<PAGE> 1
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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 March 31, 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 April 30, 2000 was 15,663,012.
================================================================================
<PAGE> 2
FREESHOP.COM, INC.
INDEX TO THE FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Balance sheets as of December 31, 1999 and March 31, 2000...................... 3
Statements of Operations for the three months ended March, 1999 and 2000....... 4
Condensed Statements of Cash Flows for the three months ended March 31, 1999
and 2000....................................................................... 5
Notes to Financial Statements.................................................. 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)
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------ ---------
1999 2000
------------ ---------
<S> <C> <C>
ASSETS
Cash and cash equivalents .................................. $ 33,795 $ 42,799
Accounts receivable, net ................................... 3,472 4,670
Prepaid expenses and other assets .......................... 382 899
Short-term investments ..................................... 13,952 50
-------- --------
Total current assets .............................. 51,601 48,418
Fixed assets, net .......................................... 2,250 2,868
Intangible assets, net ..................................... 1,922 1,638
Deposits ................................................... 43 47
-------- --------
4,215 4,553
-------- --------
$ 55,816 $ 52,971
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable ........................................... $ 1,370 $ 2,106
Accrued and other liabilities .............................. 3,390 3,681
Current portion of capital lease obligations ............... 105 87
-------- --------
Total current liabilities ......................... 4,865 5,874
-------- --------
Capital lease obligations, net of current portion .......... 40 26
Total liabilities .......................................... 4,905 5,900
Shareholders' equity
Common stock, no par value; 100,000 shares
authorized, 15,524 and 15,587 (unaudited) issued
and outstanding at December 31, 1999 and March 31,
2000, respectively 66,587 66,670
Additional paid-in capital .............................. 2,858 2,996
Deferred stock compensation ............................. (1,466) (1,352)
Accumulated deficit ..................................... (17,068) (21,243)
-------- --------
Total shareholders' equity ........................ 50,911 47,071
-------- --------
$ 55,816 $ 52,971
======== ========
</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
MARCH 31,
----------------------
1999 2000
------- --------
<S> <C> <C>
Net revenues ....................................... $ 667 $ 5,147
Cost of revenues ................................... 83 497
------- --------
Gross profit ....................................... 584 4,650
------- --------
Operating expenses
Sales and marketing ............................. 1,496 7,511
Research and development ........................ 141 477
General and administrative ...................... 210 819
Equity-based compensation ....................... 79 251
Depreciation and amortization ................... 36 442
------- --------
Total operating expenses .................. 1,962 9,500
------- --------
Operating loss ..................................... (1,378) (4,850)
Interest expense ................................... 13 6
Other income ....................................... (25) (681)
------- --------
Net loss ........................................... $(1,366) $ (4,175)
======= ========
Basic and diluted net loss per share ............... $ (0.17) $ (0.27)
======= ========
Weighted-average shares used in computing basic
and diluted net loss per share .................. 8,151 15,544
======= ========
</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>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1999 2000
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ................................................................. $ (1,366) $ (4,175)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization ........................................ 36 527
Bad debt expense ..................................................... 16 260
Amortization of deferred compensation ................................ 78 251
Gain on disposal of property and equipment ........................... 1 5
Amortization of discount on short-term investments ................... (98)
Changes in assets and liabilities, net of impact of acquisitions:
Accounts receivable ................................................ (161) (1,458)
Prepaid expenses and other assets .................................. (134) (521)
Accounts payable ................................................... 49 736
Accrued and other liabilities ...................................... 147 291
-------- --------
Net cash used in operating activities .............................. (1,334) (4,182)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment ...................................... (215) (865)
Sale of short-term investments ........................................... 14,000
-------- --------
Net cash provided by (used in) investing activities ................ (215) 13,135
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments under capital leases .................................. (26) (32)
Repurchase of common stock ............................................... (400)
Issuance of common stock, net of issuance costs .......................... 413 83
-------- --------
Net cash provided by (used in) financing activities ................ (13) 51
-------- --------
Net increase (decrease) in cash and cash equivalents ....................... (1,562) 9,004
Cash and cash equivalents at beginning of period ........................... 2,892 33,795
-------- --------
Cash and cash equivalents at end of period ................................. $ 1,330 $ 42,799
======== ========
</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 March 31, 2000, results of
operations for the three months ended March 31, 1999 and 2000 and cash
flows for the three months ended March 31, 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 months ended March 31, 2000 are not necessarily indicative of the
results to be expected for any subsequent quarter or the entire year
ending December 31, 2000.
2. 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.
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
MARCH 31,
-------------------------
1999 2000
(UNAUDITED) (UNAUDITED)
----------- -----------
<S> <C> <C>
Numerator:
Net loss ........................................................ $(1,366) $ (4,175)
======= ========
Denominator:
Weighted average shares used in computing net loss per share .... 8,151 15,544
======= ========
Potentially dilutive securities consist of the following:
Options to purchase common stock ................................ 881 1,060
Warrants to purchase common stock ............................... 38 28
------- --------
919 1,088
======= ========
</TABLE>
<PAGE> 7
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 March 31, 1999 and 2000 our ten largest clients
accounted for 26.7% and 40.1% of our revenues, respectively. During the quarters
ended March 31, 1999 and 2000, no client accounted for more than 10% of our
revenues.
Our business has been operating at a loss and generating negative cash
flows from operations since inception. As of March 31, 2000, we had accumulated
losses of approximately $20.9 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.
<PAGE> 8
RESULTS OF OPERATIONS
Revenues
We derive our revenues primarily from online lead generation and
advertising contracts. Our revenues increased by $4.4 million, or 672%, to $5.1
million in the quarter ended March 31, 2000 compared to $0.7 million in the same
quarter 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 $2.8 million in the quarter ended March 31, 2000,
compared to $0.3 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, banner
ad serving fees, equipment and software depreciation and personnel costs. Cost
of revenues increased to $0.5 million in the quarter ended March 31, 2000 from
$0.1 million in the same quarter of 1999. The increase was primarily due to
costs related to additional Internet connection capacity, depreciation of
additional equipment and personnel costs to support our growth. Gross margin
increased to 90.3% in the quarter ended March 31, 2000, from 87.6% in the same
quarter of 1999. We expect gross margin to remain at these levels in the
short-term as we continue to increase our Internet connection capacity, hardware
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 $6.0 million to $7.5 million, or 146% of revenues, in the quarter
ended March 31, 2000 compared to $1.5 million, or 224% of revenues, in the same
quarter 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. We expect to maintain our advertising and brand awareness spending in
the future at similar 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
$0.4 million to $0.5 million, or 9% of revenues, in the quarter ended March 31,
2000 compared to $0.1 million, or 21% of revenues, in the same quarter 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 $0.8 million, or 16% of revenues, in the quarter ended March 31, 2000
compared to $0.2 million, or 32% of revenues, in the same quarter of 1999. The
increase in absolute dollars was primarily due to 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.
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
<PAGE> 9
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 increased by $0.2 million to $0.3 million, or 5% of
revenues, in the quarter ended March 31, 2000 compared to $0.1 million, or 12%
of revenues, in the same quarter of 1999. The increase in absolute dollars in
the quarter resulted primarily from recognition of expense due to issuing
options with exercise prices lower than the closing price on the date granted.
The decrease as a percentage of revenue is primarily due to equity-based
compensation expenses increasing at a slower rate than revenues. 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 $406,000 to
$442,000, or 9% of revenues, in the quarter ended March 31, 2000 compared to
$36,000, or 5% of revenues, in the same quarter of 1999. The increase resulted
from the depreciation of approximately $2.8 million in equipment, furniture and
leasehold improvements acquired from April 1999 through March 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.
Interest Expense
Interest expense primarily relates to capital equipment leases, and
totaled $6,000 in the quarter ended March 31, 2000 and $13,000 in the same
quarter of 1999.
Other Income, Net
Other income, net consists primarily of interest income. Other income, net
increased by $656,000 to $681,000, or 13% of revenues, in the quarter ended
March 31, 2000 compared to $25,000, or 4% of revenues, in the same quarter 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 March 31, 2000 totaled
approximately $65.5 million, including $21.5 million raised from Fingerhut
Companies, Inc. and $41.1 million raised in our initial public offering. As of
March 31, 2000, we had approximately $42.8 million in cash and cash equivalents
and working capital of $42.5 million.
Net cash used in operating activities was $4.2 million and $1.3 million in
the three months ended March 31, 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 $13.1 million and
$(215,000) in the three months ended March 31, 2000 and 1999, respectively. In
the three months ended March 31, 2000, $14 million was received from the
maturity of commercial paper purchased in 1999 and $865,000 was used to purchase
equipment and furniture. For
<PAGE> 10
the three months ended March 31, 1999, cash used in investing activities was for
purchases of property and equipment.
Net cash provided by (used in) financing activities was $51,000 and
$(13,000) in the three months ended March 31, 2000 and 1999, respectively. In
the three months ended March 31, 2000, net cash provided by financing activities
resulted primarily from issuance of capital stock pursuant to stock options,
which was partially offset by principal payments made on capital leases. In the
three months ended March 31, 1999, $400,000 was used to repurchase 160,000
shares of common stock. In the same period, 160,000 shares of common stock were
sold for $400,000. Additionally, there was $13,000 of common stock sold pursuant
to stock options and $26,000 of principle payments made on capital leases.
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 us, or at all. If adequate funds are not available or are
not available on acceptable terms, our ability to fund our expansion, take
advantage of business opportunities, develop or enhance services or products or
otherwise respond to competitive pressures would be significantly limited, and
we might need to significantly restrict our operations.
YEAR 2000 ISSUES
Because many computer applications have been written using two digits
rather than four to define the applicable year, some date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. The year
2000 issue could result in system failures or miscalculations causing
disruptions of operations, including disruptions of our Web 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> 11
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 March 31, 2000, all of our cash equivalents mature within three
months and all of our short-term securities mature within one year. As of
March 31, 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 March 31, 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 March 31, 2000,
approximately $16.7 million of the proceeds from these transactions had been
used, primarily for marketing and other working capital and approximately 2.2
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
None.
<PAGE> 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report:
<TABLE>
<CAPTION>
<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
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).
<PAGE> 13
(b) Reports on Form 8-K:
On January 12, 2000, the Company filed as Exhibit 10.1 to the Company's
Report on Form 8-K that certain Marketing Agreement, dated December 8, 1999, by
and between Company and eNews.com, Inc., portions of which have been granted
confidential treatment by and are separately filed with the Securities and
Exchange Commission.
<PAGE> 14
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: May 15, 2000 By: /s/ JOHN A. WADE
----------------------------------
Name: John A. Wade
Title: Chief Financial Officer
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF MARCH 31, 2000 AND THE STATEMENT OF OPERATIONS FOR THE THREE MONTHS
ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
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<PAGE> 1
RISK FACTORS
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 - SAFE HARBOR FOR
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a
safe-harbor for forward-looking statements made by public companies. This
safe-harbor protects a company from securities law liability in connection with
forward-looking statements if the company complies with the requirements of the
safe-harbor. As a public company, we have relied and will continue to rely on
the protection of the safe harbor in connection with our written and oral
forward-looking statements.
When evaluating our business, you should consider:
- all of the information in this quarterly report on Form 10-Q:
- the risk factors described in our Annual Report on Form 10-K for
the year ended December 31, 2000; and
- the risk factors described below.
The Company's business is subject to the following risks. These risks also
could cause actual results to differ materially from results projected in any
forward looking statement in this report.
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;
- contract with 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 March 31, 2000,
our accumulated losses were $20.9 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 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
<PAGE> 2
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
market makes 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 March 31, 2000, 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 171
employees on March 31, 2000. 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 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 the Company
might result in publicity that could damage our reputation and diminish the
strength of our brand names.
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
<PAGE> 3
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 March 31, 2000, 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;
- 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
<PAGE> 4
- diversion of management's attention from other business concerns.
If we are unable to retain Fingerhut as a major investor, our stock price could
suffer.
Our stock price could be adversely affected if Fingerhut, which currently
holds a 33% interest in the Company, elects to change its investment strategy
related to the Internet and divest its holdings in a rapid fashion.
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 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.
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
Magazine Outlet, 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.
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.
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 through us, which would
result in lower net revenues to the Company from lead generation and cause our
business to suffer.
<PAGE> 5
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 can give no assurance
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 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.
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," "desteo.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 names 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.
<PAGE> 6
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 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.
Our business does not currently generate the cash necessary to fund our
operations. Should it become necessary, we may be unable to obtain additional
financing in the future. We currently anticipate that our available cash
resources will be sufficient to meet our currently anticipated capital
expenditures and working capital requirements through the next 18 months.
Thereafter, we may 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
<PAGE> 7
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 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.
<PAGE> 8
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.
