBJECTIVE
Our objective is to be the dominant provider of online direct marketing
services. We intend to achieve this objective through the following key
strategies:
- increase visitor traffic and transactions through both online and
traditional marketing programs;
- increase our client base by expanding our sales staff and the services we
offer and by broadening our relationships with advertising agencies and
companies with national consumer brands;
- enhance FreeShop's brand name recognition through aggressive marketing;
- expand the number of categories on our Web sites and increase the number
of offers within each category;
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- continue to develop and use technology to serve our marketer clients and
to make our Web sites faster, easier to use and more personalized; and
- further develop our marketing relationship with Fingerhut and develop a
similar relationship with Federated Department Stores, Inc., Fingerhut's
parent.
RECENT DEVELOPMENTS
On January 18, 2000, we announced net revenues of approximately $4.1
million for our fourth quarter ended December 31, 1999, up approximately 710%
over net revenues recorded in the same quarter last year and up approximately
70% over net revenues in the quarter ended September 30, 1999. Net revenues for
the year ended December 31, 1999 increased to approximately $8.5 million, up
approximately 580% over net revenues recorded in the year ended December 31,
1998.
RISK FACTORS
We have a history of significant losses and have accumulated losses of over
$16.7 million from inception through December 31, 1999. The online direct
marketing industry is highly competitive and we anticipate incurring substantial
losses for the foreseeable future. This and other risks involved in investing in
FreeShop are more fully described under the heading "Risk Factors" beginning on
page 7.
OUR HISTORY
FreeShop began as a division of Online Interactive, Inc., a Washington
corporation that was incorporated in June 1994. On June 30, 1997, Online
Interactive contributed the FreeShop division to its wholly owned subsidiary,
FreeShop International, Inc., a Washington corporation incorporated on June 23,
1997, which then began operating as a separate entity. On February 19, 1999,
FreeShop International, Inc. changed its name to FreeShop.com, Inc. Our offices
are located at 95 South Jackson Street, Suite 300, Seattle, Washington 98104.
Our telephone number is (206) 441-9100.
THE OFFERING
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Common stock offered by FreeShop......................... 1,000,000 shares
Common stock offered by the selling shareholders......... 2,000,000 shares
Common stock to be outstanding after the offering........ 16,524,170 shares
Use of proceeds.......................................... For marketing, working
capital, acquisitions and
general corporate purposes.
See "Use of Proceeds."
Nasdaq National Market symbol............................ FSHP
</TABLE>
The number of shares of common stock to be outstanding after the offering
as set forth above is based on the number of shares actually outstanding on
December 31, 1999.
The number excludes, as of December 31, 1999, a total of 1,123,260 shares
of common stock issuable upon exercise of outstanding stock options at a
weighted average exercise price of $3.92 per share, and 27,700 shares of common
stock issuable upon exercise of warrants at a weighted average exercise price of
$1.19 per share.
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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 also assumes that the underwriters' over-allotment
option is not exercised.
"Free Shop" is a registered trademark of FreeShop.com, Inc. "Find It! Try
It! Buy It!," "The starting point for smart online shopping," "Powered by
FreeShop" and "FreeShop by Email" are service marks of FreeShop. We may apply
for certain other trademarks and service marks, including Club FreeShop,
FreeShop Savings Club, Savings Central, FreeShop shopping assistant, Catalog
Site, Catalog Channel, The Catalog Site and Worldwide Brochures. All other
trademarks and service marks that we refer to in this prospectus are the
property of their respective owners. The information on our Web sites is not a
part of this prospectus.
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SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Set forth below is our statement of operations data. See Note 2 to
FreeShop's financial statements for a description of how we calculated the
number of shares used to compute basic and diluted net loss per share of common
stock.
The following unaudited balance sheet data provides a summary at December
31, 1999,
- on an actual basis; and
- on an as-adjusted basis to reflect the estimated net proceeds from the
sale of 1,000,000 shares of common stock being sold by us in this
offering at an assumed public offering price of $36.00 per share, after
deducting underwriting discounts and commissions and estimated offering
expenses payable by us.
See "Selected Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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<CAPTION>
YEAR ENDED DECEMBER 31,
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1998 1999
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STATEMENT OF OPERATIONS DATA:
Net revenues.............................................. $ 1,251 $ 8,506
Gross profit.............................................. 1,034 7,773
Operating loss............................................ (3,136) (11,669)
Net loss.................................................. $(3,199) $(10,891)
Basic and diluted net loss per share...................... $ (0.51) $ (1.08)
Shares used to compute basic and diluted net loss per
share................................................... 6,224 10,043
</TABLE>
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<CAPTION>
AS OF DECEMBER 31, 1999
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ACTUAL AS ADJUSTED
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(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $33,795 $67,495
Working capital........................................... 46,736 80,436
Total assets.............................................. 55,816 89,516
Long-term obligations, less current portion............... 40 40
Total shareholders' equity................................ 50,911 84,611
</TABLE>
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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 part of your investment.
RISKS RELATED TO OUR BUSINESS
WE HAVE A LIMITED OPERATING HISTORY, WHICH MAKES IT DIFFICULT TO PREDICT OUR
FUTURE PERFORMANCE.
Our limited operating history makes predicting our future performance
difficult and does not provide investors with a meaningful basis for evaluating
an investment in our common stock. From our inception in June 1994 through June
1997, we existed as a division of Online Interactive, Inc. We began operations
as an independent company in June 1997. In the first half of 1998, we began
offering advertising opportunities on our Web sites and in our email
newsletters, in addition to our primary business of lead generation. As a
result, our performance since the end of the first quarter of 1998 is not
comparable to prior periods. Moreover, we have never operated during a general
economic downturn in the United States, which typically adversely affects
advertising and marketing expenditures.
WE WILL FACE RISKS ENCOUNTERED BY EARLY-STAGE COMPANIES IN INTERNET-RELATED
BUSINESSES AND MAY BE UNSUCCESSFUL IN ADDRESSING THESE RISKS.
We face risks frequently encountered by early-stage companies in new and
rapidly evolving markets, including the market for online direct marketing. We
may not succeed in addressing these risks, and our business strategy may not be
successful. These risks include uncertainties about our ability to:
- attract a larger number of consumers to our Web sites;
- sign up new marketing clients and add new and compelling content to our
Web sites;
- manage our expanding operations;
- adapt to potential decreases in online advertising rates;
- successfully introduce new products and services;
- continue to develop and upgrade our technology and to minimize technical
difficulties and system downtime;
- create and maintain the loyalty of our customers and clients;
- maintain our current, and develop new, strategic relationships and
alliances; and
- attract, retain and motivate qualified personnel.
WE HAVE A HISTORY OF LOSSES, EXPECT FUTURE LOSSES AND MAY NEVER ACHIEVE
PROFITABILITY.
We have not achieved profitability and expect to continue to incur
substantial losses for the foreseeable future. We incurred net losses of $3.2
million, or more than 2.5 times the amount of our net revenues, for the year
ended December 31, 1998, and $10.9 million, or nearly 1.3 times the amount of
our net revenues, for the year ended December 31, 1999. As of December 31, 1999,
our accumulated losses were $16.7 million, which represents our losses since we
began our operations. We have recently increased our operating expenses and
capital expenditures in order to accelerate our growth. We expect further
increases in operating expenses as we significantly expand marketing and brand
name promotion. Although our net revenues have
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grown in recent quarters, we will need to significantly increase net revenues 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 net revenues will grow more slowly than we anticipate or that
operating expenses will exceed our expectations.
OUR QUARTERLY OPERATING RESULTS ARE UNCERTAIN AND MAY FLUCTUATE SIGNIFICANTLY,
WHICH COULD NEGATIVELY AFFECT THE VALUE OF YOUR INVESTMENT.
Our operating results have varied significantly from quarter to quarter in
the past and may continue to fluctuate. As a result, we believe period-to-period
comparisons of our operating results are not meaningful. For example, during the
year ended December 31, 1999, the percentage of annual net revenues attributable
to the first, second, third and fourth quarters were 7.8%, 16.4%, 28.1% and
47.7%, respectively. Our operating results for a particular quarter or year may
fall below the expectations of securities analysts and investors, which could
result in a decrease in our stock price.
Our limited operating history and the new and rapidly evolving Internet
markets make it difficult to ascertain the effects of seasonality on our
business. We believe, however, that our revenues 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.
During the three months ended December 31, 1999, approximately 90% of our
contracts were month-to-month with automatic renewal unless terminated by either
party with 10 days' notice. The loss of a significant number of these contracts
in any one period might result in a significant decline in our quarterly
operating results.
WE HAVE EXPERIENCED RAPID GROWTH WHICH HAS PLACED A STRAIN ON OUR RESOURCES, AND
ANY FAILURE TO MANAGE OUR GROWTH EFFECTIVELY COULD CAUSE OUR BUSINESS TO SUFFER.
We do not have a proven record in managing our growth and may not be
successful in doing so. We have grown from 29 employees on July 1, 1997 to 120
employees on December 31, 1999. We have recently hired key management personnel,
acquired two businesses and added personnel in connection with these
acquisitions. Due to our recent rapid growth and our inexperience in integrating
newly acquired businesses, we may not be successful in integrating new personnel
and acquired businesses into our existing operations. In addition, we plan to
continue expanding our sales and marketing, customer support and research and
development organizations. Past growth in these areas has placed, and any future
growth will continue to place, a significant strain on our management systems
and resources.
IF WE ARE UNABLE TO STRENGTHEN OUR BRAND NAMES, WE MAY BE UNABLE TO COMPETE
EFFECTIVELY AGAINST COMPETITORS WITH GREATER BRAND NAME RECOGNITION.
We may be unsuccessful in strengthening our brand names. As competitive
pressures in the online direct marketing industry increase, we expect that brand
name strength will become increasingly important. If we cannot strengthen our
brand names, we may be unable to maintain or increase traffic to our Web sites,
which would lead to decreased revenues from clients. We intend to devote
substantial resources to promote our brand names. The reputation of our brand
names will depend on, among other things, our ability to provide a high-quality
online experience for consumers visiting our Web sites or receiving our email
newsletters. Negative experiences of consumers or marketers with FreeShop might
result in publicity that could damage our reputation and diminish the strength
of our brand names.
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IF WE CANNOT SECURE SUFFICIENT PROMOTIONAL OFFERS FROM OUR MARKETER CLIENTS, OUR
BUSINESS WILL SUFFER.
If we are unsuccessful in acquiring and renewing a continuing array of
free, trial and promotional offers for our Web sites, traffic on our sites will
likely decrease. The attractiveness of our Web sites to consumers is based in
part on our ability to provide a broad variety of offers of interest to
consumers. In addition, a number of other Web sites give consumers access to
similar offers. We face competition for free, trial and promotional offers from
these Web sites as well as a variety of other online and traditional
competitors. Without sufficient variety and quality of offers, our Web sites
will become less attractive to marketers, and our ability to generate revenues
from marketer clients will be adversely affected.
THE MAJORITY OF OUR CONTRACTS HAVE MONTH-TO-MONTH TERMS, AND THE LOSS OF A
SIGNIFICANT NUMBER OF THESE CONTRACTS IN A SHORT PERIOD OF TIME COULD HARM OUR
BUSINESS.
During the three months ended December 31, 1999, approximately 90% of our
contracts had month-to-month terms with automatic renewal unless terminated by
either party with 10 days' notice. The loss of a significant number of these
contracts in any one period could result in decreased traffic to our Web sites,
cause an immediate and significant decline in our net revenues and cause our
business to suffer.
THE LOSS OF THE SERVICES OF ANY OF OUR EXECUTIVE OFFICERS OR KEY PERSONNEL WOULD
LIKELY CAUSE OUR BUSINESS TO SUFFER.
Our future success depends to a significant extent on the efforts and
abilities of our senior management, particularly Timothy C. Choate, our
Chairman, President and Chief Executive Officer, and other key employees,
including our technical and sales personnel. The loss of the services of any of
these individuals could harm our business. We may be unable to attract, motivate
and retain other key employees in the future. Competition for employees in our
industry is intense, and in the past we have experienced difficulty in hiring
qualified personnel. We do not have employment agreements with any of our key
personnel, nor do we have key-person insurance for any of our employees.
IF WE ARE UNABLE TO FULLY INTEGRATE THE OPERATIONS FROM OUR ACQUISITIONS OF THE
CATALOG SITE AND WORLDWIDE BROCHURES WEB SITES OR FROM ANY FUTURE ACQUISITIONS,
OUR BUSINESS WILL SUFFER.
We may be unsuccessful in fully 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
acquisitions and integrating the acquired entity. We may be unable to fully
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, without limitation:
- difficulties integrating operations, personnel, technologies, products
and information systems of acquired businesses;
- potential loss of key employees of acquired businesses;
- adverse effects on our results of operations from acquisition-related
charges and amortization of goodwill and purchased technology;
- increased fixed costs, which could delay profitability;
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- inability to maintain the key business relationships and the reputations
of acquired businesses;
- potential dilution to current shareholders from the issuance of
additional equity securities;
- inability to maintain our standards, controls, procedures and policies;
- responsibility for liabilities of companies we acquire; and
- diversion of management's attention from other business concerns.
IF WE ARE UNABLE TO FURTHER DEVELOP OUR BUSINESS RELATIONSHIPS WITH FINGERHUT
AND FEDERATED, OUR BUSINESS COULD SUFFER.
Our business could be adversely affected if we fail to further develop our
relationship with Fingerhut or Federated. We have a noncontractual direct
marketing relationship with Fingerhut that includes Web site links, advertising
and package and catalog inserts. Fingerhut also provides us with database
services. We do not know what further benefits, if any, we will receive from our
relationships with Fingerhut and Federated, or the degree to which, if any,
these relationships may impact our business. Both Fingerhut and Federated
operate independently of FreeShop and, subject to future contractual
obligations, each remains free to act in its own interest regardless of the
effect of its actions on us. In addition, although Fingerhut will retain a
substantial equity interest in us immediately following this offering, neither
Fingerhut nor Federated has any obligation to make equity or other capital
resources available to us in the future. Because no contractual relationships
with Fingerhut or Federated currently exist, should either become dissatisfied
with its relationship with us or decide to change its general business strategy
relating to the Internet and decide to discontinue or curtail its relationship
with us, our reputation and our stock price could be adversely affected.
AN INCREASE IN THE NUMBER OF VISITORS TO OUR WEB SITES MAY STRAIN OUR SYSTEMS,
AND WE ARE VULNERABLE TO SYSTEM MALFUNCTIONS.
Any serious or repeated problems with the performance of our Web sites
could lead to the dissatisfaction of consumers or our marketer clients. The
amount of traffic on our Web sites has increased over time to approximately 3.8
million visits in December 1999, and we are seeking to further increase traffic.
The systems that support our Web sites must be able to accommodate an increased
volume of traffic. Although we believe our systems can currently accommodate
approximately 20 million visitors monthly, in the past, our Web sites have
experienced slow response times and other systems problems for a variety of
reasons, including failure of our third party Internet service providers,
hardware failures and failure of software applications. In these instances, our
Web sites were typically unavailable or slow for approximately one and one-half
to two hours. Although these failures did not have a material adverse effect on
our business, we may experience similar problems in the future that could have a
material adverse effect on our business. See "Business -- Operations and
Technology."
WE FACE INTENSE COMPETITION FROM MARKETING-FOCUSED COMPANIES FOR MARKETER
CLIENTS AND MAY BE UNABLE TO COMPETE SUCCESSFULLY.
We may be unable to compete successfully with current or future
competitors. We face intense competition from many companies, both traditional
and online, to provide marketing and advertising services for marketer clients.
Among the free-offer Web sites, our primary competitors include Volition.com and
Free2Try.com. Among the lead-generation Web sites, our primary competitors are
eNews, Cataloglink and Catalogcity. We expect competition from online
competitors to increase significantly because there are no substantial barriers
to entry in our industry. Increased competition could result in price reductions
for online advertising space and marketing services, reduced gross margins and
loss of market share.
10
<PAGE> 12
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. These advantages may also allow them to engage in more extensive
research and development, undertake farther-reaching marketing campaigns, adopt
more aggressive pricing policies and make more attractive offers to potential
employees, strategic partners and advertisers. In addition, current and
potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their products or services to address the needs of our prospective marketer
clients.
Online marketing is a rapidly developing industry, and new types of
products and services may emerge that are more attractive to consumers and
marketers than the types of services we offer. As a result, it is possible that
new competitors may emerge and rapidly acquire significant market share. See
"Business -- Competition."
IF OUR CUSTOMERS REQUEST PRODUCTS AND SERVICES DIRECTLY FROM OUR MARKETER
CLIENTS INSTEAD OF REQUESTING THE PRODUCT OR SERVICE FROM US, OUR BUSINESS COULD
SUFFER.
Our marketer clients may offer the same free, trial or promotional products
or services on their own Web sites that we offer on our Web sites. Our customers
may choose to request products or services directly from our marketer clients
instead of requesting the product or service from us, which would result in
lower net revenues to FreeShop from lead generation and cause our business to
suffer.
WE MAY NEED TO INCUR LITIGATION EXPENSES IN ORDER TO DEFEND OUR INTELLECTUAL
PROPERTY RIGHTS, AND MIGHT NEVERTHELESS BE UNABLE TO ADEQUATELY PROTECT THESE
RIGHTS.
We may need to engage in costly litigation to enforce our intellectual
property rights, to protect our trade secrets or to determine the validity and
scope of the intellectual property rights of others. We cannot assure you that
our efforts to prevent misappropriation or infringement of our intellectual
property will be successful. An adverse determination in any litigation of this
type could require us to make significant changes to the structure and operation
of our online services and features or to license alternative technology from
another party. Implementation of any of these alternatives could be costly and
time-consuming and may not be successful. Any intellectual property litigation
would likely result in substantial costs and diversion of resources and
management attention.
Our success largely depends on our trademarks, including "Free Shop," and
internally developed technologies, including our email systems and our
order-collection, order-processing and lead-delivery systems, which we seek to
protect through a combination of trademark, copyright and trade secret laws.
Protection of our trademarks is crucial as we attempt to build our brand name
and reputation. Despite actions we take to protect our intellectual property
rights, it may be possible for third parties to copy or otherwise obtain and use
our intellectual property without authorization or to develop similar technology
independently. In addition, legal standards relating to the validity,
enforceability and scope of protection of intellectual property rights in
Internet-related businesses are uncertain and still evolving. Although we are
not currently engaged in any lawsuits for the purpose of defending our
intellectual property rights, we may need to engage in such litigation in the
future. Moreover, we may be unable to maintain the value of our intellectual
property rights in the future.
11
<PAGE> 13
WE COULD BECOME INVOLVED IN COSTLY AND TIME-CONSUMING DISPUTES REGARDING THE
VALIDITY AND ENFORCEABILITY OF RECENTLY ISSUED OR PENDING PATENTS.
The Internet, including the market for e-commerce and online advertising,
direct marketing and promotion, is characterized by a rapidly evolving legal
landscape. A variety of patents relating to the market have been recently
issued. Other patent applications may be pending. It is possible that
significant activity in this area may continue and that litigation may arise due
to the patent holder's efforts to enforce their patent rights.
We may incur substantial expense and management attention may be diverted
if litigation occurs. Moreover, whether or not claims against us have merit, we
may be required to enter into license agreements or be subject to injunctive or
other equitable relief, either of which would result in unexpected expenses or
management distraction.
IF THIRD PARTIES ACQUIRE DOMAIN NAMES THAT ARE SIMILAR TO OUR DOMAIN NAMES, THEY
COULD DECREASE THE VALUE OF OUR TRADEMARKS AND TAKE CUSTOMERS AWAY FROM OUR WEB
SITES.
We currently hold the Internet domain names "freeshop.com,"
"catalogsite.com," "wwb.com" and "clubfreeshop.com" as well as various other
related names. We may be unable to prevent third parties from acquiring similar
domain names, which could reduce the value of our trademarks, potentially weaken
our brand name and take customers away from our Web sites. Domain names
generally are regulated by Internet regulatory bodies. The regulation of domain
names in the United States and in foreign countries is subject to change in the
near future. Regulatory bodies could establish additional top-level domains,
appoint additional domain name registrars or modify the requirements for holding
domain names. The relationship between regulations governing domain names and
laws protecting trademarks and similar intellectual property rights is unclear.
Therefore, we may be unable to prevent third parties from acquiring domain names
that infringe on, or otherwise decrease the value of, our trademarks and other
intellectual property rights. We believe there are online companies in other
countries using domain names that potentially infringe on our trademarks. We may
be unable to prevent them from using these domain names, and this use may
decrease the value of our trademarks and our brand name.
WE MAY FACE LITIGATION AND LIABILITY FOR INFORMATION DISPLAYED ON OUR WEB SITES.
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 sites. 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
sites through links to other Web sites. Any litigation arising from these claims
would likely result in substantial costs and diversion of resources and
management attention, and an unsuccessful defense to one or more such claims
could result in material damages. We have no insurance coverage for these types
of claims.
SECURITY AND PRIVACY BREACHES COULD SUBJECT US TO LITIGATION AND LIABILITY AND
DETER CONSUMERS FROM USING OUR WEB SITES.
We could be subject to litigation and liability if third parties penetrate
our network security or otherwise misappropriate our users' personal or credit
card information. This liability could include claims for unauthorized purchases
with credit card information, impersonation or other similar fraud claims. It
could also include claims for other misuses of personal information, such as for
unauthorized marketing purposes. In addition, the Federal Trade Commission and
other federal and state agencies have been investigating various Internet
companies in connection with their use of personal information. We could be
subject to investigations and enforcement actions by these or other agencies. In
addition, we rent customer names and street addresses to third
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<PAGE> 14
parties. Although we provide an opportunity for our customers to remove their
names from our rental list, we nevertheless may receive complaints from
customers for these rentals.
The need to transmit confidential information securely has been a
significant barrier to electronic commerce and communications over the Internet.
Any compromise of security could deter people from using the Internet in general
or, specifically, from using the Internet to conduct transactions that involve
transmitting confidential information, such as purchases of goods or services.
Many marketers seek to offer their products and services on our Web sites
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 prove to be ineffective.
We cannot predict whether events or developments will result in a compromise or
breach of the technology we use to protect customers' personal information. We
have no insurance coverage for these types of claims.
Furthermore, our computer servers may be vulnerable to computer viruses,
physical or electronic break-ins and similar disruptions. We may need to expend
significant additional capital and other resources to protect against a security
breach or to alleviate problems caused by any such breaches. We may be unable to
prevent or remedy all security breaches. If any of these breaches occur, we
could lose marketing clients and visitors to our Web sites.
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 18 months.
Thereafter, we expect we will need to raise additional funds to develop or
enhance our services or products, fund expansion, respond to competitive
pressures or acquire businesses or technologies. Unanticipated expenses, poor
financial results or unanticipated opportunities that require financial
commitments could give rise to earlier financing requirements. If we raise
additional funds through the issuance of equity or convertible debt securities,
the percentage ownership of our existing shareholders would be reduced, and
these securities might have rights, preferences or privileges senior to those of
our common stock. Additional financing may not be available on terms favorable
to us, or at all. If adequate funds are not available or are not available on
acceptable terms, our ability to fund our expansion, take advantage of business
opportunities, develop or enhance services or products or otherwise respond to
competitive pressures would be significantly limited, and we might need to
significantly restrict our operations.
RISKS RELATED TO OUR INDUSTRY
IF THE ACCEPTANCE OF ONLINE ADVERTISING AND ONLINE DIRECT MARKETING DOES NOT
CONTINUE TO INCREASE, OUR BUSINESS WILL SUFFER.
The demand for online marketing may not develop to a level sufficient to
support our continued operations or may develop more slowly than we expect. We
expect to derive almost all of our revenues from contracts with marketer clients
under which we provide online marketing services through our Web sites and email
newsletters. The Internet has not existed long enough as a marketing medium to
demonstrate its effectiveness relative to traditional marketing methods.
Marketers that have historically relied on traditional marketing methods may be
reluctant or slow to adopt online marketing. Many marketers have limited or no
experience using the Internet as a marketing medium. In addition, marketers that
have invested substantial resources in traditional methods of marketing may be
reluctant to reallocate these resources to online marketing. Those companies
that have invested a significant portion of their marketing budgets in online
marketing may decide after a time to return to more traditional methods if they
find that online marketing is
13
<PAGE> 15
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 email newsletters in particular.
IF WE ARE UNABLE TO ADAPT TO RAPID CHANGES IN THE ONLINE MARKETING INDUSTRY, OUR
BUSINESS WILL SUFFER.
Online marketing is characterized by rapidly changing technologies,
frequent new product and service introductions, short development cycles and
evolving industry standards. We may incur substantial costs to modify our
services or infrastructure to adapt to these changes and to maintain and improve
the performance, features and reliability of our services. We may be unable to
successfully develop new services on a timely basis or achieve and maintain
market acceptance.
WE FACE RISKS FROM POTENTIAL GOVERNMENT REGULATION AND OTHER LEGAL UNCERTAINTIES
RELATING TO THE INTERNET.
Laws and regulations that apply to Internet communications, commerce and
advertising are becoming more prevalent. The adoption of such laws could create
uncertainty in use of the Internet and reduce the demand for our services.
Recently, Congress enacted legislation regarding children's privacy on the
Internet. Additional laws and regulations may be proposed or adopted with
respect to the Internet, covering issues such as user privacy, freedom of
expression, pricing, content and quality of products and services, taxation,
advertising, intellectual property rights and information security. The passage
of legislation regarding user privacy or direct marketing on the Internet may
reduce demand for our services or limit our ability to provide customer
information to marketers. Furthermore, the growth of electronic commerce may
prompt calls for more stringent consumer protection laws. For example, the
European Union recently adopted a directive addressing data privacy that may
result in limits on the collection and use of consumer information. The adoption
of consumer protection laws that apply to online marketing could create
uncertainty in Internet usage and reduce the demand for our services.
In addition, we are not certain how our business may be affected by the
application of existing laws governing issues such as property ownership,
copyrights, encryption and other intellectual property issues, taxation, libel,
obscenity and export or import matters. It is possible that future applications
of these laws to our business could reduce demand for our services or increase
the cost of doing business as a result of litigation costs or increased service
delivery costs.
Our services are available on the Internet in many states and foreign
countries, and these states or foreign countries may claim that we are required
to qualify to do business in their jurisdictions. Currently, we are qualified to
do business only in Washington, Minnesota and California. Our failure to qualify
in other jurisdictions if we were required to do so could subject us to taxes
and penalties and could restrict our ability to enforce contracts in those
jurisdictions.
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<PAGE> 16
RISKS RELATED TO THIS OFFERING
WE WILL HAVE BROAD DISCRETION IN THE USE OF THE NET PROCEEDS TO US FROM THIS
OFFERING, AND THERE IS A RISK THAT WE MIGHT USE THEM INEFFECTIVELY.
We will have broad discretion over how we use the net proceeds to us from
this offering, and we could spend the proceeds in ways with which you might not
agree. We cannot assure you that we will use these proceeds effectively. We plan
to use the proceeds from this offering for marketing, working capital,
acquisitions and general corporate purposes. We have not determined how we will
allocate proceeds among these uses. Our business strategy includes growth
through acquisitions, and we may use a substantial portion of the offering
proceeds to buy businesses we have not yet identified. See "Use of Proceeds."
FUTURE SALES OF OUR COMMON STOCK AFTER THIS OFFERING MAY NEGATIVELY AFFECT THE
MARKET PRICE OF OUR COMMON STOCK.
The market price of our common stock could decline as a result of sales of
a large number of shares of our common stock in the market following this
offering, or the perception that such sales could occur. Following this
offering, we will have a large number of shares of common stock outstanding and
available for resale beginning at various points in time in the future. These
sales also might make it more difficult for us to sell equity securities in the
future at a time and at a price that we deem appropriate. The shares of our
common stock currently outstanding will become eligible for sale without
registration pursuant to Rule 144 under the Securities Act, subject to certain
conditions. Certain holders of our common stock also have certain demand and
piggyback registration rights enabling them to register their shares for sale
under the Securities Act. In connection with this offering, our senior officers
and directors and certain of our shareholders, including each of the selling
shareholders, who hold or will hold a total of approximately 4.5 million shares
of common stock, will have agreed, subject to certain exceptions, not to sell
their shares for 90 days after the date of this prospectus without the consent
of Deutsche Bank Securities Inc. In connection with our initial public offering,
holders of 11,497,632 shares agreed, subject to certain exceptions, not to sell
their shares until March 25, 2000 without the consent of Deutsche Bank
Securities Inc. In addition, we have registered 2,268,883 shares of common stock
reserved for issuance under our 1997 Stock Option Plan. As of December 31, 1999,
options to purchase 1,123,260 shares of common stock were outstanding. These
shares will be eligible for sale in the public market from time to time, subject
to vesting, and, in the case of certain options, the expiration of lock-up
agreements. These stock options generally have exercise prices significantly
below the current price of our common stock. The possible sale of a significant
number of these shares may cause the price of our common stock to fall.
OUR STOCK PRICE MAY EXPERIENCE EXTREME PRICE AND VOLUME FLUCTUATIONS, AND
INVESTORS IN OUR STOCK MAY NOT BE ABLE TO RESELL THEIR SHARES AT OR ABOVE THE
OFFERING PRICE.
Due to fluctuations in the market price of our common stock, you may be
unable to resell your shares at or above the offering price. The market price of
our common stock has fluctuated in the past and is likely to continue to be
highly volatile. In addition, the stock market in general and the market prices
of shares of Internet companies in particular have been extremely volatile and
have experienced fluctuations that have often been unrelated or disproportionate
to the operating performance of such companies. The market price of our common
stock could continue to be highly volatile in response to many factors, some of
which are largely beyond our control. These factors include:
- quarterly variations in our results of operations;
- adverse business developments;
- changes in financial estimates by securities analysts;
15
<PAGE> 17
- investor perception of us and online direct marketing services in
general; and
- announcements by our competitors of new products and services.
SINCE OUR STOCK PRICE IS VOLATILE, WE MAY BECOME SUBJECT TO SECURITIES
LITIGATION THAT IS EXPENSIVE AND COULD RESULT IN A DIVERSION OF RESOURCES.
Litigation brought against us could result in substantial costs to us in
defending against the lawsuit and a diversion of management's attention that
could reduce the value of your investment. Securities class action litigation
has often been brought against companies that experience volatility in the
market price of their securities. Because our stock price is volatile, we could
be subject to securities litigation and incur higher expenses than expected,
which could reduce the value of your investment.
EXISTING SHAREHOLDERS WILL BE ABLE TO EXERCISE CONTROL OF OUR COMMON STOCK AND
MAY MAKE DECISIONS THAT ARE NOT IN THE BEST INTERESTS OF ALL SHAREHOLDERS.
Insider control of a large amount of our common stock could have an adverse
effect on the market price of our common stock. At the completion of this
offering, Fingerhut will own approximately 22.8% of the outstanding shares of
our common stock. In addition, following this offering, our founders, Messrs.
Choate and Ballantine, will beneficially own or control approximately 19.7% of
the outstanding shares of our common stock, and our executive officers and
directors, including Messrs. Choate and Ballantine, will beneficially own or
control approximately 21.9% 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/or Fingerhut were to vote together they would
have the ability to control the election of our board of directors and the
outcome of corporate actions requiring shareholder approval, including mergers
and other changes of corporate control, going private transactions and other
extraordinary transactions. This concentration of ownership may have the effect
of delaying or preventing a change of control of FreeShop, even if this change
of control would benefit shareholders.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements based on our current
expectations, assumptions, estimates and projections about our business and
industry. These forward-looking statements involve risks and uncertainties. Our
actual results could differ materially from those anticipated in these
forward-looking statements as a result of numerous factors, as more fully
described in "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" and elsewhere in this
prospectus. You should not unduly rely on these forward-looking statements,
which apply only as of the date of this prospectus.
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<PAGE> 18
MARKET DATA
This prospectus contains market data related to our business and the
Internet. This market data includes projections that are based on a number of
assumptions. The assumptions include the following:
- no catastrophic failure of the Internet will occur;
- the number of people online and the total number of hours spent online
will increase significantly over the next five years; and
- Internet security and privacy concerns will be adequately addressed.
If any one or more of these assumptions turns out to be incorrect, actual
results may differ from the projections based on these assumptions. The
Internet-related markets may not grow over the next three to four years at the
rates projected by these market data, or at all. The failure of these markets to
grow at these projected rates may have a material adverse effect on our business
and the market price of our common stock.
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<PAGE> 19
USE OF PROCEEDS
We estimate the net proceeds to us from the sale of the 1,000,000 shares of
common stock offered by us at an assumed public offering price of $36.00 per
share, after deducting the underwriting discounts and commissions and estimated
offering expenses payable by us, will be approximately $33.7 million, or $38.3
million if the underwriters' over-allotment option is exercised in full. We will
not receive any of the proceeds from the sale of shares by the selling
shareholders.
We intend to use the net proceeds to us of this offering to significantly
expand marketing and brand name promotion. We also expect to use these net
proceeds for other general corporate purposes, including working capital and
capital expenditures. In addition, we intend to use these net proceeds for
possible acquisitions of complementary businesses and technologies that increase
the number and variety of offers on our Web sites or increase the capabilities
of our Web sites or the marketing services offered to our clients. However, we
have no current understandings, commitments or agreements with respect to any
material acquisitions. Pending such uses, we will invest the net proceeds of
this offering in short-term, interest-bearing, investment-grade securities.
PRICE RANGE OF COMMON STOCK
Our common stock has been quoted on the Nasdaq National Market under the
symbol FSHP since our initial public offering on September 27, 1999. Prior to
that time, there was no public market for our common stock. The following table
shows the high and low closing sale prices for our common stock as reported on
the Nasdaq National Market for the periods indicated:
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1999
Third quarter (from September 27, 1999)................... $13.56 $11.50
Fourth quarter............................................ $59.94 $11.50
YEAR ENDED DECEMBER 31, 2000
First quarter (through February 8, 2000).................. $43.00 $26.00
</TABLE>
On February 8, 2000, the last reported sale price of our common stock on
the Nasdaq National Market was $36.00 per share. As of December 31, 1999, there
were approximately 141 holders of record of our common stock and 15,524,170
shares of our common stock outstanding.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock and
do not anticipate doing so in the foreseeable future. We may incur indebtedness
in the future that may prohibit or effectively restrict the payment of
dividends, although we have no current plans to do so.
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<PAGE> 20
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999,
- on an actual basis; and
- on an as adjusted basis to reflect the estimated net proceeds from the
sale of 1,000,000 shares of common stock being sold by us in this
offering at an assumed public offering price of $36.00 per share, after
deducting underwriting discounts and commissions and estimated offering
expenses payable by us.
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1999
------------------------
AS ADJUSTED
ACTUAL (UNAUDITED)
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term obligations, less current portion................. $ 40 $ 40
-------- --------
Shareholders' equity:
Preferred stock, undesignated, no par value; 6,814,516
shares authorized and no shares issued and outstanding
actual and as adjusted(1).............................. -- --
Common stock, no par value, 100,000,000 shares authorized;
15,524,170 issued and outstanding, actual and
16,524,170 shares issued and outstanding, as
adjusted(2)............................................ 66,587 100,287
Additional paid-in capital................................ 2,858 2,858
Deferred stock compensation............................... (1,466) (1,466)
Accumulated deficit....................................... (17,068) (17,068)
-------- --------
Total shareholders' equity............................. 50,911 84,611
-------- --------
Total capitalization.............................. $ 50,951 $ 84,651
======== ========
</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. On
July 18, 1997, all of the shares of Series A convertible preferred stock
were converted into common stock. On October 1, 1999, all of the 877,967
shares of Series B convertible stock previously issued were converted to
common stock.
(2) Actual shares outstanding is based on the number of common shares
outstanding as of December 31, 1999. Excludes 1,123,260 shares of common
stock issuable upon the exercise of options then outstanding with a weighted
average exercise price of $3.92 per share, and 27,700 shares of common stock
issuable upon exercise of warrants then outstanding with a weighted average
exercise price of $1.19 per share. As-adjusted shares outstanding includes
the common shares outstanding as of December 31, 1999 and the shares being
sold by us in this offering. See "Management -- Stock Option Plan" and Note
10 to FreeShop's financial statements included elsewhere in this prospectus.
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<PAGE> 21
DILUTION
Our net tangible book value as of December 31, 1999 was approximately $49.0
million, or $3.16 per share of common stock. After giving effect to the sale by
us of the 1,000,000 shares of common stock offered hereby at an assumed public
offering price of $36.00 per share and after deducting underwriting discounts
and commissions and estimated offering expenses payable by us, the as-adjusted
net tangible book value of FreeShop as of December 31, 1999 would have been
$5.00 per share of common stock. This represents an immediate increase in pro
forma net tangible book value of $1.84 per share to existing shareholders and an
immediate dilution of $30.88 per share to new investors. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share..................... $36.00
Net tangible book value per share as of December 31,
1999................................................... $ 3.16
Increase in net tangible book value per share attributable
to new investors....................................... 1.84
------
Net tangible book value per share after this offering....... 5.00
------
Dilution per share to new investors......................... $31.00
======
</TABLE>
The foregoing discussion and table assume no exercise of any stock options
or warrants outstanding after December 31, 1999. As of December 31, 1999, there
were options outstanding to purchase a total of 1,123,260 shares of our common
stock with a weighted average exercise price of $3.92 per share and warrants
outstanding to purchase a total of 27,700 shares of our common stock with a
weighted average exercise price of $1.19 per share. To the extent that any of
these options or warrants are exercised, there will be further dilution to new
investors.
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<PAGE> 22
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected financial data are qualified in their entirety by
reference to, and you should read them in conjunction with, FreeShop's financial
statements and the notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
prospectus. The statement of operations data presented below for the year ended
June 30, 1997, the six months ended December 31, 1997, and the years ended
December 31, 1998 and 1999, and the selected balance sheet data at December 31,
1998 and 1999 are derived from FreeShop's financial statements, included
elsewhere in this prospectus, that have been audited by PricewaterhouseCoopers
LLP, independent accountants. The statement of operations data presented below
for the years ended June 30, 1995 and 1996, and the selected balance sheet data
at June 30, 1995, 1996 and 1997, and December 31, 1997 are derived from our
financial statements that have also been audited by PricewaterhouseCoopers LLP
and that are not included in this prospectus. The statement of operations data
for the 12 months ended December 31, 1997 is unaudited and has been prepared by
FreeShop's management for comparative purposes only. See Note 1 to FreeShop's
financial statements included elsewhere in this prospectus for a discussion of
Online Interactive, Inc.'s contribution of its FreeShop Division to FreeShop
International, which later changed its name to FreeShop.com, Inc.
<TABLE>
<CAPTION>
FREESHOP DIVISION
OF ONLINE INTERACTIVE, INC. FREESHOP
---------------------------- -----------------------------------------------------
SIX MONTHS 12 MONTHS
YEAR ENDED JUNE 30, ENDED ENDED YEAR ENDED DEC. 31,
---------------------------- DEC. 31, DEC. 31, -----------------------
1995 1996 1997 1997 1997 1998 1999
------- ------- -------- ------------ ------------ ------------ --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues............................. $ 313 $1,271 $ 1,198 $ 535 $ 1,037 $ 1,251 $ 8,506
Cost of revenues......................... 85 310 314 140 259 217 733
------ ------ ------- ------- ------- ------- --------
Gross profit........................... 228 961 884 395 778 1,034 7,773
------ ------ ------- ------- ------- ------- --------
Operating expenses:
Sales and marketing.................... 134 624 1,810 1,175 2,225 3,088 15,042
Research and development............... 2 65 135 182 259 387 901
General and administrative............. 126 291 353 83 298 417 1,343
Equity-based compensation.............. -- -- -- 63 64 174 1,117
Depreciation and amortization.......... -- 9 30 35 52 104 1,039
------ ------ ------- ------- ------- ------- --------
Total operating expenses........... 262 989 2,328 1,538 2,898 4,170 19,442
------ ------ ------- ------- ------- ------- --------
Operating loss........................... (34) (28) (1,444) (1,143) (2,120) (3,136) (11,669)
Interest expense......................... -- -- -- 6 6 66 40
Other income, net........................ -- -- -- -- -- (3) (818)
------ ------ ------- ------- ------- ------- --------
Net loss................................. $ (34) $ (28) $(1,444) $(1,149) $(2,126) $(3,199) $(10,891)
====== ====== ======= ======= ======= ======= ========
Basic and diluted net loss per share..... $(0.01) $(0.01) $ (0.31) $ (0.22) $ (0.51) $ (1.08)
====== ====== ======= ======= ======= ========
Shares used to compute basic and diluted
net loss per share..................... 4,601 4,601 4,601 5,189 6,224 10,043
====== ====== ======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF DECEMBER 31,
------------------------- --------------------------------------
1995 1996 1997 1997 1998 1999
------ ------ ------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................ $ -- $ -- $ -- $ 26 $ 2,892 $ 33,795
Working capital (deficiency)............. 3 80 322 (158) 2,014 46,736
Total assets............................. 48 207 536 645 3,687 55,816
Long-term obligations, less current
portion................................ -- -- 5 160 195 40
Total shareholders' equity............... 8 105 432 82 2,244 50,911
</TABLE>
21
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We began our direct marketing business in 1994 as the FreeShop division of
Online Interactive, Inc., a company founded by Timothy C. Choate and John P.
Ballantine. In addition to operating the FreeShop division, Online Interactive
was also engaged in the business of selling software over the Internet. In July
1997, Micro Warehouse, Inc., a catalog retailer and direct marketer of
computers, software and related products, purchased all of the stock of Online
Interactive from its shareholders. Before the purchase was completed, Online
Interactive transferred the FreeShop division to FreeShop International, Inc., a
newly formed, wholly owned subsidiary, and spun off FreeShop International
through a distribution to its shareholders. On February 19, 1999, FreeShop
International changed its name to FreeShop.com, Inc.
We began our online marketing operations in 1994 through a relationship
with Prodigy Communications Corporation, a proprietary online service. In 1995,
we also began a marketing relationship with America Online, Inc., another
proprietary online service. We came to believe proprietary online environments,
which provide content exclusively to their fee-paying members, were limiting our
ability to develop the FreeShop brand and to access the growing number of people
using the Internet. As a result, we terminated our relationship with Prodigy in
August 1997 and our relationship with America Online in March 1998. Since March
1998, we have focused exclusively on our Web sites.
With the Micro Warehouse purchase of Online Interactive in July 1997, Mr.
Choate joined Micro Warehouse as a vice president. In March 1998, Mr. Choate
rejoined FreeShop as chief executive officer and began initiatives to expand our
sources of revenue beyond our primary business of lead generation by offering
multiple advertising vehicles, such as banner advertising, site sponsorships and
sponsorships of our Club FreeShop email newsletters. We also increased our
efforts to expand consumer awareness of and visits to FreeShop.com. We have
continued our efforts to improve the attractiveness of our Web sites and to
develop technology to improve our ability to offer services to clients and to
monitor and manage our Web sites.
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 cost per click through. The services we deliver are
primarily sold under short-term agreements that are subject to cancellation. We
recognize revenues in the period in which we deliver the service. See
"Business -- Client Services" and Note 2 to FreeShop's financial statements
included elsewhere in this prospectus.
Our ten largest clients accounted for 25.0% and 30.8% of our net revenues
in the years ended December 31, 1998 and 1999. No single client accounted for
more than 3.8% of net revenues in the year ended December 31, 1998 or 6.5% of
net revenues in the year ended December 31, 1999.
In December 1998, Fingerhut invested $4.0 million in our business and
received common stock and warrants. As of October 1, 1999, Fingerhut had
exercised all of its warrants and related anti-dilution rights for an aggregate
of $17.5 million. On October 1, 1999, all of Fingerhut's Series B preferred
stock automatically converted to common stock. Fingerhut holds approximately
33.1% of our common stock as of December 31, 1999, and will hold approximately
22.8% of our common stock after the completion of this offering. Fingerhut's
investments have given us more
22
<PAGE> 24
resources to accelerate the growth of our business and have permitted us to add
experienced management, marketing and technical personnel. Fingerhut has no
obligation to make 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 lead
generation contracts, banner advertising and site sponsorships. We accounted for
these acquisitions as asset purchases and have included the results of the
acquired businesses in our financial statements from the date we completed the
acquisitions. These acquisitions resulted in the allocation of $2.7 million to
goodwill and other intangible assets in May 1999. We are amortizing these
intangible assets over periods ranging from one to five years. We have included
unaudited pro forma combined financial information elsewhere in this prospectus
reflecting these acquisitions as if the acquisitions had occurred on January 1,
1999. Pro forma net revenues were $8.7 million for the year ended December 31,
1999. See FreeShop's unaudited pro forma combined statement of operations data,
the Commonsite financial statements and the Travel Companions International
financial statements included elsewhere in this prospectus.
Effective June 1, 1999, we entered into an agreement with NewSub Services,
Inc., a magazine distributor, to offer consumers access to numerous magazine
titles. In December 1999, the NewSub agreement was terminated, effective March
14, 2000. On December 8, 1999, we entered into an agreement with eNews.com,
Inc., a magazine distributor, which will be effective on March 15, 2000. We
believe the eNews agreement provides us more attractive financial terms while
making more magazine offers available to our consumers. We also intend to offer
lead generation contracts based on pricing per lead in the future.
We have revised our previously reported net revenues related to the barter
portion of our agreement with NewSub Services for the three months ended
September 30, 1999 and three months ended June 30, 1999. The revision resulted
in a reduction in net revenues for the three months ended September 30, 1999
from $2.6 million to $2.4 million, or 8% of net revenues. Revenues for the three
months ended June 30, 1999 were reduced from $1.5 million to $1.4 million, or 7%
of net revenues.
Our business has been operating at a loss and generating negative cash flow
since inception. As of December 31, 1999, we had accumulated losses of
approximately $16.7 million. We plan to continue increasing the level of our
investment in marketing and promotion, development of technology and expansion
of our business through internal growth and strategic acquisitions. 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, 1999 to the year ended December 31, 1998, for the
year ended December 31, 1998 to the unaudited 12-month period ended December 31,
1997 and 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
23
<PAGE> 25
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 financial statements
included elsewhere in this prospectus.
The following table sets forth statement of operations data for the periods
indicated as a percentage of net revenues:
<TABLE>
<CAPTION>
YEAR ENDED 12 MONTHS YEAR ENDED
JUNE 30, ENDED DEC. 31,
--------------- DEC. 31, ----------------
1996 1997 1997(1) 1998 1999
----- ------ ------------ ------ ------
<S> <C> <C> <C> <C> <C>
Net revenues............................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues........................... 24.4 26.2 25.0 17.3 8.6
----- ------ ------ ------ ------
Gross profit............................. 75.6 73.8 75.0 82.7 91.4
----- ------ ------ ------ ------
Operating expenses:
Sales and marketing...................... 49.1 151.1 214.7 246.9 176.8
Research and development................. 5.1 11.3 25.0 30.9 10.6
General and administrative............... 22.9 29.5 28.7 33.4 15.8
Equity-based compensation................ -- -- 6.1 13.9 13.1
Depreciation and amortization............ 0.7 2.5 5.0 8.3 12.2
----- ------ ------ ------ ------
Total operating expenses.............. 77.8 194.4 279.5 333.4 228.6
----- ------ ------ ------ ------
Operating loss............................. (2.2) (120.6) (204.5) (250.7) (137.2)
Interest expense........................... -- -- 0.7 5.2 0.5
Other income, net.......................... -- -- -- (0.2) (9.6)
----- ------ ------ ------ ------
Net loss................................... (2.2)% (120.6)% (205.2)% (255.7)% (128.0)%
===== ====== ====== ====== ======
</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.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Net revenues. We derive our revenues primarily from online lead generation
and advertising contracts. Our net revenues increased by $7.2 million, or 580%,
to $8.5 million in the year ended December 31, 1999 from $1.3 million in the
year ended December 31, 1998. This growth in net revenues was attributable to
the introduction of advertising services in June 1998 and an increase in the
number of visits to our Web sites, 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 $4.2 million in 1999, compared to $288,000 in 1998.
Cost of revenues. Cost of revenues consists of expenses associated with the
maintenance and usage of our Web sites and email delivery costs. Such costs
include Internet connection charges, banner ad serving fees, equipment and
software depreciation and personnel costs. Cost of revenues increased by
$516,000, or 238%, to $733,000 in the 1999 from $217,000 in 1998. The increase
was primarily due to costs related to additional Internet connection capacity
and personnel costs to support our growth. Gross margin increased to 91.4% in
1999 from 82.7% in 1998. The increase in gross margin was primarily due to cost
of revenues increasing at a slower rate than net revenues. We expect cost of
revenues to increase on an absolute basis and possibly as a percentage of net
revenues in the short-term as we continue to increase our Internet connection
capacity, hardware and software investments, and personnel cost in order to
support our growth.
Sales and marketing. Sales and marketing expenses consist primarily of
marketing and promotional costs related to developing our brand and generating
visits to our Web sites, as well as personnel and other costs. Sales and
marketing expenses increased by $11.9 million, or 387%,
24
<PAGE> 26
to $15.0 million in the year 1999 from $3.1 million in 1998. The increase was
due primarily to a $7.9 million, or 598%, increase in advertising and brand
awareness spending and to a $2.6 million, or 196%, increase in personnel costs.
As a percentage of net revenues, sales and marketing expenses decreased to
176.8% in 1999 from 246.9% in 1998. The decrease as a percentage of net revenues
was primarily due to sales and marketing expenses, other than advertising
spending, increasing at a lesser rate than net revenues. We expect to continue
to increase our advertising and brand awareness spending in the future.
Research and development. Research and development expenses primarily
include personnel costs related to maintaining and enhancing the features,
content and functionality of our Web sites and related systems. Research and
development expenses increased by $514,000, or 133%, to $901,000 in 1999 from
$387,000 in 1998. The increase was primarily due to hiring additional staff to
support our growth, continued improvements in our internal systems and
enhancements and modifications to our Web sites. As a percentage of net
revenues, research and development expenses decreased to 10.6% in 1999 from
30.9% in 1998. The decrease as a percentage of net revenues was primarily due to
research and development expenses increasing at a slower rate than net 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 $926,000, or 222%, to $1.3 million in 1999 from to $417,000 in
1998. The increase was primarily due to increased personnel costs and
professional service fees necessary to support our growth. As a percentage of
net revenues, general and administrative expenses decreased to 15.8% in 1999
from 33.4% in 1998. The decrease as a percentage of net revenues was primarily
due to general and administrative expenses increasing at a slower rate than net
revenues.
Equity-based compensation. Equity-based compensation expenses consist of
amortization of deferred stock compensation recognized in connection with stock
options and recognition of expenses when our principal shareholders sold our
stock to an employee at a price below the estimated fair market value of our
common stock. Deferred stock compensation is recorded based on the intrinsic
value when we issue stock options to employees and directors at an exercise
price below the estimated fair market value of our common stock at the date of
grant. Deferred stock compensation is also recorded based on the fair value of
the option granted as calculated using the Black-Scholes option pricing model
when options or warrants are issued to advisors and other service providers.
Deferred stock compensation is amortized over the vesting period of the option
or warrant. Equity-based compensation expenses increased by $943,000, or 542%,
to $1.1 million in 1999 from to $174,000 in 1998. The increase resulted
primarily from recognition of $406,000 in expenses related to the sale of
securities to an employee by a principal shareholder at a price below the
estimated fair market value as an inducement for the employee to work for
FreeShop, and recognition of expenses related to issuing options with exercise
prices based on the last price received from a third party investor. As a
percentage of net revenues, equity-based compensation expenses decreased to
13.1% in 1999 from 13.9% in 1998. We expect equity-based compensation expenses
to remain at similar levels over the next year and then to gradually decline.
Depreciation and amortization. Depreciation and amortization expenses
consist of depreciation on leased and owned computer equipment, software, office
equipment and furniture and amortization on intellectual property, non-compete
agreements and goodwill from acquisitions. Depreciation and amortization
expenses increased by $935,000, or 899%, to $1.0 million in 1999 from $104,000
in 1998. The increase resulted from the depreciation of approximately $2.3
million in equipment and furniture acquired during 1999 and the amortization of
approximately $2.7 million in intangible assets related to the acquisition of
substantially all of the assets of Commonsite, LLC and Travel Companions
International, Inc. As a percentage of net revenues, depreciation and
amortization expenses increased to 12.2% in 1999 from 8.3% in 1998.
25
<PAGE> 27
Interest expense. Interest expense primarily relates to capital equipment
leases, and totaled $40,000 in 1999 and $66,000 in 1998.
Other income, net. Other income, net, consists primarily of interest
income. Other income, net, increased by $815,000 to $818,000 in 1999 from $3,000
in 1998. The increase was due to higher cash balances resulting from the
investments by Fingerhut and the proceeds from our initial public offering in
September 1999.
Income Taxes. No provision for federal income taxes has been recorded for
any of the periods presented due to our current loss position.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO UNAUDITED 12 MONTHS ENDED DECEMBER 31,
1997
Net revenues. Our net 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 net revenues 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 net revenues was partially offset by a reduction in
lead generation revenues resulting from the termination of our relationships
with Prodigy in August 1997 and America Online in March 1998.
Cost of revenues. Cost of revenues decreased by 42,000, or 16%, to $217,000
in 1998 from $259,000 in 1997. The decrease in cost of revenues was primarily
due to lower access charges for the Internet compared to the proprietary Prodigy
and America Online environments. As a result, gross margin increased to 82.7% in
1998 from 75.0% in 1997.
Sales and marketing. Sales and marketing expenses increased by $863,000, or
39%, to $3.1 million in 1998, compared to $2.2 million in 1997. The increase was
primarily due to a $988,000, or 405%, increase in advertising and brand
awareness spending, which was partially offset by reduced contract labor
spending. As a percentage of net revenues, sales and marketing expenses
increased to 246.9% in 1998 from 214.7% in 1997.
Research and development. Research and development expenses increased by
$128,000, or 49%, to $387,000 in 1998, compared to $259,000 in 1997. The
increase was primarily due to hiring of additional staff to support our growth.
As a percentage of net revenues, research and development expenses increased to
30.9% in 1998 from 25.0% in 1997.
General and administrative. General and administrative expenses increased
by $119,000, or 40%, to $417,000 in 1998, compared to $298,000 in 1997. The
increase was primarily a result of increased personnel costs and professional
service fees necessary to support our growth. As a percentage of net revenues,
general and administrative expenses increased to 33.4% in 1998 from 28.7% in
1997.
Equity-based compensation. Equity-based compensation expenses increased by
$110,000, or 172%, to $174,000 in 1998, compared to $64,000 in 1997. This
increase resulted primarily from option grants made to advisors and directors
and four gifts of common stock made to employees by principal shareholders. As a
percentage of net revenues, equity-based compensation expenses increased to
13.9% in 1998 from 6.1% in 1997.
Depreciation and amortization. Depreciation and amortization expenses
increased by $52,000, or 100%, to $104,000 in 1998, compared to $52,000 in 1997.
This increase resulted from the depreciation of approximately $171,000 in
furniture and equipment acquired during 1998. As a percentage of net revenues,
depreciation and amortization expenses increased to 8.3% in 1998 from 5.0% in
1997.
26
<PAGE> 28
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, net. Other income, net, 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, net, in 1997.
YEAR ENDED JUNE 30, 1997 COMPARED TO YEAR ENDED JUNE 30, 1996
Net revenues. Our net 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 net revenue, in 1997 and $484,000, or 38% of total net 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 net
revenues, sales and marketing expenses increased to 151.1% in 1997 from 49.1% in
1996.
Research and development. Research and development expenses increased by
$70,000, or 108%, to $135,000 in 1997, compared to $65,000 in 1996. The increase
was primarily due to hiring of additional staff. As a percentage of net
revenues, research and development expenses increased to 11.3% in 1997 from 5.1%
in 1996.
General and administrative. General and administrative expenses increased
by $62,000, or 21%, to $353,000 in 1997, compared to $291,000 in 1996. The
increase was primarily a result of increased personnel costs and professional
service fees. As a percentage of net revenues, general and administrative
expenses increased to 29.5% in 1997 from 22.9% in 1996.
Equity-based compensation. No equity-based compensation expense was
recognized in either period while FreeShop was operating as a division of Online
Interactive during both periods.
Depreciation and amortization. Depreciation and amortization expenses
increased by $21,000, or 233%, to $30,000 in 1997, compared to $9,000 in 1996.
This increase resulted from the depreciation of approximately $109,000 in
furniture and equipment acquired during 1997. As a percentage of net revenues,
depreciation and amortization expenses increased to 2.5% in 1997 from 0.7% in
1996.
27
<PAGE> 29
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth FreeShop's unaudited quarterly statement of
operations data for the eight quarters ended December 31, 1999 as well as the
percentage of net revenues represented by each item. In the opinion of our
management, this information was prepared on substantially the same basis as
FreeShop's audited financial statements and accompanying notes included in this
prospectus.
In the opinion of our management, all necessary adjustments, consisting
only of normal recurring adjustments and the adjustments necessary to record the
acquisition of substantially all of the assets of CommonSite, LLC and Travel
Companies International, Inc. in May 1999, have been included in the amounts
stated below to present fairly the unaudited quarterly results of operations.
You should read this quarterly data in conjunction with FreeShop's financial
statements and accompanying notes included elsewhere in this prospectus. Our
operating results for any quarter are not necessarily indicative of the
operating results for any future period.
We have revised our previously reported net revenues related to the barter
portion of our agreement with NewSub Services for the three months ended
September 30, 1999 and three months ended June 30, 1999. The revision resulted
in a reduction in net revenues for the three months ended September 30, 1999
from $2.6 million to $2.4 million, or 8% of net revenues. Revenues for the three
months ended June 30, 1999 were reduced from $1.5 million to $1.4 million, or 7%
of net revenues.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
--------- -------- --------- -------- --------- --------- --------- --------
(IN THOUSANDS) (REVISED) (REVISED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net revenues............ $ 220 $ 209 $ 321 $ 501 $ 667 $ 1,397 $ 2,386 $ 4,056
Cost of revenues........ 39 37 65 76 83 107 149 394
----- ----- ------ ------ ------- ------- ------- -------
Gross profit.......... 181 172 256 425 584 1,290 2,237 3,662
----- ----- ------ ------ ------- ------- ------- -------
Operating expenses:
Sales and marketing... 459 571 981 1,077 1,496 2,645 4,641 6,260
Research and
development......... 113 81 86 107 141 181 254 325
General and
administrative...... 89 83 94 151 210 252 310 571
Equity-based
compensation........ 69 53 39 13 79 543 234 261
Depreciation and
amortization........ 24 25 26 29 36 224 366 413
----- ----- ------ ------ ------- ------- ------- -------
Total operating
expenses......... 754 813 1,226 1,377 1,962 3,845 5,805 7,830
----- ----- ------ ------ ------- ------- ------- -------
Operating loss.......... (573) (641) (970) (952) (1,378) (2,555) (3,568) (4,168)
Interest expense........ 12 16 16 22 13 10 9 8
Other (income) expense,
net................... -- 1 6 (10) (25) (62) (69) (662)
----- ----- ------ ------ ------- ------- ------- -------
Net loss................ $(585) $(658) $ (992) $ (964) $(1,366) $(2,503) $(3,508) $(3,514)
===== ===== ====== ====== ======= ======= ======= =======
</TABLE>
28
<PAGE> 30
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
--------- -------- --------- -------- --------- --------- --------- --------
(REVISED) (REVISED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF NET
REVENUES:
Net revenues.......... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues...... 17.5 17.8 20.2 15.2 12.5 7.7 6.2 9.7
------ ------ ------ ------ ------ ------- ------- ------
Gross profit........ 82.5 82.2 79.8 84.8 87.5 92.3 93.8 90.3
------ ------ ------ ------ ------ ------- ------- ------
Operating expenses:
Sales and
marketing......... 208.4 273.4 305.6 215.2 224.4 189.3 194.5 154.3
Research and
development....... 51.4 38.7 26.8 21.2 21.1 13.0 10.7 8.0
General and
administrative.... 40.3 39.8 29.3 30.1 31.5 18.0 13.0 14.1
Equity-based
compensation...... 31.6 25.5 12.2 2.5 11.9 38.9 9.8 6.4
Depreciation and
amortization...... 10.9 11.9 8.1 5.9 5.4 16.0 15.3 10.2
------ ------ ------ ------ ------ ------- ------- ------
Total operating
expenses....... 342.6 389.3 382.0 274.9 294.3 275.2 243.3 193.0
------ ------ ------ ------ ------ ------- ------- ------
Operating loss........ (260.1) (307.1) (302.2) (190.1) (206.8) (182.9) (149.5) (102.7)
Interest expense...... 5.5 7.8 4.9 4.3 2.0 0.7 0.4 0.2
Other (income)
expense, net........ -- 0.4 2.0 (1.9) (3.8) (4.4) (2.9) (16.3)
------ ------ ------ ------ ------ ------- ------- ------
Net loss.............. (265.6)% (315.3)% (309.1)% (192.5)% (205.0)% (179.2)% (147.0)% (86.6)%
====== ====== ====== ====== ====== ======= ======= ======
</TABLE>
Net revenues. Our net revenues increased in each quarter presented, except
for the second quarter of 1998. Our net revenues decreased by $11,000, or 5%, to
$209,000 in the second quarter of 1998 from $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 net revenues in the first quarter of 1998. Revenues
unrelated to America Online increased by $94,000, or 86%, to $203,000 in the
second quarter of 1998 from $109,000 in the first quarter of 1998.
Cost of revenues. As a percentage of net revenues, cost of revenues
increased during the first three quarters of 1998 as we built our infrastructure
in anticipation of future revenues. From the fourth quarter of 1998 to the third
quarter of 1999, we have recognized significant increases in gross margin due to
cost of revenues increasing at a lesser rate than net revenues. In the fourth
quarter of 1999, our gross margin decreased from the previous quarter due to the
outsourcing of email delivery, establishment of redundant systems and increases
in Internet connection capacity.
Sales and marketing. Sales and marketing expenses increased in absolute
dollars in each quarter presented. As a percentage of net revenues, there was a
decrease in sales and marketing expenses in the fourth quarter of 1998 and in
the second and fourth quarters of 1999. The decrease as a percentage of net
revenues in the fourth quarter of 1998 resulted from an increase in net revenues
in the fourth quarter of 1998 without a corresponding increase in advertising
and brand awareness spending. As a percentage of net revenues, sales and
marketing expenses have decreased in the second and fourth quarters of 1999.
These decreases were primarily due to sales and marketing expenses, other than
advertising spending, increasing at a lesser rate than net revenues.
Research and development. Research and development expenses decreased in
the second quarter of 1998 primarily due to higher personnel costs and
recruiting fees paid in the first quarter of 1998. Research and development
expenses have increased steadily since the third
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quarter of 1998 as a result of increased personnel costs related to the
continued enhancement of our systems and Web sites.
General and administrative. General and administrative expenses decreased
in the second quarter of 1998 primarily due to a decrease in personnel costs and
one-time severance costs incurred in the first quarter of 1998 resulting from
the departure of our former chief executive officer and another senior officer.
General and administrative expenses have increased steadily since the second
quarter of 1998 due primarily to additional personnel costs and professional
service fees necessary to support our growth.
Equity-based compensation. Equity-based compensation expenses for the first
three quarters of 1998 relate primarily to recognition of compensation for gifts
of stock made by a significant shareholder to some of our employees.
Equity-based compensation expenses in the fourth quarter of 1998 and the first
quarter of 1999 relate to options granted. Equity-based compensation expenses in
the second quarter of 1999 include both amounts related to grants of options and
$406,000 of expense related to the sale of securities to an employee by a
significant shareholder at a price below the estimated fair market value of the
stock. Equity-based compensation expenses in the third and fourth quarters of
1999 relate primarily to options granted to employees.
Depreciation and amortization. Depreciation and amortization expenses have
increased during each quarter presented primarily due to the acquisition of
additional computer equipment, software, office equipment and furniture. In the
second quarter of 1999, depreciation and amortization expenses increased in
absolute dollars and as a percentage of net revenues. A significant portion of
this increase resulted from the amortization of intangible assets related to the
acquisition of substantially all of the assets of Commonsite, LLC and Travel
Companions International, Inc.
We anticipate our net 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
For the year ended December 31, 1999, we granted options to purchase
498,066 shares of common stock under the 1997 Stock Option Plan. These options
were granted to employees, directors and service providers at exercise prices
ranging from $1.50 to $28.50 per share, many of which were below the fair market
value of our common stock at the date of grant. In relation to these grants, we
will recognize compensation expense of approximately $1.5 million over the
vesting terms of one to four years. Compensation expenses related to these
options of approximately $776,000, $426,000, $210,000 and $88,000 will be
classified as operating expenses in the years ending December 31, 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 equity securities.
Gross proceeds from the issuance of stock through December 31, 1999 totaled
$65.4 million, including $21.5 million raised from Fingerhut. As of December 31,
1999, we had approximately $47.7 million in cash, cash equivalents and
short-term securities, providing working capital of $46.7 million.
Net cash used in operating activities was $9.1 million and $2.2 million in
the years ended December 31, 1999 and 1998, respectively. Cash used in operating
activities for each period
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resulted primarily from net losses and increases in accounts receivable, which
were partially offset by increases in accounts payable and accrued liabilities.
Net cash used in investing activities was $17.9 million and $67,000 in the
years ended December 31, 1999 and 1998, respectively. In the year ended December
31, 1999, $1.8 million was used to acquire substantially all of the assets of
Commonsite, LLC and Travel Companions International, Inc.; $2.3 million was used
to purchase equipment, furniture and to pay for leasehold improvements and $15.3
million was used to invest in short-term securities. For the year ended December
31, 1998, cash used in investing activities was primarily related to purchases
of property and equipment.
Net cash provided by financing activities was $57.9 million and $5.2
million in the years ended December 31, 1999 and 1998, respectively. Net cash
provided by financing activities resulted primarily from issuance of capital
stock, which was partially offset by principal payments made on capital leases.
We believe our current cash and cash equivalents, including the 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 18
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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Substantially all of our cash equivalents, short-term securities and
capital lease obligations are at fixed interest rates, and therefore the fair
value of these instruments is affected by changes in market interest rates.
However, as of December 31, 1999, all of our cash equivalents mature within
three months and all of our short-term securities mature within one year. As of
December 31, 1999, we believe the reported amounts of cash equivalents,
short-term securities and capital lease obligations to be reasonable
approximations of their fair values. As a result, we believe that the market
risk arising from our holding of financial instruments is minimal.
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 that could disrupt
our operations, including our Web sites.
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To our knowledge, we have not experienced any systems failures or
disruptions of our operations or Web sites resulting from the year 2000 issue,
although we continue to monitor our systems.
To date, we have spent approximately $40,000 on year 2000 compliance. At
this time, we do not expect to incur future expenditures relating to year 2000
compliance matters.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments, and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives) and for
hedging activities. SFAS 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. We do not expect the adoption of this
Statement to have a significant impact on our results of operations, financial
position or cash flows.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition," which provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements filed with the Securities and Exchange Commission. SAB 101 outlines
the basic criteria that must be met to recognize revenue and provides guidance
for disclosures related to revenue recognition policies. Management believes
that SAB 101 would have no material effect on our financial position, results of
operations or cash flows.
LIMITATION ON NET OPERATING LOSS CARRYFORWARDS
We have approximately $14.4 million of federal net operating loss
carryforwards as of December 31, 1999, which may be available to reduce the
amount of U.S. federal income taxes payable by us in the future. The exercise of
Fingerhut's warrants in May 1999 and the closing of our initial public offering
and exercise of the remainder of Fingerhut's warrants in October 1999 resulted
in ownership changes 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
taxable income in any post-ownership change year. The limitation on the
utilization of federal net operating loss carryforwards in future years is not
expected to be material.
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BUSINESS
OVERVIEW
FreeShop provides online direct marketing services, giving consumers access
to over 1,000 free, trial and promotional offers through our Web sites and email
newsletters. Consumers seeking to discover, learn about or try new products and
services can choose from a collection of offers from over 300 companies.
FreeShop enables consumers to seek 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.
Our primary source of revenue is lead generation. We post offers from our
marketer clients for catalogs, magazine and newsletter subscriptions, product
samples, brochures, coupons, and trial periods for services, software and
publications. These clients then pay us for each lead generated. We also offer
marketers opportunities to advertise on our Web sites and to sponsor our email
newsletters. In addition, we intend to offer permission email marketing programs
to our clients. Club FreeShop members, who accounted for over 37% of our orders
generated in December 1999, regularly receive email newsletters informing them
of special offers, exclusive contests and other opportunities. We believe our
consumer-directed process creates a highly effective method of direct marketing
in terms of cost, targeting, efficiency and consumer satisfaction.
INDUSTRY BACKGROUND
GROWTH OF THE INTERNET AND ONLINE COMMERCE
Over the past several years, the Internet has emerged as a powerful and
efficient new medium, enabling people worldwide to exchange information,
communicate and conduct business electronically. The number of people using the
Internet continues to expand rapidly. International Data Corporation (IDC)
estimates that the number of people using the Internet will grow from
approximately 160 million worldwide in 1998 to over 500 million worldwide by the
end of 2003.
Businesses have recognized the online commerce opportunity and are
increasingly using the Internet to sell and distribute products and services.
According to IDC, online commerce will increase from approximately $50 billion
worldwide in 1998 to approximately $1.3 trillion worldwide in 2003, representing
a compound annual growth rate of approximately 92%. As online commerce and the
number of people using the Internet grow, advertisers and direct marketers are
increasingly using the Internet to locate customers, advertise products or
services and facilitate transactions. Forrester Research estimates that
approximately $3.3 billion was spent on Internet advertising worldwide in 1999
and that this amount will grow to approximately $33.1 billion in 2004.
DIRECT MARKETING
Advertising expenditures can be broadly categorized as either brand
advertising or direct marketing. Brand advertising is intended to generate brand
name awareness and create a specific image for a particular company, product or
service. Direct marketing involves any direct communication to a consumer
intended to generate a specific response or action, generally the purchase of a
product or service. The Direct Marketing Association estimates that direct
marketing accounts for over 57% of total U.S. advertising expenditures and that
in 1998, marketers spent $81.4 billion in the United States on direct marketing
to consumers.
Traditional Direct Marketing. Traditional direct marketing media include
direct mail, telemarketing and newspaper, magazine, radio and television
advertisements. Although traditional direct marketing is effective and widely
used, it presents a number of challenges for marketers
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and consumers alike. Traditional direct marketers generally lack specific and
timely information on a particular consumer's immediate interests. As a result,
marketers spend considerable resources on communications most consumers don't
want or need. For example, according to BAIGlobal, Inc., the average response
rate to the nearly 3.5 billion mailings of credit card solicitations in 1998 was
only 1.2%. Given the costs associated with traditional direct marketing, which
include telecommunications, postage, printing, assembly, labor and facilities,
we believe the often low response rates make the process inefficient.
Online Direct Marketing. Online direct marketing media include banner
advertisements, targeted email solicitations and Web site sponsorships. We
believe online direct marketing is more attractive than traditional direct
marketing because it requires lower production costs and provides easier and
faster customer response features. In addition, online direct marketing allows
marketers to easily:
- develop one-to-one relationships with consumers;
- collect data and feedback on marketing campaigns; and
- customize marketing campaigns to broad audiences or specific groups.
Even with these advantages, direct marketers face challenges in realizing
the full potential of the Internet as a marketing medium. With millions of Web
sites, only a fraction of which have significant audiences, it is difficult for
marketers to decide where to spend their marketing dollars. Even leading brand
name marketers who build their own Web sites must find ways to attract a
sizeable audience of visitors. In addition, technological hurdles may impede
conventional direct marketers from successfully extending their activities to
the Internet. In order to participate in most online marketing efforts,
marketers must build and maintain Web sites as well as incorporate order-taking
capabilities and develop systems to integrate online ordering with their
traditional databases.
We believe marketers desire a solution that benefits from the effectiveness
of direct marketing while overcoming the challenges presented by both
traditional and online marketing methods.
THE FREESHOP SOLUTION
FreeShop acts as an intermediary between consumers and marketers, through
which consumers seeking to try new products and services are presented with a
collection of free, trial and promotional offers from marketers seeking an
audience of potential customers. We offer a consumer-directed process in which
consumers select only those offers of immediate interest to them. We then
forward those orders to our marketer clients. We believe FreeShop's solution
creates a highly effective method of direct marketing in terms of cost,
targeting, efficiency and consumer satisfaction. Marketers pay us for the number
of customer leads delivered, the number of visitors we direct to their Web site
or the number of times an advertisement is viewed.
Benefits to Consumers. FreeShop puts consumers in control of the direct
marketing process by empowering them to select offers that most interest them
and meet their individual needs. Through our FreeShop.com, catalogsite.com and
wwb.com (Worldwide Brochures) Web sites we bring together consumers and
marketers in an interactive environment. FreeShop has more than 1,000 offers
from over 300 companies. The offers include items such as catalogs, magazines,
product samples, software, brochures and coupons, covering a variety of
interests such as travel, personal finance, entertainment, automobiles and
sports. In addition, because many offers are free samples or trial offers,
consumers are able to try new products and services before making purchase
decisions. Furthermore, because credit card information is not required for many
offers, we believe FreeShop is attractive for visitors new to online shopping
who may otherwise be reluctant to shop online.
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Benefits to Marketers. We believe FreeShop benefits marketers by offering
an effective way to acquire customers. Our clients receive visibility from our
traffic base of new and repeat customers. FreeShop offers marketers a diversity
of programs designed to meet their objectives throughout the entire marketing
process, from awareness to interest to trial to sale. Our services include lead
generation, advertising and sponsorship of our email newsletters. In addition,
because set-up costs are minimal and our lead generation services are generally
billed on a results basis, marketers can test our direct marketing services with
little risk. Most importantly, because consumers select the offers they receive,
we believe marketers acquire higher quality leads and avoid the risk of
tarnishing their brand image as a result of making numerous unwanted
solicitations.
STRATEGY
Our objective is to be the dominant provider of online direct marketing
services. We intend to achieve this objective through the following key
strategies:
Increase Traffic and Transactions. Our strategy of rapidly increasing
consumer traffic to our Web sites is focused on both new and repeat visitors.
New visits will be driven primarily by our online and traditional advertising
programs, our Associates Program of over 50,000 member sites, other traffic
relationships, including our "Powered by FreeShop" participants, and
word-of-mouth referrals. Our top four traffic relationships, based on the number
of orders generated in December 1999, are Go2Net, Inc., Excite, Inc., Deja.com,
Inc. and Xoom.com, Inc.
Under our traffic relationships, including our Associates Program, we
configure links to our Web sites for the other party to place on its Web site,
and we pay a fee for traffic and orders generated from that site. "Powered by
FreeShop" is a program through which we contract with larger sites to create
free offer content sites or promotions, which are co-branded with the brands of
FreeShop and our partner. We provide the free offer content, our partner
provides the promotion for the co-branded area, and we share any revenues
generated from the co-branded area. Through our "Powered by Freeshop" and
Associates programs we seek to become the primary free offer solution on the
Internet, providing free offers to improve the content of a wide variety of Web
sites.
We promote repeat visits primarily through regular email communications to
the 2.2 million Club FreeShop members and our other email newsletter
subscribers. 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 sites. In December 1999, over 54% of our orders
on FreeShop.com came from repeat visitors. Finally, to help retain our loyal
base of consumers, we monitor the performance of our client marketers in
fulfilling orders generated through our Web sites.
Increase Client Base. We believe FreeShop offers marketers a cost-effective
alternative to traditional direct marketing and, as a result, we believe we have
a significant opportunity to increase the number of marketer clients we serve.
In particular, we believe more and more companies with national consumer brand
names are seeking Internet-based direct marketing vehicles, and we plan to
initiate new relationships and expand our existing relationships with these
companies. We are rapidly increasing our sales staff in order to drive this
client growth. We plan to continue expanding the services we offer our clients,
including enhanced marketing programs, new methods of presenting offers,
expanded and customized data-gathering options and increased opportunities for
following up on initial lead generation. In addition to enhancing our existing
marketing programs, we will be developing new programs in an effort to meet the
needs of new and different marketers. Finally, we are focusing on marketing our
services to larger advertising agencies as a solution for their client companies
to access the rapidly increasing number of consumers on the Internet.
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Continue to Build the FreeShop Brand Name. We intend to continue to
increase the awareness and strength of the FreeShop brand name among both
consumers and marketers through site design and focused and aggressive
advertising. Because consumers and marketers tend to favor well-known Web sites,
a strong brand name is critical to our efforts to grow visitor traffic, attract
marketing clients and increase the number and quality of free, trial and
promotional offers on our Web sites. To date, we have used our Associates
Program, other traffic partnerships, advertising, promotions and public
relations in an effort to create a leading brand name in our sector.
Expand Offers. The number and quality of offers on our Web sites are
critical to our ability to attract visitors and increase revenues from our
marketer client base. We believe we have a significant competitive advantage in
attracting additional marketer clients with national consumer brand names due to
the large number of consumers visiting our Web sites and our selection of offers
across multiple categories. We plan to expand the number of categories and
increase the number of offers within each category. We will drive this content
expansion through a combination of internal sales efforts, partnerships and
acquisitions. As part of this strategy, we have recently entered into an
agreement with eNews.com, Inc., a magazine distributor, to offer consumers
access to over 800 magazine titles. We have also greatly increased the number
and quality of the catalog offers we provide through our acquisition of the
Catalog Site Web site. In addition, the acquisition of the Worldwide Brochures
Web site has dramatically increased the number of travel offers we provide.
Other categories we intend to expand in the near future include product samples,
coupons and personal finance.
Continue to Develop and Use Technology to Enhance Web Site Capabilities. We
have designed and implemented numerous proprietary systems that enable us to
process orders from consumers within one business day of receipt and regularly
deliver lead information to marketers. We regularly update our Web sites and
related system technologies to encourage consumers to place orders and
frequently revisit the Web sites in our network. As part of our effort to
promote repeat visits and additional transaction volume, we continue to develop
features that will make the FreeShop experience faster, easier and more
personalized.
Expand Relationship With Fingerhut and Federated. Fingerhut, a subsidiary
of Federated Department Stores, Inc., is the second largest general merchandise
cataloger and the eighth largest cataloger overall in the United States, selling
general merchandise through catalogs and various Web sites. In 1999, we
initiated a noncontractual direct marketing relationship with Fingerhut. As a
result of this relationship, at no cost to FreeShop, Fingerhut places FreeShop
advertisements and inserts cards listing Fingerhut's partner Web sites,
including FreeShop.com, in some of Fingerhut's catalogs and order delivery
packages. Fingerhut also provides FreeShop with additional information from its
consumer database about the individuals in FreeShop's existing customer database
and assists FreeShop with analysis of its 2.2 million clubmember database. In
addition, both FreeShop and Fingerhut have placed links on their Web sites to
the other's Web sites. These links provide each company with additional sources
of customers and customer information. A portion of the revenues generated by
FreeShop and Fingerhut as a result of these links is shared with the other,
based on fees prevailing in the market at the time. We hope to develop a similar
relationship with Federated, which operates over 400 full-line department
stores, direct mail catalog businesses and an electronic commerce business. As
part of its effort to develop a relationship with Federated, in November and
December 1999, FreeShop and Macy's, one of Federated's department stores, joined
in creating and promoting Hunger-Free Holiday(TM), a Web-based program enabling
visitors to contribute directly to America's Second Harvest, the nation's
largest domestic hunger-relief organization, with a network of 189 regional food
banks serving all 50 states and Puerto Rico.
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OUR WEB SITE
We have designed our Web sites in an effort to make them fast and easy for
consumers to use, to enhance our brand names and to encourage consumers to
request an offer. These sites are organized around categories and promotions and
are regularly updated to refresh the content and encourage repeat visits by
consumers. The key features of our core FreeShop.com Web site include offers,
promotions, highlighted offers and Club FreeShop.
Offers. Visitors are attracted to our FreeShop.com site by the aggregation
of free, trial and promotional offers. Our FreeShop.com base of more than 1,000
offers is organized around categories, currently including:
<TABLE>
<S> <C>
Auto Home & Living
Business & Career International
Catalogs Magazines
Computing & Electronics Men's Style
</TABLE>
<TABLE>
<S> <C>
Email Newsletters New Offers
Entertainment Personal Finance
Family & Kids Software
Health & Sports Travel
Hobbies Women's Style
</TABLE>
By organizing content into categories, we allow customers to review offers
in their self-selected areas of interest, which provides 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, which allows the customer to order any
additional offers in subsequent visits without having to re-enter their
information. Trial offers, such as magazines, may require the customer to enter
credit card information, which we pass on to our marketer clients who process
any charges. After a customer has ordered, we send emails to thank the customer
for the order and, later, to confirm that the order was received. The emails
include information on additional related offers, providing an opportunity to
cross-promote and "upsell" other offers.
Promotions. We organize offers from our clients around seasonal or other
events. Promotions run for limited time periods and include both special offers
created solely for individual promotions and offers listed under other
categories elsewhere on the site. Promotions function much like categories,
aggregating offers around a central theme.
Highlighted Offers. We have the ability to highlight offers and manage the
traffic directed to individual offers in various ways. Highlighted offers on our
home page are selected and regularly updated by our staff. These offers are
intended to provide a representation of the wide range of offers available on
our Web site. On subsequent pages, offers are highlighted based on an automated
ranking system.
We also create lists of our site's top offers on category pages based on
our own assessment of broad consumer appeal. The lists provide a type of
"recommended viewing" guide for customers, which results in increased orders for
such offers.
Club FreeShop. We designed Club FreeShop to communicate with our most
valued customers. Club members, totaling 2.2 million as of December 1999, are
regularly sent 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
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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 and subscription
options to Club FreeShop members in the future, which will allow for more
focused marketing. In addition, we intend to make available the opportunity for
consumers to choose to receive additional email marketing offers from our
clients.
Other Features. As part of our effort to increase traffic on our Web site
from word-of-mouth advertising, we created Tell-a-Friend. This feature,
available throughout our site, allows a customer to send an email to a friend
with a link to a specific page or offer. In addition, to make our customers'
shopping experience more comfortable, FreeShop has adopted strong privacy and
customer service policies. Our privacy policy specifies that we disclose how
customer information is used by FreeShop and our marketing customers, allows
customers to remove their information from our customer databases and fully
complies with the standards of the Direct Marketing Association. The Direct
Marketing Association standards, among other things, allow customers to remove
their information from our database, to refuse to allow us to sell, rent or
exchange their customer information and to request that we not contact them in
the future. Our privacy policy also complies with the standards of TRUSTe, an
independent, nonprofit entity which has established a recognized privacy
standard for the Internet. In accordance with TRUSTe standards, we post
disclosure on our Web site regarding our use of customer information, give our
customers a choice on how their information is used and have implemented data
security, quality and access measures to safeguard, update and correct customer
information. In addition to enabling customers to limit use of their personal
information by FreeShop, we provide our customers with access to general
information about methods of limiting use of their personal information by other
direct marketers.
CLIENT SERVICES
We offer marketers a diversity of services designed to meet their
objectives throughout the entire marketing process, from awareness to interest
to trial to sale. Our primary business is generating customer leads through
free, trial and promotional offers. We also provide a number of advertising
services on our Web sites and within our Club FreeShop and other email
newsletters. In addition, we offer the rental of our customer lists to other
marketers.
- Lead Generation. We post offers from our clients for:
- catalogs;
- magazine and newsletter subscriptions;
- product samples and information;
- brochures;
- coupons and discounts; and
- trial periods for services, software and publications.
Consumers are able to place orders with us for these offers, and we
deliver this information to our clients, who are responsible for
fulfilling these orders. Information sent to our clients includes
information required for order fulfillment as well as additional
information requested by the marketer. Marketers pay us for each customer
order, or lead, we generate. Through the aggregation of commerce
opportunities on our Web sites, we provide another form of lead
generation to our clients. We group these commerce offers in the same
categories as free and trial offers. When consumers decide to purchase a
particular item, they click through from our site to the actual commerce
site sponsoring the offer. In this way, we generate valuable leads to our
commerce partners and are not responsible for processing and fulfilling
orders for products.
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- Advertising. We provide advertising opportunities through banner ads,
site sponsorships and sponsorships of our Club FreeShop and other email
newsletters. Banner advertising clients benefit from our high traffic
volume of consumers likely to be in a shopping mode. Marketer clients can
also receive high-profile placement on our homepage and on specific
category pages through our Web site sponsorship program. We believe
newsletter sponsorships appeal to marketers due to the receptive audience
the newsletters reach.
- Email Marketing. We recently entered into a relationship with YesMail to
make available permission email marketing programs to our clients and
other clients of YesMail. We are beginning our programs to build a base
of consumers who are interested in receiving additional offers via email
and we will make this program available to clients in the near future.
- List Rental. We also rent our consumer names and street addresses to
third parties, unless the consumer has requested that they be excluded
from this program. We add consumer information to our database the first
time a consumer requests an offer.
During the three months ended December 31, 1999, approximately 90% of our
contracts were month-to-month with automatic renewal unless terminated by either
party with ten days' notice. Some of our advertising contracts have longer terms
of up to five years. During 1999, our top ten clients accounted for 30.8% of net
revenues, and no single client accounted for more than 6.5% of net revenues.
SALES AND MARKETING
CONSUMER BASE DEVELOPMENT
To encourage consumers to visit our Web sites and increase transactions, we
must continue to enhance the recognition of the our brand names and strengthen
our position as a leader in the online direct marketing industry. Additional
visitor traffic to our Web sites 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 relationships, traditional
advertising and Club FreeShop and other email newsletter programs.
Online Advertising. We recognize the importance of well-placed advertising
in building traffic and strengthening our brand names. 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 enhance our existing ones.
Associates Program and Traffic Relationships. We launched our Associates
Program in the fourth quarter of 1998 and, as of December 1999, we had over
50,000 associates. Under our "Powered by FreeShop" program, we have contracted
with larger Web sites, including Go2Net and Excite, to create free-offer content
sites or promotions, which are co-branded with the brands of FreeShop and our
partners. We share revenues generated from the co-branded site, but we typically
own any customer information generated.
Traditional Advertising. We plan to supplement our online presence with an
increase in our traditional marketing efforts 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 include package and
catalog inserts.
We also use public relations as a way to create customer awareness of the
FreeShop brand name. We have been the subject of newspaper, magazine and
television stories. Articles about FreeShop have appeared in Wired Magazine,
Advertising Age and PC World, among other publications, and television stories
featuring us have been aired nationally on CNBC and CNNfn.
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<PAGE> 41
We believe ongoing media coverage will be essential to increase general brand
name awareness and to attract new traffic to our Web sites.
Club FreeShop. We created Club FreeShop to communicate with our most valued
customers. Consumers who join Club FreeShop regularly receive email newsletters
informing them of special offers, exclusive contests and other opportunities.
Consumer response to offers contained in the Club FreeShop newsletters is a
significant source of repeat orders. In addition to Club FreeShop, we have
created a travel email newsletter for Worldwide Brochures customers, and intend
to launch additional email newsletter subscriptions in the future.
CLIENT BASE DEVELOPMENT
We sell our services to our marketer clients primarily through our direct
sales force. The majority of FreeShop's sales organization, which included 15
salespeople as of December 31, 1999, focuses on small and medium-sized sales
opportunities. Two of our salespeople focus on larger sales opportunities with
larger national clients and advertising agencies. By marketing directly to
advertising agencies, we are able to position FreeShop as the online marketing
solution for their numerous clients. Our salespeople are located in Washington,
New York, Virginia and California. As part of our strategy to increase our
client base, we intend to continue to increase our sales force in the future. In
addition, we have an ongoing advertising campaign designed to promote the
FreeShop brand name to marketers through various trade and industry
publications.
ACQUISITIONS
In order to increase the number and types of offers available on our Web
site and increase our visitor and client bases, we acquired two businesses in
May 1999 which expanded our catalog and travel-related offerings. We acquired
the Catalog Site Web site and substantially all of the related assets of
Commonsite, LLC for $441,000 and 52,920 shares of our common stock. The Catalog
Site Web site (www.catalogsite.com) offers over 200 catalogs. The business
acquired had revenues of $540,000 for the fiscal year ended December 31, 1998
and generated 194,000 leads in the quarter ended March 31, 1999. We also
acquired the Worldwide Brochures Web site and substantially all of the related
assets of Travel Companions International, Inc. for $1.4 million. The Worldwide
Brochures Web site (www.wwb.com) offers a selection of over 15,000 travel
brochures for locations around the world. The business acquired had revenues of
$220,000 for the fiscal year ended December 31, 1998 and generated 167,000 leads
in the quarter ended March 31, 1999. In the future, we may make additional
acquisitions of complementary businesses and technologies that increase the
number and variety of offers on our Web sites or increase the capabilities of
our Web sites or the marketing services offered to our clients.
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 December 1999, we received a total of
approximately 550,000 orders and for the fourth quarter of 1999, we received a
total of approximately 2.5 million orders. In December 1999, we transmitted
order data in various formats and media to over 200 clients on a regular basis.
In the fourth quarter of 1999, we received approximately 12.2 million visits to
our Web sites. We believe our systems can currently accommodate approximately 20
million visitors over the course of a month and, as our traffic increases, we
intend to increase our capacity by adding servers. All order information is
integrated with our customer and email newsletter member databases to provide
for high levels of internal data analysis. We have developed sophisticated
databases and technology supporting these systems that are not available
commercially to our competitors.
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Our systems are built around Microsoft Backoffice components to provide for
a scalable and redundant platform. In addition to in-house software, we use a
variety of third-party software and service solutions to support our business.
LinkShare Corporation provides software and support for our Associates Program,
DoubleClick Inc. provides banner ad serving and reporting, Akami provides
graphic serving and Marketwave Corporation software is used for Web site traffic
analysis. We also work with Digital Impact for delivery of our email
newsletters, and will be working with YesMail for delivery of our permission
marketing emails. These tools are used in conjunction with in-house developed
tools to enhance marketing efforts and to determine the effectiveness of various
campaigns and content on our Web sites. Performance monitoring of our Web sites
is provided by multiple sources, including Keynote Systems, Appliant, Inc., and
our Internet service and Web site hosting partners.
Web site content is posted and modified from our headquarters in Seattle
and offices in Minnesota through a combination of internally developed
applications. Visits to FreeShop.com are directed to a network of Microsoft IIS
Web servers at Frontier Global's San Jose, California, hosting facility.
Frontier Global 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. Our Seattle headquarters is connected to
the Internet via two DS-3 lines provided by MCI Worldcom and two T-1 lines
provided by Savvis Communications. In the near future we plan to establish web
servers in New York and secure servers in San Jose and New York to help prevent
systems failures and slow response times on our Web sites and significantly
increase our visit and order capacity.
COMPETITION
We face intense competition from both traditional and online advertising
and direct marketing companies. We also face competition from established online
portals and community Web sites that engage in direct marketing. Although we
believe no other company offers the combination and quality of services we
offer, we compete directly and indirectly for marketers and consumers with
companies in various categories, including:
- Free-Offer Web Sites. There are a number of sites, both large and small,
that give consumers access to free offers, including Volition.com and
Free2Try.com.
- Specialty Lead-Generation Web Sites. Various sites focus on generating
leads for a specific segment of the direct marketing industry, such as
the catalog, magazine or coupon segments. While these sites typically
provide a depth of offerings within their specific sector, they may not
offer promotions across a broad spectrum of product categories. These
sites include eNews, Cataloglink and Catalogcity. In some instances,
these companies are partners or clients of FreeShop.
- Other Web Sites. We also compete with a number of sites that offer
content, services or information about a particular topic, such as travel
related sites, as well as other advertising networks. In addition, we
compete with sites featuring loyalty programs that reward consumers for
taking specific actions. In some instances, these companies are partners
or clients of FreeShop.
The number of Web sites competing for consumer attention and marketers'
dollars has proliferated, and we expect that competition will continue to
intensify. We also compete with traditional media such as television, radio and
print for a share of marketers' total marketing budgets. We may be unable to
compete successfully against current or future competitors, many of which have
significantly greater financial, technical and marketing resources.
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We believe that the principal competitive factors in our markets are:
- brand recognition;
- Web site speed and ease of use;
- quality and diversity of offers; and
- the volume of online visitors, duration and frequency of visits and their
demographic profiles.
GOVERNMENT REGULATION
Laws and regulations that apply to Internet communications, commerce and
advertising are becoming more prevalent. The adoption of such laws could create
uncertainty in Internet usage and reduce the demand for all products and
services offered on the Internet. Recently, Congress enacted legislation
regarding children's privacy on the Internet. It is possible that additional
laws and regulations may be proposed or adopted with respect to the Internet,
covering issues such as user privacy, taxation, advertising, intellectual
property rights and information security. Several states have proposed
legislation to limit the use of personal user information gathered online or to
require online services to establish privacy policies.
The Federal Trade Commission recently reported that it has no present
intention of proposing legislation to address online privacy in the near future,
and that it believes self-regulation to be the best course of action, except for
rules enacted to implement the Children's Online Privacy Protection Act, which
governs the collection of personal information from children and the
confidentiality of such information. However, the FTC has initiated action
against at least one online service regarding the manner in which personal
information was collected from users and provided to third parties.
Legislation has recently been enacted in several states relating to sending
unsolicited emails, a practice commonly referred to as "spamming." The federal
government and several other states, including New York, are considering, or
have considered, similar legislation. Although the provisions of these current
and contemplated laws vary, generally they limit or prohibit both the
transmission of unsolicited emails and the use of familiar spamming techniques,
such as the use of forged or fraudulent routing and header information. Some
states, including California, require that unsolicited emails include opt-out
instructions and that senders of such emails honor any opt-out requests. We
believe that neither our email newsletters nor our email order confirmations
will be affected by legislation directed at unsolicited emails because we do not
send unsolicited messages and because our current practices are intended to
comply with current and proposed legislation. However, if we are required to
change our business practices as a result of new legislation, our business could
suffer.
We do not know how our business may be affected by the application to the
Internet 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 on the Internet in multiple
states and foreign countries, these states and countries may claim that we are
required to qualify to do business in their jurisdictions. Currently, we are
qualified to do business only in Washington, Minnesota and California. Our
failure to qualify in other jurisdictions where we are required to do so could
subject us to taxes and penalties. It could also restrict our ability to enforce
contracts in those
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jurisdictions. The application of laws or regulations from jurisdictions whose
laws do not currently apply to our business could have a material adverse effect
on our business, results of operations and financial condition.
The European Union has adopted a privacy directive that went into effect in
1998. Under this directive, business entities domiciled in member states of the
EU are limited with respect to the transactions in which they may engage with
business entities domiciled outside the EU, unless the non-EU entities are
domiciled in jurisdictions with privacy laws comparable to the EU privacy
directive. The United States presently does not have laws that satisfy the EU
privacy directive. Discussions between representatives of the EU and the United
States are ongoing and may lead to certain safe harbor provisions which, if
adhered to, would allow business entities in the EU and the United States to
continue doing business without limitation. If these negotiations are not
successful and the EU begins enforcing the privacy directive, there could be an
adverse impact on international Internet business. If we do business directly in
the EU in the future, we will be required to comply with the EU privacy
directive.
INTELLECTUAL PROPERTY
We regard our copyrights, service marks, trademarks, trade secrets,
proprietary technology and similar intellectual property as critical to our
success, and we rely on trademark and copyright law, trade secret protection and
confidentiality and license agreements with our employees, customers,
independent contractors, partners and others to protect our intellectual
property rights. We have registered the trademark "Free Shop" in the United
States and may apply for registration in the United States for other trademarks
and service marks, including Club FreeShop, FreeShop Savings Club, Savings
Central, FreeShop shopping assistant, Catalog Site, Catalog Channel, The Catalog
Site and Worldwide Brochures. "Find It! Try It! Buy It!", "The starting point
for smart online shopping," "Powered by FreeShop" and "FreeShop by Email" are
service marks of FreeShop. However, effective trademark, service mark, copyright
and trade secret protection may not be available in every country in which
FreeShop's products and services are made available online.
We have registered a number of domain names, including freeshop.com,
catalogsite.com, wwb.com, and clubfreeshop.com, among others. Domain names
generally are regulated by Internet regulatory bodies. The regulation of domain
names in the United States and in foreign countries is subject to change in the
near future. Regulatory bodies could establish additional top-level domains,
appoint additional domain name registrars or modify the requirements for holding
domain names. The relationship between regulations governing domain names and
laws protecting trademarks and similar intellectual property rights is unclear.
Therefore, we could be unable to prevent third parties from acquiring domain
names that infringe on 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, if at all, or guarantee that rights granted by
any licenses will be valid and enforceable.
EMPLOYEES
As of December 31, 1999, FreeShop had a total of 120 employees, including
90 in sales and marketing, 18 in technology and development, and 12 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 and 2,240 square feet in a leased facility in Detroit Lakes,
Minnesota. We are currently preparing to
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occupy an additional 9,518 square feet at our current Seattle location. We are
also currently negotiating for an additional 4,000 square feet located at our
current Seattle location. We expect these facilities will be adequate for our
needs over the next 6 months, at which time we will need to obtain additional
office space to accommodate our growth. Our current lease for our Seattle space
expires in May 2004. Our current lease for our Detroit Lakes space expires in
May 2000.
LEGAL PROCEEDINGS
FreeShop is not currently a party to any material legal proceeding.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following table sets forth certain information, as of January 31, 2000,
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
John A. Wade........................... 37 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...................... 35 Vice President, Operations and Planning
Mark S. Noblitt........................ 35 Vice President, Technology
Stephanie Hooper-Smyth................. 35 Vice President, Communications
Debora Ashworth........................ 43 Vice President, Product Management
Dave Davis............................. 41 General Counsel
John P. Ballantine..................... 35 Director
John B. Balousek....................... 54 Director
William J. Lansing..................... 41 Director
Kirk M. Loevner........................ 41 Director
</TABLE>
Timothy C. Choate has served as Chairman, President and Chief Executive
Officer since March 1998. From July 1997 to March 1998, Mr. Choate served as a
Vice President of Micro Warehouse, Inc. In 1994, Mr. Choate co-founded Online
Interactive, Inc., the former parent of FreeShop, and served as its Chairman,
President and Chief Executive Officer until March 1997. Before 1994, Mr. Choate
served as President of Softdisk Publishing LLC, a software publishing company.
Mr. Choate's prior experience includes serving as a Senior Marketing Manager at
Prodigy Communications Corporation, an Internet access and content provider, and
developing and launching the New Products Division for Business Week, a division
of the McGraw-Hill Companies Inc. Mr. Choate serves on the boards of directors
of Digital River, Inc., a provider of electronic commerce outsourcing solutions,
and LapLink.com, Inc., an Internet file transfer company. Mr. Choate holds 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 of The Smithers Company and as an auditor for Ernst & Ernst. Mr.
Fritsch holds 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 of Buzz Oates Enterprises, a
real estate development company. Prior to 1992, Mr. Wade served as the
Controller of A&A Properties, Inc., an asset management corporation, the
Controller of Labels West, a manufacturing concern, and as an auditor and
taxation specialist at McGladrey and Pullen, an international accounting firm.
Mr. Wade holds a B.S. degree in Business Administration with a concentration in
Accounting from the San Diego State University School of Business.
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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, including Cole & Weber, an Ogilvy
Mather company, and McCann Erickson. Mr. Christiansen holds 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 holds an M.B.A. degree from the University of Washington and a B.A.
degree in Business Economics from the University of California at Santa Barbara.
Karen M. Leathers has served as Vice President, Operations and Planning
since July 1998. Since joining FreeShop in September 1997, Ms. Leathers has also
served as Director, Operations and Human Resources and Manager of Operations.
From March 1997 to August 1997, Ms. Leathers managed the Web-based data
acquisition team at Affinity Publishing, a partner marketing technology services
company. From 1993 to March 1997, Ms. Leathers managed the corporate Membership
Services Department at Recreational Equipment Incorporated. Prior to 1993, Ms.
Leathers served as a market analyst for Weyerhaeuser Company. Ms. Leathers holds
a B.A. degree in Business Management and Computers from The Evergreen State
College in Washington.
Mark S. Noblitt has served as Vice President, Technology since February
1999. From July 1997 to February 1999, Mr. Noblitt 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.
Stephanie Hooper-Smyth has served as Vice President, Marketing
Communications since October 1999. Ms. Hooper-Smyth joined FreeShop in August
1999. From December 1997 to June 1999, Ms. Hooper-Smyth was Vice President of
Marketing Communications at Sierra On-Line, Inc. Ms. Hooper-Smyth has 15 years
of marketing experience, having held positions at several advertising agencies
including McCann Erickson in San Francisco, California from December 1997 to
December 1995, Publicis in Seattle, Washington from December 1995 to December
1993, and for several years with Lowe in New York, New York. Ms. Hooper-Smyth's
key experience is brand marketing having worked with companies such as
Starbucks, AT&T, Johnson and Johnson, Disney and Nordstrom. Ms. Hooper-Smyth
holds a degree in Marketing from the San Diego State University School of
Business.
Debora Ashworth has served as Vice President, Product Management since
October 1999. Ms. Ashworth joined FreeShop in June 1999. From April 1993 to July
1998, Ms. Ashworth developed and managed a direct to consumer marketing, sales,
and retention operation for GE Financial Assurance. She has also previously held
database and marketing management positions within the financial services and
insurance industries. (Nationwide Insurance and Great Northern Insured Annuity
Corporation) Ms. Ashworth holds a B.A. degree in English Literature from
Skidmore College, Saratoga Springs, New York.
Dave Davis has served as General Counsel since January, 2000. Prior to
FreeShop, Mr. Davis served as general counsel for Ride, Inc. from August 1996 to
December 1999 and Egghead.com
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<PAGE> 48
from September 1994 to August 1996. While at Ride, Inc., Mr. Davis was heavily
involved in acquisitions and the recent merger of Ride with K2. During his
tenure with Egghead.com, Mr. Davis assisted with strategic alignment of the
business, and the launch of online sales of Egghead product offerings. Mr. Davis
also worked as an attorney for the Seattle-based law firms of Stanislaw
Ashbaugh, and Lane Powell Spears Lubersky. Mr. Davis holds a B.A. degree in
History from Whitman College and a J.D. degree from the University of Oregon
School of Law.
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 developer of early-stage e-commerce concepts. From July
1997 to March 1998, Mr. Ballantine served as a Vice President of Micro
Warehouse. In 1994, Mr. Ballantine co-founded Online Interactive and served as
its Executive Vice President and later as President and Chief Executive Officer.
From February 1993 to June 1994, Mr. Ballantine served as Vice President of
Softdisk Publishing, where he managed online shopping applications with America
Online, CompuServe, Prodigy and GEnie. From March 1989 to February 1993, Mr.
Ballantine served as Vice President of Sales for DataEnvelope, a full-service
software marketing and distribution company. Mr. Ballantine holds a B.S.E.
degree in Finance and International Business from the San Diego State University
School of Business.
John B. Balousek has served as a Director since February 1999. In 1998 Mr.
Balousek co-founded PhotoAlley.com, an online retailer of photographic
equipment, supplies and services. From 1979 to 1997, Mr. Balousek served in
various positions, including President/Chief Operating Officer and Director of
Foote, Cone & Belding Communications, Inc., a global advertising and
communications company. In 1996, Mr. Balousek served as Chairman/Chief Executive
Officer of True North Technologies, a digital and interactive service of True
North Communications, Foote, Cone & Belding's parent company. Mr. Balousek
currently serves as a director for Geoworks Corporation, a provider of
end-to-end solutions for the wireless communications market; Transilluminant
Corporation, a privately held company focusing on electronic data marketing; and
EDB Holdings, Inc., a superoptical retailing company. Mr. Balousek holds an
undergraduate degree from Creighton University and a graduate degree from
Northwestern University.
William J. Lansing has served as a Director since January 1999 and was
appointed by Fingerhut pursuant to the terms of a stockholders agreement between
us, Mr. Choate, Mr. Ballantine and Fingerhut. Mr. Lansing has served as the
President of Fingerhut since 1998. He was named Chief Executive Officer of
Fingerhut in May 1999. From November 1996 to May 1998, Mr. Lansing served as a
Vice President for Business Development of 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 as a director 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 holds a B.A. degree in English from
Wesleyan University and a J.D. degree from Georgetown University.
Kirk M. Loevner has served as a Director since November 1998. In February
1999, Mr. Loevner founded PublishOne Inc., an online publishing service for
businesses, of which he is currently President and Chief Executive Officer. From
August 1996 to August 1998, Mr. Loevner served as President and Chief Executive
Officer of the Internet Shopping Network, Inc., an online retailer and auction
house. From November 1993 to July 1996, Mr. Loevner served as a Vice President
and General Manager of Silicon Graphics Inc., a leading supplier of visual
computing and high-performance computer systems. Before November 1993, Mr.
Loevner served as a Vice President and General Manager of Apple Computer Inc., a
computer manufacturing company. Mr. Loevner currently serves on the board of
directors of the Software Industry and Information Association, a software
industry association. Mr. Loevner holds a B.S.E. degree in Computer
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<PAGE> 49
Science from Tufts University and an M.B.A. degree in General Management from
Harvard 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 of directors established two standing board
committees, 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, Balousek and Loevner.
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 and Lansing.
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 services as members of the board of directors, although they may be
reimbursed for certain expenses in connection with attendance at board and
committee meetings. We do not provide additional compensation for committee
participation or special assignments of the board of directors. From time to
time, certain of our directors have received grants of options to purchase
shares of our common stock pursuant to the 1997 Stock Option Plan. In January
1998, we granted to Messrs. Choate and Ballantine options to purchase 16,000
shares of common stock at an exercise price of $1.02 per share. In addition,
since March 1998, we have paid health insurance premiums on behalf of Mr.
Ballantine of approximately $360 per month. In September 1998, we granted to Mr.
Loevner an option to purchase 16,000 shares of common stock at an exercise price
of $1.50 per share. In February 1999, we granted to Mr. Balousek an option to
purchase 16,000 shares of common stock at an exercise price of $2.50 per share.
See "-- Stock Option Plan."
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<PAGE> 50
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid to our Chief Executive
Officer and four most highly compensated executive officers for the years ended
December 31, 1998 and December 31, 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ------------------
-------------------- SECURITIES
NAME AND PRINCIPAL POSITION SALARY BONUS UNDERLYING OPTIONS
--------------------------- -------- ------- ------------------
<S> <C> <C> <C> <C>
Timothy C. Choate(1).................. 1999 $107,293 $35,417
Chairman, President and 1998 26,825(2) 16,000
Chief Executive Officer
William H. Fritsch.................... 1999 105,208 30,208 25,000
Executive Vice President, 1998 50,000
Marketing
John A. Wade.......................... 1999 97,500 25,000
Secretary, Vice President, 1998 37,500 80,000
Finance and
Chief Financial Officer
Ronald C. Christiansen................ 1999 93,205 25,000 40,000
Vice President, Sales
Lisa C. Wolff......................... 1999 76,917 24,167
Vice President, Business 1998 65,167
Development
</TABLE>
- ---------------
(1) Mr. Choate became our Chief Executive Officer in March 1998.
(2) Includes $19,220 in deferred compensation paid in January 1999.
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<PAGE> 51
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information regarding stock option
grants to our Chief Executive Officer and four most highly compensated executive
officers during the year ended December 31, 1999. 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.
OPTION GRANTS IN 1999
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE
--------------------------------------------------------- AT ASSUMED ANNUAL RATES
NUMBER OF % OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO EXERCISE 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......... -- -- -- -- -- --
William H. Fritsch........ 25,000(3) 5.4% $12.69 11/15/09 $199,517 $505,615
John A. Wade.............. -- -- -- -- -- --
Ronald C. Christiansen.... 40,000(4) 8.7% 2.50 2/9/09 62,889 159,374
Lisa C. Wolff............. -- -- -- -- -- --
</TABLE>
- ---------------
(1) During 1999, options to purchase 462,066 shares were issued to employees.
(2) The exercise price per share was equal to the fair market value of the
common stock on the date of grant as determined by the board of directors.
(3) Represents options vesting according to the following schedule: 20% vesting
at one year, 6.7% vesting quarterly for the following 11 quarters and 6.3%
vesting at the end of four years.
(4) Represents options vesting according to the following schedule: 9.1% vesting
at six months, 9.1% vesting quarterly for the following nine quarters and
9.0% vesting at the end of three years.
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table sets forth for our Chief Executive Officer and four
most highly compensated executive officers the number of shares acquired upon
exercise of stock options during the year ended December 31, 1999 and the number
of shares subject to exercisable and unexercisable stock options held at
December 31, 1999.
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<PAGE> 52
AGGREGATED OPTION EXERCISES IN 1999
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, 1999 DECEMBER 31, 1999(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Timothy C. Choate....... 14,000 $180,320 1,000 1,000 $ 46,980 $ 46,980
William H. Fritsch...... -- -- 13,650 61,350 634,725 2,573,025
John A. Wade............ -- -- 32,760 47,240 1,532,076 2,207,124
Ronald C.
Christiansen.......... 3,640 41,496 3,640 32,720 165,620 1,488,760
Lisa C. Wolff........... 7,185 98,794 22,853 9,563 1,085,388 452,958
</TABLE>
- ---------------
(1) The value of unexercised in-the-money options at December 31, 1999 is based
on $48.00 per share, the closing price of the common stock at such time,
less the exercise price per share.
STOCK OPTION PLAN
On June 30, 1997, we adopted our 1997 Stock Option Plan, which was
subsequently approved by our shareholders. The plan authorizes the board of
directors, or a committee of independent directors, to act as the plan
administrator.
The plan provides for the grant of incentive stock options and nonqualified
stock options to purchase up to 2,400,000 shares of common stock. The plan
administrator may grant incentive stock options to our full-time employees or to
our nonemployee directors only. Nonqualified 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, which, for incentive stock
options, 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 its expiration. As of December 31, 1999, 1,112,623 shares were
available for future grant.
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
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<PAGE> 53
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 December 31, 1999.
DIRECTOR AND OFFICER INDEMNIFICATION AND LIABILITY
Our amended and restated articles of incorporation limit the liability of
our directors to the fullest extent permitted by Washington law, and our
articles incorporate by reference any later amendments to the Washington
Business Corporation Act. This act provides that a corporation's articles of
incorporation may contain a provision eliminating or limiting the personal
liability of directors for monetary damages for breach of their fiduciary duty
as directors, except for liability for:
- acts or omissions that involve intentional misconduct or a knowing
violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 23B.08.310 of the Washington Business
Corporation Act; or
- any transaction from which the director derived an improper personal
benefit.
Our bylaws provide that:
- we must indemnify our directors and officers against all reasonable
expenses incurred in a proceeding in which they are a party because they
are or were directors or officers;
- 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
directors or officers if:
1. they acted in good faith, and they reasonably believed, in the case
of conduct in the individuals' official capacities, that their
conduct was in our best interests and, in all other cases, that their
conduct was at least not opposed to our best interests; and
2. in the case of a criminal proceeding, the individual had no
reasonable cause to believe that his or her conduct was unlawful;
- we may indemnify other employees and agents to the same extent that we
indemnify our directors and officers, unless otherwise required by law,
our articles of incorporation, our bylaws or agreements; and
- we must advance expenses, as incurred, to our directors and officers in
connection with a legal proceeding to the fullest extent permitted by
Washington law.
We have entered into agreements with each of our directors that, among
other things, indemnify the director 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> 54
RELATED-PARTY TRANSACTIONS
TRANSACTIONS WITH MANAGEMENT AND OTHERS
TRANSACTIONS WITH DIRECTORS AND OFFICERS
We have entered into indemnification agreements with each of our directors
and officers containing provisions that may require us, among other things, to
indemnify our directors and officers against liabilities that may arise by
reason of their status or service as directors and officers, other than
liabilities arising from willful misconduct of a culpable nature, and to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified. See "Management -- Director and Officer
Indemnification and Liability."
TRANSACTIONS WITH FINGERHUT
The following is a description of our equity transactions with Fingerhut,
pursuant to which Fingerhut acquired shares of our common stock and warrants and
related rights, which were subsequently exercised for shares of our Series B
convertible preferred stock. On October 1, 1999, the Series B convertible
preferred stock was converted into common stock.
On December 10, 1998, we issued 1,619,387 shares of our common stock to
Fingerhut for $4.0 million, or $2.47 per share. Immediately following the
issuance of the shares, Fingerhut owned 19.9% of our issued and outstanding
common stock.
On December 10, 1998, we entered into a warrant agreement with Fingerhut,
pursuant to which we granted Fingerhut the following warrants to purchase our
common stock. Subsequently, in May of 1999 we agreed to issue Fingerhut shares
of our Series B convertible preferred stock in lieu of common stock upon the
exercise of these warrants.
(1) Irrevocable "percentage warrants"
The percentage warrants are designed to allow Fingerhut to increase
its percentage ownership in us and included:
- a warrant to purchase 293,536 shares of our Series B convertible
preferred stock at $17.18 per share;
- a warrant to purchase 179,072 shares of our Series B convertible
preferred stock at $19.94 per share; and
- a warrant to purchase 208,918 shares of our Series B convertible
preferred stock at $22.09 per share.
In May and June of 1999, Fingerhut exercised the first two tranches of
its percentage warrants, consisting of its $17.18 percentage warrants and
its $19.94 percentage warrants for a total of 472,608 shares of Series B
convertible preferred stock. On October 1, 1999, Fingerhut exercised its
$22.09 percentage warrant for 208,918 shares of our Series B preferred
stock.
(2) "Anti-dilution" warrants
The anti-dilution warrants were designed to allow Fingerhut to
maintain its percentage ownership in us if the number of issued and
outstanding shares increased due to the exercise of outstanding options and
warrants or the exercise of options to be granted under our stock option
plan. On October 1, 1999, all of the anti-dilution warrants were exercised.
(3) "Third-party agreement" warrants
The third-party agreement warrants were designed to allow Fingerhut to
maintain its ownership percentage in us if the number of issued and
outstanding shares increased due to the exercise of rights to purchase
additional shares of our common stock that were held by
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<PAGE> 55
two parties. We agreed with Fingerhut that the third-party agreement
warrants could be exercised by Fingerhut at its discretion in proportion to
the exercise by one or both of the other parties for a total of up to
12,153 shares of our Series B convertible preferred stock at $15.86 per
share. The third-party agreement warrants were exercised on October 1,
1999.
On December 10, 1998, we entered into a shareholders agreement with Mr.
Ballantine, Mr. Choate and Fingerhut. Under the terms of the shareholders
agreement, we granted Fingerhut:
- a preemptive right to purchase shares in the event of additional
share issuances by us;
- a right to approve any pledge of all of our assets, amendment to our
articles of incorporation or bylaws, merger with another corporation
or sale of substantially all of our assets;
- a one-time right to demand registration of shares owned by Fingerhut,
exercisable after June 30, 2001;
- a right to "piggyback," or include shares owned by Fingerhut, in two
registrations of shares initiated by us; and
- a right to appoint up to two members of our board of directors. To
date, Fingerhut has appointed only one director, William J. Lansing.
Fingerhut's preemptive rights, special approval rights and board appointment
rights expired on October 1, 1999.
In addition, Fingerhut, Mr. Choate and Mr. Ballantine agreed not to make
any public sale of any of our equity securities, or any securities convertible
into any of our equity securities, during the 30-day period before, and the
180-day period after, the effective date of our initial public offering. They
are subject to similar restrictions for any underwritten demand registration or
piggyback registration in which their shares are included, including this
offering. The shareholders agreement terminates generally on the earlier of
December 10, 2008 or the closing of the sale of all of our assets or the
acquisition of us by merger or consolidation.
On June 18, 1999, we entered into a letter agreement with Fingerhut under
which Fingerhut agreed to exercise all of its remaining exercisable warrants
upon completion of our initial public offering, which consisted of:
- percentage warrants to purchase 208,918 shares of our Series B
convertible preferred stock at $22.09 per share;
- anti-dilution warrants to purchase 184,288 shares of our Series B
convertible preferred stock at $22.09 per share; and
- third-party warrants to purchase 3,333 shares of our Series B convertible
preferred stock at $15.86 per share.
Additionally, Fingerhut agreed to purchase 8,820 shares of our Series B
convertible preferred stock at $15.86 per share.
In connection with the letter agreement, we entered into an escrow
agreement with Fingerhut, pursuant to which Fingerhut agreed to deposit into
escrow the full purchase price for the exercised warrants and the additional
shares of Series B convertible preferred stock to be purchased by Fingerhut, in
exchange for the deposit into escrow by us of the warrant shares and the
additional shares. The escrow agreement provided for the release of the escrowed
funds to us and the shares to Fingerhut upon the completion of our initial
public offering, which occurred on October 1, 1999.
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<PAGE> 56
CERTAIN BUSINESS RELATIONSHIPS
William J. Lansing, a member of our board of directors, is the President
and Chief Executive Officer of Fingerhut. During 1999, we provided approximately
$55,000 in lead-generation services to Fingerhut and Fingerhut provided
approximately $215,000 in fulfillment services to us. Mr. Lansing is also a
director of BigStar Entertainment, Inc., a client of FreeShop. In 1998 and 1999,
we billed BigStar approximately $9,000 and $265,000, respectively, for our
services. In January 2000, we entered into an agreement with Digital River to
offer free commercial software products to our customers. We have not yet
provided any services under our agreement with Digital River. Timothy Choate and
William Lansing are directors of Digital River.
Fingerhut is a significant shareholder of Roxy.com, Inc. In 1999, we billed
Roxy approximately $425,000 for our services.
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<PAGE> 57
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth information concerning the beneficial
ownership of our outstanding common stock as of December 31, 1999 and as
adjusted to reflect the sale of the shares of common stock in this offering for:
- each person or group that we know owns beneficially 5% or more of our
common stock;
- each of our directors;
- each of our four most highly compensated executive officers;
- each selling shareholder; and
- all directors and executive officers as a group.
The term "beneficial ownership" includes shares over which the indicated
beneficial owner exercises voting and/or investment power. The rules also deem
common stock subject to options or warrants currently exercisable, or
exercisable within 60 days, to be outstanding for purposes of computing the
percentage ownership of the person holding the options or warrants, but they 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
shareholder is based on 15,524,170 shares of common stock outstanding as of
December 31, 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.
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<PAGE> 58
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO THE NUMBER OF OWNED AFTER
OFFERING SHARES THE OFFERING
DIRECTORS, NAMED EXECUTIVE ------------------- BEING -------------------
OFFICERS AND 5% SHAREHOLDERS NUMBER PERCENT OFFERED NUMBER PERCENT
---------------------------- --------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Fingerhut Companies, Inc.(2)............ 5,131,255 33.05 1,360,000 3,771,255 22.82%
Timothy C. Choate(1)(3)................. 1,845,121 11.88 -- 1,845,121 11.17%
John P. Ballantine(4)................... 1,656,739 10.66 246,000 1,410,739 8.54%
Kirk M. Loevner(5)...................... 86,171 * 15,000 71,171 *
John B. Balousek(6)..................... 51,000 * -- 51,000 *
William J. Lansing...................... -- * -- -- *
Lisa Wolff(7)........................... 60,038 * 3,500 56,538 *
John A. Wade(8)......................... 52,760 * 3,000 49,760 *
Ron Christiansen(1)(9).................. 47,284 * -- 47,284 *
William H. Fritsch(10).................. 30,317 * 2,500 27,817 *
All directors and officers as a group
(11 persons)(11)...................... 3,865,862 24.69 270,000 3,595,862 21.76
OTHER SELLING SHAREHOLDERS
- ----------------------------------------
Charles Gottschalk...................... 77,600 * 30,000 47,600 *
Michael Tannen(12)...................... 83,448 * 30,000 53,448 *
Dennis E. Green, Jr..................... 73,200 * 30,000 43,200 *
Michael Roper........................... 62,135 * 62,135 -- *
Fred and Eleanor Silverstein(13)........ 50,659 * 20,000 30,659 *
William J. Byrne(14).................... 49,765 * 10,000 39,765 *
Christine M. Hanna...................... 28,278 * 15,000 13,278 *
Hugh Michael Ballantine................. 20,000 * 10,000 10,000 *
Catherine V. Tannen..................... 20,000 * 10,000 10,000 *
Noah R. Tannen.......................... 20,000 * 10,000 10,000 *
Robert Gauntt........................... 18,510 * 13,510 5,000 *
Willie Langston......................... 18,510 * 15,000 3,510 *
Kevin Lilly............................. 14,639 * 7,639 7,000 *
Elise Gottschalk(14).................... 1,600 * 800 800 *
Zachery Gottschalk(15).................. 1,600 * 800 800 *
Houston International Church............ 1,000 * 1,000 -- *
Second Baptist Church................... 1,000 * 1,000 -- *
Other selling shareholders
(approximately 42 persons)(17)........ 597,537 3.85 103,116 494,421 2.99
</TABLE>
- ---------------
* Less than one percent of the outstanding shares of common stock.
(1) Assumes that the Underwriters' over-allotment option is not exercised. If
the over-allotment option is exercised in full, we expect the following
selling shareholders will sell the following additional numbers of shares:
<TABLE>
<S> <C>
Fingerhut............................................ 40,000 shares;
Timothy C. Choate.................................... 270,000 shares; and
Ron Christiansen..................................... 6,000 shares.
</TABLE>
(2) Federated Department Stores, Inc. may be deemed to control Fingerhut by
virtue of its ownership of 100% of Fingerhut's capital stock and its
corresponding right to elect Fingerhut's directors, and, therefore, our
capital stock owned by Fingerhut may also be deemed to be beneficially
owned by Federated.
(3) Represents 1,831,121 shares held by Mr. Choate directly, 12,000 shares held
by trusts established for Mr. Choate's children and 2,000 shares that Mr.
Choate has a right to acquire pursuant to options exercisable within 60
days of December 31, 1999.
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<PAGE> 59
(4) Represents 1,641,739 shares held by Mr. Ballantine directly and 15,000
shares that Mr. Ballantine has a right to acquire pursuant to options
exercisable within 60 days of December 31, 1999.
(5) Represents 73,171 shares held by Kirk Loevner Trust w/d/t dated 8/5/96
directly and 13,000 shares that Mr. Loevner has a right to acquire pursuant
to options exercisable within 60 days of December 31, 1999.
(6) Represents 30,000 shares held by the Balousek Family Limited Partnership,
10,000 shares held by the Balousek 1994 Irrevocable Trust and 11,000 shares
that Mr. Balousek has a right to acquire pursuant to options exercisable
within 60 days of December 31, 1999.
(7) Represents 37,185 shares held by Ms. Wolff directly and 22,853 shares that
Ms. Wolff has a right to acquire pursuant to options exercisable within 60
days of December 31, 1999.
(8) Represents 20,000 shares held by Mr. Wade directly and 32,760 shares that
Mr. Wade has a right to acquire pursuant to options exercisable within 60
days of December 31, 1999.
(9) Represents 43,640 shares held by Mr. Christiansen directly and 3,644 shares
that Mr. Christiansen has a right to acquire pursuant to options
exercisable within 60 days of December 31, 1999.
(10) Represents 16,667 shares held by Mr. Fritsch directly and 13,650 shares
that Mr. Fritsch has a right to acquire pursuant to options exercisable
within 60 days of December 31, 1999.
(11) Represents 3,729,843 shares listed as to all current directors and
executive officers and 150,579 shares issuable within 60 days of December
31, 1999 upon the exercise of outstanding options.
(12) Represents 75,448 shares held by Mr. Tannen directly and 8,000 shares that
Mr. Tannen has a right to acquire pursuant to options exercisable within 60
days of December 31, 1999.
(13) Represents 34,659 shares held by Fred Silverstein directly, and 16,000
shares held by Fred and Eleanor Silverstein directly.
(14) Represents 40,000 shares held by Mr. Byrne directly and 9,765 shares that
Mr. Byrne has a right to acquire pursuant to options exercisable within 60
days of December 31, 1999.
(15) Represents 1600 shares held by Ms. Gottschalk directly with Charles
Gottschalk serving as Ms. Gottschalk's custodian.
(16) Represents 1600 shares held by Mr. Gottschalk directly, with Charles
Gottschalk serving as Mr. Gottschalk's custodian.
(17) Represents approximately 597,537 shares held by approximately 42 selling
shareholders.
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<PAGE> 60
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 December 31, 1999, there were 15,524,170 shares of our common stock
outstanding which were held of record by 141 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, of which 877,967 shares were issued and later
converted into common stock in October 1999.
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 December 31, 1999, we had warrants outstanding to purchase 27,700
shares of common stock. Generally, each warrant contains provisions for the
adjustment of the exercise price and the number of shares issuable upon the
exercise of the warrant upon the occurrence of events such as stock dividends,
stock splits, reorganizations, reclassifications and consolidations.
REGISTRATION RIGHTS
According to the terms of a shareholders agreement between us, Fingerhut
and 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 shareholders
agreement, Fingerhut is entitled to two "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
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<PAGE> 61
register any shares of common stock under the Securities Act of 1933, as
amended, Fingerhut is entitled to receive notice and to include its shares in
the registration statement, subject to certain limitations. After this offering,
Fingerhut is entitled to one piggyback registration under the agreement.
We have also granted piggyback registration rights to Commonsite with
respect to 52,920 shares of common stock in connection with our acquisition of
substantially all of the assets of Commonsite. Under the terms of the
registration rights agreement, after completion of this offering, Commonsite is
entitled to one piggyback registration in connection with any registration by us
of our securities for our own account or for the account of other security
holders (other than any registration of securities to be issued in connection
with an acquisition or under our employee compensation plans). If we propose to
register any shares of common stock under the Securities Act, Commonsite is
entitled to receive notice and to include its shares in the registration
statement, subject to certain limitations.
ANTITAKEOVER EFFECTS OF CERTAIN ARTICLES AND BYLAW PROVISIONS AND THE WASHINGTON
BUSINESS CORPORATION ACT
Articles and Bylaws. Our articles of incorporation and bylaws contain
provisions that may have the effect of delaying, deferring or preventing a
change in control. Neither the articles of incorporation nor the bylaws provide
for cumulative voting in the election of directors. Furthermore, the
authorization of undesignated preferred stock makes it possible for the board of
directors to issue preferred stock with voting or other rights or preferences
that could impede any attempt to change control of FreeShop.
Washington Business Corporation Act. Washington law imposes restrictions on
certain transactions between a corporation and certain significant shareholders.
Chapter 23B.19 of the Washington Business Corporation Act prohibits a "target
corporation," with some exceptions, from engaging in certain significant
business transactions with a person or group of persons that beneficially owns
10% or more of the voting securities of the target corporation (an Acquiring
Person) for a period of five years after such acquisition, unless the
transaction or acquisition of shares is approved by a majority of the members of
the target corporation's board of directors prior to the time of acquisition.
Transactions prohibited by this statute include, among others:
- a merger or consolidation with, disposition of assets to, or issuance or
redemption of stock to or from, the Acquiring Person;
- termination of 5% or more of the employees of the target corporation as a
result of the Acquiring Person's acquisition of 10% or more of the
shares; or
- allowing the Acquiring Person to receive any disproportionate benefit as
a shareholder.
After the five-year period, a "significant business transaction" may occur,
as long as it complies with certain "fair price" provisions of the statute. A
public corporation may not "opt out" of this statute. This provision may have
the effect of delaying, deferring or preventing a change in control of FreeShop.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar 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
Our common stock is quoted on the Nasdaq National Market under the trading
symbol "FSHP."
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<PAGE> 62
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 only limited 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 December 31, 1999, we will have outstanding an aggregate of
16,524,170 shares of our common stock, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options. Of these shares,
the 3,000,000 shares sold in this offering will be freely tradable without
restriction or further registration under the Securities Act, unless such shares
are purchased by "affiliates," as that term is defined in Rule 144 under the
Securities Act. In addition, in our recent initial public offering, 3,680,000
shares of our common stock were sold and such shares are freely tradeable
without restriction except for the "affiliate" restrictions described
immediately above.
Lock-Up Agreements. In connection with our initial public offering, certain
shareholders, including each of our directors and officers, who held an
aggregate of 11,497,632 shares of common stock 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 until March 25, 2000 without the prior written consent of
Deutsche Bank Securities Inc. We entered into a similar agreement, except that
we may, without the prior written consent of Deutsche Bank Securities Inc.,
issue common stock:
- as consideration or partial consideration for business acquisitions;
- in connection with the formation of strategic alliances;
- pursuant to the exercise of outstanding options and warrants; and
- in connection with the issuance and exercise of options granted under our
stock option plan.
Any shares so issued will be subject to a lock-up agreement until March 25,
2000. In addition, Fingerhut, Mr. Ballantine and Mr. Choate entered into a
cross-lock-up 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.
In connection with this offering, each of our directors and officers and
each of the selling shareholders, who hold an aggregate of shares of
common 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 90 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.
61
<PAGE> 63
As a result of the lockup agreements described above and subject to the
provisions of Rule 144, additional shares will be available for sale in the
public market as follows:
<TABLE>
<CAPTION>
APPROXIMATE
SHARES
ELIGIBLE FOR
DATE FUTURE SALE
---- ------------
<S> <C> <C>
Currently............................ Freely tradeable shares sold in initial public
offering or issued more than one year ago or
issued under employee stock option plan
At effectiveness of this registration
statement.......................... 3,000,000 Shares sold in this offering
March 25, 2000....................... Expiration of initial public offering lock-up
agreements
91 days after the date of this
registration statement............. 90 days lock-up expires; Rule 144 and Rule 701
limitations apply
From time to time thereafter.........
</TABLE>
Rule 144. In general, under Rule 144 as currently in effect, since December
26, 1999, 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 165,241 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.
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 beginning December 26, 1999 in
reliance on Rule 144, but without compliance with some restrictions, including
the holding period, contained in Rule 144.
Registration Rights. Upon completion of this offering, Fingerhut and
Commonsite will be entitled to rights with respect to the registration of shares
of our common stock under the Securities Act. See "Description of Capital
Stock -- Registration Rights." After such a registration, these shares become
freely tradable without restriction under the Securities Act. Fingerhut and
Commonsite will not 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.
62
<PAGE> 64
Stock Options. As of December 31, 1999, options to purchase 1,123,260
shares of common stock were issued and outstanding under our 1997 Stock Option
Plan. We have filed a registration statement on Form S-8 to register all of the
shares of common stock reserved for issuance under our 1997 Stock Option Plan
(including shares subject to outstanding options). Upon the expiration of the
lock-up agreements described above, at least 623,688 shares of common stock will
be subject to vested options (based on options outstanding as of December 31,
1999). Accordingly, shares registered under such registration statement are,
subject to any contractual lockup period, vesting provisions and Rule 144 volume
limitations applicable to our affiliates, be available for sale in the open
market.
63
<PAGE> 65
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representatives Deutsche Bank Securities
Inc., Dain Rauscher Incorporated, Thomas Weisel Partners LLC, Prudential
Securities Incorporated and E*OFFERING Corp. have severally agreed to purchase
from us and the selling shareholders 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 Incorporated..................................
Thomas Weisel Partners LLC..................................
Prudential Securities Incorporated..........................
E*OFFERING Corp.............................................
---------
Total............................................. 3,000,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the
underwriters are subject to the approval of certain legal matters by their
counsel and to certain other conditions. The agreement also provides for the
allocation of expenses incurred in the offering. In addition, the agreement
provides that the underwriters will purchase all the shares of common stock
offered by this prospectus, other than those covered by the over-allotment
option described below, if any of such shares are purchased. Pursuant to the
underwriting agreement, we have agreed to indemnify the underwriters against
liabilities under the Securities Act, and to contribute to payments the
underwriters may be required to make with respect to liabilities under the
Securities Act.
We have been advised by the representatives that the underwriters propose
to offer the shares of common stock directly to the public at the offering price
set forth on the cover page of this prospectus and to certain dealers at such
price less a concession not in excess of $ per share. The underwriters may
allow, and such dealers may re-allow, a concession not in excess of $ per
share to certain other dealers. After the this public offering, the offering
price and other selling terms may be changed by the representatives.
A prospectus in electronic format is being made available on Internet Web
sites maintained by E*OFFERING Corp. and E*TRADE Securities, Inc. Internet
purchases of the common stock offered by this prospectus will be available only
to registered customers of E*TRADE Securities, Inc. who possess sufficient net
worth and investment experience. All eligible accounts may submit a conditional
offer to E*TRADE Securities, Inc. to purchase shares. If demand exceeds
availability, E*TRADE Securities, Inc. will randomly allocate shares to
applicants in 100-share lots in a round-robin fashion, meaning that no applicant
will receive a second lot until all applicants have received one lot, and so
forth, until all shares available to E*TRADE Securities, Inc. have been
distributed. The common stock offered by this prospectus will not be directed to
any additional Internet customers other than the registered customers of E*TRADE
Securities, Inc.
Prudential Securities Incorporated facilitates the marketing of new issues
on-line through its PrudentialSecurities.com division. Clients of
PrudentialAdvisor(SM), a full service brokerage firm program, may view offering
terms and a prospectus on-line and place orders through their financial
advisors.
Some selling shareholders have granted to the underwriters an option,
exercisable not later than 30 days after the date of this prospectus, to
purchase up to 450,000 additional shares of common stock at the public offering
price less the underwriting discounts and commissions set forth on the cover
page of this prospectus. The underwriters may exercise this option only to cover
over-allotments made in connection with the sale of the common stock offered in
this prospectus. To the extent the underwriters exercise the option, each of the
underwriters will
64
<PAGE> 66
become obligated, subject to certain conditions, to purchase approximately the
same percentage of additional shares of common stock as the number of shares of
common stock to be purchased by it in the above table bears to the total listed
above. We will be obligated, pursuant to the option, to sell these shares to the
underwriters to the extent the option is exercised. If any additional shares of
common stock are purchased, the underwriters will offer such additional shares
on the same terms as those on which the 3,000,000 shares are being offered.
The following table summarizes the underwriting compensation that will be
paid in connection with this offering.
<TABLE>
<CAPTION>
TOTAL
-------------------------------
WITHOUT WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
--------- -------------- --------------
<S> <C> <C> <C>
Underwriting discounts and commissions paid by us.... $ $ $
Underwriting discounts and commissions paid by the
selling shareholders............................... $ $ $
</TABLE>
We estimate that the total expenses of the offering, excluding underwriting
discounts and commissions, will be approximately $500,000.
Each of our officers, directors, affiliates and selling shareholders who
hold an aggregate of shares of common 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 90 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., other than in this offering.
This consent may be given at any time without public notice. We have entered
into a similar agreement, except that we may, without the prior written consent
of Deutsche Bank Securities Inc., issue common stock:
- as consideration or partial consideration for business acquisitions;
- in connection with the formation of strategic alliances;
- pursuant to the exercise of outstanding options and warrants; and
- in connection with the issuance and exercise of options granted under our
stock option plan.
Any shares so issued will be subject to a lock-up agreement for a period of 90
days after the effective date of the registration statement of which this
prospectus is a part.
Due to the fact that one of the representatives of the underwriters was
organized within the last three years, we are providing the following
information. Thomas Weisel Partners, LLC, one of the representatives of the
underwriters, was organized and registered as a broker-dealer in December 1998.
Since December 1998, Thomas Weisel Partners LLC has been named as a lead or
co-manager of, or as a syndicate member in, numerous public offerings of equity
securities. Thomas Weisel Partners LLC does not have any material relationship
with us or any of our officers, directors or other controlling persons.
In connection with this offering, certain underwriters may engage in
passive market making transactions in the common stock on the Nasdaq National
Market immediately prior to the commencement of sales in this offering in
accordance with Rule 103 of Regulation M. Passive market making consists of
displaying bids on the Nasdaq National Market limited by the bid prices of
independent market markers and making purchases limited by such prices and
effected in response to order flow. Net purchases by a passive market maker on
each day are limited to a specified percentage of the passive market maker's
average daily trading volume in the common stock during a specified period and
must be discontinued when such limit is reached. Passive market making may
stabilize the market price of the common stock at a level above that which might
otherwise prevail and, if commenced, may be discontinued at any time.
65
<PAGE> 67
We and the selling stockholders have been advised by the representatives of
the underwriters that during and after this offering, subject to applicable
limitations, the underwriters may purchase and sell common stock in the open
market. These transactions may include over-allotment and stabilizing
transactions and purchases to cover syndicate short positions created in
connection with this offering. Stabilizing transactions consist of certain bids
or purchases for the purpose of preventing or retarding a decline in the market
price of the common stock; and syndicate short positions involve the sale by the
underwriters of a greater number of shares of common stock than they are
required to purchase from us in this offering. The underwriters also may impose
penalty bids, whereby selling concessions allowed to the syndicate members or
other broker-dealers in respect of the common stock sold in this offering for
their account may be reclaimed by the syndicate if such securities are
repurchased by the syndicate in stabilizing or short-covering transactions.
These activities may stabilize, maintain or otherwise affect the market price of
the common stock, which may be higher than the price that might otherwise
prevail in the open market. These transactions may be effected on the Nasdaq
National Market or otherwise and these activities, if commenced, may be
discontinued at any time.
The representatives have advised us that the underwriters do not intend to
confirm orders to any account over which they exercise discretionary authority.
66
<PAGE> 68
LEGAL MATTERS
Dorsey & Whitney LLP, Seattle, Washington, will pass upon the legality of
the shares offered by this prospectus. Perkins Coie LLP, Seattle, Washington, is
acting as legal counsel to the underwriters in connection with this offering. A
partner of Dorsey & Whitney LLP owns an aggregate of 11,232 shares of our common
stock.
EXPERTS
The financial statements of FreeShop as of December 31, 1998 and 1999 and
for the year ended June 30, 1997, the six months ended December 31, 1997 and the
years ended December 31, 1998 and 1999, included in this prospectus have been
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The financial statements of Commonsite as of December 31, 1998 and for the
year then ended that are included in this prospectus have been included in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm 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 said firm 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 Commission in Room 1024, Judiciary Plaza,
450 5th Street, N.W., Washington, D.C. 20549; and at the SEC's Regional Offices
located at 7 World Trade Center, Suite 1300, New York, New York 10048 and 1400
Citicorp Center, 500 West Madison Street, Chicago, Illinois 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 SEC maintains a Web site on the
Internet at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission.
67
<PAGE> 69
INDEX TO FINANCIAL STATEMENTS
FREESHOP.COM, INC.
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Balance Sheet as of December 31, 1998 and 1999.............. F-3
Statement of Operations for the year ended June 30, 1997,
the six months ended December 31, 1997, and the years
ended December 31, 1998 and 1999.......................... F-4
Statement of Shareholders' Equity/Division Equity for the
year ended June 30, 1997, the six months ended December
31, 1997, and the years ended December 31, 1998 and
1999...................................................... F-5
Statement of Cash Flows for the year ended June 30, 1997,
the six months ended December 31, 1997, and the years
ended December 31, 1998 and 1999.......................... F-6
Notes to Financial Statements............................... F-7
COMMONSITE, LLC
FINANCIAL STATEMENTS
Report of Independent Accountants........................... F-21
Statement of Financial Position as of December 31, 1998 and
March 31, 1999
(unaudited)............................................... F-22
Statement of Operations and Members' Deficit for the year
ended December 31, 1998, and the three months ended March
31, 1998 and 1999 (unaudited)............................. F-23
Statement of Cash Flows for the year ended December 31,
1998, and the three months ended March 31, 1998 and 1999
(unaudited)............................................... F-24
Notes to Financial Statements............................... F-25
TRAVEL COMPANIONS INTERNATIONAL, INC.
FINANCIAL STATEMENTS
Report of Independent Accountants........................... F-29
Balance Sheet as of December 31, 1998 and March 31, 1999
(unaudited)............................................... F-30
Statement of Income for the year ended December 31, 1998,
and the three months ended March 31, 1998 and 1999
(unaudited)............................................... F-31
Statement of Stockholders' Deficit for the year ended
December 31, 1998, and the three months ended March 31,
1999 (unaudited).......................................... F-32
Statement of Cash Flows for the year ended December 31,
1998, and the three months ended March 31, 1998 and 1999
(unaudited)............................................... F-33
Notes to Financial Statements............................... F-34
FREESHOP.COM, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
Unaudited Pro Forma Combined Statement of Operations........ F-37
Unaudited Pro Forma Combined Statement of Operations for the
year ended December 31, 1999.............................. F-38
Notes to Unaudited Pro Forma Combined Statement of
Operations................................................ F-39
</TABLE>
F-1
<PAGE> 70
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 shareholders' equity/division equity and of cash flows present
fairly, in all material respects, the financial position of FreeShop.com, Inc.
at December 31, 1998 and 1999, and the results of its operations and its cash
flows for the year ended June 30, 1997, the six-month period ended December 31,
1997 and the years ended December 31, 1998 and 1999, in conformity with
accounting principles generally accepted in the United States. 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
auditing standards generally accepted in the United States 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
January 21, 2000
F-2
<PAGE> 71
FREESHOP.COM, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1999
----------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 2,892,144 $ 33,794,811
Short-term investments...................................... 13,951,918
Accounts receivable, net.................................... 339,179 3,471,648
Prepaid expenses and other assets........................... 30,497 382,272
----------- ------------
Total current assets................................... 3,261,820 51,600,649
Property and equipment, net................................. 381,296 2,249,624
Intangible assets, net...................................... 1,922,412
Other assets and deposits................................... 43,454 43,454
----------- ------------
$ 3,686,570 $ 55,816,139
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable............................................ $ 464,872 $ 1,370,622
Accrued and other liabilities............................... 670,857 3,389,645
Current portion of capital lease obligations................ 112,327 104,715
----------- ------------
Total current liabilities.............................. 1,248,056 4,864,982
Long-term convertible debt.................................. 50,000
Capital lease obligations, net of current portion........... 144,727 40,012
----------- ------------
Total liabilities...................................... 1,442,783 4,904,994
----------- ------------
Commitments
Shareholders' equity
Series B convertible preferred stock, no par value; no
shares authorized, issued or outstanding at December
31, 1998, 1,250,000 shares authorized, no shares issued
and outstanding at December 31, 1999...................
Common stock, no par value; 100,000,000 shares authorized,
8,140,959 shares issued and outstanding at December 31,
1998 and 15,524,170 shares issued and outstanding at
December 31, 1999...................................... 7,816,328 66,586,978
Additional paid-in capital................................ 294,529 2,858,206
Deferred stock compensation............................... (12,927) (1,465,886)
Accumulated deficit....................................... (5,854,143) (17,068,153)
----------- ------------
Total shareholders' equity............................. 2,243,787 50,911,145
----------- ------------
$ 3,686,570 $ 55,816,139
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 72
FREESHOP.COM, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED YEAR ENDED DECEMBER 31,
JUNE 30, DECEMBER 31, ---------------------------
1997 1997 1998 1999
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Net revenues............................. $ 1,197,757 $ 534,733 $ 1,250,940 $ 8,505,628
Cost of revenues......................... 313,672 139,451 216,557 732,619
----------- ----------- ----------- ------------
Gross profit......................... 884,085 395,282 1,034,383 7,773,009
----------- ----------- ----------- ------------
Operating expenses:
Sales and marketing.................... 1,809,912 1,174,745 3,088,446 15,041,960
Research and development............... 135,121 182,532 386,629 901,399
General and administrative............. 352,923 83,217 416,766 1,342,517
Equity-based compensation.............. 62,968 174,102 1,116,859
Depreciation and amortization.......... 30,011 34,468 104,393 1,039,139
----------- ----------- ----------- ------------
Total operating expenses............. 2,327,967 1,537,930 4,170,336 19,441,874
----------- ----------- ----------- ------------
Operating loss........................... (1,443,882) (1,142,648) (3,135,953) (11,668,865)
Interest expense......................... 6,226 65,654 39,664
Other income, net........................ (2,582) (818,019)
----------- ----------- ----------- ------------
Net loss................................. $(1,443,882) $(1,148,874) $(3,199,025) $(10,890,510)
=========== =========== =========== ============
Basic and diluted net loss per share..... $ (0.31) $ (0.22) $ (0.51) $ (1.08)
=========== =========== =========== ============
Weighted average shares used in computing
net loss per share..................... 4,600,840 5,188,910 6,223,726 10,042,927
=========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 73
FREESHOP.COM, INC.
STATEMENT OF
SHAREHOLDERS' EQUITY/DIVISION EQUITY
<TABLE>
<CAPTION>
SERIES B CONVERTIBLE NOTE
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE DEFERRED
----------------------- ------------------------ PAID-IN FROM STOCK
SHARES AMOUNT SHARES AMOUNT CAPITAL SHAREHOLDER COMPENSATION
-------- ------------ ---------- ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
-------- ------------ ---------- ----------- ---------- ---------- -----------
Balances at June 30, 1996....... -- $ -- -- $ -- $ -- $ -- $ --
Capital contributions...........
Issuance of common and Series A
preferred stock in connection
with spin-off.................. 4,600,820 1,659,182
Net loss........................
-------- ------------ ---------- ----------- ---------- ---------- -----------
Balances at June 30, 1997....... -- -- 4,600,820 1,659,182 -- -- --
Forfeiture of common stock...... (520,000)
Conversion of preferred stock... 774,194 279,196
Issuance of common stock........ 718,190 736,140
Common stock issued in exchange
for a note receivable.......... 24,391 25,000 (25,000)
Stock options issued to third
parties........................ 62,968
Net loss........................
-------- ------------ ---------- ----------- ---------- ---------- -----------
Balances at December 31, 1997... -- -- 5,597,595 2,699,518 62,968 (25,000) --
Issuance of common stock, net of
offering expenses of $72,888... 2,487,670 5,108,150
Exercise of stock options....... 55,694 8,660
Repayment of note receivable
from shareholder............... 25,000
Deferred compensation related to
grants of stock options and
warrants....................... 147,561 (22,677)
Shares transferred to employees
by principal shareholders...... 84,000
Amortization of deferred stock
compensation................... 9,750
Net loss........................
-------- ------------ ---------- ----------- ---------- ---------- -----------
Balances at December 31, 1998... -- -- 8,140,959 7,816,328 294,529 -- (12,927)
Repurchase of common stock...... (160,000) (76,500)
Issuance of common stock........ 160,000 400,000
Issuance of common stock upon
conversion of promissory
note........................... 20,000 50,000
Issuance of common stock in
connection with business
combinations................... 52,920 736,000
Shares sold to employee by
principal shareholder.......... 406,000
Issuance of common stock in
initial public offering, net of
expenses of $4,134,454......... 3,680,000 40,025,546
Exercise of stock options and
warrants....................... 877,967 17,494,529 118,423 141,075
Conversion of preferred stock... (877,967) (17,494,529) 3,511,868 17,494,529
Deferred compensation related to
grants of stock options........ 2,323,772 (2,323,772)
Deferred compensation related to
forfeitures of stock options... (166,095) 166,095
Amortization of deferred stock
compensation................... 704,718
Net loss........................
-------- ------------ ---------- ----------- ---------- ---------- -----------
Balances at December 31, 1999... -- $ -- 15,524,170 $66,586,978 $2,858,206 $ -- $(1,465,886)
======== ============ ========== =========== ========== ========== ===========
<CAPTION>
TOTAL
SHAREHOLDERS'
DIVISION ACCUMULATED EQUITY/
EQUITY DEFICIT DIVISION EQUITY
----------- ------------ ---------------
<S> <C> <C> <C>
----------- ------------ ------------
Balances 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)
----------- ------------ ------------
Balances 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)
----------- ------------ ------------
Balances at December 31, 1997... -- (2,655,118) 82,368
Issuance of common stock, net of
offering expenses of $72,888... 5,108,150
Exercise of stock options....... 8,660
Repayment of note receivable
from shareholder............... 25,000
Deferred compensation related to
grants of stock options and
warrants....................... 124,884
Shares transferred to employees
by principal shareholders...... 84,000
Amortization of deferred stock
compensation................... 9,750
Net loss........................ (3,199,025) (3,199,025)
----------- ------------ ------------
Balances at December 31, 1998... -- (5,854,143) 2,243,787
Repurchase of common stock...... (323,500) (400,000)
Issuance of common stock........ 400,000
Issuance of common stock upon
conversion of promissory
note........................... 50,000
Issuance of common stock in
connection with business
combinations................... 736,000
Shares sold to employee by
principal shareholder.......... 406,000
Issuance of common stock in
initial public offering, net of
expenses of $4,134,454......... 40,025,546
Exercise of stock options and
warrants....................... 17,635,604
Conversion of preferred stock...
Deferred compensation related to
grants of stock options........ --
Deferred compensation related to
forfeitures of stock options... --
Amortization of deferred stock
compensation................... 704,718
Net loss........................ (10,890,510) (10,890,510)
----------- ------------ ------------
Balances at December 31, 1999... $ -- $(17,068,153) $ 50,911,145
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 74
FREESHOP.COM, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
YEAR ENDED ENDED DECEMBER 31,
JUNE 30, DECEMBER 31, ---------------------------
1997 1997 1998 1999
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss...................................... $(1,443,882) $(1,148,874) $(3,199,025) $(10,890,510)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization............. 33,659 47,617 140,710 1,156,442
Bad debt expense.......................... 146,310 122,485 56,551 393,221
Amortization of deferred stock
compensation........................... 9,750 710,859
Shares sold to an employee by a principal
shareholder............................ 406,000
Shares transferred to employees by
principal shareholders................. 84,000
Issuance of stock options and warrants for
services............................... 62,968 88,321
Issuance of stock for office rent......... 32,637
Loss (gain) on disposal of property and
equipment.............................. 8,624 (2,697)
Amortization of discount on short-term
investments............................ (154,024)
Changes in assets and liabilities, net of
effects of business acquisitions:
Accounts receivable.................... (94,449) (196,560) (191,039) (3,489,175)
Prepaid expenses and other assets...... (17,280) (43,559) (21,074) (357,915)
Accounts payable....................... 43,044 192,402 217,381 905,750
Accrued and other liabilities.......... (48,957) 27,545 601,891 2,236,858
Payable to Online Interactive, Inc..... (280,918) 308,187 (27,269)
----------- ----------- ----------- ------------
Net cash used in operating
activities........................... (1,662,473) (595,152) (2,231,179) (9,085,191)
----------- ----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment............ (108,894) (55,902) (67,428) (2,263,238)
Payment for business combinations, net of cash
acquired.................................... (1,841,000)
Purchase of short-term investments............ (15,297,894)
Sale of short-term investments................ 1,500,000
----------- ----------- ----------- ------------
Net cash used in investing
activities........................... (108,894) (55,902) (67,428) (17,902,132)
----------- ----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Contributed capital........................... 1,771,492
Proceeds from notes payable................... 135,000
Repayment of notes payable.................... (85,000)
Principal payments under capital leases....... (26,245) (63,951) (112,327)
Proceeds from shareholder note receivable..... 25,000
Repurchase of common stock.................... (400,000)
Issuance of common stock, net of issuance
costs....................................... 703,503 5,153,373 40,907,788
Issuance of Series B preferred stock.......... 17,494,529
----------- ----------- ----------- ------------
Net cash provided by financing
activities........................... 1,771,492 677,258 5,164,422 57,889,990
----------- ----------- ----------- ------------
Net increase in cash and cash equivalents....... 125 26,204 2,865,815 30,902,667
Cash and cash equivalents at beginning of
period........................................ -- 125 26,329 2,892,144
----------- ----------- ----------- ------------
Cash and cash equivalents at end of period...... $ 125 $ 26,329 $ 2,892,144 $ 33,794,811
=========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 75
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. FreeShop is primarily 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 year ended June 30, 1997 reflect the net
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
nine months ended March 31, 1997. For the three-month period ended June 30,
1997, these corporate expenses were generally allocated 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,
1997
----------
<S> <C>
Sales and marketing......................................... $176,768
Research and development.................................... 110,230
General and administrative.................................. 362,810
--------
$649,808
========
</TABLE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH, CASH EQUIVALENTS AND SHORT TERM INVESTMENTS
The Company generally considers any highly liquid investments purchased
with an original or remaining maturity of three months or less at the date of
purchase to be cash equivalents.
The Company classifies, at the date of acquisition, its marketable
securities into categories in accordance with the provisions of Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." At December 31, 1999, short-term investments
consisted of commercial paper with maturities of less than one year.
F-7
<PAGE> 76
FREESHOP.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Currently, the Company classifies all of its short-term investments as
available-for-sale, which are reported at fair market value with the related
unrealized gains and losses included in shareholders' equity. Realized gains and
losses and declines in value of securities judged to be other than temporary are
included in other income (expense), net. At December 31, 1999, the carrying
value of the Company's short-term investments, recorded at amortized cost,
approximate their fair value.
The Company invests its cash and cash equivalents in deposits with two
financial institutions that may, at times, exceed federally insured limits.
Management believes that the risk of loss is minimal. To date, the Company has
not experienced any losses related to temporary cash investments.
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
Leasehold improvements...................................... Three to Five 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. Leasehold
improvements are amortized on a straight-line method over their estimated useful
lives or the term of the related lease, whichever is shorter. Equipment under
capital leases, which all contain a bargain purchase option, is recorded at the
present value of minimum lease payments and is amortized using the straight-line
method over the estimated useful lives of the related assets.
INTANGIBLE ASSETS
Intangible assets are stated at cost less accumulated amortization and are
amortized using the straight-line method over their estimated useful lives. The
estimated useful lives are as follows:
<TABLE>
<S> <C>
Client list................................................. One year
Non-compete agreement and customer lists.................... Two years
Goodwill.................................................... Three years
Worldwide Brochures database................................ Five years
</TABLE>
At December 31, 1999, accumulated amortization of intangible assets was
$744,835.
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
F-8
<PAGE> 77
FREESHOP.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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, short-term investments, accounts receivable, accounts
payable and accrued liabilities, approximate fair value because of their short
maturities. The carrying amounts of the Company's capital lease obligations
approximate the fair values of such instruments based upon management's
estimates of interest rates that would be available to the Company for similar
debt at December 31, 1999.
DEFERRED REVENUES
Deferred revenues consist of advance billings and payments on marketing
contracts and are 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 revenues consist 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 email newsletter sponsorships, banner
advertising, and anchor positions. Newsletter sponsorship revenues are derived
from a fixed fee or a fee based on the circulation of the newsletter. Newsletter
sponsorship revenues are recognized in the period in which the newsletter is
delivered. Banner advertising and anchor positions can be based on impressions,
fixed fees, or click throughs. Fixed fee contracts, which range from three
months to two years, are recognized ratably over the term of the agreement,
provided that no significant Company obligations remain. Revenue from
impressions or click through based contracts is recognized based on the
proportion of impressions or click throughs delivered, to the total number of
guaranteed impressions or click throughs provided for under the related
contracts.
List rental revenues are 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.
Also included in net 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, 1996 through December 31, 1997 barter transactions were not
significant. For the years ended December 31, 1998 and 1999, the Company
recognized approximately $83,000 and $489,000, respectively, of revenue from
barter transactions.
F-9
<PAGE> 78
FREESHOP.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Total advertising
expense for the year ended June 30, 1997, the six months ended December 31,
1997, and the years ended December 31, 1998 and 1999, was $148,543, $242,919,
$1,190,811 and $8,599,879, respectively.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
INCOME TAXES
The Company accounts for income taxes under the liability method, which
requires recognition of deferred tax assets and liabilities for the expected
future tax consequences of temporary differences between the carrying amounts
and the tax bases of assets and liabilities. If it is more likely than not that
some portion of a deferred tax asset will not be realized, a valuation allowance
is recorded.
NET LOSS PER SHARE
Basic net loss per share represents net loss available to common
shareholders divided by the weighted average number of shares outstanding during
the period. Diluted net loss per share represents net loss available to common
shareholders divided by the weighted average number of shares outstanding,
including the potentially dilutive impact of mandatorily redeemable convertible
preferred stock and common stock options and warrants. Common stock options and
warrants are converted using the treasury stock method. Basic and diluted net
loss per share are equal for all periods presented because the impact of common
stock equivalents is antidilutive.
The following table sets forth the computation of the numerators and
denominators in the basic and diluted net loss per share calculations for the
periods indicated and those common stock equivalent securities not included in
the diluted net loss per share calculation:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED YEAR ENDED DECEMBER 31,
JUNE 30, DECEMBER 31, ----------------------------
1997 1997 1998 1999
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Numerator:
Net loss................................ $(1,443,882) $(1,148,874) $(3,199,025) $(10,890,510)
=========== =========== =========== ============
Denominator:
Weighted average shares used in
computing net loss per share.......... 4,600,840 5,188,910 6,223,726 10,042,927
=========== =========== =========== ============
Potentially dilutive securities consist of
the following:
Options to purchase common stock........ 528,536 1,197,969 815,021 1,123,260
Warrants to purchase common stock....... 2,400 3,500,956 27,700
Mandatorily redeemable convertible
preferred stock....................... 1,935,484
----------- ----------- ----------- ------------
2,464,020 1,200,369 4,315,977 1,150,960
=========== =========== =========== ============
</TABLE>
F-10
<PAGE> 79
FREESHOP.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 net revenues or
accounts receivable balances for the year ended December 31, 1998. For the year
ended December 31, 1999 one customer accounted for 13.1% of outstanding accounts
receivable. No other customers accounted for greater than 10% of total net
revenues or accounts receivable for the year ended December 31, 1999. 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.
STOCK COMPENSATION
The Company has elected to apply the disclosure-only provision of SFAS No.
123 for employee stock-based compensation plans. Accordingly, the Company
accounts for stock-based compensation to employees using the intrinsic-value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. Compensation expense
for stock options is measured as the excess, if any, of the fair value of the
Company's common stock at the date of grant over the exercise price. The Company
records the fair value of equity instruments issued to nonemployees in
accordance with the provisions of SFAS No. 123 and the Emerging Issues Task
Force consensus in Issue No. 96-18, "Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction With Selling,
Goods or Services".
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 nonowner sources. To date, the Company has not had any transactions that
are required to be reported in comprehensive income other than its net loss.
F-11
<PAGE> 80
FREESHOP.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
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, 2000. The Company does not expect the adoption of this
statement to have a significant impact on results of its operations, financial
position or cash flows.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition," which
provides guidance on the recognition, presentation, and disclosure of revenue in
financial statements filed with the SEC. SAB 101 outlines the basic criteria
that must be met to recognize revenue and provides guidance for disclosures
related to revenue recognition policies. Management believes that the impact of
SAB 101 would have no material effect on the financial position or results of
operations of the Company.
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1999
-------- -------------
<S> <C> <C>
Accounts receivable......................................... $381,830 $3,842,764
Less: Allowance for doubtful accounts....................... (42,651) (339,000)
Less: Allowance for list rental adjustments................. (32,116)
-------- ----------
$339,179 $3,471,648
======== ==========
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1999
--------- -------------
<S> <C> <C>
Computer hardware and software.............................. $ 468,483 $2,308,027
Office furniture and equipment.............................. 129,517 352,379
Leasehold improvements...................................... 194,631
--------- ----------
598,000 2,855,037
Less: Accumulated depreciation and amortization............. (216,704) (605,413)
--------- ----------
$ 381,296 $2,249,624
========= ==========
</TABLE>
Property and equipment includes equipment purchased under capital leases in
the amount of $338,449 at December 31, 1998 and 1999. Accumulated amortization
on this equipment was $92,150 and $190,314 at December 31, 1998 and 1999,
respectively.
F-12
<PAGE> 81
FREESHOP.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. ACCRUED AND OTHER LIABILITIES
Accrued and other liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1999
-------- ----------
<S> <C> <C>
Accrued advertising expense................................. $488,451 $1,973,095
Accrued commissions......................................... 13,918 431,831
Accrued bonus............................................... 365,307
Accrued public relations costs.............................. 151,000
Deferred revenue............................................ 1,129 91,412
Accrued vacation............................................ 37,169 90,722
List rental deposit......................................... 74,538
Other....................................................... 55,652 286,278
-------- ----------
$670,857 $3,389,645
======== ==========
</TABLE>
6. RELATED PARTY TRANSACTIONS
In January and February 1998, the Company issued notes payable to
shareholders in the amount of $85,000. Such notes included interest at 10%. The
outstanding balance, including accrued interest of $5,745, was repaid in
September 1998.
During 1998, two of the Company's principal shareholders transferred 56,000
shares of common stock to certain employees of the Company as incentive
compensation. As a result, the Company recorded $84,000 of compensation expense
based on the fair market value of the Company's common stock on the date of
transfer.
During January 1999, the Company repurchased 50,000 shares of common stock
from a principal shareholder for $125,000 and subsequently retired the shares.
The repurchase price of $2.50 per share was less than the $5.20 per share
estimated fair value of the common stock at the date of repurchase.
During 1999, the Company provided services in the amount of $425,000 to a
company for which Fingerhut is a significant shareholder.
7. LONG-TERM CONVERTIBLE DEBT
In March 1998, the Company issued an uncollateralized 10% convertible
promissory note totaling $50,000 to a third party with a maturity date of March
2000. 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.
8. COMMITMENTS
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 leases certain equipment under
agreements treated for financial reporting purposes as capital leases.
F-13
<PAGE> 82
FREESHOP.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments under the noncancellable leases are as
follows.
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
------------------------ --------- ----------
<S> <C> <C>
2000...................................................... $ 120,798 $ 549,236
2001...................................................... 42,969 635,153
2002...................................................... 675,880
2003...................................................... 718,361
2004...................................................... 310,134
--------- ----------
Total minimum lease payments................................ 163,767 $2,888,764
==========
Less: Amount representing interest.......................... (19,040)
---------
Present value of capital lease obligations.................. 144,727
Less: Current portion....................................... (104,715)
---------
Capital lease obligations, net of current portion........... $ 40,012
=========
</TABLE>
Rent expense for the year ended June 30, 1997, the six months ended
December 31, 1997 and the years ended December 31, 1998 and 1999, was $49,003,
$60,594, $199,136 and $325,383, respectively.
9. 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. On July 18, 1997, subsequent to the spin-off of FreeShop from Online, all
outstanding shares of Series A redeemable convertible preferred stock were
converted into common stock at a rate of 2.5 shares of preferred to one share of
common.
10. SHAREHOLDERS' EQUITY
PREFERRED STOCK
In May 1999 the Board of Directors designated 1,250,000 shares of preferred
stock as Series B convertible preferred stock. Each share of Series B
convertible preferred stock is convertible into four shares of common stock.
Each share of Series B convertible preferred stock has similar rights and
obligations as four shares of common stock, except it has no voting rights.
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.
COMMON STOCK
On December 10, 1998, FreeShop issued 1,619,387 shares of the Company's
common stock to Fingerhut Companies Inc. (Fingerhut) at a price of $2.47 per
share. The shares were partially paid for by surrender and cancellation of a
$500,000 Convertible Promissory Note, which the Company had issued to Fingerhut
on December 4, 1998.
The Company and Fingerhut also entered into a Shareholders 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
F-14
<PAGE> 83
FREESHOP.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Company's Board of Directors, requires Board approval of certain specified
actions 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
Shareholders Agreement terminates on the earliest of December 10, 2008, the
closing of a sale of the Company's assets or the acquisition of the Company by
merger or consolidation.
On August 9, 1999, the Board of Directors declared a 1 for 2.5 reverse
stock split on the Company's common stock. Common stock issued, stock option,
warrant and convertible preferred stock information in these financial
statements have been restated to reflect this reverse split.
On October 1, 1999 the Company closed its initial public offering of
3,200,000 shares of the Company's common stock at $12.00 per share. Total
proceeds, net of offering costs of $3,731,254, were $34,668,746. In addition, on
October 29, 1999, the Company sold an additional 480,000 shares under the
underwriters' overallotment option. Total proceeds, net of offering costs of
$403,200, were $5,356,800. Concurrent with the closing of the initial public
offering, Fingerhut exercised their remaining rights to purchase 405,359
additional shares of Series B convertible preferred stock for $8,879,404. Upon
the closing of the initial public offering all of the Company's Series B
convertible preferred stock converted into 3,511,868 shares of common stock.
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. These warrants were modified in May 1999 to allow for the purchase
of Series B convertible preferred stock. These warrants were exercised during
1999.
In return for various services the Company has issued warrants to purchase
shares of common stock. At December 31, 1999, warrants outstanding are as
follows:
<TABLE>
<CAPTION>
YEAR OF ISSUE SHARES EXERCISE PRICE YEAR OF EXPIRATION
- ------------- ------ -------------- ------------------
<S> <C> <C> <C>
1997 2,400 $1.02 2002
1998 14,000 $1.02 2003
1998 1,300 $1.02 2002
1998 10,000 $1.50 2003
</TABLE>
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, 2,235,883
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,
1999, options to
F-15
<PAGE> 84
FREESHOP.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
purchase 1,112,623 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 year ended June 30, 1997, the six months ended December 31,
1997, or the year ended December 31, 1998. For the year ended December 31, 1998
and 1999, $3,177 and 2,323,772, respectively, of deferred compensation was
recorded and will be amortized over the vesting period of the related options.
During the year ended December 31, 1999, $166,095 of deferred compensation was
reversed due to forfeitures of 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 would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED DECEMBER 31,
ENDED ---------------------------
DECEMBER 31, 1997 1998 1999
----------------- ----------- ------------
<S> <C> <C> <C>
Net loss
As reported......... $(1,148,874) $(3,199,025) $(10,890,510)
Pro forma........... $(1,167,435) $(3,248,168) $(12,031,468)
Loss per share
As reported......... $ (0.22) $ (0.51) $ (1.08)
Pro forma........... $ (0.22) $ (0.52) $ (1.20)
</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 allowable for
non-public companies for the six months ended December 31, 1997 and the year
ended December 31, 1998, and the Black-Scholes option pricing model for the year
ended December 31, 1999, with the following assumptions used for grants to
employees:
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED DECEMBER 31,
DECEMBER 31, ------------
1997 1998 1999
------------ ---- ----
<S> <C> <C> <C>
Weighted average risk free interest rate................ 5.70% 4.78% 5.62%
Weighted average expected life (in years)............... 4.00 4.00 3.94
Volatility.............................................. 0% 0% 100%
Dividends............................................... none none none
</TABLE>
F-16
<PAGE> 85
FREESHOP.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents activity under the Plan:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
INCEPTION TO SIX MONTHS ENDED -------------------------------------------
JUNE 30, 1997 DECEMBER 31, 1997 1998 1999
------------------ -------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of period.......... 528,536 $0.15 1,002,847 $0.56 815,021 $1.12
Options granted................ 528,536 $0.15 474,311 1.02 645,420 1.30 498,066 7.68
Options exercised.............. 55,694 0.15 108,423 1.21
Options forfeited.............. 777,552 0.60 81,404 2.45
------- --------- --------- --------- -----
Options outstanding at end of
period....................... 528,536 $0.15 1,002,847 $0.56 815,021 $1.12 1,123,260 $3.92
======= ========= ========= =========
Weighted average fair value of
options granted during the
period....................... $0.03 $0.30 $0.34 $9.99
</TABLE>
The following table summarizes information about stock options outstanding
under the Plan at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- --------------------------------------------------------------- ---------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICES NUMBER OF SHARES LIFE (IN YEARS) PRICE NUMBER OF SHARES PRICE
- --------------- ---------------- --------------- -------- ---------------- --------
<S> <C> <C> <C> <C> <C>
$ 0.15 86,369 6.3 $ 0.15 67,552 $0.15
1.02 316,035 4.7 1.02 264,865 1.02
1.50 258,446 8.6 1.50 114,970 1.50
2.50 129,960 8.4 2.50 27,336 2.50
4.27 - $ 5.00 126,600 9.4 4.54 3,000 4.76
11.50 - 14.88 196,650 9.9 12.90
23.44 - 28.50 9,200 10.0 26.27
--------- -------
1,123,260 7.6 $ 3.92 477,723 $1.12
========= =======
</TABLE>
The weighted average fair values and weighted average exercise prices per
share at the date of grant for options granted were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
1998 1999
----- ------
<S> <C> <C>
Weighted average fair value of options granted with exercise
prices less than the fair value of the stock on the date
of grant.................................................. $0.41 $10.18
Weighted average fair value of options granted with exercise
prices equal to the fair value of the stock on the date of
grant..................................................... $0.34 $ 9.42
Weighted average fair value of options granted with exercise
prices greater than the fair value of the stock on the
date of grant............................................. $ 9.80
Weighted average exercise price of options granted with
exercise prices less than the fair value of the stock on
the date of grant......................................... $2.50 $ 5.18
Weighted average exercise price of options granted with
exercise prices equal to the fair value of the stock on
the date of grant......................................... $1.28 $13.19
Weighted average exercise price of options granted with
exercise prices greater than the fair value of the stock
on the date of grant...................................... $15.19
</TABLE>
F-17
<PAGE> 86
FREESHOP.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
All stock options granted during the year ended June 30, 1997 and the six
months ended December 31, 1997 were granted with exercise prices equal to the
fair value of the stock on the date of grant.
During the six months ended December 31, 1997, the Company granted options
to purchase 195,122 shares of common stock to certain investors. These grants
were made outside of the stock option plan. As of December 31, 1998, all of
these options had expired without exercise. During the year ended December 31,
1998, the Company granted options to purchase 209,000 shares of common stock to
consultants, advisors and investment managers and as severance to certain
employees.
The Company follows SFAS No. 123 in accounting for options and warrants
issued to non-employees. As such, the Company recognized $62,968 of 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
$67,150 of expense 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 in 1998, 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 the fair
value of the options and warrants granted or issued to non-employees on the date
of grant, the Company used the Black-Scholes option-pricing model with the
following assumptions:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
SIX MONTHS ENDED ------------
DECEMBER 31, 1997 1998 1999
----------------- ---- ----
<S> <C> <C> <C>
Weighted average risk free interest rate................... 5.17% 5.14% 4.63%
Weighted average expected life (in years).................. 0.55 1.30 1.00
Volatility................................................. 100% 100% 100%
Dividends.................................................. none none none
</TABLE>
The weighted-average fair value of warrants issued during 1998 was $0.83
per share.
11. EMPLOYEE RETIREMENT PLAN
During 1999, the Company established 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. The Company 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. The Company has
made no matching contributions to the plan as of December 31, 1999.
F-18
<PAGE> 87
FREESHOP.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
12. INCOME TAXES
A current provision for income taxes was not recorded for the six months
ended December 31, 1997 or the years ended December 31, 1998 and 1999 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, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1999
----------- -----------
<S> <C> <C>
Net operating loss carryforwards............................ $ 1,412,566 $ 4,912,607
Nondeductible allowances and accruals....................... 39,544 519,510
Expense related to stock options and restricted stock
rights.................................................... 30,635 377,697
----------- -----------
1,482,745 5,809,814
Less: Valuation allowance................................... (1,482,745) (5,809,814)
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
At December 31, 1998 and 1999, the Company had net operating loss
carry-forwards of approximately $4,155,000 and $14,449,000 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 ownership changes occurred as a result of Fingerhut's
exercise of warrants in May 1999 and October 1, 1999 and the closing of our
initial public offering on October 1, 1999.
13. SUPPLEMENTAL CASH FLOW INFORMATION
The following items are supplemental information required for the statement
of cash flows:
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
YEAR ENDED ENDED DECEMBER 31,
JUNE 30, DECEMBER 31, -------------------
1997 1997 1998 1999
---------- ------------ -------- --------
<S> <C> <C> <C> <C>
Cash paid during the period for interest....... $ -- $ 6,226 $ 65,654 $ 39,664
====== ======== ======== ========
Property and equipment acquired with capital
leases....................................... $7,237 $237,846 $102,167 $ --
====== ======== ======== ========
Common stock issued in exchange for note
receivable from shareholder.................. $ -- $ 25,000 $ -- $ --
====== ======== ======== ========
Common stock issued in connection with business
combination.................................. $ -- $ -- $ -- $736,000
====== ======== ======== ========
Conversion of preferred stock.................. $ -- $279,196 $ -- $ --
====== ======== ======== ========
Conversion of note payable..................... $ -- $ -- $ -- $ 50,000
====== ======== ======== ========
</TABLE>
F-19
<PAGE> 88
FREESHOP.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
14. ACQUISITIONS
In May 1999, FreeShop entered into purchase and sale agreements to acquire
substantially all of the assets of Commonsite LLC (Commonsite) and Travel
Companions International, Inc. (Travel). Total consideration for the acquired
assets of the two companies is $2,577,000, which is comprised of $1,841,000 in
cash and 52,920 shares of common stock. The aggregate purchase price has been
allocated to the net assets acquired, based upon their respective fair market
values. The excess of the purchase price over the fair market value of the
assets acquired and liabilities assumed of $1,382,247 has been allocated to cost
in excess of net assets acquired and is being amortized over three years.
In connection with the acquisitions, assets acquired and liabilities
assumed were as follows:
<TABLE>
<S> <C>
Fair value of assets acquired............................... $ 1,339,808
Cash paid................................................... (1,841,000)
Common stock issued......................................... (736,000)
Cost in excess of net assets acquired....................... 1,382,247
-----------
Liabilities assumed......................................... $ 145,055
===========
</TABLE>
The following summarizes the unaudited pro forma results of operations, on
a combined basis, as if the Company's acquisition of Commonsite and Travel
occurred as of the beginning of each of the periods presented, after including
the impact of certain adjustments such as amortization of cost in excess of net
assets acquired:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------------
1998 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
Net revenues................................................ $ 1,893,267 $ 8,739,781
Pro forma net loss.......................................... $(4,295,661) $(11,196,020)
Pro forma basic and diluted net loss per share.............. $ (0.68) $ (1.11)
</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.
15. SUBSEQUENT EVENTS
On January 4, 2000 the Board of Directors of the Company authorized the
Company's management to file a registration statement for a secondary offering
of the Company's common stock.
F-20
<PAGE> 89
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 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-21
<PAGE> 90
COMMONSITE, LLC
STATEMENT OF FINANCIAL POSITION
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 12,811 $ 23,652
Accounts receivable, net.................................... 42,358 29,151
-------- --------
Total current assets................................... 55,169 52,803
Property and equipment, net................................. 9,728 8,097
-------- --------
Total assets........................................... $ 64,897 $ 60,900
======== ========
LIABILITIES AND MEMBERS' DEFICIT
Accounts payable............................................ $ 6,536 $ 567
Related party payable....................................... 16,245 11,946
Accrued liabilities......................................... 6,609 6,046
Deferred revenue............................................ 109,337 120,422
-------- --------
Total current liabilities.............................. 138,727 138,981
Members' deficit............................................ (73,830) (78,081)
-------- --------
Total liabilities and members' deficit................. $ 64,897 $ 60,900
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE> 91
COMMONSITE, LLC
STATEMENT OF OPERATIONS AND MEMBERS' DEFICIT
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, ---------------------
1998 1998 1999
------------ --------- --------
(UNAUDITED)
<S> <C> <C> <C>
Revenues............................................. $540,114 $ 106,053 $106,435
Cost of revenues..................................... 180,244 47,289 21,492
-------- --------- --------
Gross profit....................................... 359,870 58,764 84,943
-------- --------- --------
Operating expenses:
Sales and marketing................................ 276,378 73,887 36,463
General and administrative......................... 72,290 30,446 52,731
-------- --------- --------
Total operating expenses................... 348,668 104,333 89,194
-------- --------- --------
Net income (loss).................................... 11,202 (45,569) (4,251)
Members' deficit, beginning of period................ (85,032) (85,032) (73,830)
-------- --------- --------
Members' deficit, end of period...................... $(73,830) $(130,601) $(78,081)
======== ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE> 92
COMMONSITE, LLC
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, ------------------
1998 1998 1999
------------ -------- -------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)........................................ $ 11,202 $(45,569) $(4,251)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities
Depreciation.......................................... 6,525 1,631 1,631
Bad debt expense...................................... 9,999 1,150 1,422
(Increase) decrease in accounts receivable............ (35,846) (18,098) 11,785
Decrease in accounts payable.......................... (9,005) (5,572) (5,969)
Increase (decrease) in related party payable.......... 16,245 12,803 (4,299)
Decrease in accrued liabilities....................... (6,449) (440) (563)
Increase in deferred revenue.......................... 2,272 56,665 11,085
-------- -------- -------
Net cash (used in) provided by operating
activities..................................... (5,057) 2,570 10,841
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from member contributions....................... 5,000 -- --
-------- -------- -------
Net (decrease) increase in cash and cash equivalents....... (57) 2,570 10,841
Cash and cash equivalents, beginning of period............. 12,868 12,868 12,811
-------- -------- -------
Cash and cash equivalents, end of period................... $ 12,811 $ 15,438 $23,652
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE> 93
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
with 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.
F-25
<PAGE> 94
COMMONSITE, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
REVENUE RECOGNITION
Revenue is recognized based on the type of contract. Fixed fee contracts,
which range from three months to one year, are recognized ratably over the term
of the agreement, provided that no significant Company obligations remain.
Revenue from click through based contracts is recognized in the period in which
the click throughs are delivered. Revenue from catalog development is recognized
under the percentage of completion method, whereby revenue is recognized upon
completion of agreed upon milestones.
CONCENTRATIONS OF CREDIT RISK
Concentrations of credit risk with respect to accounts receivable are
limited due to the wide variety of customers to which the Company provides
services, as well as their dispersion across many different geographic areas. As
such, no single customer accounted for greater than 10% of total revenues or
accounts receivable balances for the year ended December 31, 1998. The Company
maintains an allowance for doubtful accounts receivable based upon its
historical experience and the expected collectibility of all accounts
receivable. Credit losses to date have been within management's estimates.
INCOME TAXES
The Company is not subject to federal income tax. The pro rata income or
loss is included in the tax returns of the individual members.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reporting amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses. Actual results
could differ from those estimates.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial data as of March 31, 1999 and for the three months
ended March 31, 1998 and 1999 is unaudited; however, in the opinion of
management, the interim data includes all adjustments, consisting only of normal
recurring adjustments necessary to present fairly the Company's financial
position as of March 31, 1999 and the results of its operations and cash flows
for the three months ended March 31, 1998 and 1999.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 is effective
for financial statements for years beginning after December 15, 1998. SOP 98-1
provides guidance on 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 its results of operations, financial position or cash flows.
F-26
<PAGE> 95
COMMONSITE, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 its 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 its results of operations, financial
position or cash flows.
3. RELATED PARTY TRANSACTIONS
The Company pays Bennett Company (Bennett) for services provided in
relation to the operations and management of the Company. A member of Commonsite
owns Bennett. Costs incurred by Bennett were billed to the Company based on an
estimate of Bennett personnel time dedicated to the operations and management of
Commonsite. A summary of these expenses is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
YEAR ENDED -------------------
DECEMBER 31, 1998 1998 1999
----------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Salaries.................................... $230,979 $73,123 $34,574
Equipment................................... 16,236 6,287 9,146
Connectivity................................ 22,957 5,136 4,487
Rent........................................ 12,637 2,575 3,475
Internet marketing.......................... 26,134 6,970 --
Other....................................... 5,848 1,234 841
-------- ------- -------
$314,791 $95,325 $52,523
======== ======= =======
</TABLE>
4. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ -----------
(UNAUDITED)
<S> <C> <C>
Accounts receivable................................... $ 66,866 $ 55,081
Less: Allowance for doubtful accounts................. (24,508) (25,930)
-------- --------
$ 42,358 $ 29,151
======== ========
</TABLE>
F-27
<PAGE> 96
COMMONSITE, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ -----------
(UNAUDITED)
<S> <C> <C>
Computer hardware and software........................ $19,578 $ 19,578
Less: Accumulated depreciation........................ (9,850) (11,481)
------- --------
$ 9,728 $ 8,097
======= ========
</TABLE>
6. SUBSEQUENT EVENT
In May 1999, Commonsite entered into a purchase and sale agreement to sell
substantially all of its assets to FreeShop.com, Inc. Total consideration for
the assets is approximately $1,200,000 which is comprised of $441,000 in cash
and 52,920 shares of common stock.
F-28
<PAGE> 97
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, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Travel Companions International,
Inc. (the Company) at December 31, 1998, and the results of its operations and
its cash flows for the year 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-29
<PAGE> 98
TRAVEL COMPANIONS INTERNATIONAL, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,091 $ 3,545
Accounts receivable....................................... 8,772 34,225
Prepaid expenses.......................................... 700 820
--------- ---------
Total current assets................................... 14,563 38,590
Property and equipment, net................................. 3,050 2,265
--------- ---------
Total assets........................................... $ 17,613 $ 40,855
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Liabilities:
Current liabilities:
Debt................................................... $ 52,603 $ 51,668
Accounts payable....................................... 4,600 4,600
Accrued expenses....................................... 3,038 3,296
Deferred revenue....................................... 11,299 24,956
--------- ---------
Total current liabilities.............................. 71,540 84,520
Notes payable to stockholders............................. 459,678 454,678
--------- ---------
Total liabilities...................................... 531,218 539,198
--------- ---------
Stockholders' deficit:
Common stock, no par value; 5,000 shares authorized, 5,000
shares issued and outstanding.......................... 5,000 5,000
Accumulated deficit....................................... (518,605) (503,343)
--------- ---------
Total stockholders' deficit............................ (513,605) (498,343)
--------- ---------
Total liabilities and stockholders' deficit............ $ 17,613 $ 40,855
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE> 99
TRAVEL COMPANIONS INTERNATIONAL, INC.
STATEMENT OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, ------------------
1998 1998 1999
------------ ------- -------
(UNAUDITED)
<S> <C> <C> <C>
Revenues................................................ $219,813 $58,380 $72,188
Cost of revenues........................................ 94,875 23,570 25,866
-------- ------- -------
124,938 34,810 46,322
-------- ------- -------
Operating expenses:
Sales and marketing................................... 9,393 3,324 1,950
General and administrative............................ 92,645 27,876 28,000
-------- ------- -------
Total operating expenses........................... 102,038 31,200 29,950
-------- ------- -------
Operating income........................................ 22,900 3,610 16,372
Interest expense........................................ 4,287 1,147 1,110
-------- ------- -------
Net income.............................................. $ 18,613 $ 2,463 $15,262
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE> 100
TRAVEL COMPANIONS INTERNATIONAL, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK
---------------- ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
------ ------ ----------- ---------
<S> <C> <C> <C> <C>
Balances, December 31, 1997................... 5,000 $5,000 $(537,218) $(532,218)
Net income.................................... 18,613 18,613
------ ------ --------- ---------
Balances, December 31, 1998................... 5,000 5,000 (518,605) (513,605)
Net income (unaudited)........................ 15,262 15,262
------ ------ --------- ---------
Balances, March 31, 1999 (unaudited).......... 5,000 $5,000 $(503,343) $(498,343)
====== ====== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE> 101
TRAVEL COMPANIONS INTERNATIONAL, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, ------------------
1998 1998 1999
------------ ------- --------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................... $ 18,613 $ 2,463 $ 15,262
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization......................... 2,790 424 785
Changes in assets and liabilities:
Accounts receivable................................. 4,159 (25,453)
Prepaid expenses.................................... 78 28 (120)
Inventory........................................... 300 (74)
Deferred revenue.................................... (40) (40) 13,657
Accrued expenses and other liabilities.............. 1,230 693 258
-------- ------- --------
Net cash provided by operating activities........ 27,130 3,494 4,389
-------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment...................... (1,139) -- --
-------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of debt............................... (3,209) (935)
Principal payments of notes payable to stockholders...... (19,700) (1,304) (5,000)
-------- ------- --------
Net cash used in financing activities............ (22,909) (1,304) (5,935)
-------- ------- --------
Net increase (decrease) in cash and cash equivalents....... 3,082 2,190 (1,546)
Cash and cash equivalents at beginning of period........... 2,009 2,009 5,091
-------- ------- --------
Cash and cash equivalents at end of period................. $ 5,091 $ 4,199 $ 3,545
======== ======= ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest.............................................. $ 4,323 $ 1,250 $ 1,121
Significant non-cash financing activities:
Refinancing of accrued interest to debt............... $ 5,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE> 102
TRAVEL COMPANIONS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS DESCRIPTION
Travel Companions International, Inc. (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 AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original or remaining maturity of three months or less at the date of purchase
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 Web site. Both banner advertising and priority listing
revenue are derived from fixed fee contracts, with no guaranteed number of
impressions. Fixed fee contracts are recognized ratably over the term of the
agreement, provided that no significant Company obligations remain. Deferred
revenue consists of payments received from customers for future advertising
services to be performed by the Company under contract.
F-34
<PAGE> 103
TRAVEL COMPANIONS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
INCOME TAXES
The Company has elected to be taxed as an S corporation under the
provisions of the Internal Revenue Code (the Code) and comparable state income
tax law. Under those provisions, the Company's income is reported on the
individual tax returns of the Company's stockholders. As such, the Company is
generally not subject to corporate income taxes. Therefore, no provision or
liability for income taxes is reflected in the financial statements of the
Company.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial data as of March 31, 1999 and for the three months
ended March 31, 1998 and 1999 is unaudited; however, in the opinion of
management, the interim data includes all adjustments, consisting only of normal
recurring adjustments necessary to present fairly the Company's financial
position as of March 31, 1999 and the results of its operations and cash flows
for the three months ended March 31, 1998 and 1999.
2. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ -----------
(UNAUDITED)
<S> <C> <C>
Property and equipment:
Computer equipment........................................ $ 23,488 $ 23,488
Furniture and office equipment............................ 23,881 23,881
Leasehold improvements.................................... 878 878
-------- --------
48,247 48,247
Less accumulated depreciation and amortization.............. (45,197) (45,982)
-------- --------
$ 3,050 $ 2,265
======== ========
</TABLE>
3. BORROWING ARRANGEMENTS
DEBT
The Company has a note with a local development authority. The loan bears
simple interest at a rate of 8.5% and calls for monthly principal and interest
payments of $682 per month for five years with the remaining principal and
accrued interest due in April 2003. As of December 31, 1998, the balance
outstanding under this loan agreement was $52,603. The outstanding balance has
been classified as current in accordance with the terms of the agreement due to
the pending acquisition of the majority of the Company's assets as described in
Note 6. In the event that the acquisition is not consummated, approximately
$48,700 of the outstanding debt balance would be reclassified to long-term.
F-35
<PAGE> 104
TRAVEL COMPANIONS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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
and $454,678 as of December 31, 1998 and March 31, 1999 (unaudited),
respectively. These amounts do not bear interest and are due on demand
subsequent to May 31, 2000.
4. RELATED PARTY TRANSACTIONS
The Company leases office space on a month-to-month basis from one of its
stockholders. The Company recognized $18,000 of rent expense related to this
arrangement during the year ended December 31, 1998 and $4,500 during the three
months ended March 31, 1999 (unaudited).
5. RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 is effective
for financial statements for years beginning after December 15, 1998. SOP 98-1
provides guidance on 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-36
<PAGE> 105
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
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 was $2,576,000, which consisted of
$1,841,000 in cash and 52,920 shares of FreeShop common stock. The unaudited pro
forma combined statement of operations are based on individual historical
results of operations of FreeShop, Commonsite and Travel for the year ended
December 31, 1999, after giving effect to the acquisitions of Commonsite and
Travel as if they had occurred on January 1, 1999.
The unaudited pro forma combined financial statements should be read in
conjunction with the historical financial statements and notes thereto of
FreeShop, Commonsite and Travel. The unaudited pro forma combined financial
statements are presented for illustrative purposes only and are not necessarily
indicative of results of operations that would have actually occurred had the
acquisitions of Commonsite and Travel been effected on the date assumed.
F-37
<PAGE> 106
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1999
---------------------------------------------------------------------------------
PRO FORMA
FREESHOP COMMONSITE TRAVEL COMBINED ADJUSTMENTS PRO FORMA
------------ ---------- ------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues.................... $ 8,505,628 $146,345 $87,808 $ 8,739,781 $ 8,739,781
Cost of revenues................ 732,619 25,689 30,241 788,549 788,549
------------ -------- ------- ------------ ------------
Gross profit.................... 7,773,009 120,656 57,567 7,951,232 7,951,232
------------ -------- ------- ------------ ------------
Operating expenses:
Sales and marketing........... 15,041,960 53,084 2,675 15,097,719 15,097,719
Research and development...... 901,399 901,399 901,399
General and administrative.... 1,342,517 73,476 62,260 1,478,253 1,478,253
Equity-based compensation..... 1,116,859 1,116,859 1,116,859
Depreciation and
amortization................ 1,039,139 652 240 1,040,031 $ 292,014 (2) 1,331,377
(668)(4)
------------ -------- ------- ------------ --------- ------------
Total operating expenses........ 19,441,874 127,212 65,175 19,634,261 291,346 19,925,607
------------ -------- ------- ------------ --------- ------------
Loss from operations............ (11,668,865) (6,556) (7,608) (11,683,029) (291,346) (11,974,375)
Interest expense................ 39,664 1,155 40,819 (1,155)(3) 39,664
Other income, net............... (818,019) (818,019) (818,019)
------------ -------- ------- ------------ --------- ------------
Net loss........................ $(10,890,510) $ (6,556) $(8,763) $(10,905,829) $(290,191) $(11,196,020)
============ ======== ======= ============ ========= ============
Basic and diluted net loss per
share......................... $ (1.08) $ (1.11)
============ ============
Weighted average shares used in
computing net loss per
share......................... 10,042,927 52,920(1) 10,095,847(5)
</TABLE>
F-38
<PAGE> 107
NOTES TO UNAUDITED PRO FORMA
COMBINED STATEMENT OF OPERATIONS
1. Reflects the issuance of 52,920 shares of FreeShop common stock in
connection with the Commonsite acquisition as though they were issued on
January 1, 1998.
2. Reflects the amortization of the client lists, customer lists, data base
content, covenants not to compete and goodwill acquired in the business
combinations, which are being amortized over one, two, five, two and three
years, respectively.
3. Represents elimination of interest expense for debt not assumed in the
acquisitions.
4. 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.
5. Basic and diluted net loss per share is computed using the weighted average
number of shares of common stock outstanding after the issuance of FreeShop
common stock in connection with the Commonsite acquisition.
F-39
<PAGE> 108
[ON INSIDE BACK COVER]
[The FreeShop logo is centered on the page with the phrase "PUTTING CONSUMERS IN
CONTROL OF THE DIRECT MARKETING PROCESS."]
<PAGE> 109
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>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary...................... 3
Risk Factors............................ 7
Forward-Looking Statements.............. 16
Market Data............................. 17
Use of Proceeds......................... 18
Price Range of Common Stock............. 18
Dividend Policy......................... 18
Capitalization.......................... 19
Dilution................................ 20
Selected Financial Data................. 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 22
Business................................ 33
Management.............................. 45
Related-Party Transactions.............. 53
Principal and Selling Shareholders...... 56
Description of Capital Stock............ 59
Shares Eligible for Future Sale......... 61
Underwriting............................ 64
Legal Matters........................... 67
Experts................................. 67
Where You Can Find More Information..... 67
Index to Financial Statements........... F-1
</TABLE>
[FREESHOP LOGO]
3,000,000 SHARES
COMMON STOCK
DEUTSCHE BANC ALEX. BROWN
DAIN RAUSCHER WESSELS
THOMAS WEISEL PARTNERS LLC
PRUDENTIAL VOLPE TECHNOLOGY
a unit of Prudential Securities
E*OFFERING
Prospectus
, 2000
<PAGE> 110
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......... $ 32,448
NASD Filing Fee.............................................
Nasdaq National Market Listing Fee..........................
Legal Fees and Expenses.....................................
Accountants' Fees and Expenses..............................
Blue Sky Filing and Counsel Fees and Expenses...............
Miscellaneous Expenses......................................
--------
Total............................................. $500,000
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Sections 23B.08.500 through 23B.08.600 of the Washington Business
Corporation Act (the "Washington Act") authorize a court to award, or a
corporation's board of directors to grant, indemnification to directors and
officers on terms sufficiently broad to permit indemnification under certain
circumstances for liabilities arising under the Securities Act of 1933, as
amended (the "Securities Act"). Article 6 of the registrant's Second Amended and
Restated Articles of Incorporation and Article IX of the registrant's Amended
and Restated Bylaws together 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 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 this Registration Statement.
II-1
<PAGE> 111
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since the registrant's inception in June 1997, the registrant has issued
and sold the following unregistered securities:
1. On June 30, 1997, the registrant issued 4,600,820 shares of common stock
and 774,194 shares of Series A convertible preferred stock to Online
Interactive, Inc. for aggregate consideration consisting of the contribution to
the registrant of the operating assets and liabilities of the FreeShop Division
of Online Interactive, Inc. The 774,194 shares of Series A convertible preferred
stock were convertible into the same number of shares of common stock.
2. On July 18, 1997, the registrant issued 387,097 shares of Common Stock
to Timothy C. Choate and 387,097 shares of common stock to John P. 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 964,872 shares of common stock to 21 investors for a consideration
of $1.025 per share, or an aggregate of $989,003.
4. On August 22, 1997, the registrant issued options for 24,391 shares of
common stock exercisable at a price of $1.025 per share, expiring February 22,
1998, to each of Othneil D. Palomino and Dwayne Walker. These options were
issued outside of the registrant's 1997 stock option plan.
5. On September 7, 1997, the registrant issued options for 146,340 shares
of common stock exercisable at a price of $1.025 per share, expiring October 30,
1997, to Michael Tannen and Johan Liedgren. The expiration of these options was
extended to January 15, 1998. These options were issued outside of the
registrant's 1997 stock option plan.
6. On October 15, 1997, the registrant issued Warrants for 2,400 shares of
common stock exercisable at a price of $1.02 per share, expiring October 23,
2002, to Hallco Leasing Corporation in partial consideration of an equipment
lease.
7. During the period October 1997 through December 1997, the registrant
issued a total of 31,841 shares of common stock to its landlord, Merrill Place
LLC, in lieu of rent payments in the aggregate amount of $32,637.
8. On January 16, 1998, the registrant issued Warrants for 1,300 shares of
common stock exercisable at a price of $1.02 per share, expiring January 16,
2002, to Karrie Lee for consulting services.
9. On January 19, 1998, the registrant issued Warrants for 14,000 shares of
common stock exercisable at a price of $1.02 per share, expiring January 23,
2003, to Hallco Leasing Corporation in partial consideration of an equipment
lease.
10. On January 23, 1998, the registrant issued Warrants for 400 shares of
common stock exercisable at a price of $1.02 per share, expiring December 31,
2002, to Dennis Green for consulting services.
11. On January 23, 1998, the registrant issued Warrants for 10,000 shares
of common stock exercisable at a price of $1.02 per share, expiring January 23,
2002, to Employco, Inc. for consulting services.
12. On March 17, 1998, the registrant issued a $50,000 convertible
promissory note to Oki Enterprises, LLC, with a maturity date of March 1, 2000.
The principal balance of the note was convertible at the discretion of the
holder at any time prior to the maturity date into shares of the registrant's
preferred stock on the same terms at which the registrant may then be offering
preferred stock to other investors.
II-2
<PAGE> 112
13. On June 30, 1998, the registrant issued 1,456 shares of common stock to
Anthony Lee Simonelli in consideration of consulting services valued at $1,492
rendered to the registrant.
14. During the period June 1998 through September 1998, the registrant
issued an aggregate of 612,674 shares of common stock to 22 investors at $1.50
per share for aggregate consideration of $919,004.
15. On September 18, 1998, the registrant issued Warrants for 10,000 shares
of common stock exercisable at a price of $1.50 per share, expiring September
18, 2003, to Imperial Bank in partial consideration of a credit facility.
16. On December 11, 1998, the registrant issued 1,619,387 shares of common
stock, and Warrants to purchase 1,174,143 shares of common stock at $4.29565 per
share, 716,290 shares at $4.986 per share and 1,572,822 shares at $5.522975 per
share and 13,332 shares of common stock at $3.965 per share to Fingerhut for an
aggregate consideration of $4,000,000.
17. In February 1999, the registrant issued an aggregate of 160,000 shares
of common stock to a total of ten investors at $2.50 per share for aggregate
consideration of $400,000.
18. On April 5, 1999, the registrant issued 20,000 shares of common stock
to Oki Enterprises, LLC, in exchange for the $50,000 convertible promissory note
referenced in paragraph 12 above.
19. On May 6, 1999, in accordance with an Asset Purchase Agreement among
the registrant, Commonsite, LLC and a shareholder of Commonsite, the registrant
issued 52,920 shares of common stock to Commonsite in connection with the
registrant's purchase of certain of Commonsite's assets.
20. On May 24, 1999, the registrant issued 293,536 shares of Series B
convertible preferred stock in lieu of common stock to Fingerhut for aggregate
consideration of $5,043,704 upon the exercise by Fingerhut of a Warrant
identified in paragraph 16 above. Each share of Series B convertible preferred
stock is convertible into four shares of common stock.
21. On May 25, 1999, the registrant issued 10,000 shares of common stock to
Employco for aggregate consideration of $10,250 upon the exercise by Employco of
Warrants identified in paragraph 11 above.
22. On June 8, 1999, the registrant issued 179,072 shares of Series B
convertible preferred stock in lieu of common stock to Fingerhut for aggregate
consideration of $3,571,420 upon the exercise by Fingerhut of a warrant
identified in paragraph 16 above. Each share of Series B convertible preferred
stock is convertible into four shares of common stock.
23. On October 1, 1999, the registrant issued 396,539 shares of Series B
convertible preferred stock in lieu of common stock to Fingerhut for aggregate
consideration of $8,739,166 upon the exercise by Fingerhut of warrants
identified in paragraph 16 above. Each share of Series B convertible preferred
stock is convertible into four shares of common stock.
24. On October 1, 1999, the registrant issued 8,820 shares of Series B
convertible preferred stock to Fingerhut for aggregate consideration of
$140,238. Each share of Series B convertible preferred stock is convertible into
4 shares of common stock.
25. On October 1, 1999 the 877,967 outstanding shares of Series B
convertible preferred stock were converted into 3,511,868 shares of common stock
upon the closing of our initial public offering.
26. Since inception, the registrant has issued an aggregate of 2,145,889
options to purchase common stock, with exercise prices ranging from $0.15 to
$28.50 per share, to employees, directors, advisors and service providers under
the registrant's 1997 stock option plan. Of these
II-3
<PAGE> 113
options, options for 858,512 shares have been canceled without being exercised,
options for 164,117 shares have been exercised and options for 1,123,260 shares
remain outstanding.
The sales and issuances of securities described in paragraphs 3, 14, 16,
17, 19, 20 and 22 above were exempt from Securities Act registration pursuant to
Rule 506 of Regulation D under the Securities Act. The sales and issuances of
securities described in paragraphs 1, 2, 6-13, 15, 18 and 21 above were exempt
from Securities Act registration under Section 4(2) of the Securities Act, on
the basis that the transactions did not involve a public offering. The sales and
issuances of securities described in paragraphs 4, 5 and 23 above were exempt
from Securities Act registration under Rule 701 under the Securities Act, on the
basis that these options were offered and sold in accordance with a written
compensatory benefit plan or contract.
No underwriters were used in connection with these sales and issuances.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
A. Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1** Second Amended and Restated Articles of Incorporation of
registrant.
3.2** 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 P. 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.
10.11.1 Second Amendment to Lease, dated November 30, 1999, between
registrant and Merrill Place LLC.
10.12** Promotion Agreement, dated May 18, 1998 and amended as of
June 30, 1998 and September 30, 1998, between registrant and
CNET, Inc.
10.13+** Linkshare Network Membership Agreement, dated September 23,
1998, between registrant and Linkshare Corporation.
10.14** Letter Agreement dated June 18, 1999 between registrant and
Fingerhut.
</TABLE>
II-4
<PAGE> 114
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.15** Escrow Agreement dated June 18, 1999 between registrant and
Fingerhut.
10.16** Common Stock Purchase Warrant dated January 26, 1998 in
favor of Karrie Lee.
10.17** Warrant to Purchase Stock dated September 18, 1998 in favor
of Imperial Bank.
10.18** Common Stock Purchase Warrant dated January 23, 1998 in
favor of Hallco Leasing Corporation.
10.19** Common Stock Purchase Warrant dated December 4, 1997 in
favor of Hallco Leasing Corporation.
10.20** Common Stock Purchase Warrant dated January 26, 1998 in
favor of Employco, Inc.
10.21+** Marketing Agreement with NewSub Services, Inc. effective as
of June 1, 1999.
10.22++ Marketing Agreement with eNews.com, Inc. dated December 8,
1999. (Incorporated by reference Exhibit 10.1 to the
Company's Report on Form 8-K filed January 12, 2000).
23.1 Consent of PricewaterhouseCoopers LLP, independent
accountants.
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>
- -------------------------
* This exhibit will be filed by amendment.
** Incorporated by reference to the Company's Registration Statement on Form S-1
(No. 333-81151).
+ Confidential treatment has been granted as to certain portions of this
Exhibit. Omitted portions have been filed separately with the Securities and
Exchange Commission.
++ Confidential treatment has been requested as to certain portions of this
Exhibit. Omitted portions have been filed separately with the Securities and
Exchange Commission.
B. Financial Statement Schedules.
Except as provided, 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.
<TABLE>
<CAPTION>
SCHEDULE NO. DESCRIPTION
------------ -----------
<C> <S>
Report of Independent Accountants on Financial Statement
1.1 Schedule
1.2 Valuation and Qualifying Accounts and Reserves
</TABLE>
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.
II-5
<PAGE> 115
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-6
<PAGE> 116
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 February 9, 2000.
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 attorney-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 February 9, 2000
- ----------------------------------------------------- Chief Executive Officer
Timothy C. Choate (principal executive
officer)
/s/ JOHN A. WADE Secretary, Vice President, February 9, 2000
- ----------------------------------------------------- Finance and Chief
John A. Wade Financial Officer
(principal finance and
accounting officer)
/s/ JOHN P. BALLANTINE Director February 9, 2000
- -----------------------------------------------------
John P. Ballantine
/s/ KIRK M. LOEVNER Director January 21, 2000
- -----------------------------------------------------
Kirk M. Loevner
/s/ JOHN B. BALOUSEK Director January 21, 2000
- -----------------------------------------------------
John B. Balousek
/s/ WILLIAM J. LANSING Director February 9, 2000
- -----------------------------------------------------
William J. Lansing
</TABLE>
II-7
<PAGE> 117
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders
of FreeShop.com, Inc.
Our audits of the financial statements referred to in our report dated
January 21, 2000 appearing in the Registration Statement on Form S-1 also
included an audit of the financial statement schedule listed in Item 16 of this
Form S-1. In our opinion, this financial statement schedule presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related financial statements.
[PRICEWATERHOUSECOOPERS LLP]
Seattle, Washington
January 21, 2000
S-1
<PAGE> 118
SCHEDULE 1.2
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
BALANCE AT CHARGES TO CHARGES
BEGINNING OF COSTS AND TO OTHER BALANCE AT END
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
----------- ------------ ---------- ---------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1997
Allowance for doubtful accounts....... $ 58,907 $146,310 $ -- $124,699 $ 80,518
Tax valuation allowance............... -- --
Six months ended December 31, 1997
Allowance for doubtful accounts....... 80,518 122,485 123,284 79,719
Tax valuation allowance............... -- 418,697 418,697
Year ended December 31, 1998
Allowance for doubtful accounts....... 79,719 56,551 93,619 42,651
Tax valuation allowance............... 418,697 1,064,048 1,482,745
Year ended December 31, 1999
Allowance for doubtful accounts....... 42,651 393,221 64,756 371,116
Tax valuation allowance............... 1,482,745 4,327,069 5,809,814
</TABLE>
S-2
<PAGE> 119
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** 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 P. 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.
10.11.1 Second Amendment to Lease, dated November 30, 1999, between
registrant and Merrill Place LLC.
10.12** Promotion Agreement, dated May 18, 1998 and amended as of
June 30, 1998 and September 30, 1998, between registrant and
CNET, Inc.
10.13+** Linkshare Network Membership Agreement, dated September 23,
1998, between registrant and Linkshare Corporation.
10.14** Letter Agreement dated June 18, 1999 between registrant and
Fingerhut.
10.15** Escrow Agreement dated June 18, 1999 between registrant and
Fingerhut.
10.16** Common Stock Purchase Warrant dated January 26, 1998 in
favor of Karrie Lee.
10.17** Warrant to Purchase Stock dated September 18, 1998 in favor
of Imperial Bank.
10.18** Common Stock Purchase Warrant dated January 23, 1998 in
favor of Hallco Leasing Corporation.
10.19** Common Stock Purchase Warrant dated December 4, 1997 in
favor of Hallco Leasing Corporation.
10.20** Common Stock Purchase Warrant dated January 26, 1998 in
favor of Employco, Inc.
</TABLE>
<PAGE> 120
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
10.21+** Marketing Agreement with NewSub Services, Inc. effective as
of June 1, 1999.
10.22++ Marketing Agreement with eNews.com, Inc. dated December 8,
1999. (Incorporated by reference Exhibit 10.1 to the
Company's Report on Form 8-K filed January 12, 2000).
23.1 Consent of PricewaterhouseCoopers LLP, independent
accountants.
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>
- -------------------------
* This exhibit will be filed by amendment.
** Incorporated by reference to the Company's Registration Statement on Form S-1
(No. 333-81151).
+ Confidential treatment has been granted as to certain portions of this
Exhibit. Omitted portions have been filed separately with the Securities and
Exchange Commission.
++ Confidential treatment has been requested as to certain portions of this
Exhibit. Omitted portions have been filed separately with the Securities and
Exchange Commission.
<PAGE> 1
EXHIBIT 10.11.1
SECOND AMENDMENT TO LEASE
THIS SECOND AMENDMENT TO LEASE (the "Amendment") is made and entered into
this 30th day of November, 1999, by and between MERRILL PLACE, LLC, a
Washington limited liability company ("Landlord"), and FREESHOP.COM, 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. Pursuant to an Amendment to Lease dated February 16, 1999 (the
"First Amendment"), Tenant agreed to lease additional space (the "First
Additional Space") on the second floor of the Warehouse Building consisting of
8,374 square feet of office space and 1,211 square feet of office space on the
first floor.
C. Tenant has exercised its right of first opportunity to lease
additional space in the Warehouse Building pursuant to Paragraph 36 of the
Lease.
D. 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 1,518 rentable square feet of floor
area on the first floor and 8,000 rentable square feet of floor area in the
basement of the Warehouse Building (the "Second Additional Space") (hereinafter
the Original Premises, the First Additional Space and the Second Additional
space are collectively called the "Premises"), upon the same terms and
conditions contained in the Lease, except as provided otherwise herein. The
Second 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 Second 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 Warehouse Building utilized
for office space.
-1-
<PAGE> 2
3. Commencement Date for Second Additional Space. The Lease commencement
date for the Second Additional Space (the "Commencement Date for the Second
Additional Space") shall be the later to occur of February 15, 2000, 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 9 below, the Commencement Date for the Second Additional Space will
be February 15, 2000.
4. Expiration Date. The expiration date of the Lease is hereby extended
from May 31, 2003 to May 31, 2004 (the "Termination Date"). All of Tenant's
rights to lease the Premises will terminate on the Termination Date.
5. Early Termination. Tenant may terminate the Lease upon the second and
third anniversary of the Commencement Date for the Second 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's not being able to provide
Tenant with additional expansion space within Merrill Place to meet Tenant's
expansion requirements set forth in Tenant's termination notice. This paragraph
supersedes all termination rights under the Lease as amended by the First
Amendment.
6. 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 Second Additional Space:
<TABLE>
<CAPTION>
<S> <C> <C>
FIRST AND SECOND ADDI- ORIGINAL PREMISES
RENTAL PERIOD TIONAL SPACE $/RSF/YEAR $/RSF/YEAR
Commencement to 5/31/2000 $18.50 $21.00
6/1/2000 to 5/31/2001 $19.50 $22.00
6/1/2001 to 5/31/2002 $20.50 $23.00
6/1/2002 to 5/31/2003 $21.50 $24.00
6/1/2003 to 5/31/2004 $22.50 $25.00
</TABLE>
Rent for the balcony space shall remain at $4.00 per square foot per year
throughout the term of the Lease.
7. 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 First Additional Space and 2000 for the Second Additional Space.
8. Landlord Improvements. Landlord agrees to make the following
improvements to or for the Second Additional Space and its systems (the
"Landlord Improvements"):
a. Landlord will provide adequate electrical capacity to the main
distribution panel. Distribution throughout the Second Additional Space is part
of Tenant Improvements costs per industry standards.
-2-
<PAGE> 3
b. Landlord will upgrade and add new HVAC equipment into the Second
Additional Space at its sole cost, but distribution from each heat pump unit is
part of the Tenant Improvement costs per industry standards. The HVAC fresh air
duct will remain in its current location as it serves the entire building.
9. Tenant Improvements. Landlord will construct all improvements to the
Second Additional Space requested by Tenant (the "Tenant Improvements")
according to plans and specifications approved by Landlord and Tenant; provided
that the Tenant Improvements to the server room on the first floor will include
finished walls only. The Commencement Date for the Second Additional Space of
February 15, 2000 is contingent upon Landlord's and Tenant's meeting the
following construction schedule:
NOVEMBER 30, 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.
DECEMBER 1, 1999. Demolition of the Second Additional Space commences.
Tenant acknowledges that demolition and construction of the Tenant Improvements
to the Second Additional Space could cause some inconvenience to its current
occupancy of the Original Premises and First Additional Space.
DECEMBER 15, 1999. Anticipated date that building permit will be issued.
Upon issuance of the building permit, construction of the Tenant Improvements
will begin.
FEBRUARY 15, 2000. Anticipated delivery date of Second 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. Tenant shall have the right to review Landlord's
decision.
10. Tenant Improvement Allowance. Landlord will provide Tenant with an
improvement allowance for the Tenant Improvements in the Second Additional
Space of $10.00 per rentable square foot of the Second Additional Space. Tenant
agrees to pay, on or before the Commencement Date for the Second Additional
Space, for all costs of the Tenant Improvements in excess of this tenant
improvement allowance.
11. 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 twenty-seven (27) cars on a nonreserved basis for
ninety percent (90%) of the posted market rental rate. Landlord will also
provide Tenant with one (1) 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.
-3-
<PAGE> 4
12. 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.
13. All Other Terms Remain Unchanged. Except as amended herein, all
other terms and conditions of the Lease, as amended by the First Amendment,
shall remain unchanged and in full force and effect, including but not limited
to, Tenant's Right of First Option contained in Paragraph 36 of the Lease,
except that the rental rate for any Expansion Space (as defined in Paragraph 36)
will be the same as for the Second Additional Space.
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.COM, INC.
By: /s/ JOHN A. WADE
---------------------------------
Its: CFO
----------------------------
<PAGE> 5
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 7th day of December,
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 A. 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.COM,
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 1st day of December,
1999.
/s/ SHERRY ANN LANDRUM
----------------------------------------
(Signature of Notary)
Notary Public
State of Washington
Sherry Ann Landrum
Appointment Expires Oct. 2, 2002
----------------------------------------
(Print or stamp name of Notary)
NOTARY PUBLIC in and for the State
of Washington
My Appointment Expires: Oct. 2, 2002
----------------
-5-
<PAGE> 6
EXHIBIT A
(DRAWING OF ADDITIONAL SPACE)
-6-
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of
our reports dated January 21, 2000 relating to the financial statements and
financial statement schedule 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 headings "Experts" and "Selected
Financial Data" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
Seattle, Washington
February 9, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF DECEMBER 31, 1999 AND THE STATEMENT OF OPERATIONS FOR THE YEAR ENDED
DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 33,794,811
<SECURITIES> 13,951,918
<RECEIVABLES> 3,842,764
<ALLOWANCES> 371,116
<INVENTORY> 0
<CURRENT-ASSETS> 51,600,649
<PP&E> 2,855,037
<DEPRECIATION> 605,413
<TOTAL-ASSETS> 55,816,139
<CURRENT-LIABILITIES> 4,864,982
<BONDS> 0
0
0
<COMMON> 66,586,978
<OTHER-SE> (15,675,833)
<TOTAL-LIABILITY-AND-EQUITY> 55,816,139
<SALES> 0
<TOTAL-REVENUES> 8,505,628
<CGS> 0
<TOTAL-COSTS> 732,619
<OTHER-EXPENSES> 19,441,874
<LOSS-PROVISION> 393,221
<INTEREST-EXPENSE> 39,664
<INCOME-PRETAX> 10,890,510
<INCOME-TAX> 0
<INCOME-CONTINUING> 10,890,510
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,890,510
<EPS-BASIC> (1.08)
<EPS-DILUTED> (1.08)
</TABLE>
