<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________ TO ________________.
COMMISSION FILE NUMBER 000-27065
FREESHOP.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
WASHINGTON 91-1809146
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
95 SOUTH JACKSON STREET
SUITE 300
SEATTLE, WASHINGTON 98104
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(206) 441-9100
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of outstanding shares of common stock, no par value, of the
Registrant at July 31, 2000 was 15,693,118.
<PAGE> 2
FREESHOP.COM, INC.
INDEX TO THE FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Balance sheets as of December 31, 1999 and June 30, 2000 (unaudited)........... 3
Statements of Operations (unaudited) for the three and six months ended
June 30, 1999 and 2000....................................................... 4
Condensed Statements of Cash Flows (unaudited) for the six months ended
June 30, 1999 and 2000....................................................... 5
Notes to Financial Statements (unaudited)...................................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS..................................................................... 7
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK...................... 11
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.............................................................. 11
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS...................................... 11
ITEM 3. DEFAULTS UPON SENIOR SECURITIES ............................................... 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................ 11
ITEM 5. OTHER INFORMATION.............................................................. 11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................................... 12
SIGNATURES...................................................................................... 14
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FREESHOP.COM, INC.
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, June 30,
------------ -----------
1999 2000
(unaudited)
------------ -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents ....................................... $ 33,795 $ 39,914
Accounts receivable, net ........................................ 3,472 6,163
Prepaid expenses and other assets ............................... 382 816
Short-term investments .......................................... 13,952 51
-------- --------
Total current assets ................................... 51,601 46,944
Property and equipment, net ..................................... 2,250 3,780
Intangible assets, net .......................................... 1,922 1,399
Deposits ........................................................ 43 47
-------- --------
4,215 5,226
-------- --------
$ 55,816 $ 52,170
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable ................................................ $ 1,370 $ 2,848
Accrued and other liabilities ................................... 3,390 4,443
Current portion of capital lease obligations .................... 105 69
Current portion of note payable ................................. 800
-------- --------
Total current liabilities .............................. 4,865 8,160
-------- --------
Capital lease obligations, net of current portion ............... 40 12
Note payable, net of current portion ............................ 1,200
Total liabilities ............................................... 4,905 9,372
Shareholders' equity
Common stock, no par value; 100,000 shares
authorized, 15,524 and 15,688 (unaudited) issued
and outstanding at December 31, 1999 and June 30,
2000, respectively ........................................ 66,587 66,760
Additional paid-in capital ................................... 2,858 2,981
Deferred stock compensation .................................. (1,466) (1,088)
Accumulated deficit .......................................... (17,068) (25,855)
-------- --------
Total shareholders' equity ............................. 50,911 42,798
-------- --------
$ 55,816 $ 52,170
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 4
FREESHOP.COM, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
June 30, June 30,
----------------------- -----------------------
1999 2000 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues ............................................ $ 1,397 $ 5,877 $ 2,064 $ 11,024
Cost of revenues ........................................ 107 518 190 1,015
-------- -------- -------- --------
Gross profit ............................................ 1,290 5,359 1,874 10,009
-------- -------- -------- --------
Operating expenses
Sales and marketing .................................. 2,645 8,511 4,141 16,022
Research and development ............................. 181 499 322 976
General and administrative ........................... 252 880 462 1,699
Equity-based compensation ............................ 543 249 622 500
Depreciation and amortization ........................ 224 461 260 903
-------- -------- -------- --------
Total operating expenses ....................... 3,845 10,600 5,807 20,100
-------- -------- -------- --------
Operating loss .......................................... (2,555) (5,241) (3,933) (10,091)
Interest expense ........................................ 10 5 23 11
Other income, net ....................................... (62) (634) (87) (1,315)
-------- -------- -------- --------
Net loss ................................................ $ (2,503) $ (4,612) $ (3,869) $ (8,787)
======== ======== ======== ========
Basic and diluted net loss per share .................... $ (0.30) $ (0.29) $ (0.47) $ (0.56)
======== ======== ======== ========
Weighted-average shares used in computing basic
and diluted net loss per share ....................... 8,214 15,664 8,183 15,603
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 5
FREESHOP.COM, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
June 30,
-----------------------
1999 2000
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ..................................................................... $ (3,869) $ (8,787)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization ............................................ 287 1,073
Bad debt expense ......................................................... 51 696
Amortization of deferred compensation .................................... 212 500
Compensation on shares sold to an employee by a principle shareholder .... 406
(Gain) loss on disposal of property and equipment ........................ 1 (4)
Amortization of discount on short-term investments ....................... (98)
Changes in assets and liabilities, net of impact of acquisitions:
Accounts receivable .................................................... (694) (3,387)
Prepaid expenses and other assets ...................................... (267) (438)
Accounts payable ....................................................... 327 1,478
Accrued and other liabilities .......................................... 125 1,053
-------- --------
Net cash used in operating activities .................................. (3,421) (7,914)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment .......................................... (580) (2,090)
Proceeds from disposal of property and equipment ............................. 15
Payments for business combinations ........................................... (1,666)
Purchase of short-term investments ........................................... (1,486) (1)
Sale of short-term investments ............................................... 14,000
-------- --------
Net cash provided by (used in) investing activities .................... (3,732) 11,924
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments under capital leases ...................................... (54) (64)
Proceeds from note payable ................................................... 2,000
Repurchase of common stock ................................................... (400)
Issuance of common stock, net of issuance costs .............................. 430 173
Issuance of series B convertible preferred stock ............................. 8,615
-------- --------
Net cash provided by financing activities .............................. 8,591 2,109
-------- --------
Net increase in cash and cash equivalents ...................................... 1,438 6,119
Cash and cash equivalents at beginning of period ............................... 2,892 33,795
-------- --------
Cash and cash equivalents at end of period ..................................... $ 4,330 $ 39,914
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 6
FREESHOP.COM, INC.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The interim condensed financial statements are unaudited and have been
prepared on the same basis as the annual financial statements. 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 June 30, 2000, results of
operations for the three and six months ended June 30, 1999 and 2000 and
cash flows for the six months ended June 30, 1999 and 2000.
The unaudited financial statements should be read in conjunction with the
Company's audited financial statements and the notes thereto included in
the Company's Annual Report on Form 10-K filed with the Securities and
Exchange Commission on March 30, 2000. The results of operations for the
three and six months ended June 30, 2000 are not necessarily indicative of
the results to be expected for any subsequent quarter or the entire year
ending December 31, 2000.
2. 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. For the three months ended June 30, 2000 and
1999 barter revenues were $472,000 and $160,000, respectively. For the six
months ended June 30, 2000 and 1999 barter revenues were $673,000 and
$246,000, respectively.
3. NET LOSS PER SHARE
Basic net loss per share amounts are computed by dividing the net loss by
the weighted average number of shares of common stock outstanding during
the period. Diluted net loss per share represents the net loss divided by
the weighted-average number of shares outstanding, including the
potentially dilutive impact of common stock options and warrants. Basic
and diluted net loss per share are equal for all periods presented because
the impact of common stock equivalents is antidilutive.
<PAGE> 7
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>
THREE MONTHS ENDED SIX MONTHS ENDED
June 30, June 30,
----------------------- -----------------------
(UNAUDITED) (UNAUDITED)
1999 2000 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Numerator:
Net loss ....................................... $ (2,503) $ (4,612) $ (3,869) $ (8,787)
======== ======== ======== ========
Denominator:
Weighted average shares used in computing
net loss per share ........................... 8,214 15,664 8,183 15,603
======== ======== ======== ========
Potentially dilutive securities consist of
the following:
Options to purchase common stock ............. 953 1,462 953 1,462
Warrants to purchase common stock ............ 28 16 28 16
Series B convertible preferred stock ......... 1,890 1,890
Warrants to purchase Series B convertible
preferred stock ............................ 1,621 1,621
-------- -------- -------- --------
4,492 1,478 4,492 1,478
======== ======== ======== ========
</TABLE>
<PAGE> 8
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company contains forward-looking statements within the meaning
of section 27A of the Securities Act of 1933 and section 21E of the Securities
Exchange Act of 1934. The Company's actual results and the timing of certain
events could differ materially from those anticipated in these forward-looking
statements as a result of certain factors including, but not limited to, those
described in connection with the forward looking statement and the factors
listed on Exhibit 99 to this report, which factors are hereby incorporated by
reference in this report.
In some cases, you can identify forward-looking statements by our use of
words such as "may," "will," "should," "could," "expect," "plan," "intend,"
"anticipate," "believe," "estimate," "predict," "potential" or "continue" or the
negative or other variations of these words, or other comparable words or
phrases.
Although we believe the expectations reflected in our forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements or other future events. Moreover, neither
we nor anyone else assumes responsibility for the accuracy and completeness of
forward-looking statements. We are under no duty to update any of our
forward-looking statements after the date of this filing. You should not place
undue reliance on forward-looking statements.
OVERVIEW
FreeShop is an online direct 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 sponsorships, and others. Our services are provided through our
network of Web sites at www.freeshop.com, www.desteo.com, and
www.catalogsite.com, and through direct email communications.
We began our direct marketing business in 1994 as the FreeShop division of
Online Interactive, Inc. In June 1997, 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 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.
In the quarters ended June 30, 1999 and 2000 our ten largest clients
accounted for 34.2% and 41.2% of our revenues, respectively. During the quarter
ended June 30, 1999 NewSub Services, Inc. was our largest client accounting for
10.2% of our revenues. No other client accounted for more than 10% of our
revenues in the quarter ended June 30, 1999 and no client accounted for more
than 10% of our revenues in the quarter ended June 30, 2000. In the six months
ended June 30, 1999 and 2000 our ten largest clients accounted for 32.1% and
33.5% of our revenues, respectively. No single client accounted for more than
10% of our revenues in the six months ended June 30, 1999 and 2000.
Our business has been operating at a loss and generating negative cash
flows from operations since inception. As of June 30, 2000, we had accumulated
deficits of approximately $25.9 million. We plan to continue the level of our
investment in marketing and promotion, development of technology and expansion
of our business. As a result, our losses and negative cash flows are likely to
continue. We have experienced rapid growth and have a limited operating history.
Because of this we believe period-to-period comparison of our operating results
is not meaningful and the results for any period should not be relied upon as an
indication of future performance.
On July 28, 2000 the Company announced its intention to purchase on the open
market up to 10% of the issued and outstanding shares of FreeShop common stock.
The first repurchase of such shares occurred on August 1, 2000.
<PAGE> 9
RESULTS OF OPERATIONS
Revenues
We derive our revenues primarily from online lead generation and
advertising contracts. Our revenues increased by $4.5 million, or 321%, to $5.9
million in the quarter ended June 30, 2000 compared to $1.4 million in the same
quarter of 1999. On a year to date basis net revenues have increased by $8.9
million or 434% to $11 million, compared to $2.1 million in the first six months
of 1999. This growth in revenue was primarily attributable to continued
increases in the size of our email newsletter list and an increase in the number
of visits to our Web sites. An increase in visits to our Web sites provides more
banner and anchor inventory and increased lead generation revenues. Revenues
from advertising services were $3.7 million in the quarter ended June 30, 2000,
compared to $0.6 million in the same quarter of the prior year.
Cost of Revenues
Cost of revenues consists of expenses associated with the maintenance and
usage of the Company's Web sites, including Internet connection charges, email
delivery costs, banner ad serving fees, equipment and software depreciation and
personnel costs. Cost of revenues increased to $0.5 million in the quarter ended
June 30, 2000 from $0.1 million in the same quarter of 1999. On a year to date
basis cost of revenues increased to $1.0 million from $0.2 million in the first
six months of 1999. The increase was primarily due to costs related to
additional Internet connection capacity, additional email delivery costs,
depreciation of additional equipment and personnel costs to support our growth.
Gross margin decreased to 91.2% in the quarter ended June 30, 2000, from 92.3%
in the same quarter of 1999. On a year to date basis gross margin remained
consistent at 90.8% in the first six months of the year in 2000 and 1999. We
expect gross margin to remain at these levels in the short-term as we continue
to increase our Internet connection capacity, hardware, email delivery and
software investments, and personnel costs in order to support our growth.
Sales and Marketing
Sales and marketing expenses consist primarily of marketing and
promotional costs related to developing our brands and generating visits to our
Web sites, as well as personnel and other costs. Sales and marketing expenses
increased by $5.9 million to $8.5 million, or 145% of revenues, in the quarter
ended June 30, 2000 compared to $2.6 million, or 189% of revenues, in the same
quarter of 1999. On a year to date basis sales and marketing expenses have
increased by $11.9 million to $16.0 million, or 145% of revenues, compared to
$4.1 million, or 201% of revenues, in the first six months of 1999. The increase
in absolute dollars was due primarily to increases in advertising and brand
awareness spending and increases in personnel costs. The decrease as a
percentage of revenue was primarily due to sales and marketing expenses, other
than advertising spending, increasing at a lesser rate than revenues. On an
absolute basis, we expect to maintain our advertising and brand awareness
spending in the future at comparable levels.
Research and Development
Research and development expenses primarily include personnel costs
related to maintaining and enhancing the features, content and functionality of
our Web site and related systems. Research and development expenses increased by
$0.3 million to $0.5 million, or 9% of revenues, in the quarter ended June 30,
2000 compared to $0.2 million, or 13% of revenues, in the same quarter of 1999.
On a year to date basis research and development expenses have increased by $0.7
million to $1.0 million, or 9% of revenues, compared to $0.3 million, or 16% of
revenues, in the first six months of 1999. The increase in absolute dollars was
primarily due to hiring additional staff to support our growth, continued
improvements in our internal systems and enhancements and modification to our
Web site. The decrease as a percentage of revenues was primarily due to research
and development expenses increasing at a slower rate than revenues.
General and Administrative
General and administrative expenses primarily consist of management,
financial and administrative personnel expenses and related costs and
professional service fees. General and administrative expenses increased by $0.6
million to $0.9 million, or 15% of revenues, in the quarter ended June 30, 2000
compared to $0.3 million, or 18% of revenues, in the same quarter of 1999. On a
year to date basis general and administrative expenses have increased by $1.2
million to $1.7 million, or 15% of revenues, compared to $0.5 million, or 22% of
revenues, in the first six months of 1999. The increase in absolute dollars was
primarily due to a one-time write-off of costs associated with the Company's
cancelled secondary offering, increased personnel costs and professional service
fees necessary to support our growth. The decrease as a percentage of revenue is
primarily due to general and administrative expenses increasing at a slower rate
than revenues.
<PAGE> 10
Equity-Based Compensation
Equity-based compensation expenses consist of amortization of unearned
compensation recognized in connection with stock options and recognition of
expenses when our principal shareholders sell our stock to employees and
directors at a price below the then estimated fair market value of our common
stock. Unearned 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. Unearned
compensation is also recorded based on the fair value of the option granted as
calculated using the Black-Scholes option pricing model when options or warrants
are issued to advisors and other service providers. Unearned compensation is
amortized over the vesting period of the option or warrant. Equity-based
compensation expenses decreased by $0.3 million to $0.2 million, or 4% of
revenues, in the quarter ended June 30, 2000 compared to $0.5 million, or 39% of
revenues, in the same quarter of 1999. On a year to date basis equity-based
compensation expenses have decreased by $0.1 million to $0.5 million, or 5% of
revenues, compared to $0.6 million, or 30% of revenues, in the first six months
of 1999. The decrease in absolute dollars and as a percentage of revenue
resulted primarily from recognition of $0.4 million of expense associated with
the sale of shares by a principle shareholder to an employee in April of 1999.
This has been offset by increases in expense due to issuing options with
exercise prices lower than the closing price on the date granted. We expect
equity-based compensation to remain relatively consistent over the next few
quarters.
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 $0.3 million
to $0.5 million, or 8% of revenues, in the quarter ended June 30, 2000 compared
to $0.2 million, or 16% of revenues, in the same quarter of 1999. On a year to
date basis depreciation and amortization expenses have increased by $0.6 million
to $0.9 million, or 8% of revenues, compared to $0.3 million, or 13% of
revenues, in the first six months of 1999. The increase resulted from the
depreciation of approximately $3.5 million in equipment, software, furniture and
leasehold improvements acquired from July 1999 through June 2000 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. in May of 1999.
Interest Expense
Interest expense primarily relates to capital equipment leases, and
totaled $5,000 in the quarter ended June 30, 2000 and $10,000 in the same
quarter of 1999. On a year to date basis interest expense totaled $11,000 and
$23,000 in the first six months of 2000, and 1999, respectively. Interest
expense is expected to increase in future quarters as a result of interest
accruing under a $2.0 million loan represented by that certain Amended and
Restated Loan and Security Agreement, dated June 29, 2000, by and between the
Company and Imperial Bank, the proceeds of which have been used by the Company
to purchase equipment, software, furniture and leasehold improvements.
Other Income, Net
Other income, net consists primarily of interest income. Other income, net
increased by $0.5 million to $0.6, or 11% of revenues, in the quarter ended June
30, 2000 compared to $0.1 million, or 4% of revenues, in the same quarter of
1999. On a year to date basis other income, net has increased by $1.2 million to
$1.3 million, or 12% of revenues, compared to $0.1 million, or 4% of revenues,
in the first six months of 1999. The increase in other income, net was due to
higher cash balances resulting from our IPO. We expect interest income to
decline slightly over the next several quarters as cash is used in operating,
investing and financing activities.
Income Taxes
No provision for federal income taxes has been recorded for any of the
periods presented due to the Company's current loss position.
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 June 30, 2000 totaled
approximately $65.6
<PAGE> 11
million, including $21.5 million raised from Fingerhut Companies, Inc. and $41.1
million raised in our initial public offering. As of June 30, 2000, we had
approximately $39.9 million in cash and cash equivalents and working capital of
$38.8 million.
Net cash used in operating activities was $7.9 million and $3.4 million in
the six months ended June 30, 2000 and 1999, respectively. Cash used in
operating activities for each period resulted primarily from net losses and
increases in accounts receivable and prepaid expenses, which were partially
offset by increases in accounts payable and accrued liabilities.
Net cash provided by (used in) investing activities was $11.9 million and
$(3.7 million) in the six months ended June 30, 2000 and 1999, respectively. In
the six months ended June 30, 2000, $14 million was received from the maturity
of commercial paper purchased in 1999 and approximately $2.0 million was used to
purchase equipment, software, leasehold improvements and furniture. In the six
months ended June 30, 1999, $600,000 was used for purchases of equipment,
software, leasehold improvements and furniture, $1.7 million was used in the
acquisitions of Catalog Site and World Wide Brochures and $1.5 million was used
to purchase short-term investments which matured in the first quarter of 2000.
Net cash provided by financing activities was $2.1 million and $8.6
million in the six months ended June 30, 2000 and 1999, respectively. In the six
months ended June 30, 2000, net cash provided by financing activities resulted
primarily from proceeds of a $2.0 million loan represented by an Amended and
Restated Loan and Security Agreement, dated June 29, 2000, by and between the
Company and Imperial Bank, the proceeds of which have been used by the Company
to purchase equipment, software, furniture and leasehold improvements. In the
six months ended June 30, 1999, net cash provided by financing activities
resulted primarily from $8.6 million received from the sale of preferred stock
pursuant to the exercise of warrants.
We believe our current cash and cash equivalents will be sufficient to
meet our anticipated cash needs for working capital and capital expenditures
over the next 18 months. Although we have increased revenues, our expenses also
have continued to increase, and we expect this trend to continue in the near
future. Although we believe we have sufficient cash and cash equivalents to fund
our operations for the next 18 months, our cash requirements depend on several
factors, including without limitation, 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 the Company, or at all. If adequate funds are not
available or are not available on acceptable terms, our ability to fund our
expansion, take advantage of business opportunities, develop or enhance services
or products or otherwise respond to competitive pressures would be significantly
limited, and we might need to significantly restrict our operations.
YEAR 2000 ISSUES
Because many computer applications have been written using two digits
rather than four to define the applicable year, some date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. The year
2000 issue could result in system failures or miscalculations causing
disruptions of operations, including disruptions of our Web sites.
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.
<PAGE> 12
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE 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 June 30, 2000, all of our cash equivalents mature within three
months and all of our short-term securities mature within one year. As of June
30, 2000, 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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of the date hereof, there is no material litigation pending against the
Company. From time to time, the Company is a party to litigation and claims
incident to the ordinary course of business. While the results of litigation and
claims cannot be predicted with certainty, the Company believes that the final
outcome of such matters will not have a material adverse effect on the Company's
business, financial condition, results of operations and cash flows.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Changes in Securities
There were no changes in the Company's securities during the three months
ended June 30, 2000.
(b) Use of proceeds
On September 27, 1999, the Securities and Exchange Commission declared
effective the Company's Registration Statement, on Form S-1 (333-81151).
Pursuant to this Registration Statement, on October 1, 1999 the Company closed
its initial public offering of 3,200,000 shares of the Company's common stock at
an initial public offering price of $12.00 per share (the "Offering"). Net
proceeds to the Company, after calculation of the underwriters' discount and
commissions, from the Offering totaled $35,712,000. In addition, on October 25,
1999, the Company sold 480,000 additional shares under the underwriters'
overallotment option. Total net proceeds were $5,356,800. As of June 30, 2000,
approximately $27.1 million of the proceeds from these transactions had been
used, primarily for marketing and other working capital and approximately $3.4
million had been used to purchase computers, software, furniture and leasehold
improvements. Until the proceeds are used they will be invested in short-term
commercial paper.
(c) Sales of Unregistered Securities
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
(a) Imperial Bank Loan.
On June 29, 2000, the Company obtained a $2.0 million loan pursuant to
that certain Amended and Restated Loan and Security Agreement, by and between
the Company and Imperial Bank, the proceeds of which have been used by the
Company to purchase equipment, software, furniture and leasehold improvements.
<PAGE> 13
(b) Stock Buy Back.
On July 28, 2000, the Company announced its intention to purchase on
the open market up to 10% of the issued and outstanding shares of FreeShop
common stock. The first repurchase of such shares occurred on August 1, 2000.
<PAGE> 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report:
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<S> <C>
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.
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
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<PAGE> 15
<TABLE>
<S> <C>
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.
27.1 Financial Data Schedule.
99 Private Securities Litigation Reform Act of 1995 Safe Harbor
Compliance Statements for Forward Looking Statements
</TABLE>
* 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.
++ (Incorporated by reference to Exhibit 10.1 to the Company's Report on Form
8-K filed January 12, 2000).
(b) Reports on Form 8-K:
None.
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FREESHOP.COM, INC.
Date: August 10, 2000 By: /s/ JOHN A. WADE
Name: John A. Wade
Title: Chief Financial Officer
