-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, W1UPElJb3LNJw4xxBnRz5KlqkJBmMFEqWmEKNDSh2gJDeDnukkfE+ZAz65WF6gjP USDEX1RxgWPlJI+NsMgc6A== 0000891020-99-001055.txt : 19990623 0000891020-99-001055.hdr.sgml : 19990623 ACCESSION NUMBER: 0000891020-99-001055 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 18 FILED AS OF DATE: 19990621 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FREESHOP COM INC CENTRAL INDEX KEY: 0001087277 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 911809146 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-81151 FILM NUMBER: 99649290 BUSINESS ADDRESS: STREET 1: 95 SOUTH JACKSON STREET 2: STE 300 CITY: SEATTLE STATE: WA ZIP: 98104 BUSINESS PHONE: 2064419100 MAIL ADDRESS: STREET 1: 95 SOUTH JACKSON STREET 2: STE 300 CITY: SEATTLE STATE: WA ZIP: 98104 S-1 1 FORM S-1 1 As filed with the Securities and Exchange Commission on June 21, 1999. File No. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ FREESHOP.COM, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) WASHINGTON 7310 91-1809146 (STATE OR JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
95 SOUTH JACKSON STREET EVERGREEN CORPORATE SERVICES, INC. SUITE 300 31635 36TH AVENUE S.W. SEATTLE, WASHINGTON 98104 FEDERAL WAY, WASHINGTON 98023-2105 (206) 441-9100 (253) 925-9044 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE (NAME, ADDRESS, INCLUDING ZIP CODE, AND NUMBER TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL INCLUDING AREA CODE, OF AGENT FOR SERVICE) EXECUTIVE OFFICES)
COPIES TO: CHRISTOPHER J. BARRY STEPHEN M. GRAHAM BRYCE L. HOLLAND, JR. PERKINS COIE LLP DORSEY & WHITNEY LLP 1201 THIRD AVENUE, 48TH FLOOR U.S. BANK CENTRE, SUITE 4200 SEATTLE, WASHINGTON 98101 1420 FIFTH AVENUE (206) 583-8888 SEATTLE, WASHINGTON 98101 (206) 903-8800
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] - --------------- If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] - --------------- If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] - --------------- If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [X] CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- TITLE OF EACH CLASS OF SECURITIES PROPOSED MAXIMUM TO BE REGISTERED AGGREGATE OFFERING PRICE(1) AMOUNT OF REGISTRATION FEE - ------------------------------------------------------------------------------------------------------------------- Common Stock, no par value........... $46,000,000 $12,788 - ------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------
(1) Pursuant to Rule 457(a), the proposed maximum aggregate offering price is estimated solely for the purpose of calculating the registration fee. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION , 1999 FREESHOP LOGO SHARES COMMON STOCK This is the initial public offering of FreeShop.com, Inc. and we are offering shares of our common stock. We anticipate that the initial public offering price will be between $ and $ per share. We have applied to list our common stock on the Nasdaq National Market under the symbol "FSHP." INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE RISK FACTORS BEGINNING ON PAGE 7. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
UNDERWRITING PUBLIC OFFERING DISCOUNTS AND PROCEEDS TO PRICE COMMISSIONS FREESHOP Per Share $ $ $ Total $ $ $
We have granted the underwriters the right to purchase up to additional shares to cover any over-allotments. DEUTSCHE BANC ALEX. BROWN DAIN RAUSCHER WESSELS A DIVISION OF DAIN RAUSCHER INCORPORATED VOLPE BROWN WHELAN & COMPANY The date of this prospectus is , 1999 3 ( DESCRIPTION OF INSIDE COVER COLOR ARTWORK TO BE FILED BY AMENDMENT ) 4 PROSPECTUS SUMMARY You should read the following summary together with the more detailed information and financial statements and accompanying notes appearing in this prospectus. FREESHOP.COM, INC. FreeShop is a leading provider of direct marketing services on the Internet, leveraging an innovative consumer-driven approach that changes the dynamics of direct marketing. Through our FreeShop.com Web site, consumers seeking to discover, learn about, or try new products can choose among a broad selection of free, trial and promotional offers in a fun, interactive environment. FreeShop provides a network through which consumers can seek out new products of specific interest to them, unlike the traditional direct marketing model in which marketers communicate to broad audiences in search of new customers. FreeShop currently has more than 1,000 high-quality offers from over 100 companies such as Johnson & Johnson, Inc., The Walt Disney Company, eBay, Inc., US News & World Report, Inc., Hammacher Schlemmer & Co., Inc. and The Columbia House Company. Marketers pay us for the number of customer leads delivered, the number of visitors we direct to their Web site, or the number of times visitors view their advertisements. We believe FreeShop's Internet-based, consumer-directed process creates a highly effective method of direct marketing in terms of cost, targeting, efficiency and consumer satisfaction. Through our direct marketing network of consumers and marketers, we have generated more than 5.0 million orders for various offers and promotions. In April 1999, FreeShop was among the top 20 online shopping sites based on reach, according to Media Metrix, Inc. Our customer database has grown from approximately 850,000 customers in January 1998 to more than 1.8 million customers as of April 1999. In addition, we have over 650,000 members of Club FreeShop. Members of Club FreeShop regularly receive an email newsletter informing them of special offers, exclusive contests and other opportunities. We believe that the number and diversity of our free, trial and promotional offers attracts an increasing number of consumers. This helps us to continue to grow our marketer client base and with it our base of offers, resulting in a positive cycle as an increasing number of marketers are attracted to the increasing number of consumers visiting our Web site. The direct marketing industry is large and growing. In 1998, businesses spent an estimated $80.1 billion marketing directly to consumers through direct mail, telemarketing and direct response advertising in both online and offline media. Direct marketing involves any direct communication to a consumer that is designed to generate a response in the form of an order, a request for further information or a visit to a place of business. Direct marketing allows marketers to reach targeted audiences and to quantify and measure the effectiveness of their campaigns and advertising spending. However, the traditional direct marketers' targeting process is inefficient because marketers lack specific information about a consumer's immediate interests and needs. As a result, the majority of direct mail is discarded and the majority of telemarketing calls are terminated quickly or ignored. The Internet is particularly well suited for direct marketing because it can be used to create an interactive environment between the consumer and the marketer. The Direct Marketing Association estimates online direct marketing will grow from $603 million in 1998 to $5.5 billion in 2003. We believe online direct marketing is more attractive than traditional direct marketing media because it requires lower production costs and provides easier customer response features. In addition, online direct marketing allows marketers to more effectively: - develop one-to-one relationships with consumers; - interact real-time with consumers; - collect data and feedback on marketing campaigns; and - customize marketing campaigns to broad audiences or specific groups. 3 5 Even with these advantages, direct marketers face challenges in fully utilizing the Internet as a marketing medium. With millions of Web sites, only a fraction of which have significant audiences, it is difficult for marketers to decide where to spend their marketing dollars. Even leading brand marketers who build their own Web sites must find ways to attract a sizeable audience of visitors. We believe marketers desire a solution that takes advantage of the effectiveness of direct marketing while overcoming the challenges presented by both traditional and online marketing methods. FreeShop provides this solution, fundamentally changing the dynamics of direct marketing by putting consumers in control of the marketing process. FreeShop benefits consumers by allowing them to select the offers that most interest them and meet their unique needs. We provide consumers with offers for high quality items such as catalogs, magazines, product samples, software, coupons and consumer goods, covering a variety of interests from travel, personal finance and entertainment to automobiles and sports. In addition, because many of our offers are free samples or trial offers, consumers are able to try new products and services before making purchase decisions. FreeShop allows new online visitors to sample the experience of online shopping in an easy, intuitive and risk-free way. FreeShop benefits marketers by offering a cost-effective way to acquire customers. We provide a diversity of programs designed to meet marketers' objectives throughout the entire marketing process, from awareness to interest to trial to sale. We offer a variety of services to marketers, including lead generation, banner advertising, site sponsorships and newsletter sponsorships. We believe our programs are quick and easy to implement relative to traditional direct marketing programs. In December 1998, Fingerhut Companies, Inc. became a significant minority shareholder in FreeShop. Fingerhut is one of the largest direct marketers in the United States, selling general merchandise through catalogs and various Web sites. Currently, Fingerhut's database consists of over 30 million consumers, and, during 1999, Fingerhut expects to distribute over 450 million catalog and promotional mailings. As a result of our participation in a portion of these mailings, we believe we can increase our customer base quickly and cost-effectively. We have recently initiated a direct marketing relationship with Fingerhut which will include Web site links, package inserts, statement stuffers and "blow in" cards for catalogs. In March 1999, Fingerhut was acquired by Federated Department Stores, Inc., which operates over 400 full-line department stores, including Bloomingdale's, The Bon Marche, Burdines, Goldsmith's, Lazarus, Macy's, Rich's, and Stern's. Federated also operates direct mail catalog businesses under the names Bloomingdale's By Mail and Macy's By Mail, and operates an electronic commerce business which provides goods and services online under the name macys.com. We are exploring ways to further develop our relationships with both Fingerhut and Federated in order to improve our Web site content and enhance our customer database. Our objective is to be the dominant provider of online direct marketing services. We intend to achieve this objective through the following key strategies: - increase visitor traffic and transactions through both online and offline marketing programs, including our Associates Program of over 14,000 member sites; - grow our client base by expanding our sales staff, the services we offer and our relationships with advertising agencies and companies with national consumer brands; - enhance FreeShop's brand recognition through aggressive marketing; - expand the number of categories and increase the number of offers within each category; - continue to develop and leverage technology to serve our marketer clients and make our Web site faster, easier to use and more personalized; and - further develop our marketing relationships with both Fingerhut and Federated. 4 6 RECENT ACQUISITIONS As part of our strategy to deepen and diversify our content and grow our visitor and client bases, we recently acquired two businesses which greatly expanded our catalog and travel-related offerings. Commonsite, LLC. In May 1999, we acquired the Catalog Site Web site and substantially all of the related assets of Commonsite, LLC for $441,000 and 132,300 shares of our common stock. The Catalog Site Web site (www.catalogsite.com) offers over 200 catalogs. The business acquired had revenues of $540,000 for the fiscal year ended December 31, 1998 and generated 194,000 leads in the quarter ended March 31, 1999. Travel Companions International, Inc. In May 1999, we acquired the Worldwide Brochures Web site and substantially all of the related assets of Travel Companions International, Inc. for $1.4 million. The Worldwide Brochures Web site (www.wwb.com) offers an extensive selection of over 15,000 travel brochures for locations around the world. The business acquired had revenues of $220,000 for the fiscal year ended December 31, 1998 and generated 167,000 leads in the quarter ended March 31, 1999. THE OFFERING Common stock offered by FreeShop............................ shares Common stock to be outstanding after the offering........... shares(1) Use of proceeds............................................. For working capital and general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol...................... FSHP
- ------------------------- (1) Based on the number of shares actually outstanding as of May 24, 1999. Includes 293,536 shares of series B convertible preferred stock which will convert into 2,935,360 shares of common stock not later than the completion of this offering and warrants to purchase 592,750 shares of series B convertible preferred stock which will be exercised and converted into 5,927,500 shares of common stock not later than the completion of this offering. Excludes, as of May 24, 1999, a total of 2,413,530 shares of common stock issuable upon exercise of outstanding stock options at a weighted average exercise price of $0.61, and 69,250 shares of common stock issuable upon exercise of warrants at a weighted average exercise price of $0.41. --------------- The terms "Freeshop," "we," "us," and "our" as used in this prospectus refer to FreeShop.com., Inc. Unless otherwise specifically stated, information throughout this prospectus assumes that: - the Underwriters' over-allotment option is not exercised; - Fingerhut will exercise warrants to purchase 592,750 shares of series B convertible preferred stock prior to the completion of this offering, and all shares of series B convertible preferred stock will convert into 8,862,860 shares of common stock not later than the completion of this offering. Free Shop is a registered trademark of FreeShop.com, Inc. "Find It! Try It! Buy It!", "The starting point for smart online shopping", "Powered by FreeShop" and "FreeShop by Email" are service marks of FreeShop. We may apply for certain other trademarks and servicemarks including Club FreeShop, FreeShop Savings Club, Savings Central, FreeShop shopping assistant, Catalog Site, Catalog Channel, The Catalog Site and Worldwide Brochures. All other trademarks and service marks that we refer to in this prospectus are the property of their respective owners. The information on our Web site or the Web sites of our affiliates is not a part of this prospectus. 5 7 SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following unaudited pro forma statement of operations data gives effect to the acquisitions of the Catalog Site and Worldwide Brochures Web sites and related assets as if they had occurred on January 1, 1998, but does not reflect the issuance and conversion of the series B convertible preferred stock which will have occurred not later than the completion of this offering. See Note 9 to our unaudited pro forma combined financial information for a description of the method we used to compute our basic and diluted net loss per share of common stock and the number of shares used in that computation. With regard to the following actual statement of operations data, see Note 2 to Freeshop's audited financial statements for a description of how we calculated the number of shares used to compute basic and diluted net loss per share of common stock. The following balance sheet data provides a summary at March 31, 1999, (a) on an actual basis; (b) on a pro forma basis to reflect (1) the authorization of series B convertible preferred stock, (2) the issuance of series B convertible preferred stock upon the exercise of warrants, (3) the conversion of all series B convertible preferred stock into shares of common stock no later than the completion of this offering, and (4) the acquisition of the Catalog Site and Worldwide Brochures Web sites and related assets; and (c) on a pro forma as adjusted basis to reflect the estimated net proceeds from the sale of shares of common stock in this offering at an assumed initial offering price of $ per share, after deducting underwriting discounts and commissions and estimated offering expenses. See "Use of Proceeds," "Capitalization" and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
THREE MONTHS ENDED (UNAUDITED) YEAR ENDED ----------------------------------------------------------- DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, 1998 1998 1998 1998 1998 1999 ----------- --------- --------- --------- --------- ----------- STATEMENT OF OPERATIONS DATA: ACTUAL Revenues......................... $ 1,251 $ 220 $ 209 $ 321 $ 501 $ 667 Gross profit..................... 1,034 182 172 256 425 584 Operating loss................... (3,136) (572) (641) (970) (952) (1,378) Net loss......................... $ (3,199) $ (584) $ (658) $ (992) $ (963) $ (1,366) Basic and diluted net loss per common share................... $ (0.21) $ (0.04) $ (0.04) $ (0.06) $ (0.06) $ (0.07) Shares used to compute basic and diluted net loss per common share.......................... 15,559 14,219 14,887 15,918 17,177 20,377 PRO FORMA (UNAUDITED) Revenues......................... $ 1,893 $ 838 Gross profit..................... 1,455 707 Operating loss................... (4,233) (1,584) Net loss......................... $ (4,296) $ (1,571) Basic and diluted net loss per common share................... $ (0.27) $ (0.08) Shares used to compute basic and diluted net loss per common share.......................... 15,692 20,509
AS OF MARCH 31, 1999 (UNAUDITED) -------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ---------- ----------- ----------- BALANCE SHEET DATA: Cash and cash equivalents................................. $ 1,330 $ 17,115 $ Working capital........................................... 530 16,221 Total assets.............................................. 2,581 21,067 Long-term obligations, less current portion............... 113 113 Total shareholders' equity................................ 1,020 19,381
6 8 RISK FACTORS This offering involves a high degree of risk. You should carefully consider the risks described below and the other information in this prospectus before deciding to invest in shares of our common stock. Any of these risk factors could materially and adversely affect our business, financial condition or operating results. In that case, the trading price of our common stock could decline, and you could lose all or a part of your investment. RISKS RELATED TO OUR BUSINESS WE HAVE A LIMITED OPERATING HISTORY AND MAY FACE DIFFICULTIES ENCOUNTERED BY EARLY STAGE COMPANIES IN INTERNET-RELATED BUSINESSES. Our limited operating history makes predicting our future performance difficult. From our inception in June 1994 through June 1997, we existed as a division of Online Interactive. We commenced operations as an independent company in June 1997. You must consider the risks early stage companies frequently encounter in new and rapidly evolving markets, including the market for online direct marketing. These risks include uncertainties about our ability to: - attract a larger number of consumers to our Web site; - sign up new marketing clients and add new and compelling content to our Web site; - manage our expanding operations; - adapt to potential decreases in online advertising rates; - successfully introduce new products and services; - continue to develop and upgrade our technology and minimize technical difficulties and system downtime; - create and maintain the loyalty of our customers and clients; - maintain our current, and develop new, strategic relationships and alliances; and - attract, retain and motivate qualified personnel. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." WE HAVE A HISTORY OF LOSSES AND EXPECT FUTURE LOSSES. We have not achieved profitability and expect to continue to incur operating losses for the foreseeable future. We incurred net losses of $3.2 million for the year ended December 31, 1998 and $1.4 million for the three months ended March 31, 1999. As of March 31, 1999, our accumulated deficit was $7.2 million. We have recently increased our operating expenses and capital expenditures in order to accelerate our growth. We expect further increases in operating and capital expenditures. Although our revenues have grown in recent quarters, we will need to generate significant increases in revenue to achieve profitability. Even if we do achieve profitability, we may be unable to sustain profitability on a quarterly or annual basis in the future. It is possible that our revenues will grow more slowly than we anticipate or that operating expenses will exceed our expectations. See "Selected Actual Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO FLUCTUATIONS AND SEASONALITY. Our operating results have varied significantly from quarter to quarter in the past and may continue to fluctuate. We believe period-to-period comparisons of our operating results are not meaningful. Our operating results for a particular quarter or year may fall below the expectations of securities analysts and investors which could result in a decrease in our stock price. Numerous factors contribute to the unpredictability of our operating results, including: - the demand for online marketing; - the addition of new or loss of current marketer clients; - the responsiveness of consumers to the offers contained on our Web site; - changes in the growth rate of Internet usage and online traffic levels; - changes in costs we incur to attract and retain marketer clients and visitors to our Web site; 7 9 - changes in our prices, the prices of our competitors or the prices for Internet advertising and direct marketing generally; - the introduction of new services and programs by us or by our competitors; - the timing and amount of costs relating to the expansion of our operations and acquisition of technology or businesses; and - the occurrence of technical difficulties and system downtime. Our limited operating history and the new and rapidly evolving Internet markets make it difficult to ascertain the effects of seasonality on our business. We believe, however, that our revenue may be subject to seasonal fluctuations because advertisers generally place fewer advertisements during the first and third calendar quarters of each year. In addition, expenditures by advertisers tend to be cyclical, reflecting overall economic conditions as well as budgeting and buying patterns. A decline in the economic prospects of advertisers could alter current or prospective advertisers' spending priorities, or the time periods in which they determine their budgets, or increase the time it takes to close a sale with our advertisers. The majority of our contracts are month-to-month and automatically renew unless terminated by either party with 10 days notice. The loss of a significant number of these contracts in any one period might result in significant fluctuations in our quarterly operating results. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." WE MAY BE UNABLE TO MANAGE OUR GROWTH EFFECTIVELY. We may not be successful in managing our growth. To be successful, we must continue to expand the size and scope of our business while retaining the ability to react quickly to the requirements of our marketer clients. We must also implement new technologies and respond to initiatives by new and existing competitors. We have grown from 29 employees on July 1, 1997 to 96 employees on June 15, 1999. We have recently hired key management personnel and added personnel in connection with our recent business acquisitions. We may not be successful in integrating our new management personnel and other employees into our existing operations. In addition, we plan to continue to expand our sales and marketing, customer support and research and development organizations. Past growth in these areas has placed, and any future growth will continue to place, a significant strain on our management systems and resources. Furthermore, we expect we will need to continue to improve our financial and managerial controls and our reporting systems and procedures. These changes in systems and controls may prove to be ineffective or inadequate. THE SUCCESS OF OUR BUSINESS WILL DEPEND ON OUR ABILITY TO STRENGTHEN THE FREESHOP BRAND. We may not be successful in strengthening our brand. As competitive pressures in the online direct marketing industry increase, we expect that brand strength will become increasingly important. We intend to devote substantial resources to promote the FreeShop brand. The reputation of our brand will depend on our ability to provide a high-quality online experience for consumers visiting our Web site or receiving our Club Freeshop e-mail newsletters. If consumers are not satisfied with the quality of their experience with us, they may stop visiting our Web site or accepting our newsletters. In addition, negative experiences of consumers or marketers with FreeShop might result in publicity that could damage our reputation. WE MAY BE UNABLE TO SECURE SUFFICIENT PROMOTIONAL OFFERS FROM OUR MARKETER CLIENTS. The attractiveness of our Web site to consumers is based in part on our ability to provide a broad variety of high quality offers. A number of other Web sites give consumers access to similar offers. We face competition from these Web sites as well as a variety of other online and offline competitors. If we are unsuccessful in acquiring and renewing a continuing array of free, trial and promotional offers for our Web site, traffic on our site will likely decrease. As a result, our Web site will become less attractive to marketers and our ability to generate revenue from marketer clients will be adversely affected. 8 10 WE DEPEND ON KEY PERSONNEL FOR OUR FUTURE SUCCESS. Our future success depends to a significant extent on the efforts and abilities of our senior management, particularly Timothy C. Choate, our Chairman, President and Chief Executive Officer, and other key employees, including our technical and sales personnel. The loss of service of these individuals could adversely affect our business. We may be unable to attract, motivate and retain other key employees in the future. Competition for these employees in our industry is intense and in the past we have experienced difficulty in hiring qualified personnel. We do not have employment agreements with any of our key personnel, nor do we have key-person insurance for any of our employees. WE MAY BE UNABLE TO INTEGRATE THE OPERATIONS FROM OUR ACQUISITIONS OF THE CATALOG SITE AND WORLDWIDE BROCHURES WEB SITES OR FROM ANY FUTURE ACQUISITIONS. We may not be successful in integrating the operations from our two recent acquisitions or from any future acquisitions. In May 1999, we acquired the Catalog Site and Worldwide Brochures Web sites and related assets. These are our first acquisitions and we have limited experience with completing and integrating acquisitions. We may be unable to integrate their operations into our existing business. Our business strategy includes growth through acquisitions, so we expect to pursue other acquisitions in the future. Our recent acquisitions and any future acquisitions present many risks and uncertainties generally associated with acquisitions, including: - difficulties integrating operations, personnel, technologies, products and information systems of acquired businesses; - potential loss of key employees of acquired businesses; - adverse effects on our reported results of operations from acquisition-related charges and amortization of goodwill and purchased technology; - increased fixed costs, which could cause profits to decrease; - inability to maintain the key business relationships and the reputations of acquired businesses; - potential dilution to current shareholders from the issuance of additional equity securities; - inability to maintain our standards, controls, procedures and policies; - responsibility for liabilities of companies we acquire; and - diversion of management's attention from other business concerns. WE MAY BE UNABLE TO DEVELOP AND MAINTAIN POSITIVE BUSINESS RELATIONSHIPS WITH FINGERHUT OR FEDERATED. Failure to develop and maintain positive relationships with Fingerhut or Federated could adversely affect our business. We recently initiated a direct marketing relationship with Fingerhut which will include Web site links, package inserts, statement stuffers and "blow in" cards for catalogs. Because Fingerhut only recently invested in us, and because Federated only recently acquired Fingerhut, we do not know what benefits, if any, we will generate from either or both of these relationships. Both Fingerhut and Federated operate independently of FreeShop and, subject to future contractual obligations, each remains free to act in its own interest regardless of the effect of its actions on us. In addition, although Fingerhut will retain a substantial equity interest in us immediately following this offering, apart from the exercise of its warrants, neither Fingerhut nor Federated has any obligation to make equity or other capital resources available to us in the future. Should either Fingerhut or Federated become dissatisfied with its relationship with us or decide to change its general business strategy relating to the Internet, our relationships with these companies could be adversely affected. Further, should either Fingerhut or Federated decide to discontinue its relationship with us, or our reputation, our stock price, or both may be adversely affected. AN INCREASE IN THE NUMBER OF VISITORS TO OUR WEB SITE MAY STRAIN OUR SYSTEMS, AND WE ARE VULNERABLE TO OTHER SYSTEM MALFUNCTIONS. Any serious or repeated problems with the performance of our Web site could lead to the dissatisfaction of consumers or our marketer clients. The amount of traffic on our Web site has 9 11 continued to increase over time, and we are seeking to further increase traffic on our Web site. The systems that support our Web site must be able to accommodate an increased volume of traffic. In the past, our Web site has experienced slow response times and other systems problems for a variety of reasons. We may continue to experience these problems in the future. If we do not effectively address any capacity constraints or system failures, our business could be adversely affected. See "Business -- Operations and Technology." WE MAY FACE SYSTEM FAILURES RESULTING FROM YEAR 2000 RISKS. Because many computer applications have been written using two digits rather than four to define the applicable year, some date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This year 2000 problem could result in system failures or miscalculations causing disruptions of operations, including disruptions of our Web site. Although we are in the process of obtaining confirmation from our third-party vendors that they have resolved their year 2000 issues, until we have received responses from all of these vendors and completed our testing, we will not know the extent of our exposure to year 2000 risks. In addition, the systems and services provided by these vendors may fail to be year 2000 compliant despite their representations to the contrary. Failure of these systems or services to be year 2000 compliant could result in a systemic failure beyond our control and prevent us from delivering our services to our customers, prevent users from accessing our Web site and decrease the use of the Internet generally. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Year 2000 Issues." WE FACE INTENSE COMPETITION FROM MARKETING-FOCUSED COMPANIES FOR MARKETER CLIENTS. We may be unable to compete successfully with current or future competitors. We face intense competition from many companies in a number of categories, both offline and online, to provide marketing and advertising services for marketer clients. We expect competition from online competitors to increase significantly because there are no substantial barriers to entry in our industry. Increased competition could result in price reductions for online advertising space and marketing services, reduced gross margins and loss of our market share. Many of our existing competitors, as well as a number of potential new competitors, have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical and marketing resources than FreeShop. These advantages may allow them to respond more quickly and effectively to new or emerging technologies and changes in customer requirements. It may also allow them to engage in more extensive research and development, undertake more far-reaching marketing campaigns, adopt more aggressive pricing policies and make more attractive offers to potential employees, strategic partners and advertisers. In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products or services to address the needs of our prospective marketer clients. Online marketing is a rapidly developing market, and new types of products and services may emerge that are more attractive to consumers and marketers than the types of services we offer. As a result, it is possible that new competitors may emerge and rapidly acquire significant market share. See "Business -- Competition." WE MAY NEED TO INCUR LITIGATION EXPENSES IN ORDER TO DEFEND OUR INTELLECTUAL PROPERTY RIGHTS AND MIGHT NEVERTHELESS BE UNABLE TO ADEQUATELY PROTECT THESE RIGHTS. We may need to engage in costly litigation to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the intellectual property rights of others. We cannot assure you that our efforts to prevent misappropriation or infringement of our intellectual property will be successful. An adverse determination in any litigation of this type could require us to make significant changes to the structure and operation of our online services and features or to license alternative technology from another party. Implementation of any of these alternatives could be costly and time consuming and may not be successful. Any intellectual property litigation would likely result in substantial costs and diversion of resources and management attention. 10 12 Our success largely depends on our trademarks and internally developed technologies, which we seek to protect through a combination of trademark, copyright and trade secret laws. Despite actions we take to protect our intellectual property rights, it may be possible for third parties to copy or otherwise obtain and use our intellectual property without authorization or to develop similar technology independently. In addition, legal standards relating to the validity, enforceability and scope of protection of intellectual property rights in Internet-related businesses are uncertain and still evolving. We may be unable to maintain the value of our intellectual property rights in the future. See "Business -- Intellectual Property." We currently hold the Internet domain names "freeshop.com," "catalogsite.com" and "wwb.com" as well as various other related names. Domain names generally are regulated by Internet regulatory bodies. The regulation of domain names in the United States and in foreign countries is subject to change. Regulatory bodies could establish additional top-level domains, appoint additional domain name registrars or modify the requirements for holding domain names. As a result, we may be unable to acquire FreeShop top level domain names in all of the countries in which we may desire to conduct business in the future. The relationship between regulations governing domain names and laws protecting trademarks and similar intellectual property rights is unclear. Therefore, we may be unable to prevent third parties from acquiring domain names that infringe or otherwise decrease the value of our trademarks and other intellectual property rights. We believe there are online companies in other countries using domain names that potentially infringe on our trademarks. We may be unable to prevent them from using these domain names and this use may decrease the value of our trademark. We may need to obtain licenses from others to refine, develop, market and deliver new services. We may be unable to obtain any such license on commercially reasonable terms if at all. Rights granted pursuant to any licenses may not be valid and enforceable. WE MAY FACE LITIGATION AND LIABILITY FOR INFORMATION DISPLAYED ON OUR WEB SITE. We may be subjected to claims for defamation, negligence, copyright or trademark infringement and various other claims relating to the nature and content of materials we publish on our Web site. These types of claims have been brought, sometimes successfully, against online services in the past. We could also face claims based on the content that is accessible from our Web site through links to other Web sites. Any litigation would likely result in substantial costs and diversion of resources and management attention. SECURITY AND PRIVACY BREACHES COULD SUBJECT US TO LITIGATION AND LIABILITY AND DETER CONSUMERS FROM USING OUR WEB SITE. We could be subject to litigation and liability if third parties were able to penetrate our network security or otherwise misappropriate our users' personal or credit card information. This liability could include claims for unauthorized purchases with credit card information, impersonation or other similar fraud claims. It could also include claims for other misuses of personal information, such as for unauthorized marketing purposes. In addition, the Federal Trade Commission and other states and federal agencies have been investigating various Internet companies regarding their use of personal information. We could be subject to investigations and enforcement actions by these or other agencies. The need to transmit confidential information securely has been a significant barrier to electronic commerce and communications over the Internet. Any compromise of security could deter people from using the Internet in general, or, specifically, from using the Internet to conduct transactions that involve transmitting confidential information, such as purchases of goods or services. Many marketers seek to market their products and services on our Web site because they want to encourage people to use the Internet to purchase their goods or services. Internet security concerns could frustrate these efforts. Also, our relationships with consumers may be adversely affected if the security measures we use to protect their personal information are ineffective. We cannot predict whether events or developments will result in a compromise or breach of the technology we use to protect a customer's personal information. 11 13 Furthermore, our computer servers may be vulnerable to computer viruses, physical or electronic break-ins and similar disruptions. We may need to expend significant additional capital and other resources to protect against a security breach or to alleviate problems caused by any breaches. We may be unable to prevent or remedy all security breaches. If any of these breaches occur, we could lose marketing clients and visitors to our Web site. RISKS RELATED TO OUR INDUSTRY WE DEPEND ON THE ACCEPTANCE OF ONLINE MARKETING. The demand for online marketing may not develop to a level sufficient to support our continued operations or may develop more slowly than we expect. We expect to derive almost all of our revenues from contracts with marketer clients under which we provide online marketing services through our Web site and email. The Internet has not existed long enough as a marketing medium to demonstrate its effectiveness relative to traditional marketing methods. Marketers that have historically relied on traditional marketing methods may be reluctant or slow to adopt online marketing. Many marketers have limited or no experience using the Internet as a marketing medium. In addition, marketers that have invested substantial resources in traditional methods of marketing may be reluctant to reallocate these resources to online marketing. Those companies that have invested a significant portion of their marketing budgets in online marketing may decide after a time to return to more traditional methods if they find that online marketing is a less effective method of promoting their products and services than traditional marketing methods. We do not know if accepted industry standards for measuring the effectiveness of online marketing will develop. An absence of accepted standards for measuring effectiveness could discourage companies from committing significant resources to online marketing. There are a variety of pricing models for marketing on the Internet. We cannot predict which, if any, will emerge as the industry standard. Absence of such a standard makes it difficult to project our future pricing and revenues. Email marketing is also vulnerable to potential negative public perception associated with unsolicited email, known as "spam." Although we do not send unsolicited email, public perception, press reports or governmental action related to spam could reduce the overall demand for email marketing in general and our Club FreeShop email newsletter in particular. WE MUST ADAPT TO RAPID CHANGES IN THE ONLINE MARKETING INDUSTRY. Online marketing is characterized by rapidly changing technologies, frequent new product and service introductions, short development cycles and evolving industry standards. We may incur substantial costs to modify our services or infrastructure to adapt to these changes and to maintain and improve the performance, features and reliability of our services. We may be unable to successfully develop new services on a timely basis or achieve and maintain market acceptance. WE FACE RISKS FROM POTENTIAL GOVERNMENT REGULATION AND OTHER LEGAL UNCERTAINTIES RELATING TO THE INTERNET. We are not currently subject to direct federal, state or local regulation in the United States other than regulations applicable to businesses generally or directly applicable to electronic commerce. The adoption of such laws could create uncertainty in use of the Internet and reduce the demand for all products and services. It is possible laws and regulations may be proposed or adopted with respect to the Internet covering issues such as user privacy, freedom of expression, pricing, content and quality of products and services, taxation, advertising, intellectual property rights and information security. Furthermore, the growth of electronic commerce may prompt calls for more stringent consumer protection laws. The adoption of such consumer protection laws could create uncertainty in Internet usage and reduce the demand for all products and services. In addition, we are not certain how our business may be affected by the application of existing laws governing issues such as property ownership, copyrights, encryption and other intellectual property issues, taxation, libel, obscenity and export or import matters. It is possible that future 12 14 applications of these laws to our business could reduce demand for our service or increase the cost of doing business as a result of litigation costs or increased service delivery costs. Because our services are available over the Internet in multiple states and foreign countries, other jurisdictions may claim that we are required to qualify to do business in each state or foreign country. We are qualified to do business only in Washington, Minnesota and California. Our failure to qualify in other jurisdictions when we are required to do so could subject us to taxes and penalties and could restrict our ability to enforce contracts in those jurisdictions. The European Union recently adopted a directive addressing data privacy that may result in limits on the collection and use of consumer information. See "Business -- Government Regulation." RISKS RELATED TO THIS OFFERING WE WILL HAVE BROAD DISCRETION IN USE OF THE PROCEEDS FROM THIS OFFERING, AND THERE IS A RISK THAT WE MIGHT USE THE PROCEEDS INEFFECTIVELY. We will have broad discretion over how we use the offering proceeds, and we might spend the proceeds in ways with which you might not agree. We cannot assure you that we will use these proceeds effectively. We plan to use the proceeds of this offering for working capital and for general corporate purposes, including expansion of sales and marketing activities. We have not determined how we will allocate proceeds among these uses. Our business strategy includes growth through acquisitions, and we may use a substantial portion of the offering proceeds to buy businesses that we have not yet identified. See "Use of Proceeds" and "Business -- Strategy." VIRTUALLY ALL OF OUR SHARES WILL BE ELIGIBLE FOR SALE SHORTLY AFTER THIS OFFERING, WHICH COULD RESULT IN A DECLINE IN OUR STOCK PRICE. If our shareholders sell substantial amounts of common stock in the public market following this offering, the market price of our common stock could fall. These sales also might make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate. Based on shares outstanding as of May 24, 1999, upon completion of this offering, we will have shares of common stock outstanding. Of these shares, the shares being offered in this prospectus will be freely tradable, and 29,276,309 shares will become eligible for sale in the public market as follows:
NUMBER OF SHARES DATE - ---------------- ---- At various times after the date of this prospectus pursuant ............. to Rule 144 At various times after 90 days from the date of this ............. prospectus
Most of these shares are subject to contractual restrictions with the underwriters that prevent them from being sold until 180 days after the effective date of the registration statement for this offering without the consent of Deutsche Bank Securities Inc. In addition, shortly after the effective date of this offering, we expect to register for sale up to 6,000,000 shares of common stock reserved for issuance under the 1997 Stock Option Plan. As of May 24, 1999, options to purchase 2,413,530 shares of common stock were outstanding. Shares acquired upon exercise of these options will be eligible for sale in the public market from time to time subject to vesting and the 180-day lockup restrictions that apply to the outstanding stock. These stock options generally have exercise prices significantly below the expected initial public offering price of our common stock. Also, at the completion of this offering we will have 69,250 shares of common stock issuable upon the exercise of outstanding warrants. The possible sale of a significant number of these shares may cause the price of our common stock to decline. Neither Fingerhut, Mr. Choate nor Mr. Ballantine, who in the aggregate beneficially own approximately 85.5% of our capital stock as of May 24, 1999, are restricted from selling any of their FreeShop securities, other than as provided in lock-up agreements with Deutsche Bank Securities Inc., a stockholders agreement and under applicable securities laws. Also, shareholders and warrant holders representing approximately 13,043,622 shares of common stock may have the right, subject to 13 15 conditions, to include their shares in registration statements relating to our securities. By exercising their registration rights and causing a large number of shares to be registered and sold in the public market, these holders could cause the price of the common stock to decline. In addition, any demand to include these shares in our registration statements could have an adverse effect on our ability to raise additional capital. See "Management -- Director Compensation," "-- Stock Option Plan," "Description of Capital Stock -- Registration Rights" and "Shares Eligible for Future Sale." OUR SECURITIES HAVE NO PRIOR MARKET. There has not been a public market for our common stock. We cannot predict the extent to which investor interest in our common stock will lead to the development of an active trading market or how liquid that market might become. The initial public offering price for the shares will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of prices that will prevail in the trading market. See "Underwriting." THE PRICE OF OUR STOCK AFTER THIS INITIAL PUBLIC OFFERING IS LIKELY TO BE VOLATILE. The stock market has experienced significant price and volume fluctuations, and the market prices of securities of Internet-related companies have been highly volatile. Investors may be unable to resell their shares at or above the initial public offering price. In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. A securities class action lawsuit against us could result in substantial costs and a diversion of management's attention and resources. WE MAY NEED ADDITIONAL FINANCING, AND OUR PROSPECTS FOR OBTAINING IT ARE UNCERTAIN. We may be unable to obtain necessary additional financing in the future. Our business does not generate the cash necessary to fund our operations. We currently anticipate that our available cash resources combined with the net proceeds from this offering will be sufficient to meet our anticipated capital expenditures and working capital requirements through the next twelve months. Thereafter, we expect we will need to raise additional funds to develop or enhance our services or products, fund expansion, respond to competitive pressures or acquire businesses or technologies. Unanticipated expenses, poor financial results or unanticipated opportunities that require financial commitments could give rise to earlier financing requirements. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our shareholders would be reduced, and these securities might have rights, preferences or privileges senior to those of our common stock. Additional financing may not be available on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms, our ability to fund our expansion, take advantage of business opportunities, develop or enhance services or products or otherwise respond to competitive pressures would be significantly limited, and we might need to significantly restrict our operations. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." EXISTING SHAREHOLDERS WILL BE ABLE TO EXERCISE CONTROL OF OUR COMMON STOCK. Insider control of a large amount of our common stock could have an adverse effect on the market price of our common stock. At the completion of this offering, Fingerhut will own approximately % of the outstanding shares of our common stock. In addition, following this offering our executive officers and directors will beneficially own or control approximately % of the outstanding shares of our common stock and our founders, Messrs. Choate and Ballantine, will beneficially own or control approximately % of the outstanding shares of our common stock. Although they are under no obligation to do so, if our officers, directors, founders, their affiliates and Fingerhut were to vote together they would have the ability to control the election of our board of directors and the outcome of corporate actions requiring shareholder approval, including mergers and other changes of corporate control, going private transactions and other extraordinary transactions. This concentration of ownership may have the effect of delaying or preventing a change of control of Freeshop, even if this change of control would benefit shareholders. 14 16 FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements based on our current expectations, assumptions, estimates and projections about our business and industry. These forward-looking statements involve risks and uncertainties. Our actual results could differ materially from those anticipated in such forward-looking statements as a result of numerous factors, as more fully described in "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" and elsewhere in this prospectus. We undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future. 15 17 USE OF PROCEEDS The net proceeds from the sale of the shares of common stock offered hereby at an assumed initial public offering price of $ per share, after deducting the underwriting discounts and commissions and estimated offering expenses, are estimated to be $ million, or $ million if the underwriters' over-allotment option is exercised in full. We intend to use at least $20.0 million of the net proceeds from this offering to significantly expand marketing and brand promotion spending over the next twelve months. We expect to use the remaining net proceeds of this offering for other general corporate purposes, including working capital, capital expenditures and possible acquisitions of businesses and technologies, although there are no current understandings, commitments or agreements with respect to any material acquisitions. Pending such uses, we will invest the net proceeds of this offering in short-term, interest-bearing, investment-grade securities. DIVIDEND POLICY We have never declared or paid any cash dividends on our capital stock and do not anticipate paying any cash dividends on our capital stock in the foreseeable future. We may incur indebtedness in the future that may prohibit or effectively restrict the payment of dividends, although we have no current plans to do so. THE COMPANY FreeShop began as a division of Online Interactive, Inc., a Washington corporation that was incorporated in June 1994. On June 30, 1997, Online Interactive contributed the FreeShop division to its wholly-owned subsidiary, FreeShop International, Inc., a Washington corporation incorporated on June 23, 1997, which then began operating as a separate entity. On February 19, 1999, FreeShop International, Inc. changed its name to FreeShop.com, Inc. Our offices are located at 95 South Jackson Street, Suite 300, Seattle, Washington 98104. Our telephone number is (206) 441-9100. 16 18 CAPITALIZATION The following table sets forth our capitalization as of March 31, 1999 (a) on an actual basis; (b) on a pro forma basis to reflect (1) the authorization of series B convertible preferred stock, (2) the issuance of series B convertible preferred stock upon the exercise of warrants, (3) the conversion of all series B convertible preferred stock into shares of common stock not later than the completion of this offering, and (4) the acquisition of the Catalog Site and Worldwide Brochures Web sites and related assets; and (c) on a pro forma as adjusted basis to reflect the estimated net proceeds from the sale of shares of common stock in this offering at an assumed initial public offering price of $ per share, after deducting underwriting discounts and commissions and estimated offering expenses.
AS OF MARCH 31, 1999 (UNAUDITED) ---------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED --------- -------------- ----------- (IN THOUSANDS) Current portion of long-term obligations.................... $ 117 $ 117 $ ======= ======= ======= Long-term obligations, less current portion................. $ 113 $ 113 $ ------- ------- ------- Shareholders' equity: Preferred stock, undesignated, no par value; 10,000,000 shares authorized and no shares issued or outstanding, actual; 6,814,516 shares authorized and no shares issued and outstanding pro forma and pro forma as adjusted(1)............................................ -- -- -- Series A convertible preferred stock, no par value; 1,935,484 shares authorized and issued; no shares outstanding, actual, pro forma and pro forma as adjusted(2)............................................ -- -- -- Series B convertible preferred stock, no par value; no shares authorized, issued or outstanding, actual; 1,250,000 shares authorized, no shares issued or outstanding pro forma and pro forma as adjusted(3)..... -- -- -- Common stock, no par value, 100,000,000 shares authorized; 20,440,874, 29,303,733 and shares issued and outstanding, actual, pro forma and pro forma as adjusted, respectively(4).............................. 7,880 26,241 Additional paid-in capital................................ 1,035 1,035 Deferred stock compensation............................... (675) (675) Accumulated deficit....................................... (7,220) (7,220) ------- ------- ------- Total shareholders' equity............................. 1,020 19,381 ------- ------- ------- Total capitalization.............................. $ 1,133 $19,494 $ ======= ======= =======
- --------------- (1) Ten million shares of undesignated preferred stock are authorized, of which 1,935,484 shares were designated as series A convertible preferred stock and 1,250,000 shares were designated as series B convertible preferred stock. (2) Shares of series A convertible preferred stock were issued on June 30, 1997. On July 18, 1997, all of the shares of series A convertible preferred stock were converted into common stock. (3) The shares of series B convertible preferred stock were designated on May 21, 1999. On May 24, 1999, 293,536 shares were issued pursuant to the exercise of warrants. Prior to the completion of this offering, 592,750 additional shares of series B convertible preferred stock will be issued pursuant to the exercise of warrants. Upon completion of this offering each share of series B convertible preferred stock will be converted into 10 shares of common stock. (4) Based on the number of shares outstanding as of March 31, 1999. Excludes 2,221,490 shares of common stock then issuable upon the exercise of options then outstanding with a weighted average exercise price of $0.52 per share, and 192,040 shares of common stock issuable upon exercise of options granted after March 31, 1999. See "Management -- Stock Option Plan" and Note 10 to Freeshop's audited financial statements included in this prospectus. 17 19 DILUTION The pro forma net tangible book value of FreeShop as of March 31, 1999, was approximately $1,020,000, or $0.03 per share of common stock. Pro forma net tangible book value per share represents the amount of total tangible assets less total liabilities, divided by the number of shares of common stock outstanding on a pro forma basis after giving effect to the conversion of the Series B convertible preferred stock into 8,862,860 shares of common stock concurrent with the closing of this offering. After giving effect to the sale of shares of common stock offered by FreeShop at an assumed initial public offering price of $ per share and after deducting underwriting discounts and commissions and estimated offering expenses, the pro forma net tangible book value of FreeShop as of March 31, 1999 would have been $ per share of common stock. This represents an immediate increase in pro forma net tangible book value of $ per share to existing shareholders and an immediate dilution of $ per share to new investors. The following table illustrates this per share dilution: Assumed initial public offering price per share............. $ Pro forma net tangible book value per share before this offering............................................... $ 0.03 Increase per share attributable to new investors.......... -------- Pro forma net tangible book value per share after this offering.................................................. -------- Dilution per share to new investors......................... $ ========
The following table summarizes, on a pro forma basis as of March 31, 1999, the differences between existing shareholders and new investors with respect to the number of shares of common stock purchased from FreeShop, the total consideration paid to FreeShop and the average price per share paid:
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE -------------------- -------------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ---------- ------- --------- Existing shareholders..................... 20,440,874 % $7,879,761 % $0.39 New investors............................. ---------- --- ---------- --- ----- Total................................ % $ % ========== === ========== === =====
The foregoing discussion and tables assume no exercise of any stock options outstanding as of March 31, 1999. As of March 31, 1999, there were options outstanding to purchase a total of 2,221,490 shares of common stock with a weighted average exercise price of $0.52 per share. To the extent that any of the options are exercised, there will be further dilution to new investors. See "Management -- Stock Option Plan" and Note 10 to FreeShop's audited financial statements included in this prospectus. 18 20 SELECTED UNAUDITED PRO FORMA FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following unaudited pro forma statement of operations data reflects the acquisitions of the Catalog Site and Worldwide Brochures Web sites and related assets as if they had occurred on January 1, 1998. The following unaudited pro forma financial data is presented for informational purposes only and has been derived from the unaudited pro forma financial statements and accompanying notes appearing in this prospectus and should be read in conjunction with those financial statements. The selected unaudited pro forma financial data does not purport to be indicative of future operations and should not be construed as representative of future operations of the combined businesses. See Note 9 to FreeShop's unaudited pro forma combined financial information for a description of the method we used to compute our basic and diluted net loss per share of common stock.
PRO FORMA PRO FORMA YEAR ENDED THREE MONTHS ENDED DEC. 31, 1998 MARCH 31, 1999 ----------------- ------------------ STATEMENT OF OPERATIONS DATA: Revenues.................................................. $ 1,893 $ 838 Cost of revenues.......................................... 438 131 ----------- ----------- Gross profit........................................... 1,455 707 Operating expenses: Sales and marketing.................................... 3,429 1,592 Research and development............................... 407 152 General and administrative............................. 711 337 Amortization........................................... 1,141 210 ----------- ----------- Total operating expenses.......................... 5,688 2,291 Operating loss............................................ (4,233) (1,584) Interest expense.......................................... 66 13 Other (income) expense.................................... (3) (26) ----------- ----------- Net loss.................................................. $ (4,296) $ (1,571) =========== =========== Basic and diluted net loss per common share............... $ (0.27) $ (0.08) =========== =========== Shares used to compute basic and diluted net loss per common share................................. 15,692 20,509
19 21 SELECTED ACTUAL FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following selected actual financial data are qualified in their entirety by reference to, and you should read them in conjunction with, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and FreeShop's audited financial statements and accompanying notes appearing in this prospectus. We have derived the statements of operations data for December 31, 1998 from our audited financial statements that appear in this prospectus, and this data is qualified by reference to the financial statements. Prior to June 30, 1997, FreeShop's business operations were conducted as a division of Online Interactive. On June 30, 1997, Online Interactive contributed the FreeShop division to its wholly owned subsidiary, FreeShop International, which began operating as an independent entity with a fiscal year end of December 31. The statements of operations and balance sheet information for the three fiscal years ended June 30, 1995, 1996 and 1997 reflect the data of the FreeShop division of Online Interactive. The statements of operations and balance sheet information for the six months ended December 31, 1997, the fiscal year ended December 31, 1998 and the three month periods ended March 31, 1998 and March 31, 1999 reflect data compiled since FreeShop began operating as an independent entity. See Note 1 to Freeshop's audited financial statements included in this prospectus.
FREESHOP DIVISION OF ONLINE INTERACTIVE, INC. FREESHOP ---------------------------- -------------------------------------------------------------- THREE MONTHS SIX MONTHS 12 MONTHS YEAR ENDED YEAR ENDED JUNE 30, ENDED ENDED ENDED MARCH 31, ---------------------------- DEC. 31, DEC. 31, DEC. 31, ----------------- 1995 1996 1997 1997 1997(1) 1998 1998 1999 -------- ------- ------- ------------ ------------ ------------ ------- ------- (UNAUDITED) STATEMENT OF OPERATIONS DATA: Revenues........................ $ 313 $ 1,271 $ 1,198 $ 535 $ 1,037 $ 1,251 $ 220 $ 667 Cost of revenues................ 85 310 314 140 259 217 38 83 -------- ------- ------- ------- ------- ------- ------- ------- Gross profit.................. 228 961 884 395 778 1,034 182 584 Operating expenses: Sales and marketing........... 134 624 1,810 1,192 2,243 3,248 507 1,554 Research and development...... 2 66 137 188 265 407 120 152 General and administrative.... 126 299 381 158 391 515 127 256 -------- ------- ------- ------- ------- ------- ------- ------- Total operating expenses................ 262 989 2,328 1,538 2,899 4,170 754 1,962 Operating loss.................. (34) (28) (1,444) (1,143) (2,121) (3,136) (572) (1,378) Interest expense................ -- -- -- 6 6 66 12 13 Other (income) expense.......... -- -- -- 0 0 (3) 0 (25) -------- ------- ------- ------- ------- ------- ------- ------- Net loss........................ $ (34) $ (28) $(1,444) $(1,149) $(2,127) $(3,199) $ (584) $(1,366) ======== ======= ======= ======= ======= ======= ======= ======= Basic and diluted net loss per common share.................. $ (0.00) $ (0.00) $ (0.13) $ (0.09) $ (0.21) $ (0.04) $ (0.07) ======== ======= ======= ======= ======= ======= ======= Shares used to compute basic and diluted net loss per common share......................... 11,502 11,502 11,502 12,972 15,559 14,219 20,377
AS OF JUNE 30, AS OF DEC. 31, ---------------------------- --------------------------- AS OF MARCH 31, 1995 1996 1997 1997 1998 1999 -------- ------- ------- ------------ ------------ ----------------- (UNAUDITED) BALANCE SHEET DATA: Cash and cash equivalents....... $ -- $ -- $ -- $ 26 $ 2,892 $1,330 Working capital (deficiency).... 3 80 322 (158) 2,014 530 Total assets.................... 48 207 536 645 3,687 2,581 Long-term obligations, less current portion............... -- -- 5 160 195 113 Total shareholders' equity...... 8 105 432 82 2,244 1,020
- --------------- (1) The financial information presented for the 12 months ended December 31, 1997 is an unaudited 12 month period prepared by our management for comparative purposes only. 20 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW We began our direct marketing business in 1994 as the FreeShop division of Online Interactive, Inc., a company founded by Timothy Choate and John Ballantine. In addition to operating the FreeShop division, Online Interactive was also engaged in the business of selling software over the Internet. In July 1997, Micro Warehouse, Inc. purchased all of the stock of Online Interactive from its shareholders. Before the purchase was completed, Online Interactive transferred the FreeShop division to FreeShop International, Inc., a newly formed, wholly owned subsidiary of Online Interactive. In June 1997, Online Interactive spun off FreeShop International through a distribution to its shareholders. On February 19, 1999, FreeShop International changed its name to FreeShop.com, Inc. We began our online marketing operations in 1994 through a relationship with Prodigy Communications Corporation, a proprietary online service. In 1995, we also began a marketing relationship with America Online, Inc., another proprietary online service. We believed proprietary online environments, which provide content exclusively to their fee-paying members, were limiting our ability to develop the FreeShop brand and to access the growing number of people using the Internet. As a result, we terminated our relationship with Prodigy in August 1997 and our relationship with America Online in March 1998. Since March 1998, we have focused exclusively on our FreeShop.com Web site. With the Micro Warehouse purchase of Online Interactive in July 1997, Mr. Choate joined Micro Warehouse as a vice president. In March 1998, Mr. Choate rejoined FreeShop as chief executive officer and began initiatives to expand our sources of revenue by offering multiple advertising vehicles such as banner advertising, site sponsorships and sponsorships of our Club FreeShop email newsletters, in addition to our primary business of lead generation. We also increased our efforts to expand consumer awareness of and visits to our Web site. We have continued our efforts to improve the attractiveness of the FreeShop.com Web site to consumers and to develop technology to improve our ability to offer services to clients and to monitor and manage our Web site. We derive our revenues primarily from online lead generation and advertising contracts. We receive lead generation revenues when we deliver customer information to a marketer in connection with an offer on our Web site. We receive advertising revenues from sales of banner advertising, site sponsorships and newsletter sponsorships. We also derive a small portion of our lead generation revenues from the rental of customer names and street addresses to third parties. Lead generation pricing is based on cost per lead and varies depending on the type of offer. Generally, pricing of advertising is based on cost per impression or per "click through." The services we deliver are primarily sold under short-term agreements that are subject to cancellation. Revenues are recognized in the period the service is delivered. See "Business -- Client Services" and Note 2 to FreeShop's audited financial statements included in this prospectus. Our ten largest clients accounted for 25.0% of our revenues in the year ended December 31, 1998 and 26.6% of our revenues in the three months ended March 31, 1999. No single client accounted for more than 5.3% of our revenues in either the year ended December 31, 1998 or the three months ended March 31, 1999. One client accounted for 9.0% of our revenues for the three months ended March 31, 1998. In December 1998, Fingerhut invested $4.0 million in our business and received common stock and warrants. As of May 24, 1999, Fingerhut had exercised warrants for an additional investment of $5.0 million. Subsequently, Fingerhut exercised warrants for an additional investment of $3.6 million. Pursuant to the terms of an escrow agreement, Fingerhut has agreed to exercise the remainder of its 21 23 warrants for an additional investment of $9.0 million, subject to certain conditions. Assuming the exercise of the warrants and conversion of the series B convertible preferred stock, Fingerhut will hold approximately 43.5% of the common stock immediately prior to the completion of this offering. Fingerhut's investments have given us more resources to accelerate the growth of our business and have permitted us to add additional experienced management, marketing and technical personnel. Apart from the exercise by Fingerhut of these warrants, however, neither Fingerhut nor Federated has any obligation to make equity or other capital resources available to us in the future. See "Business -- Strategy" and "Related Party Transactions." Part of our strategy involves growth through the acquisition of businesses that will expand our offerings to consumers and our services to marketers. In May 1999, we purchased the Web sites and related assets of two companies, Commonsite LLC, whose Catalog Site Web site offers more than 200 catalogs, and Travel Companions International, Inc., whose Worldwide Brochures Web site offers consumers more than 15,000 free travel brochures. Revenues generated by the Catalog Site and Worldwide Brochures Web sites primarily come from flat-fee advertising contracts. We intend to transition these advertising contracts to lead generation contracts. We accounted for these acquisitions as asset purchases and will include the results of the acquired businesses in our financial statements from the date we completed the acquisitions. These acquisitions will result in the allocation of $2.7 million to goodwill and other intangible assets in the quarter ending June 30, 1999. We will amortize these intangible assets over periods ranging from one to five years. We have included unaudited pro forma combined financial information in this prospectus reflecting these acquisitions as if the acquisitions had occurred on January 1, 1998. Pro forma revenues were $838,000 for the three months ended March 31, 1999 and $1.9 million for the year ended December 31, 1998. See our unaudited pro forma combined financial statements, the Commonsite audited financial statements and the Travel Companions International audited financial statements included in this prospectus. Our business has been operating at a loss and generating negative cash flow since inception. As of March 31, 1999, we had an accumulated deficit of approximately $7.2 million. After the completion of this offering, we plan to increase further the level of our investment in marketing and promotion, development of technology and expansion of our business. As a result, our losses and negative cash flow are likely to continue to increase. RESULTS OF OPERATIONS We changed our fiscal year end from June 30 to December 31 in connection with our spin off from Online Interactive in June 1997. Due to this change, we believe comparison of the year ended December 31, 1998 to the six months ended December 31, 1997 is not appropriate. Therefore, management prepared financial information for the 12 month period ended December 31, 1997 for the purposes of comparison only. The following discussion compares the results of operations for the year ended December 31, 1998 to the unaudited 12 month period ended December 31, 1997 and compares the results of operations for the year ended June 30, 1997 to the year ended June 30, 1996. Our financial statements for the years ended June 30, 1996 and 1997 reflect the assets and liabilities and the revenues, expenses and cash flow of the FreeShop division of Online Interactive. Certain expenses of Online Interactive were allocated to us on a basis we believe reflects a reasonable allocation of expenses to present FreeShop as a stand-alone company. See Note 1 to FreeShop's audited financial statements included in this prospectus. 22 24 The following table sets forth statement of operations data for the periods indicated as a percentage of revenues:
THREE MONTHS YEAR ENDED 12 MONTHS YEAR ENDED JUNE 30, ENDED ENDED MARCH 31, --------------- DEC. 31, DEC. 31, ---------------- 1996 1997 1997(1) 1998 1998 1999 ----- ------ ------------ ---------- ------ ------ (UNAUDITED) Revenues....................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenues............... 24.4 26.2 25.0 17.3 17.5 12.5 ----- ------ ------ ------ ------ ------ Gross profit................. 75.6 73.8 75.0 82.7 82.5 87.5 Operating expenses: Sales and marketing.......... 49.1 151.1 216.3 259.7 230.3 233.1 Research and development..... 5.2 11.5 25.5 32.5 54.7 22.8 General and administrative... 23.5 31.8 37.7 41.2 57.7 38.5 ----- ------ ------ ------ ------ ------ Total operating expenses................ 77.8 194.4 279.5 333.4 342.6 294.3 ----- ------ ------ ------ ------ ------ Operating loss................. (2.2) (120.5) (204.5) (250.7) (260.0) (206.8) Interest expense............... 0.0 0.0 0.6 5.2 5.5 2.0 Other (income) expense......... 0.0 0.0 0.0 (0.2) 0.0 (3.8) ----- ------ ------ ------ ------ ------ Net loss....................... (2.2)% (120.5)% (205.2)% (255.7)% (265.5)% (204.9)% ===== ====== ====== ====== ====== ======
- --------------- (1) The financial information for the 12 months ended December 31, 1997 is an unaudited 12 month period prepared by our management for comparative purposes only. THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) Revenues. We derive our revenues primarily from online lead generation and advertising contracts. Our revenues increased by $447,000, or 203%, to $667,000 in the three months ended March 31, 1999, compared to $220,000 in the three months ended March 31, 1998. This growth in revenue was primarily attributable to the introduction of advertising revenue after March 31, 1998 and an increase in the number of visits to our site, which increased lead generation revenues. We introduced advertising, including banner ads, site sponsorships and newsletter sponsorships, in the second and third quarters of 1998. Revenues from advertising services were $263,000 in the three months ended March 31, 1999 compared to no advertising revenues in the three months ended March 31, 1998. Over the same period, lead generation revenues increased to $404,000 from $220,000. Cost of revenues. Cost of revenues consists of expenses associated with the production and usage of the FreeShop.com Web site. Such costs consist primarily of Internet connection charges, banner ad serving fees, equipment and software depreciation and personnel costs. Cost of revenues increased to $83,000 in the three months ended March 31, 1999 from $38,000 in the three months ended March 31, 1998. The increase was primarily due to costs related to additional Internet connection capacity and personnel costs to support our growth. Gross margin increased to 87.5% in the three months ended March 31, 1999 from 82.5% in the three months ended March 31, 1998. This increase in gross margin was primarily due to leveraging relatively fixed expenses against higher revenues. Sales and marketing. Sales and marketing expenses consist primarily of marketing and promotional costs related to developing our brand, as well as personnel and other costs. Sales and marketing expenses increased by $1.1 million, or 206%, to $1.6 million in the three months ended March 31, 1999, compared to $507,000 in the three months ended March 31, 1998. The increase was due to a $619,000, or 652%, increase in advertising and brand awareness spending and a $445,000, or 504%, increase in personnel costs. We expect to continue to increase our advertising and brand awareness spending in the future. As a percentage of revenues, sales and 23 25 marketing expenses increased to 233.1% in the three months ended March 31, 1999 from 230.3% in the three months ended March 31, 1998. Research and development. Research and development expenses primarily include personnel costs relating to maintaining and enhancing the features, content and functionality of our Web site and related systems. Research and development expenses increased by $32,000, or 27%, to $152,000 in the three months ended March 31, 1999, compared to $120,000 in the three months ended March 31, 1998. The increase was primarily due to hiring additional staff to support our growth. As a percentage of revenues, research and development expenses decreased to 22.8% in the three months ended March 31, 1999 from 54.7% in the three months ended March 31, 1998. The decrease was primarily due to leveraging relatively fixed research and development expenses against higher revenues. General and administrative. General and administrative expenses primarily consist of management, financial and administrative personnel expenses and related costs and professional service fees. General and administrative expenses increased by $129,000, or 102%, to $256,000 in the three months ended March 31, 1999, compared to $127,000 in the three months ended March 31, 1998. The increase was primarily due to increased personnel costs and professional service fees necessary to support our growth. As a percentage of revenues, general and administrative expenses decreased to 38.5% in the three months ended March 31, 1999 from 57.7% in the three months ended March 31, 1998. The decrease is primarily due to leveraging relatively fixed general and administrative expenses against higher revenues. Interest expense. Interest expense primarily relates to capital equipment leases and totaled $13,000 in the three months ended March 31, 1999 and $12,000 in the three months ended March 31, 1998. Other (income) expense. Other (income) expense consists primarily of interest income. Interest income increased to $25,000 in the three months ended March 31, 1999 from no interest income in the three months ended March 31, 1998, due to higher cash balances resulting from the investment by Fingerhut in December 1998. Income taxes. No provision for federal income taxes has been recorded for any of the periods presented. As of March 31, 1999, we had approximately $5.5 million of federal net operating loss carryforwards that are available to offset future taxable income; these carryforwards expire in various years beginning in 2012, if not previously utilized. We expect that Fingerhut will increase its ownership of our common stock prior to the completion of this offering which will limit, under the Tax Reform Act of 1986, the amounts of and benefits from our net operating loss carryforwards. Based on preliminary estimates, we believe the effect of such limitation, if imposed, will not have a material adverse effect on our business, results of operations and financial condition. YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE UNAUDITED 12 MONTHS ENDED DECEMBER 31, 1997 Revenues. Our revenues increased by $214,000, or 21%, to $1.3 million in the year ended December 31, 1998, compared to $1.0 million in the 12 months ended December 31, 1997. The growth in revenue in 1998 was primarily attributable to the introduction of new revenue streams. We introduced advertising, including banner ads, site sponsorships and newsletter sponsorships in the second and third quarters of 1998. Revenues from advertising were $288,000 in 1998 compared to no advertising revenues in 1997. Revenues from lead generation were $963,000 in 1998 compared to $1.0 million in 1997. The overall growth in revenues was partially offset by a reduction in lead generation revenues resulting from the termination of our relationships with Prodigy in August 1997 and America Online in March 1998. 24 26 Cost of revenues. Cost of revenues decreased to $217,000 in 1998 from $259,000 in 1997. The decrease in cost of revenues was primarily due to lower access charges for the Internet compared to the proprietary Prodigy and America Online environments. As a result, gross margin increased to 82.7% in 1998 from 75.0% in 1997. Sales and marketing. Sales and marketing expenses increased by $1.0 million, or 45%, to $3.2 million in 1998, compared to $2.2 million in 1997. The increase was primarily due to a $988,000, or 405%, increase in advertising and brand awareness spending. As a percentage of revenues, sales and marketing expenses increased to 259.7% in 1998 from 216.3% in 1997. Research and development. Research and development expenses increased by $142,000, or 54%, to $407,000 in 1998, compared to $265,000 in 1997. The increase was primarily due to hiring of additional staff to support our growth. As a percentage of revenues, research and development expenses increased to 32.5% in 1998 from 25.5% in 1997. General and administrative. General and administrative expenses increased by $124,000, or 32%, to $515,000 in 1998, compared to $391,000 in 1997. The increase was primarily a result of increased personnel costs and professional service fees necessary to support our growth. As a percentage of revenues, general and administrative expenses increased to 41.2% in 1998 from 37.7% in 1997. Interest expense. Interest expense increased by $60,000, to $66,000 in 1998, compared to $6,000 in 1997. The increase was due to the addition of leased capital equipment in the third and fourth quarters of 1997 and throughout 1998. Other (income) expense. Other (income) expense in 1998 consisted primarily of interest income in the amount of $11,000 offset by the write-off of obsolete assets in the amount of $9,000. There was no other (income) expense in 1997. YEAR ENDED JUNE 30, 1997 COMPARED TO THE YEAR ENDED JUNE 30, 1996 Revenues. Our revenues decreased by $73,000, or 6%, to $1.2 million in the year ended June 30, 1997 compared to $1.3 million in the year ended June 30, 1996. The decrease was primarily due to the decline in Prodigy's membership base. Revenues related to the Prodigy relationship were $396,000, or 33% of total revenue, in 1997 and $484,000, or 38% of total revenue, in 1996. Cost of revenues. Cost of revenues increased to $314,000 in 1997 from $310,000 in 1996. As a result, gross margin decreased to 73.8% in 1997 from 75.6% in 1996. Sales and marketing. Sales and marketing expenses increased by $1.2 million, or 190%, to $1.8 million in 1997, compared to $624,000 in 1996. The increase was primarily due to increased personnel costs related to building our own internal sales and marketing staff in 1997 and costs associated with termination of a contract with a third-party sales agent. As a percentage of revenues, sales and marketing expenses increased to 151.1% in 1997 from 49.1% in 1996. Research and development. Research and development expenses increased by $71,000, or 109%, to $137,000 in 1997, compared to $66,000 in 1996. The increase was primarily due to hiring of additional staff. As a percentage of revenues, research and development expenses increased to 11.5% in 1997 from 5.2% in 1996. General and administrative. General and administrative expenses increased by $82,000, or 27%, to $381,000 in 1997, compared to $299,000 in 1996. The increase was primarily a result of increased personnel costs and professional service fees. As a percentage of revenues, general and administrative expenses increased to 31.8% in 1997 from 23.5% in 1996. 25 27 QUARTERLY RESULTS OF OPERATIONS The following table sets forth Freeshop's unaudited quarterly statement of operations data for the five quarters ended March 31, 1999. In the opinion of our management, this information was prepared on substantially the same basis as FreeShop's audited financial statements and accompanying notes included in this prospectus. In the opinion of our management, all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts stated below to present fairly the unaudited quarterly results. You should read this quarterly data in conjunction with FreeShop's audited financial statements and accompanying notes included in this prospectus. Our operating results for any quarter are not necessarily indicative of the operating results for any future period.
QUARTER ENDED ----------------------------------------------------------- MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, 1998 1998 1998 1998 1999 --------- -------- --------- -------- --------- (IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Revenues............................ $ 220 $ 209 $ 321 $ 501 $ 667 Cost of revenues.................... 38 37 65 76 83 ----- ----- ------ ------ ------- Gross profit..................... 182 172 256 425 584 Operating expenses: Sales and marketing.............. 507 612 1,030 1,100 1,554 Research and development......... 120 85 90 111 152 General and administrative....... 127 116 106 166 256 ----- ----- ------ ------ ------- Total operating expenses....... 754 813 1,226 1,377 1,962 ----- ----- ------ ------ ------- Operating loss...................... (572) (641) (970) (952) (1,378) Interest expense.................... 12 16 16 21 13 Other (income) expense.............. -- 1 6 (10) (25) ----- ----- ------ ------ ------- Net loss............................ $(584) $(658) $ (992) $ (963) $(1,366) ===== ===== ====== ====== =======
QUARTER ENDED ----------------------------------------------------------- MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, 1998 1998 1998 1998 1999 --------- -------- --------- -------- --------- AS A PERCENTAGE OF REVENUES: Revenues............................ 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenues.................... 17.5 17.8 20.2 15.2 12.5 ------ ------ ------ ------ ------ Gross profit..................... 82.5 82.2 79.8 84.8 87.5 Operating expenses: Sales and marketing.............. 230.3 292.8 320.9 219.6 233.1 Research and development......... 54.7 40.9 28.1 22.2 22.8 General and administrative....... 57.7 55.6 33.0 33.1 38.5 ------ ------ ------ ------ ------ Total operating expenses....... 342.6 389.3 382.0 274.9 294.3 ------ ------ ------ ------ ------ Operating loss...................... (260.0) (307.1) (302.2) (190.1) (206.8) Interest expense.................... 5.5 7.8 4.9 4.3 2.0 Other (income) expense.............. 0.0 0.4 2.0 (1.9) (3.8) ------ ------ ------ ------ ------ Net loss............................ (265.5)% (315.3)% (309.1)% (192.4)% (204.9)% ====== ====== ====== ====== ======
Revenues. Our revenues increased in each quarter presented, except for the second quarter of 1998. Our revenues decreased by $11,000, or 5%, to $209,000 in the second quarter of 1998 compared to $220,000 in the first quarter of 1998. This decrease was due to the termination of our relationship with America Online in March 1998. The relationship with America Online had accounted for $111,000, or 50%, of total revenues in the first quarter of 1998. Revenues unrelated 26 28 to America Online increased by $94,000, or 86%, to $203,000 in the second quarter of 1998 compared to $109,000 in the first quarter of 1998. In addition, our current chief executive officer, Timothy C. Choate, rejoined FreeShop in March 1998 and focused on creating new revenue streams and accelerating the growth of our business. Cost of revenues. As a percentage of revenues, cost of revenues increased during the first three quarters of 1998 as we built our infrastructure in anticipation of future revenues. Since the third quarter of 1998, we have recognized significant increases in gross margin due to leveraging relatively fixed expenses against higher revenue. Sales and marketing. Sales and marketing expenses increased in absolute dollars in each quarter presented. As a percentage of revenues, there was a decrease in sales and marketing expenses in the fourth quarter of 1998. This resulted from an increase in revenues in the fourth quarter of 1998 without a corresponding increase in advertising and brand awareness spending. Research and development. Research and development expenses decreased in the second quarter of 1998 primarily due to higher personnel costs and recruiting fees paid in the first quarter of 1998. Research and development expenses have increased steadily since the third quarter of 1998 as a result of increased personnel costs related to the continued enhancement of our systems and Web site. General and administrative. General and administrative expenses decreased in the second quarter of 1998 primarily due to a decrease in personnel costs and one-time severance costs incurred in the first quarter of 1998 resulting from the departure of our former chief executive officer and another senior officer. General and administrative expenses decreased in the third quarter of 1998 primarily due to higher recruiting costs in the second quarter of 1998. General and administrative expenses have increased steadily since the third quarter of 1998 due primarily to additional personnel costs and professional service fees necessary to support our growth. We anticipate our revenues may be subject to seasonal fluctuations. We believe advertisers generally place fewer advertisements during the first and third calendar quarters of each year. In addition, expenditures by advertisers tend to be cyclical, reflecting overall economic conditions as well as budgeting and buying patterns. Our results of operations may fluctuate significantly in the future as a result of a variety of factors, many of which are beyond our control. STOCK OPTIONS GRANTED IN 1999 From January 1, 1999 to March 31, 1999, we granted stock options to purchase 277,000 shares of common stock under the 1997 Stock Option Plan. These stock options were granted to employees, directors and service providers at an exercise price of $1.00 per share which was below the fair market value at the date of grant. In relation to these grants, we will recognize estimated compensation expense of approximately $740,000 over the vesting terms of one to four years. Compensation expense related to the options of approximately $373,000, $210,000, $104,000, $46,000 and $7,000 will be classified as operating expenses in the years ending 1999, 2000, 2001, 2002 and 2003, respectively. LIQUIDITY AND CAPITAL RESOURCES Since we began operating as an independent company in June 1997, we have financed our operations primarily through the issuance of common stock. Gross proceeds from the issuance of stock through March 31, 1999 totaled $5.9 million, including $4.0 million raised in December 1998. As of March 31, 1999 we had a $500,000 bank line-of-credit available at prime plus 1.5%. As of March 31, 1999 we had approximately $1.3 million in cash and cash equivalents and working capital of $530,000. Subsequent to March 31, 1999, Fingerhut exercised warrants to purchase additional capital stock in the amount of $8.6 million. Net cash used in operating activities was $1.3 million in the three months ended March 31, 1999, $2.2 million in the year ended December 31, 1998 and $595,000 in the six months ended December 31, 1997. Cash used in operating activities for each period resulted primarily from net 27 29 losses and increases in accounts receivable, which were partially offset by increases in accounts payable and accrued liabilities. Net cash used in investing activities was $227,000 in the three months ended March 31, 1999, $67,000 in the year ended December 31, 1998 and $56,000 in the six months ended December 31, 1997. Cash used in investing activities was primarily related to purchases of property and equipment in each period. Net cash used in financing activities was $13,000 in the three months ended March 31, 1999. Net cash provided by financing activities was $5.2 million in the year ended December 31, 1998 and $677,000 in the six months ended December 31, 1997. Net cash used in financing activities in the three months ended March 31, 1999 was primarily due to the payment of lease obligations. Net cash provided by financing activities in the year ended December 31, 1998 and the six months ended December 31, 1997 resulted primarily from issuance of common stock, which was partially offset by principle payments made on capital leases. We believe our current cash and cash equivalents, including expected net proceeds from this offering, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. Thereafter, we expect we will need to raise additional capital to meet our long term operating requirements. Although we have increased revenues, our expenses also have continued to increase, and we expect to increase our expenses significantly in future periods such that our expenses will exceed our revenues for the foreseeable future. Accordingly, we do not expect to be able to fund our operations from internally generated funds for the foreseeable future. Our cash requirements depend on several factors, including the level of expenditures on advertising and brand awareness, the rate of market acceptance of our services, and the extent to which we use cash for acquisitions and strategic investments. Unanticipated expenses, poor financial results or unanticipated opportunities that require financial commitments could give rise to earlier financing requirements. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our shareholders would be reduced, and these securities might have rights, preferences or privileges senior to those of our common stock. Additional financing may not be available on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms, our ability to fund our expansion, take advantage of business opportunities, develop or enhance services or products or otherwise respond to competitive pressures would be significantly limited, and we might need to significantly restrict our operations. YEAR 2000 ISSUES Because many computer applications have been written using two digits rather than four to define the applicable year, some date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. The year 2000 issue could result in system failures or miscalculations causing disruptions of operations, including disruptions of our Web site. We have completed a review of our internal information technology and non-information technology systems for year 2000 compliance. We do not believe that we have material exposure to the year 2000 issue with respect to our systems. We are in the process of obtaining confirmation from all of our third-party vendors that they have resolved their year 2000 issues. The majority of our vendors have responded and either confirmed their compliance or provided patches for their affected software. We expect to receive replies from our remaining third-party vendors by June 30, 1999. The vendors who have already responded include all vendors related to our critical systems. We have completed an initial test of our internal systems and anticipate conducting tests with the cooperation of our vendors after June 30, 1999 to simulate the year 2000 rollover with hardware, software and key vendors. We plan to make any modifications resulting from the test by the third quarter of 1999. Based on the test results, if any vendor is found to be non-compliant, our contingency plan is to attempt to find a replacement vendor. In addition, we have developed 28 30 a limited contingency plan related to the functioning of our Web site and order processing systems. We are establishing backup servers at a site maintained by Fingerhut in Minnesota in the event that there is a power or other electrical failure that affects our computer servers and systems located in the Seattle area. Aside from the identification of new vendors and the establishment of offsite servers, we do not currently have any other contingency plans, and we do not anticipate developing any other contingency plans. To date, we have spent approximately $30,000 on year 2000 compliance. We expect total expenditures to be between $40,000 and $50,000. Most of our future expenses are expected to be operating expenses associated with the time spent by employees working on year 2000 compliance matters. The worst-case scenario pertaining to the year 2000 issue would be an overall failure of the Internet, electronic and telecommunications infrastructures. In addition, the systems and services provided by our third-party vendors may fail to be year 2000 compliant despite their representations to the contrary. The failure by these entities or systems to be year 2000 compliant could result in a systemic failure beyond our control, which could also prevent us from delivering our services to our customers or generally prevent users from accessing our Web site, which would have a material adverse effect on our business, results of operations and financial condition. RECENT ACCOUNTING PRONOUNCEMENTS In March 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained For Internal Use," which is effective for fiscal years beginning after December 15, 1998. SOP No. 98-1 provides guidance on accounting for the costs of computer software developed or obtained for internal use and defines specific criteria that determine when such costs are required to be expensed, and when such costs may be capitalized. The adoption of this standard has not had a material effect on the Company's capitalization policy, results of operations, financial position or cash flows. In April 1998, the AICPA issued SOP 98-5, "Reporting the Costs of Start-up Activities," SOP 98-5, which is effective for fiscal years beginning after December 15, 1998, provides guidance on the financial reporting of start-up costs and organization costs. It requires costs of start up activities and organization costs to be expensed as incurred. As we have expensed these costs historically, the adoption of this standard has not had a significant impact on our results of operations, financial position or cash flows. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities", which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. SFAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. We do not expect the adoption of this statement to have a significant impact on our results of operations, financial position or cash flows. LIMITATION ON NET OPERATING LOSS CARRYFORWARDS We have approximately $5.5 million of federal net operating loss carryforwards as of March 31, 1999 which may be available to reduce the amount of United States federal income taxes payable by us in the future. We believe the exercise of Fingerhut's warrants prior to the completion of this offering will result in an ownership change for purposes of Section 382 of the Internal Revenue Code. As a result, the use of our pre-ownership change federal net operating loss carryforwards will be limited annually by Section 382 of the Internal Revenue Code. Section 382 of the Internal Revenue Code limits the amount of net operating losses that may be utilized from pre-ownership change years to offset our taxable income in any post-ownership change year. 29 31 BUSINESS OVERVIEW FreeShop is a leading provider of direct marketing services on the Internet, leveraging an innovative consumer-driven approach that changes the dynamics of direct marketing. Through our FreeShop.com Web site, consumers seeking to discover, learn about, or try new products can choose among a broad selection of free, trial and promotional offers in a fun, interactive environment. FreeShop provides a network through which consumers can seek out new products of specific interest to them, unlike the traditional direct marketing model in which marketers communicate to broad audiences in search of new customers. FreeShop currently has more than 1,000 high-quality offers from more than 100 companies such as Johnson & Johnson, Walt Disney, eBay, US News & World Report, Hammacher Schlemmer and Columbia House. Marketers pay us for the number of customer leads delivered, the number of visitors we direct to their Web site, or the number of times visitors view their advertisements. We believe FreeShop's Internet-based, consumer-directed process creates a highly effective method of direct marketing in terms of cost, targeting, efficiency and consumer satisfaction. Through our direct-marketing network of consumers and marketers, we have generated more than 5 million orders for various offers and promotions. In April 1999, FreeShop was among the top 20 online shopping sites based on reach, according to Media Metrix. Our customer database has grown from approximately 850,000 customers in January 1998 to more than 1.8 million customers as of April 1999. In addition, we have over 650,000 members of Club FreeShop. In April 1999, over 40% of our orders came from repeat customers. We believe that the number and diversity of our free, trial and promotional offers attracts an increasing number of consumers. This helps us to continue to grow our marketer client base and with it our base of offers, resulting in a positive cycle as an increasing number of marketers are attracted to the increasing number of consumers visiting our Web site. INDUSTRY BACKGROUND GROWTH OF THE INTERNET AND ONLINE COMMERCE Over the past several years, the Internet has emerged as a powerful and efficient new medium enabling people worldwide to exchange information, communicate and conduct business electronically. The number of people using the Internet continues to expand rapidly. International Data Corporation estimates that the number of people using the Internet will grow from approximately 160 million worldwide in 1998 to over 500 million worldwide by the end of 2003. Businesses have recognized the online commerce opportunity and are increasingly using the Internet to sell and distribute products and services. According to IDC, online commerce will increase from approximately $50 billion worldwide in 1998 to approximately $1.3 trillion worldwide in 2003, representing a compound annual growth rate of approximately 92%. As online commerce and the number of people using the Internet grow, advertisers and direct marketers are increasingly using the Internet to locate customers, advertise products or services and facilitate transactions. Forrester Research estimates that approximately $1.5 billion was spent on Internet advertising worldwide in 1998 and that this amount will grow to approximately $15.3 billion in 2003. DIRECT MARKETING Advertising expenditures can be broadly categorized as either brand advertising or direct marketing. Brand advertising is intended to generate awareness and create a specific image for a particular company, product or service. Direct marketing involves any direct communication to a consumer that is designed to generate a response in the form of an order, a request for further 30 32 information or a visit to a place of business. These responses can range from simple replies to consumer registrations to actual purchases. The Direct Marketing Association estimates that direct marketing accounts for over 57% of total U.S. advertising expenditures, and in 1998, marketers spent $80.1 billion on direct marketing to consumers. Traditional Direct Marketing. Traditional direct marketing media include direct mail, telemarketing and direct response advertising in newspapers, magazines, radio and television. Although traditional direct marketing is effective and widely used, it presents a number of challenges for marketers and consumers alike. The traditional direct marketer's targeting process is inefficient because marketers lack specific and timely information on a consumer's immediate interests and needs. As a result, marketers spend considerable resources on communications most consumers don't want or need. For example, the average response rate to the nearly 3.5 billion mailings of credit card solicitations in 1998 was only 1.2%, according to BAIGlobal, Inc. Given the significant costs associated with traditional direct marketing, which include telecommunications, postage, printing, assembly, labor and facilities, the often low response rates make the process particularly inefficient. Online Direct Marketing. Online direct marketing media include banner advertisements, targeted email solicitations and Web site sponsorships and promotions. We believe online direct marketing is more attractive than traditional direct marketing media because it requires lower production costs and provides easier customer response features. In addition, online direct marketing allows marketers to more effectively: - develop one-to-one relationships with consumers; - interact real-time with consumers; - collect data and feedback on marketing campaigns; and - customize marketing campaigns to broad audiences or specific groups. Even with these advantages, direct marketers face challenges in realizing the full potential of the Internet as a marketing medium. With millions of Web sites, only a fraction of which have significant audiences, it is difficult for marketers to decide where to spend their marketing dollars. Even leading brand marketers who build their own Web sites must find ways to attract a sizeable audience of visitors. In addition, technological hurdles may impede conventional direct marketers from successfully extending their activities to the Internet. In order to participate in most online marketing efforts, marketers must build and maintain Web sites as well as incorporate order taking capabilities and develop systems to integrate online ordering with their traditional databases. Marketers desire a solution that benefits from the effectiveness of direct marketing while overcoming the challenges presented by both traditional and online marketing methods. THE FREESHOP SOLUTION FreeShop fundamentally changes the dynamics of direct marketing by putting consumers in control of the process. As a result, we deliver to marketers a cost effective way to reach customers who are truly interested in their product or service. Our solution significantly reduces the inefficiencies associated with traditional and online direct marketing. Consumers benefit from being able to select offers that most interest them without being inundated with unwanted communications. FreeShop creates a direct marketing network by acting as an intermediary between consumers and marketers. Consumers seeking to try new products are presented with a broad selection of free, trial and promotional offers from marketers seeking an audience of potential customers. FreeShop offers a consumer-directed process, in which consumers select only those offers that are of immediate interest to them. We then forward those orders to our clients. FreeShop's solution 31 33 creates a highly effective method of direct marketing in terms of cost, targeting, efficiency and consumer satisfaction. Marketers pay us for the number of customer leads delivered, the number of visitors we direct to their Web site, or the number of times an advertisement is viewed. Benefits to Consumers. FreeShop puts consumers in control of the direct marketing process by empowering them to select offers that most interest them and meet their individual needs. Through our FreeShop.com Web site, we bring together consumers and marketers in a fun, interactive environment. FreeShop has more than 1,000 high-quality offers from over 100 companies such as Johnson & Johnson, Walt Disney, eBay, US News & World Report, Hammacher Schlemmer and Columbia House. The offers include items such as catalogs, magazines, product samples, software and coupons, covering a variety of interests from travel, personal finance and entertainment to automobiles and sports. In addition, because many offers are free samples or trial offers, consumers are able to try new products and services before making purchase decisions. FreeShop allows new online visitors to sample the experience of online shopping in an easy, intuitive and risk-free way. Benefits to Marketers. FreeShop benefits marketers by offering a cost-effective and low-risk way to acquire customers. Our clients receive significant visibility from our large traffic base of new and repeat customers. FreeShop offers marketers a diversity of programs designed to meet their objectives throughout the entire marketing process, from awareness to interest to trial to sale. Our services include lead generation, banner advertising, site sponsorships and sponsorship of the Club FreeShop newsletter. In addition, because set-up costs are minimal, marketers can test the FreeShop medium with little risk. Our programs are quick and easy to implement relative to traditional direct marketing formats. Most importantly, because the process is consumer-directed, we believe marketers receive higher quality leads and avoid the risk of tarnishing their brand image as a result of making numerous unwanted solicitations. STRATEGY Our objective is to be the dominant provider of online direct marketing services. We intend to achieve this objective through the following key strategies: Increase Traffic and Transactions. Our strategy to rapidly increase consumer traffic to our Web site is focused on both new and repeat visitors. New visits will be driven primarily by our online and offline advertising programs, our Associates Program of over 14,000 member sites, other traffic partnerships, including "Powered By FreeShop" participants, word-of-mouth referrals and our traffic relationships with companies such as Yahoo! Inc., Excite, Inc., Go2Net, Inc., Microsoft Corporation and Lycos, Inc. We promote repeat visits through regular email communications to the over 650,000 members of Club FreeShop. In addition, we encourage repeat visits and additional transactions by seeking to continually improve the consumer's experience with FreeShop by increasing the volume and quality of our offers and by improving the speed and overall ease-of-use of our Web site. In April 1999, over 40% of our orders came from repeat visitors. Finally, to ensure that we retain our loyal base of consumers, we monitor the performance of our client marketers in fulfilling orders generated through our Web site. Grow Client Base. We believe FreeShop offers marketers a cost-effective alternative to traditional direct marketing and, as a result, we have a significant opportunity to grow the number of clients we serve. In particular, we believe more and more companies with national consumer brands are seeking Internet-based direct marketing vehicles, and we plan to expand our relationships with these companies. We are rapidly increasing our sales staff in order to drive this client growth. We will continue to build upon the services we offer our clients including enhanced marketing programs, new methods of presenting offers, expanded and customized data gathering options and increased opportunities for following up on initial lead generation. In addition to enhancing our existing marketing programs, we will be developing new programs in an effort to meet the needs of new and different marketers. Finally, we are focusing on marketing 32 34 our services to larger advertising agencies as a solution for their client companies to access the rapid growth of consumers on the Internet. Continue to Build the FreeShop Brand. We intend to continue to increase awareness and strength of the FreeShop brand among both consumers and marketers through site design and focused and aggressive advertising. Because both consumers and marketers tend to favor well known Web sites, strong brand presence is critical to our efforts to grow visitor traffic, attract marketing clients and increase the number and quality of free, trial and promotional offers on our Web site. To date, we have used our Associates Program, other traffic partnerships, online advertising and public relations in an effort to create a leading brand name in our sector. We plan to initiate a major offline marketing campaign which will include outdoor, radio and print advertising in key metropolitan markets. Expand Offers. The number and quality of offers is critical to our ability to drive visitor traffic and increase revenues from our client marketer base. We believe that we have a significant competitive advantage in attracting additional clients with national consumer brands due to our high traffic level and wide selection of offers across multiple categories. We plan to expand the number of categories and increase the number of offers within each category. We will drive this content expansion through a combination of internal sales efforts, partnerships and acquisitions. As part of this strategy, we are expanding our relationship with NewSub Services, Inc. to offer consumers access to over 600 magazine titles. We have also greatly increased the number and quality of our offers within the catalog and travel categories through the recent acquisitions of the Catalog Site and Worldwide Brochures Web sites and related assets. Other categories which we intend to expand in the near future include product samples, coupons and personal finance. Continue to Develop and Leverage Technology. We have designed and implemented numerous proprietary systems that enable us to rapidly and cost-effectively process orders from consumers and deliver lead generation information to marketers. We regularly update our Web site and related system technologies to encourage consumers to place orders and frequently revisit the FreeShop.com Web site. As part of our effort to drive repeat visits and additional transaction volume, we continue to develop features that will make the FreeShop experience faster, easier and more personalized. In addition, we are enhancing our technology in an effort to maintain our rapid processing time as orders increase and to expand marketer options for consumer information received with each order. Develop Relationship with Fingerhut and Federated. Fingerhut is one of the largest direct marketers in the United States, selling general merchandise through catalogs and various Web sites. Currently, Fingerhut's database consists of over 30 million consumers, and in 1999, Fingerhut expects to distribute over 450 million catalog and promotional mailings. As a result of our participation in a portion of these mailings, we believe we can increase our customer base quickly and cost-effectively. We have recently initiated a direct marketing relationship with Fingerhut that will include Web site links, package inserts, statement stuffers and "blow in" cards for catalogs. In March 1999, Fingerhut was acquired by Federated which operates over 400 full-line department stores, including Bloomingdale's, The Bon Marche, Burdines, Goldsmith's, Lazarus, Macy's, Rich's and Stern's. Federated also operates direct mail catalog businesses under the names Bloomingdale's By Mail and Macy's By Mail, and operates an electronic commerce business which provides goods and services online under the name macys.com. We are exploring ways to further develop our relationship with Fingerhut and Federated in order to improve our Web site content and enhance our customer database. OUR WEB SITE We have designed all aspects of our Web site to ensure our site is fast, enjoyable and easy to use for our customers, to enhance the FreeShop brand and to encourage customers to request an offer. The site is organized around categories, events and promotions. We regularly update the 33 35 site to refresh the content and encourage repeat visits by customers. The key features of Freeshop.com include: offers, promotions, highlighted offers and Club FreeShop. Offers. Visitors are attracted to our Web site by the aggregation of free, trial and promotional offers. Our base of more than 1,000 offers is organized around categories, currently including: Auto, Business & Career, Catalogs, Computing & Electronics, Entertainment, Family, Health & Sports, Hobbies, Home & Living, Image & Fashion, International, Magazines, Men's Style, New Offers, Personal Finance, Software and Travel. By organizing content into categories, we allow customers to review offers in their self-selected areas of interest, providing our clients the ability to do more targeted direct marketing. Each offer page provides a description of the product offered, delivery information and any cancellation details for trial offers. The ordering process is straightforward and requires the customer to provide basic information only once. FreeShop saves this information, allowing the customer to order any additional offers in subsequent visits by clicking the "Express Order" button. After a customer has ordered, we send emails to thank the customer for the order and, later, to confirm the order has been received. The emails include information on additional related offers, providing an opportunity to cross-promote and "upsell" other offers. Promotions. We combine free offers with items for sale from our clients organized around seasonal or other events. Promotions run for limited time periods and include both special offers created solely for individual promotions as well as offers listed under other categories elsewhere on the site. Promotions function much like categories, aggregating free and trial offers as well as products for sale around a central theme. Highlighted Offers. We have the ability to highlight offers and dynamically manage the traffic directed to individual offers in various ways. Highlighted offers on our home page are selected and regularly updated by our staff. These offers are intended to provide a representation of the wide range of offers available on our Web site. On subsequent pages, offers are highlighted based on an automated ranking system. We also create a list of our site's top offers based on our own assessment of broad consumer appeal. This allows customers to review several of the site's best offers without having to explore every category. The list provides a type of "recommended viewing" guide for customers, which results in increased order volume for such offers. Club FreeShop. We designed Club FreeShop to communicate with our most valued customers. Club members, totalling over 650,000 as of April 1999, regularly receive email newsletters informing them of special offers, exclusive contests and other opportunities. Membership in the Club is free and available to any visitor who chooses to provide an email address to FreeShop. We invite customers who place orders on FreeShop to join Club FreeShop as a way of receiving updates about additional items of interest. We anticipate providing more personalized and targeted offers to Club FreeShop members in the future which will allow for more focused marketing. Other Features. As part of our effort to increase traffic on our site from word-of-mouth advertising, we created Tell-a-Friend. This feature, available throughout our site, allows a customer to send an email to a friend with a link to a specific page or offer. In addition, to make our customer's shopping experience more comfortable, FreeShop has adopted strong privacy and customer service policies, which are fully explained on our Web site. Our privacy policy fully complies with the standards of the Direct Marketing Association and TRUSTe. In addition to enabling customers to limit use of their personal information by FreeShop, we provide our customers with access to general information about methods of limiting use of their personal information by other direct marketers. 34 36 CLIENT SERVICES We provide numerous services to our marketer clients. Our primary business is generating customer leads for our clients through free, trial and promotional offers. We also provide a number of advertising services on our Web site and within our Club FreeShop newsletters. In addition, we offer the rental of our customer lists to other marketers. We offer marketers a diversity of programs designed to meet their objectives along the entire marketing process, from awareness to interest to trial to sale. - Lead Generation. We post offers from our clients for catalogs, magazine and newsletter subscriptions, product samples and information, coupons and discounts, and trial periods for services, software and publications. Consumers are able to place orders with us for these offers, and we deliver this order information to our clients, who are responsible for fulfilling these orders. Information sent to our clients includes information required for order fulfillment as well as additional information requested by the marketer. Marketers pay us for each customer inquiry, or lead. Another form of lead generation that we provide to our clients is the aggregation of commerce opportunities on our Web site. We group these commerce offers in the same categories as free and trial offers. When consumers decide to purchase a particular item, they click through from our site to the actual commerce site sponsoring the offer. In this way, we generate valuable leads to our commerce partners and do not have responsibility for processing and fulfilling orders for products. - Advertising. We offer advertising opportunities through banner ads, site sponsorships and sponsorships of the Club FreeShop newsletters. Banner advertising clients benefit from our high traffic volume of consumers who are likely to be in a shopping mode. Marketing clients can also receive high-profile placement on our homepage and on specific category pages through our site sponsorship program. Club FreeShop newsletter sponsorships appeal to marketers due to the receptive audience the newsletters reach. The majority of our contracts are month-to-month, and automatically renew unless terminated by either party with 10 days notice. Some of our advertising contracts have longer terms of up to eight months. In the first quarter of 1999, our top ten clients accounted for 26.6% of revenues and no client accounted for more than 5.3% of revenues. SALES AND MARKETING CONSUMER BASE DEVELOPMENT To drive traffic to our Web site and increase transactions, we must continue to enhance the recognition of the FreeShop brand and position ourselves as a leader in the online direct marketing industry. Additional traffic provides increased opportunities to add members to our consumer base. The primary methods we use to build our traffic are online advertising, our Associates Program and other traffic partnerships, offline advertising and Club FreeShop. Online Advertising. We recognize the importance of well-placed advertising in building traffic and the strength of our brand. FreeShop has a number of marketing relationships with leading Web sites that promote the FreeShop brand and specific offers to targeted audiences. We continue to seek new cost-effective advertising vehicles and to optimize our existing ones. Associates Program and Traffic Partners. We launched our Associates Program in the fourth quarter of 1998 and, as of June 1999, we had over 14,000 associates. Under the program, we configure a link to our site for an associate to place on its Web site and pay the associate a fee for traffic and orders generated from the associate's Web site. In April 1999, the Associates Program provided over 8.0% of our traffic and 8.7% of our orders. We also offer a traffic partnership program called "Powered by FreeShop" under which we contract with larger Web sites, including Go2Net and Excite, to create free-offer content sites or promotions, which are co-branded with 35 37 the brands of FreeShop and our partners. We share revenues generated from the co-branded site, but we own any customer information generated. In April 1999, approximately 11.8% of our traffic and 14.5% of our orders were provided by other non-Associates Program traffic partnerships, including the "Powered by FreeShop" program. Offline Advertising. We plan to supplement our online presence with an offline marketing campaign, which will include outdoor, radio and print advertising in key metropolitan markets. We recently hired a creative director and engaged an advertising agency to assist with campaign development and provide media placement services. Additionally, we have initiated direct marketing efforts with Fingerhut that will include package inserts, statement stuffers and "blow in" cards for catalogs. We also use public relations as a way to create customer awareness of the FreeShop brand. We have been the subject of newspaper, magazine, and television stories. Articles about FreeShop have appeared in Wired Magazine, Advertising Age, PC World and the Washington Post, among other publications. Television stories featuring us have been aired nationally on CNBC and CNNfn. We believe ongoing media coverage will be essential to increase general brand awareness and to drive new traffic to our site. Club FreeShop. We created Club FreeShop to communicate with our most valued customers. Consumers who join Club FreeShop regularly receive email newsletters informing them of special offers, exclusive contests and other opportunities. Consumer response to offers contained in the Club FreeShop newsletters is a significant source of repeat traffic. CLIENT BASE DEVELOPMENT We sell our client services primarily through our direct sales force. The majority of FreeShop's sales organization, which included ten salespeople as of May 24, 1999, focuses on small and medium-sized clients. Two of our salespeople specifically target larger national clients and advertising agencies. By marketing directly to advertising agencies, we are able to position Freeshop as the online marketing solution for their numerous clients. Our salespeople are located in Washington, New York, Virginia and California. As part of our strategy to grow our client base, we intend to significantly increase our sales force in the near future. In addition, we have an ongoing advertising campaign designed to promote the FreeShop brand to marketers through various trade and industry publications. OPERATIONS AND TECHNOLOGY We have implemented a broad array of site management, customer service, transaction processing and fulfillment systems using both proprietary and licensed technologies. During April 1999, we received a total of approximately 280,000 orders and transmitted order data in various formats and media to over 80 clients on a regular basis. All order information is integrated with our customer and Club FreeShop member databases to provide for high levels of internal data analysis. The sophisticated databases and technology supporting these systems are not available commercially and were developed over a number of years, acting as a barrier to entry for our competitors. Our systems are built around Microsoft Backoffice components to provide for a scalable and redundant platform. In addition to in-house software, we use a variety of third party software and service solutions to support our business. LinkShare provides software and support for our Associates Program, DoubleClick is used for banner ad serving and reporting, and Marketwave software is used for Web site traffic analysis. These tools are used in conjunction with in-house developed tools to optimize marketing efforts and to determine the effectiveness of various campaigns and content on our Web site. Performance monitoring of our Web site is provided by multiple sources, including Keynote Systems and our Internet service and Web site hosting partners. 36 38 Web content is posted and modified from our headquarters in Seattle through a combination of internally developed applications. Visits to FreeShop.com are directed to a network of Microsoft IIS Web servers at the Mead Group, a hosting facility, in Seattle. The Mead Group provides redundant power and environmental controls. In order to provide a high level of security, all order information is gathered using secure servers at our Seattle headquarters. The Internet connection to both facilities is provided by Savvis Communications in the form of DS-3 and multiple T-1 redundant services. COMPETITION We face intense competition from both offline and online advertising and direct marketing companies. We also face competition from established online portals and community Web sites that engage in direct marketing. Although we believe no other company offers the combination of attributes we offer, we compete directly and indirectly for marketers and consumers with companies in various categories, including: - Free Offer Web Sites. There are a number of sites, both large and small, that give consumers access to free offers including Volition.com and Free2Try.com. - Specialty Lead Generation Web Sites. Various sites focus on generating leads for a specific segment of the direct marketing industry such as the catalog, magazine or coupon segments. While these sites typically provide a depth of offerings within their specific sector, they may not offer promotions across a broad spectrum of product categories. These sites include eNews, Cataloglink and Catalogcity. In some instances, we have partnerships with these companies and include their offerings on our Web site. - Other Web Sites. We also compete with a number of "community" sites that offer content, services or information about a particular topic as well as other advertising networks. In addition, we compete with sites featuring loyalty programs that reward consumers for taking certain actions. The number of Web sites competing for consumer attention and marketers' dollars has proliferated, and we expect that competition will continue to intensify. We also compete with traditional offline media such as television, radio and print for a share of marketers' total marketing budgets. We may be unable to compete successfully against current or future competitors, many of which have significantly greater financial, technical and marketing resources. We believe that the principal competitive factors in our markets are: - brand recognition; - Web site speed and ease of use; - quality and diversity of offers; and - the volume of online visitors, duration and frequency of visits and their demographic profiles. GOVERNMENT REGULATION We are not currently subject to direct federal, state or local regulation in the United States other than regulations applicable to businesses generally or directly applicable to electronic commerce. The adoption of such laws could create uncertainty in Internet usage and reduce the demand for all products and services. It is possible laws and regulations may be proposed or adopted with respect to the Internet covering issues such as user privacy, freedom of expression, pricing, content and quality of products and services, taxation, advertising, intellectual property rights and information security. Several states have proposed legislation to limit the use of 37 39 personal user information gathered online or to require online services to establish privacy policies. In addition, the Federal Trade Commission has indicated that it may propose legislation on this issue in the near future and has initiated action against at least one online service regarding the manner in which personal information was collected from users and provided to third parties. We do not know how our business may be affected by the application of existing laws governing issues such as property ownership, copyrights, encryption and other intellectual property issues, taxation, libel, obscenity and export or import matters. Most of these laws were adopted before the advent of the Internet and do not contemplate or address the unique issues of the Internet and related technologies. Changes in laws intended to address such issues could create uncertainty in the Internet marketplace. That uncertainty could reduce demand for our service or increase the cost of doing business as a result of litigation costs or increased service delivery costs. In addition, because our services are available over the Internet in multiple states and foreign countries, other jurisdictions may claim that we are required to qualify to do business in each state or foreign country. We are qualified to do business only in Washington, Minnesota and California. Our failure to qualify in other jurisdictions when we are required to do so could subject us to taxes and penalties. It could also restrict our ability to enforce contracts in those jurisdictions. The application of laws or regulations from jurisdictions whose laws do not currently apply to our business could have a material adverse affect on our business, results of operations and financial condition. The European Union has adopted a policy directive that went into effect in 1998. Under this directive, business entities domiciled in member states of the EU are limited in the transactions they may do with business entities domiciled outside the EU unless they are domiciled in a jurisdiction with privacy laws comparable to the EU privacy directive. The United States presently does not have laws that satisfy the EU privacy directive. Discussions between representatives of the EU and the United States are ongoing and may lead to certain safe harbor provisions which, if adhered to, would allow business entities in the EU and the United States to continue to do business without limitation. If these negotiations are not successful and the EU begins enforcement of the privacy directive, there could be an adverse impact on international Internet business. If we do business directly in the EU in the future we will be required to comply with the privacy directive of the EU. INTELLECTUAL PROPERTY We regard our copyrights, service marks, trademarks, trade secrets, proprietary technology and similar intellectual property as critical to our success, and we rely on trademark and copyright law, trade secret protection and confidentiality and license agreements with our employees, customers, independent contractors, partners and others to protect our intellectual property rights. We have registered the trademark Free Shop in the United States and may apply for registration in the United States for other trademarks and service marks, including Club FreeShop, FreeShop Savings Club, Savings Central, FreeShop shopping assistant, Catalog Site, Catalog Channel, The Catalog Site and Worldwide Brochures. "Find It! Try It! Buy It!", "The starting point for smart online shopping", "Powered by FreeShop" and "FreeShop by Email" are service marks of FreeShop. However, effective trademark, service mark, copyright and trade secret protection may not be available in every country in which FreeShop's products and services are made available online. We have registered domain names, including: freeshop.com, catalogsite.com, wwb.com, clubfreeshop.com, and others. Domain names generally are regulated by Internet regulatory bodies. The regulation of domain names in the United States and in foreign countries is subject to change. Regulatory bodies could establish additional top-level domains, appoint additional 38 40 domain name registrars or modify the requirements for holding domain names. As a result, we may be unable to acquire FreeShop top level domain names in all of the countries in which we may desire to conduct business in the future. The relationship between regulations governing domain names and laws protecting trademarks and similar intellectual property rights is unclear. Therefore, we could be unable to prevent third parties from acquiring domain names that infringe or otherwise decrease the value of our trademarks and other proprietary rights. We believe there are online companies in other countries using domain names that potentially infringe on our trademarks. FreeShop may be required to obtain licenses from others to refine, develop, market and deliver new services. We may be unable to obtain any such license on commercially reasonable terms or at all or that rights granted by any licenses will be valid and enforceable. EMPLOYEES As of June 15, 1999, FreeShop had a total of 96 employees, including 72 in sales and marketing, 15 in technology and development, and nine in finance and administration. None of our employees are represented by unions, and we consider relations with our employees to be good. FACILITIES We currently occupy 20,920 square feet in a leased facility in Seattle, Washington. We expect that this facility will be adequate for meeting our needs over the next 12 months. Our current lease expires in May 2003. LEGAL PROCEEDINGS FreeShop is not currently a party to any material legal proceeding. 39 41 MANAGEMENT EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES The following table sets forth certain information, as of June 15, 1999, regarding the executive officers, directors and key employees of FreeShop:
NAME AGE POSITION ---- --- -------- Timothy C. Choate...................... 34 Chairman, President and Chief Executive Officer William H. Fritsch..................... 47 Executive Vice President, Marketing John A. Wade........................... 36 Secretary, Vice President, Finance and Chief Financial Officer Ronald C. Christiansen................. 46 Vice President, Sales Lisa C. Wolff.......................... 30 Vice President, Business Development Karen M. Leathers...................... 34 Vice President, Operations and Planning Mark S. Noblitt........................ 35 Vice President, Technology John P. Ballantine..................... 35 Director Kirk M. Loevner........................ 41 Director John B. Balousek....................... 53 Director William J. Lansing..................... 40 Director
Timothy C. Choate has served as Chairman, President and Chief Executive Officer since March 1998. From July 1997 to March 1998, Mr. Choate served as a vice president of Micro Warehouse. In 1994, Mr. Choate co-founded Online Interactive, Inc., the former parent of FreeShop, and served as its Chairman, President and Chief Executive Officer until June 1997. Before 1994, Mr. Choate served as President of Softdisk Publishing LLC, a software publishing company. Mr. Choate's prior experience includes serving as a Senior Marketing Manager at Prodigy, an Internet access and content provider, and developing and launching the New Products Division for Business Week, a division of the McGraw-Hill Companies Inc. Mr. Choate serves on the boards of directors of Digital River, Inc., a provider of electronic commerce outsourcing solutions, and Traveling Software, Inc., a software publishing company. Mr. Choate has a B.S.E. degree in Marketing and Entrepreneurial Management from the Wharton School of Business at the University of Pennsylvania. William H. Fritsch has served as Executive Vice President, Marketing since February 1999. Mr. Fritsch joined FreeShop in January 1999 as Vice President, Sales and Marketing. In 1988, Mr. Fritsch co-founded CF2GS, a Seattle-based direct marketing agency, and served as its president until 1998. Before 1988, Mr. Fritsch served as Vice President for Sharp Hartwig Advertising, as the Director of Marketing Services at Walt Disney Productions, as Marketing Coordinator for The Smithers Company and as an auditor for Ernst & Ernst. Mr. Fritsch has a B.S. degree in Accounting from the University of Akron in Ohio. John A. Wade has served as Secretary, Vice President, Finance and Chief Financial Officer since May 1998. From 1992 to May 1998, Mr. Wade served as the Chief Financial Officer and Chief Operating Officer for Buzz Oates Enterprises, a real estate development company. Prior to 1992, Mr. Wade served as the controller for A&A Properties, Inc., an asset management corporation, the controller for Labels West, a manufacturing concern, and as an auditor and taxation specialist at McGladrey and Pullen, an international accounting firm. Mr. Wade has a B.S. degree in Business Administration with a concentration in Accounting from the San Diego State University School of Business. Ronald C. Christiansen has served as Vice President, Sales since January 1999. In 1988, Mr. Christiansen co-founded CF2GS and served as its New Business Development Director until 1998. Prior to 1988, Mr. Christiansen worked at several large national advertising agencies, 40 42 including Cole & Weber (an Ogilvy Mather company) and McCann Erickson. Mr. Christiansen has an undergraduate degree in Advertising from Washington State University. Lisa C. Wolff has served as Vice President, Business Development since July 1998. Ms. Wolff joined FreeShop as Director of Business Development in July 1997. From 1995 to 1997, Ms. Wolff served as Director of Consumer Marketing and as Product Manager for Online Interactive. From May 1994 to August 1994, Ms. Wolff served as an Associate Product Manager for Microsoft Corporation's TechNet. Prior to May 1994, Ms. Wolff worked for two years in corporate sales and marketing at NeXT Computer, Inc., a computer software and hardware company. Ms. Wolff has an MBA from the University of Washington and a B.A. degree in Business Economics from the University of California at Santa Barbara. Karen M. Leathers has served as Vice President, Operations and Planning since July 1998. Since joining FreeShop in September 1997, Ms. Leathers has also served as Director, Operations and Human Resources and Manager of Operations. From March 1997 to August 1997, Ms. Leathers managed the Web-based data acquisition team at Affinity Publishing, a partner marketing technology services company. From 1993 to March 1997, Ms. Leathers managed the corporate Membership Services Department at Recreational Equipment Incorporated. Prior to 1993, Ms. Leathers served as a market analyst for Weyerhaeuser Company. Ms. Leathers holds a B.A. in Business Management and Computers from The Evergreen State College in Washington. Mark S. Noblitt has served as Vice President, Technology since February 1999. Since July 1997, Mr. Noblitt has served as Director of Technology, Production Engineering Manager and SQL Developer. From October 1996 to July 1997, Mr. Noblitt served as SQL Database Administrator for Online Interactive. From June 1987 to January 1996, Mr. Noblitt served as Project Manager and Lead Estimator for Leewens Corporation, a company specializing in hazardous waste containment projects. Mr. Noblitt also serves on the Board of Advisors for International Barter Corporation, an international commercial barter exchange company. Mr. Noblitt is a Microsoft Certified Systems Engineer with specialties in SQL, NT, Microsoft BackOffice, Microsoft Office and TCP/IP. John P. Ballantine has served as a Director since July 1997. Since March 1999, Mr. Ballantine has served as Chairman and Chief Executive Officer of iStart Ventures LLC, a company that develops early stage e-commerce concepts. From July 1997 to March 1998, Mr. Ballantine served as a vice president of Micro Warehouse. In 1994, Mr. Ballantine co-founded Online Interactive and served as its Executive Vice President and later as President and Chief Executive Officer. From February 1993 to June 1994, Mr. Ballantine served as Vice President of Softdisk Publishing, where he managed online shopping applications with America Online, CompuServe, Prodigy and GEnie. From March 1989 to February 1993, Mr. Ballantine served as Vice President of Sales for DataEnvelope, a full-service software marketing and distribution company. Mr. Ballantine holds a B.S.E. in Finance and International Business from the San Diego State University School of Business. Kirk M. Loevner has served as a Director since November 1998. In February 1999, Mr. Loevner founded PublishOne Inc., an online publishing service for businesses, of which he is currently President and Chief Executive Officer. From August 1996 to August 1998, Mr. Loevner served as President and Chief Executive Officer of the Internet Shopping Network, an online retailer and auction house. From November 1993 to July 1996, Mr. Loevner served as a vice president and general manager of Silicon Graphics Inc., a leading supplier of visual computing and high performance computer systems. Before November 1993, Mr. Loevner served as a vice president and general manager of Apple Computer Inc., a computer manufacturing company. Mr. Loevner currently serves on the board of directors of the Software Industry and Information Association, a software industry association. Mr. Loevner holds a B.S.E. in Computer Science from Tufts University and an MBA in General Management from Harvard University. 41 43 John B. Balousek has served as a Director since February 1999. In 1998 Mr. Balousek co-founded PhotoAlley.com, an internet retailer of photographic equipment, supplies and services. From 1979 to 1997, Mr. Balousek served in various positions, including President/Chief Operating Officer and Director of Foote, Cone & Belding Communications, Inc., a global advertising and communications company. In 1996 Mr. Balousek served as Chairman/Chief Executive Officer of True North Technologies, a digital and interactive service of True North Communications, Foote, Cone & Belding's parent company. Mr. Balousek currently serves as a director for Geoworks, a provider of end-to-end solutions for the wireless communications market; Transilluminant Corporation, a privately-held company focusing on electronic data marketing; and EDB Holdings, Inc., a superoptical retailing company. Mr. Balousek has an undergraduate degree from Creighton University and a graduate degree from Northwestern University. William J. Lansing has served as a Director since January 1999. Mr. Lansing is the President and Chief Executive Officer of Fingerhut. From May 1998 to May 1999, Mr. Lansing served as President of Fingerhut. From November 1996 to May 1998, Mr. Lansing served as a vice president for business development at General Electric Corp. From January 1996 to October 1996, he served as Chief Operating Officer of Prodigy. From 1986 to 1996, Mr. Lansing was a principal at McKinsey & Co., a management consulting company. Mr. Lansing also serves on the board of directors of Digital River, Inc., an electronic commerce solutions provider, Select Comfort Corp., a specialty retailer and direct marketer of air beds, Net Perceptions, Inc., a developer of Internet marketing solutions and BigStar Entertainment, Inc., an online filmed entertainment superstore. Mr. Lansing has a B.A. degree in English from Wesleyan University and a J.D. from Georgetown University. Freeshop currently has authorized six directors. Each director is elected for a period of one year at our annual meeting of shareholders and serves until the next annual meeting or until his successor is duly elected and qualified. The executive officers serve at the discretion of the board. There are no family relationships among any of the directors and executive officers of Freeshop. BOARD COMMITTEES In May 1999, the Board established two standing committees of the board of directors, an audit committee and a compensation committee. Audit Committee. The audit committee's responsibilities include reviewing our internal accounting procedures and consulting with and reviewing the services provided by our independent accountants. The audit committee currently consists of Messrs. Ballantine and Balousek. Compensation Committee. The compensation committee's responsibilities include reviewing and recommending to the board of directors the compensation and benefits of all our executive officers, administering our stock option plans and establishing and reviewing general policies relating to compensation and benefits of our employees. The compensation committee currently consists of Messrs. Ballantine, Lansing and Loevner. No interlocking relationships exist between our board of directors or compensation committee and the board of directors or compensation committee of any other company, nor has any such interlocking relationship existed in the past. DIRECTOR COMPENSATION Directors do not currently receive cash compensation from FreeShop for their service as members of the board of directors, although they may be reimbursed for certain expenses in connection with attendance at board and committee meetings. We do not provide additional compensation for committee participation or special assignments of the board of directors. From 42 44 time to time, certain of our directors have received grants of options to purchase shares of our common stock pursuant to the 1997 Stock Option Plan. In January 1998, we granted to Mr. Choate and Mr. Ballantine options to purchase 40,000 shares of common stock at an exercise price of $0.41 per share. In addition, since March 1998, we have paid health insurance premiums on behalf of Mr. Ballantine of approximately $250 per month. In September 1998, we granted to Mr. Loevner an option to purchase 40,000 shares of common stock at an exercise price of $0.60 per share. In February 1999, we granted to Mr. Balousek an option to purchase 40,000 shares of common stock at an exercise price of $1.00 per share. See "-- Stock Option Plan." EXECUTIVE COMPENSATION The following table sets forth the compensation paid to our Chief Executive Officer and former Chief Executive Officer for the year ended December 31, 1998. No other executive officer of FreeShop earned a salary and bonus for such fiscal year in excess of $100,000. SUMMARY COMPENSATION TABLE
LONG TERM ANNUAL COMPENSATION COMPENSATION ----------------- ------------ SECURITIES ALL OTHER NAME AND PRINCIPAL POSITION SALARY UNDERLYING OPTION COMPENSATION --------------------------- ------------ ----------------- ------------ Timothy C. Choate(1)....................... $26,825(2) 40,000 $ 5,085(3) Chairman, President and Chief Executive Officer Mike Schutzler(4).......................... $26,951 340,000 $41,420(5)
- --------------- (1) Mr. Choate became our Chief Executive Officer in March 1998. (2) Includes $19,220 in deferred compensation paid in January 1999. (3) Represents health insurance premiums paid by us on behalf of Mr. Choate. (4) Mr. Schutzler was the Chief Executive Officer until March 1998. (5) This figure includes a $7,000 cash payment for severance and $36,488 worth of common stock, at fair value, that Mr. Schutzler received on exercise of certain options. OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth certain information regarding stock option grants to our Chief Executive Officer and former Chief Executive Officer during the fiscal year ended December 31, 1998. The potential realizable value is calculated based on the assumption that the common stock appreciates at the annual rate shown, compounded annually, from the date of grant until the expiration of its term. These numbers are calculated based on Securities and Exchange Commission requirements and do not reflect our projection or estimate of future stock price growth. Potential realizable values are computed by: - multiplying the number of shares of common stock subject to a given option by the exercise price; - assuming that the aggregate stock value derived from that calculation compounds at the annual 5% or 10% rate shown in the table for the entire ten-year term of the option; and - subtracting from that result the aggregate option exercise price. 43 45 OPTION GRANTS IN 1998
INDIVIDUAL GRANTS POTENTIAL REALIZED ---------------------------------------------------------- VALUE AT ASSUMED NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK SECURITIES OPTIONS PRICE APPRECIATION FOR UNDERLYING GRANTED TO EXERCISE OPTION TERM OPTIONS EMPLOYEES IN PRICE EXPIRATION ----------------------- NAME GRANTED FISCAL YEAR(1) (PER SHARE)(2) DATE 5% 10% ---- ---------- -------------- -------------- ---------- ---------- ---------- Timothy C. Choate(3)...... 40,000 2.78% $0.41 1/15/08 $10,314 $26,137 Mike Schutzler(4)......... 300,000 20.82% $0.41 3/16/00 $12,608 $25,830 40,000(5) 2.78% $0.41 1/15/08 $10,314 $26,137
- --------------- (1) During 1998, 350,000 options were issued as severance compensation, 200,000 options were issued as compensation to members of the board of directors for their services on the Board and 891,050 options were issued to employees. (2) The exercise price per share of each option was equal to the fair market value of the common stock on the date of grant as determined by the board of directors. (3) Mr. Choate became the Chief Executive Officer in March 1998. (4) Mr. Schutzler was the Chief Executive Officer until March 1998. (5) Mr. Schutzler has forfeited these options. OPTION EXERCISES AND FISCAL YEAR-END VALUES The following table sets forth for our Chief Executive Officer and former Chief Executive Officer the number of shares acquired upon exercise of stock options during the fiscal year ended December 31, 1998 and the number of shares subject to exercisable and unexercisable stock options held at December 31, 1998. AGGREGATED OPTION EXERCISES IN 1998 AND YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT SHARES DECEMBER 31, 1998 DECEMBER 31, 1998(1) ACQUIRED ON VALUE --------------------------- --------------------------- NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- -------- ----------- ------------- ----------- ------------- Timothy C. Choate........... -- -- 27,500 12,500 $ 40,700 $18,500 Mike Schutzler.............. 104,250 36,488 300,000 0 $440,000 $ 0
- --------------- (1) The value of unexercised in-the-money options at December 31, 1998 is based on $1.89 per share, the assumed fair market value of the common stock at such time, less the exercise price per share. NONCOMPETITION AGREEMENTS Until July 1999, Messrs. Choate and Ballantine are subject to the terms of noncompetition agreements with Micro Warehouse. Under the terms of the agreements, Messrs. Choate and Ballantine cannot engage in any business activity that directly competes with Micro Warehouse's business. We do not believe that their current positions with FreeShop violate these agreements. STOCK OPTION PLAN On June 30, 1997, we adopted our 1997 Stock Option Plan, which was subsequently approved by our shareholders. The plan authorizes the board of directors, or a committee of independent directors, to act as the plan administrator. The plan provides for the grant of incentive stock options and non-qualified stock options to purchase up to an authorized total of 6,000,000 shares of common stock. The plan administrator 44 46 may grant incentive stock options to our full-time employees or to our non-employee directors only. Non-qualified stock options are available to employees, directors and other persons as the plan administrator shall select. The plan authorizes the plan administrator to, among other things: - set the number of shares of common stock to be issued upon exercise of the options; - set the exercise price of the options, provided that, for incentive stock options granted to greater than 10% shareholders, the price cannot be less that 110% of the fair market value per share of common stock at the date of grant of such options; - designate the expiration date of the options, for incentive stock options, which cannot be later than ten years from the date such options were granted; and - accelerate the vesting of the options, which otherwise vest over four years according to a set schedule. The 1997 Stock Option Plan will expire on June 30, 2007. The expiration of the plan, however, will not affect the exercisability of options granted under the plan prior to the plan's expiration. 401(K) PLAN Our employees participate in the Freeshop.com, Inc. 401(k) plan, a tax qualified savings and retirement plan intended to qualify under Section 401 of the Internal Revenue Code. All employees who satisfy the eligibility requirements relating to minimum age and length of service are eligible to participate in the plan and may enter the plan on the first day of any month after they become eligible to participate. Participants may make pre-tax contributions to the plan of up to 15% of their eligible earnings, subject to a statutorily prescribed annual limit. At our discretion, we may make matching contributions of up to 100% of the first 6% of the compensation elected for contribution to the plan by an employee. Each participant is fully vested in his or her contributions and the investment earnings thereon, but vesting in any matching contributions by us takes place over a period of five years. Contributions by the participants or us, and the income earned on such contributions, are generally not taxable to the participants until withdrawn. Contributions by us, if any, are generally deductible by us when made. Contributions are held in trust as required by law. Individual participants may direct the trustee to invest their accounts in authorized investment alternatives. We have made no matching contributions to the plan as of March 31, 1999. DIRECTOR AND OFFICER INDEMNIFICATION AND LIABILITY Our amended and restated articles of incorporation limit the liability of our directors to the fullest extent permitted by Washington law, and our articles incorporate by reference any later amendments to the Washington Business Corporation Act. This Act provides that a corporation's articles of incorporation may contain a provision eliminating or limiting the personal liability of directors for monetary damages for breach of their fiduciary duty as directors, except for liability for: - acts or omissions that involve intentional misconduct or a knowing violation of law; - unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 23B.08.310 of the Washington Business Corporation Act; or - any transaction from which the director derived an improper personal benefit. 45 47 Our bylaws provide that: - we must indemnify our directors and officers against all reasonable expenses incurred in a proceeding in which they are a party because they are or were a director or officer; - we must indemnify our directors and officers against liability incurred in a proceeding in which they are a party because they are or were a director or officer if: 1. they acted in good faith, and they reasonably believed, in the case of conduct in the individual's official capacity, that their conduct was in our best interest and, in all other cases, that their conduct was at least not opposed to our best interest; 2. in the case of a criminal proceeding, the individual had no reasonable cause to believe that their conduct was unlawful; - we may indemnify other employees and agents to the same extent that we indemnified our officers and directors, unless otherwise required by law, our articles of incorporation, our bylaws or agreements; and - we must advance expenses, as incurred, to our directors and executive officers in connection with a legal proceeding to the fullest extent permitted by Washington law. We have entered into agreements with our directors that, among other things, indemnify them for reasonable expenses incurred in legal proceedings if the director acted in good faith and with a reasonable belief that such director's official conduct was in the best interests of FreeShop, or, if not taken in an official capacity, not opposed to FreeShop's best interests. 46 48 RELATED PARTY TRANSACTIONS On December 10, 1998, FreeShop issued 4,048,467 shares of its common stock to Fingerhut Companies Inc. in consideration for $4.0 million ($0.99 per share) pursuant to an investor subscription agreement. Fingerhut paid $500,000 of the $4.0 million consideration by converting into common stock the entire principal balance of a promissory note FreeShop had issued to Fingerhut on December 4, 1998. Immediately following the issuance of such shares, Fingerhut owned 19.9% of FreeShop's issued and outstanding shares of common stock. FreeShop also entered into a warrant agreement with Fingerhut under which FreeShop issued to Fingerhut the following warrants to purchase FreeShop common stock: (1) a series of irrevocable "percentage warrants," including - a warrant to purchase 2,935,356 shares at $1.72 per share; - a warrant to purchase 1,790,724 shares at $1.99 per share; - a warrant to purchase 2,089,178 shares at $2.21 per share; (2) "anti-dilution warrants" to purchase 1,842,877 shares at $2.21 per share; and (3) "third party agreement warrants" to purchase 204,720 shares at $1.59 per share. In May 1999, we agreed to issue to Fingerhut series B convertible preferred stock on the exercise of their warrants rather than common stock. As of May 24, 1999, Fingerhut exercised percentage warrants for a total of 293,536 shares of series B convertible preferred stock. These shares will be converted into 2,935,360 shares of common stock upon the completion of this offering. Subsequently, Fingerhut exercised an additional warrant for a total of 179,072 shares of series B convertible preferred stock. These shares will be converted into 1,790,720 shares of common stock upon completion of this offering. Any unexercised warrants held by Fingerhut expire at the completion of this offering. Pursuant to the terms of an escrow agreement, Fingerhut has agreed to exercise all of their warrants prior to the completion of this offering, subject to certain conditions. FreeShop, Mr. Ballantine and Mr. Choate also entered into a stockholders agreement with Fingerhut. The stockholders agreement, among other things, grants Fingerhut a right of first refusal on shares proposed for transfer by Messrs. Ballantine or Choate, contains agreements among the parties regarding composition of FreeShop's board of directors, requires approval by the board of directors of specified actions by FreeShop, grants Fingerhut preemptive rights to maintain its percentage ownership interest in connection with proposed share issuances by FreeShop, grants demand and piggyback registration rights to Fingerhut and provides for drag-along and tag-along rights among the parties with respect to proposed sales of shares to third parties. The stockholders agreement terminates generally on the earlier of December 10, 2008 or the closing of a sale of substantially all of FreeShop's assets or the acquisition of FreeShop by merger or consolidation. Specific provisions of the stockholders agreement, including the right of first refusal, right of participation, the agreements regarding board composition, the special voting requirements, the preemptive rights and the drag-along and tag-along rights, terminate at the completion of this offering. In addition, Fingerhut, Mr. Ballantine and Mr. Choate have entered into a cross-lockup agreement which prevents any of the parties from selling common stock pursuant to a waiver from Deutsche Bank Securities Inc. under the lock-up agreements unless the other parties receive similar waivers. Recently, Federated purchased Fingerhut. Federated and Fingerhut are clients of FreeShop. In the first quarter of 1999, we received approximately $11,000 for services provided to Federated and Fingerhut consisting primarily of lead generation. William J. Lansing, a member of FreeShop's board of directors, is the current President and Chief Executive Officer of Fingerhut. 47 49 Mr. Lansing is also a director of BigStar Entertainment, Inc., a client of FreeShop. In 1998, Bigstar Entertainment paid $42,330 for our services. In 1988, Messrs. Fritsch and Christiansen founded CF2GS, which was purchased by True North Communications in April 1994. In March 1998, CF2GS merged into Bozell Worldwide, another company True North Communications had purchased in December 1997. Mr. Fritsch ceased his employment with Bozell in December 1998, and Mr. Christiansen ceased his employment with Bozell in March 1998. In consideration for services provided to FreeShop by Bozell during 1999, FreeShop issued to Bozell and three Bozell employees options to purchase a total of 30,000 shares of FreeShop common stock at an exercise price of $1.00 per share. During January and February of 1998, Mr. Choate advanced a series of three loans to FreeShop for a total principal amount of $55,000, each at a 10% interest rate. Also during this period, Mr. Ballantine advanced two loans to FreeShop for a total principal amount of $30,000, each at a 10% interest rate. FreeShop repaid all five of these loans in full in September 1998. During the period from May 1998 through August 1998, Mr. Ballantine transferred 115,000 shares of his FreeShop common stock, with an estimated value of $69,000, and Mr. Choate transferred 25,000 shares of his FreeShop common stock, with an estimated value of $15,000, to employees of FreeShop as compensation for services. In January 1999, we repurchased 125,000 shares of our common stock from Mr. Ballantine for a total purchase price of $125,000. We have entered into indemnification agreements with each of our officers and directors containing provisions that may require us, among other things, to indemnify our officers and directors against liabilities that may arise by reason of their status or service as officers and directions, other than liabilities arising from willful misconduct of a culpable nature, and to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified. See "Management -- Director and Officer Indemnification and Liability." 48 50 PRINCIPAL SHAREHOLDERS The following table sets forth certain information concerning the beneficial ownership of our outstanding common stock as of May 24, 1999 and as adjusted to reflect the sale of the shares of common stock in this offering: - each person or group that we know owns beneficially more than 5% of our common stock; - each of our directors and executive officers individually; and - all directors and executive officers as a group. Certain rules of the Securities and Exchange Commission define the term "beneficial ownership." Under these rules, the term includes shares over which the indicated beneficial owner exercises voting and/or investment power. The rules also deem common stock subject to options currently exercisable, or exercisable within 60 days, to be outstanding for purposes of computing the percentage ownership of the person holding the options but do not deem such stock to be outstanding for purposes of computing the percentage ownership of any other person. The applicable percentage of ownership for each stockholder is based on 20,608,174 shares of common stock outstanding as of May 24, 1999, together with applicable options and warrants for that shareholder. Except as otherwise indicated, we believe the beneficial owners of the common stock listed below, based on information furnished by them, have sole voting and investment power over the number of shares listed opposite their names. The information provided in the table below assumes no exercise of the underwriters' over-allotment option.
PERCENT OF NUMBER OF SHARES OUTSTANDING SHARES -------------------- NAME AND ADDRESS BENEFICIALLY BEFORE AFTER OF BENEFICIAL OWNER OWNED OFFERING OFFERING ------------------- ------------------ -------- -------- Fingerhut Companies, Inc.(1)....................... 12,739,937 43.5% 4400 Baker Road Minnetonka, Minnesota 55343 Timothy C. Choate(2)............................... 4,522,420 21.9% 95 South Jackson Street, Ste. 300 Seattle, WA 98104 John P. Ballantine(3).............................. 4,139,347 20.1% 95 South Jackson Street, Ste. 300 Seattle, WA 98104 Kirk M. Loevner(4)................................. 210,427 1.0% John B. Balousek(5)................................ 125,000 * John A. Wade(6).................................... 95,500 * William H. Fritsch(7).............................. 64,417 * William J. Lansing................................. -- * All directors and officers as a group (11 persons)(8).................................. 9,387,122 44.4%
- --------------- * Less than one percent of the outstanding shares of common stock. (1) Represents 6,983,827 shares (including 293,536 shares of series B preferred stock, which will be converted into 2,935,360 shares of common stock upon the completion of this offering) held by Fingerhut directly and 5,756,110 shares of common stock that Fingerhut has a right to acquire pursuant to warrants exercisable into series B convertible preferred stock within sixty days of May 24, 1999. Fingerhut is a wholly-owned subsidiary of Federated Department Stores, Inc. and, as such, our capital stock owned by Fingerhut may also be deemed to be beneficially owned by Federated. 49 51 (2) Represents 4,457,420 shares held by Mr. Choate directly, 30,000 shares held by a trust established for Mr. Choate's children and 35,000 shares that Mr. Choate has a right to acquire pursuant to options exercisable within sixty days of May 24, 1999. (3) Represents 4,104,347 shares held by Mr. Ballantine directly and 35,000 shares that Mr. Ballantine has a right to acquire pursuant to options exercisable within sixty days of May 24, 1999. (4) Represents 182,927 shares held by Kirk Loevner Trust w/d/t dated 8/5/96 directly and 27,500 shares that Mr. Loevner has a right to acquire pursuant to options exercisable within sixty days of May 24, 1999. (5) Represents 75,000 shares held by the Balousek Family Limited Partnership and 25,000 shares held by the Balousek 1994 Irrevocable Trust and 25,000 shares that Mr. Balousek has a right to acquire pursuant to options exercisable within sixty days of May 24, 1999. (6) Represents 50,000 shares held by Mr. Wade directly and 45,500 shares that the Mr. Wade has a right to acquire pursuant to options exercisable within sixty days of May 24, 1999. (7) Represents 41,667 shares held by Mr. Fritsch directly and 22,750 shares that Mr. Fritsch has a right to acquire pursuant to options exercisable within sixty days of May 24, 1999. (8) Represents 9,149,661 shares listed as to all current directors and executive officers and includes 237,461 shares issuable within sixty days of May 24, 1999 upon the exercise of outstanding options. 50 52 DESCRIPTION OF CAPITAL STOCK Our authorized capital stock consists of 100,000,000 shares of common stock, no par value per share, and 10,000,000 shares of preferred stock, no par value per share. COMMON STOCK As of May 24, 1999, there were 23,543,534 shares of our common stock issued and outstanding (including shares issuable upon conversion of outstanding series of preferred stock), held of record by 110 shareholders. Holders of common stock are entitled to one vote per share on all matters to be voted upon by the shareholders. The articles of incorporation do not authorize cumulative voting for the election of directors, which means that the holders of a majority of the shares voted can elect all of the directors then standing for election. Subject to preferences of any outstanding shares of preferred stock, holders of common stock are entitled to receive ratably any dividends the board of directors declares out of funds legally available for the payment of dividends. If we are liquidated, dissolved or wound up, the holders of common stock are entitled to share in proportion to the percentage of their ownership all assets remaining after payment of liabilities and liquidation preferences of any outstanding shares of preferred stock. Holders of shares of common stock have no preemptive or conversion rights or other subscriptive rights, and there are no redemption or sinking fund provisions that apply to the common stock. All outstanding shares of common stock are fully paid and nonassessable, and the shares of common stock in this offering will be fully paid and nonassessable. PREFERRED STOCK In June 1997, we designated 1,935,484 shares of series A convertible preferred stock, all of which was issued and later converted into common stock in July 1997. In May 1999, we designated 1,250,000 shares of series B convertible preferred stock. As of May 24, 1999, we had outstanding 293,536 shares of series B convertible preferred stock. The series B convertible preferred stock has identical rights and preferences as common stock except that it has no voting rights. Each share of series B convertible preferred stock is convertible into ten shares of common stock at the option of the holder or upon the completion of this offering. Subject to the provisions of the articles of incorporation and limitations prescribed by law, the board of directors has the authority to issue, without further vote or action by the shareholders, up to 6,814,516 additional shares of preferred stock in one or more series. The board has the authority to fix the rights, preferences, privileges and restrictions of the shares of each series including dividend rights, convertibility, voting rights, redemption rights, liquidation preferences and the number of shares constituting any series and the designation of such series. Issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, a majority of our outstanding voting stock. WARRANTS As of May 24, 1999, Fingerhut held irrevocable "percentage warrants" to purchase 387,990 shares of our series B convertible preferred stock; "anti-dilution warrants" to purchase 184,288 of our series B convertible preferred stock; and "third party agreement warrants" to purchase 20,472 shares of our series B convertible preferred stock. All Fingerhut warrants will expire at the closing of this offering, if not previously exercised. Pursuant to the terms of an escrow agreement, Fingerhut has agreed to exercise the remainder of their warrants prior to the completion of this offering, subject to certain conditions. See "Related Party Transactions." In addition to the warrants held by Fingerhut, as of May 24, 1999 we had warrants outstanding to purchase 69,250 shares of common stock. Generally, each warrant contains 51 53 provisions for the adjustment of the exercise price and the number of shares issuable upon the exercise of the warrant upon the occurrence of events such as stock dividends, stock splits, reorganizations, reclassifications and consolidations. REGISTRATION RIGHTS According to the terms of a stockholders agreement between us, Fingerhut, Messrs. Choate and Ballantine, Fingerhut is entitled to make a one-time demand that we file a registration statement with respect to shares of common stock owned by Fingerhut. However, we are not required to effect this "demand registration" before June 30, 2001 and may postpone the registration for up to 180 days for bona fide business reasons. In addition, under the stockholders agreement, Fingerhut is entitled to "piggyback" registration rights in connection with any registration by us of our securities for our own account or for the account of other security holders (other than in this offering and in any registration of securities to be issued in connection with an acquisition or under our employee compensation plans). If we propose to register any shares of common stock under the Securities Act, Fingerhut is entitled to receive notice and to include its shares in the registration statement, subject to certain limitations. Fingerhut is entitled to two piggyback registrations under the agreement. We have also granted piggyback registration rights to Commonsite with respect to 132,300 shares of common stock in connection with our acquisition of substantially all of the assets of Commonsite. Under the terms of the registration rights agreement, after completion of this offering, Commonsite is entitled to one piggyback registration in connection with any registration by us of our securities for our own account or for the account of other security holders (other than any registration of securities to be issued in connection with an acquisition or under our employee compensation plans). If we propose to register any shares of common stock under the Securities Act, Commonsite is entitled to receive notice and to include its shares in the registration statement, subject to certain limitations. ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER AND BYLAWS PROVISIONS AND THE WASHINGTON BUSINESS CORPORATION ACT Articles and Bylaws. Our articles of incorporation and bylaws contain provisions that may have the effect of delaying, deferring or preventing a change in control. Neither the articles of incorporation nor the bylaws provide for cumulative voting in the election of directors. Furthermore, the authorization of undesignated preferred stock makes it possible for the board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to change control of FreeShop. Washington Business Corporation Act. Washington law imposes restrictions on certain transactions between a corporation and certain significant shareholders. Chapter 23B.19 of the Washington Business Corporation Act prohibits a "target corporation," with some exceptions, from engaging in certain significant business transactions with a person or group of persons that beneficially owns 10% or more of the voting securities of the target corporation (an Acquiring Person) for a period of five years after such acquisition, unless the transaction or acquisition of shares is approved by a majority of the members of the target corporation's board of directors prior to the time of acquisition. Transactions prohibited by this statute include, among others, - a merger or consolidation with, disposition of assets to, or issuance or redemption of stock to or from, the Acquiring Person; - termination of 5% or more of the employees of the target corporation as a result of the Acquiring Person's acquisition of 10% or more of the shares; or - allowing the Acquiring Person to receive any disproportionate benefit as a shareholder. 52 54 After the five-year period, a "significant business transaction" may occur, as long as it complies with certain "fair price" provisions of the statute. A public corporation may not "opt out" of this statute. This provision may have the effect of delaying, deferring or preventing a change in control of FreeShop. TRANSFER AGENT AND REGISTRAR The registrar and transfer agent for our common stock is ChaseMellon Shareholder Services, L.L.C. Its address is 400 South Oak Street, 4th Floor, Los Angeles, California 90071, and its telephone number at this location is (213) 553-9731 . LISTING We have applied to list our common stock on the Nasdaq National Market under the trading symbol "FSHP." SHARES ELIGIBLE FOR FUTURE SALE Future sales of substantial amounts of our common stock in the public market could adversely affect prevailing market prices of our common stock. Furthermore, because no shares will be available for sale shortly after this offering because of certain contractual and legal restrictions on resale described below, sales of substantial amounts of common stock in the public market after these restrictions lapse could adversely affect the prevailing market price and our ability to raise equity capital in the future. Upon completion of this offering and based on shares of common stock outstanding as of May 24, 1999, we will have outstanding an aggregate of shares of our common stock, assuming no exercise of the underwriters' over-allotment option and no exercise of outstanding options. Of these shares, shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act, unless such shares are purchased by "affiliates" as that term is defined in Rule 144 under the Securities Act. The remaining 20,608,174 shares of common stock held by existing shareholders are "restricted securities" as that term is defined in Rule 144 under the Securities Act. Restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration under Rule 144 or 701 promulgated under the Securities Act, which rules are summarized below. Lock-Up Agreements. A majority of shareholders, including each of our officers and directors, who hold an aggregate of 26,938,486 shares of common stock (which includes common stock issuable upon conversion of series B convertible preferred stock), have agreed not to offer, sell, contract to sell or otherwise dispose of, or enter into any transaction that is designed to, or could be expected to, result in the disposition of any portion of, any common stock for a period of 180 days after the effective date of the registration statement of which this prospectus is a part, without the prior written consent of Deutsche Bank Securities Inc. This consent may be given at any time without public notice. We have entered into a similar agreement, except that we may issue, and grant options or warrants to purchase, common stock or any securities convertible into, or exercisable for or exchangeable for, shares of common stock, pursuant to the exercise of outstanding options and warrants and the issuance of options granted under our existing stock option plans. In addition, Fingerhut, Mr. Ballantine and Mr. Choate have entered into a cross-lockup agreement which prevents any of the parties from selling stock pursuant to a waiver from Deutsche Bank Securities Inc. under the lock-up agreements unless the other parties receive similar waivers. Before taking into account the lock-up agreements, the following shares will be eligible for sale in the public market at the following times: - Beginning on the effective date of the offering, shares will be immediately available for sale in the public market. 53 55 - Beginning 90 days after the effective date of the offering, approximately shares will be eligible for sale pursuant to Rules 144 and 701. - An additional shares will become eligible for sale pursuant to Rule 144 at various times after 90 days from the effective date of the offering. Shares eligible to be sold by affiliates pursuant to Rule 144 are subject to volume restrictions as described below. Rule 144. In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a person who has beneficially owned shares of our common stock for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: - 1% of the number of shares of common stock then outstanding, which will equal approximately shares immediately after this offering; or - the average weekly trading volume of the common stock on the Nasdaq National Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale. Sales under Rule 144 are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about us. Rule 144(k). Under Rule 144(k), a person who is not deemed to have been one of our affiliates at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, including the holding period of any prior owner other than an affiliate, is entitled to sell such shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Therefore, unless otherwise restricted, "144(k) shares" may be sold immediately upon the completion of this offering. Rule 701. In general, under Rule 701 of the Securities Act as currently in effect, any of our employees, consultants or advisors who purchases shares from us in connection with a compensatory stock or option plan or other written agreement is eligible to resell such shares 90 days after the effective date of this offering in reliance on Rule 144, but without compliance with certain restrictions, including the holding period, contained in Rule 144. Registration Rights. Upon completion of this offering, Fingerhut and Commonsite will be entitled to rights with respect to the registration of shares of our common stock under the Securities Act. See "Description of Capital Stock -- Registration Rights." After such a registration, these shares become freely tradable without restriction under the Securities Act. Neither Fingerhut nor Commonsite will have any obligation or other restrictions on resale with respect to any of our securities, other than restrictions imposed by lock-up agreements and applicable securities laws. Any sales of securities by these shareholders could have a material adverse effect on the trading price of our common stock. Stock Options. Immediately after this offering, we intend to file a registration statement under the Securities Act covering up to 6,000,000 shares of common stock reserved for issuance under our 1997 Stock Option Plan. As of May 24, 1999, options to purchase 2,413,530 shares of common stock were issued and outstanding. Upon the expiration of the lock-up agreements described above, at least shares of common stock will be subject to vested options (based on options outstanding as of May 24, 1999). Such registration statement is expected to be filed and become effective as soon as practicable after the effective date of this offering. Accordingly, shares registered under such registration statement will, subject to vesting provisions and Rule 144 volume limitations applicable to our affiliates, be available for sale in the open market immediately after the 180-day lock-up agreements expire. 54 56 UNDERWRITING Subject to the terms and conditions of the underwriting agreement, the underwriters named below, through their representatives Deutsche Bank Securities Inc., Dain Rauscher Wessels, a division of Dain Rauscher Incorporated, and Volpe Brown Whelan & Company, LLC have severally agreed to purchase from us the following respective numbers of shares of common stock at the public offering price less the underwriting discounts and commissions set forth on the cover page of this prospectus.
NUMBER UNDERWRITER OF SHARES ----------- --------- Deutsche Bank Securities Inc. .............................. Dain Rauscher Wessels....................................... Volpe Brown Whelan & Company, LLC........................... -------- Total.............................................
The underwriting agreement provides that the obligations of the underwriters are subject to certain conditions and that the underwriters will purchase all the shares of common stock offered by this prospectus, other than those covered by the over-allotment option described below, if any of such shares are purchased. We have been advised by the representatives that the underwriters propose to offer the shares of common stock directly to the public at the offering price set forth on the cover page of this prospectus and to certain dealers at such price less a concession not in excess of $ per share. The underwriters may allow, and such dealers may re-allow, a concession not in excess of $ per share to certain other dealers. After the initial public offering, the offering price and other selling terms may be changed by the representatives. We have granted to the underwriters an option, exercisable not later than 30 days after the date of this prospectus, to purchase up to additional shares of common stock at the public offering price less the underwriting discounts and commissions set forth on the cover page of this prospectus. The underwriters may exercise this option only to cover over-allotments made in connection with the sale of the common stock offered in this prospectus. To the extent the underwriters exercise the option, each of the underwriters will become obligated, subject to certain conditions, to purchase approximately the same percentage of additional shares of common stock as the number of shares of common stock to be purchased by it in the above table bears to the total listed above. We will be obligated, pursuant to the option, to sell these shares to the underwriters to the extent the option is exercised. If any additional shares of common stock are purchased, the underwriters will offer such additional shares on the same terms as those on which the shares are being offered. The following table summarizes the compensation that we will pay to the underwriters in connection with this offering.
TOTAL ------------------------------- WITHOUT WITH PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT --------- -------------- -------------- Underwriting discounts and commissions paid by us.... $ $ $
We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, and to contribute to payments the underwriters may be required to make with respect to such liabilities. 55 57 The representatives have advised us that the underwriters do not intend to confirm orders to any account over which they exercise discretionary authority. In order to facilitate the offering of the common stock, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the market price of the common stock. Specifically, the underwriters may over-allot shares of the common stock in connection with this offering, thus creating a short position in the common stock for their own account. Additionally, to cover these over-allotments or to stabilize the market price of the common stock, the underwriters may bid for, and purchase, shares of the common stock in the open market. Finally, the representatives, on behalf of the underwriters, may reclaim selling concessions allowed to an underwriter or dealer if the underwriting syndicate repurchases shares distributed by that underwriter or dealer. Any of these activities may maintain the market price of our common stock at a level above that which might otherwise prevail in the open market. The underwriters are not required to engage in these activities and, if commenced, may end any of these activities at any time. We estimate that the total expenses of the offering, excluding underwriting discounts and commissions, will be approximately $ . The underwriters, at our request, have reserved for sale at the initial public offering price up to shares of common stock for visitors to our Web site and users of our services who express an interest in purchasing these shares. Any reserved shares not so purchased will be offered by the underwriters on the same basis as the other shares offered by this prospectus. PRICING OF THE OFFERING Prior to this offering, there has been no public market for our common stock. Consequently, the initial public offering price for our common stock will be determined by negotiation among FreeShop and the representatives of the underwriters. Among the factors to be considered in determining the public offering price will be: - prevailing market conditions; - our results of operations in recent periods; - the present stage of our development; - the market capitalizations and stages of development of other companies we and the representatives believe to the comparable to us; and - estimates of our business potential. LEGAL MATTERS Dorsey & Whitney LLP, Seattle, Washington, will pass upon the legality of the shares offered by this prospectus. Perkins Coie LLP, Seattle, Washington, will pass upon certain legal matters for the underwriters. A partner of Dorsey & Whitney LLP owns an aggregate of 28,080 shares of our common stock. EXPERTS The financial statements of Freeshop as of December 31, 1997 and 1998 and for the years ended June 30, 1996 and 1997, the six months ended December 31, 1997 and the year ended December 31, 1998, included in this prospectus, have been included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of PricewaterhouseCoopers as experts in auditing and accounting. The financial statements of Commonsite as of December 31, 1998 and for the year then ended that are included in this prospectus, have been included in reliance on the report of 56 58 PricewaterhouseCoopers LLP, independent accountants, given on the authority of PricewaterhouseCoopers as experts in auditing and accounting. The financial statements of Travel Companions International as of December 31, 1998 and for the year then ended that are included in this prospectus, have been included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of PricewaterhouseCoopers as experts in auditing and accounting. WHERE YOU CAN FIND MORE INFORMATION We have filed with the Securities and Exchange Commission a registration statement on Form S-1 covering the shares being sold in this offering. We have not included in this prospectus some information contained in the registration statement, and you should refer to the registration statement, including exhibits and schedules filed with the registration statement, for further information. You may review without charge a copy of the registration statement at the public reference section of the Securities and Exchange Commission in Room 1024, Judiciary Plaza, 450 5th Street, N.W., Washington, D.C. 20549; and at the SEC's Regional Office located at 7 World Trade Center, Suite 1300, New York, New York 10048 and 1400 Citicorp Center, 500 West Madison Street, Chicago, IL 60661. You may also obtain copies of such materials at prescribed rates from the public reference section at the Commission, Room 1024, Judiciary Plaza, 450 5th Street, N.W., Washington, D.C. 20549. In addition, the Securities and Exchange Commission maintains a Web site on the Internet at the address http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Securities and Exchange Commission. 57 59 INDEX TO FINANCIAL STATEMENTS FREESHOP.COM, INC. FINANCIAL STATEMENTS
PAGE ---- Report of Independent Accountants........................... F-2 Balance Sheet for the periods ended December 31, 1997, December 31, 1998 and March 31, 1999 (unaudited).......... F-3 Statement of Operations for the periods ended June 30, 1996, June 30, 1997, December 31, 1997, December 31, 1998, March 31, 1998 (unaudited) and March 31, 1999 (unaudited)....... F-4 Statement of Changes in Mandatorily Redeemable Preferred Stock and Shareholders' Equity/Division Equity for the periods ended June 30, 1996, June 30, 1997, December 31, 1997, December 31, 1998 and March 31, 1999 (unaudited).... F-5 Statement of Cash Flows for the periods ended June 30, 1996, June 30, 1997, December 31, 1997, December 31, 1998, March 31, 1998 (unaudited) and March 31, 1999 (unaudited)....... F-6 Notes to Financial Statements............................... F-7 COMMONSITE, LLC FINANCIAL STATEMENTS Report of Independent Accountants........................... F-20 Statement of Financial Position as of December 31, 1998..... F-21 Statement of Operations and Members' Deficit for the year ended December 31, 1998................................... F-22 Statement of Cash Flows for the year ended December 31, 1998...................................................... F-23 Notes to Financial Statements............................... F-24 TRAVEL COMPANIONS INTERNATIONAL, INC. FINANCIAL STATEMENTS Report of Independent Accountants........................... F-27 Balance Sheet as of December 31, 1998....................... F-28 Statement of Income for the year ended December 31, 1998.... F-29 Statement of Stockholders' Deficit for the year ended December 31, 1998......................................... F-30 Statement of Cash Flows for the year ended December 31, 1998...................................................... F-31 Notes to Financial Statements............................... F-32 FREESHOP.COM, INC. UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION Unaudited Pro Forma Combined Financial Information.......... F-35 Unaudited Pro Forma Combined Balance Sheet as of March 31, 1999...................................................... F-36 Unaudited Pro Forma Combined Statement of Operations for the year ended December 31, 1998 and the three months ended March 31, 1999............................................ F-37 Notes to Unaudited Pro Forma Combined Financial Statements................................................ F-38
F-1 60 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of FreeShop.com, Inc. In our opinion, the accompanying balance sheet and the related statements of operations, of changes in mandatorily redeemable convertible preferred stock and shareholders' equity/division equity and of cash flows present fairly, in all material respects, the financial position of FreeShop.com, Inc. at December 31, 1997 and 1998, and the results of its operations and its cash flows for the years ended June 30, 1996 and 1997, the six-month period ended December 31, 1997 and the year ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As described in Note 1, FreeShop.com, Inc. was a wholly owned subsidiary of Online Interactive, Inc. prior to July 1, 1997. PricewaterhouseCoopers LLP Seattle, Washington April 16, 1999, except as to paragraphs two through four of Note 13 which are as of June 18, 1999. F-2 61 FREESHOP.COM, INC. BALANCE SHEET
DECEMBER 31, MARCH 31, ------------------------- ----------- 1997 1998 1999 ----------- ----------- ----------- (UNAUDITED) ASSETS Cash and cash equivalents......................... $ 26,329 $ 2,892,144 $ 1,330,482 Accounts receivable, net.......................... 204,691 339,179 484,648 Prepaid expenses.................................. 13,598 30,497 163,686 ----------- ----------- ----------- Total current assets......................... 244,618 3,261,820 1,978,816 Property and equipment, net....................... 354,496 381,296 558,970 Other assets and deposits......................... 45,818 43,454 43,454 ----------- ----------- ----------- $ 644,932 $ 3,686,570 $ 2,581,240 =========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable.................................. $ 247,491 $ 464,872 $ 510,132 Accrued and other liabilities..................... 68,966 670,857 820,847 Payable to Online Interactive, Inc................ 27,269 Current portion of capital lease obligations...... 59,081 112,327 117,386 ----------- ----------- ----------- Total current liabilities.................... 402,807 1,248,056 1,448,365 ----------- ----------- ----------- Long-term convertible debt........................ 50,000 Capital lease obligations, net of current portion......................................... 159,757 144,727 113,413 Commitments (Note 9) Mandatorily redeemable preferred stock, Series A convertible, no par value; 10,000,000 shares authorized, none issued and outstanding at December 31, 1997 and 1998 and March 31, 1999, liquidation value $0.086........................ Shareholders' equity Common stock, no par value; 100,000,000 shares authorized, 13,993,970 issued and outstanding at December 31, 1997, 20,352,354 issued and outstanding at December 31, 1998 and 20,440,874 issued and outstanding at March 31, 1999 (unaudited)......................... 2,699,518 7,816,328 7,879,761 Additional paid-in capital...................... 62,968 294,529 1,034,976 Note receivable from shareholder................ (25,000) Deferred stock compensation..................... (12,927) (675,054) Accumulated deficit............................. (2,655,118) (5,854,143) (7,220,221) ----------- ----------- ----------- Total shareholders' equity................... 82,368 2,243,787 1,019,462 ----------- ----------- ----------- $ 644,932 $ 3,686,570 $ 2,581,240 =========== =========== ===========
The accompanying notes are an integral part of these financial statements. F-3 62 FREESHOP.COM, INC. STATEMENT OF OPERATIONS
SIX MONTHS THREE MONTHS ENDED YEAR ENDED JUNE 30, ENDED YEAR ENDED MARCH 31, ------------------------ DECEMBER 31, DECEMBER 31, ------------------------- 1996 1997 1997 1998 1998 1999 ---------- ----------- ------------ ------------ ----------- ----------- (UNAUDITED) Net revenues......... $1,270,949 $ 1,197,757 $ 534,733 $ 1,250,940 $ 220,136 $ 666,579 Cost of revenues..... 310,308 313,672 139,451 216,557 38,420 83,106 ---------- ----------- ----------- ----------- ----------- ----------- Gross profit......... 960,641 884,085 395,282 1,034,383 181,716 583,473 ---------- ----------- ----------- ----------- ----------- ----------- Operating expenses Sales and marketing........ 624,560 1,809,912 1,192,062 3,248,429 506,885 1,553,810 Research and development...... 65,694 137,226 187,534 407,053 120,307 151,783 General and administrative... 298,808 380,829 158,334 514,854 126,935 256,368 ---------- ----------- ----------- ----------- ----------- ----------- Total operating expenses...... 989,062 2,327,967 1,537,930 4,170,336 754,127 1,961,961 ---------- ----------- ----------- ----------- ----------- ----------- Operating loss....... (28,421) (1,443,882) (1,142,648) (3,135,953) (572,411) (1,378,488) Interest expense..... 6,226 65,654 12,152 13,048 Other (income) expense............ (2,582) (25,458) ---------- ----------- ----------- ----------- ----------- ----------- Loss before income tax expense........ (28,421) (1,443,882) (1,148,874) (3,199,025) (584,563) (1,366,078) Income tax expense... ---------- ----------- ----------- ----------- ----------- ----------- Net loss............. $ (28,421) $(1,443,882) $(1,148,874) $(3,199,025) $ (584,563) $(1,366,078) ========== =========== =========== =========== =========== =========== Basic and diluted net loss per share..... $ (0.00) $ (0.13) $ (0.09) $ (0.21) $ (0.04) $ (0.07) ========== =========== =========== =========== =========== =========== Weighted-average shares used in computing net loss per share.......... 11,502,050 11,502,050 12,972,275 15,559,315 14,218,990 20,376,622 ========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements. F-4 63 FREESHOP.COM, INC. STATEMENT OF CHANGES IN MANDATORILY REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY/DIVISION EQUITY
MANDATORILY REDEEMABLE CONVERTIBLE NOTE PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE ---------------------- ----------------------- PAID-IN FROM DEFERRED SHARES AMOUNT SHARES AMOUNT CAPITAL SHAREHOLDER COMPENSATION ---------- --------- ---------- ---------- ---------- ----------- ------------ Balance at June 30, 1995......... -- $ -- -- $ -- $ -- $ -- $ -- Capital contributions............ Net loss......................... ---------- --------- ---------- ---------- ---------- -------- ----------- Balance at June 30, 1996......... -- -- -- -- -- -- -- Capital contributions............ Issuance of common and Series A preferred stock in connection with spin-off................... 1,935,484 279,196 11,502,050 1,659,182 Net loss......................... ---------- --------- ---------- ---------- ---------- -------- ----------- Balance at June 30, 1997......... 1,935,484 279,196 11,502,050 1,659,182 -- -- -- Forfeiture of common stock....... (1,300,000) Conversion of preferred stock.... (1,935,484) (279,196) 1,935,484 279,196 Issuance of common stock......... 1,795,461 736,140 Common stock issued in exchange for a note receivable........... 60,975 25,000 (25,000) Stock options issued to third parties......................... 62,968 Net loss......................... ---------- --------- ---------- ---------- ---------- -------- ----------- Balance at December 31, 1997..... -- -- 13,993,970 2,699,518 62,968 (25,000) -- Issuance of common stock, net of offering expenses of $36,563.... 6,219,249 5,108,150 Exercise of stock options........ 139,135 8,660 Repayment of note receivable from shareholder..................... 25,000 Stock options and warrants issued to third parties................ 147,561 (22,677) Shares transferred to employees by principal shareholders....... 84,000 Amortization of deferred compensation.................... 9,750 Net loss......................... ---------- --------- ---------- ---------- ---------- -------- ----------- Balance at December 31, 1998..... -- -- 20,352,354 7,816,328 294,529 -- (12,927) Issuance of common stock upon conversion of promissory note (unaudited)..................... 50,000 50,000 Exercise of stock options (unaudited)..................... 38,520 13,433 Stock options and warrants issued to third parties (unaudited).... 740,447 (740,447) Amortization of deferred compensation (unaudited)........ 78,320 Net loss (unaudited)............. ---------- --------- ---------- ---------- ---------- -------- ----------- Balance at March 31, 1999 (unaudited)..................... -- $ -- 20,440,874 $7,879,761 $1,034,976 $ -- $ (675,054) ========== ========= ========== ========== ========== ======== =========== TOTAL SHAREHOLDERS' DIVISION ACCUMULATED EQUITY/ EQUITY DEFICIT DIVISION EQUITY ----------- ----------- --------------- Balance at June 30, 1995......... $ 7,747 $ -- $ 7,747 Capital contributions............ 125,198 125,198 Net loss......................... (28,421) (28,421) ----------- ----------- ----------- Balance at June 30, 1996......... 104,524 -- 104,524 Capital contributions............ 1,771,492 1,771,492 Issuance of common and Series A preferred stock in connection with spin-off................... (1,876,016) (62,362) (279,196) Net loss......................... (1,443,882) (1,443,882) ----------- ----------- ----------- Balance at June 30, 1997......... -- (1,506,244) 152,938 Forfeiture of common stock....... -- Conversion of preferred stock.... 279,196 Issuance of common stock......... 736,140 Common stock issued in exchange for a note receivable........... -- Stock options issued to third parties......................... 62,968 Net loss......................... (1,148,874) (1,148,874) ----------- ----------- ----------- Balance at December 31, 1997..... -- (2,655,118) 82,368 Issuance of common stock, net of offering expenses of $36,563.... 5,108,150 Exercise of stock options........ 8,660 Repayment of note receivable from shareholder..................... 25,000 Stock options and warrants issued to third parties................ 124,884 Shares transferred to employees by principal shareholders....... 84,000 Amortization of deferred compensation.................... 9,750 Net loss......................... (3,199,025) (3,199,025) ----------- ----------- ----------- Balance at December 31, 1998..... -- (5,854,143) 2,243,787 Issuance of common stock upon conversion of promissory note (unaudited)..................... 50,000 Exercise of stock options (unaudited)..................... 13,433 Stock options and warrants issued to third parties (unaudited).... -- Amortization of deferred compensation (unaudited)........ 78,320 Net loss (unaudited)............. (1,366,078) (1,366,078) ----------- ----------- ----------- Balance at March 31, 1999 (unaudited)..................... $ -- $(7,220,221) $ 1,019,462 =========== =========== ===========
The accompanying notes are an integral part of these financial statements. F-5 64 FREESHOP.COM, INC. STATEMENT OF CASH FLOWS
SIX MONTHS THREE MONTHS ENDED YEAR ENDED JUNE 30, ENDED YEAR ENDED MARCH 31, ----------------------- DECEMBER 31, DECEMBER 31, ----------------------- 1996 1997 1997 1998 1998 1999 --------- ----------- ------------ ------------ --------- ----------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES Net loss...................... $ (28,421) $(1,443,882) $(1,148,874) $(3,199,025) $(584,563) $(1,366,078) Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization........... 5,566 33,659 47,617 140,710 32,338 48,840 Bad debt expense.......... 58,907 146,310 122,485 56,551 10,816 16,261 Amortization of deferred compensation........... 9,750 78,320 Shares transferred to employees by principal shareholders........... 84,000 Issuance of stock options and warrants for services............... 62,968 88,321 69,496 Issuance of stock for office rent............ 32,637 Loss on disposal of property and equipment.............. 8,624 896 Changes in assets and liabilities: Accounts receivable.... (198,548) (94,449) (196,560) (191,039) (13,961) (161,730) Prepaid expenses and other assets......... (17,280) (43,559) (21,074) 4,640 (133,189) Accounts payable....... 11,873 43,044 192,402 217,381 89,550 45,260 Accrued and other liabilities.......... 50,502 (48,957) 27,545 601,891 43,132 149,990 Payable to Online Interactive, Inc..... (280,918) 308,187 (27,269) (27,269) --------- ----------- ----------- ----------- --------- ----------- Net cash used in operating activities........... (100,121) (1,662,473) (595,152) (2,231,179) (375,821) (1,321,430) --------- ----------- ----------- ----------- --------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment................... (25,077) (108,894) (55,902) (67,428) (10,116) (227,410) --------- ----------- ----------- ----------- --------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Contributed capital........... 125,198 1,771,492 Proceeds from notes payable... 135,000 135,000 Repayment of notes payable.... (85,000) Principal payments under capital leases.............. (26,245) (63,951) (26,255) Proceeds from Shareholder Note Receivable.................. 25,000 25,000 Issuance of common stock, net of issuance costs........... 703,503 5,153,373 213,096 13,433 --------- ----------- ----------- ----------- --------- ----------- Net cash provided by (used in) financing activities........... 125,198 1,771,492 677,258 5,164,422 373,096 (12,822) --------- ----------- ----------- ----------- --------- ----------- Net increase (decrease) in cash and cash equivalents.......... -- 125 26,204 2,865,815 (12,841) (1,561,662) Cash and cash equivalents at beginning of period........... 125 26,329 26,329 2,892,144 --------- ----------- ----------- ----------- --------- ----------- Cash and cash equivalents at end of period..................... $ -- $ 125 $ 26,329 $ 2,892,144 $ 13,488 $ 1,330,482 ========= =========== =========== =========== ========= =========== Cash paid during the period for Interest...................... $ -- $ -- $ 6,226 $ 65,654 $ 12,152 $ 13,048 ========= =========== =========== =========== ========= ===========
The accompanying notes are an integral part of these financial statements. F-6 65 FREESHOP.COM, INC. NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND BUSINESS FreeShop began as a division of Online Interactive, Inc. (Online), a Washington corporation, incorporated in July 1994. On June 30, 1997, Online Interactive contributed the FreeShop Division, including certain net assets, to its wholly-owned subsidiary, FreeShop International, Inc., a Washington corporation incorporated on June 23, 1997, which then began operating as a separate entity. In connection with the spin-off, Online issued FreeShop common shares equal to the number of Online shares (both preferred and common) outstanding as of June 30, 1997. Online then distributed the FreeShop common shares to its shareholders. Each Online shareholder received a number of FreeShop shares equal to the number of Online shares held as of the Distribution Record Date. However, 1,300,000 shares of common stock were forfeited on July 18, 1997 in connection with agreements between Online and certain shareholders. As a result of the distribution, FreeShop ceased to be a subsidiary of Online. On February 19, 1999, FreeShop International, Inc. changed its name to FreeShop.com, Inc. (FreeShop or the Company). FreeShop operates an online direct marketing network from a Web site at http://www.freeshop.com. Essentially, FreeShop is an online marketing service that generates sales leads, creates product awareness, and initiates consumer purchases through multiple online marketing vehicles, including free and trial offers, banner advertising, email newsletter sponsorship, and others. The financial statements for the two years ended June 30, 1997 reflect the revenues, expenses and changes in division equity and cash flows of the FreeShop Division of Online. Certain general and administrative costs incurred by Online have been allocated to the Company on a basis which management believes represents a reasonable allocation of such costs to present FreeShop as a stand-alone company. These allocations consist primarily of corporate expenses such as executive and other compensation, depreciation, rent and legal expenses. The corporate expenses have been allocated based on an estimate of Online personnel time dedicated to the operations and management of FreeShop for the year ended June 30, 1996 and the nine months ended March 31, 1997. For the three-month period ended June 30, 1997, these corporate expenses were generally allocated based on a specific identification basis rather than on the basis of personnel time. A summary of these allocations are as follows:
YEAR ENDED JUNE 30, -------------------- 1996 1997 -------- -------- Sales and marketing......................................... $ 97,564 $176,768 Research and development.................................... 77,147 110,230 General and administrative.................................. 282,694 362,810 -------- -------- $457,405 $649,808 ======== ========
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH AND CASH EQUIVALENTS Cash equivalents consist of short-term highly liquid investments that mature within three months of their acquisition. The Company deposits its cash and cash equivalents in interest bearing demand deposit accounts with high credit quality financial institutions. The Company has not experienced any losses on its cash and cash equivalents. F-7 66 FREESHOP.COM, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) PROPERTY AND EQUIPMENT Property and equipment are stated at cost less accumulated depreciation and are depreciated using the straight-line method over their estimated useful lives. The estimated useful lives are as follows: Office furniture and equipment.............................. Five years Computer hardware and software.............................. Three years
The cost of normal maintenance and repairs are charged to expense as incurred and expenditures for major improvements are capitalized, at cost. Gains or losses on the disposition of assets in the normal course of business are reflected in the results of operations at the time of disposal. IMPAIRMENT OF LONG-LIVED ASSETS The Company evaluates its long-lived assets for financial impairment and continues to evaluate them as events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable. The Company evaluates the recoverability of long-lived assets by measuring the carrying amount of the assets against the estimated undiscounted future cash flows associated with these assets. At the time such evaluations indicate that the future undiscounted cash flows of certain long-lived assets are not sufficient to recover the carrying value of such assets, the assets are adjusted to their fair values. No losses for impairment have been recognized. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of the Company's financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximate fair value because of their short maturities. The carrying amount of the Company's capital leases and other equipment financing obligations approximates the fair value of such instruments based upon management's estimates of interest rates that would be available to the Company for similar debt obligations at December 31, 1998. DEFERRED REVENUES Deferred revenues consist of advance billings and payments on marketing contracts and is included in accrued and other liabilities in the accompanying balance sheet. REVENUE RECOGNITION The Company has several revenue sources from its online marketing service activities, including lead generation, advertising, list rental, barter and transaction fees. Lead generation revenue consists of fees received, generally on a per inquiry basis, for delivery of leads to clients. Revenue is recognized in the period the leads are provided to the client. Advertising revenues consist of e-mail newsletter sponsorships, banner advertising, and anchor positions. Newsletter sponsorship revenue is derived from a fixed fee or a fee based on the circulation of the newsletter. Newsletter sponsorship revenue is recognized in the period in which the newsletter is delivered. Banner advertising and anchor positions can be based on impressions, fixed fees, or per click through. Fixed fee contracts, which range from three months to one year, are recognized ratably over the term of the agreement, provided that no significant F-8 67 FREESHOP.COM, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Company obligations remain. Revenue from impressions or click through based contracts is recognized in the period in which the services are provided. List rental revenue is revenue received from the rental of customer names to third parties through the use of list brokers. Revenue from list rental activities is recognized in the period the names are delivered by the list broker to the third party. Transaction fees are recognized in the period the transaction occurred and was reported to the Company by the online merchant. Also included in revenues are barter revenues generated from exchanging lead generation and advertising services for advertising services. Such transactions are recorded at the lower of the estimated fair value of the advertisements received or delivered, whichever is more reliably measurable. Revenue from barter transactions is recognized when advertising or lead generation is provided, and services received are charged to expense when used. From July 1, 1995 through December 31, 1997 barter transactions were not significant. For the year ended December 31, 1998 and the unaudited three months ended March 31, 1999, the Company recognized approximately $83,000 and $90,000, respectively, of revenue and advertising expense from barter transactions. ADVERTISING COSTS The Company expenses advertising costs as incurred. Total advertising expense for the years ended June 30, 1996 and 1997, the six months ended December 31, 1997, and the year ended December 31, 1998 and the unaudited three months ended March 31, 1999, was $13,179, $148,543, $242,919, $1,190,811 and $667,053, respectively. RESEARCH AND DEVELOPMENT COSTS Research and development costs are expensed as incurred. INCOME TAXES The Company accounts for income taxes under the asset and liability method, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. If it is more likely than not that some portion of a deferred tax asset will not be realized, a valuation allowance is recorded. NET LOSS PER SHARE In 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share". SFAS No. 128 replaced primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Basic earnings per share is computed using the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted-average number of common and common stock equivalent shares outstanding during the period. Common stock equivalent shares are excluded from the computation if their effect is antidilutive. Examples of common stock equivalents, are warrants, stock options and convertible promissory notes. F-9 68 FREESHOP.COM, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Stock options to purchase 1,321,332, 2,507,109, 2,037,550 and 2,221,490 shares of common stock at an average exercise price of $0.06, $0.23, $0.45 and $0.52 per share and warrants to purchase 0, 6,000, 6,909,508 and 6,909,508 shares of common stock at an average price of $0, $0.41, $1.92 and $1.92 per share have not been included in the computation of diluted net loss per share for the year ended June 30, 1997, the six months ended December 31, 1997, the year ended December 31, 1998 and the three months ended March 31, 1999 (unaudited) respectively, as their effect would have been antidilutive. CONCENTRATIONS OF CREDIT RISK Concentrations of credit risk with respect to accounts receivable are limited due to the wide variety of customers to which the Company provides services, as well as their dispersion across many different geographic areas. As such, no single customer accounted for greater than 10% of total revenues or accounts receivable balances for either the period ended December 31, 1998 or March 31, 1999 (unaudited). The Company maintains an allowance for doubtful accounts receivable based upon its historical experience and the expected collectibility of all accounts receivable. Credit losses to date have been within management's estimates. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform with the current year's presentation. UNAUDITED INTERIM FINANCIAL STATEMENTS The interim financial data as of March 31, 1999 and for the three months ended March 31, 1998 and 1999 is unaudited; however, in the opinion of management, the interim data includes all adjustments, consisting only of normal recurring adjustments necessary to present fairly the Company's financial position as of March 31, 1999 and the results of its operations and cash flows for the three months ended March 31, 1998 and 1999. STOCK COMPENSATION The Company follows SFAS No. 123, "Accounting for Stock-Based Compensation", which establishes financial accounting and reporting standards for stock-based employee compensation plans and for the issuance of equity instruments to acquire goods and services from nonemployees. The Company has elected to apply the disclosure-only provision of SFAS No. 123 for employee stock-based compensation plans. Accordingly, the Company accounts for stock-based compensation to employees using the intrinsic-value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. Compensation expense for stock options is measured as the excess, if any, of the fair value of the Company's common stock at the date of grant over the exercise price. The Company records the F-10 69 FREESHOP.COM, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) fair value of equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123. COMPREHENSIVE INCOME Effective January 1, 1998, the Company adopted the provisions of SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting comprehensive income and its components in financial statements. Comprehensive income, as defined, includes all changes in equity during a period from non-owner sources. To date, the Company has not had any transactions that are required to be reported in comprehensive income other than its net loss. RECENT ACCOUNTING PRONOUNCEMENTS In March 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Cost of Computer Software Developed or Obtained for Internal Use". SOP 98-1 is effective for financial statements for years beginning after December 15, 1998. SOP 98-1 provides guidance over accounting for computer software developed for internal use including the requirement to capitalize specified costs and amortization of such costs. Adoption of this standard during the first quarter of 1999 did not have a material effect on the Company's results of operations, financial position or cash flows. In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-up Activities". SOP 98-5, which is effective for fiscal years beginning after December 15, 1998, provides guidance on the financial reporting of start-up costs and organization costs. It requires costs of start up activities and organization costs to be expensed as incurred. As the Company has expensed these costs historically, the adoption of this standard during the first quarter of 1999 did not have a significant impact on results of operations, financial position or cash flows. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and Hedging Activities", which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company does not expect the adoption of this statement to have a significant impact on results of operations, financial position or cash flows. 3. ACCOUNTS RECEIVABLE Accounts receivable consist of the following:
DECEMBER 31, -------------------- MARCH 31, 1997 1998 1999 -------- -------- ----------- (UNAUDITED) Accounts receivable..................................... $284,410 $381,830 $523,868 Less: Allowance for doubtful accounts................... (79,719) (42,651) (39,220) -------- -------- -------- $204,691 $339,179 $484,648 ======== ======== ========
F-11 70 FREESHOP.COM, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 4. PROPERTY AND EQUIPMENT Property and equipment consist of the following:
DECEMBER 31, --------------------- MARCH 31, 1997 1998 1999 -------- --------- ----------- (UNAUDITED) Computer hardware and software........................ $310,595 $ 468,483 $ 655,480 Office furniture and equipment........................ 129,517 129,517 164,515 -------- --------- --------- 440,112 598,000 819,995 Less: Accumulated depreciation and amortization....... (85,616) (216,704) (261,025) -------- --------- --------- $354,496 $ 381,296 $ 558,970 ======== ========= =========
5. ACCRUED AND OTHER LIABILITIES Accrued and other liabilities consist of the following:
DECEMBER 31, ------------------ MARCH 31, 1997 1998 1999 ------- -------- ----------- (UNAUDITED) Deferred revenue............................................ $20,000 $ 1,129 $ 29,750 Accrued advertising expense................................. 488,451 552,913 List rental deposit......................................... 74,538 29,824 Accrued vacation............................................ 12,802 37,169 49,977 Accrued commissions......................................... 3,313 13,918 50,048 Accrued commerce expense.................................... 78,904 Other....................................................... 32,851 55,652 29,431 ------- -------- -------- $68,966 $670,857 $820,847 ======= ======== ========
6. BANK LINE-OF-CREDIT FACILITY The Company has a line-of-credit facility with a bank. Pursuant to the terms of the facility agreement, the Company may borrow up to $500,000 at the bank's prime rate plus 1.5%, 9.25% at December 31, 1998. The line of credit is collateralized by all assets of the Company and guaranteed up to $200,000 by the Company's President and Chief Executive Officer. The credit facility matures September 18, 1999, contains covenants not to encumber trade accounts receivable and requires maintenance of certain financial ratios. At December 31, 1998, the Company was in compliance with the loan covenants and no balance was outstanding under the line. 7. RELATED PARTY TRANSACTIONS In January and February 1998, the Company issued notes payable to shareholders in the amount of $85,000. Such notes included interest at 10%. The outstanding balance, including accrued interest of $5,745, was repaid in September 1998. During 1998, two of the Company's principal shareholders transferred 140,000 shares of common stock to certain employees of the Company as incentive compensation. As a result, the Company recorded $84,000 of compensation expense based on the fair market value of the Company's common stock on the date of transfer. F-12 71 FREESHOP.COM, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 8. LONG-TERM CONVERTIBLE DEBT In March 1998, the Company issued an uncollateralized 10% convertible promissory note totaling $50,000 to a third party. The note matures in March 2000. At any time prior to the maturity date, the third party may convert the outstanding principal balance into shares of the Company's preferred stock at the price at which such stock is being offered to other investors. During the first quarter of 1999, the terms of the note were modified to allow conversion into shares of common stock and the note was then converted. See Note 13 for further discussion. 9. COMMITMENTS In May 1998 a promotion agreement was entered into with CNET which provides for CNET to invest in FreeShop an amount equal to 20% of the amount paid or payable to CNET for promotion. The agreement called for an investment to be made on September 30, 1998 on the same terms and conditions, including price, as FreeShop was then closing the sale of such securities to other investors. Subsequent investments are to be made on the scheduled closing date of each subsequent equity financing on the same terms and conditions, including price, as FreeShop is then closing the sale of such securities to other investors. If no equity investments are closed within nine months of the previous investment by CNET then one day after nine months CNET will make an equity investment using the same terms and conditions as the previous investment made by CNET. No investment was made by CNET during the year ended December 31, 1998. The Company's office facilities are leased under operating leases that provide for minimum rentals and require payment of property taxes and include escalation clauses. In addition, the Company also rents certain equipment under agreements treated for financial reporting purposes as capital leases. The Company's property under capital leases which is included in property and equipment on the balance sheet at December 31, 1997 and 1998 was $221,801 and $246,299, respectively, which is net of accumulated amortization of $16,045 and $92,150, respectively. Future minimum lease payments under the noncancellable leases are as follows.
CAPITAL OPERATING YEAR ENDING DECEMBER 31, LEASES LEASES ------------------------ --------- ---------- 1999...................................................... $ 149,397 $ 289,105 2000...................................................... 120,798 403,730 2001...................................................... 42,969 426,648 2002...................................................... 448,397 2003...................................................... 192,055 --------- ---------- Total minimum lease payments................................ 313,164 $1,759,935 ========== Less: Amount representing interest.......................... (56,110) --------- Present value of capital lease obligations.................. 257,054 Less: Current portion....................................... (112,327) --------- Capital lease obligations, non-current portion.............. $ 144,727 =========
Rent expense for the years ended June 30, 1996 and 1997, the six months ended December 31, 1997 and year ended December 31, 1998, was $42,468, $49,003, $60,594 and $199,136, respectively. F-13 72 FREESHOP.COM, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 10. SHAREHOLDERS' EQUITY MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK On June 30, 1997, the Company's Board of Directors approved the designation and issuance of 1,935,484 shares of Series A redeemable convertible preferred stock. The preferred Series A shares are convertible into one share of common stock (subject to anti-dilution adjustments) at any time at the option of the holder. On July 18, 1997, subsequent to the spin-off of FreeShop from Online, all outstanding shares of Series A redeemable convertible preferred stock were converted into common stock on a one-for-one basis. COMMON STOCK On December 10, 1998, FreeShop issued 4,048,467 shares of the Company's common stock to Fingerhut Companies Inc. (Fingerhut) at a price of $0.99 per share. The shares were partially paid for by surrender and cancellation of the $500,000 Convertible Promissory Note, which the Company had issued to Fingerhut on December 4, 1998. The Company and Fingerhut also entered into a Stockholders Agreement on December 10, 1998 which grants Fingerhut a right of first refusal on shares proposed for transfer by the Company's two principal shareholders, contains certain agreements regarding composition of the Company's Board of Directors, requires Board approval of certain specified actions by the Company, grants Fingerhut preemptive rights to maintain its percentage ownership interest in connection with proposed share issuances by the Company, grants certain demand and piggyback registration rights to Fingerhut, and provides for certain drag-along and tag-along rights among the parties with respect to proposed sales of shares to third parties. The Stockholders Agreement terminates, on the earlier of December 10, 2008 or the closing of a sale of the Company's assets or the acquisition of the Company by merger or consolidation. Certain specific provisions of the agreement terminate upon the consummation of an underwritten public offering of the Company's securities in which the deemed market capitalization of the Company is at least $75 million. WARRANTS In connection with the sale of common stock to Fingerhut, the Company issued to Fingerhut a series of warrants to purchase shares of the Company's common stock as follows: a warrant to purchase 2,935,356 shares at $1.72 per share; a warrant to purchase 1,790,724 shares at $1.99 per share; a warrant to purchase 2,089,178 shares at $2.21 per share; warrants to purchase from time to time at $2.21 per share a number of shares equal to specified percentages of shares of common stock that are issued upon exercise of specified options and warrants; and warrants to purchase at exercise prices ranging from $.99 per share to $2.21 per share a number of shares of common stock equal to specified percentages of shares of common stock that are issued to certain named third parties pursuant to existing contractual arrangements. Unless sooner exercised, all such warrants expire on the earlier of December 31, 2000, or the consummation of an underwritten public offering of the Company's securities in which the deemed market capitalization of the Company is at least $75 million. In connection with the equipment acquired under capital lease as described in Note 9, the Company issued warrants to purchase 41,000 shares of common stock. The warrants are exercisable at a price equal to $0.41 per share and expire from October 2002 to January 2003. F-14 73 FREESHOP.COM, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The Company determined the fair value of the warrants to be $12,019 using the Black-Scholes option pricing model and recognized the entire expense during 1998. In return for recruiting services, the Company issued warrants to purchase 28,250 shares of common stock in January 1998. The warrants are exercisable at a price equal to $0.41 per share and expire in January 2003. The Company determined the fair value of these warrants to be $8,277 using the Black-Scholes option pricing model and recognized the entire expense during 1998. A warrant to purchase 25,000 shares of the Company's common stock at an exercise price of $0.60 per share was issued to the bank in connection with the line of credit described in Note 6. The warrant expires in September 2003. The Company determined the fair value of the warrants to be $10,625 using the Black-Scholes option pricing model. The fair value was recorded as prepaid loan fees during 1998 and will be amortized over the life of the credit facility. STOCK OPTIONS Effective June 30, 1997, the Company approved the 1997 Stock Option Plan (the Plan) to provide for the granting of stock options to employees, directors and consultants of the Company to acquire ownership in the Company and provide them with incentives for their service. Under the terms of the Plan, 2,660,765 shares of common stock have been reserved for issuance to plan participants. The Plan is administered by the Board of Directors of the Company, which determines the terms and conditions of the options granted, including exercise price, number of options granted and the vesting period of such options. The maximum term of options is ten years from the date of grant. The options are generally granted at the estimated fair value of the underlying stock, as determined by the Board of Directors, on the date of grant. As of December 31, 1998, options to purchase 623,215 shares of common stock were available for future grant under the Plan. No compensation expense has been recognized relative to options issued to employees for the years ended June 30, 1996 and 1997, the six months ended December 31, 1997, nor the year ended December 31, 1998. For the year ended December 31, 1998, $3,177 of deferred compensation was recorded and will be amortized over the vesting period of the related options. During the three month period ended March 31, 1999 (unaudited), the Company granted options to purchase 277,000 shares of common stock to employees and service providers at an average exercise price of $1.00. The Company recorded $740,447 of deferred compensation based upon the average deemed fair value of $2.67 which will be amortized over the vesting period of the related options. Had compensation expense for employee-related options been determined based on the fair value at the grant dates consistent with the method of SFAS No. 123, "Accounting for Stock Based Compensation", the Company's net loss and loss per share for the six months ended F-15 74 FREESHOP.COM, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) December 31, 1997 and the year ended December 31, 1998 would have been increased to the pro forma amounts indicated below:
1997 1998 ----------- ----------- Net loss As reported.............................. $(1,148,874) $(3,199,025) Pro forma................................ $(1,167,435) $(3,248,168) Loss per share As reported.............................. $ (0.09) $ (0.21) Pro forma................................ $ (0.09) $ (0.21)
For SFAS No. 123 pro forma disclosure, the fair value of each option is estimated on the date of grant using the minimum value method with the following assumptions used for grants to employees in 1998 and 1997; weighted-average risk-free interest rates of 4.78% and 5.70%, respectively, and expected lives of four years. The following table presents activity under the Plan:
JUNE 30, 1997 DECEMBER 31, 1997 DECEMBER 31, 1998 --------------------- --------------------- --------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE --------- --------- --------- --------- --------- --------- Outstanding at beginning of period.................... 1,321,332 $0.06 2,507,109 $0.23 Granted..................... 1,321,332 $0.06 1,185,777 0.41 1,613,550 0.52 Exercised................... 139,235 0.06 Forfeited................... 1,943,874 0.24 --------- --------- --------- Outstanding at end of period.................... 1,321,332 $0.06 2,507,109 $0.23 2,037,550 $0.45 ========= ========= ========= Weighted-average fair value of options granted during the period................ $0.01 $0.14 $0.13
The following table summarizes information about stock options outstanding under the Plan at December 31, 1998:
WEIGHTED- NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED- RANGE OF OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE PRICES 1998 LIFE PRICE 1998 PRICE - -------- -------------- ----------- --------- -------------- --------- 0$.06.. 252,333 8.5 $0.06 126,150 $0.60 0.41.. 919,167 6.0 0.41 605,983 0.41 0.60.. 856,050 9.0 0.60 148,264 0.60 1.00.. 10,000 10.0 1.00 1.00 --------- ------- 2,037,550 7.6 $0.45 880,397 $0.45 ========= =======
During the six months ended December 31, 1997, the Company granted options to purchase 487,802 shares of common stock to certain investors. These grants were made outside of the stock option plan. As of December 31, 1998 all of these options had expired without exercise. During the year ended December 31, 1998, the Company granted options to purchase 522,500 shares of common stock to consultants, advisors and investment managers and as severance to certain employees. F-16 75 FREESHOP.COM, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The Company follows SFAS No. 123 in accounting for options and warrants issued to non-employees. As such, the Company recognized $62,968 of general and administrative expense for the six months ended December 31, 1997 in connection with options issued to third parties. During the year ended December 31, 1998, the Company recognized $32,800 and $34,350 of sales and marketing and general and administrative expense, respectively, in connection with options issued to terminated employees and advisors. The remaining fair value of options issued to advisors of $9,750 is recorded as deferred compensation in the shareholders' equity section and will be amortized over the remaining vesting period of the options. Additionally, in connection with the sale of common stock, the Company issued options to certain investment managers. The fair value of those options of $36,563 was netted against the proceeds recorded in the transaction. In determining fair value of the options and warrants on the date of grant, the Company used the Black-Scholes option-pricing model with the following assumptions used for grants in 1997 and 1998; no dividend yield; expected volatility of 100%; weighted-average risk-free interest rates of 5.17% and 5.14%, respectively, and weighted-average expected lives of .55 years and 1.3 years, respectively. The weighted-average fair value of warrants issued during 1998 was $0.33 per share. 11. INCOME TAXES A current provision for income taxes was not recorded for the six months ended December 31, 1997 or the year ended December 31, 1998 due to taxable losses incurred during such periods. A valuation allowance has been recorded for deferred tax assets because realization is primarily dependent on generating sufficient taxable income prior to the expiration of net operating loss carry-forwards. Net operating losses of the FreeShop division of Online did not carry over to the Company. Deferred tax assets at December 31, 1997 and 1998 are as follows:
DECEMBER 31, ------------------------ 1997 1998 --------- ----------- Net operating loss carryforwards............................ $ 371,326 $ 1,412,566 Nondeductible allowances.................................... 23,779 39,544 Expense related to stock options and restricted stock rights.................................................... 21,416 30,635 Other....................................................... 2,176 --------- ----------- 418,697 1,482,745 Less: Valuation allowance................................... (418,697) (1,482,745) --------- ----------- $ -- $ -- ========= ===========
At December 31, 1997 and 1998, the Company has net operating loss carry-forwards of approximately $1,092,000 and $4,155,000, respectively, for federal income tax reporting purposes. The net operating losses will expire beginning in 2012 if not previously utilized. As specified in Section 382 of the Internal Revenue Code, a 50% or more ownership change by certain combinations of the Company's shareholders during any three-year period would result in limitations on the Company's ability to utilize its net operating loss carry-forwards. Such an ownership change may have occurred as a result of the equity issuances as described in Note 13. F-17 76 FREESHOP.COM, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 12. SUPPLEMENTAL CASH FLOW INFORMATION The following items are supplemental information of noncash investing and financing activities:
THREE MONTHS YEAR ENDED SIX MONTHS ENDED JUNE 30, ENDED YEAR ENDED MARCH 31, --------------- DECEMBER 31, DECEMBER 31, ---------------- 1996 1997 1997 1998 1998 1999 ------ ------ ------------ ------------ ------ ------- (UNAUDITED) Property and equipment acquired with capital leases........... $ -- $7,237 $237,846 $102,167 $ -- $ -- ====== ====== ======== ======== ====== ======= Common stock issued in exchange for note receivable from shareholder................... $ -- $ -- $ 25,000 $ -- $ -- $ -- ====== ====== ======== ======== ====== ======= Conversion of preferred stock... $ -- $ -- $279,196 $ -- $ -- $ -- ====== ====== ======== ======== ====== ======= Conversion of note payable...... $ -- $ -- $ -- $ -- $ -- $50,000 ====== ====== ======== ======== ====== =======
13. SUBSEQUENT EVENTS On March 1, 1999, the terms of the convertible promissory note described in Note 8 were modified to allow conversion into shares of common stock. The note was then retired through conversion into 50,000 shares of common stock. In May 1999, the warrants issued to Fingerhut as described in Note 10 were modified to provide for issuance of series B convertible preferred stock. Each share of series B convertible preferred stock is convertible into ten shares of common stock. Each share of series B convertible preferred stock has similar rights and obligations as 10 shares of common stock, except it has no voting rights. Fingerhut then exercised one warrant to purchase 293,536 shares of series B convertible preferred stock at a purchase price of $17.18 per share and one warrant to purchase 179,072 shares of series B convertible preferred stock at a purchase price of $19.94 per share on May 24, 1999 and June 18, 1999, respectively. In May 1999, the Board of Directors of the Company, authorized the Company's management to file a registration statement for an initial public offering of the Company's common stock. In May 1999, FreeShop entered into purchase and sale agreements to acquire substantially all of the assets of Commonsite LLC (Commonsite) and Travel Companions International, Inc. (Travel). Total consideration for the acquired assets of the two companies is $2,577,000, which is comprised of $1,841,000 in cash and 132,300 shares of common stock. The aggregate purchase price will be allocated to the net assets acquired, based upon their respective fair market values. The excess of the purchase price over the fair market value of the assets acquired and liabilities assumed of $1,383,000 has been allocated to cost in excess of net assets acquired and will be amortized over three years. In connection with the acquisition, liabilities were assumed as follows: Fair value of assets acquired............................... $ 1,331,660 Cash paid................................................... (1,841,000) Common stock issued......................................... (736,000) Cost in excess of net assets acquired....................... 1,383,000 ----------- Liabilities assumed......................................... $ 137,660 ===========
F-18 77 FREESHOP.COM, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The following summarizes the unaudited pro forma results of operations, on a combined basis, as if the Company's acquisition of Commonsite and Travel occurred as of the beginning of each of the periods presented, after including the impact of certain adjustments such as amortization of cost in excess of net assets acquired:
THREE MONTHS YEAR ENDED ENDED DECEMBER 31, MARCH 31, 1998 1999 ------------ ------------ (UNAUDITED) Revenues.................................................... $ 1,893,267 $ 837,901 Pro forma net loss.......................................... (4,295,661) (1,571,027) Pro forma basic and diluted net loss per share.............. $ (0.27) $ (0.08)
The unaudited pro forma results are not necessarily indicative of the results of operations which would actually have been reported had the acquisition occurred prior to the beginning of the periods presented. In addition, they are not intended to be indicative of future results. F-19 78 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of FreeShop.com, Inc. In our opinion, the accompanying statement of financial position and the related statements of operations and members' deficit and of cash flows present fairly, in all material respects, the financial position of Commonsite, LLC. (the "Company") at December 31, 1998, and the results of its operations and its cash flows for the year ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. As described in Note 6, subsequent to year-end the members approved and authorized the sale of substantially all of the Company's assets. PricewaterhouseCoopers LLP Seattle, Washington May 6, 1999 F-20 79 COMMONSITE, LLC STATEMENT OF FINANCIAL POSITION
DECEMBER 31, 1998 ------------ ASSETS Cash........................................................ $ 12,811 Accounts receivable, net.................................... 42,358 -------- Total current assets................................... 55,169 Property and equipment, net................................. 9,728 -------- Total assets........................................... $ 64,897 ======== LIABILITIES AND MEMBERS' DEFICIT Accounts payable............................................ $ 6,536 Related party payable....................................... 16,245 Accrued liabilities......................................... 6,609 Deferred revenue............................................ 109,337 -------- Total current liabilities.............................. 138,727 -------- Members' deficit............................................ (73,830) -------- Total liabilities and members' deficit................. $ 64,897 ========
The accompanying notes are an integral part of these financial statements. F-21 80 COMMONSITE, LLC STATEMENT OF OPERATIONS AND MEMBERS' DEFICIT
DECEMBER 31, 1998 ------------ Revenues.................................................... $540,114 Cost of revenues............................................ 180,244 -------- Gross profit................................................ 359,870 -------- Operating expenses Sales and marketing....................................... 276,378 General and administrative................................ 72,290 -------- Total operating expenses.......................... 348,668 -------- Net income.................................................. 11,202 Members' deficit, December 31, 1997......................... (85,032) -------- Members' deficit, December 31, 1998......................... $(73,830) ========
The accompanying notes are an integral part of these financial statements. F-22 81 COMMONSITE, LLC STATEMENT OF CASH FLOWS
DECEMBER 31, 1998 ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income................................................ $ 11,202 Adjustments to reconcile net income to net cash used in operating activities Depreciation........................................... 6,525 Bad debt expense....................................... 9,999 Increase in accounts receivable........................ (35,846) Decrease in accounts payable........................... (9,005) Increase in related party payable...................... 16,245 Decrease in accrued liabilities........................ (6,449) Increase in unearned revenue........................... 2,272 -------- Net cash used in operating activities............. (5,057) -------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from member contributions........................ 5,000 -------- Net cash provided by financing activities......... 5,000 -------- Net decrease in cash and cash equivalents................... (57) Cash and cash equivalents, beginning of year................ 12,868 -------- Cash and cash equivalents, end of year...................... $ 12,811 ========
The accompanying notes are an integral part of these financial statements. F-23 82 COMMONSITE, LLC NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND BUSINESS Commonsite, LLC ("Commonsite" or "the Company") is a limited liability company in which there are seven limited partners. The Company was formed in September 1995 to develop and operate a shopping portal focusing on catalog companies. Essentially, the Company provides catalog companies with consumer requests for their catalogs. In addition, the Company provides catalog companies the development and hosting of online stores, links directly to their existing Web sites and a software solution for tracking online sales back to the traffic source. Profits and losses of the Company are allocated based upon the ownership percentages of the members. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH AND CASH EQUIVALENTS Cash equivalents consist of highly liquid investments purchased within 90 days or less of maturity. They are recorded at cost which approximates fair value. The Company deposits its cash and cash equivalents with high credit quality financial institutions. The Company has not experienced any losses on its cash and cash equivalents. PROPERTY AND EQUIPMENT Property and equipment consisting of computer hardware and software, are stated at cost less accumulated depreciation and are depreciated using the straight-line method over their estimated useful lives of three years. The cost of normal maintenance and repairs are charged to expense as incurred. IMPAIRMENT OF LONG-LIVED ASSETS The Company evaluates its long-lived assets for financial impairment and continues to evaluate them as events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable. The Company evaluates the recoverability of long-lived assets by measuring the carrying amount of the assets against the estimated undiscounted future cash flows associated with these assets. At the time such evaluations indicate that the future undiscounted cash flows of certain long-lived assets are not sufficient to recover the carrying value of such assets, the assets are adjusted to their fair values. No losses from impairment have been recognized. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of the Company's financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximate fair value because of their short maturities. DEFERRED REVENUE Deferred revenue consists of advance billings and payments on marketing contracts. REVENUE RECOGNITION Revenue is recognized based on the type of contract. Fixed fee contracts, which range from three months to one year, are recognized ratably over the term of the agreement, provided that no significant Company obligations remain. Revenue from impressions or click through based F-24 83 COMMONSITE, LLC NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) contracts is recognized in the period in which the services are provided. Revenue from catalog development is recognized under the percentage of completion method, whereby revenue is recognized upon completion of agreed upon milestones. CONCENTRATIONS OF CREDIT RISK Concentrations of credit risk with respect to accounts receivable are limited due to the wide variety of customers to which the Company provides services, as well as their dispersion across many different geographic areas. As such, no single customer accounted for greater than 10% of total revenues or accounts receivable balances for the year ended December 31, 1998. The Company maintains an allowance for doubtful accounts receivable based upon its historical experience and the expected collectibility of all accounts receivable. Credit losses to date have been within management's estimates. INCOME TAXES The Company is not subject to Federal income tax. The pro-rata income or loss is included in the tax returns of the individual members. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reporting amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses. Actual results could differ from those estimates. RECENT ACCOUNTING PRONOUNCEMENTS In March 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Cost of Computer Software Developed or Obtained for Internal Use". SOP 98-1 is effective for financial statements for years beginning after December 15, 1998. SOP 98-1 provides guidance over accounting for computer software developed for internal use including the requirement to capitalize specified costs and amortization of such costs. The Company does not expect the adoption of this standard to have a material effect on it's results of operations, financial position or cash flows. In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-up Activities". SOP 98-5, which is effective for fiscal years beginning after December 15, 1998, provides guidance on the financial reporting of start-up costs and organization costs. It requires costs of start up activities and organization costs to be expensed as incurred. As the Company has expensed these costs historically, the adoption of this standard is not expected to have a significant impact on it's results of operations, financial position or cash flows. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and Hedging Activities", which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company does not expect the adoption of this statement to have a significant impact on it's results of operations, financial position or cash flows. F-25 84 COMMONSITE, LLC NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 3. RELATED PARTY TRANSACTIONS The Company pays Bennett Company (Bennett) for services provided in relation to the operations and management of the Company. A member of Commonsite owns Bennett. Costs incurred by Bennett were billed to the Company based on an estimate of Bennett personnel time dedicated to the operations and management of Commonsite. A summary of these expenses for the year ended December 31, 1998 is as follows: Salaries.................................................... $230,979 Equipment................................................... 16,236 Connectivity................................................ 22,957 Rent........................................................ 12,637 Internet marketing.......................................... 26,134 Other....................................................... 5,848 -------- $314,791 ========
4. ACCOUNTS RECEIVABLE Accounts receivable consist of the following:
DECEMBER 31, 1998 ------------ Accounts receivable......................................... $ 66,866 Less: Allowance for doubtful accounts....................... (24,508) -------- $ 42,358 ========
5. PROPERTY AND EQUIPMENT Property and equipment consist of the following:
DECEMBER 31, 1998 ------------ Computer hardware and software.............................. $19,578 Less: Accumulated depreciation.............................. (9,850) ------- $ 9,728 =======
6. SUBSEQUENT EVENT In May 1999, Commonsite entered into a purchase and sale agreement to sell substantially all of its assets to FreeShop.com, Inc. Total consideration for the assets is approximately $1,200,000 which is comprised of $441,000 in cash and 132,300 shares of common stock. F-26 85 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of FreeShop.com, Inc. In our opinion, the accompanying balance sheet and the related statements of income, stockholders' equity and cash flows present fairly, in all material respects, the financial position of Travel Companions International, Inc. (the Company) at December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. As described in Note 6, subsequent to year-end, the stockholders of the Company approved and authorized the sale of substantially all of the Company's assets. PricewaterhouseCoopers LLP Minneapolis, Minnesota May 24, 1999 F-27 86 TRAVEL COMPANIONS INTERNATIONAL, INC. BALANCE SHEET AS OF DECEMBER 31, 1998 ASSETS Current assets: Cash...................................................... $ 5,091 Accounts receivable....................................... 8,772 Prepaid expenses.......................................... 700 --------- Total current assets................................... 14,563 Property and equipment, net................................. 3,050 --------- Total assets........................................... $ 17,613 ========= LIABILITIES AND STOCKHOLDERS' DEFICIT Liabilities: Current liabilities: Debt................................................... $ 52,603 Accounts payable....................................... 4,600 Accrued expenses....................................... 3,038 Deferred revenue....................................... 11,299 --------- Total current liabilities.............................. 71,540 Notes payable to stockholders............................. 459,678 --------- Total liabilities...................................... 531,218 --------- Stockholders' deficit: Common stock, no par value; 5,000 shares authorized, 5,000 shares issued and outstanding.......................... 5,000 Accumulated deficit....................................... (518,605) --------- Total stockholders' deficit............................ (513,605) --------- Total liabilities and stockholders' deficit............ $ 17,613 =========
The accompanying notes are an integral part of these financial statements. F-28 87 TRAVEL COMPANIONS INTERNATIONAL, INC. STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1998 Revenues.................................................... $219,813 Cost of revenues............................................ 94,875 -------- 124,938 -------- Operating expenses: Sales and marketing....................................... 9,393 General and administrative................................ 92,645 -------- Total operating expenses............................... 102,038 -------- Operating income............................................ 22,900 -------- Interest expense............................................ 4,287 -------- Net income.................................................. $ 18,613 ========
The accompanying notes are an integral part of these financial statements. F-29 88 TRAVEL COMPANIONS INTERNATIONAL, INC. STATEMENT OF STOCKHOLDERS' DEFICIT FOR THE YEAR ENDED DECEMBER 31, 1998
COMMON STOCK ACCUMULATED SHARES AMOUNT DEFICIT TOTAL ------ ------ ----------- --------- Balances, December 31, 1997................. 5,000 $5,000 $(537,218) $(532,218) Net income.................................. 18,613 18,613 ----- ------ --------- --------- Balances, December 31, 1998................. 5,000 $5,000 $(518,605) $(513,605) ===== ====== ========= =========
The accompanying notes are an integral part of these financial statements. F-30 89 TRAVEL COMPANIONS INTERNATIONAL, INC. STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1998 CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................ $ 18,613 Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization.......................... 2,790 Changes in assets and liabilities: Accounts receivable.................................. 4,159 Prepaid expenses..................................... 78 Inventory............................................ 300 Deferred revenue..................................... (40) Accrued and other liabilities........................ 1,230 -------- Net cash provided by operating activities......... 27,130 -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of furniture and equipment....................... (1,139) -------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments of debt................................ (3,209) Principal payments of notes payable to stockholders....... (19,700) -------- Net cash provided by financing activities......... (22,909) -------- Net increase in cash........................................ 3,082 Cash at beginning of period................................. 2,009 -------- Cash at end of period....................................... $ 5,091 ======== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for: Interest............................................... $ 4,323 Significant non-cash financing activities: Refinancing of accrued interest to debt................ 5,000
The accompanying notes are an integral part of these financial statements. F-31 90 TRAVEL COMPANIONS INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS DESCRIPTION Travel Companions International (the Company), an S Corporation, was incorporated in the State of Minnesota in October 1988. The Company is in the business of distributing travel literature in conjunction with various travel programs offered through American Express for its cardholders, as well as programs implemented by Norvista, the global group of travel agencies and tour operators belonging to the Finnair Group. The Company also publishes Worldwide Brochures, a listing of over 15,000 free travel maps, guides, and brochures from over 10,000 companies. USE OF ESTIMATES The preparation of the Company's financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH EQUIVALENTS The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation and amortization are determined using the straight line method over the estimated useful lives of the assets of three to seven years. The cost and related accumulated depreciation or amortization on asset disposals are removed from the accounts and any gain or loss thereon is included in operations in the year of disposal. Maintenance, repairs and minor renewals are charged to expense as incurred, while additions and betterments are capitalized. REVENUE RECOGNITION Literature distribution revenue, which comprises over 80% of total revenue, consists of fees received for delivery of travel literature to both American Express cardholders and Norvista customers. Revenue is recognized in the period the literature is sent to the customer. Advertising revenue consists of banner advertising and priority listings placed on the Company's website. Both banner advertising and priority listing revenue are derived from fixed fee contracts. Fixed fee contracts are recognized ratably over the term of the agreement, provided that no significant Company obligations remain. Deferred revenue consists of payments received from customers for future advertising services to be performed by the Company under contract. CONCENTRATIONS OF CREDIT RISK AND SIGNIFICANT CUSTOMERS Financial instruments that potentially subject the Company to credit risk consist primarily of accounts receivable. The Company grants credit to customers in the ordinary course of business. Two customers accounted for approximately 59% and 21% of total revenues during 1998. Receivables from these same two customers accounted for approximately 68% and 32% of total receivables at December 31, 1998, respectively. F-32 91 TRAVEL COMPANIONS INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) INCOME TAXES The Company has elected to be taxed as an S corporation under the provisions of the Internal Revenue Code (the Code) and comparable state income tax law. Under those provisions, the Company's income is reported on the individual tax returns of the Company's stockholders. As such, the Company is generally not subject to corporate income taxes. Therefore, no provision or liability for income taxes is reflected in the financial statements of the Company. 2. PROPERTY AND EQUIPMENT Property and equipment: Computer equipment........................................ $23,488 Furniture and office equipment............................ 23,881 Leasehold improvements.................................... 878 ------- 48,247 Less accumulated depreciation and amortization.............. 45,197 ------- $ 3,050 =======
3. BORROWING ARRANGEMENTS DEBT The Company has a note with a local development authority. The loan bears simple interest at a rate of 8.5% and calls for monthly principal and interest payments of $682 per month for five years with the remaining principal and accrued interest due in April 2003. As of December 31, 1998, the balance outstanding under this loan agreement was $52,603. The outstanding balance has been classified as current in accordance with the terms of the agreement due to the pending acquisition of the majority of the Company's assets as described in Note 6. In the event that the acquisition is not consummated, approximately $48,700 of the outstanding debt balance would be reclassified to long term. Borrowings outstanding under the agreement are collateralized by all inventory and equipment of the Company and are personally guaranteed by the stockholders. In addition, the borrowings are collateralized by the proceeds from life insurance policies maintained by the Company on all of its stockholders with a face value of $300,000. NOTES PAYABLE TO STOCKHOLDERS The Company has entered into subordinated note agreements with its stockholders. The amounts outstanding under the note agreements totaled $459,678 as of December 31, 1998. These amounts do not bear interest and are due on demand subsequent to May 31, 2000. 4. RELATED PARTY TRANSACTIONS The Company leases office space on a month-to-month basis from one of its stockholders. The Company recognized $18,000 of rent expense related to this arrangement during the year ended December 31, 1998. 5. RECENT ACCOUNTING PRONOUNCEMENTS In March 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Cost of Computer Software Developed or Obtained for Internal Use." SOP 98-1 is effective for financial statements for years beginning after F-33 92 TRAVEL COMPANIONS INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) December 15, 1998. SOP 98-1 provides guidance over accounting for computer software developed for internal use including the requirement to capitalize specified costs and amortization of such costs. The Company does not expect the adoption of this standard to have a material effect on the results of its operations, financial position or cash flows. 6. SUBSEQUENT EVENTS In May 1999, the Company entered into an asset purchase agreement to sell substantially all of its assets to FreeShop.com, Inc. for a purchase price of $1,400,000 in cash. F-34 93 UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION In May 1999, FreeShop.com, Inc. (FreeShop) entered into purchase and sale agreements to acquire substantially all of the assets of Commonsite, LLC (Commonsite) and Travel Companions International, Inc. (Travel). Total consideration for the two companies is $2,576,000, which is comprised of $1,841,000 in cash and 132,300 shares of common stock. The unaudited pro forma condensed combined balance sheet is based on the individual unaudited balance sheets of FreeShop, Commonsite and Travel appearing elsewhere in this prospectus and has been prepared to reflect the acquisitions by FreeShop of the assets of Commonsite and Travel as of March 31, 1999. The unaudited pro forma condensed combined statements of operations are based on individual historical results of operations of FreeShop, Commonsite and Travel for the year ended December 31, 1998 and for the three months ended March 31, 1999 after giving effect to the acquisitions of Commonsite and Travel as if they had occurred at the beginning of each of the periods presented. The unaudited pro forma combined financial statements should be read in conjunction with the historical financial statements and notes thereto of FreeShop, Commonsite and Travel. The pro forma condensed financial statements are presented for illustrative purposes only and are not necessarily indicative of results of operations that would have actually occurred had the acquisitions of Commonsite and Travel been effected on the dates assumed. F-35 94 UNAUDITED PRO FORMA COMBINED BALANCE SHEET AS OF MARCH 31, 1999
PRO FORMA FREESHOP COMMONSITE TRAVEL COMBINED ADJUSTMENTS PRO FORMA ----------- ---------- --------- ----------- ----------- ----------- ASSETS Current assets: Cash and cash equivalents............ $ 1,330,482 $ 23,652 $ 3,545 $ 1,357,679 $ (27,197)(4) $ (510,518) (1,841,000)(1) Accounts receivable, net............. 484,648 29,151 5,200 518,999 (5,200)(4) 513,799 Prepaid expenses and other current assets............................. 163,686 820 164,506 (820)(4) 163,686 ----------- --------- --------- ----------- ----------- ----------- Total current assets............... 1,978,816 52,803 9,565 2,041,184 (1,874,217) 166,967 Property and equipment, net............ 558,970 8,097 2,265 569,332 3,638(4) 572,970 Other assets and deposits.............. 43,454 43,454 43,454 Goodwill and other..................... -- 2,657,503(1) 2,657,503 ----------- --------- --------- ----------- ----------- ----------- Total assets....................... $ 2,581,240 $ 60,900 $ 11,830 $ 2,653,970 $ 786,924 $ 3,440,894 =========== ========= ========= =========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities Debt obligation, current portion..... $ 51,668 $ 51,668 $ (51,668)(4) Accounts payable..................... $ 510,132 $ 567 4,600 515,299 (5,167)(4) $ 510,132 Current portion of capital lease obligations........................ 117,386 117,386 117,386 Accrued liabilities.................. 791,097 17,992 3,296 812,385 (21,288)(4) 791,097 Deferred revenue..................... 29,750 120,422 3,232 153,404 153,404 ----------- --------- --------- ----------- ----------- ----------- Total current liabilities...... 1,448,365 138,981 62,796 1,650,142 (78,123) 1,572,019 Capital lease obligations, net of current portion...................... 113,413 113,413 113,413 Notes payable to shareholders.......... 454,678 454,678 (454,678)(4) -- Shareholders' equity (deficit) Common stock................................ 7,879,761 5,000 7,884,761 736,000(2) 8,615,761 (5,000)(10) Additional paid-in capital........... 1,034,976 153,432 1,188,408 (153,432)(10) 1,034,976 Deferred stock compensation.......... (675,054) (675,054) (675,054) Accumulated deficit.................. (7,220,221) (231,513) (510,644) (7,962,378) 742,157(10) (7,220,221) ----------- --------- --------- ----------- ----------- ----------- Total shareholders' equity (deficit)........................ 1,019,462 (78,081) (505,644) 435,737 1,319,725 1,755,462 ----------- --------- --------- ----------- ----------- ----------- Total liabilities and shareholders' equity (deficit)................. $ 2,581,240 $ 60,900 $ 11,830 $ 2,653,970 $ 786,924 $ 3,440,894 =========== ========= ========= =========== =========== ===========
F-36 95 UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998 -------------------------------------------------------------------------------- PRO FORMA FREESHOP COMMONSITE TRAVEL COMBINED ADJUSTMENTS PRO FORMA ----------- ---------- -------- ----------- ----------- ----------- Net revenues.................... $ 1,250,940 $540,114 $219,813 $ 2,010,867 $ (117,600)(5) $ 1,893,267 Cost of revenues................ 216,557 180,244 61,872 458,673 (20,547)(6) 438,126 ----------- -------- -------- ----------- ----------- ----------- Gross profit.................... 1,034,383 359,870 157,941 1,552,194 (97,053) 1,455,141 Operating expenses Sales and marketing........... 3,248,429 276,378 9,393 3,534,200 (105,000)(6) 3,429,200 Research and development...... 407,053 407,053 407,053 General and administrative.... 514,854 72,290 125,648 712,792 (2,315)(8) 710,477 Amortization.................. 1,141,000(3) 1,141,000 ----------- -------- -------- ----------- ----------- ----------- Total operating expenses........ 4,170,336 348,668 135,041 4,654,045 1,033,685 5,687,730 ----------- -------- -------- ----------- ----------- ----------- Loss from operations............ (3,135,953) 11,202 22,900 (3,101,851) (1,130,738) (4,232,589) Interest expense................ 65,654 65,654 65,654 Other (income) expense.......... (2,582) 4,287 1,705 (4,287)(7) (2,582) ----------- -------- -------- ----------- ----------- ----------- Net (loss) income............... $(3,199,025) $ 11,202 $ 18,613 $(3,169,210) $(1,126,451) $(4,295,661) =========== ======== ======== =========== =========== =========== Basic and diluted net loss per share......................... $ (0.21) $ (0.27)(9) =========== =========== Weighted average shares of common stock outstanding used in computing basic and diluted net loss per share............ 15,559,315 132,300(2) 15,691,615(9) =========== =========== ===========
THREE MONTHS ENDED MARCH 31, 1999 -------------------------------------------------------------------------------- PRO FORMA FREESHOP COMMONSITE TRAVEL COMBINED ADJUSTMENTS PRO FORMA ----------- ---------- -------- ----------- ----------- ----------- Net revenues.................... $ 666,579 $106,435 $ 64,887 $ 837,901 $ 837,901 Cost of revenues................ 83,106 21,492 25,866 130,464 130,464 ----------- -------- -------- ----------- ----------- Gross profit.................... 583,473 84,943 39,021 707,437 707,437 Operating expenses Sales and marketing........... 1,553,810 36,463 1,950 1,592,223 1,592,223 Research and development...... 151,783 151,783 151,783 General and administrative.... 256,368 52,731 28,000 337,099 $ (481)(8) 336,618 Amortization.................. 210,250(3) 210,250 ----------- -------- -------- ----------- ----------- ----------- Total operating expenses........ 1,961,961 89,194 29,950 2,081,105 209,769 2,290,874 ----------- -------- -------- ----------- ----------- ----------- Loss from operations............ (1,378,488) (4,251) 9,071 (1,373,668) (209,769) (1,583,437) Interest expense................ 13,048 1,110 14,158 (1,110)(7) 13,048 Other (income) expense.......... (25,458) (25,458) (25,458) ----------- -------- -------- ----------- ----------- ----------- Net (loss) income............... $(1,366,078) $ (4,251) $ 7,961 $(1,362,368) $ (208,659) $(1,571,027) =========== ======== ======== =========== =========== =========== Basic and diluted net loss per share......................... $ (0.07) $ (0.08)(9) =========== =========== Weighted average shares of common stock outstanding used in computing basic and diluted net loss per share............ 20,376,622 132,300(2) 20,508,922(9) =========== =========== ===========
F-37 96 NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS 1. Reflects the preliminary allocation of the purchase price and the amortization of the cost of intangible assets and goodwill acquired in the Commonsite and Travel acquisitions. The preliminary allocation has resulted in intangible assets, including client and customer lists, database content, and covenants not to compete, estimated at approximately $1,285,000 and estimated goodwill of approximately $1,383,000, which is being amortized over periods of one to five years. The total estimated purchase price for the Commonsite and Travel acquisitions has been allocated on a preliminary basis to assets and liabilities based on management's best estimates of their fair value with the excess costs over the net assets acquired allocated to intangible assets and goodwill. This allocation is subject to change pending a final analysis of the value of the assets acquired and, liabilities assumed, upon closure of the acquisition. The impact of such changes could be material. 2. Reflects the issuance of 132,300 shares of FreeShop Common Stock in connection with the Commonsite acquisition. 3. Reflects the amortization of the intangible assets and goodwill referred to in note 1 above. 4. Reflects elimination of assets and liabilities not purchased in the Commonsite and Travel acquisitions and the increase in value of the property and equipment acquired in the Travel acquisition. 5. Represents a revenue stream discontinued after December 31, 1998. 6. Represents additional programming and management service fees of Commonsite that FreeShop would not have required due to the similarity in business operations. 7. Represents elimination of interest expense for debt not assumed in the acquisitions. 8. Represents elimination of depreciation expense related to property and equipment not purchased in the Commonsite acquisition offset by the additional depreciation expense recorded for the increase in the value of the property and equipment acquired in the Travel acquisition. 9. Pro forma net loss reflects the impact of the adjustments above. Basic and diluted net loss per share (pro forma) is computed using the weighted-average number of shares of common stock outstanding after the issuance of FreeShop Common Stock in connection with the Commonsite acquisition. 10. Reflects elimination of Commonsite and Travel members' and stockholders' equity. F-38 97 YOU MAY RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR SALE OF COMMON STOCK MEANS THAT INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AFTER THE DATE OF THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY THESE SHARES OF COMMON STOCK IN ANY CIRCUMSTANCES UNDER WHICH THE OFFER OR SOLICITATION IS UNLAWFUL. TABLE OF CONTENTS Prospectus Summary....................... 3 Risk Factors............................. 7 Forward-Looking Statements............... 15 Use of Proceeds.......................... 16 Dividend Policy.......................... 16 The Company.............................. 16 Capitalization........................... 17 Dilution................................. 18 Selected Unaudited Pro Forma Financial Data................................... 19 Selected Actual Financial Data........... 20 Management's Discussion And Analysis of Financial Condition and Results of Operations............................. 21 Business................................. 30 Management............................... 40 Related Party Transactions............... 47 Principal Shareholders................... 49 Description of Capital Stock............. 51 Shares Eligible for Future Sale.......... 53 Underwriting............................. 55 Legal Matters............................ 56 Experts.................................. 56 Where You Can Find More Information...... 57 Index to Financial Statements............ F-1
DEALER PROSPECTUS DELIVERY OBLIGATION: UNTIL , 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS THAT BUY, SELL OR TRADE THESE SHARES OF COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. FREESHOP LOGO SHARES COMMON STOCK DEUTSCHE BANC ALEX. BROWN DAIN RAUSCHER WESSELS a division of Dain Rauscher Incorporated VOLPE BROWN WHELAN & COMPANY Prospectus , 1999 98 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table states the costs and expenses, other than the underwriting discounts and commissions, payable by the registrant in connection with the sale of common stock being registered by this registration statement. All amounts shown are estimates, except the Securities and Exchange Commission registration fee, the NASD Filing Fee and the Nasdaq National Market listing Fee.
AMOUNT -------- Securities and Exchange Commission Registration Fee......... $ 12,788 NASD Filing Fee............................................. 5,100 Nasdaq National Market Listing Fee.......................... Legal Fees and Expenses..................................... Accountants' Fees and Expenses.............................. Blue Sky Filing and Counsel Fees and Expenses............... Printing and Engraving Expenses............................. Transfer Agent and Registrar Fees........................... Miscellaneous Expenses...................................... Total.............................................
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Sections 23B.08.500 through 23B.08.600 of the Washington Business Corporation Act (the "Washington Act") authorize a court to award, or a corporation's board of directors to grant, indemnification to directors and officers on terms sufficiently broad to permit indemnification under certain circumstances for liabilities arising under the Securities Act of 1933, as amended (the "Securities Act"). Article IX of the registrant's Bylaws provide for indemnification of the registrant's directors, officers, employees and agents to the maximum extent permitted by Washington law. The registrant has entered into agreements with its directors and officers arising out of their service as officers and director, as applicable, and has agreed to advance expenses to defend claims subject to indemnification. The directors and officers of the registrant also may be indemnified against liability they may incur for serving in that capacity pursuant to a liability insurance policy maintained by the registrant for such purpose. Section 23B.08.320 of the Washington Act authorizes a corporation to limit a director's liability to the corporation or its shareholders for monetary damages for acts or omissions as a director, except in certain circumstances involving intentional misconduct, self-dealing or illegal corporate loans or distributions, or any transaction from which the director personally receives a benefit in money, property or services to which the director is not legally entitled. Article 6 of the registrant's Articles of Incorporation contains provisions implementing, to the fullest extent permitted by Washington law, such limitations on a director's liability to the registrant and its shareholders. Reference is also made to the Form of Underwriting Agreement to be filed as Exhibit 1.1 to this Registration Statement for certain provisions regarding the indemnification of officers and directors of the registrant by the underwriters in connection with matters specifically provided in writing by the underwriters for inclusion in the Registration Statement. II-1 99 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. Since the registrant's inception in June 1997, the registrant has issued and sold the following unregistered securities: 1. On June 30, 1997, the registrant issued 11,502,050 shares of Common Stock and 1,935,484 shares of Series A Preferred Stock to Online Interactive, Inc. for aggregate consideration consisting of the contribution to the Company of the operating assets and liabilities of the FreeShop Division of Online Interactive, Inc. The 1,935,484 shares of Series A Preferred Stock were convertible into the same number of shares of Common Stock. 2. On July 18, 1997, the registrant issued 967,742 shares of Common Stock to Timothy C. Choate and 967,742 shares of Common Stock to John Ballantine upon conversion of Series A Preferred Stock held by each of them. 3. During the period July 1997 through June 1998, the registrant issued an aggregate of 2,168,301 shares of Common Stock to twenty-one investors for a consideration of $0.41 per share, or an aggregate of $889,003. 4. On October 15, 1997, the registrant issued Warrants for 6,000 shares of Common Stock exercisable at a price of $0.41 per share, expiring October 23, 2002, to HALLCO in partial consideration of an equipment lease. 5. During the period October 1997 through December 1997, the registrant issued a total of 79,602 shares of Common Stock to its landlord Merrill Place LLC in lieu of rent payments in the aggregate amount of $32,637. 6. On January 16, 1998, the registrant issued Warrants for 3,250 shares of Common Stock exercisable at a price of $0.41 per share, expiring January 16, 2002, to Karrie Lee for consulting services. 7. On January 19, 1998, the registrant issued Warrants for 35,000 shares of Common Stock exercisable at a price of $0.41 per share, expiring January 23, 2003, to HALLCO in partial consideration of an equipment lease. 8. On January 23, 1998, the registrant issued Warrants for 1,000 shares of Common Stock exercisable at a price of $0.41 per share, expiring December 31, 2002, to Dennis Green for consulting services. 9. On January 23, 1998, the registrant issued Warrants for 25,000 shares of Common Stock exercisable at a price of $0.41 per share, expiring January 23, 2002, to EMPLOYCO for consulting services. 10. On March 17, 1998, the registrant issued a $50,000 convertible promissory note to Oki Enterprises, LLC, with a maturity date March 1, 2000. The principal balance of the note was convertible in the discretion of the holder at any time prior to the maturity date into shares of the Company's Preferred Stock on the same terms at which the Company may then be offering Preferred Stock to other investors. 11. On June 30, 1998, the registrant issued 3,639 shares of Common Stock to Anthony Lee Simonelli in consideration of consulting services valued at $1,492 rendered to the Company. 12. During the period June 1998 through September 1998, the registrant issued an aggregate of 1,531,673 shares of Common Stock to twenty-two investors at $0.60 per share for aggregate consideration of $919,004. 13. On September 18, 1998, the registrant issued Warrants for 25,000 shares of Common Stock exercisable at a price of $0.60 per share, expiring September 18, 2003, to Imperial Bank in partial consideration of a credit facility. II-2 100 14. On December 11, 1998, the registrant issued 4,048,467 shares of Common Stock, and Warrants to purchase 2,935,356 shares of Common Stock at $1.71826 per share, 1,790,724 shares at $1.99440 per share and 3,932,055 shares at $2.20919 per share, to Fingerhut for an aggregate consideration of $4,000,000. 15. In February 1999, the registrant issued an aggregate of 400,000 shares of Common Stock to a total of ten investors at $1.00 per share for aggregate consideration of $400,000. 16. On April 5, 1999, the registrant issued 50,000 shares of Common Stock to Oki Enterprises, LLC, in exchange for the $50,000 convertible promissory note referenced in item 10 above. 17. On April 8, 1999, the registrant issued 243,903 shares of Common Stock to Techwave, Inc. at $0.41 per share for aggregate consideration of $100,000. 18. On May 6, 1999, in accordance with an Asset Purchase Agreement among the registrant, Commonsite, LLC and a shareholder of Commonsite, the registrant issued 132,300 shares of Common Stock to Commonsite in connection with the registrant's purchase of certain of Commonsite's assets. 19. On May 24, 1999, the registrant issued 293,536 shares of Series B Preferred Stock in lieu of Common Stock to Fingerhut for aggregate consideration of $5,043,704 upon the exercise by Fingerhut of Warrants identified in item 14 above. Each share of Series B Preferred Stock is convertible into ten shares of Common Stock. 20. On May 25, 1999, the registrant issued 25,000 shares of Common Stock to EMPLOYCO for aggregate consideration of $15,000 upon the exercise by EMPLOYCO of Warrants identified in item 9 above. 21. Since inception, the registrant has issued an aggregate of 5,190,641 options to purchase Common Stock, with exercise prices ranging from $0.06 to $1.71 per share, to employees under the registrant's 1997 Stock Option Plan. Of these options, options for 2,599,446 shares have been canceled without being exercised, options for 187,975 shares have been exercised and options for 2,403,220 shares remain outstanding. The sales and issuances of securities described in paragraphs 1 through 14 above were exempt from Securities Act registration under Section 4(2) of the Securities Act, on the basis that the transactions did not involve a public offering. The sales and issuances of securities described in paragraph 15 above were exempt from Securities Act registration under Rule 701 under the Securities Act, on the basis that these option were offered and sold in accordance with a written compensatory benefit plan. No underwriters were used in connection with these sales and issuances. II-3 101 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. A. Exhibits
EXHIBIT NO. DESCRIPTION ----------- ----------- 1.1* Form of Underwriting Agreement. 3.1* Second Amended and Restated Articles of Incorporation of registrant. 3.2* First Amended and Restated Bylaws of registrant. 4.1* Specimen Stock Certificate. 4.2 Form of Common Stock Warrant. 5.1* Opinion of Dorsey & Whitney LLP. 10.1 Form of Indemnification Agreement between the registrant and each of its directors. 10.2 1997 Stock Option Plan, as amended. 10.3 Form of Stock Option Agreement. 10.4 Investor Subscription Agreement, dated December 10, 1998, between registrant and Fingerhut Companies, Inc. 10.5 Warrant Agreement, dated December 10, 1998, between registrant and Fingerhut Companies, Inc. 10.6 Stockholders Agreement, dated December 10, 1998, among registrant, Timothy C. Choate, John Ballantine and Fingerhut Companies, Inc. 10.7 Asset Purchase Agreement, dated May 5, 1999, among registrant, Travel Companions International, Inc., Jeff Mohr and Janet Mohr. 10.8 Asset Purchase Agreement, dated May 6, 1999, among registrant, Commonsite, LLC and Alan Bennett. 10.9 Registration Rights Agreement, dated May 6, 1999, between registrant and Commonsite, LLC. 10.10 Loan and Security Agreement, dated September 18, 1998, between registrant and Imperial Bank. 10.11 Lease Agreement, dated September 23, 1997 and amended as of February 16, 1999, between registrant and Merrill Place LLC. 10.12+ Promotion Agreement, dated May 18, 1998 and amended as of June 30, 1998 and September 30, 1998, between registrant and CNET, Inc. 10.13+ Linkshare Network Membership Agreement, dated September 23, 1998, between registrant and Linkshare Corporation. 10.14 Escrow Agreement dated June 18, 1999 between registrant and Fingerhut. 23.1 Consent of PricewaterhouseCoopers LLP, independent auditors. 23.2* Consent of Dorsey & Whitney LLP (included in Exhibit 5.1). 24.1 Power of Attorney (included on the signature page). 27.1 Financial Data Schedule
- ------------------------- * To be filed by amendment. + Confidential treatment has been requested as to certain portions of this exhibit. Omitted portions will be filed separately with the Securities and Exchange Commission. II-4 102 B. Financial Statement Schedules. All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions, are inapplicable or not material, or the information called for thereby is otherwise included in the financial statements and therefore has been omitted. ITEM 17. UNDERTAKINGS. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names by the underwriter to permit prompt delivery to each purchaser. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be a part of this Registration Statement as of the time it was declared effective. (2) For the purposes of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-5 103 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Seattle, state of Washington, on June 18, 1999. FREESHOP.COM, INC. By: /s/ TIMOTHY C. CHOATE ------------------------------------ Timothy C. Choate Chairman, President and Chief Executive Officer POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints each of Timothy C. Choate and John A. Wade his or her attorney-in-fact and agent, with the full power of substitution and resubstitution and full power to act without the other, for them in any and all capacities, to sign any and all amendments, including post-effective amendments, and any registration statement relating to the same offering as this registration that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, to this registration statement, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact, or their substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ TIMOTHY C. CHOATE Chairman, President and June 18, 1999 - ----------------------------------------------------- Chief Executive Officer Timothy C. Choate (principal executive officer) /s/ JOHN A. WADE Secretary, Vice President, June 18, 1999 - ----------------------------------------------------- Finance and Chief Financial John A. Wade Officer (principal finance and accounting officer) /s/ JOHN P. BALLANTINE Director June 18, 1999 - ----------------------------------------------------- John P. Ballantine /s/ KIRK M. LOEVNER Director June 18, 1999 - ----------------------------------------------------- Kirk M. Loevner /s/ JOHN B. BALOUSEK Director June 18, 1999 - ----------------------------------------------------- John B. Balousek Director - ----------------------------------------------------- William J. Lansing
II-6 104 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ----------- ----------- 1.1* Form of Underwriting Agreement. 3.1* Second Amended and Restated Articles of Incorporation of registrant. 3.2* First Amended and Restated Bylaws of registrant. 4.1* Specimen Stock Certificate. 4.2 Form of Common Stock Warrant. 5.1* Opinion of Dorsey & Whitney LLP. 10.1 Form of Indemnification Agreement between the registrant and each of its directors. 10.2 1997 Stock Option Plan, as amended. 10.3 Form of Stock Option Agreement. 10.4 Investor Subscription Agreement, dated December 10, 1998, between registrant and Fingerhut Companies, Inc. 10.5 Warrant Agreement, dated December 10, 1998, between registrant and Fingerhut Companies, Inc. 10.6 Stockholders Agreement, dated December 10, 1998, among registrant, Timothy C. Choate, John Ballantine and Fingerhut Companies, Inc. 10.7 Asset Purchase Agreement, dated May 5, 1999, among registrant, Travel Companions International, Inc., Jeff Mohr and Janet Mohr. 10.8 Asset Purchase Agreement, dated May 6, 1999, among registrant, Commonsite, LLC and Alan Bennett. 10.9 Registration Rights Agreement, dated May 6, 1999, between registrant and Commonsite, LLC. 10.10 Loan and Security Agreement, dated September 18, 1998, between registrant and Imperial Bank. 10.11 Lease Agreement, dated September 23, 1997 and amended as of February 16, 1999, between registrant and Merrill Place LLC. 10.12+ Promotion Agreement, dated May 18, 1998 and amended as of June 30, 1998 and September 30, 1998, between registrant and CNET, Inc. 10.13+ Linkshare Network Membership Agreement, dated September 23, 1998, between registrant and Linkshare Corporation. 10.14 Escrow Agreement dated June 18, 1999 between registrant and Fingerhut. 23.1 Consent of PricewaterhouseCoopers LLP, independent auditors 23.2* Consent of Dorsey & Whitney LLP (included in Exhibit 5.1). 24.1 Power of Attorney (included on the signature page). 27.1 Financial Data Schedule
- ------------------------- * To be filed by amendment. + Confidential treatment has been requested as to certain portions of this Exhibit. Omitted portions will be filed separately with the Securities and Exchange Commission. EX-4.2 2 FORM OF COMMON STOCK WARRANT 1 EXHIBIT 4.2 THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE LAWS, AND NO INTEREST THEREIN MAY BE SOLD, DISTRIBUTED, ASSIGNED, OFFERED, PLEDGED OR OTHERWISE TRANSFERRED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS COVERING ANY SUCH TRANSACTION OR SUCH TRANSACTION IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND LAWS, SUCH COMPLIANCE, AT THE OPTION OF THE CORPORATION, TO BE EVIDENCED BY AN OPINION OF WARRANTHOLDER'S COUNSEL, IN FORM ACCEPTABLE TO THE CORPORATION, THAT NO VIOLATION OF SUCH REGISTRATION PROVISIONS WOULD RESULT FROM ANY PROPOSED TRANSFER OR ASSIGNMENT. COMMON STOCK PURCHASE WARRANT FREESHOP.COM, INC. THIS CERTIFIES that for good and valuable consideration received, ___________________ a(n) ___________________________ or registered assigns, is entitled, upon the terms and subject to the conditions hereinafter set forth, to acquire from FreeShop.com, Inc., a Washington corporation (the "Corporation") up to fully paid and nonassessable shares of common stock, without par value, of the Corporation ("Warrant Stock") at a purchase price per share (the "Exercise Price") of _____. 1. TERM OF WARRANT Subject to the terms and conditions set forth herein, this Warrant shall be exercisable, in whole or from time to time part, at any time on or after the date hereof and at or prior to 11:59 p.m., Pacific Time, on _________________________ (the "Expiration Time"). Notwithstanding the foregoing, at any time the Corporation shall have the right, except as may be limited by law, other agreements or herein, to call this Warrant for exercise, in whole or in part, by mailing written notice by United States mail to the registered holder hereof if the Corporation completes a private placement or public offering, of the Corporation's common stock for an aggregate offering, price of $______ at a price per share equal to or greater than __________ per share, as adjusted pursuant to Section 10 hereof. In such event, this Warrant shall expire and cease to be exercisable at 11:59 p.m. Pacific Time, of the twenty-first day after the date of mailing of the notice. 2. EXERCISE OF WARRANT The purchase rights represented by this Warrant are exercisable by the registered holder hereof, in whole or in part, at any time and from time to time at or prior to the Expiration Time by the surrender of this Warrant and the Notice of Exercise form attached hereto duly executed to the office of the Corporation at 95 South Jackson, Suite #300, Seattle, Washington 98104 (or such other office or agency of the Corporation as it may designate by notice in writing to the registered holder hereof at the address of such holder appearing on the books of the Corporation), and upon payment of the Exercise Price for the shares thereby purchased (by cash or by check or bank draft payable to the order of the Corporation or by cancellation of indebtedness of the Corporation to the holder hereof, if any, at the time of exercise in an amount equal to the purchase price of the shares thereby purchased); whereupon the holder of this Warrant shall be entitled to receive from the Corporation a stock certificate in proper form representing the number of shares of Warrant Stock so purchased. 3. ISSUANCE OF SHARES; NO FRACTIONAL SHARES OF SCRIP Certificates for shares purchased hereunder shall be delivered to the holder hereof by the Corporation's transfer agent at the Corporation's expense within a reasonable time after the date on which this Warrant shall have 1 2 been exercised in accordance with the terms hereof. Each certificate so delivered shall be in such denominations as may be requested by the holder hereof and shall be registered in the name of such holder or, subject to applicable laws, other name as shall be requested by such holder. If, upon exercise of this Warrant, fewer than all of the shares of Warrant Stock evidenced by this Warrant are purchased prior to the Expiration Time, one or more new warrants substantially in the form of, and on the terms in, this Warrant will be issued for the remaining, number of shares of Warrant Stock not purchased upon exercise of this Warrant. The Corporation hereby represents and warrants that all shares of Warrant Stock which may be issued upon the exercise of this Warrant will, upon such exercise, be duly and validly authorized and issued, fully paid and nonassessable and free from all taxes, liens and charges in respect of the issuance thereof (other than liens or charges created by or imposed upon the holder of the Warrant Stock). The Corporation agrees that the shares so issued shall be and be deemed to be issued to such holder as the record owner of such shares as of the close of business on the date on which this Warrant shall have been surrendered for exercise in accordance with the terms hereof. No fractional shares or scrip representing, fractional shares shall be issued upon the exercise of this Warrant. With respect to any fraction of a share called for upon the exercise of this Warrant, an amount equal to such fraction multiplied by the then current price at which each share may be purchased hereunder shall be paid in cash to the holder of this Warrant. 4. CHARGES, TAXES AND EXPENSES Issuance of certificates for shares of Warrant Stock upon the exercise of this Warrant shall be made without charge to the holder hereof for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Corporation, and such certificates shall be issued in the name of the holder of this Warrant or in such name or names as may be directed by the holder of this Warrant; provided, however, that in the event certificates for shares of Warrant Stock are to be issued in a name other than the name of the holder of this Warrant, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the holder hereof. 5. NO RIGHTS AS SHAREHOLDERS This Warrant does not entitle the holder hereof to any voting, rights or other rights as a shareholder of the Corporation prior to the exercise hereof. 6. EXCHANGE AND REGISTRY OF WARRANT This Warrant is exchangeable, upon the surrender hereof by the registered holder at the above-mentioned office or agency of the Corporation, for a new Warrant of like tenor and dated as of such exchange. The Corporation shall maintain at the above-mentioned office or agency a registry showing, the name and address of the registered holder of this Warrant. This Warrant may be surrendered for exchange, transfer or exercise, in accordance with its terms, at such office or agency of the Corporation, and the Corporation shall be entitled to rely in all respects, prior to written notice to the contrary, upon such registry. 7. LOSS, THEFT, DESTRUCTION OR MUTILATION OF WARRANT Upon receipt by the Corporation of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and in case of loss, theft or destruction of indemnity or security reasonably satisfactory to it, and upon reimbursement to the Corporation of all reasonable expenses incidental thereto, and upon surrender and cancellation of this Warrant, if mutilated, the Corporation will make and deliver a new Warrant of like tenor and dated as of such cancellation, in lieu of this Warrant. 8. SATURDAYS, SUNDAYS AND HOLIDAYS 2 3 If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday or a Sunday or shall be a legal holiday, then such action may be taken or such right may be exercised on the next succeeding, day not a Saturday, Sunday or legal holiday. 9. MERGER, SALE OF ASSETS, ETC. If at any time the Corporation proposes to merge or consolidate with or into any other corporation, effect any reorganization, or sell or convey all or substantially all of its assets to any other entity, then, as a condition of such reorganization, consolidation, merger, sale or conveyance, the Corporation or its successor, as the case may be, shall enter into a supplemental agreement to make lawful and adequate provision whereby the holder shall have the right to receive, upon exercise of the Warrant, the kind and amount of equity securities which would have been received upon such reorganization, consolidation, merger, sale or conveyance by a holder of a number of shares of common stock equal to the number of shares issuable upon exercise of the Warrant immediately prior to such reorganization, consolidation, merger, sale or conveyance. If the property to be received upon such reorganization, consolidation, merger, sale or conveyance is not equity securities, the Corporation shall give the holder of this Warrant ten (10) business days prior written notice of the proposed effective date of such transaction, and if this Warrant has not been exercised by or on the effective date of such transaction, it shall terminate. 10. SUBDIVISION, COMBINATION, RECLASSIFICATION, CONVERSION, ETC. If the Corporation at any time shall, by subdivision, combination, reclassification of securities or otherwise, change the Warrant Stock into the same or a different number of securities of any class or classes, this Warrant shall thereafter entitle the holder to acquire such number and kind of securities as would have been issuable in respect of the Warrant Stock (or other securities which were subject to the purchase rights under this Warrant immediately prior to such subdivision, combination, reclassification or other change) as the result of such change if this Warrant had been exercised in full for cash immediately prior to such change. The Exercise Price hereunder shall be adjusted if and to the extent necessary to reflect such change. If the Warrant Stock or other securities issuable upon exercise hereof are subdivided or combined into a greater or smaller number of shares of such security, the number of shares issuable hereunder shall be proportionately increased or decreased, as the case may be, and the Exercise Price shall be proportionately reduced or increased, as the case may be, in both cases according to the ratio which the total number of shares of such security to be outstanding immediately after such even bears to the total number of shares of such security outstanding immediately prior to such event. The Corporation shall give the holder prompt written notice of any chance in the type of securities issuable hereunder, any adjustment of the Exercise Price for the securities issuable hereunder, and any increase or decrease in the number of shares issuable hereunder. 11. TRANSFERABILITY; COMPLIANCE WITH SECURITIES LAWS (a) This Warrant may not be transferred or assigned in whole or in part without compliance with all applicable federal and state securities laws by the transferor and transferee (including the delivery of investment representation letters and legal opinions reasonably satisfactory to the Corporation, if requested by the Corporation). Subject such restrictions, prior to the Expiration Time, this Warrant and all rights hereunder are transferable by the holder hereof, in whole or in part, at the office or agency of the Corporation referred to in Section I hereof. Any such transfer shall be made in person or by the holder's duty authorized attorney, upon surrender of this Warrant together with the Assignment Form attached hereto properly endorsed. (b) The Holder of this Warrant, by acceptance hereof, acknowledges that this Warrant and the Warrant Stock issuable upon exercise hereof are being, acquired solely for the holder's own account and not as a nominee for any other party, and for investment, and that the holder will not offer, sell or otherwise dispose of this Warrant or any shares of Warrant Stock to be issued upon exercise hereof except under circumstances that will not result in a violation of the Securities Act of 1933, as amended, or any state securities laws. Upon exercise of this Warrant, the holder shall, if requested by the Corporation, confirm in writing, in a form satisfactory to the 3 4 Corporation, that the shares of Warrant Stock so purchased are being, acquired solely for holder's own account and not as a nominee for any other party, for investment, and not with a view toward distribution or resale. (c) The Warrant Stock has not been and will not be registered under the Securities Act of 1933, as amended, and this Warrant may not be exercised except by (i) the original purchaser of this Warrant from the Corporation or (ii) an "accredited investor" as defined in Rule 501(a) under the Securities Act of 1933, as amended. Each certificate representing the Warrant Stock or other securities issued in respect of the Warrant Stock upon any stock split, stock dividend, recapitalization, merger, consolidation or similar event, shall be stamped or otherwise imprinted with a legend substantially in the following form (in addition to any legend required under applicable securities laws): THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER UNITED STATES FEDERAL OR STATE SECURITIES LAWS AND MAY NOT BE OFFERED FOR SALE, SOLD OR OTHERWISE TRANSFERRED OR ASSIGNED FOR VALUE, DIRECTLY OR INDIRECTLY, NOR MAY THE SECURITIES BE TRANSFERRED ON THE BOOKS OF THE CORPORATION, WITHOUT REGISTRATION OF SUCH SECURITIES UNDER ALL APPLICABLE UNITED STATES FEDERAL OR STATE SECURITIES LAWS OR COMPLIANCE WITH AN APPLICABLE EXEMPTION THEREFROM, SUCH COMPLIANCE, AT THE OPTION OF THE CORPORATION, TO BE EVIDENCED BY AN OPINION OF SHAREHOLDER'S COUNSEL, IN FORM ACCEPTABLE TO THE CORPORATION, THAT NO VIOLATION OF SUCH REGISTRATION PROVISIONS WOULD RESULT FROM ANY PROPOSED TRANSFER OR ASSIGNMENT. 12. REPRESENTATIONS AND WARRANTIES The Corporation hereby represents and warrants to the holder hereof that: (a) during the period this Warrant is outstanding, the Corporation will reserve from its authorized and unissued common stock a sufficient number of shares to provide for the issuance of Warrant Stock upon the exercise of this Warrant; (b) the issuance of this Warrant shall constitute full authority to the Corporation's officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for the shares of Warrant Stock issuable upon exercise of this Warrant; (c) the Corporation has all requisite legal and corporate power to execute and deliver this Warrant, to sell and issue the Warrant Stock hereunder, to issue the common stock issuable upon exercise of the Warrant Stock and to carry out and perform its obligations under the terms of this Warrant; (d) all corporate action on the part of the Corporation, its directors and shareholders necessary for the authorization, execution, delivery and performance of this Warrant by the Corporation, the authorization, sale, issuance and delivery of the Warrant Stock, the grant of registration rights as provided herein and the performance of the Corporation's obligations hereunder has been taken; (e) the Warrant Stock, when issued in compliance with the provisions of this Warrant and the Corporation's Articles of Incorporation (as they may be amended from time to time (the "Articles")), will be validly issued, fully paid and nonassessable, and free of all taxes, liens or encumbrances with respect to the issue thereof, and will be issued in compliance with all applicable federal and state securities laws; and (f) the issuance of the Warrant Stock will not be subject to any preemptive rights, rights of first refusal or similar rights. 4 5 13. CORPORATION The Corporation will not, by amendment of its Articles or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but will at all times in good faith assist in the carrying, out of all the provisions of this Warrant and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holder of the Warrant against impairment. 14. GOVERNING LAW This Warrant shall be governed by and construed in accordance with the laws of the State of Washington. IN WITNESS WHEREOF, the Corporation has caused this Warrant to be executed by its duly authorized officers. Dated: _____________________________ FreeShop.com, Inc. By: ________________________________ ________________________________ ________________________________ 5 6 NOTICE OF EXERCISE To: FreeShop.com, Inc. (1) The undersigned hereby elects to purchase ____________ shares of common stock of FreeShop.com, Inc. pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price in full, together with all applicable transfer taxes, if any. (2) In exercising this Warrant, the undersigned hereby confirms and acknowledges that the shares of common stock to be issued upon exercise hereof are being acquired solely for the account of the undersigned and not as a nominee for any other party, and for investment, and that the undersigned will not offer, sell or otherwise dispose of any such shares of common stock except under circumstances that will not result in a violation of the Securities Act of 1933, as amended, or any state securities laws. (3) Please issue a certificate or certificates representing, said shares of common stock in the name of the undersigned or in such other name as is specified below: __________________________________________ (Name) __________________________________________________________ (Address) (3) The undersigned represents that (a) he, she or it is the original purchaser from the Corporation of the attached Warrant or an "accredited investor" within the meaning of Rule 501(a) under the Securities Act of 1933, as amended and (b) the aforesaid shares of common stock are being acquired for the account of the undersigned for investment and not with a view to, or for resale in connection with, the distribution thereof and that the undersigned has no present intention of distributing or reselling such shares. _______________________ ___________________________________________________ (Date) (Signature) 6 7 ASSIGNMENT FORM (To assign the foregoing Warrant, execute this form and supply required information. Do not use this form to purchase shares.) FOR VALUE RECEIVED, the undersigned registered owner of this Warrant hereby sells, assigns and transfers unto the Assignee named below all of the rights of the undersigned under the within Warrant, with respect to the number of shares of common stock of FreeShop.com, Inc. set forth below: Name of Assignee Address No. of Shares. - ---------------- ------- -------------- and does hereby irrevocably constitute and appoint Attorney ____________________________to make such transfer on the books of FreeShop.com, Inc., maintained for the purpose, with full power of substitution in the premises. The undersigned also represents that, by assignment hereof, the Assignee acknowledges that this Warrant and the shares of stock to be issued upon exercise hereof are being, acquired for investment and that the Assignee will not offer, sell or otherwise dispose of this Warrant or any shares of stock to be issued upon exercise hereof except under circumstances which will not result in a violation of the Securities Act of 1933, as amended, or any state securities laws. Further, the Assignee shall, if requested by the Corporation, confirm in writing, in a form satisfactory to the Corporation, that the shares of stock so purchased are being acquired for investment and not with a view toward distribution or resale. Dated: ____________________________________ Holder's Signature: _______________________ Holder's Address: _________________________ _________________________ _________________________ Guaranteed Signature: NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatever, and must be guaranteed by a bank or trust company. Officers of corporations and those action in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant. 7 EX-10.1 3 FORM OF INDEMNIFICATION AGREEMENT 1 EXHIBIT 10.1 INDEMNIFICATION AGREEMENT This Agreement is made as of ____________ by and between FreeShop.com, Inc., a Washington corporation, (the "Corporation") and ____________ (the "Indemnitee") with reference to the following facts: RECITALS A. The Indemnitee is currently serving as a Director or Officer of the Corporation and the Corporation wishes the Indemnitee to continue in such capacity at this time. The Indemnitee is willing, under certain circumstances, to continue in such capacity. B. In order to induce and encourage experienced and capable persons such as the Indemnitee to continue to serve as a Director or Officer of the Corporation, the Board of Directors has determined, after due consideration and investigation of the terms and provisions of this Agreement and the various other options available to the Corporation and the Indemnitee in lieu hereof, that this Agreement is not only reasonable and prudent but necessary to promote and ensure the best interests of the Corporation and its shareholders. AGREEMENT NOW, THEREFORE, in consideration of the continued services of the Indemnitee and in order to induce the Indemnitee to continue to serve as a Director or Officer of the Corporation, the Corporation and the Indemnitee agree as follows: 1. Definitions. For purposes of this Agreement: (a) "Corporation" includes any domestic or foreign predecessor entity of the Corporation in a merger or other transaction in which the predecessor's existence ceased upon consummation of the transaction. (b) "Director" means an individual who is or was a director of the Corporation or an individual who, while a director of the Corporation, is or was serving at the Corporation's request as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise. A director is considered to be serving an employee benefit plan at the Corporation's request if the director's duties to the Corporation also impose duties on, or otherwise involve services by, the director to the plan or to participants in or beneficiaries of the plan. "Director" includes, unless the context requires otherwise, the estate or personal representative of a director. (c) "Expenses" include counsel fees. (d) "Liability" means the obligation to pay a judgment, settlement, penalty, fine, including an excise tax assessed with respect to an employee benefit plan or reasonable expenses incurred with respect to a proceeding. (e) "Officer" means an individual who is or was an officer of the Corporation or an individual who, while an officer of the Corporation, is or was serving at the Corporation's request as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise. An officer is considered to be serving an employee benefit plan at the Corporation's request if the officer's duties to the Corporation also impose duties on, or otherwise involve services by, the officer to the plan or to participants in or beneficiaries of the plan. "Officer" includes, unless the context requires otherwise, the estate or personal representative of an officer. -1- 2 (f) "Official capacity" means, when used with respect to a Director, the office of director in the Corporation and, when used with respect to an Officer, the office in the Corporation held by the Officer. "Official capacity" does not include service for any other foreign or domestic corporation or any partnership, joint venture, trust, employee benefit plan, or other enterprise. (g) "Party" includes an individual who was, is, or is threatened to be made a named defendant or respondent in a proceeding. (h) "Proceeding" means any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative or investigative and whether formal or informal. 2. Indemnification by the Corporation. (a) The Corporation shall indemnify the Indemnitee in the defense of any proceeding, whether or not brought by or in the right of the Corporation, to which the Indemnitee was a party because of being a director or officer of the Corporation against all reasonable expenses incurred by the Indemnitee in connection with the proceeding. (b) Except as provided in subsection (e) of this Section 2, the Corporation shall indemnify the Indemnitee made a party to a proceeding, because the Indemnitee is or was a director or officer of the Corporation, against liability incurred in the proceeding if: (i) The Indemnitee acted in good faith; and (ii) The Indemnitee reasonably believed: (A) In the case of conduct in the Indemnitee's official capacity with the Corporation, that the Indemnitee's conduct was in the Corporation's best interests; and (B) In all other cases, that the Indemnitee's conduct was at least not opposed to the Corporation's best interests; and (iii) In the case of any criminal proceeding, the Indemnitee had no reasonable cause to believe the Indemnitee's conduct was unlawful. (c) The Indemnitee's conduct with respect to an employee benefit plan for a purpose the Indemnitee reasonably believed to be in the interests of the participants in and beneficiaries of the plan is conduct that satisfies the requirement of subsection (b)(ii) of this Section 2. (d) The termination of a proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent is not, of itself, determinative that the Indemnitee did not meet the standard of conduct described in this Section. (e) The Corporation shall not indemnify the Indemnitee under Section 2 of this Agreement: (i) In connection with a proceeding by or in the right of the Corporation in which the Indemnitee was adjudged liable to the Corporation; or (ii) In connection with any other proceeding charging improper personal benefit to the Indemnitee whether or not involving action in the Indemnitee's official capacity, in which the Indemnitee was adjudged liable on the basis that the Indemnitee improperly received personal benefit. (f) Indemnification under this Agreement in connection with a proceeding by or in the right of the Corporation is limited to reasonable expenses incurred in connection with the proceeding. -2- 3 3. Advance for Expenses. (a) The Corporation shall pay for or reimburse the reasonable expenses incurred by the Indemnitee who is a party to a proceeding in advance of final disposition of the proceeding and in advance of any determination and authorization of indemnification pursuant to Section 4 of this Agreement if: (i) The Indemnitee furnishes the Corporation a written affirmation of the Indemnitee's good faith belief that the Indemnitee has met the standard of conduct described in Section 2 of this Agreement; and (ii) The Indemnitee furnishes the Corporation a written undertaking, executed personally or on the Indemnitee's behalf, to repay the advance if it is ultimately determined that the Indemnitee did not meet the standard of conduct. (b) The undertaking required by subsection (a)(i) of this Section 3 must be an unlimited general obligation of the Indemnitee but need not be secured and may be accepted without reference to financial ability to make repayment. 4. Determination and Authorization of Indemnification. (a) The Corporation shall not indemnify the Indemnitee under this Agreement unless authorized in the specific case after a determination has been made that indemnification of the Indemnitee is permissible in the circumstances because the Indemnitee has met the standard of conduct set forth in Section 2(b) of this Agreement. (b) The determination shall be made: (i) By the Board of Directors by majority vote of a quorum consisting of directors not at the time parties to the proceeding; (ii) If a quorum cannot be obtained under (i) of this subsection, by majority vote of a committee duly designated by the Board of Directors, in which designation directors who are parties may participate, consisting solely of two or more directors not at the time parties to the proceeding; (iii) By special legal counsel: (A) Selected by the Board of Directors or its committee in the manner prescribed in (i) or (ii) of this subsection; or (B) If a quorum of the Board of Directors cannot be obtained under (i) of this subsection and a committee cannot be designated under (ii) of this subsection, selected by majority vote of the full Board of Directors, in which selection directors who are parties may participate; or (iv) By the shareholders, but shares owned by or voted under the control of directors or officers who are at the time parties to the proceeding may not be voted on the determination. (c) Authorization of indemnification and evaluation as to reasonableness of expenses shall be made in the same manner as the determination that indemnification is permissible, except that if the determination is made by special legal counsel, authorization of indemnification and evaluation as to reasonableness of expenses shall be made by those entitled under subsection (b) (iii) of this Section to select counsel. -3- 4 5. Right of the Indemnitee to Bring Suit: If a claim under this Agreement is not paid in full by the Corporation within 60 days after a written claim has been received by the Corporation, except in the case of a claim for expenses incurred in defending a proceeding in advance of its final disposition, in which case the applicable period shall be 20 days, the Indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, to the extent successful in whole or in part, the Indemnitee shall be entitled to be paid also the expense of prosecuting such claim. Neither the failure of the Corporation (including its Board of Directors, its shareholders or special legal counsel) to have made a determination prior to the commencement of such action that indemnification of or reimbursement or advancement of expenses to the claimant is proper in the circumstances, nor an actual determination by the Corporation (including its Board of Directors, its shareholders or special legal counsel) that the Indemnitee is not entitled to indemnification or to the reimbursement or advancement of expenses, shall be a defense to the action or create a presumption that the Indemnitee is not so entitled. 6. Nonexclusivity of Rights: The right to indemnification under this Agreement shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Articles of Incorporation, Bylaws, other agreement, vote of shareholders or disinterested directors, insurance policy, principles of common law or equity, or otherwise. 7. Continuation of Rights: Rights of indemnification under this Agreement shall continue as to an Indemnitee who has ceased to be a Director or Officer and shall inure to the benefit of his heirs, executors and administrators. 8. Savings Clause: If any provision of this Agreement or any portion thereof shall be invalidated on any ground by any court of competent jurisdiction, the Corporation shall nevertheless indemnify each director and officer as to reasonable expenses and liabilities with respect to any proceeding, whether or not brought by or in the right of the Corporation, to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated, or by any other applicable law. 9. Gender: Whenever the context requires, the gender of all words used herein shall include the masculine, feminine and neuter. 10. Governing Law: This Agreement shall be governed by and construed in accordance with the laws of the State of Washington. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first written above. INDEMNITEE - ------------------------------- - ------------------- FreeShop.com, Inc. By_____________________________ Timothy C. Choate, CEO -4- 5 EXHIBIT A STATEMENT OF REQUEST FOR INDEMNIFICATION STATE OF __________ ) ) ss. COUNTY OF _________ ) I, NAME , being first duly sworn, do depose and say as follows: 1. This Statement is submitted pursuant to the Indemnification Agreement (the "Agreement") dated ___________, between FreeShop.com, Inc., a Washington corporation, (the "Corporation") and the undersigned. 2. I am requesting indemnification against expenses (including attorneys' and others' fees and expenses), judgments, fines and amounts paid in settlement, all of which (collectively, "Liabilities") have been or will be actually and reasonably incurred by me in connection with the defense of a proceeding to which I was or am a party. 3. With respect to all matters related to any such action or proceeding, I am entitled to be indemnified as herein contemplated pursuant to the aforesaid Indemnification Agreement. 4. Without limiting any other rights that I have or may have, I am requesting indemnification against Liabilities that have arisen or may arise out of ___________________________________________________________________________. Dated: _______________, ____. ___________________________________ ______________ Subscribed and sworn to before me this ____ day of _____________, ____. ___________________________________ (Seal) Notary Public in and for the State of __________, residing at ________ -5- 6 EXHIBIT B STATEMENT OF UNDERTAKING STATE OF __________ ) ) ss. COUNTY OF _________ ) I, ____________, being first duly sworn, do depose and say as follows: 1. This Statement of Undertaking is submitted pursuant to the Indemnification Agreement dated _____________, between FreeShop.com, a Washington corporation, (the "Corporation") and the undersigned. 2. I am requesting advancement of certain expenses (including attorneys' and others' fees and expenses) which I have incurred or will incur in defending a civil or criminal action or proceeding. 3. It is my good faith belief that I have met the standard of conduct necessary for indemnification by the Corporation under the terms of the aforesaid Indemnification Agreement. 4. I hereby undertake to repay this advancement of expenses if it shall be ultimately determined that I am not entitled to be indemnified by the Corporation under the aforesaid Indemnification Agreement or otherwise. 5. The expenses for which advancement is requested are, in general, all expenses related to ________________________________________________________. Dated: ______________, ____. ___________________________________ ______________ Subscribed and sworn to before me this ____ day of _____________, ____. ___________________________________ (Seal) Notary Public in and for the State of __________, residing at ________ -6- EX-10.2 4 1997 STOCK OPTION PLAN, AS AMENDED 1 EXHIBIT 10.2 FREESHOP INTERNATIONAL, INC. 1997 STOCK OPTION PLAN This Stock Option Plan (the "Plan") provides for the grant of options to acquire shares of Common Stock, no par value (the "Common Stock"), of FreeShop International, Inc., a Washington corporation (the "Company"). Stock options granted under this Plan that qualify under Section 422 of the Internal Revenue Code of 1986, as amended, (the "Code") are referred to in this Plan as "Incentive Stock Options." Incentive Stock Options and stock options that do not qualify under Section 422 of the Code ("Non-Qualified Stock Options") granted under this Plan are referred to as "Options." 1. PURPOSES. The purposes of this Plan are to retain the services of valued key employees, directors and consultants of the Company and such other persons as the Plan Administrator shall select in accordance with Section 3 below, to encourage such persons to acquire a greater proprietary interest in the Company, thereby strengthening their incentive to achieve the objectives of the shareholders of the Company, and to serve as an aid and inducement in the hiring of new employees, consultants and other persons selected by the Plan Administrator. 2. ADMINISTRATION. (a) This Plan shall be administered initially by the Board of Directors of the Company (the "Board"). If the Board so desires, the Plan shall be administered by the full Board or a committee of the Board composed solely of two or more directors, which committee (the "Committee") may be an executive, compensation or other committee, including a separate committee especially created for this purpose. The Board, or any committee thereof appointed to administer the Plan in accordance with Paragraph (b) below, is referred to herein as the "Plan Administrator." (b) At such time as the Company becomes subject to the reporting obligations of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Plan shall be administered by the full Board or a Committee composed solely of two or more "non-employee directors," as defined in Rule 16b-3 (as amended from time to time) promulgated under the Exchange Act or any successor rule or regulatory requirement (the "Rule"). The Committee shall have the powers and authority vested in the Board hereunder (including the power and authority to interpret any provision of this Plan or of any Option). The members of any such Committee shall serve at the pleasure of the Board. A majority of the members of the Committee shall constitute a quorum, and all actions of the Committee shall be taken by a majority of the members present. Any action may be taken by a written instrument signed by all of the members of the Committee and any action so taken shall be fully effective as if it had been taken at a meeting. (c) Subject to the provisions of this Plan, and with a view to effecting its purpose, the Plan Administrator shall have sole authority, in its absolute discretion, to (i) construe FreeShop International, Inc. 1997 Stock Option Plan -1- 2 and interpret this Plan; (ii) define the terms used in this Plan; (iii) prescribe, amend and rescind rules and regulations relating to this Plan; (iv) correct any defect, supply any omission or reconcile any inconsistency in this Plan; (v) grant Options under this Plan; (vi) determine the individuals to whom Options shall be granted under this Plan and whether the Option is an Incentive Stock Option or a Non-Qualified Stock Option; (vii) determine the time or times at which Options shall be granted under this Plan; (viii) determine the number of shares of Common Stock subject to each Option, the exercise price of each Option, the duration of each Option and the times at which each Option shall become exercisable; (ix) determine all other terms and conditions of Options; and (x) make all other determinations necessary or advisable for the administration of this Plan. All decisions, determinations and interpretations made by the Plan Administrator shall be binding and conclusive on all participants in this Plan and on their legal representatives, heirs and beneficiaries. (d) The Board or the Committee may delegate to one or more executive officers of the Company the authority to grant Options under this Plan to employees of the Company who, on the Date of Grant, are not subjected to Section 16(b) of the Exchange Act with respect to the Common Stock ("Non-Insiders"), and are not "covered employees" as such term is defined for purposes of Section 162(m) of the Code ("Non-Covered Employees"), and in connection therewith the authority to determine: (i) the number of shares of Common Stock subject to such Option; (ii) the duration of the Option; (iii) the vesting schedule for determining the times at which such Option shall become exercisable; and (iv) all other terms and conditions of such Options. The exercise price for any Option granted by action of an executive officer or officers pursuant to such delegation of authority shall not be less than the fair market value per share of the Common Stock on the Date of Grant. Unless expressly approved in advance by the Board or the Committee, such delegation of authority shall not include the authority to accelerate the vesting, extend the period for exercise or otherwise alter the terms of outstanding Options. The term "Plan Administrator" when used in any provision of this Plan other than Sections 2, 5(m), and 11 shall be deemed to refer to the Board or the Committee, as the case may be, and an executive officer who has been authorized to grant Options pursuant thereto, insofar as such provisions may be applied to persons that are Non-Insiders and Non-Covered Employees and Options granted to such persons. 3. ELIGIBILITY. Incentive Stock Options may be granted to any individual who, at the time the Option is granted, is a full-time employee of the Company or any Related Corporation (as defined below) ("Employees") or who is a non-Employee director of the Company. Non-Qualified Stock Options may be granted to Employees, directors and such other persons as the Plan Administrator shall select. Options may be granted in substitution for outstanding Options of another corporation in connection with the merger, consolidation, acquisition of property or stock or other reorganization between such other corporation and the Company or any subsidiary of the Company. Options also may be granted in exchange for outstanding Options. Any person to whom an Option is granted under this Plan is referred to as an "Optionee." As used in this Plan, the term "Related Corporation," when referring to a subsidiary corporation, shall mean any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if, at the time of the granting of the Option, each of the corporations other than the last corporation in the unbroken chain owns stock FreeShop International, Inc. 1997 Stock Option Plan -2- 3 possessing fifty percent (50%) or more of the total combined voting power of all classes of stock of one of the other corporations in such chain. When referring to a parent corporation, the term "Related Corporation" shall mean any corporation (other than the Company) in an unbroken chain of corporations ending with the Company if, at the time of granting of the Option, each of the corporations other than the Company owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock of one of the other corporations in such chain. 4.* STOCK. The Plan Administrator is authorized to grant Options to acquire up to a total of 1,600,000 shares of the Company's authorized but unissued, or reacquired, Common Stock. The number of shares with respect to which Options may be granted hereunder is subject to adjustment as set forth in Section 5(m) hereof. In the event that any outstanding Option expires or is terminated for any reason, the shares of Common Stock allocable to the unexercised portion of such Option may again be subject to an Option to the same Optionee or to a different person eligible under Section 3 of this Plan. 5. TERMS AND CONDITIONS OF OPTIONS. Each Option granted under this Plan shall be evidenced by a written agreement approved by the Plan Administrator (the "Agreement"). Agreements may contain such additional provisions, not inconsistent with this Plan, as the Plan Administrator in its discretion may deem advisable. All Options also shall comply with the following requirements: (a) Number of Shares and Type of Option. Each Agreement shall state the number of shares of Common Stock to which it pertains and whether the Option is intended to be an Incentive Stock Option or a Non-Qualified Stock Option. In the absence of action to the contrary by the Plan Administrator in connection with the grant of an Option, all Options shall be Non-Qualified Stock Options. The aggregate fair market value (determined at the Date of Grant, as defined below) of the stock with respect to which Incentive Stock Options are exercisable for the first time by the Optionee during any calendar year (granted under this Plan and all other Incentive Stock Option plans of the Company, a Related Corporation or a predecessor corporation) shall not exceed $100,000, or such other limit as may be prescribed by the Code as it may be amended from time to time. Any Option which exceeds the annual limit shall not be void but rather shall be a Non-Qualified Stock Option. - -------- * This section was amended and restated by the Third Amendment to 1997 Stock Option Plan pursuant to a resolution of the Board of Directors dated January 21, 1998 and later amended and restated by the Fourth Amendment to 1997 Stock Option Agreement pursuant to a resolution of the Board of Directors dated May 24, 1999. FreeShop International, Inc. 1997 Stock Option Plan -3- 4 (b) Date of Grant. Each Agreement shall state the date the Plan Administrator has deemed to be the effective date of the Option for purposes of this Plan (the "Date of Grant"). (c) Exercise Price. Each Agreement shall state the price per share of Common Stock at which it is exercisable. The exercise price shall be fixed by the Plan Administrator at whatever price the Plan Administrator may determine in the exercise of its sole discretion in good faith; provided, that with respect to Incentive Stock Options granted to greater-than-10 percent (>10%) shareholders of the Company (as determined with reference to Section 424(d) of the Code), the exercise price per share shall not be less than 110 percent (110%) of the fair market value per share of the Common Stock at the Date of Grant. (d) Duration of Options. At the time of the grant of the Option, the Plan Administrator shall designate, subject to paragraph 5(g) below, the expiration date of the Option, which date shall not be later than ten (10) years from the Date of Grant in the case of Incentive Stock Options; provided, that the expiration date of any Incentive Stock Option granted to a greater-than-10 percent (>10%) shareholder of the Company (as determined with reference to Section 424(d) of the Code) shall not be later than five (5) years from the Date of Grant. In the absence of action to the contrary by the Plan Administrator in connection with the grant of a particular Option, and except in the case of Incentive Stock Options as described above, all Options granted under this Plan shall expire ten (10) years from the Date of Grant. (e)** Vesting Schedule. No Option shall be exercisable until it has vested. The vesting schedule for each Option shall be specified by the Plan Administrator at the time of grant of the Option; provided, that if no vesting schedule is specified at the time of grant, the Option shall vest according to the following schedule:
Number of Months Following Percentage of Total Date Employment or Services Commence Option Vested 12 25% 15 31.25% 18 37.50% 21 43.75% 24 50% 27 56.25% 30 62.50% 33 68.75% 36 75% 39 81.25% 42 87.50% 45 93.75% 48 100%
- -------------- ** This section was amended and restated by the First Amendment to 1997 Stock Option Plan pursuant to a resolution of the Board of Directors dated July 1, 1997 and later amended and restated by the Second Amendment to 1997 Stock Option Plan pursuant to a resolution of the Board of Directors dated August 22, 1997. FreeShop International, Inc. 1997 Stock Option Plan -4- 5 (f) Acceleration of Vesting. The vesting of one or more outstanding Options may be accelerated by the Plan Administrator at such times and in such amounts as it shall determine in its sole discretion. The vesting of Options also shall be accelerated under the circumstances described in Sections 5(m) below and under such other circumstances, if any, as may be described in individual Agreements. (g) Term of Option. Vested Options shall terminate, to the extent not previously exercised, upon the occurrence of the first of the following events: (i) the expiration of the Option, as designated by the Plan Administrator in accordance with Section 5(d) above; (ii) the expiration of ninety (90) days from the date of an Optionee's termination of employment or contractual relationship with the Company or any Related Corporation for any reason whatsoever other than death or Disability (as defined below) unless, in the case of a Non-Qualified Stock Option, the exercise period is extended by the Plan Administrator until a date not later than the expiration date of the Option; or (iii) the expiration of one (1) year from (A) the date of death of the Optionee or (B) cessation of an Optionee's employment or contractual relationship by reason of Disability (as defined below) unless, in the case of a Non-Qualified Stock Option, the exercise period is extended by the Plan Administrator until a date not later than the expiration date of the Option. If an Optionee's employment or contractual relationship is terminated by death, any Option then held by the Optionee shall be exercisable only by the person or persons to whom such Optionee's rights under such Option shall pass by the Optionee's will or by the laws of descent and distribution of the state or county of the Optionee's domicile at the time of death. For purposes of the Plan, unless otherwise defined in the Agreement, "Disability" shall mean any physical, mental or other health condition which substantially impairs the Optionee's ability to perform her or his assigned duties for one hundred twenty (120) days or more in any two hundred forty (240) day period or that can be expected to result in death. The Plan Administrator shall determine whether an Optionee has incurred a Disability on the basis of medical evidence acceptable to the Plan Administrator. Upon making a determination of Disability, the Plan Administrator shall, for purposes of the Plan, determine the date of an Optionee's termination of employment or contractual relationship. Unless accelerated in accordance with Section 5(f) above, unvested Options shall terminate immediately upon termination of employment or contractual relationship of the Optionee by the Company for any reason whatsoever, including death or Disability. FreeShop International, Inc. 1997 Stock Option Plan -5- 6 For purposes of this Plan, transfer of employment or contractual relationship between or among the Company and/or any Related Corporation shall not be deemed to constitute a termination of employment with the Company or any Related Corporations. For purposes of this Plan, if an Employee Optionee's relationship with the Company changes (e.g., from an Employee to a non-Employee, such as a part-time employee or a consultant, or by reason of military leave, sick leave or other leave of absence), such change shall be deemed to constitute a termination of employment unless otherwise determined by the Plan Administrator; provided, that if, in the case of an Incentive Stock Option, the Plan Administrator determines that for purposes hereof a change from an Employee to a part-time employee or consultant shall not constitute a termination of the Optionee's employment with the Company, then the Optionee's Incentive Stock Option shall automatically be converted into a Non-Qualified Stock Option; and provided further, that with respect to Incentive Stock Options, employment shall in no event be deemed to continue beyond the first ninety (90) days of any leave of absence unless the Optionee's re-employment rights are guaranteed by statute or by contract. (h) Exercise of Options. Options shall be exercisable, either all or in part, at any time after vesting, until termination; provided, that after registration of any of the Company's securities under Section 12 of the Exchange Act and regardless of when the Option is exercised, any Optionee who is an Insider shall be precluded from selling or transferring any Common Stock or other security underlying an Option during the six (6) months immediately following the grant of that Option. If less than all of the shares included in the vested portion of any Option are purchased, the remainder may be purchased at any subsequent time prior to the expiration of the Option term. No portion of any Option for less than five (5) shares (as adjusted pursuant to Section 5(m) below) may be exercised; provided, that if the vested portion of any Option is less than five (5) shares, it may be exercised with respect to all shares for which it is vested. Only whole shares may be issued pursuant to an Option, and to the extent that an Option covers less than one (1) share, it is unexercisable. Options or portions thereof may be exercised by giving written notice to the Company, which notice shall specify the number of shares to be purchased, and be accompanied by payment in the amount of the aggregate exercise price for the Common Stock so purchased, which payment shall be in the form specified in Section 5(i) below. The Company shall not be obligated to issue, transfer or deliver a certificate of Common Stock to any Optionee, or to his personal representative, until the aggregate exercise price has been paid for all shares for which the Option shall have been exercised and adequate provision has been made by the Optionee for satisfaction of any tax withholding obligations associated with such exercise. During the lifetime of an Optionee, Options are exercisable only by the Optionee. (i) Payment upon Exercise of Option. Upon the exercise of any Option, the aggregate exercise price shall be paid to the Company in cash or by certified or cashier's check. In addition, upon approval of the Plan Administrator, an Optionee may pay for all or any portion of the aggregate exercise price (1) by delivering to the Company shares of Common Stock previously held by such Optionee, (2) by having shares withheld from the amount of shares of Common Stock to be received by Optionee or (3) by complying with any other payment mechanism approved by the Plan Administrator FreeShop International, Inc. 1997 Stock Option Plan -6- 7 from time to time. The shares of Common Stock received or withheld by the Company as payment for shares of Common Stock purchased upon the exercise of Options shall have a fair market value at the date of exercise (as determined by the Plan Administrator) equal to the aggregate exercise price (or portion thereof) to be paid by the Optionee upon such exercise. (j) Rights as a Shareholder. An Optionee shall have no rights as a shareholder with respect to any shares covered by an Option until such Optionee becomes a record holder of such shares, irrespective of whether such Optionee has given notice of exercise. Subject to the provisions of Section 5(m) hereof, no rights shall accrue to an Optionee and no adjustments shall be made on account of dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights declared on, or created in, the Common Stock for which the record date is prior to the date the Optionee becomes a record holder of the shares of Common Stock covered by the Option, irrespective of whether such Optionee has given notice of exercise. (k) Transfer of Option. Unless otherwise specified in the Agreement or by the Plan Administrator, Options granted under this Plan and the rights and privileges conferred by this Plan may not be transferred, assigned, pledged or hypothecated in any manner (whether by operation of law or otherwise) other than by will, by applicable laws of descent and distribution, or (except in the case of an Incentive Stock Option) pursuant to a qualified domestic relations order, and shall not be subject to execution, attachment or similar process; provided however, that any Agreement may provide or be amended to provide that a Non-Qualified Stock Option to which it relates is transferable during the Optionee's lifetime without payment of consideration to immediate family members of the Optionee or to trusts or partnerships established exclusively for the benefit of the Optionee and the Optionee's immediate family members. Upon any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of any Option or of any right or privilege conferred by this Plan contrary to the provisions hereof, or upon the sale, levy or any attachment or similar process upon the rights and privileges conferred by this Plan, such Option shall thereupon terminate and become null and void. (l) Securities Regulation and Tax Withholding. (1) Shares shall not be issued with respect to an Option unless the exercise of such Option and the issuance and delivery of such shares shall comply with all relevant provisions of law, including, without limitation, any applicable state securities laws, the Securities Act of 1933, as amended, (the "Securities Act"), the Exchange Act, the rules and regulations thereunder and the requirements of any stock exchange upon which such shares may then be listed, and such issuance shall be further subject to the approval of counsel for the Company with respect to such compliance, including the availability of an exemption from registration for the issuance and sale of such shares. The inability of the Company to obtain from any regulatory body the authority deemed by the Company to be necessary for the lawful issuance and sale of any shares under this Plan, or the unavailability of an exemption from FreeShop International, Inc. 1997 Stock Option Plan -7- 8 registration for the issuance and sale of any shares under this Plan, shall relieve the Company of any liability with respect to the non-issuance or sale of such shares. As a condition to the exercise of an Option, the Plan Administrator may require the Optionee to represent and warrant in writing at the time of such exercise that the shares are being purchased only for investment and without any then-present intention to sell or distribute such shares. At the option of the Plan Administrator, a stop-transfer order against such shares may be placed on the stock books and records of the Company, and a legend indicating that the stock may not be pledged, sold or otherwise transferred unless an opinion of counsel is provided stating that such transfer is not in violation of any applicable law or regulation, may be stamped on the certificates representing such shares in order to assure an exemption from registration. The Plan Administrator also may require such other documentation as may from time to time be necessary to comply with federal and state securities laws. It is the intent of the Company to register the shares issuable upon exercise of the Option as soon as reasonably practical after such time, if ever, as the Company registers any of its other shares of common stock under the Securities Act, but THE COMPANY HAS NO OBLIGATION TO UNDERTAKE REGISTRATION OF OPTIONS OR THE SHARES OF STOCK ISSUABLE UPON THE EXERCISE OF OPTIONS. (2) As a condition to the exercise of any Option granted under this Plan, the Optionee shall make such arrangements as the Plan Administrator may require for the satisfaction of any federal, state or local withholding tax obligations that may arise in connection with such exercise. (3) The issuance, transfer or delivery of certificates of Common Stock pursuant to the exercise of Options may be delayed, at the discretion of the Plan Administrator, until the Plan Administrator is satisfied that the applicable requirements of the federal and state securities laws and the withholding provisions of the Code have been met. (m) Stock Dividend, Reorganization or Liquidation. (1) If (i) the Company shall at any time be involved in a transaction described in Section 424(a) of the Code (or any successor provision) or any "corporate transaction" described in the regulations thereunder; (ii) the Company shall declare a dividend payable in, or shall subdivide or combine, its Common Stock; or (iii) any other event with substantially the same effect shall occur, the Plan Administrator shall, with respect to each outstanding Option, proportionately adjust the number of shares of Common Stock and/or the exercise price per share so as to preserve the rights of the Optionee substantially proportionate to the rights of the Optionee prior to such event, and to the extent that such action shall include an increase or decrease in the number of shares of Common Stock subject to outstanding Options, the number of shares available under Section 4 of this Plan shall automatically be increased or decreased, as the case may be, proportionately, without further action on the part of the Plan Administrator, the Company or the Company's shareholders. FreeShop International, Inc. 1997 Stock Option Plan -8- 9 (2) If the Company is liquidated or dissolved, the Plan Administrator may allow the holders of any outstanding Options to exercise all or any part of the unvested portion of the Options held by them; provided, that such Options must be exercised prior to the effective date of such liquidation or dissolution. If the Option holders do not exercise their Options prior to such effective date, each outstanding Option shall terminate as of the effective date of the liquidation or dissolution. (3) The foregoing adjustments in the shares subject to Options shall be made by the Plan Administrator, or by any successor administrator of this Plan, or by the applicable terms of any assumption or substitution document. (4) The grant of an Option shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure, to merge, consolidate or dissolve, to liquidate or to sell or transfer all or any part of its business or assets. 6. EFFECTIVE DATE; TERM. This Plan shall be effective as of June 30, 1997. Incentive Stock Options may be granted by the Plan Administrator from time to time thereafter through and until June 30, 2007. Non-Qualified Stock Options may be granted until this Plan is terminated by the Board in its sole discretion. Termination of this Plan shall not terminate any Option granted prior to such termination. Any Options granted by the Plan Administrator prior to the approval of this Plan by a majority of the shareholders of the Company shall be granted subject to ratification of this Plan by the shareholders of the Company within twelve (12) months after this Plan is adopted by the Board, and if shareholder ratification is not obtained, each and every Option granted under this Plan shall be null and void and shall convey no rights to the holder thereof. 7. NO OBLIGATIONS TO EXERCISE OPTION. The grant of an Option shall impose no obligation upon the Optionee to exercise such Option. 8. NO RIGHT TO OPTIONS OR TO EMPLOYMENT. Whether or not any Options are to be granted under this Plan shall be exclusively within the discretion of the Plan Administrator, and nothing contained in this Plan shall be construed as giving any person any right to participate under this Plan. The grant of an Option shall in no way constitute any form of agreement or understanding binding on the Company or any Related Company, express or implied, that the Company or any Related Company will employ or contract with an Optionee for any length of time, nor shall it interfere in any way with the Company's or, where applicable, a Related Company's right to terminate Optionee's employment at any time, which right is hereby reserved. FreeShop International, Inc. 1997 Stock Option Plan -9- 10 9. APPLICATION OF FUNDS. The proceeds received by the Company from the sale of Common Stock issued upon the exercise of Options shall be used for general corporate purposes, unless otherwise directed by the Board. 10. INDEMNIFICATION OF PLAN ADMINISTRATOR. In addition to all other rights of indemnification they may have as members of the Board, members of the Plan Administrator shall be indemnified by the Company for all reasonable expenses and liabilities of any type or nature, including attorneys' fees, incurred in connection with any action, suit or proceeding to which they or any of them are a party by reason of, or in connection with, this Plan or any Option granted under this Plan, and against all amounts paid by them in settlement thereof (provided that such settlement is approved by independent legal counsel selected by the Company), except to the extent that such expenses relate to matters for which it is adjudged that such Plan Administrator member is liable for willful misconduct; provided, that within fifteen (15) days after the institution of any such action, suit or proceeding, the Plan Administrator member involved therein shall, in writing, notify the Company of such action, suit or proceeding, so that the Company may have the opportunity to make appropriate arrangements to prosecute or defend the same. 11. AMENDMENT OF PLAN. The Plan Administrator may, at any time, modify, amend or terminate this Plan and Options granted under this Plan, including, without limitation, such modifications or amendments as are necessary to maintain compliance with applicable statutes, rules or regulations; provided, that any amendment for which shareholder approval is required by the Rule in order for the Plan to be eligible or continue to qualify for the benefits of the Rule shall be subject to approval of the requisite percentage of the shareholders of the Company in accordance with the Rule. Without limiting the generality of the foregoing, the Plan Administrator may modify grants to persons who are eligible to receive Options under this Plan who are foreign nationals or employed outside the United States to recognize differences in local law, tax policy or custom. Date Approved by Board of Directors of Company: June 30, 1997. Date Approved by Shareholders of Company: June 30, 1997. FreeShop International, Inc. 1997 Stock Option Plan -10- 11 FREESHOP INTERNATIONAL, INC. FIRST AMENDMENT TO 1997 STOCK OPTION PLAN This First Amendment (the "First Amendment") to 1997 Stock Option Plan (the "Plan") is dated to be effective as of July 1, 1997. On June 30, 1997, FreeShop International, Inc. (the "Company") adopted the Plan. Capitalized terms used in this First Amendment and not otherwise defined have the meanings assigned to such terms in the Plan. By resolution adopted by the Board of Directors of the Company on July 1, 1997, the Company hereby amends Section 5(e) of the Plan and restates such section in its entirety as follows: "(e) Vesting Schedule. No Option shall be exercisable until it has vested. The vesting schedule for each Option shall be specified by the Plan Administrator at the time of grant of the Option; provided, that if no vesting schedule is specified at the time of grant, the Option shall vest according to the following schedule:
Number of Months Following Date Employment or Services Commence Percentage of Total (Date of Grant: After 7/01/97) Option Vested 0 0.0% 3 0.0% 6 9.1% 9 9.1% 12 9.1% 15 9.1% 18 9.1% 21 9.1% 24 9.1% 27 9.1% 30 9.1% 33 9.1% 36 9.0%"
12 FREESHOP INTERNATIONAL, INC. SECOND AMENDMENT TO 1997 STOCK OPTION PLAN This Second Amendment (the "Second Amendment") to 1997 Stock Option Plan (the "Plan") is dated to be effective as of August 22, 1997. On June 30, 1997, FreeShop International, Inc. (the "Company") adopted the Plan. Capitalized terms used in this Second Amendment and not otherwise defined have the meanings assigned to such terms in the Plan. By resolution adopted by the Board of Directors of the Company on August 22, 1997, the Company hereby amends Section 5(e) of the Plan and restates such section in its entirety as follows: "(e) Vesting Schedule. No Option shall be exercisable until it has vested. The vesting schedule for each Option shall be specified by the Plan Administrator at the time of grant of the Option; provided, that if no vesting schedule is specified at the time of grant, the Option shall vest according to the following schedule:
Number of Months Following Date Employment or Services Commence Percentage of Total (Date of Grant: After 7/01/97) Option Vested 0 0.0% 3 0.0% 6 0.0% 9 0.0% 12 20.0% 15 6.7% 18 6.7% 21 6.7% 24 6.7% 27 6.7% 30 6.7% 33 6.7% 36 6.7% 39 6.7% 42 6.7% 45 6.7% 48 6.3%"
13 FREESHOP INTERNATIONAL, INC. THIRD AMENDMENT TO 1997 STOCK OPTION PLAN This Third Amendment (the "Third Amendment") to 1997 Stock Option Plan (the "Plan") is dated to be effective as of January 21, 1998. On June 30, 1997, FreeShop International, Inc. (the "Company") adopted the Plan. Capitalized terms used in this Third Amendment and not otherwise defined have the meanings assigned to such terms in the Plan. By resolution adopted by the Board of Directors of the Company on January 21, 1998, the Company hereby amends Section 4 of the Plan and restates such section in its entirety as follows: "4. STOCK. The Plan Administrator is authorized to grant Options to acquire up to a total of 2,800,000 shares of the Company's authorized but unissued, or reacquired, Common Stock. The number of shares with respect to which Options may be granted hereunder is subject to adjustment as set forth in Section 5(m) hereof. In the event that any outstanding Option expires or is terminated for any reason, the shares of Common Stock allocable to the unexercised portion of such option may again be subject to an Option to the same Optionee or to a different person eligible under Section 3 of this Plan." 14 FREESHOP.COM, INC. (FORMERLY "FREESHOP INTERNATIONAL, INC.") FOURTH AMENDMENT TO 1997 STOCK OPTION PLAN This Fourth Amendment (the "Fourth Amendment") to 1997 Stock Option Plan (the "Plan") is dated to be effective as of May 24, 1999. On June 30, 1997, FreeShop.com, Inc. (formerly "FreeShop International, Inc." and herein referred to as the "Company") adopted the Plan. Capitalized terms used in this Fourth Amendment and not otherwise defined have the meanings assigned to such terms in the Plan. By resolution adopted by the Board of Directors of the Company on May 24, 1999, the Company hereby amends Section 4 of the Plan and restates such section in its entirety as follows: "4. STOCK. The Plan Administrator is authorized to grant Options to acquire up to a total of 6,000,000 shares of the Company's authorized but unissued, or reacquired, Common Stock. The number of shares with respect to which Options may be granted hereunder is subject to adjustment as set forth in Section 5(m) hereof. In the event that any outstanding Option expires or is terminated for any reason, the shares of Common Stock allocable to the unexercised portion of such option may again be subject to an Option to the same Optionee or to a different person eligible under Section 3 of this Plan." EX-10.3 5 FORM OF STOCK OPTION AGREEMENT 1 EXHIBIT 10.3 **OPTIONEE COPY** FREESHOP.COM, INC. 1997 STOCK OPTION PLAN STOCK OPTION AGREEMENT THIS AGREEMENT is entered into this GRANT DATE ("Date of Grant") between FreeShop.com, Inc., a Washington corporation (the "Company"), and NAME (the "Optionee"). WHEREAS, the Board of Directors of the Company (the "Board") has approved and adopted the 1997 Stock Option Plan, as amended (the "Plan"), pursuant to which the Board is authorized to grant to employees and other selected persons stock options to purchase common stock, no par value, of the Company (the "Common Stock"); WHEREAS, the Plan provides for the granting of stock options that either (i) are intended to qualify as "Incentive Stock Options" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or (ii) do not qualify under Section 422 of the Code ("Non-Qualified Stock Options"); WHEREAS, the Board has authorized the grant to Optionee of options to purchase a total of NUMBER OF OPTIONS shares of Common Stock (the "Options"), which Options are intended to be: Non-Qualified Stock Options NOW, THEREFORE, the Company agrees to offer to the Optionee the option to purchase, upon the terms and conditions set forth herein and in the Plan, NUMBER OF OPTIONS shares of Common Stock. Capitalized terms not otherwise defined herein shall have the meanings ascribed thereto in the Plan. 1. Exercise Price. The exercise price of the options shall be PRICE per share. 2. Limitation on the Number of Shares. If the Options granted hereby are Incentive Stock Options, the number of shares which may be acquired upon exercise thereof is subject to the limitations set forth in Section 5(a) of the Plan. 3. Vesting Schedule. The Options are exercisable in accordance with the following vesting schedule:
Number of Months Following Start Date Percentage of Total VEST DATE Option Vested - ------------------------------------------------------------------------------- 0 0.0% 3 0.0% 6 0.0% 9 20.0% 12 6.7% 15 6.7% 18 6.7% 21 6.7% 24 6.7% 27 6.7% 30 6.7% 33 6.7% 36 6.7% 39 6.7% 42 6.7% 45 6.7% 48 6.3%
2 FreeShop.com, Inc. -- 1997 Stock Option Plan **OPTIONEE COPY** Stock Option Agreement Page 2 4. Options not Transferable. This Option may not be transferred, assigned, pledged or hypothecated in any manner (whether by operation of law or otherwise) other than by will, by applicable laws of descent and distribution or (except in the case of an Incentive Stock Option) pursuant to a qualified domestic relations order, and shall not be subject to execution, attachment or similar process; provided, however, that if this Option represents a Non-Qualified Stock Option, such Option is transferable without payment of consideration to immediate family members of the Optionee or to trusts or partnerships established exclusively for the benefit of the Optionee and the Optionee's immediate family members. Upon any attempt to transfer, pledge, hypothecate or otherwise dispose of any Option or of any right or privilege conferred by the Plan contrary to the provisions thereof, or upon the sale, levy or attachment or similar process upon the rights and privileges conferred by the Plan, such Option shall thereupon terminate and become null and void. 5. Investment Intent. By accepting the option, the Optionee represents and agrees that none of the shares of Common Stock purchased upon exercise of the Option will be distributed in violation of applicable federal and state laws and regulations. In addition, the Company may require, as a condition of exercising the Options, that the Optionee execute an undertaking, in such a form as the Company shall reasonably specify, that the Stock is being purchased only for investment and without any then-present intention to sell or distribute such shares. 6. Termination of Employment and Options. Vested Options shall terminate, to the extent not previously exercised, upon the occurrence of the first of the following events: (i) Expiration: The expiration of ten (10) years from the Date of Grant (EXPIRY DATE); except, that the expiration date of any Incentive Stock Option granted to a greater-than-10 percent (>10%) shareholder of the Company shall not be later than five (5) years from the Date of Grant. (ii) Termination Due to Death or Disability: The expiration of one (1) year from the date of the death of the Optionee or cessation of an Optionee's employment or contractual relationship by reason of Disability (as defined in Section 5(g) of the Plan). If an Optionee's employment or contractual relationship is terminated by death, any Option held by the Optionee shall be exercisable only by the person or persons to whom such Optionee's rights under such Option shall pass by the Optionee's will or by the laws of descent and distribution. (iii) Termination for Any Other Reason: The expiration of ninety (90) days from the date of an Optionee's termination of employment or contractual relationship with the Company or any Related Corporation for any reason whatsoever other than death or Disability (as defined in Section 5(g) of the Plan). Each unvested Option granted pursuant hereto shall terminate immediately upon termination of the Optionee's employment or contractual relationship with the Company for any reason whatsoever, including death or Disability unless vesting is accelerated in accordance with Section 5(f) of the Plan. 7. Stock. In the case of any stock split, stock dividend or like change in the nature of shares of Stock covered by this Agreement, the number of shares and exercise price shall be proportionately adjusted as set forth in Section 5(m) of the Plan. 8. Exercise of Option. Options shall be exercisable, in full or in part, at any time after vesting, until termination; provided, however, that any Optionee who is subject to the reporting and liability provisions of Section 16 of the Securities and Exchange Act of 1934, as amended, with respect to the Common Stock shall be precluded from selling or transferring any Common Stock or other security underlying an Option during the six (6) months immediately following the grant of that Option. If less than all of the shares included in the vested portion of any Option are purchased, the remainder may be purchased at any subsequent time prior to the expiration of the Option term. No portion of any Option for less than five (5) shares (as adjusted pursuant to Section 5(m) of the Plan) may be exercised; provided, that if the vested portion of any Option is less than five (5) shares, it may be exercised with respect to all shares for which it is vested. Only whole shares may be issued pursuant to an Option, and to the extent that an Option covers less than one (1) share, it is unexercisable. Each exercise of the Option shall be by means of delivery of a notice of election to exercise (which may 3 FreeShop.com, Inc. -- 1997 Stock Option Plan **OPTIONEE COPY** Stock Option Agreement Page 3 be in the form attached hereto as Exhibit A) to the Secretary of the Company at its principal executive office, specifying the number of shares of Common Stock to be purchased and accompanied by payment in cash by certified check or cashier's check in the amount of the full exercise price for the Common Stock to be purchased. In addition to payment in cash by certified check or cashier's check, an Optionee or transferee of an Option may pay for all or any portion of the aggregate exercise price by complying with one or more of the following alternatives: (i) by delivering to the Company shares of Common Stock previously held by such person or by the Company withholding shares of Common Stock otherwise deliverable pursuant to exercise of the Option, which shares of Common Stock received or withheld shall have a fair market value at the date of exercise (as determined by the Plan Administrator) equal to the aggregate purchase price to be paid by the Optionee upon such exercise; or (ii) by complying with any other payment mechanism approved by the Plan Administrator at the time of exercise. 9. Holding Period for Incentive Stock Options. In order to obtain the tax treatment provided for Incentive Stock Options by Section 422 of the Code, the shares of Common Stock received upon exercising any Incentive Stock Options received pursuant to this Agreement must be sold, if at all, after a date which is later of two (2) years from the date of this agreement is entered into or one (1) year from the date upon which the Options are exercised. The Optionee agrees to report sales of such shares prior to the above determined date to the Company within one (1) business day after such sale is concluded. The Optionee also agrees to pay to the Company, within five (5) business days after such sale is concluded, the amount necessary for the Company to satisfy its withholding requirement required by the Code in the manner specified in Section 5(l)(2) of the Plan. Nothing in this Section 9 is intended as a representation that Common Stock may be sold without registration under state and federal securities laws or an exemption therefrom, or that such registration or exemption will be available at any specified time. 10. Subject to 1997 Stock Option Plan. The terms of the Options are subject to the provisions of the Plan, as the same may from time to time be amended, and any inconsistencies between this Agreement and the Plan, as the same may be from time to time amended, shall be governed by the provisions of the Plan, a copy of which has been delivered to the Optionee, and which is available for inspection at the principal offices of the Company 11. Professional Advice. The acceptance of the Options and the sale of Common Stock issued pursuant to the exercise of Options may have consequences under federal and state tax and securities laws which may vary depending upon the individual circumstances of the Optionee. Accordingly, the Optionee acknowledges that he or she has been advised to consult his or her personal legal and tax advisor in connection with this Agreement and his or her dealings with respect to Options for the Common Stock. Without limiting other matters to be considered, the Optionee should consider whether upon the exercise of Options, the Optionee will file an election with the Internal Revenue Service pursuant to Section 83(b) of the Code. 12. No Employment Relationship. Whether or not any Options are to be granted under this Plan shall be exclusively within the discretion of the Plan Administrator, and nothing contained in this Plan shall be construed as giving any person any right to participate under this Plan. The grant of an Option shall in no way constitute any form of agreement or understanding binding on the Company or any Related Company, express or implied, that the Company or any Related Company will employ or contract with an Optionee for any length of time, nor shall it interfere in any way with the Company's or, where applicable, a Related Company's right to terminate Optionee's employment at any time, which right is hereby reserved. 13. Entire Agreement. This Agreement is the only agreement between the Optionee and the Company with respect to the Options, and this Agreement and the Plan supersede all prior and contemporaneous oral and written statements and representations and contain the entire agreement between the parties with respect to the Options 4 FreeShop.com, Inc. -- 1997 Stock Option Plan **OPTIONEE COPY** Stock Option Agreement Page 4 14. Notices. Any notice required or permitted to be made or given hereunder shall be mailed or delivered personally to the addresses set forth below, or as changed from time to time by written notice to the other: The Company: FreeShop.com, Inc. 95 South Jackson, Suite 300 Seattle, Washington 98104 Attention: Tim Choate President & CEO The Optionee: ___________________________ ___________________________ ___________________________ FREESHOP.COM, INC. OPTIONEE By: _____________________________ _______________________________ Signature of NAME Its: _____________________________ Printed Name THERE MAY NOT BE PRESENTLY AVAILABLE EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF APPLICABLE FEDERAL AND STATE SECURITIES LAWS FOR THE ISSUANCE OF SHARES OF STOCK UPON EXERCISE OF THESE OPTIONS. ACCORDINGLY, THESE OPTIONS CANNOT BE EXERCISED UNLESS THESE OPTIONS AND THE SHARES OF STOCK TO BE ISSUED UPON EXERCISE OF THESE OPTIONS ARE REGISTERED OR AN EXEMPTION FROM SUCH REGISTRATION REQUIREMENTS IS AVAILABLE. THE SHARES OF STOCK ISSUED PURSUANT TO THE EXERCISE OF OPTIONS WILL BE "RESTRICTED SECURITIES" AS DEFINED IN RULE 144 UNDER THE SECURITIES ACT OF 1933 AND WILL BEAR A LEGEND RESTRICTING RESALE UNLESS THEY ARE REGISTERED UNDER STATE AND FEDERAL SECURITIES LAWS OR AN EXEMPTION FROM REGISTRATION IS AVAILABLE. THE COMPANY IS NOT OBLIGATED TO REGISTER THE SHARES OF STOCK OR TO MAKE AVAILABLE ANY EXEMPTION FROM REGISTRATION. 5 EXHIBIT A Notice of Election to Exercise This Notice of Election to Exercise shall constitute proper notice pursuant to Section 5(h) of the FreeShop.com, Inc. 1997 Stock Option Plan (the "Plan") and Section 8 of that certain Stock Option Agreement (the "Agreement") dated as of the ____ day of _____________, 19____ between FreeShop.coml, Inc. (the "Company") and the undersigned. The undersigned hereby elects to exercise Optionee's option to purchase __________ shares of the common stock of the Company at a purchase price of $_______ per share, for aggregate consideration of $_____, on the terms and conditions set forth in the Agreement and the Plan. Such aggregate consideration, in the form specified in Section 8 of the Agreement, accompanies this notice. The undersigned has executed this Notice this ____ day of ____________, 19____. ---------------------------------- Signature ---------------------------------- Name (typed or printed) EX-10.4 6 INVESTOR SUBSCRIPTION AGREEMENT 1 EXHIBIT 10.4 INVESTOR SUBSCRIPTION AGREEMENT THIS AGREEMENT, made as of December 10, 1998, by and between FREESHOP INTERNATIONAL, INC., a Washington corporation (the "Corporation"), and FINGERHUT COMPANIES, INC., a Minnesota corporation (the "Investor"). W I T N E S S E T H : WHEREAS, the Corporation and the Investor desire to enter into this Investor Subscription Agreement (this "Agreement") pursuant to which the Investor will purchase, and the Corporation will sell, 4,048,467 shares of the Corporation's common stock, without par value (the "Common Stock"), and the Corporation will, pursuant to the Warrant Agreement dated as of the date hereof between the Corporation and Investor (the "Warrant Agreement"), grant to the Investor warrants to purchase a number of shares which together with the shares of Common Stock issued to the Investor pursuant to this Agreement will represent 40.0% of the outstanding Common Stock (subject to adjustment as provided in the Warrant Agreement); WHEREAS, in order to induce the Investor to enter into this Agreement, the Corporation has also entered into a Stockholders Agreement dated as of the date hereof (the "Stockholders Agreement") (the transactions contemplated by this Agreement, the Stockholders Agreement and the Warrant Agreement being referred to herein as the "Transaction"); NOW THEREFORE, in consideration of the mutual covenants and agreements set forth below, the parties hereto hereby agree as follows: ARTICLE I Section I.1. Issuance of the Subscription Stock. Upon the execution of this Agreement, the Investor shall purchase, and the Corporation shall issue to the Investor, 4,048,467 shares of Common Stock (the "Investor Stock"), which following such issuance will be 19.9% of the issued and outstanding shares of Common Stock, at a price of $.98803 per share, for aggregate consideration of $4,000,000.00, $500,000 of which shall be paid by the surrender and cancellation of a Convertible Promissory Note, dated as of December 4, 1998, issued by the Corporation to the Investor. The Corporation shall deliver to the Investor a certificate representing such Investor Stock. -1- 2 ARTICLE II Section II.1. Investor Representations and Warranties. In connection with the purchase and sale of the Investor Stock hereunder and the warrants pursuant to the Warrant Agreement, the Investor represents and warrants to the Corporation that: (i) The Investor is aware that the Investor Stock, the Warrants and the shares of Common Stock issuable upon exercise of the Warrants (collectively, the "Investor Securities") have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), or any state securities laws, in reliance on exemptions from such registration. It is understood that reliance by the Corporation on such exemptions is predicated in part upon the truth and accuracy of the statements made by the Investor in this Agreement. (ii) The Investor's duly authorized representatives, either alone or with the assistance of the Investor's professional advisors, have such knowledge and experience in financial and business matters that they are capable of evaluating the merits and risks of Investor's purchase of the Investor Securities. (iii) The Investor has sufficient financial resources to be able to bear the risk of the Investor's investment in the Investor Securities. (iv) The duly authorized representatives of the Investor have either spoken or met with, or been given reasonable opportunity to speak with or meet with, representatives of the Corporation for the purpose of asking questions of, and receiving answers and information from, such representatives concerning the Investor's investment in the Investor Securities. (v) The Investor is purchasing the Investor Securities for its own account for investment purposes and not with a view toward the sale or distribution of all or any part of such securities. No one other than the Investor has any beneficial interest in the Investor Securities. (vi) It is understood that, because the Investor Securities have not been registered under the Securities Act, (a) the Investor Securities have the status of securities acquired in a transaction under Section 4(2) of the Securities Act; and (b) the Investor Securities cannot be sold unless such stock is subsequently registered or an exemption from registration is available. (vii) Investor will in no event sell or distribute all or any part of the Investor Securities unless (a) there is an effective registration statement under the Securities Act and applicable state securities laws covering any such transaction involving such stock, or (b) the Corporation receives an opinion of the Investor's legal counsel, in form acceptable to the Corporation, stating that such transaction is exempt from registration. -2- 3 (viii) Investor understands that at the present time Rule 144 promulgated under the Securities Act may not be relied upon for the resale or distribution of the Investor Securities because the Corporation does not file the reports or make information about the Corporation publicly available nor is there a public market for the Investor Securities. Moreover, there can be no assurance that the Corporation will in the future file such reports or make publicly available such information, or that a public market for the Investor Securities will develop. (ix) This Agreement has been duly executed and delivered by the Investor, and constitutes the legal, valid and binding obligation of the Investor, enforceable in accordance with its terms, except as limited by (a) bankruptcy, insolvency or similar laws of general application affecting the enforcement of creditors' rights, and (b) the availability of equitable remedies. (x) The execution, delivery and performance of this Agreement by the Investor does not and will not conflict with, violate or cause a breach of any agreement, contract or instrument to which the Investor is a party or any judgment, order or decree to which the Investor is subject. ARTICLE III In connection with the transactions contemplated hereunder, the Corporation represents and warrants to the Investor that: Section III.1. Corporate Organization, Etc. The Corporation is a corporation duly organized, validly existing and in good standing under the laws of the State of Washington with full corporate power and authority to carry on its business as it is now being conducted, and to own, operate and lease its properties and assets. The Corporation is duly qualified or licensed to do business and is in corporate and tax good standing in those jurisdictions set forth in Schedule 3.1, which sets forth every jurisdiction in which the conduct of its business, the ownership or lease of its properties, the proposed conduct of its business or ownership or lease of its properties, or the sale of its capital stock to the Investor at the closing of the Transaction require it to be so qualified or licensed, unless the failure to be so qualified would not have a material adverse effect upon the Corporation or the ability of the Corporation to meet its obligations hereunder. The Corporation has no subsidiaries. Section III.2. Authorization, Etc. The Corporation has full power and authority to enter into and consummate the Transaction. The execution, delivery and performance of this Agreement, the issuance of the Investor Stock and all other agreements and transactions which are part of the Transaction have been duly authorized by the board of directors of the Corporation and no other corporate proceedings, including authorization by the stockholders of the Corporation, on its part are necessary to authorize this Agreement, the issuance of the Investor Stock or the Transaction. This Agreement constitutes a legal, valid -3- 4 and binding obligation of the Corporation enforceable against the Corporation in accordance with its terms. Section III.3. Capitalization. (i) Set forth in Schedule 3.3 is a description of the indebtedness of the Corporation, outstanding as of the date hereof. (ii) Set forth in Schedule 3.3 is (A) a list of the shareholders of the Corporation and the number of shares of Common Stock held by each, (B) a description of the authorized capital stock of the Corporation, and (C) a description of all rights to acquire shares of capital stock of the Corporation, the terms thereof, and the persons holding such rights. The Corporation has reserved for issuance the total number of shares deliverable upon exercise of the warrants pursuant to the Warrant Agreement. The issuance of the Investor Stock has been duly and validly authorized and, when issued in accordance with the terms hereof, the Investor Stock will be duly and validly issued, fully paid and nonassessable and free of preemptive rights. Section III.4. No Violation. The execution, delivery and performance by the Corporation of this Agreement, and all other agreements which are part of the Transaction, and the fulfillment of and compliance with the respective terms hereof and thereof by the Corporation, do not and will not (a) conflict with or result in a breach of the terms, conditions or provisions of, (b) constitute a default or event of default under (with due notice, lapse of time or both), (c) result in the creation of any lien upon the Corporation's capital stock or assets pursuant to, (d) give any third party the right to accelerate any obligation under, (e) result in a violation of, or (f) require any authorization, consent, approval, exemption or other action by, notice to, or filing with any authority pursuant to, the articles of incorporation, bylaws of the Corporation or any applicable regulation, order or contract to which the Corporation or its respective properties are subject. Section III.5. Binding Obligation. This Agreement constitutes a valid and binding obligation of the Corporation, enforceable in accordance with its respective terms, except to the extent enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws generally affecting creditors' rights and by equitable principles (regardless of whether the enforcement is sought in equity or at law). Section III.6. Financial Statements. The Corporation has delivered to the Investor its audited financial statements for the year ended December 31, 1997. Attached hereto as Schedule 3.6 is the Corporation's unaudited balance sheet as at October 31, 1998 (the "Balance Sheet"). Also set forth in Schedule 3.6 is the unaudited statement of operations for the ten-month period ended October 31, 1998. Each of such financial statements was prepared in accordance with GAAP consistently applied, and fairly presents in all material respects the financial condition of the Corporation at the date thereof, and reflects the assets and liabilities of the Corporation as of the date hereof except as set forth in Schedule 3.6. Since October 31, 1998, there has been no material adverse change in the business, operations, properties, prospects or condition (financial or otherwise) of the Corporation, except that the Corporation has continued to experience losses consistent with the results of previous months during 1998. Section III.7. Litigation. Except as set forth in Schedule 3.7 hereto, there is no action, suit, proceeding or investigation pending, or, to the best knowledge of the Corporation, -4- 5 threatened against the Corporation which might result in any adverse change in the business, operations, conditions, prospects, properties or assets of the Corporation or the ability of the Corporation to perform the Transaction. There is no judgment, order, writ, injunction, or decree outstanding against the Corporation. Section III.8. Ownership of Property, Liens. On and as of the date hereof, the Corporation is the lawful owner of, has good and marketable title to and is in lawful possession of, or has valid leasehold interests in, all properties and other assets, real or personal, tangible, intangible or mixed, purported to be owned or leased, as the case may be, by the Corporation on the Balance Sheet and none of its properties and assets is subject to any Liens, except as set forth in Schedule 3.8. The Corporation conducts its business without infringement or claim of infringement of any material license, patent, trademark, trade name, service mark, copyright, trade secret or other intellectual property right of others, and there is no infringement or claim of infringement by others of any material license, patent, trademark, trade name, service mark, copyright, trade secret or other intellectual property right of the Corporation. Section III.9. No Default. Except as set forth in Schedule 3.9 and except for the fact that certain accounts payable of the Corporation are past due, the Corporation is not in default under or with respect to any material contract, agreement, lease or other instrument to which it is a party or by which its property is bound or affected. Section III.10. No Burdensome Restrictions. There presently exists no condition, event or act under any contract, lease, agreement or other instrument to which the Corporation is a party or by which any of its property is bound or affected, and no charge, corporate restriction, judgment, decree or order and no provision of applicable law or governmental regulation to which the Corporation is subject, which could have a material adverse effect on the Corporation. Section III.11. Tax Matters. All Federal, state and local tax returns, reports and statements required to be filed by or on behalf of the Corporation have been filed with the appropriate governmental agencies in all jurisdictions in which such returns, reports and statements are required to be filed, and all taxes (including real property taxes) and other charges shown to be due and payable have been or will be timely paid prior to the date on which any fine, penalty, interest, late charge or loss may be added thereto for nonpayment thereof, except such taxes as are being contested in good faith by appropriate proceedings for which adequate reserves have been established. All state and local sales and use taxes required to be paid by the Corporation have been paid except to the extent where the failure to so pay would not have a material adverse effect. All federal and state returns have been filed by the Corporation for all periods for which returns were due with respect to employee tax withholding, social security and unemployment taxes, and the amounts shown thereon to be due and payable have been paid in full or adequate provisions therefor have been made. Section III.12. Compliance with Law and Applicable Government Regulations. The Corporation is presently in material compliance with regard to its operations, practices, real property, plants, structures, machinery, equipment and other property, and all other aspects of its business, with all applicable statutes, rules, regulations and orders, including, but -5- 6 not limited to, all regulations relating to the safe conduct of business, environmental protection, quality and labeling, antitrust, taxes, consumer protection, equal opportunity, discrimination, health, sanitation, fire, zoning, building and occupational safety. Section III.13. ERISA and Related Matters; Benefit Plans; Obligations to Employees. Except as set forth in Schedule 3.13 hereto, neither the Corporation, nor any ERISA Affiliate of the Corporation, is a party to or participates in or has any liability or contingent liability with respect to: (i) any "employee welfare benefit plan" or "employee pension benefit plan" or "multiemployer plan" (as those terms are respectively defined in Sections 3(1), 3(2) and 3(37) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")); (ii) any retirement or deferred compensation plan, incentive compensation plan, stock plan, unemployment compensation plan, vacation pay, severance pay, bonus or benefit arrangement, insurance or hospitalization program or any other fringe benefit arrangements for any employee, director, consultant or agent, whether pursuant to contract, arrangement, custom or informal understanding, which does not constitute an "employee benefit plan" (as defined in Section 3(3) of ERISA); or (iii) any employment agreement not terminable on 30 days' or less written notice, without further liability. Any plan, arrangement or agreement required to be listed on Schedule 3.13 for which the Corporation or any ERISA Affiliate of the Corporation may have any liability or contingent liability is sometimes hereinafter referred to as a "Benefit Plan". For purposes of this Section, the term "ERISA Affiliate" shall mean any trade or business, whether or not incorporated, that together with the Corporation would be deemed a "single employer" within the meaning of Section 4001(b)(i) of ERISA. Section III.14. Brokerage. There are no claims for brokerage commissions, finders' fees or similar compensation in connection with the Transaction based on any arrangement or agreement binding upon the Corporation. Section III.15. Employment, Shareholders and Subscription Agreements. Except for the agreements described in Schedule 3.15, there are no (i) employment agreements covering the management of the Corporation, (ii) collective bargaining agreements or other labor agreements covering any employees of the Corporation, (iii) agreements for managerial, consulting or similar services to which the Corporation is a party or by which it is bound or (iv) agreements regarding the Corporation, its assets or operations or any investment therein to which any of its stockholders is a party or by which it is bound, including without limitation any stock option plan or stock appreciation right plan. Section III.16. Environmental Laws. The Corporation is not aware of, and the Corporation has not received any written notice, notification, demand, request for information, complaint, citation, summons, investigation, administrative order, consent order, agreement, litigation or settlement arising under or relating to Environmental Laws nor, to the Corporation's knowledge, are any of the foregoing threatened, with respect to or in connection with the Corporation or any properties now or previously owned, leased or operated by the Corporation. All uses by the Corporation of any now or previously owned, leased or operated property comply and at all times have complied with applicable Environmental Laws. The prior uses of all now or previously owned, leased or operated properties have at all times -6- 7 complied with applicable Environmental Laws. No property now or previously owned, leased or operated by the Corporation or any Subsidiary of the Corporation, no property to which any materials originating at or from the Corporation or any Subsidiary of the Corporation have been sent, and no property on which the Corporation or any Subsidiary or the Corporation has transported or arranged for the transportation of any material is listed or, to the Corporation's knowledge, proposed for listing on the National Priorities List promulgated pursuant to CERCLA, on CERCLIS (as defined in CERCLA) or on any similar federal, state or foreign list of sites requiring investigation or cleanup, nor, to the knowledge of the Corporation, is any such property threatened to be placed on any such list. Other than in compliance with all applicable Environmental Laws, no Hazardous Materials are located on any properties now or previously owned, leased or operated by the Corporation or have been released into the environment, or deposited, discharged, placed or disposed of at, on, or under any of such properties. No portion of any such property is being used, or has been used at any previous time, for the disposal, storage, treatments processing or other handling of Hazardous Materials (other than processing or handling or generation of Hazardous Materials in compliance with all applicable Environmental Laws), nor is any such property affected by any Hazardous Materials Contamination. Section III.17. Full Disclosure. None of the information (financial or otherwise) furnished by or on behalf of the Corporation in connection with the consummation of the transactions contemplated hereby contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained herein or therein not misleading in the light of the circumstances under which such statements were made. Section III.18. Employees. Schedule 3.18 sets forth a list of all officers, directors, employees and consultants of the Corporation earning more than $25,000 annually. The Corporation is in compliance with all Federal, state and local statutes, rules and regulations or orders affecting employment and employment practices of the Corporation, including terms and conditions of employment and wages and hours except for such circumstances, which, individually or in the aggregate, if enforced would not materially impair the ability of the Corporation to meet its obligations under the Transaction or conduct its business as presently conducted. Except as set forth in Schedule 3.18, the Corporation does not have any liability to any of its employees, officers or directors other than for the payment of salaries and director fees to be paid for current periods in the ordinary course of business except as reflected on the Balance Sheet. Section III.19. Contracts. The Corporation has delivered to the Investor true and complete copies of all the contracts and documents listed in the schedules to this Agreement. Set forth in Schedule 3.19 is a list of contracts to which the Corporation is a party which are not terminable by the Corporation without liability on less than 60 days notice. Section III.20. Intellectual Property. (a) Schedule 3.20(a). Set forth in Schedule 3.20(a) is a list of the Intellectual Property (as hereinafter defined) owned or used by the Corporation and material to its business, and there is no additional such Intellectual Property used in the business of the -7- 8 Corporation. All such Intellectual Property either is owned by the Corporation or used pursuant to a valid license which is not currently terminable due to any breach or noncompliance by the Corporation and which shall not be adversely affected by the transactions contemplated herein. Schedule 3.20(a) indicates which such Intellectual Property is owned by the Corporation and which of such Intellectual Property is covered by a license. None of the Corporation's rights in or to any such Intellectual Property shall be adversely affected by its execution or delivery of this Agreement or by the performance of its obligations hereunder. "Intellectual Property": means: (i) any and all domain names, trademarks, service marks, brand names, certification marks, trade dress, assumed names, trade names, logos and other indications of origin, sponsorship or affiliation, together with the goodwill associated therewith (whether the foregoing are registered or unregistered); registrations thereof in any jurisdiction and applications to register any of the foregoing in any jurisdiction, and any extension, modification or renewal of any such registration or application; (ii) any and all inventions, developments, improvements, discoveries, know how, concepts and ideas, whether patentable or not in any jurisdiction; (iii) any and all patents, revalidations, industrial designs, industrial models and utility models, patent applications (including reissues, continuations, divisions, continuations-in-part and extensions) and patent disclosures; (iv) any and all non-public information, trade secrets and proprietary or confidential information and rights in any jurisdiction to limit the use or disclosure thereof by any person; (v) any and all writings and other works, whether copyrighted, copyrightable or not in any jurisdiction, such works including computer programs and software (including source code, object code, data and databases); (vi) any and all copyrights, copyright registrations and applications for registration of copyrights in any jurisdiction, and any renewals or extensions thereof; (vii) any and all other intellectual property or proprietary rights; and (viii) any and all agreements, licenses, immunities, covenants not to sue and the like relating to any of the foregoing. (b) Except as set forth in Schedule 3.20(b), the Corporation owns all right, title and interest in, or has the right to use, the Intellectual Property used in the conduct of its business, and there are no claims or causes of action arising out of or related to any infringement or misappropriation of any of the Intellectual Property. Except as set forth in Schedule 3.20(b), each employee of the Corporation and each independent contractor or outside consultant or other agent who has worked or is working for the Corporation and who has participated or is participating in the design or development of any Intellectual Property for, on behalf of or at the request of the Corporation, has assigned all of his/her/its right, title and interest in and to such Intellectual Property to the Corporation. Each such assignment agreement is in full force and effect and has not been in any respect breached, waived or modified. (c) No claims with respect to any Intellectual Property have been asserted or, to the Corporation's knowledge, threatened (i) against the Corporation, or (ii) to the Corporation's knowledge, against any other person based on its use of any of the Corporation's Intellectual Property. To the Corporation's knowledge, no use of any of the Corporation's Intellectual Property by any person (including the Corporation) constitutes an unauthorized use, infringement, misappropriation or other violation of the Intellectual Property of any other -8- 9 person. Without limiting the generality of the foregoing, no person ever employed or otherwise engaged by the Corporation has asserted or, to the Corporation's knowledge, threatened any claim against the Corporation relating to any Intellectual Property. All granted and issued patents, copyright registrations, and registered trademarks and service marks listed on Schedule 3.20(a) and all copyrights held by the Corporation are valid, enforceable and subsisting. To the knowledge of the Corporation, there has not been, nor is there presently, any unauthorized use, infringement, misappropriation or violation of any of its Intellectual Property by any person. To the Corporation's knowledge, except as set forth in Schedule 3.20(c), the Corporation has the full right to possess, use, copy, distribute, display, transfer and license all Intellectual Property used in the business of the Corporation. (d) Except as set forth in Schedule 3.20(d), no Intellectual Property of the Corporation is subject to any outstanding order, award, decision, injunction, judgment, decree, stipulation or agreement in any manner restricting the transfer, use, enforcement or licensing thereof by the Corporation. Except as set forth in Schedule 3.20(d), the Corporation has not entered into any agreement to indemnify any other person against any charge of infringement of any Intellectual Property. The Corporation has not entered into any agreement granting any third party the right to bring infringement actions with respect to, or otherwise to enforce rights with respect to, any of the Corporation's Intellectual Property. The Corporation has the exclusive right to file, prosecute and maintain all applications and registrations with respect to its Intellectual Property. (e) Except as set forth in Schedule 3.20(e), to the knowledge of the Corporation, the Corporation has taken all reasonable and necessary steps to obtain, maintain, enforce and protect its Intellectual Property and its rights thereunder. The Corporation has paid all fees, annuities and all other payments which have heretofore become due to any governmental or regional authority with respect to the Corporation's Intellectual Property. (f) Except as set forth in Schedule 3.20(f), the Corporation has not transferred title in or to any copy of any computer program or software. No computer program or software has been supplied by the Corporation to any person. Section III.21. Customer Warranties. There are no pending, nor to the best knowledge of the Corporation, threatened, any claims under or pursuant to any warranty, whether expressed or implied, on products or services sold prior to the date hereof by the Corporation which are not set forth in Schedule 3.21. Section III.22. Insurance. All of the insurance policies of the Corporation are in full force and effect, all premiums with respect thereto covering all periods up to and including the date hereof have been paid or accrued therefor, and no notice of cancellation or termination has been received with respect to any such policy. Schedule 3.22 hereto sets forth a complete and accurate summary of all policies, including name of insurer, the types and amounts of coverage. The Corporation has not breached or otherwise failed to perform in any material respects its obligations under any of such policies nor has the Corporation received any adverse notice or communication from any of the insurers party to the policies with respect to any such alleged breach or failure in connection with any of the policies. Except as set forth -9- 10 in Schedule 3.22, all of such policies remain in full force and effect through 30 days after the date hereof. Except as set forth in Schedule 3.22, the Corporation has never been refused any insurance with respect to its assets or operations, nor has coverage ever been limited by any insurance carrier to which the Corporation has applied for any insurance policy or with which it has carried an insurance policy. Section III.23. Accounts Receivable; Inventories. The accounts receivable of the Corporation reflected in the Balance Sheet and such additional accounts receivable as are reflected on the books of the Corporation on the date hereof are good and collectible except to the extent reserved against thereon (which reserves have been determined based upon actual prior experience and are consistent with prior practices) or except as collected in the ordinary course after the date of the Balance Sheet. All such accounts receivable (except to the extent so reserved against) are valid, genuine and subsisting, arise out of bona fide sales and deliveries of goods, performance of services or other business transactions and are not subject to defenses, set-offs or counterclaims. Except as set forth in Schedule 3.23 hereto, the Corporation is not aware of any material adverse conditions affecting the supply of materials available to the Corporation, and the consummation of the Transaction will not adversely affect any such supply. Section III.24. Accredited Investors. All issuances of securities by the Corporation have been in accordance with all applicable federal and state laws. ARTICLE IV Section IV.1. Restrictions on Transfer. The Investor shall not sell, transfer, assign, encumber or otherwise dispose of any interest (a "Transfer") in any shares of the Investor Stock except as permitted under the Stockholders Agreement. Section IV.2. Additional Restrictions on Transfer. The certificates representing the Investor Stock shall bear the legends set forth in the Stockholders Agreement. ARTICLE V Section V.1. Survival of Representations and Warranties. The representations and warranties shall survive the consummation of the Transaction. The representations and warranties in Sections III.2 and III.20 shall not terminate. All other representations and warranties shall terminate on the earlier to occur of (i) January 1, 2000 or (ii) the occurrence of a Qualified Public Offering as such term is defined in the Stockholders Agreement. -10- 11 Section V.2. Indemnification of the Investor by the Corporation. The Corporation shall reimburse, indemnify and hold harmless the Investor from, against and in respect of the following ("Claim(s)"): (i) any and all damage, loss, liability, claim or deficiency resulting from, or which exists or arises due to any untruth, inaccuracy, breach or omission of, from or in, the representations and warranties made in Article III hereof as long as such representations and warranties shall survive, or from any untruth, inaccuracy, breach or omission of, from or in, any representation or warranty, or any nonfulfillment of any covenant or agreement made in any other agreement which is part of the Transaction; and (ii) any and all actions, suits, claims, proceedings, investigations, audits, demands, assessments, fines, judgments, costs and other expenses (including, without limitation, reasonable audit and legal fees) resulting from the circumstances described in clause (i) of this Section. The obligations of the Corporation under this Section V.2 shall terminate upon the consummation of a Qualified Public Offering as such term is defined in the Stockholders Agreement. ARTICLE VI Section VI.1. Definitions. For purposes of this Agreement the following terms shall have the following meanings: "Environmental Laws" means any and all applicable federal, state, local and foreign statutes, laws, judicial decisions, regulations, ordinances, rules, judgments, orders, decrees, codes, plans, injunctions, permits, concessions, grants, franchises, licenses, agreements and governmental restrictions, whether now or hereafter in effect, relating to pollution or protection of human health, the environment or to emissions, discharges or releases of pollutants, contaminants, Hazardous Materials or wastes into the environment, including ambient air, surface water, ground water or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, Hazardous Materials or wastes or the clean-up or other remediation thereof. "GAAP": United States generally accepted accounting principles, consistently applied. "Hazardous Materials" means (i) any "hazardous substance" as defined in CERCLA; (ii) asbestos; (iii) polychlorinated biphenyls; (iv) petroleum, its derivatives, by-products and other hydrocarbons; and (v) any other toxic, radioactive, caustic or otherwise hazardous substance regulated under Environmental Laws. "Hazardous Materials Contamination" means contamination which is subject to clean-up, remediation, removal, permitting or other regulation under any Environmental Law (a) of the improvements, buildings, facilities, personalty, soil, groundwater, air or other elements on or of the relevant property by Hazardous Materials, or any derivatives thereof, or (b) on or of any other property as a result of Hazardous Materials, or any derivatives thereof, generated on, emanating from or disposed of in connection with the relevant property. -11- 12 "Lien": any mortgage, deed of trust, pledge, security interest, encumbrance, lien or charge of any kind whatsoever. "Transaction": the related set of transactions which dated as of the date of this Agreement between the Corporation and the Investor relating to the proposed purchase of shares of Common Stock and warrants by the Investor. "Transaction Closing": the closing of the Transaction. ARTICLE VII The parties further agree as follows: Section VII.1. Agreement to Defend. In the event any action, suit, proceeding or investigation which would prevent the consummation of the transactions contemplated hereby is commenced, all the parties hereto agree to cooperate and use their best efforts to defend against and respond thereto. Section VII.2. Further Assurances. Subject to the terms and conditions of this Agreement, the parties hereto shall use their best efforts to take, or cause to be taken, all action, and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective as promptly as possible the Transaction contemplated by this Agreement, and to cooperate with each other in connection with the foregoing. Section VII.3. Technology License Agreement. Promptly after the Transaction, the parties agree to negotiate in good faith a Technology License Agreement to provide for the licensing of technology by either or both parties on an arms-length basis and for most favored nation status for each party. Section VII.4. Issuance of Additional Shares. In the event the parties learn after the closing that there are additional securities, options or warrants issued to third parties and outstanding as of the date of this Agreement which have not been taken into account in calculating the number of shares of Common Stock sold to Investor pursuant to this Agreement, the Corporation shall issue to Investor without charge additional shares of Common Stock so that Investor shall hold a number of shares which represent 19.9% of the issued and outstanding shares of the Corporation's Common Stock as of the date of this Agreement. Section VII.5. Deliveries After Closing. From time to time after the date hereof, at the Investor's request and without further consideration from the Investor, the Corporation shall execute and deliver such other instruments of conveyance and transfer and take such other action as the Investor reasonably may require to convey, transfer to and vest in -12- 13 the Investor and to put the Investor in possession of any rights or property to be sold, conveyed, transferred and delivered hereunder. Section VII.6. Public Announcements. The form, content and timing of all press releases, public announcements or publicity statements with respect to this Agreement and transactions contemplated hereby shall be subject to the prior approval of both the Corporation and the Investor, which approval shall not be unreasonably withheld. No press releases, public announcements or publicity statements shall be released by either party without such prior mutual agreement. ARTICLE VIII Section VIII.1. Notices. All notices, requests, other communications and distributions to any party hereunder shall be in writing (including prepaid overnight courier, telex, facsimile transmission or similar writing) and shall be given to such party at its address or telecopy number set forth below or at such other address or telecopy number as such party may hereafter specify for the purpose by notice to the other parties. If to the Corporation: FreeShop International, Inc. 95 South Jackson, Suite 300 Seattle, Washington 98104 Attn: Mr. Timothy C. Choate If to the Investor: Fingerhut Companies, Inc. 4400 Baker Road Minnetonka, MN 55343 Attn: Michael P. Sherman, Esq. Each such notice, request or other communication shall be effective (i) if given by telex or telecopy, when such telex or telecopy is transmitted to the telex or telecopy number specified on the signature pages hereof and the appropriate answer back is received (in the case of telex) or telephonic confirmation of receipt thereof is obtained (in the case of telecopy) or (ii) if given by mail, prepaid overnight courier or any other means, when received at the address specified on the signature pages hereof or when delivery at such address is refused. Section VIII.2. Severability. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision of any other jurisdiction, but this -13- 14 Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein. Section VIII.3. Complete Agreement. This Agreement and the other agreements which are part of the Transaction embody the complete agreement and understanding among the parties and supersede and preempt any prior understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way. Section VIII.4. Counterparts. This Agreement may be executed in separate counterparts, each of which is deemed to be an original and all of which taken together constitute one and the same agreement. Section VIII.5. Successors and Assigns. Except as otherwise provided herein, this Agreement shall bind and inure to the benefit of and be enforceable by the Corporation and the Investor and their respective successors and assigns. Section VIII.6. Remedies. Each of the parties to this Agreement will be entitled to enforce its rights under this Agreement specifically, to recover damages and costs (including reasonable attorney's fees) caused by any breach of any provision of this Agreement and to exercise all other rights existing in its favor. The parties hereto agree to acknowledge that money damages may not be an adequate remedy for any breach of the provisions of this Agreement and that any party may in its sole discretion apply to any court of law or equity of competent jurisdiction (without posting any bond or deposit) for specific performance and/or other injunctive relief in order to enforce or prevent any violations of the provisions of this Agreement. Section VIII.7. Applicable Law. The provisions of this Agreement shall be construed in accordance with the laws of the State of Washington and all rights and remedies shall be governed by such laws without regard to principles of conflict of laws. Section VIII.8. Amendment and Waiver. The provisions of this Agreement may be amended and waived only with the prior written consent of the Corporation and the Investor. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first written above. FREESHOP INTERNATIONAL, INC. By /s/ TIM CHOATE --------------------------------- -14- 15 FINGERHUT COMPANIES, INC. By /s/ MICHAEL SHERMAN ------------------------------- -15- EX-10.5 7 WARRANT AGREEMENT 1 EXHIBIT 10.5 WARRANT AGREEMENT WARRANT AGREEMENT (this "Agreement"), dated as of December 10, 1998, by and between FREESHOP INTERNATIONAL, INC., a Washington corporation (the "Grantor"), and FINGERHUT COMPANIES, INC., a Minnesota corporation (the "Grantee"). W I T N E S S E T H: WHEREAS, Grantor and Grantee are parties to an Investor Subscription Agreement of even date herewith (as the same may be amended from time to time, the "Investment Agreement") pursuant to which Grantee is purchasing 4,048,467 shares of Common Stock of Grantor, without par value ("Common Stock"); WHEREAS, Grantor has agreed to issue to Grantee Warrants to purchase that number of shares of Common Stock which together with such 4,048,467 shares of Common Stock and the purchase by Grantee of all additional shares of Common Stock available pursuant to certain anti-dilution rights also to be granted to Grantee will represent forty percent (40.0%) of the outstanding Common Stock of Grantor. NOW, THEREFORE, in consideration of the execution of the Investment Agreement and the transactions contemplated thereby and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: SECTION 1. Grant of Warrant. (a) Grantor hereby grants to Grantee, at a warrant purchase price of $1.00 each, a series of irrevocable warrants (the "Percentage Warrants," and each individually, a "Percentage Warrant"), to purchase at the exercise price per share specified in the table below up to that number of shares of Common Stock which, together with 4,048,467 shares of Common Stock to be issued to Grantee on the date hereof pursuant to the Investment Agreement, will represent forty percent (40.0%) of the outstanding Common Stock of Grantor as of the date hereof (subject to adjustment as provided in this Agreement). The percent of outstanding shares represented by each Percentage Warrant (prior to exercise of the Anti-Dilution Warrants and the Third Party Agreement Warrants and based upon the number of shares of Common Stock outstanding as of the date hereof), the number of shares to be purchased upon exercise of each Percentage Warrant, the aggregate percent of outstanding shares owned after exercise of each Percentage Warrant (prior to exercise of any Anti-Dilution Warrants or Third Party Agreement Warrants and based upon the number of shares of Common Stock outstanding as of the date hereof) (the "Percentage Ownership"), the purchase price per share upon exercise of each Percentage Warrant, the expiration date of each 2 Percentage Warrant and the purchase price for each Percentage Warrant are as follows (except as otherwise specified in this Agreement): -2- 3
Purchase Price Percent of Number of Shares Aggregate Percent per Share Shares to be Purchased of Outstanding Shares upon Exercise Expiration Date Represented by upon Exercise of Owned after Exercise of each of Each Percentage each Percentage each Percentage of each Percentage Percentage Percentage Warrant Warrant Warrant Warrant Warrant Warrant Purchase Price - ------- ------- -------- ------- ------- -------------- 10.1% 2,935,356 30.0% $1.71826 12/31/2000 $1.00 5.0% 1,790,724 35.0% $1.99440 12/31/2000 $1.00 5.0% 2,089,178 40.0% $2.20919 12/31/2000 $1.00
The Percentage Warrants representing the 10.1%, 5% and 5% investments shall be referred to herein as the "First Tranche Investment," the "Second Tranche Investment," and the "Third Tranche Investment," respectively. The "Applicable Percentage," as used herein, means 19.9% plus that percentage or percentages set forth in the first column of the table with respect to which Percentage Warrants have been exercised from time to time. (b) Grantor also hereby grants to Grantee warrants (the "Anti-Dilution Warrants") to purchase from time to time on or before December 31, 2000, at a purchase price of $2.20919 per share, in the aggregate up to such number of shares of Common Stock as is equal to the Applicable Percentage of the total number of shares of Common Stock then issued and outstanding solely as a result of exercise of (i) options and warrants outstanding at the date of this Agreement and (ii) options remaining available at the date of this Agreement for grant pursuant to Grantor's 1997 Stock Option Plan (such options and warrants being collectively, the "Additional Shares"). Grantor represents that the total number of Additional Shares is 2,764,315. (c) Grantor also hereby grants to Grantee warrants (the "Third Party Agreement Warrants") to purchase from time to time on or before December 31, 2000, in the event that shares of Common Stock are issued pursuant to that certain Convertible Promissory Note made March 17, 1998, by Grantor in favor of Oki Enterprises, LLC ("Oki") and/or that certain Promotion Agreement dated as of May 18, 1998, between Grantor and CNET, Inc. ("CNET"), as amended to date (collectively, the "Third Party Agreements," and such shares being the "Third Party Shares"), in the aggregate up to such number of shares of Common Stock as is equal to the Applicable Percentage of the Third Party Shares. The exercise prices for Third Party Agreement Warrants are $.98803 per share for such shares as are necessary to maintain Grantee's initial 19.9% interest, $1.71826 per share for such shares as are necessary to maintain Grantee's next 10.1% interest, $1.99440 per share for such shares as are necessary to maintain Grantee's next 5% interest and $2.20919 per share for such shares as are necessary to maintain Grantee's final 5% interest (as any or all such percentage interests may be adjusted pursuant to this Agreement). (d) The Percentage Warrants, the Anti-Dilution Warrants and the Third Party Agreement Warrants are referred to collectively as the "Warrants," and each individually, a "Warrant," and the shares of Common Stock issuable upon exercise of the -3- 4 Warrants are referred to as the "Warrant Shares." Grantee's rights to exercise the Warrants shall be independent of rights granted to Grantee to purchase shares of Common Stock pursuant to the Stockholders Agreement dated as of the date hereof among Grantor, Grantee, Tim Choate and John Ballantine (the "Stockholders Agreement"). (e) Notwithstanding anything to the contrary in this Agreement, the Warrants shall expire at the closing of a Qualified Public Offering if they are not exercised at or before such time. For purposes of this Agreement "Qualified Public Offering" shall have the meaning set forth in the Stockholders Agreement. (f) In determining the number of shares to be issued to Grantee upon exercise of a Warrant, there shall be included in the number of shares owned by Grantee prior to such issuance only those shares acquired by Grantee through (i) the purchase of shares pursuant to the Investment Agreement and (ii) the exercise of the Warrants. (g) The Percentage Ownership numbers set forth in Section 1(a) and the percentage set forth in Section 1(b) are subject to adjustment as set forth in Section 3(c) below. (h) In lieu of receiving shares of Common Stock upon exercise of the Percentage Warrant for the First Tranche Investment, Grantee may elect to receive a zero coupon convertible subordinated note, convertible into the same number of shares of Common Stock as are issuable upon exercise of the Percentage Warrant for the First Tranche Investment, in form similar to the Convertible Promissory Note made as of December 4, 1998 by Grantor in favor of Grantee but maturing on the earlier to occur of a Qualified Public Offering and December 31, 2001, which is otherwise acceptable in form and terms to Grantor. SECTION 2. Exercise of Warrants. (a) Grantee may exercise the Warrants, in whole or in part (but, with respect to Percentage Warrants exercisable at the same Exercise Price, all Percentage Warrants at such Exercise Price), by giving to Grantor notice to such effect, specifying a date not later than ten business days from the date such notice is given for the closing of the purchase. Percentage Warrants may only be exercised in the order shown in the above table. Such closing may be by mail or by transfer of funds as specified on such notice. (b) Upon notice from Grantor that it intends to file a registration statement with respect to a Qualified Public Offering, Grantee will promptly advise Grantor as to its intentions with respect to exercise of Grantee's rights under this Agreement. (c) Grantor shall make any request that Grantee exercise its Warrants pursuant to this Section 2 or otherwise by providing written notice of its request to Grantee by overnight mail or by facsimile. SECTION 3. Investments. -4- 5 (a) Upon a determination by Grantor's Board of Directors that additional equity funds are needed for the operations of Grantor's business, on or after February 1, 1999, Grantor may request in writing that Grantee exercise its Percentage Warrant for the First Tranche Investment. Within ten days following receipt of such written request, Grantee shall advise Grantor in writing whether: (i) it will exercise its Percentage Warrant for the First Tranche Investment; (ii) it will offer to purchase a zero coupon convertible note, maturing on December 31, 2001, but otherwise consistent with the terms of the note specified in Section 1(g) above, subject to Grantee's acceptance of the form and terms of such convertible note; or (iii) it will participate in a private placement of Grantor's stock (the "First Private Placement") as hereinafter described. If Grantee does not choose to exercise its Percentage Warrant for the First Tranche Investment and no convertible note is purchased, Grantor may seek to raise funds in an amount of up to $10 million in the First Private Placement. Grantee shall subscribe for 19.9% of the shares offered in such First Private Placement on the same terms and conditions offered to and accepted by all other potential investors in the First Private Placement. If the deemed valuation of Grantor is $40 million or less immediately following the closing of the First Private Placement, Grantee shall continue to have all rights granted under this Agreement with respect to the Percentage Warrant for the First Tranche Investment. If the deemed valuation of Grantor is in excess of $40 million immediately following the closing of the First Private Placement, Grantee's rights under this Agreement with respect to the Percentage Warrant for the First Tranche Investment shall expire. (b) In the event that Grantor seeks to raise funds in a private placement subsequent to the First Private Placement (the "Subsequent Private Placement"), Grantor may request in writing that Grantee exercise any or all of its remaining Warrant(s) and/or subscribe for shares in the Subsequent Private Placement. Within ten days following receipt of such written request, Grantee shall advise Grantor in writing whether Grantee wishes to exercise such Warrant(s) or subscribe for such shares. If Grantee declines to exercise such Warrant(s) and subscribe for shares in the Subsequent Private Placement, Grantee shall use its reasonable best efforts (other than exercise of such Warrant(s)) to assist Grantor in the Subsequent Private Placement. (c) In the event Grantee's Percentage Ownership is diluted as a result of Grantee's decision not to exercise any or all of its rights to purchase shares under this Agreement or under the Stockholders Agreement, (i) if Grantee subsequently exercises its Percentage Warrants for the First Tranche Investment, the Second Tranche Investment and/or the Third Tranche Investment, Grantee shall have the right to purchase in connection with each such exercise only such number of shares of Common Stock, at the respective purchase price per share specified in the table at Section 1(a) above, as will result in Grantee's Percentage Ownership after the First Tranche Investment being 10.1% higher than Grantee's Percentage Ownership immediately prior to such First Tranche Investment, Grantee's Percentage Ownership after the Second Tranche Investment being 5% higher than Grantee's Percentage Ownership immediately prior to such Second Tranche Investment and Grantee's Percentage Ownership after the Third Tranche Investment being 5% higher than Grantee's Percentage Ownership immediately prior to such Third Tranche Investment and (ii) if Grantee subsequently exercises its Anti-Dilution Warrants, Grantee shall have the right to purchase in -5- 6 connection with such exercise only up to such number of shares of Common Stock, at the purchase price of $2.20919 per share, as is equal to a percentage of the Additional Shares equal to Grantee's Percentage Ownership immediately prior to exercise of the Anti-Dilution Warrants. SECTION 4. Adjustment of Warrant Shares Issuable. (a) In case at any time or from time to time after the date of this Agreement Grantor shall (i) declare or pay any dividend or make any other distribution upon any capital stock of Grantor which is payable in Common Stock or securities convertible into Common Stock ("Convertible Securities"), or (ii) effect a subdivision of the outstanding shares of Common Stock into a greater number of shares of Common Stock (by reclassification or otherwise than by payment of a dividend in Common Stock), then, in any such event, the total number of additional shares of Common Stock, or (in the case of any such dividend or distribution payable in Convertible Securities) Convertible Securities, issuable in payment of such dividend or distribution or to give effect to such subdivision shall be deemed to have been issued immediately after the close of business on the record date (or other date) for the determination of holders of any class of securities in connection with such subdivision. (b) In case the outstanding shares of Common Stock shall be combined or consolidated, by reclassification or otherwise, into a lesser number of shares of Common Stock, the purchase price per share in effect for each Warrant immediately prior to such combination or consolidation shall, concurrently with the effectiveness of such combination or consolidation, be proportionately increased. (c) In case Grantor shall take any of the actions set forth in Sections 4(a) and (b) above, the number of Warrant Shares purchasable upon exercise of each Warrant immediately prior thereto shall be adjusted so that Grantee shall be entitled to receive the kind and number of Warrant Shares which it would have owned or have been entitled to receive after any of the events described above, had each such Warrant been exercised immediately prior to such event or any record date with respect thereto. An adjustment made pursuant to this clause (c) shall become effective immediately after the effective date of such event retroactive to the record date, if any for such event. (d) This Section 4 shall not be applicable to the Third Party Agreement Warrants. SECTION 5. Payment and Delivery of Warrant Shares. At any closing hereunder, (a) Grantee shall make payment to Grantor of the purchase price per share, and (b) Grantor shall issue the Warrant Shares to Grantee and register such issuance on Grantor's stock ledger. SECTION 6. Representations and Warranties of Grantor. (a) Organization. Grantor is a corporation duly incorporated, validly existing and in good standing under the laws of Washington. -6- 7 (b) Authorization; No Contravention. The execution, delivery and performance by Grantor of this Agreement are within Grantor's corporate powers, have been duly authorized by all necessary corporate action, require no action by or in respect of, or filing with, any governmental body, agency or official (other than as may be required by state and federal securities laws) and do not contravene, or constitute a default under, any provision of applicable law or regulation or of the certificate of incorporation or bylaws of Grantor or of any other agreement, judgment, injunction, order, decree or other instrument binding upon Grantor. (c) Binding Effect. This Agreement constitutes a valid and binding agreement of Grantor, enforceable in accordance with its terms. (d) Private Offering. Neither Grantor nor any person acting on its behalf has offered the Warrant Shares or any similar securities for sale, or solicited any offer to buy any of the same from, or otherwise approached or negotiated in respect thereof with, any persons. Neither Grantor nor any person acting on its behalf has taken, or will take, any action which would subject the issuance or sale of the Warrant Shares to the registration requirements of Section 5 of the Securities Act of 1933, as amended (the "Securities Act"). (e) Issuance of Shares. Upon the exercise of the Warrants pursuant to this Agreement, the Warrant Shares reserved for issuance hereunder will be duly and validly authorized, issued, fully paid and non-assessable, free of preemptive rights and free and clear of any lien and any other limitation or restriction (including any restriction on the right to vote, sell or otherwise dispose of the Warrant Shares), other than such limitations or restrictions imposed by the Stockholders Agreement and by the Securities Act. (f) Capital Stock. On the date hereof, the authorized capital stock of Grantor consists of 100,000,000 shares of Common Stock, of which 16,295,587 shares of Common Stock are outstanding, and 10,000,000 shares of Preferred Stock, of which 1,935,484 shares were previously designated and issued as Series A Convertible Preferred Stock and have been converted into outstanding shares of Common Stock. Assuming all Warrants are exercised, the Warrant Shares and the 4,048,467 shares of Common Stock to be issued to Grantee on the date hereof pursuant to the Investment Agreement will represent 40.0% of Grantor's outstanding Common Stock on a fully diluted basis, after the issuance of the Warrant Shares (subject to adjustment as provided in this Agreement). SECTION 7. Covenants of Grantor. Grantor will at all times reserve and keep available, solely for issuance pursuant to the exercise of the Warrant, the number of shares of Common Stock which from time to time shall be issuable to Grantee upon the exercise of the Warrant. Grantor shall take all action to assure that all such shares shall be duly authorized and, when issued pursuant to the exercise of the Warrant, shall be validly issued, fully paid and non-assessable with no liability on the part of the holders thereof. -7- 8 SECTION 8. Miscellaneous. (a) Grantee understands that the Warrant Shares are being offered only in a transaction not involving any public offering within the meaning of the Securities Act, and that, if in the future Grantee decides to resell, pledge or otherwise transfer any of the Warrant Shares, such Warrant Shares may be resold, pledged or transferred only (i) in accordance with the terms of the Stockholders Agreement or (ii) pursuant to an exemption from registration under the Securities Act. (b) Grantee understands that the Warrant Shares will, unless otherwise agreed by Grantor thereof, bear a legend to the following effect: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") AND MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR AN EXEMPTION FROM REGISTRATION THEREUNDER. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON TRANSFER, CERTAIN REPURCHASE OPTIONS AND CERTAIN OTHER AGREEMENTS SET FORTH IN A STOCKHOLDERS AGREEMENT. A COPY OF SUCH AGREEMENT MAY BE OBTAINED BY THE HOLDER HEREOF AT THE CORPORATION'S PRINCIPAL PLACE OF BUSINESS WITHOUT CHARGE. (c) Amendments. This Agreement may not be modified, amended, altered or supplemented, except upon the execution and delivery of a written agreement executed by the parties hereto. (d) Notices. All notices, requests, other communications and distributions to any party hereunder shall be in writing (including prepaid overnight courier, telex, facsimile transmission or similar writing) and shall be given to such party at its address or telecopy number set forth below or at such other address or telecopy number as such party may hereafter specify for the purpose by notice to the other parties. If to Grantor: FreeShop International, Inc. 95 South Jackson - Suite 300 Seattle, Washington 98104 Attn: Mr. Tim Choate If to Grantee: -8- 9 Fingerhut Companies, Inc. 4400 Baker Road Minnetonka, MN 55343 Attn: Michael P. Sherman, Esq. Each such notice, request or other communication shall be effective (i) if given by telex or telecopy, when such telex or telecopy is transmitted to the telex or telecopy number specified on the signature pages hereof and the appropriate answerback is received (in the case of telex) or telephonic confirmation of receipt thereof is obtained (in the case of telecopy) or (ii) if given by mail, prepaid overnight courier or any other means, when received at the address specified on the signature pages hereof or when delivery at such address is refused. (e) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Washington and all rights and remedies shall be governed by such laws without regard to principles of conflict of laws. (f) Counterparts. This Agreement may be executed in counterparts, each of which shall be an original, but all of which together shall constitute one and the same Warrant. (g) Headings. The paragraph headings herein are for convenience only and shall not affect the construction hereof. (h) Assignment. This Agreement shall not be assignable by either party. -9- 10 IN WITNESS WHEREOF, Grantor and Grantee have caused this Agreement to be duly executed as of the day and year first above written. FREESHOP INTERNATIONAL, INC. By: /s/ TIM CHOATE ------------------------------- FINGERHUT COMPANIES, INC. By: /s/ MICHAEL SHERMAN ------------------------------- -10- EX-10.6 8 STOCKHOLDERS AGREEMENT 1 EXHIBIT 10.6 FREESHOP INTERNATIONAL, INC. STOCKHOLDERS AGREEMENT THIS AGREEMENT is made as of December 10, 1998, by and among FreeShop International, Inc., a Washington corporation (the "Corporation"), Timothy C. Choate and John Ballantine, each a stockholder of the Corporation (each an "Initial Stockholder" and collectively the "Initial Stockholders" and Fingerhut Companies, Inc., a Minnesota corporation ("Fingerhut"). The Initial Stockholders and Fingerhut are sometimes collectively referred to as the "Stockholders" and individually as a "Stockholder." Capitalized terms used herein are defined in Section 19. Contemporaneously with the execution of this Stockholders Agreement, Fingerhut will purchase shares of the Corporation's Common Stock, without par value (the "Common Stock"), pursuant to an Investor Subscription Agreement between Fingerhut and the Corporation dated as of the date hereof (the "Investment Agreement") and the Corporation is entering into a Warrant Agreement with Fingerhut dated as of the date hereof (the "Warrant Agreement") pursuant to which Fingerhut has the right to purchase additional shares of Common Stock (collectively, the "Transaction"). The Corporation and the Stockholders desire to enter into this Agreement for the purposes, among others, of (i) describing the composition of the Board of Directors in accordance with ownership of the Corporation, (ii) limiting the manner and terms by which the Stockholder Shares may be transferred and (iii) providing Fingerhut with certain demand registration rights and piggyback rights. The execution and delivery of this Agreement is a condition to Fingerhut's purchase of the Common Stock pursuant to the Investment Agreement. NOW, THEREFORE, in consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties to this Agreement hereby agree as follows: 1. Restrictions on Transfer of Stockholder Shares. The restrictions set forth in this Section 1 shall apply to all Stockholder Shares until the closing of a Qualified Public Offering or an Approved Sale of the Corporation (but shall not apply to such Qualified Public Offering or Approved Sale) or the date on which such Stockholder Shares have been transferred in a Public Sale. (a) Prohibition Against Transfer of Stockholder Shares. No Stockholder shall sell, transfer, assign, pledge, hypothecate, encumber or otherwise dispose of (collectively, a "Transfer") any interest in any Stockholder Shares unless pursuant to either (i) a Public Sale or (ii) the provisions of Sections 1(b) through l(d) hereof. -1- 2 (b) Right of First Refusal. At least fifteen (15) days prior to making any Transfer of any Stockholder Shares (other than through l(a)(i), or (ii) or a Permitted Transfer), the transferring Stockholder (the "Transferring Stockholder") shall deliver an Offer Notice to Fingerhut, with a copy to the other Stockholder. The Offer Notice shall be deemed to be an offer of the subject Stockholder Shares to Fingerhut on the same terms and conditions as proposed by the third party. Fingerhut may elect to purchase all or a portion of the Stockholder Shares specified in the Offer Notice at the price and on the terms specified therein by delivering written notice of such election to the Transferring Stockholder ("Right of First Refusal") within ten (10) days after the delivery of the Offer Notice (the "Election Period"). Fingerhut may also assign its right to purchase all or a part of the Stockholder Shares subject to the Offer Notice to the other Stockholder pursuant to the procedures in Section 1(c) hereof. The purchase of the subject Stockholder Shares shall be made in accordance with Section l(c) hereof. (c) Procedures for Acquiring Stockholder Shares. If Fingerhut (or the other Stockholder) has elected to purchase Stockholder Shares from the Transferring Stockholder, the Transfer of such shares shall be consummated as soon as practical after the delivery of the election notices, but in any event within fifteen (15) days after the expiration of the Election Period. To the extent that Fingerhut has not elected to purchase all of the Stockholder Shares being offered, the Transferring Stockholder may, within sixty (60) days after the expiration of the Election Period, transfer the Shares subject to such notice to one or more third parties at a price no less than the price per share specified in the Offer Notice and on other terms no more favorable to the transferees than offered to Fingerhut in the Offer Notice, and such purchases shall be conditioned upon all purchasers of Stockholder Shares executing a counterpart of this Section 1. In the event the Offer Notice provides for any noncash consideration for the Stockholder Shares, Fingerhut and the Transferring Stockholder shall negotiate in good faith to determine the all cash equivalent of the consideration proposed in the Offer Notice. Fingerhut and/or the other Stockholder shall only be required to pay cash for the Stockholder Shares acquired from the Transferring Stockholder. At the closing of the purchase of Stockholder Shares, the Transferring Stockholder shall provide representations and warranties as to his title to such securities and that there are no liens or encumbrances on such securities and shall sign such stock powers and other documents as may reasonably be requested by Fingerhut. (d) Permitted Transfers. The restrictions contained in this Section 1 shall not apply to any Transfer of Stockholder Shares (i) pursuant to applicable laws of descent and distribution, (ii) pursuant to gifts or to pledges in connection with an extension of credit, and (iii) as part of the Company's repurchase prior to February 28, 1999, of shares of Common Stock from current stockholders of the Company for an aggregate payment not in excess of $400,000 and simultaneous issuance of shares of Common Stock in an aggregate number less than or equal to the number so repurchased for an aggregate cash consideration paid at such time greater than or equal to the amount paid for the shares of Common Stock repurchased (each such Transfer being a "Permitted Transfer"). 2. Composition of the Board of Directors. The Board of Directors (the "Board") shall consist of four (4) members immediately prior to closing of the Transaction. Promptly thereafter, the size of the Board shall be increased by one and one person nominated by -2- 3 Fingerhut shall be elected to the Board. Upon the exercise by Fingerhut of the Percentage Warrant in connection with the First Tranche Investment, as such terms are defined in the Warrant Agreement, the size of the Board shall again be increased by one and another person nominated by Fingerhut shall be elected to the Board. A third additional person not nominated by Fingerhut but reasonably acceptable to Fingerhut may be elected to the Board at any time (before or after the election of the second additional director nominated by Fingerhut) but not later than promptly following the exercise of all the Percentage Warrants, with the size of the Board first being increased to allow such additional person. In each instance the persons nominated by Fingerhut shall be reasonably acceptable to the Board. Promptly after closing of the Transaction, the Corporation shall cause its Bylaws to be amended to be consistent with the provisions of this Section 2. The provisions of this Section 2 shall expire upon the Corporation's consummation of a Qualified Public Offering. 3. Special Voting Requirements. (a) From and after the date hereof and until the consummation of a Qualified Public Offering, approval by the Board is required for each of the following: (i) Entering into any Material Contracts. (ii) Incurring debt for borrowed money, except for draw downs under credit facilities from financial institutions not exceeding $750,000 in the aggregate. (iii) Material Expenditures by the Corporation. (iv) Compensation of directors and officers who are vice presidents and senior thereto, treasurers and the chief financial officer. (v) Issuance of shares of Common Stock or other securities or rights to purchase securities. (b) From the date of the exercise by Fingerhut of all of its Percentage Warrants (as defined in the Warrant Agreement) until the consummation of a Qualified Public Offering, in addition to any stockholder approval required by applicable law, the following actions must be approved by Fingerhut (subject to Section 12 below), with such approval not to be unreasonably withheld: (i) Pledging all or substantially all of the Corporation's assets. (ii) Amending the articles of incorporation or the by-laws of the Corporation. (iii) Merger or sale of substantially all of the assets of the Corporation. -3- 4 (c) Actions Consistent with Agreement. The Corporation shall not circumvent this Agreement by taking any action through a subsidiary or affiliate that would be prohibited under this Agreement. 4. Right of Participation. (a) Each time after closing of the Transaction the Corporation proposes to issue securities, including stock to be issued in a private placement, or upon the exercise of warrants or options or upon the conversion of convertible securities (excluding only (i) the issuance of securities to Fingerhut, (ii) the issuance of securities in connection with which Fingerhut is granted rights to purchase shares of Common Stock pursuant to the Warrant Agreement (including without limitation, the Additional Shares (as defined in the Warrant Agreement), and (iii) the issuance of securities pursuant to warrants, options or convertible securities where the right of participation set forth herein was offered upon the issuance of the particular warrant, option or convertible security), the Corporation shall give written notice ("Issue Notice") to Fingerhut within a reasonable time prior to the closing of such proposed issuance. The Issue Notice shall describe in reasonable detail the proposed issuance of securities, including, without limitation the number and type of securities proposed to be sold, the consideration to be paid, and the names of proposed offerees, if known. Fingerhut shall have the right, exercisable upon written notice to the Corporation within fifteen (15) business days after receipt of the Issue Notice, to purchase the securities to be issued on the same terms and conditions as those being proposed. Fingerhut may elect to purchase pursuant to the Issue Notice up to that amount of securities which, when taken together with the other shares of Common Stock owned by Fingerhut, gives Fingerhut the same percentage of the outstanding Common Stock and securities convertible into Common Stock as Fingerhut shall have immediately prior to such issuance of such securities. (b) Fingerhut shall effect its participation in the issuance by delivering to the Corporation at closing of such sale payment in the per share amount set forth in the Issue Notice to purchase the securities determined in accordance with Section 4(a) above. (c) The exercise or non-exercise of the rights to participate in one or more sales of securities made by the Corporation shall not adversely affect Fingerhut's right to participate in subsequent sales of securities pursuant to this Section 4. (d) Upon compliance with the terms of this Agreement and absent any material changes in the terms or conditions of sale from the terms or conditions specified in the Issue Notice, the Corporation shall have the right to sell securities with respect to which such right of participation was not exercised upon substantially the terms and conditions (including, without limitation, the purchase price) specified in the Issue Notice. (e) This Section 4 shall terminate upon the consummation of a Qualified Public Offering (but shall not apply to such Qualified Public Offering). 5. Demand Registrations. -4- 5 (a) Requests for Registration. At any one time Fingerhut may request registration under the Securities Act of all or part of its Stockholder Shares. A registration requested pursuant to this Section 5(a) is referred to herein as the "Demand Registration." The request for a Demand Registration shall specify the approximate number of Stockholder Shares requested to be registered and the requested per share price range, if any, for such offering. (b) Restrictions on the Demand Registration. The Corporation shall not be obligated to effect any Demand Registration until June 30, 2001. The Corporation may postpone for up to one hundred eighty (180) days following the receipt of a request for a Demand Registration the filing of a registration statement for a Demand Registration for bona fide business reasons but only if the Corporation notifies Fingerhut that such Demand Registration would reasonably be expected to have an adverse effect on any business plan of the Corporation or any of its subsidiaries; provided that in such event, Fingerhut will be entitled to withdraw such request and, if such request is withdrawn, such Demand Registration will not count as the permitted Demand Registration hereunder and the Corporation shall pay all Registration Expenses in connection with such registration. (c) Selection of Underwriters. The Corporation will have the right to select the investment banker(s) and manager(s) to administer any offerings. 6. Piggyback Registrations. (a) Right to Piggyback. Fingerhut shall have the right to demand on two (2) separate occasions a "Piggyback Registration." Whenever the Corporation proposes to register any of its Common Stock under the Securities Act (other than the initial public offering, pursuant to a Demand Registration, an acquisition of or a merger with another entity including, without limitation, a purchase of stock or assets or a transaction described under Rule 145 of the Securities Act, a transaction registering securities convertible into Common Stock or pursuant to Form S-8 or its successor forms) and the registration form to be used may be used for the registration of the Stockholder Shares of Fingerhut (a "Piggyback Registration"), the Corporation shall give prompt written notice to the Stockholders of its intention to effect such a registration and will include in such registration the Stockholder Shares of Fingerhut with respect to which the Corporation has received written requests for inclusion therein within fifteen (15) days after the receipt of the Corporation's notice, subject to the underwriter's discretion as to the number of Stockholder Shares which may be included in the offering. (b) Piggyback Expenses. The Registration Expenses of Fingerhut shall be paid by the Corporation in all Piggyback Registrations. (c) Proration of Eligible Shares. In the event of any registration pursuant to this Section 6 the full amount of the Stockholder Shares requested to be included in such registration cannot be included in full, then the number of Stockholder Shares available for registration shall be allocated among such group pro rata based upon the number of Stockholder Shares requested to be included in such registration. -5- 6 (d) Piggyback Rights Restored. In the event the underwriter determines that the shares Fingerhut has requested be included in the Piggyback Registration cannot be sold in the offering, then the requested Piggyback Right shall be restored. 7. Lockup Agreement. Each Stockholder agrees not to effect any public sale or distribution (including sales pursuant to Rule 144) of equity securities of the Corporation, or any securities convertible into or exchangeable or exercisable for such securities, during the 30-day period prior to and the 180-day period beginning on the effective date of any (i) underwritten Demand Registration or any underwritten Piggyback Registration in which Stockholder Shares are included (except as part of such underwritten registration) or (ii) the initial public offering, in each case unless the underwriters managing the registered public offering and the Corporation otherwise agree. 8. Registration Procedures. Whenever Fingerhut has requested that any securities be registered pursuant to this Agreement, the Corporation shall use its best efforts to effect the registration and the sale of such securities in accordance with the intended method of disposition thereof, and pursuant thereto the Corporation shall as expeditiously as possible: (a) prepare and file with the Securities and Exchange Commission a registration statement with respect to such securities and use its best efforts to cause such registration statement to become effective (provided that before filing a registration statement or prospectus or any amendments or supplements thereto, the Corporation shall furnish to the counsel selected by Fingerhut copies of all such documents proposed to be filed, which documents will be subject to the review and comment of such counsel); (b) prepare and file with the Securities and Exchange Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for a period of not less than six months and comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement during such period in accordance with the intended methods of disposition by the sellers thereof set forth in such registration statement; (c) keep Fingerhut fully informed and provide copies of all material correspondence and drafts of documents related to such registration and furnish to each seller of securities such number of copies of such registration statement, each amendment and supplement thereto, the prospectus included in such registration statement (including each preliminary prospectus) and such other documents as such seller may reasonably request in order to facilitate the disposition of the securities owned by such seller; (d) use its best efforts to register or qualify such securities under such other securities or blue sky laws of such jurisdictions as any seller reasonably requests and do any and all other acts and things which may be reasonably necessary or advisable to enable such -6- 7 seller to consummate the disposition in such jurisdictions of the securities owned by such seller (provided that the Corporation shall not be required to (i) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this subparagraph, (ii) subject itself to taxation in any such jurisdiction, or (iii) consent to general service of process in any such jurisdiction); (e) notify each seller of Stockholder Shares, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event as a result of which the prospectus included in such registration statement contains an untrue statement of a material fact or omits any fact necessary to make the statements therein not misleading, and, at the request of any such seller, the Corporation shall prepare a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such Stockholder Shares, such prospectus will not contain an untrue statement of a material fact or omit to state any fact necessary to make the statements therein not misleading; (f) provide a transfer agent and registrar for all such securities not later than the effective date of such registration statement; (g) enter into such customary agreements (including underwriting agreements in customary form) and take all such other actions as the Investor or the underwriters, if any, reasonably request in order to expedite or facilitate the disposition of such securities (including, without limitation, effecting a stock split or a combination of shares); (h) make available for inspection by any seller of securities, any underwriter participating in any disposition pursuant to such registration statement and any attorney, accountant or other agent retained by any such seller or underwriter, all financial and other records, pertinent corporate documents and properties of the Corporation, and cause the Corporation's officers, directors, employees and independent accountants to supply all information reasonably requested by any such seller, underwriter, attorney, accountant or agent in connection with such registration statement; (i) otherwise use its reasonable efforts to comply with all applicable rules and regulations of the Securities and Exchange Commission, and make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve months beginning with the first day of the Corporation's first full calendar quarter after the effective date of the registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder; (j) in the event of the issuance of any stop order suspending the effectiveness of a registration statement, or of any order suspending or preventing the use of any related prospectus or suspending the qualification of any Common Stock included in such registration statement for sale in any jurisdiction, the Corporation shall use its best efforts promptly to obtain the withdrawal of such order; and -7- 8 (k) obtain a cold comfort letter from the Corporation's independent public accountants in customary form and covering such matters of the type customarily covered by cold comfort letters. 9. Registration Expenses. (a) All expenses incident to the Corporation's performance of or compliance with Sections 5, 6 and 8 of this Agreement, including without limitation all registration and filing fees, fees and expenses of compliance with securities or blue sky laws, printing expenses, messenger and delivery expenses, and fees and disbursements of counsel for the Corporation and all independent certified public accountants, underwriters (excluding discounts and commissions) and other persons retained by the Corporation (all such expenses being herein called "Registration Expenses"), shall be borne as provided in this Agreement, except that the Corporation shall, in any event, pay its internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit or quarterly review, the expense of any liability insurance and the expenses and fees for listing the securities to be registered on each securities exchange on which similar securities issued by the Corporation are then listed or on the Nasdaq-related system. (b) To the extent Registration Expenses are not required to be paid by the Corporation, each holder of securities included in any registration hereunder shall pay those Registration Expenses allocable to the registration of such holder's securities so included, and Registration Expenses not so allocable shall be borne by all sellers of securities included in such registration in proportion to the aggregate selling price of the securities to be so registered. 10. Indemnification. (a) The Corporation agrees to indemnify Fingerhut, to the extent permitted by law, against all losses, claims, damages, liabilities and expenses caused by any untrue or alleged untrue statement of material fact contained in any registration statement, prospectus or preliminary prospectus or any amendment thereof or supplement thereto or any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading. (b) Fingerhut agrees to indemnify the Corporation, to the extent permitted by law, against all losses, claims, damages, liabilities and expenses caused by any untrue or alleged untrue statement of material fact made by Fingerhut expressly for use in connection with any registration statement, prospectus or preliminary prospectus and relied upon by the Corporation in such document or any amendment thereof or supplement thereto, or any omission or alleged omission of a material fact by Fingerhut required to be stated therein or necessary to make the statements therein not misleading. (c) Any person entitled to indemnification hereunder shall (i) give prompt written notice to the indemnifying party of any claim with respect to which it seeks -8- 9 indemnification and (ii) unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist with respect to such claim, permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party. If such defense is assumed, the indemnifying party shall not be subject to any liability for any settlement made by the indemnified party without its consent (but such consent shall not be unreasonably withheld). An indemnifying party who is not entitled to, or elects not to, assume the defense of a claim shall not be obligated to pay the fees and expenses of more than one counsel for all parties indemnified by such indemnifying party with respect to such claim, unless in the reasonable judgment of any indemnified party a conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such claim. (d) The indemnification provided for under this Agreement shall remain in full force and effect regardless of any investigation made by or on behalf of the indemnified party or any officer, director or controlling person of such indemnified party and shall survive the transfer of securities. The indemnifying parties also agree to make such provisions, as are reasonably requested by any indemnified party, for contribution to such party in the event the Corporation's indemnification is unavailable for any reason. 11. Participation in Underwritten Registrations. No person may participate in any registration hereunder which is underwritten unless such person (i) agrees to sell such person's securities on the basis provided in any underwriting arrangements approved by the person or persons entitled hereunder to approve such arrangements and (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such underwriting arrangements; provided that no holder of securities included in any underwritten registration shall be required to make any representations or warranties to the Corporation or the underwriters other than representations and warranties regarding such holder and such holder's intended method of distribution. 12. Drag-Along Rights. (a) In the event an Approved Sale is agreed to by at least two Stockholders, who on the date such Approved Sale is agreed to by them own, in the aggregate, more shares of the outstanding Common Stock than are then owned by the third Stockholder, the Corporation shall deliver twenty (20) days' prior written notice of the Approved Sale to each Stockholder. Each Stockholder shall vote for and consent to and shall raise no objections to, bring a claim against or contest such Approved Sale. If such Approved Sale is structured as (i) a merger or consolidation, each Stockholder shall waive any dissenters rights, appraisal rights or similar rights in connection with such merger or consolidation; or (ii) a sale of stock, each Stockholder shall sell his Stockholder Shares on the terms and conditions approved by the Board and the holders of a majority of the Stockholder Shares then outstanding. Each Stockholder shall take such other necessary or desirable actions in connection with the consummation of the Approved Sale as reasonably requested by the Corporation. (b) The obligations of the Stockholders with respect to the Approved Sale of the Corporation described in Section 12(a) are subject to the satisfaction of the following -9- 10 conditions: (i) upon the consummation of the Approved Sale, each Stockholder shall receive for each of his Stockholder Shares the same form of consideration and the same amount of consideration as the holders of a majority of the Stockholder Shares receive for each of their Stockholder Shares; (ii) if any holders of a class of Common Stock are given an option as to the form and amount of consideration to be received, each holder of such class of Common Stock shall be given the same option; and (iii) each holder of then currently exercisable rights to acquire shares of a class of Common Stock shall be given an opportunity to either (A) exercise such rights prior to the consummation of the Approved Sale or (B) receive in exchange for such rights consideration equal to the amount determined by multiplying (1) the same amount of consideration per share of a class of Common Stock received by holders of such class of Common Stock in connection with the Approved Sale less the exercise price per share of such class of Common Stock of such rights to acquire such class of Common Stock by (2) the number of shares of such class of Common Stock represented by such rights. (c) The provisions of this Section 12 shall terminate (i) with respect to a Stockholder at such time as such Stockholder ceases to hold in excess of 10% of the outstanding Common Stock and (ii) upon the consummation of a Qualified Public Offering. 13. Tag-Along Rights. (a) If (i) any Stockholder proposes to Transfer (other than pursuant to a Public Sale or pursuant to Section 1(d)) at any time any of its shares of Common Stock to any Independent Third Party and (ii) neither Fingerhut nor the other Stockholder has exercised any rights pursuant to Section 1(b), then the Transferring Stockholder may transfer its Stockholder Shares provided that it complies with the provisions of this Section 13. The Transferring Stockholder (which may include Fingerhut) shall deliver an Offer Notice to the other Stockholders. The other Stockholders shall have the right to participate in the Transfer of shares of Common Stock to the Independent Third Party, upon the same terms and for the same per share consideration as are specified in the Offer Notice. Each Stockholder shall have the right to participate in the Transfer, exercisable by delivering a written notice to the Transferring Stockholder and the other Stockholder within 15 days after delivery of the Offer Notice, stating therein the number of shares of Common Stock (which may be the number of shares set forth in the Offer Notice or a portion thereof) which such Stockholder desires to sell to the Independent Third Party. Prior to the earlier of (x) the end of such 15-day period or (y) the acceptance or rejection by each Stockholder of the right to participate in the Transfer, as the case may be, no sale of shares of Common Stock to the Independent Third Party shall be completed. (b) At the end of such 15-day period, the Corporation shall calculate the total number of Stockholder Shares that are proposed to be sold by all Stockholders. Each Stockholder exercising the right to participate shall be entitled to sell to the Independent Third Party that number of Stockholder Shares (or if such number is not an integral number, the next integral number which is greater than such number) which shall be the product of (x) the aggregate number of Stockholder Shares proposed to be sold by such Stockholder and (y) a fraction, the numerator of which shall be the number of shares of Common Stock indicated in the Offer Notice as subject to purchase by the Independent Third Party and the denominator of -10- 11 which shall be the total number of Stockholder Shares proposed to be sold by all participating Stockholders. Thereafter, the participating Stockholders may sell to the Independent Third Party, for the consideration stated and on terms no more favorable to the Independent Third Party than those set forth in the Offer Notice, their respective number of the shares of Common Stock stated in the Offer Notice as subject to purchase by the Independent Third Party. (c) The provisions of this Section 13 shall terminate (i) with respect to a Stockholder at such time as such Stockholder ceases to hold in excess of 10% of the outstanding Common Stock and (ii) upon the consummation of a Qualified Public Offering. 14. Legend. Each certificate evidencing Stockholder Shares and each certificate issued in exchange for or upon the Transfer of any Stockholder Shares (if such shares remain Stockholder Shares as defined herein after such transfer) shall be stamped or otherwise imprinted with a legend in substantially the following form: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR AN EXEMPTION FROM REGISTRATION THEREUNDER. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON TRANSFER, CERTAIN REPURCHASE OPTIONS AND CERTAIN OTHER AGREEMENTS SET FORTH IN AN INVESTOR SUBSCRIPTION AGREEMENT AND/OR A STOCKHOLDERS AGREEMENT. A COPY OF SUCH AGREEMENTS MAY BE OBTAINED BY THE HOLDER HEREOF AT THE CORPORATION'S PRINCIPAL PLACE OF BUSINESS WITHOUT CHARGE. " The Corporation shall imprint such legend on certificates evidencing outstanding Stockholder Shares. The legend set forth above shall be removed from the certificates evidencing any shares which cease to be Stockholder Shares pursuant to a Public Sale. 15. Confidentiality. All materials and information obtained by any Stockholder pursuant to this Agreement or otherwise delivered by the Corporation to any Stockholders shall be kept confidential and shall not be disclosed to any third party except (a) as has become generally available to the public (other than through disclosure by such Stockholder in contravention of this Agreement), (b) to such Stockholder's directors, officers, trustees, partners, employees, agents and professional consultants on a need to know basis, (c) to any other holder of Common Stock, (d) to any person to which such Stockholder offers to sell or transfer any shares of Common Stock, provided, that the prospective transferee shall agree to be bound by the provisions of this Section 15, (e) in any report, statement, testimony or other submission to any governmental authority having or claiming to have jurisdiction over such Stockholder, or (f) in order to comply with any law, rule, regulation or order applicable to such Stockholder, or in response to any summons, subpoena or other legal process or formal -11- 12 or informal investigative demand issued to such Stockholder in the course of any litigation, investigation or administrative proceeding. 16. Conflicting Agreements. Each Stockholder represents that it has not granted and is not a party to any proxy, voting trust or other agreement which is inconsistent with or conflicts with the provisions of this Agreement, and no Stockholder shall grant any proxy or become party to any voting trust or other agreement which is inconsistent with or conflicts with the provisions of this Agreement. No Stockholder shall act, for any reason, as a member of a group or in concert or enter into any agreement or arrangement with any other person in connection with the acquisition, disposition or voting of Stockholder Shares in any manner which is inconsistent with the provisions of this Agreement. The provisions of this Section 16 shall terminate upon the consummation by the Corporation of a Qualified Public Offering (but shall not apply to such Qualified Public Offering). 17. Actions Consistent with Agreement. The Corporation shall not circumvent this Agreement by taking any action through a subsidiary or affiliate that would be prohibited under this Agreement. The articles of incorporation and bylaws of the Corporation may be amended in any manner permitted thereunder, except that neither the certificate nor the bylaws shall be amended in any manner that would conflict with, or be inconsistent with, the provisions of this Agreement. 18. Transfer. Prior to Transferring any Stockholder Shares (other than in a Public Sale) to any person or entity pursuant to the terms of this Agreement, the Transferring Stockholder shall cause the prospective transferee to execute and deliver to the Corporation and the other Stockholders a counterpart of this Agreement. If as a result of such Transfer there would be more than three persons holding the Stockholder Shares held as of the date hereof by the Stockholders, then this Agreement shall at such time also be amended in such respects as the Stockholders reasonably agree are necessary to adapt the terms hereof for application to more than the Stockholders alone. Each such counterpart shall be deemed to be an original part of this Agreement as though executed on the date hereof. 19. Definitions. "Approved Sale" means a disposition of the Corporation, whether pursuant to a merger, consolidation or sale of the Common Stock, to an Independent Third Party, which disposition is approved by the Board and the holders of a majority of the outstanding shares of Common Stock. "Common Stock" is defined in the preamble to the Agreement. "Corporation" is defined in the preamble and shall include all of the Corporation's subsidiaries. "Demand Registration" is defined in Section 5(a). "Election Period" is defined in Section l(b). -12- 13 "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time. "Fingerhut" is defined in the preamble. "Independent Third Party" means any person who, immediately prior to the contemplated transaction, does not directly or indirectly own in excess of 5% of the Corporation's Common Stock on a fully-diluted basis (a "5% Owner)", who is not controlling, controlled by or under common control with any such 5% Owner and who is not the spouse or descendent (by birth or adoption) of any such 5% Owner or a trust for the benefit of such 5% Owner and/or such other persons. "Initial Stockholder" is defined in the preamble. "Investment Agreement" is defined in the preamble. "Issue Notice" is defined in Section 4(a). "Material Contract" means any contract which requires the Corporation to make aggregate payments in excess of $250,000 and which is not unilaterally terminable by the Corporation prior to the payment of $250,000, or any contract of lesser amount which the Board has deemed to be material. "Material Expenditures" means any single expenditure in excess of $250,000 or any other single expenditure of lesser amount which the Board has deemed material. "Nasdaq" is the National Association of Securities Dealers Automated Quotations system. "Offer Notice" means the notice required to be given by a Transferring Stockholder to the Corporation and/or the other Stockholder describing a proposed Transfer. At a minimum, the Offer Notice shall be in writing and shall contain (i) the number of shares of Common Stock that the Transferring Stockholder proposes to sell; (ii) the name and address of the proposed transferee; (iii) the proposed purchase price, terms of payment and other material terms and conditions of such proposed transfer; and (iv) an estimate, in the Transferring Stockholder's reasonable judgment, of the fair market value of any non-cash offered by the proposed transferee. "Option" means any right, warrant, option or arrangement which allows a person to acquire securities of the Corporation or requires the Corporation to issue any securities to a Person. "Permitted Transfer" is defined in Section l(d). "Piggyback Registration" is defined in Section 5(a). -13- 14 "Public Sale" means any sale of Stockholder Shares to the public pursuant to an offering registered under the Securities Act or to the public through a broker, dealer or market maker pursuant to the provisions of Rule 144 adopted under the Securities Act. "Qualified Public Offering" means an underwritten offering of Common Stock registered with the Securities and Exchange Commission in which the deemed market capitalization of the Company in connection with the offering is at least $75 million. "Registration Expenses" is defined in Section 8(a). "Sale of the Corporation" means the sale of the Corporation to an Independent Third Party or group of Independent Third Parties pursuant to which such party or parties acquire (i) capital stock of the Corporation possessing the voting power under normal circumstances to elect a majority of the Corporation's Board (whether by merger, consolidation or sale or transfer of the Corporation's capital stock) or (ii) all or substantially all of the Corporation's assets determined on a consolidated basis. "Securities Act" means the Securities Act of 1933, as amended from time to time. "Stockholder" is defined in the preamble and includes permitted successors and assigns. "Stockholders" is defined in the preamble. "Stockholder Shares" means (i) any Common Stock purchased or otherwise acquired by any Stockholder, (ii) any equity securities issued or issuable directly or indirectly with respect to the Common Stock referred to in clause (i) above by way of stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization, and (iii) any other shares of any class or series of capital stock of the Corporation held by a Stockholder. As to any particular shares constituting Stockholder Shares, such shares shall cease to be Stockholder Shares when they have been sold to the public through a Public Sale even if thereafter they are reacquired by a Stockholder. "Transfer" is defined in Section l(a). "Transferring Stockholder" is defined in Section l(b). "Warrant Agreement" is defined in the preamble. 20. Transfers in Violation of Agreement. Any Transfer or attempted Transfer of any Stockholder Shares in violation of any provision of this Agreement shall be void, and the Corporation shall not record such Transfer on its books or treat any purported transferee of such Stockholder Shares as the owner of such shares for any purpose. -14- 15 21. Amendment and Waiver. Except as otherwise provided herein, no modification, amendment or waiver of any provision of this Agreement shall be effective against the Corporation, Fingerhut or the Initial Stockholders unless such modification, amendment, termination or waiver is approved in writing by the Corporation, Fingerhut and the Initial Stockholders; provided, however, that the Corporation may from time to time add additional shareholders of the Corporation to this Agreement without the consent or additional signatures of the parties hereto (and amend and/or restate the Agreement to reflect such additions) and upon the Corporation's receipt of such additional stockholders' signature pages, such additional stockholders shall be deemed to be a party hereto and such additional signature pages shall be a part of this Agreement. The failure of any party to enforce any of the provisions of this Agreement shall in no way be construed as a waiver of such provisions and shall not affect the right of such party thereafter to enforce each and every provision of this Agreement in accordance with its terms. 22. Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision or any other jurisdiction, but this Agreement shall be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein. 23. Entire Agreement. This document embodies the complete agreement and understanding among the parties hereto with respect to the subject matter hereof and supersedes and preempts any prior understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way. 24. Successors and Assigns. Except as otherwise provided herein, this Agreement shall bind and inure to the benefit of and be enforceable by the Corporation and its successors and assigns and the Stockholders and any permitted subsequent holders of Stockholder Shares and the respective successors and permitted assigns of each of them, so long as they hold Stockholder Shares. 25. Counterparts. This Agreement may be executed in separate counterparts each of which shall be an original and all of which taken together shall constitute one and the same agreement. 26. Remedies. The Corporation, Fingerhut and the Initial Stockholders shall be entitled to enforce their rights under this Agreement specifically, to recover damages by reason of any breach of any provision of this Agreement and to exercise all other rights existing in their favor. The parties hereto agree and acknowledge that money damages may not be an adequate remedy for any breach of the provisions of this Agreement and that each of the parties may in their sole discretion apply to any court of law or equity of competent jurisdiction for specific performance and/or injunctive relief (without posting a bond or other security) in order to enforce or prevent any violation of the provisions of this Agreement. -15- 16 27. Notices. Any notice provided for in this Agreement shall be in writing and shall be either personally delivered, or mailed first class mail (postage prepaid) or sent by reputable overnight courier service (charges prepaid) to the Corporation at the address set forth below and to any other recipient at the address indicated on Schedule 1 hereto and to any subsequent holder of Stockholder Shares subject to this Agreement at such address as indicated by the Corporation's records, or at such address or to the attention of such other person as the recipient party has specified by prior written notice to the sending party. Notices will be deemed to have been given hereunder when delivered personally, three days after deposit in the U.S. mail and one day after deposit with a reputable overnight courier service. The Corporation's address is: FreeShop International, Inc. 95 South Jackson, Suite 300 Seattle, Washington 98104 Attn: Mr. Tim Choate 28. Governing Law. This Agreement will be construed and interpreted in accordance with and governed by the laws of the State of Washington and all rights and remedies shall be governed by such laws without regard to principles of conflicts of laws. 29. Termination. Except to the extent an earlier termination of a specific section of this Agreement is provided for in such section, this Agreement shall expire on the earlier of (i) the tenth anniversary of the date of this Agreement; or (ii) the closing of the sale of all or substantially all of the Corporation's assets or the acquisition of the Corporation by another entity by means of merger or consolidation resulting in the exchange of the outstanding shares of the Corporation for securities or consideration issued, or caused to be issued, by the acquiring entity or its subsidiary. -16- 17 IN WITNESS WHEREOF, the parties hereto have executed this Stockholders Agreement on the day and year first above written. FINGERHUT COMPANIES, INC. By: /s/ -------------------------------- Its: EVP -------------------------------- FREESHOP INTERNATIONAL, INC. By: /s/ TIM CHOATE -------------------------------- Its: President & CEO -------------------------------- /s/ TIM CHOATE ------------------------------------ Tim Choate /s/ JOHN BALLANTINE ------------------------------------ John Ballantine -17- 18 SCHEDULE 1 List of Stockholders (other than Fingerhut Companies, Inc.)
Name Address - ---- ------- Timothy C. Choate 117 Madrona Place East Seattle, WA 98112 John Ballantine 714 Lakeside Ave. S. No. 404 Seattle, WA 98144
-18- EX-10.7 9 ASSET PURCHASE AGREEMENT 1 EXHIBIT 10.7 ASSET PURCHASE AGREEMENT THIS ASSET PURCHASE AGREEMENT ("Agreement") is made as of May 5, 1999, by and among FREESHOP.COM, INC., a Washington corporation ("Purchaser"), Travel Companions International, Inc., a Minnesota corporation ("Seller"), and Jeff Mohr and Janet Mohr, significant shareholders of Seller (together, "Mohr"). WHEREAS, Seller owns and operates web-based, electronic commerce businesses known as Worldwide Brochures and Travel Companions (the "Businesses"); WHEREAS, Seller desires to sell and assign to Purchaser, and Purchaser desires to purchase and assume from Seller, all of Seller's right, title and interest in substantially all the assets of the Businesses upon the terms and subject to the conditions set forth in this Agreement; and WHEREAS, in order to induce Purchaser to enter into the purchase transaction, Mohr is willing to join in the representations and warranties of Seller hereunder and to make certain other convenants; NOW, THEREFORE, in consideration of the mutual representations, warranties, covenants and agreements set forth in this Agreement, the parties hereto agree as follows: ARTICLE 1 DEFINITIONS 1.1 Definitions. (a) In addition to the terms defined above, the following capitalized terms, as used herein, have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Closing Date" means the date of the Closing. "Encumbrance" means any charge, claim, community property interest, condition, equitable or beneficial interest, lien, option, pledge, security interest, right of first refusal, or restriction of any kind, including without limitation restrictions on transfer, receipt of income or exercise of any other attribute of ownership. "Marks" means each registered or unregistered trademark, service mark and tradename used by Seller as described in Schedule A. "Employment and Noncompetition Agreement" means the Employment and Noncompetition Agreement attached as Exhibit A. "Section" means a section or subsection of this Agreement. 1 2 (b) Each of the following terms is defined in the Section below set forth opposite such term:
Term Section ---- ------- Apportioned Obligations 8.1 Assumed Liabilities 2.4 Closing 2.8 Consideration 2.6 Distributor Contracts 2.2 Excluded Assets 2.3 Excluded Liabilities 2.5 Financial Statements 3.5 Holdback Amount 2.7 Indemnified Party 10.3 Indemnifying Party 10.3 Losses 10.2 Purchased Assets 2.2 Securities Act 3.4
1.2 References. Unless stated otherwise in this Agreement, references in this Agreement to Sections, Schedules and Exhibits are references to Sections of and Schedules and Exhibits attached to this Agreement. Each Schedule to this Agreement is by this reference incorporated into this Agreement. ARTICLE 2 PURCHASE AND SALE 2.1 Purchase and Sale. Upon the terms and subject to the conditions of this Agreement, the parties agree to consummate the following transactions at the Closing: (a) Seller will sell, transfer and assign to Purchaser, and Purchaser will purchase from Seller, all of the Purchased Assets; and (b) Seller will assign to Purchaser, and Purchaser will assume, and become directly responsible for the performance of all obligations with respect to, the Assumed Liabilities; and (c) Purchaser will pay to Seller the Consideration as provided herein. Notwithstanding the foregoing, Seller will remain obligated to discharge the Excluded Liabilities without any responsibility therefor on the part of Purchaser. 2.2 Purchased Assets. For purposes hereof, the term "Purchased Assets" means, to the extent not specifically included in the Excluded Assets, all assets, powers and rights held by Seller as of the Closing Date, or in which Seller has a right, title or interest as of the Closing Date, and which are used, were acquired for use or are held for use by Seller primarily in connection with the Businesses, of whatever kind, tangible and intangible, and wherever located, including, without limitation: 2 3 (a) the servers, software, content and data to run the Businesses; (b) all intellectual property related to the Businesses, including without limitation all Marks. (c) the database of registered consumer subscribers, including the software system holding the data and third-party licenses for such software; (d) all contracts between the Businesses and their respective clients (collectively the "Merchant Contracts"); (e) all distribution contracts with portals or other world wide web sites (the "Distribution Contracts"); (f) all equipment, property and assets of the fulfillment facility; (g) all other user lists and other books, records, lists, files and papers, whether in hard copy or electronic format; and (h) all goodwill associated with the Businesses or the Purchased Assets. 2.3 Excluded Assets. For purposes hereof, the term "Excluded Assets" means the following rights, properties and assets of Seller which are used, were acquired for use or are held for use by Seller primarily in connection with the Businesses, which shall not be included as part of the Purchased Assets and shall not be conveyed to Purchaser at the Closing: (a) all cash; and (b) all accounts, notes and other receivables; 2.4 Assumed Liabilities. Upon the terms and subject to the conditions of this Agreement, Purchaser agrees, effective at the time of Closing, to assume only the following liabilities of Seller ("Assumed Liabilities") arising out of the conduct of the Businesses: (a) the obligations of the Businesses under the Merchant Contracts. 2.5 Excluded Liabilities. For purposes hereof, the term "Excluded Liabilities" means all liabilities of Seller, whether known or unknown, whether relating to the operation of the Businesses or otherwise, now existing or arising and created by Seller hereafter, except the Assumed Liabilities. 2.6 Consideration. The consideration (the "Consideration") for the Purchased Assets shall be cash in the amount of one million four hundred thousand Dollars ($1,400,000.00). The Consideration, net of the Holdback Amount, shall be delivered to Seller at Closing. 3 4 2.7 Holdback. Purchaser shall retain the sum of $150,000 (the "Holdback Amount") for a period of 180 days after Closing, at the expiration of which period Purchaser shall promptly pay the Holdback Amount, subject to any offsets in accordance with Section 10.2(c) below, to Seller. During Holdback period, without limitation, Seller shall transfer the Purchased Assets, excluding fulfillment business, to Purchaser's Seattle offices and provide education and training to Purchaser in the operation of such Purchased Assets prior to Closing. 2.8 Closing. Provided that all conditions have been satisfied, and unless the parties agree in writing to an extension, closing (the "Closing") shall occur at a time, date and place mutually agreeable to the parties, but not later than June 15, 1999. Purchaser shall be entitled to sole possession of the Purchased Assets on and after the Closing Date. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF SELLER Seller and Mohr hereby jointly and severally represent and warrant to Purchaser that: 3.1 Status of Seller. Seller is a corporation, validly existing and in good standing under the laws of the State of Minnesota, and has all corporate powers and all governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. Seller is not required to qualify to do business in any other state or jurisdiction. 3.2 Authorization. The execution, delivery and performance by Seller of this Agreement and all other documents and instruments to be delivered by Seller hereunder, and the consummation by Seller of the transactions contemplated hereby, are within the corporate powers of Seller and have been duly authorized by all necessary action on the part of Seller. This Agreement has been duly executed and delivered by a duly authorized officer of Seller and constitutes a valid and binding agreement of Seller. All other documents and instruments to be delivered by Seller under this Agreement, when executed and delivered, will constitute valid and binding obligations of Seller. 3.3 Approvals. Neither the execution of this Agreement, the consummation of the sale of the Purchased Assets nor the assumption of the Assumed Liabilities hereunder requires the approval or consent of any governmental body, agency, official or authority having jurisdiction over the Businesses. 3.4 Financial Statements. Seller has provided Purchaser with true, correct, and complete copies of Seller's income statement and balance sheet for the period ending December 31, 1998, and the interim income statement for the three months ended March 31, 1999 (collectively, "Financial Statements"). To the best of Seller's knowledge, the Financial Statements are correct and complete and fairly present the results of operations and financial condition of Seller for the period or as at the date specified, and were prepared on an income tax basis, applied on a consistent basis throughout the periods involved, subject to any comments 4 5 noted therein. The books of account from which the Financial Statements were prepared accurately reflect all of the items of income and expense, all assets and liabilities, and all accruals of Seller. 3.5 Liabilities. There are no liabilities or obligations of any nature or of any amount whatsoever, whether accrued or unaccrued, absolute or contingent, liquidated or unliquidated, unmatured, unasserted, potential or otherwise, related to the Purchased Assets or the Businesses except: (a) to the extent reflected in the Financial Statements and not already paid or discharged; and (b) those that have been or will be incurred in or as a result of the normal and ordinary course of business after March 31, 1999. 3.6 Litigation. There are no actions, suits, claims, proceedings or investigations pending or, to the best of Seller's knowledge, threatened against or affecting the Purchased Assets or the Businesses at law or in equity or before or by any federal, state, municipal or other governmental court, department, commission, board, bureau, agency or instrumentality. To the best of Seller's knowledge, no event has occurred or circumstance exists that may give rise to or serve as a basis for the commencement of any such action, suit, claim proceeding or investigation. Seller has fully complied with all laws and regulations applicable to the Purchased Assets and the Businesses. There are no awards, decisions, injunctions, judgment, orders, rulings, subpoenas or verdicts entered, issued, made or rendered by any court, administrative agency, governmental body, or arbitrator to which the Purchased Assets or the Businesses are subject. 3.7 Employee Claims. No employee of Seller involved in the operations of the Businesses has any claim against Seller, and Seller is not obligated or liable to any such person in any way or for any amounts except compensation due to employees in the ordinary course of business. 3.8 Taxes. (a) Seller has filed with the appropriate governmental authorities all tax and related returns required to be filed by it, and such returns accurately reflect the taxes payable; (b) all federal, state, local, county, franchise, sales, use, excise, property, and other taxes which are due and payable have been duly paid; (c) no reserves for unpaid taxes have been set up or are required on the basis of the facts and in accordance with generally accepted accounting principles, except as reflected in the Financial Statements; 5 6 (d) there are no unpaid assessments or proposed assessments of federal, state or local taxes pending against Seller; and (e) there are no federal, state, or local tax audits pending or, to the best of Seller's knowledge, threatened, concerning Seller. 3.9 Title to Personal Property. Seller owns good and marketable title to all personal property and assets of every type and description purported to be owned or used by it as part of the Businesses, including those properties and assets reflected on its Financial Statements, free and clear of any and all Encumbrances of every kind, nature, and description; and all of Seller's operating assets are in good operating condition and repair, not in need of non-routine maintenance and are adequate and sufficient for the uses to which they are being put and for the continued conduct of the Businesses by Purchaser. 3.11 Intellectual Properties. (a) Seller has no patents or patent rights, and requires no such rights in connection with the conduct of its business as presently conducted. Seller is not infringing or otherwise acting adversely to the right of any person under or in respect to any patent or patent rights. (b) Schedule A contains a complete and accurate list of all Marks owned or claimed by Seller and material to its business as presently conducted. Seller is the owner of all right, title, and interest in and to each of these Marks, free and clear of all Encumbrances or other adverse claims. None of the Marks infringe or violate any trademark, service mark, tradename or other proprietary right of any other person. Seller does not license any of the Marks from any third party. The Marks constitute all those necessary for the operation of Seller's business as currently conducted. 3.12 Employees and Benefits. Seller is not a party to any pension or other employee benefit plan and has no outstanding withdrawal liability (or other obligation) with respect to any such plan; is not a party to any collective bargaining or union agreement; and has no written or oral employment agreements with any of its employees. Seller has timely paid all withholding, FICA, and other taxes required to be paid on behalf of its employees 3.13 Employment Practices. Seller has been and is in compliance with all federal or state law respecting employment or employment practices, including without limitation terms and conditions of employment, wages and hours, equal employment opportunity, non-discrimination, immigration, collective bargaining and occupation safety and health. There is no labor or employment problem or dispute pending or threatened against or affecting Seller with respect to the Businesses or the Purchased Assets. Notwithstanding the foregoing, it is not intended that this Agreement shall in any way require Purchaser to assume any obligations or liabilities of Seller with respect to labor or employment matters. 6 7 3.14 Brokers. Seller has not employed any broker, finder, or agent, or otherwise become in any way obligated for any broker's, finder's or agent's (or similar) fee with respect to the transaction contemplated by this Agreement. 3.15 Insurance. Seller is adequately insured with respect to all risks normally insured against by companies similarly situated. Seller has paid all premiums and otherwise performed all its obligations under all its insurance policies and will keep all such insurance policies in full force and effect through the Closing Date. 3.16 Absence of Certain Events, Circumstances, Etc. Since March 31, 1999, Seller has conducted the Businesses only in the ordinary course and there has not been any material adverse change in the Businesses or in the assets, properties, prospects or condition of the Businesses, and no event has occurred or circumstances exists that may result in such a material adverse change, and Seller has not: (a) incurred any obligation or liability related to the Businesses, whether absolute or contingent, except obligations and liabilities incurred in the ordinary course of Seller's business; (b) discharged or satisfied any Encumbrance or paid any obligation or liability related to the Businesses, whether absolute or contingent, other than current liabilities having become due and payable since that date in the ordinary course; (c) sold or transferred any of its tangible or intangible assets or properties or cancelled any debts or claims related to the Businesses, except, in each case, in the ordinary course; (d) sold, assigned, or transferred any Mark; (e) suffered any losses that would have a materially adverse effect on the business or financial condition of the Businesses or waived any rights of substantial value; (f) suffered any loss, damage, or destruction to any of its properties due to fire or other casualty whether or not insured, which loss, damage, or destruction materially and adversely affects its business, properties or operations; (g) mortgaged, pledged, or subjected to any Encumbrance any of its tangible or intangible assets related to the Businesses, except the lien of current personal property taxes not yet due and payable; or (h) conducted the Businesses otherwise than in its ordinary, normal and usual manner. 7 8 3.17 Disclosure. (a) No representation or warranty of Seller and/or Mohr in this Agreement omits to state a material fact necessary to make the statements herein, in light of the circumstances in which they were made, not misleading; and (b) No notice given pursuant to Section 5.3 will contain any untrue statement or omit to state a material fact necessary to make the statement therein or in this Agreement, in light of the circumstances in which they were made, not misleading. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF PURCHASER Purchaser hereby represents and warrants to Seller that: 4.1 Organization and Existence. Purchaser is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Washington and has all corporate powers required to carry on its business as now conducted. 4.2 Corporate Authorization. The execution, delivery and performance by Purchaser of this Agreement and all other documents and instruments to be delivered by Purchaser hereunder, and the consummation by Purchaser of the transactions contemplated hereby, are within the corporate powers of Purchaser and have been duly authorized by all necessary corporate action on the part of Purchaser. This Agreement has been duly executed and delivered by a duly authorized officer of Purchaser and constitutes a valid and binding agreement of Purchaser. All other documents and instruments to be delivered by Purchaser under this Agreement, when executed and delivered, will constitute valid and binding obligations of Purchaser. 4.3 Governmental Authorization. The execution, delivery and performance by Purchaser of this Agreement require no action by or in respect of, or filing with, any governmental body, agency, official or authority. 4.4 Non-Contravention. The execution, delivery and performance by Purchaser of this Agreement do not and will not (a) contravene or conflict with the articles of incorporation or bylaws of Purchaser or (b) to the knowledge of Purchaser contravene or conflict with any provision of any law, regulation, judgment, injunction, order or decree binding upon Purchaser. 4.5 Litigation. There is no action, suit, investigation or proceeding pending against, or to the knowledge of Purchaser, threatened against or affecting, Purchaser before any court or arbitrator or any governmental body, agency or official which in any matter challenges or seeks to prevent, enjoin, alter or materially delay the transactions contemplated hereby. 8 9 ARTICLE 5 COVENANTS OF SELLER Seller agrees that: 5.1 Conduct of the Businesses. Except as Purchaser otherwise expressly agrees in writing, Seller covenants that, prior to the Closing Date, Seller will: (a) conduct the Businesses only in the ordinary and usual course, without material change in the nature of its operations, and not otherwise sell, mortgage, lease or dispose of any portion of its assets or acquire any property or assets; (b) not incur any debts, liabilities or contract obligations related to the Businesses, except in the ordinary course or with the prior approval of Purchaser, which involve total consideration in excess of $5,000 and cannot be canceled by Seller on 30 days' notice; (c) not do or cause to be done anything that would cause any representation or warranty to be untrue or inaccurate if made at the time, except as otherwise permitted by this Agreement; (d) maintain the Purchased Assets, and the insurance with respect thereto, in accordance with good business practice; (e) make no change with respect to management or supervisory personnel or its auditors or other major consultants; (f) use its best efforts to preserve its business organization intact, keep available the services of its present management, and preserve the goodwill of its suppliers, customers, and others having business relationships with it; and (g) permit no increase in the compensation payable or to become payable by it to any of its employees or consultants, or other employees except as required under Seller's established policies and consistent with past practice. 5.2 Access to Information. During the period from the date hereof to the Closing Date, Purchaser and its duly authorized representatives shall have full and free access to the offices, records, files, and books of account of Seller related to the Businesses; provided, however, that such access shall not unreasonably interfere with Seller's normal operations and employee relationships. Purchaser and its representatives shall treat all information obtained from such access and not otherwise in the public domain as confidential, and if this transaction does not close, Purchaser shall return all books, records and documents made available to it. 5.3 Notices of Certain Events. Between the date of this Agreement and the Closing Date, Seller will promptly notify Purchaser in writing if Seller becomes aware of any fact or condition that causes or constitutes a breach of any of Seller's representations and warranties as 9 10 of the date of this Agreement, or if Seller becomes aware of the occurrence after the date of this Agreement of any fact or condition that would (except as expressly contemplated by this Agreement) cause or constitute a breach of any representation or warranty had such representation or warranty been made as of the time of occurrence or delivery of such fact or condition. 5.4 Employee Matters. Seller shall terminate all employees of the Businesses as of the Closing Date. Seller will be responsible for accrued wages, vacation, pension, termination pay and all benefits (including all matters related to COBRA rights) arising from Seller's employment or termination of all personnel involved with the Businesses. ARTICLE 6 COVENANTS OF PURCHASER Purchaser agrees that: 6.1 Confidentiality. Prior to the Closing Date and after any termination of this Agreement, Purchaser will hold all confidential documents and information concerning Seller furnished to Purchaser in connection with the transactions contemplated by this Agreement in confidence, except to the extent that such information can be shown to have been (i) previously known on a nonconfidential basis by Purchaser, (ii) in the public domain through no fault of Purchaser or (iii) later lawfully acquired by Purchaser from sources other than Seller; provided that Purchaser may disclose such information to its officers, directors, employees, accountants, counsel, consultants, advisors and agents in connection with the transactions contemplated by this Agreement so long as such persons are informed by Purchaser of the confidential nature of such information and are directed by Purchaser to treat such information confidentially. The obligation of Purchaser to hold any such information in confidence shall be satisfied if they exercise the same care with respect to such information as they would take to preserve the confidentiality of their own similar information. If this Agreement is terminated, Purchaser will cause its officers, directors, employees, accountants, counsel, consultants, advisors, auditors and agents to, destroy or deliver to Seller, upon written request, all documents and other materials, and all copies thereof, obtained by Purchaser or on its behalf from Seller in connection with this Agreement that are subject to such confidence. 6.2 Hiring of Employees. Purchaser will offer the three current employees of Businesses employment with Purchaser. These employees will be offered compensation at a level not less than that which they are currently receiving. 10 11 ARTICLE 7 COVENANTS OF BOTH PARTIES The parties hereto agree that: 7.1 Reasonable Efforts; Further Assurances. Subject to the terms and conditions of this Agreement, each party will use its best efforts (exclusive of litigation) to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary or desirable under applicable laws and regulations to consummate the transactions contemplated by this Agreement. Seller and Purchaser each agree to execute and deliver such other documents, certificates, agreements and other writings and to take such other actions as may be necessary or desirable to consummate or implement expeditiously the transactions contemplated by this Agreement and to vest in Purchaser good and marketable title to the Purchased Assets. Prior to Closing, Seller will cause the American Express and Norvista contracts to be transferred to Purchase and shall provide Purchaser with evidence of such transfers reasonably satisfactory to Purchaser. 7.2 Certain Filings. Seller and Purchaser shall cooperate with one another (a) in determining whether any action by or in respect of, or filing with, any governmental body, agency, official or authority is required, or any actions, consents, approvals or waivers are required to be obtained from parties to any material contracts, in connection with the consummation of the transactions contemplated by this Agreement and (b) in taking such actions or making any such filings, furnishing information required in connection therewith and seeking timely to obtain any such actions, consents, approvals or waivers. 7.3 Confidentiality of Agreement. Seller and Purchaser will hold, and will use their best efforts to cause their respective officers, directors, employees, accountants, counsel, consultants, advisors and agents to hold the terms of this Agreement in confidence, unless compelled to disclose such terms by judicial or administrative process or by other requirements of law. ARTICLE 8 TAX MATTERS 8.1 Tax Cooperation; Allocation of Taxes. (a) Purchaser and Seller agree to furnish or cause to be furnished to each other, upon request, as promptly as practicable, such information and assistance relating to the Purchased Assets and the Businesses as is reasonably necessary for the filing of all Tax returns, and making of any election related to Taxes, the preparation for any audit by any taxing authority, and the prosecution or defense of any claim, suit or proceeding relating to any Tax return. Seller and Purchaser shall cooperate with each other in the conduct of any audit or other proceeding related to Taxes involving the Businesses and each shall execute and deliver such powers of attorney and other documents as are necessary to carry out the intent of this Section 8.1(a). 11 12 (b) All personal property taxes due and payable in 1999 with respect to the Purchased Assets shall be apportioned between Seller and Purchaser as of the Closing Date based on the number of days of such taxable period included in the Pre-Closing Tax Period and the number of days of such taxable period included in the Post-Closing Tax Period. Seller shall be liable for the proportionate amount of such taxes that is attributable to the Pre-Closing Tax Period, and Purchaser shall be liable for the proportionate amount of such taxes that is attributable to the Post-Closing Tax Period. Within 90 days after the Closing, Seller and Purchaser shall present a statement to the other setting forth the amount of reimbursement to which each is entitled under this Section 8.1(b) together with such supporting evidence as is reasonably necessary to calculate the proration amount. The proration amount shall be paid by the party owing it to the other within 10 days after delivery of such statement. Thereafter, Seller shall notify Purchaser upon receipt of any bill for personal property taxes relating to the Purchased Assets, part or all of which are attributable to the Post-Closing Tax Period, and shall promptly deliver such bill to Purchaser who shall pay the same to the appropriate taxing authority, provided that if such bill covers the Pre-Closing Tax Period, Seller shall also remit prior to the due date of assessment to Purchaser payment for the proportionate amount of such bill that is attributable to the Pre-Closing Tax Period. In the event that either Seller or Purchaser shall thereafter make a payment for which it is entitled to reimbursement under this Section 8.1(b), the other party shall make such reimbursement promptly but in no event later than 30 days after the presentation of a statement setting forth the amount of reimbursement to which the presenting party is entitled along with such supporting evidence as is reasonably necessary to calculate the amount of reimbursement. Any payment required under this Section and not made within 10 days of delivery of the statement shall bear interest at the rate of 12% per annum for each day until paid. (c) All transfer, documentary, sales, use and other Taxes assessed upon or with respect to the transfer of the Purchased Assets to Purchaser (exclusive of Taxes imposed upon or measured by Seller's net income or gross receipts) shall be the responsibility of Purchaser. ARTICLE 9 CONDITIONS TO CLOSING 9.1 Conditions to the Obligations of Each Party. The obligations of Purchaser and Seller to consummate the Closing are subject to the satisfaction of the following conditions: (a) no action or proceeding shall have been instituted in which an order has been entered restraining or prohibiting or invalidating the transactions contemplated by this Agreement, or affecting the right of Purchaser to own the Purchased Assets after the Closing Date; and (b) all actions by or in respect of or filings with any governmental body, agency, official or authority required to permit the consummation of the Closing shall have been 12 13 obtained. 9.2 Conditions to Obligation of Purchaser. The obligation of Purchaser to consummate the Closing is subject to the satisfaction of the following further conditions: (a) Purchaser shall have completed its due diligence review of Seller, the Businesses and the Purchased Assets, and the results of such review shall be to Purchaser's satisfaction in its sole discretion; (b) Seller shall have performed in all material respects all of its obligations hereunder required to be performed by it at or prior to the Closing Date; (c) The Purchased Assets, including but not limited to all servers and databases, shall have been transferred to Purchaser's Seattle offices and otherwise delivered to the satisfaction of Purchaser in its sole discretion; (d) The representations and warranties of Seller contained in this Agreement and in any certificate or other writing delivered by Seller pursuant hereto shall be true in all material respects at and as of the Closing Date, as if made at and as of such time; (e) The Employment and Noncompetition Agreement shall have been duly executed by Jeff Mohr; (f) Purchaser shall have received: (i) a bill of sale for the Purchased Assets, duly executed by the Seller, in form reasonably satisfactory to Purchaser and its legal counsel; and (ii) assignment and assumption agreements for the Merchant Contracts and the Distributor Contracts, duly executed by Seller, in form reasonably satisfactory to Purchaser and its legal counsel, and all necessary consents from the other parties to such contracts; (iii) such other approvals or documents as Purchaser may reasonably request including without limitation written consents to transfer of the American Express and Norvista contracts. 9.3 Conditions to Obligation of Seller. The obligation of Seller to consummate the Closing is subject to the satisfaction of the following conditions: (a) Purchaser shall have performed in all material respects all of its obligations hereunder required to be performed by it at or prior to the Closing Date; (b) The representations and warranties of Purchaser contained in this Agreement and in any certificate or other writing delivered by Purchaser pursuant hereto shall be 13 14 true in all material respects at and as of the Closing Date, as if made at and as of such time; (c) Seller shall have received: (i) payment of the Consideration, as provided in Section 2.6; (ii) assignment and assumption agreements for the Merchant Contracts and the Distributor Contracts, duly executed by Purchaser, in form reasonably satisfactory to Seller and its legal counsel, and all necessary consents from the other parties to such contracts; and (iii) such other approvals or documents as Seller may reasonably request. ARTICLE 10 SURVIVAL; INDEMNIFICATION 10.1 Survival. The representations and warranties of the parties hereto contained in this Agreement or in any certificate or other writing delivered pursuant hereto or in connection herewith shall survive the Closing for a period of one year. The right to indemnification, payment of damages or other remedy based on such representation and warranties or other covenants and obligations will not be affected by any investigation conducted with respect to any knowledge acquired (or capable of being acquired) at any time, whether before or after the execution and delivery of this Agreement or the Closing Date, with respect to the accuracy or inaccuracy of or compliance with any such representation, warranty, covenant or obligation. The waiver of any condition based on the accuracy of any representation or warranty, or on the performance of or compliance with any covenant or obligation, will not affect the right to indemnification, payment of damages or other remedy based on such representation, warranties, covenants and obligations. 10.2 Indemnification. (a) Seller and Mohr each hereby agrees to indemnify Purchaser against and agrees to hold it harmless from any and all damage, loss, liability and expense (including, without limitation, reasonable expenses of investigation and reasonable attorneys' fees and expenses in connection with any action, suit or proceeding) (collectively, "Losses") incurred or suffered by Purchaser in any way related to or arising out of (i) any misrepresentation or breach of warranty, covenant or agreement made or to be performed by Seller pursuant to this Agreement, or (ii) Seller's ownership of the Purchased Assets or operation of the Businesses prior to the Closing Date. (b) Purchaser hereby indemnifies Seller and Mohr against and agrees to hold each of them harmless from any and all Losses incurred or suffered by Seller or Mohr in any way related to or arising out of (i) any misrepresentation or breach of warranty, covenant or agreement made or to be performed by Purchaser pursuant to this Agreement or (ii) Purchaser's ownership of the Purchased Assets or operation of the Businesses on or after the Closing Date. 14 15 (c) In addition to any other legal or equitable remedies available to Purchaser for Seller's and/or Mohr's breach of any representation, warranty, covenant or agreement contained in this Agreement, and in addition to pursuing indemnification rights for Losses covered under Section 10.2(a) above, Purchaser may, as a nonexclusive remedy, offset against the Holdback Amount the amount of any loss that it shall have suffered as a result of such breach or the amount of any Losses for which Purchaser is to be indemnified pursuant to Section 10.2(a) above. 10.3 Procedures. The party seeking indemnification under Section 10.2 (the "Indemnified Party") agrees to give prompt notice to the party against whom indemnity is sought (the "Indemnifying Party") of the assertion of any claim, or the commencement of any suit, action or proceeding in respect of which indemnity may be sought under such Section. The Indemnifying Party may, at its own expense, participate in and control the defense of any such suit, action or proceeding; provided, the Indemnifying Party's counsel is reasonably satisfactory to the Indemnified Party and the Indemnifying Party thereafter consults with the Indemnified Party upon the Indemnified Party's reasonable request from time to time with respect to such suit, action or proceeding. The parties shall in any event cooperate in the defense or prosecution of any such suit, action or proceeding. The Indemnifying Party shall not be liable under Section 10.2 for any settlement effected without its consent of any claim, litigation or proceeding in respect of which indemnity may be sought hereunder. ARTICLE 11 TERMINATION 11.1 Grounds for Termination. This Agreement may be terminated at any time prior to the Closing: (a) by Purchaser if the results of Purchaser's due diligence review of Seller, the Businesses and the Purchased Assets are not satisfactory to Purchaser in its sole discretion; (b) by mutual written agreement of Seller and Purchaser; (c) by either Seller or Purchaser if the Closing shall not have been consummated on or before June 15, 1999; (d) by either Seller or Purchaser if there shall be any law or regulation that makes the consummation of the transaction contemplated hereby illegal or otherwise prohibited or if consummation of the transactions contemplated hereby would violate any nonappealable final order, decree or judgment of any court or governmental body having competent jurisdiction; or (e) by either Seller or Purchaser, in the event of any material breach by the other party to this Agreement. The party desiring to terminate this Agreement shall give prompt notice of such 15 16 termination to the other party. 11.2 Effect of Termination. If this Agreement is terminated as permitted by Section 11.1, such termination shall be without liability of either party (or any shareholder, director, officer, employee, agent, consultant or representative of such party) to the other party to this Agreement; provided that if such termination shall result from the willful failure of either party to fulfill a condition to the performance of the obligations of the other party or to perform a covenant of this Agreement or from a willful breach by either party to this Agreement, such party shall be fully liable for any and all Losses incurred or suffered by the other party as a result of such failure or breach. The provisions of Section 12.3 shall survive any termination hereof pursuant to Section 11.1. ARTICLE 12 MISCELLANEOUS 12.1 Notices. All notices, requests and other communications to either party hereunder shall be in writing (including facsimile or similar writing) and shall be given, if to Purchaser, to: FreeShop.com, Inc. 95 South Jackson St., Suite 300 Seattle, WA 98104 Fax: (206) 441-9661 Attn: Timothy Choate, President and CEO if to Seller, to: Travel Companions International, Inc. 1227 Kenneth Street Detroit Lakes, MN 56501 Fax: (218) 847 7090 Attn: Jeff Mohr or to such other address as such party shall have designated by notice so given to each other party. 12.2 Amendments; No Waivers. Any provision of this Agreement may be amended or waived prior to the Closing Date if, and only if, such amendment or waiver is in writing and signed, in the case of an amendment, by Purchaser and Seller, or in the case of a waiver, by the party against whom the waiver is to be effective. No failure or delay by either party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not 16 17 exclusive of any rights or remedies provided by law. 12.3 Expenses. Except as otherwise specified herein, Purchaser and Seller will each be solely responsible for and bear all of its own respective expenses, including, without limitation, expenses of legal counsel, accountants, and other advisors, incurred at any time in connection with pursuing or consummating this Agreement and the transactions contemplated hereby. 12.4 Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. 12.5 Governing Law. This Agreement shall be construed in accordance with and governed by the law of the State of Washington, without regard to the conflicts of law rules of such state. 12.6 Consent to Jurisdiction; Attorneys' Fees. For purposes of any litigation arising out of or in connection with this Agreement, the parties hereby consent to the jurisdiction of State and Federal Courts sitting in King County, Washington. In the event of any such litigation, the prevailing party shall be entitled to recover from the other party all of its attorneys' fees and other expenses incurred in connection with such litigation. 12.7 Counterparts; Effectiveness. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement shall become effective when each party hereto shall have received a counterpart hereof signed by the other party hereto. 12.8 Entire Agreement. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior agreements, understandings and negotiations, both written and oral, between the parties with respect to the subject matter of this Agreement. No representation, inducement, promise, understanding, condition or warranty not set forth herein has been made or relied upon by either party hereto. Neither this Agreement nor any provision hereof is intended to confer upon any person other than the parties hereto any rights or remedies hereunder. 12.9 Captions. The captions herein are included for convenience of reference only and shall be ignored in the construction or interpretation hereof. 12.10 Severability. Unless otherwise provided herein, if any provision of this Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining portions shall not in any way be affected or impaired thereby. 17 18 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. FREESHOP.COM, INC. By________________________________ Name: Tim Choate Title: CEO TRAVEL COMPANIONS INTERNATIONAL, INC. By: _______________________________ Name: Janet Mohr Title: Chief Executive Officer By_______________________________ Name: Jeff Mohr Title: Chief Operating Officer 18 19 SCHEDULE A MARKS - WORLDWIDE BROCHURES - THE OFFICIAL TRAVEL BROCHURE DIRECTORY 19 20 EXHIBIT A --------- Employment and Noncompetition Agreement 20 EX-10.8 10 ASSET PURCHASE AGREEMENT 1 EXHIBIT 10.8 ASSET PURCHASE AGREEMENT THIS ASSET PURCHASE AGREEMENT ("Agreement") is made as of May 6, 1999, by and among FREESHOP.COM, INC., a Washington corporation ("Purchaser"), and COMMONSITE, LLC, a California limited liability company ("Seller"), and Alan Bennett, an owner of Seller ("Bennett"). WHEREAS, Seller owns and operates web-based, electronic commerce businesses known as Catalog Site and Catalog Channel (the "Businesses"); WHEREAS, Seller desires to sell and assign to Purchaser, and Purchaser desires to purchase and assume from Seller, all of Seller's right, title and interest in substantially all the assets of the Businesses upon the terms and subject to the conditions set forth in this Agreement; and WHEREAS, in order to induce Purchaser to enter into the purchase transaction, Bennett is willing to join in the representations and warranties of Seller hereunder and to make certain other covenant; NOW, THEREFORE, in consideration of the mutual representations, warranties, covenants and agreements set forth in this Agreement, the parties hereto agree as follows: ARTICLE 1 DEFINITIONS 1.1 Definitions. (a) In addition to the terms defined above, the following capitalized terms, as used herein, have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Closing Date" means the date of the Closing. "Encumbrance" means any charge, claim, community property interest, condition, equitable or beneficial interest, lien, option, pledge, security interest, right of first refusal, or restriction of any kind, including without limitation restrictions on transfer, receipt of income or exercise of any other attribute of ownership. "Marks" means each registered or unregistered trademark, service mark and tradename used by Seller as described in Schedule C. 1 2 "Noncompetition Agreement" means the Noncompetition Agreement attached as Exhibit A. "Registration Rights Agreement" means the Registration Rights Agreement attached as Exhibit B. "Section" means a section or subsection of this Agreement. "Software License Agreement" means the Software License Agreement attached hereto as Exhibit C. (b) Each of the following terms is defined in the Section below set forth opposite such term:
Term Section ---- ------- Assumed Liabilities 2.4 Closing 2.9 Commerce Solution Purchaser 5.5 Consideration 2.6 Excluded Assets 2.3 Excluded Liabilities 2.5 Financial Statements 3.5 Holdback Amount 2.8 Indemnified Party 10.3 Indemnifying Party 10.3 Losses 10.2 Merchant Contracts 2.2 Purchased Assets 2.2 Securities Act 3.4 Shares 2.6
1.2 References. Unless stated otherwise in this Agreement, references in this Agreement to Sections, Schedules and Exhibits are references to Sections of and Schedules and Exhibits attached to this Agreement. Each Schedule to this Agreement is by this reference incorporated into this Agreement. 2 3 ARTICLE 2 PURCHASE AND SALE 2.1 Purchase and Sale. Upon the terms and subject to the conditions of this Agreement, the parties agree to consummate the following transactions at the Closing: (a) Seller will sell, transfer and assign to Purchaser, and Purchaser will purchase from Seller, all of the Purchased Assets; and (b) Seller will assign to Purchaser, and Purchaser will assume, and become directly responsible for the performance of all obligations with respect to, the Assumed Liabilities; and (c) Purchaser will pay to Seller the Consideration as provided herein. Notwithstanding the foregoing, Seller will remain obligated to discharge the Excluded Liabilities without any responsibility therefor on the part of Purchaser. 2.2 Purchased Assets. For purposes hereof, the term "Purchased Assets" means, to the extent not specifically included in the Excluded Assets, all assets, powers and rights held by Seller as of the Closing Date, or in which Seller has a right, title or interest as of the Closing Date, and which are used, were acquired for use or are held for use by Seller primarily in connection with the Businesses, of whatever kind, tangible and intangible, and wherever located, including, without limitation: (a) the servers, software, content and data to run the Businesses; (b) the URL's shown on Schedule A and all other intellectual property related to the Businesses, including without limitation all Marks. (c) the database of registered catalogsite.com newsletter subscribers, including the software system holding the data and third-party licenses for such software; (d) the database of users who have ordered catalogs through Catalog Site, including the software system holding the data and third-party licenses for such software; (e) all contracts between Catalog Site and its clients (the "Merchant Contracts"), including without limitation those merchants listed in Schedule B, and all accounts receivable arising from the Merchant Contracts; (f) all servers, software and other data used in the operation of Catalog Channel; (g) all other user lists and other books, records, lists, files and papers, whether in hard copy or electronic format; and (h) all goodwill associated with the Businesses or the Purchased Assets. 3 4 2.3 Excluded Assets. For purposes hereof, the term "Excluded Assets" means the following rights, properties and assets of Seller which are used, were acquired for use or are held for use by Seller primarily in connection with the Businesses, which shall not be included as part of the Purchased Assets and shall not be conveyed to Purchaser at the Closing: (a) all cash; (b) all accounts, notes and other receivables except accounts receivable arising from the Merchant Contracts; (c) the Commerce Solution affiliate software and intellectual property related thereto; (d) affiliate marketing agreements other than with companies identified in Schedule B; and (e) contracts with merchants other than the Merchant Contracts. 2.4 Assumed Liabilities. Upon the terms and subject to the conditions of this Agreement, Purchaser agrees, effective at the time of Closing, to assume only the following liabilities of Seller ("Assumed Liabilities") arising out of the conduct of the Businesses: (a) the obligations of Catalog Site under the Merchant Contracts. 2.5 Excluded Liabilities. For purposes hereof, the term "Excluded Liabilities" means all liabilities of Seller, whether known or unknown, whether relating to the operation of the Businesses or otherwise, now existing or arising and created by Seller hereafter, except the Assumed Liabilities. 2.6 Consideration. The consideration (the "Consideration") for the Purchased Assets and for the execution and delivery of the Non-Competition Agreement (Exhibit A hereto) shall be (a) cash in the amount of four hundred forty one thousand dollars ($441,000) ("Cash Portion"), and (b) 132,300 shares of the common stock of Purchaser (the "Shares") to be issued to Seller. The Cash Portion, net of the Holdback Amount, and the Shares shall be delivered to Seller at Closing. Three hundred ninety-one thousand dollars ($391,000) of the Cash Portion is consideration for the Purchased Assets, and Fifty thousand dollars ($50,000) of the Cash Portion is consideration paid for the execution and delivery of the Non-Competition Agreement. The Shares shall be issued in the name of Seller; upon request by Seller, and in compliance with the relevant securities laws, Purchaser shall reissue the Shares to the persons as directed by Seller. 2.7 Reserved. 4 5 2.8 Holdback. Purchaser shall retain the sum of $50,000 (the "Holdback Amount") for a period of 30 days after date (the "Start Date") upon which (i) the Purchased Assets are in the possession of Purchaser at their Seattle offices and (ii) the software, data and other content necessary to run the Businesses have been installed and are performing in a manner substantially similar to the performance of the Businesses as of the date of this Agreement. At such time as the Seller determines that items (i) and (ii) above have occurred, Seller shall notify Purchaser in writing of such fact, stating the date which Seller believes is the Start Date. Within five (5) business days after receipt of Seller's notice, if Purchaser reasonably determines that the Start Date has not yet occurred, Purchaser shall notify Seller in writing of its disagreement and state with specificity the reasons for its disagreement. Thereafter, Seller shall use its best efforts to accomplish items (i) and (ii) above as expeditiously as possible, and again shall notify Purchaser in writing when the Start Date has occurred. Within thirty (30) days after the Start Date, Purchaser shall promptly pay to Seller the Holdback Amount. 2.9 Closing. Provided that all conditions have been satisfied, and unless the parties agree in writing to an extension, closing (the "Closing") shall occur at a time, date and place mutually agreeable to the parties, but not later than May 7, 1999. Purchaser shall be entitled to sole possession of the Purchased Assets on and after the Closing Date in accordance with the following procedures. A. On or prior to the Closing Date, Purchaser shall deliver by wire transfer the Cash Portion (net of the Holdback Amount) of the Purchase Price to the Trust Account of King, Weiser, Bazar & Jacobs ("KWBJ"), and shall deliver by overnight courier a certificate for the Shares to KWBJ at 2049 Century Park East, Suite 900, Los Angeles, California 90067, Attn: Michael Allderdice. The Cash Portion (net of the Holdback Amount) and the Shares are to be held by KWBJ for disposition in accordance with this Section 2.9. Wire Transfer Information: Wells Fargo & Co. 2020 Avenue of the Stars, #P138-00 Los Angeles, California 90067 ABA # (or Routing #): 121000248 Account # 0359-222379 B. KWBJ is authorized to release the Cash Portion (net of the Holdback Amount) and the Shares to Company upon its receipt from Purchaser of written notice that: 5 6 1. Ownership of all of the URL's listed on Schedule A has been transferred to Purchaser via Internic. 2. A copy of all current and archive order bases has been transferred to Purchaser. 3. A copy of all web site databases and content has been transferred to Purchaser. 4. A copy of all source code and documentation for Commerce Solution has been transferred to Purchaser. C. Upon delivery of the above-listed items, Purchaser shall notify KWBJ of such fact in writing or by facsimile transmission, signed by Lisa Wolff or an officer of Purchaser. D. Purchaser acknowledges that the Cash Portion and the Shares may be transferred to Seller prior to the time that Catalog Site and Catalog Channel are operational at Purchaser's offices in Seattle; that is, the installation and operation of Catalog Site and Catalog Channel are not conditions precedent to the release of the Cash Portion and the Shares to Seller. E. Purchaser and Seller shall each indemnify and hold KWBJ harmless from and against any and all claims, loss, damage, or liability (including attorney's fees and costs) arising out of KWBJ's actions or failure to act under this Section 2.9, excepting only its gross negligence or willful misconduct in carrying out the instructions set forth in this Section. KWBJ shall not be responsible for verifying the validity of any signature and may therefor assume that any correspondence received by it was validly signed by the person identified as the signator. F. Notwithstanding any other provisions of this Agreement, if KWBJ has not received written authorization to release the Cash Portion (net of the Holdback Amount) and the Shares to Seller within 45 days after KWBJ's receipt of the Cash Portion (net of the Holdback Amount) and the Shares, KWBJ has the absolute right at its election to file an action in interpleader in the Superior Court of Los Angeles County, California, requiring Purchaser and Seller to answer and litigate their several claims and rights among themselves, and to deposit the Cash Portion (net of the Holdback Amount) and the Shares with the clerk of that court. In the event such action is filed, Purchaser and Seller jointly and severally agree to pay KWBJ's costs, expenses and reasonable attorney's fees which are required to file and prosecute such interpleader action, the amount thereof to be fixed and judgment therefor to be rendered by the court. Upon the filing of such action, KWBJ shall be fully released and discharged from all obligations imposed on it by this Section. 6 7 G. Upon receipt of any conflicting instructions, KWBJ shall take no action in connection with its responsibilities hereunder (other than as set forth at paragraph F above) until non-conflicting instruction are received from both Purchaser and Seller. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF SELLER Seller and Bennett hereby jointly and severally represent and warrant to Purchaser that: 3.1 Status of Seller. Seller is a limited liability company, validly existing and in good standing under the laws of the State of California, and has all powers and all governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. Seller is not required to qualify to do business in any other state or jurisdiction. 3.2 Authorization. The execution, delivery and performance by Seller of this Agreement and all other documents and instruments to be delivered by Seller hereunder, and the consummation by Seller of the transactions contemplated hereby, are within the limited liability company powers of Seller and have been duly authorized by all necessary action on the part of Seller. This Agreement has been duly executed and delivered by a duly authorized representative of Seller and constitutes a valid and binding agreement of Seller. All other documents and instruments to be delivered by Seller under this Agreement, when executed and delivered, will constitute valid and binding obligations of Seller. 3.3 Approvals. Neither the execution of this Agreement, the consummation of the sale of the Purchased Assets nor the assumption of the Assumed Liabilities hereunder requires the approval or consent of any governmental body, agency, official or authority having jurisdiction over the Businesses. 3.4 Investment Representations. (a) Seller is aware that the Shares have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), or any state securities laws, in reliance on exemptions from such registration. It is understood that reliance by Purchaser on such exemptions is predicated in part upon the truth and accuracy of the statements made by Seller in this Agreement. (b) Seller's duly authorized representatives, either alone or with the assistance of Seller's professional advisors, have such knowledge and experience in financial and business matters that they are capable of evaluating the merits and risks of Seller's purchase of the Shares. 7 8 (c) Seller has sufficient financial resources to be able to bear the risk of Seller's investment in the Shares. (d) The duly authorized representatives of Seller have either spoken or met with, or been given reasonable opportunity to speak with or meet with, representatives of Purchaser for the purpose of asking questions of, and receiving answers and information from, such representatives concerning Seller's investment in the Shares. (e) Seller is purchasing the Shares for its own account for investment purposes and not with a view toward the sale or distribution of all or any part of such securities. No one other than Seller will have any beneficial interest in the Shares. (f) Seller understands that, because the Shares have not been registered under the Securities Act, (i) the Shares have the status of securities acquired in a transaction under Section 4(2) of the Securities Act; and (ii) the Shares cannot be sold unless they are subsequently registered or an exemption from registration is available. (g) Seller will in no event sell or distribute all or any part of the Shares unless (i) there is an effective registration statement under the Securities Act and applicable state securities laws covering any such transaction involving such stock, or (ii) Purchaser receives an opinion from Seller's legal counsel, in form acceptable to Purchaser, stating that such transaction is exempt from registration. (h) Seller understands that at the present time Rule 144 promulgated under the Securities Act may not be relied upon for the resale or distribution of the Shares because Purchaser does not file the reports or make information about Purchaser publicly available nor is there a public market for the Shares. Moreover, there can be no assurance that Purchaser will in the future file such reports or make publicly available such information, or that a public market for the Shares will develop. (i) Seller is an accredited investor under the Securities Act because it is (i) an entity not formed for the specific purpose of acquiring the Shares, with total assets in excess of $5,000,000 or (ii) an entity in which all of the equity owners are themselves natural persons who either (A) each had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and a reasonable expectation of reaching the same income level in the current year or (B) each have an individual net worth, or a joint net worth with that person's spouse, in excess of $1,000,000. 3.5 Financial Statements. Seller has provided Purchaser with true, correct, and complete copies of Seller's income statement and balance sheet for the period ending December 31, 1998, and the interim income statement and balance sheet for the three months ended March 31, 1999 (collectively, "Financial Statements"). To the best of Seller's knowledge, the Financial 8 9 Statements are correct and complete and fairly present the results of operations and financial condition of Seller for the period or as at the date specified, and were prepared on an income tax basis, applied on a consistent basis throughout the periods involved, subject to any comments noted therein. The books of account from which the Financial Statements were prepared accurately reflect all of the items of income and expense, all assets and liabilities, and all accruals of Seller. 3.6 Liabilities. There are no liabilities or obligations of any nature or of any amount whatsoever, whether accrued or unaccrued, absolute or contingent, liquidated or unliquidated, unmatured, unasserted, potential or otherwise, related to the Purchased Assets or the Businesses except: (a) to the extent reflected in the Financial Statements and not already paid or discharged; and (b) those that have been or will be incurred in or as a result of the normal and ordinary course of business after March 31, 1999. 3.7 Litigation. There are no actions, suits, claims, proceedings or investigations pending or, to the best of Seller's knowledge, threatened against or affecting the Purchased Assets or the Businesses at law or in equity or before or by any federal, state, municipal or other governmental court, department, commission, board, bureau, agency or instrumentality. To the best of Seller's knowledge, no event has occurred or circumstance exists that may give rise to or serve as a basis for the commencement of any such action, suit, claim proceeding or investigation. Seller has fully complied with all laws and regulations applicable to the Purchased Assets and the Businesses. There are no awards, decisions, injunctions, judgment, orders, rulings, subpoenas or verdicts entered, issued, made or rendered by any court, administrative agency, governmental body, or arbitrator to which the Purchased Assets or the Businesses are subject. 3.8 Employee Claims. To the best of Seller's knowledge, no employee of Seller involved in the operations of the Businesses has any claim against Seller, and Seller is not obligated or liable to any such person in any way or for any amounts except compensation due to employees in the ordinary course of business. 3.9 Taxes. (a) Seller has filed with the appropriate governmental authorities all tax and related returns required to be filed by it, and such returns accurately reflect the taxes payable; (b) all federal, state, local, county, franchise, sales, use, excise, property, and other taxes which are due and payable have been duly paid; 9 10 (c) no reserves for unpaid taxes have been set up or are required on the basis of the facts and in accordance with generally accepted accounting principles, except as reflected in the Financial Statements; (d) there are no unpaid assessments or proposed assessments of federal, state or local taxes pending against Seller; and (e) there are no federal, state, or local tax audits pending or, to the best of Seller's knowledge, threatened, concerning Seller. 3.10 Title to Personal Property. Seller owns good and marketable title to all personal property and assets of every type and description purported to be owned or used by it as part of the Businesses, including those properties and assets reflected on its Financial Statements, free and clear of any and all Encumbrances of every kind, nature, and description; and all of Seller's operating assets are in good operating condition and repair, not in need of non-routine maintenance and are adequate and sufficient for the uses to which they are being put and for the continued conduct of the Businesses by Purchaser. 3.11 Accounts Receivable. All the accounts receivable of Seller reflected in the Financial Statements and to be acquired by Purchaser represent valid obligations arising from sales actually made in the ordinary course of business and have been collected or are good and collectible in the aggregate recorded amounts thereof (less the reasonable amount for doubtful accounts as reflected in the Financial Statements) and can reasonably be anticipated to be paid in full, without set off, within 90 days after the day on which it first becomes due. 3.12 Intellectual Properties. (a) Seller has no patents or patent rights, and requires no such rights in connection with the conduct of its business as presently conducted. To the best of Seller's knowledge, Seller is not infringing or otherwise acting adversely to the right of any person under or in respect to any patent or patent rights. (b) Schedule C contains a complete and accurate list of all Marks owned or claimed by Seller and material to its business as presently conducted. Seller is the owner of all right, title, and interest in and to each of these Marks, free and clear of all Encumbrances or other adverse claims. To the best of Seller's knowledge, none of the Marks infringe or violate any trademark, service mark, tradename or other proprietary right of any other person. Seller does not license any of the Marks from any third party. The Marks constitute all those necessary for the operation of Seller's business as currently conducted. 10 11 3.13 Employees and Benefits. Seller is not a party to any pension or other employee benefit plan and has no outstanding withdrawal liability (or other obligation) with respect to any such plan; is not a party to any collective bargaining or union agreement; and has no written or oral employment agreements with any of its employees. Seller has timely paid all withholding, FICA, and other taxes required to be paid on behalf of its employees. 3.14 Employment Practices. To the best of Seller's knowledge, Seller has been and is in compliance with all federal or state law respecting employment or employment practices, including without limitation terms and conditions of employment, wages and hours, equal employment opportunity, non-discrimination, immigration, collective bargaining and occupation safety and health. 3.15 Brokers. Except for Dan Ambrose of DeSilva & Phillips, Inc., Seller has not employed any broker, finder, or agent, or otherwise become in any way obligated for any broker's, finder's or agent's (or similar) fee with respect to the transaction contemplated by this Agreement. 3.16 Insurance. Seller is adequately insured with respect to all risks normally insured against by companies similarly situated. Seller has paid all premiums and otherwise performed all its obligations under all its insurance policies and will keep all such insurance policies in full force and effect through the Closing Date. 3.17 Absence of Certain Events, Circumstances, Etc. Since March 31, 1999, Seller has conducted the Businesses only in the ordinary course and there has not been any material adverse change in the Businesses or in the assets, properties, prospects or condition of the Businesses, and no event has occurred or circumstances exists that may result in such a material adverse change, and Seller has not: (a) incurred any obligation or liability related to the Businesses, whether absolute or contingent, except obligations and liabilities incurred in the ordinary course of Seller's business; (b) discharged or satisfied any Encumbrance or paid any obligation or liability related to the Businesses, whether absolute or contingent, other than current liabilities having become due and payable since that date in the ordinary course; (c) sold or transferred any of its tangible or intangible assets or properties or cancelled any debts or claims related to the Businesses, except, in each case, in the ordinary course; (d) sold, assigned, or transferred any Mark; 11 12 (e) suffered any losses that would have a materially adverse effect on the business or financial condition of the Businesses or waived any rights of substantial value; (f) suffered any loss, damage, or destruction to any of its properties due to fire or other casualty whether or not insured, which loss, damage, or destruction materially and adversely affects its business, properties or operations; (g) mortgaged, pledged, or subjected to any Encumbrance any of its tangible or intangible assets related to the Businesses, except the lien of current personal property taxes not yet due and payable; or (h) conducted the Businesses otherwise than in their ordinary, normal and usual manner. 3.18 Disclosure. (a) No representation or warranty of Seller and/or Bennett in this Agreement omits to state a material fact necessary to make the statements herein, in light of the circumstances in which they were made, not misleading; and (b) No notice given pursuant to Section 5.3 will contain any untrue statement or omit to state a material fact necessary to make the statement therein or in this Agreement, in light of the circumstances in which they were made, not misleading. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF PURCHASER Purchaser hereby represents and warrants to Seller that: 4.1 Organization and Existence. Purchaser is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Washington and has all corporate powers required to carry on its business as now conducted. 4.2 Corporate Authorization. The execution, delivery and performance by Purchaser of this Agreement and all other documents and instruments to be delivered by Purchaser hereunder, and the consummation by Purchaser of the transactions contemplated hereby, are within the corporate powers of Purchaser and have been duly authorized by all necessary corporate action on the part of Purchaser. This Agreement has been duly executed and delivered by a duly authorized officer of Purchaser and constitutes a valid and binding agreement of Purchaser. All other documents and instruments to be delivered by Purchaser under this 12 13 Agreement, when executed and delivered, will constitute valid and binding obligations of Purchaser. 4.3 Governmental Authorization. The execution, delivery and performance by Purchaser of this Agreement require no action by or in respect of, or filing with, any governmental body, agency, official or authority. 4.4 Non-Contravention. The execution, delivery and performance by Purchaser of this Agreement do not and will not (a) contravene or conflict with the articles of incorporation or bylaws of Purchaser or (b) to the knowledge of Purchaser contravene or conflict with any provision of any law, regulation, judgment, injunction, order or decree binding upon Purchaser. 4.5 Litigation. There is no action, suit, investigation or proceeding pending against, or to the knowledge of Purchaser, threatened against or affecting, Purchaser before any court or arbitrator or any governmental body, agency or official which in any matter challenges or seeks to prevent, enjoin, alter or materially delay the transactions contemplated hereby. ARTICLE 5 COVENANTS OF SELLER Seller agrees that: 5.1 Conduct of the Businesses. Except as Purchaser otherwise expressly agrees in writing, Seller covenants that, prior to the Closing Date, Seller will: (a) conduct the Businesses only in the ordinary and usual course, without material change in the nature of its operations, and not otherwise sell, mortgage, lease or dispose of any portion of its assets or acquire any property or assets; (b) not incur any debts, liabilities or contract obligations related to the Businesses, except in the ordinary course or with the prior approval of Purchaser, which involve total consideration in excess of $5,000 and cannot be canceled by Seller on 30 days' notice; (c) not do or cause to be done anything that would cause any representation or warranty to be untrue or inaccurate if made at the time, except as otherwise permitted by this Agreement; (d) maintain the Purchased Assets, and the insurance with respect thereto, in accordance with good business practice; 13 14 (e) make no change with respect to management or supervisory personnel or its auditors or other major consultants; (f) use its best efforts to preserve its business organization intact, keep available the services of its present management, and preserve the goodwill of its suppliers, customers, and others having business relationships with it; and (g) permit no increase in the compensation payable or to become payable by it to any of its employees or consultants, or other employees except as required under Seller's established policies and consistent with past practice. 5.2 Access to Information. During the period from the date hereof to the Closing Date, Purchaser and its duly authorized representatives shall have full and free access to the offices, records, files, and books of account of Seller related to the Businesses; provided, however, that such access shall not unreasonably interfere with Seller's normal operations and employee relationships. Purchaser and its representatives shall treat all information obtained from such access and not otherwise in the public domain as confidential, and if this transaction does not close, Purchaser shall return all books, records and documents made available to it. 5.3 Notices of Certain Events. Between the date of this Agreement and the Closing Date, Seller will promptly notify Purchaser in writing if Seller becomes aware of any fact or condition that causes or constitutes a breach of any of Seller's representations and warranties as of the date of this Agreement, or if Seller becomes aware of the occurrence after the date of this Agreement of any fact or condition that would (except as expressly contemplated by this Agreement) cause or constitute a breach of any representation or warranty had such representation or warranty been made as of the time of occurrence or delivery of such fact or condition. 5.4 Employee Matters. Seller will be responsible for accrued wages, vacation, pension, termination pay and all benefits (including all matters related to COBRA rights) arising from Seller's employment or termination of all personnel involved with the Businesses. 5.5 Future Prohibition. If Seller, within twelve (12) months after the date of this Agreement, sells the assets that comprise its Commerce Solution business, Seller will require that the purchaser of such assets (the "Commerce Solution Purchaser") agree at the time of such purchase that the Commerce Solution Purchaser will not, for a period which will terminate on the first anniversary of the date of this Agreement, sell or license the Commerce Solution software to a buyer in the same type of business as FreeShop.com, Catalog Site or Catalog Channel. Purchaser acknowledges that Seller will sell or license the Commerce Solution software for use in e-commerce activity that might involve the aggregation of multiple merchants and products, and that such sale or license will not be a breach of this Agreement. 14 15 5.6 Post-Closing Assistance. Seller shall use it best efforts to make available to Purchaser the developer services of David Milby for a period of one week after Closing at no cost to Purchaser for the purpose of establishing the Business at Purchaser's offices in Seattle. The one week period shall commence on a date selected by Buyer, but not later than thirty (30) days after the date hereof. Seller shall be responsible to pay the airfare and living expenses of one trip to Seattle by Milby. Thereafter, and for a period of 12 weeks after Closing, Seller shall use its best efforts to make available to Purchaser the services of Milby for up to 10 hours per week at a cost of $50 per hour, plus travel and living expenses, if required. Seller is not aware of any reason why Milby would not be available to perform these services. ARTICLE 6 COVENANTS OF PURCHASER Purchaser agrees that: 6.1 Confidentiality. Prior to the Closing Date and after any termination of this Agreement, Purchaser will hold all confidential documents and information concerning Seller furnished to Purchaser in connection with the transactions contemplated by this Agreement in confidence, except to the extent that such information can be shown to have been (i) previously known on a nonconfidential basis by Purchaser, (ii) in the public domain through no fault of Purchaser or (iii) later lawfully acquired by Purchaser from sources other than Seller; provided that Purchaser may disclose such information to its officers, directors, employees, accountants, counsel, consultants, advisors and agents in connection with the transactions contemplated by this Agreement so long as such persons are informed by Purchaser of the confidential nature of such information and are directed by Purchaser to treat such information confidentially. The obligation of Purchaser to hold any such information in confidence shall be satisfied if they exercise the same care with respect to such information as they would take to preserve the confidentiality of their own similar information. If this Agreement is terminated, Purchaser will cause its officers, directors, employees, accountants, counsel, consultants, advisors, auditors and agents to, destroy or deliver to Seller, upon written request, all documents and other materials, and all copies thereof, obtained by Purchaser or on its behalf from Seller in connection with this Agreement that are subject to such confidence. ARTICLE 7 COVENANTS OF BOTH PARTIES The parties hereto agree that: 7.1 Reasonable Efforts; Further Assurances. Subject to the terms and conditions of this Agreement, each party will use its best efforts (exclusive of litigation) to take, or cause to be 15 16 taken, all actions and to do, or cause to be done, all things necessary or desirable under applicable laws and regulations to consummate the transactions contemplated by this Agreement. Without limitation, Seller shall transfer the Purchased Assets to Purchaser's Seattle offices and provide education and training to Purchaser in the operation of such Purchased Assets prior to Closing. Seller and Purchaser each agree to execute and deliver such other documents, certificates, agreements and other writings and to take such other actions as may be necessary or desirable to consummate or implement expeditiously the transactions contemplated by this Agreement and to vest in Purchaser good and marketable title to the Purchased Assets. 7.2 Certain Filings. Seller and Purchaser shall cooperate with one another (a) in determining whether any action by or in respect of, or filing with, any governmental body, agency, official or authority is required, or any actions, consents, approvals or waivers are required to be obtained from parties to any material contracts, in connection with the consummation of the transactions contemplated by this Agreement and (b) in taking such actions or making any such filings, furnishing information required in connection therewith and seeking timely to obtain any such actions, consents, approvals or waivers. 7.3 Confidentiality of Agreement. Seller and Purchaser will hold, and will use their best efforts to cause their respective officers, directors, employees, accountants, counsel, consultants, advisors and agents to hold the terms of this Agreement in confidence, unless compelled to disclose such terms by judicial or administrative process or by other requirements of law. ARTICLE 8 TAX MATTERS 8.1 Tax Cooperation; Allocation of Taxes. (a) Purchaser and Seller agree to furnish or cause to be furnished to each other, upon request, as promptly as practicable, such information and assistance relating to the Purchased Assets and the Businesses as is reasonably necessary for the filing of all Tax returns, and making of any election related to Taxes, the preparation for any audit by any taxing authority, and the prosecution or defense of any claim, suit or proceeding relating to any Tax return. Seller and Purchaser shall cooperate with each other in the conduct of any audit or other proceeding related to Taxes involving the Businesses and each shall execute and deliver such powers of attorney and other documents as are necessary to carry out the intent of this Section 8.1(a). (b) All personal property taxes due payable in 1999 with respect to the Purchased Assets shall be apportioned between Seller and Purchaser as of the Closing Date based on the number of days of such taxable period included in the Pre-Closing Tax Period and 16 17 the number of days of such taxable period included in the Post-Closing Tax Period. Seller shall be liable for the proportionate amount of such taxes that is attributable to the Pre-Closing Tax Period, and Purchaser shall be liable for the proportionate amount of such taxes that is attributable to the Post-Closing Tax Period. Within 90 days after the Closing, Seller and Purchaser shall present a statement to the other setting forth the amount of reimbursement to which each is entitled under this Section 8.1(b) together with such supporting evidence as is reasonably necessary to calculate the proration amount. The proration amount shall be paid by the party owing it to the other within 10 days after delivery of such statement. Thereafter, Seller shall notify Purchaser upon receipt of any bill for personal property taxes relating to the Purchased Assets, part or all of which are attributable to the Post-Closing Tax Period, and shall promptly deliver such bill to Purchaser who shall pay the same to the appropriate taxing authority, provided that if such bill covers the Pre-Closing Tax Period, Seller shall also remit prior to the due date of assessment to Purchaser payment for the proportionate amount of such bill that is attributable to the Pre-Closing Tax Period. In the event that either Seller or Purchaser shall thereafter make a payment for which it is entitled to reimbursement under this Section 8.1(b), the other party shall make such reimbursement promptly but in no event later than 30 days after the presentation of a statement setting forth the amount of reimbursement to which the presenting party is entitled along with such supporting evidence as is reasonably necessary to calculate the amount of reimbursement. Any payment required under this Section and not made within 10 days of delivery of the statement shall bear interest at the rate of 12% per annum (but in no event higher than the maximum legal rate) for each day until paid. (c) All transfer, documentary, sales, use and other Taxes assessed upon or with respect to the transfer of the Purchased Assets to Purchaser (exclusive of Taxes imposed upon or measured by Seller's net income or gross receipts) shall be the responsibility of Purchaser. ARTICLE 9 CONDITIONS TO CLOSING 9.1 Conditions to the Obligations of Each Party. The obligations of Purchaser and Seller to consummate the Closing are subject to the satisfaction of the following conditions: (a) no action or proceeding shall have been instituted in which an order has been entered restraining or prohibiting or invalidating the transactions contemplated by this Agreement, or affecting the right of Purchaser to own the Purchased Assets after the Closing Date; and (b) all actions by or in respect of or filings with any governmental body, agency, official or authority required to permit the consummation of the Closing shall have been obtained. 17 18 9.2 Conditions to Obligation of Purchaser. The obligation of Purchaser to consummate the Closing is subject to the satisfaction of the following further conditions: (a) Purchaser shall have completed its due diligence review of Seller, the Businesses and the Purchased Assets, and the results of such review shall be to Purchaser's reasonable satisfaction. As of the date of this Agreement, Purchaser's due diligence review is substantially complete. Purchaser has had full and free access to inspect and audit Seller's books relating to the Business, to observe and inspect the operation of the Business, and to discuss all phases of the Business with Bennett and employees of the Business. (b) Seller shall have performed in all material respects all of its obligations hereunder required to be performed by it at or prior to the Closing Date; (c) The Purchased Assets, including but not limited to all servers and databases, shall have been transferred to Purchaser's Seattle offices and otherwise delivered to the satisfaction of Purchaser; (d) The representations and warranties of Seller contained in this Agreement and in any certificate or other writing delivered by Seller pursuant hereto shall be true in all material respects at and as of the Closing Date, as if made at and as of such time; (e) The Noncompetition Agreement shall have been duly executed by Bennett; (f) The Registration Rights Agreement shall have been duly executed by Seller; (g) The Software License Agreement shall have been duly executed by Seller; and (h) Purchaser shall have received: (i) a bill of sale for the Purchased Assets, duly executed by the Seller, in form reasonably satisfactory to Purchaser and its legal counsel; and (ii) assignment and assumption agreements for the Merchant Contracts, duly executed by Seller, in form reasonably satisfactory to Purchaser and its legal counsel, and all necessary consents from the other parties to such contracts; (iii) such other approvals or documents as Purchaser may reasonably request. 18 19 9.3 Conditions to Obligation of Seller. The obligation of Seller to consummate the Closing is subject to the satisfaction of the following conditions: (a) Purchaser shall have performed in all material respects all of its obligations hereunder required to be performed by it at or prior to the Closing Date; (b) The representations and warranties of Purchaser contained in this Agreement and in any certificate or other writing delivered by Purchaser pursuant hereto shall be true in all material respects at and as of the Closing Date, as if made at and as of such time; (c) The Registration Rights Agreement shall have been duly executed by Purchaser; (d) The Software License Agreement shall have been duly executed by Purchaser; and (e) Seller shall have received: (i) payment of the Consideration, including delivery of the Shares, as provided in Section 2.6; (ii) assignment and assumption agreements for the Merchant Contracts and the Distributor Contracts, duly executed by Purchaser, in form reasonably satisfactory to Seller and its legal counsel, and all necessary consents from the other parties to such contracts; and (iii) such other approvals or documents as Seller may reasonably request. ARTICLE 10 SURVIVAL; INDEMNIFICATION 10.1 Survival. The representations and warranties of the parties hereto contained in this Agreement or in any certificate or other writing delivered pursuant hereto or in connection herewith shall survive the Closing for a period of one year. The right to indemnification, payment of damages or other remedy based on such representation and warranties or other covenants and obligations will not be affected by any investigation conducted with respect to any knowledge acquired (or capable of being acquired) at any time, whether before or after the execution and delivery of this Agreement or the Closing Date, with respect to the accuracy or inaccuracy of or compliance with any such representation, warranty, covenant or obligation. The waiver of any condition based on the accuracy of any representation or warranty, or on the 19 20 performance of or compliance with any covenant or obligation, will not affect the right to indemnification, payment of damages or other remedy based on such representation, warranties, covenants and obligations. 10.2 Indemnification. (a) Seller and Bennett each hereby agrees to indemnify Purchaser against and agrees to hold it harmless from any and all damage, loss, liability and expense (including, without limitation, reasonable expenses of investigation and reasonable attorneys' fees and expenses in connection with any action, suit or proceeding) (collectively, "Losses") incurred or suffered by Purchaser in any way related to or arising out of (i) any misrepresentation or breach of warranty, covenant or agreement made or to be performed by Seller pursuant to this Agreement, or (ii) Seller's ownership of the Purchased Assets or operation of the Businesses prior to the Closing Date. (b) Purchaser hereby indemnifies Seller and Bennett against and agrees to hold each of them harmless from any and all Losses incurred or suffered by Seller or Bennett in any way related to or arising out of (i) any misrepresentation or breach of warranty, covenant or agreement made or to be performed by Purchaser pursuant to this Agreement or (ii) Purchaser's ownership of the Purchased Assets or operation of the Businesses on or after the Closing Date. (c) In addition to any other legal or equitable remedies available to Purchaser for Seller's and/or Bennett's breach of any representation, warranty, covenant or agreement contained in this Agreement, and in addition to pursuing indemnification rights for Losses covered under Section 10.2(a) above, Purchaser may, as a nonexclusive remedy, offset against the Holdback Amount the amount of any loss that it shall have suffered as a result of such breach or the amount of any Losses for which Purchaser is to be indemnified pursuant to Section 10.2(a) above. 10.3 Procedures. The party seeking indemnification under Section 10.2 (the "Indemnified Party") agrees to give prompt notice to the party against whom indemnity is sought (the "Indemnifying Party") of the assertion of any claim, or the commencement of any suit, action or proceeding in respect of which indemnity may be sought under such Section. The Indemnifying Party may, at its own expense, participate in and control the defense of any such suit, action or proceeding; provided, the Indemnifying Party's counsel is reasonably satisfactory to the Indemnified Party and the Indemnifying Party thereafter consults with the Indemnified Party upon the Indemnified Party's reasonable request from time to time with respect to such suit, action or proceeding. The parties shall in any event cooperate in the defense or prosecution of any such suit, action or proceeding. The Indemnifying Party shall not be liable under Section 10.2 for any settlement effected without its consent of any claim, litigation or proceeding in respect of which indemnity may be sought hereunder. 20 21 ARTICLE 11 TERMINATION 11.1 Grounds for Termination. This Agreement may be terminated at any time prior to the Closing: (a) by Purchaser if the results of Purchaser's due diligence review of Seller, the Businesses and the Purchased Assets are not satisfactory to Purchaser in its sole discretion; (b) by mutual written agreement of Seller and Purchaser; (c) by either Seller or Purchaser if the Closing shall not have been consummated on or before May 7, 1999; (d) by either Seller or Purchaser if there shall be any law or regulation that makes the consummation of the transaction contemplated hereby illegal or otherwise prohibited or if consummation of the transactions contemplated hereby would violate any nonappealable final order, decree or judgment of any court or governmental body having competent jurisdiction; or (e) by either Seller or Purchaser, in the event of any material breach by the other party to this Agreement. The party desiring to terminate this Agreement shall give promptly notice of such termination to the other party. 11.2 Effect of Termination. If this Agreement is terminated as permitted by Section 11.1, such termination shall be without liability of either party (or any shareholder, director, officer, employee, agent, consultant or representative of such party) to the other party to this Agreement; provided that if such termination shall result from the willful failure of either party to fulfill a condition to the performance of the obligations of the other party or to perform a covenant of this Agreement or from a willful breach by either party to this Agreement, such party shall be fully liable for any and all Losses incurred or suffered by the other party as a result of such failure or breach. The provisions of Section 12.3 shall survive any termination hereof pursuant to Section 11.1. 21 22 ARTICLE 12 MISCELLANEOUS 12.1 Notices. All notices, requests and other communications to either party hereunder shall be in writing (including facsimile or similar writing) and shall be given, if to Purchaser, to: FreeShop.com, Inc. 95 South Jackson St., Suite 300 Seattle, WA 98104 Fax: (206) 441-9661 Attn: Timothy Choate, President and CEO if to Seller, to: Commonsite, LLC 3000 Ocean Park Suite 3010 Santa Monica, California 90405 Fax: (310) 656-5729 Attn: Alan Bennett or to such other address as such party shall have designated by notice so given to each other party. 12.2 Amendments; No Waivers. Any provision of this Agreement may be amended or waived prior to the Closing Date if, and only if, such amendment or waiver is in writing and signed, in the case of an amendment, by Purchaser and Seller, or in the case of a waiver, by the party against whom the waiver is to be effective. No failure or delay by either party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. 12.3 Expenses. Except as otherwise specified herein, Purchaser and Seller will each be solely responsible for and bear all of its own respective expenses, including, without limitation, expenses of legal counsel, accountants, and other advisors, incurred at any time in connection with pursuing or consummating this Agreement and the transactions contemplated hereby. 22 23 12.4 Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. 12.5 Governing Law. This Agreement shall be construed in accordance with and governed by the law of the State of Washington, without regard to the conflicts of law rules of such state. 12.6 Consent to Jurisdiction; Attorneys' Fees. For purposes of any litigation arising out of or in connection with this Agreement, the parties hereby consent to the jurisdiction of State and Federal Courts sitting in King County, Washington. In the event of any such litigation, the prevailing party shall be entitled to recover from the other party all of its attorneys' fees and other expenses incurred in connection with such litigation. 12.7 Counterparts; Effectiveness. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement shall become effective when each party hereto shall have received a counterpart hereof signed by the other party hereto. 12.8 Entire Agreement. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior agreements, understandings and negotiations, both written and oral, between the parties with respect to the subject matter of this Agreement. No representation, inducement, promise, understanding, condition or warranty not set forth herein has been made or relied upon by either party hereto. Neither this Agreement nor any provision hereof is intended to confer upon any person other than the parties hereto any rights or remedies hereunder. 12.9 Captions. The captions herein are included for convenience of reference only and shall be ignored in the construction or interpretation hereof. 12.10 Severability. Unless otherwise provided herein, if any provision of this Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining portions shall not in any way be affected or impaired thereby. 23 24 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. FREESHOP.COM, INC. By________________________________ Name: Tim Choate Title: Chief Executive Officer COMMONSITE, LLC By_______________________________ Name: Alan Bennett Title: Chief Executive Officer 24 25 SCHEDULE A URL's www.catalogsite.com www.catalogchannel.com www.apparelcatalogs.com www.b2bcatalogs.com www.businesscatalogs.com www.catalogshop.com www.funcatalogs.com www.giftcatalogs.com www.giftplace.com www.gardencatalogs.com www.gourmetcatalogs.com www.homecatalogs.com www.recreationcatalogs.com www.salesite.com www.saleplace.com www.sportcatalogs.com 25 26 SCHEDULE B MERCHANTS A1 Books American Frame Cake & Candle Cassettes Cents Off Corona Cigar Company Debonair Del Sol of Santa Rosa Edutainco (The Edutainment Catalog) Eskimo Joe's Felissimo Flowers USA Mobile Office Outfitter Stash Tea Co. Walkabout Travel Gear 26 27 SCHEDULE C MARKS Catalog Site The Catalog Site Catalog Channel The Catalog Channel 27 28 EXHIBIT A Noncompetition Agreement 28 29 EXHIBIT B Registration Rights Agreement 29 30 EXHIBIT C Software License Agreement 30 EX-10.9 11 REGISTRATION RIGHTS AGREEMENT 1 EXHIBIT 10.9 REGISTRATION RIGHTS AGREEMENT THIS AGREEMENT is entered into as of May 6, 1999, by and between FreeShop.com, Inc., a Washington corporation (the "Company"), and Commonsite, LLC, a California limited liability company (the "Investor"). RECITALS A. Concurrently with the execution of this Agreement, the Company has proposed to sell and issue 132,300 shares (the "Shares") of its common stock to the Investor pursuant to that certain Asset Purchase Agreement of even date herewith between the Company and the Investor (the "Asset Purchase Agreement"). B. By this Agreement, the Investor and the Company desire to set forth the registration rights of the Shares. NOW, THEREFORE, in consideration of the mutual promises, representations, warranties, covenants and conditions set forth in this Agreement, the parties hereto mutually agree as follows: 1. Registration Rights. The Company covenants and agrees as follows: 1.1 Definitions. For purposes of this Section 1: (a) The term "register," "registered," and "registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Securities Act of 1933, as amended (the "Securities Act"), and the declaration or ordering of effectiveness of such registration statement or document. (b) The term "Registrable Securities" means (i) the Shares and (ii) any common stock of the Company issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, the Shares. (c) The terms "Holder" or "Holders" means the Investor or qualifying transferees under subsection 1.8 hereof who hold Registrable Securities. (d) The term "SEC" means the Securities and Exchange Commission. 1 2 1.2 Company Registration. (a) Registration. If at any time or from time to time, after the effective date of the first registration statement for a public offering of securities of the Company to the general public (the "Initial Public Offering"), the Company shall determine to register any of its securities, for its own account or the account of any of its shareholders, other than a registration on Form S-1 or S-8 relating solely to employee stock option or purchase plans, or a registration on Form S-4 relating solely to an SEC rule 145 transaction, or a registration on any other form (other than Form S-1, S-2, S-3, S-18, or their successor forms) or any successor to such forms, which does not include substantially the same information as would be required to be included in a registration statement covering the sale of Registrable Securities, the Company will: (i) promptly give to each Holder written notice thereof (which shall include a list of the jurisdictions in which the Company intends to attempt to qualify such securities under the applicable blue sky or other state securities laws); and (ii) include in such registration (and compliance), and in any underwriting involved therein, all the Registrable Securities specified in a written request or requests, made within 30 days after receipt of such written notice from the Company, by any Holder or Holders, except as set forth in subsection 1.2(b) below. (b) Underwriting. If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise the Holders as a part of the written notice given pursuant to subsection 1.2(a)(i). In such an event the right of any Holder to registration pursuant to this subsection 1.2 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company and the other shareholders distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by the Company. (c) Apportionment. If the underwriters advise the Company that marketing factors require a limitation on the number of shares, including Registrable Securities, to be included in such offering, then the Company shall so advise all Holders of Registrable Securities that would otherwise have been underwritten pursuant to this Section 1.2, and the number of shares, including Registrable Securities, that may be included in the registration shall be apportioned first to the Company, then pro rata among the selling Holders according to the total amount of Registrable Securities requested to be sold in such registration by such Holders, 2 3 and then pro rata among any other selling shareholders according to the total amount of securities otherwise entitled to be included therein owned by each such other selling shareholder, or in such other proportions as shall mutually be agreed to by such selling shareholders. (d) Delay of Registration. No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Agreement. 1.3 Expenses of Registration. All expenses incurred in connection with any registration, qualification or compliance pursuant to this Section 1 including without limitation, all registration, filing and qualification fees, printing expenses, fees and disbursements of counsel for the Company and expenses of any special audits incidental to or required by such registration, shall be borne by the Company, except the Company shall not be required to pay underwriters' fees, discounts or commissions relating to Registrable Securities. All expenses of any registered offering not otherwise borne by the Company shall be borne pro rata among the Holders participating in the offering and the Company. 1.4 Registration Procedures. In the case of each registration, qualification or compliance effected by the Company pursuant to this Registration Rights Agreement, the Company will keep each Holder participating therein advised in writing as to the initiation of each registration, qualification and compliance and as to the completion thereof. Except as otherwise provided in subsection 1.3, at its expense the Company will: (a) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective, and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective for up to 120 days. (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement. (c) Furnish to the Holders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they reasonable request in order to facilitate the disposition of Registrable Securities owned by them. 3 4 (d) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (e) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement. (f) Notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act or the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. 1.5 Indemnification. (a) The Company will indemnify each Holder of Registrable Securities and each of its officers, directors and partners, and each person controlling such Holder, with respect to which such registration, qualification or compliance has been effected pursuant to this Rights Agreement, and each underwriter, if any, and each person who controls any underwriter of the Registrable Securities held by or issuable to such Holder, against all claims, losses, expenses, damages and liabilities (or actions in respect thereto) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any prospectus, offering circular or other document (including any related registration statement, notification or the like) incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statement therein not misleading, or any violation or alleged violation by the Company of the Securities Act, the Securities Exchange Act of 1934, as amended, (Exchange Act) or any state securities law applicable to the Company or any rule or regulation promulgated under the Securities Act, the Exchange Act or any such state law and relating to action or inaction required of the Company in connection with any such registration, qualification of compliance, and will reimburse each such Holder, each of its officers, directors and partners, and each person controlling such Holder, each such underwriter and each person who controls any such underwriter, within a reasonable amount of time after incurred for any reasonable legal and any other expenses incurred in connection with investigating, defending or settling any such claim loss damage, liability or action, provided, however, that the indemnity agreement 4 5 contained in this subsection 1.5(a) shall not apply to amounts paid in settlement of any such claim, loss, damage, liability, or action if such settlement is effected without the consent of the company (which consent shall not be unreasonably withheld); and provided further, that the company will not be liable in any such case to the extent that any such claim, loss, damage or liability arises out of or is based on any untrue statement or omission based upon written information furnished to the Company by an instrument duly executed by such Holder or underwriter specifically for use therein (b) Each Holder will, if Registrable Securities held by or issuable to such Holder are included in the Securities as to which such registration, qualification or compliance is being effected, indemnify the company, each of its directors and officers, each underwriter, if any, of the Company's securities covered by such a registration statement, each person who controls the Company within the meaning of the Securities Act, and each other such Holder, each of its officers, directors and partners and each person controlling such Holder, against all claims, losses, expenses, damages and liabilities )or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in an such registration statement, prospectus, offering circular or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company such Holders, such directors, officers, partners, persons or underwriters for any reasonable legal or any other expenses incurred in connection with investigating, defending or settling any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by such Holder specifically for use therein; provided, however, that the indemnity agreement contained in this subsection 1.5(b) shall not apply to amounts paid in settlement of any such claim, loss damage, liability or action if such settlement is effected without the consent of the Holder, (which consent shall not be unreasonably withheld); and provided further, that the total amount for which any Holder shall be liable under this subsection 1.5(b) shall not in any event exceed the aggregate proceeds received by such Holder from the sale of Registrable Securities held by such Holder in such registration. (c) Each party entitled to indemnification under this subsection 1.5 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom; provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not be unreasonably withheld), and the 5 6 Indemnified Party may participate in such defense at such party's expense, and provided further, that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations thereunder, unless such failure resulted in prejudice to the Indemnifying Party; and provided further, that an Indemnified Party (together with all other Indemnified Parties which may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the fees and expenses to be paid by the Indemnifying Party, if representation of such Indemnified Party by the counsel retained by the Indemnifying Party would be inappropriate due to actual or potential differing interests between such Indemnified Party and any other party represented by such counsel in such proceeding. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability to respect to such claim or litigation. 1.6 Information by Holder. Any Holder or Holders of Registrable Securities included in any registration shall promptly furnish to the Company such information regarding such Holder or Holders and the distribution proposed by such Holder or Holders as the Company may request in writing and as shall be required in connection with any registration, qualification or compliance referred to herein. 1.7 Rule 144 Reporting. With a view to making available to Holders the benefits of certain rules and regulations of the SEC which may permit the sale of the Registrable Securities to the public without registration, the Company agrees to use commercially reasonable efforts to (a) make and keep public information available as those terms are understood and defined in SEC Rule 144, after 90 days after the effective date of the first registration filed by the Company for an offering of its securities to the general public; (b) file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements); and (c) so long as a Holder owns any Registrable Securities to furnish to such Holder forthwith upon request a written statement by the Company as to its compliance with the reporting requirements of said Rule 144 (at any time after 90 days after the effective date of the first registration statement filed by the Company for an offering of its securities to the general public), and of the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents so filed by the Company as the Holder may 6 7 reasonably request in complying with any rule or regulation of the SEC allowing the Holder to sell any such securities without registration. 1.8 Transfer of Registration Rights. Holders' right to cause the Company to register their securities and keep information available granted to them by the Company under subsections 1.2 and 1.7 may be assigned to a transferee or assignee of a Holder's Registrable Securities not sold to the public provided, that the Company is given written notice by such Holder at the time of or within a reasonable time after said transfer, stating the name and address of said transferee or assignee and identifying the securities with respect to which such registration rights are being assigned. The Company may prohibit the transfer of any Holders' right under this subsection 1.8 to any proposed transferee or assignee who the Company reasonably believes is a competitor of the Company. 1.9 "Market Stand-Off" Agreement. The Holders hereby agree that they shall not, to the extent requested by the Company and an underwriter of Common Stock (or other securities) of the Company, (other than to persons who agree to be similarly bound) sell or otherwise transfer or dispose of any Registrable Securities for 180 days following the effective date of a registration statement of the Company filed under the Securities Act. In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to the Registrable Securities of the Holders (and the shares or securities of every other person subject to the foregoing restriction) until the end of such period 1.10 Single Use Only. Notwithstanding anything to the contrary in this Agreement, each Holder may exercise only one time its right to cause the Company to register any or all of such Holder's securities. 2. General. 2.1 Waivers and Amendments. With the written consent of the record or beneficial holders of at least a majority of the Registrable Securities, the obligations of the Company and the rights of the Holders of the Registrable Securities under this agreement may be waived (either generally or in a particular instance, either retroactively or prospectively, and either for a specified period of time or indefinitely), and with the same consent the Company, when authorized by resolution of its Board of Directors, may enter into a supplementary agreement for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Agreement, provided, however, that no such modification, amendment or waiver shall reduce the aforesaid percentage of Registrable Securities without the consent of all of the Holders of the Registrable Securities. Upon the effectuation of each such waiver, consent, agreement of amendment or modification, the Company shall promptly give written notice thereof to the record holders of the Registrable Securities who have not previously 7 8 consented thereto in writing. This Agreement or any provision hereof may be changed, waived, discharged or terminated only by a statement in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought, except to the extent provided in this subsection 2.1. 2.2 Termination of Registration Rights. The registration rights granted pursuant to this Agreement shall terminate as to all Holders on the fifth anniversary of the closing of the Company's Initial Public Offering (the "Fifth Anniversary") provided, however, such termination shall be postponed until the later of (i) that number of days following such Fifth Anniversary equal to the number of days, if any, between the date of such first public offering and the Fifth Anniversary that the Common Stock of the Company is not traded on a national stock exchange or the Nasdaq National Market System (or any successor organization) and (ii) if as of the Fifth Anniversary, the Company is not so traded, then, one year following such date as the Company first resumes trading on a national stock exchange or the Nasdaq National Market System (or any successor organization). 2.3 Governing Law. This Agreement shall be governed in all respects by the laws of the State of Washington. 2.4 Successors and Assigns. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of and be binding upon, the successors assigns, heirs, executors and administrators of the parties hereto. 2.5 Entire Agreement. Except as set forth below, this Agreement and the other documents delivered pursuant hereto constitute the full and entire understanding and Agreement between the parties with regard to the subjects hereof and thereof. 2.6 Notices, etc. All notices and other communications required or permitted hereunder shall be in writing and shall be mailed by first class mail, postage prepaid, certified or registered mail, return receipt requested, addressed (a) if to Holder, at such Holder's address as set forth below, or at such other address as such Holder shall have furnished to the Company in writing, or (b) if to the company, at the Company's address set forth below, or at such other address as the Company shall have furnished to the Holder in writing. 2.7 Severability. In case any provision of this Agreement shall be invalid, illegal, or unenforceable, the validity, legality and enforceability of the remaining provisions of this Agreement or any provisions of the other Agreement shall not in any way be affected or impaired thereby. 8 9 2.8 Titles and Subtitles. The titles of the sections and subsections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 2.9 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. INVESTOR COMPANY COMMONSITE, LLC FREESHOP.COM, INC. By /s/ ALAN BENNETT By /s/ TIM CHOATE ------------------------------- ------------------------------ Name: Alan Bennett Name: Tim Choate Title: CEO Title: CEO Address: 3000 Ocean Park Address: 95 South Jackson Suite 3010 Suite 300 Santa Monica, California 90405 Seattle, WA 98104 9 EX-10.10 12 LOAN AND SECURITY AGREEMENT 1 EXHIBIT 10.10 - -------------------------------------------------------------------------------- FREESHOP INTERNATIONAL, INC. LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- 2 This LOAN AND SECURITY AGREEMENT is entered into as of September 18, 1998, by and between IMPERIAL BANK ("Bank") and FREESHOP INTERNATIONAL, INC. ("Borrower"). RECITALS Borrower wishes to obtain credit from time to time from Bank, and Bank desires to extend credit to Borrower. This Agreement sets forth the terms on which Bank will advance credit to Borrower, and Borrower will repay the amounts owing to Bank. AGREEMENT The parties agree as follows: 1. DEFINITIONS AND CONSTRUCTION. 1.1 Definitions. As used in this Agreement, the following terms shall have the following definitions: "Accounts" means all presently existing and hereafter arising accounts, contract rights, and all other forms of obligations owing to Borrower arising out of the sale or lease of goods (including, without limitation, the licensing of software and other technology) or the rendering of services by Borrower, whether or not earned by performance, and any and all credit insurance, guaranties, and other security therefor, as well as all merchandise returned to or reclaimed by Borrower and Borrower's Books relating to any of the foregoing. "Advance" or "Advances" means a cash advance under the Revolving Facility. "Affiliate" means, with respect to any Person, any Person that owns or controls directly or indirectly such Person, any Person that controls or is controlled by or is under common control with such Person. "Bank Expenses" means all: reasonable costs or expenses (including reasonable attorneys' fees and expenses) incurred in connection with the preparation, negotiation, administration, and enforcement of the Loan Documents; reasonable Collateral audit fees; and Bank's reasonable attorneys' fees and expenses incurred in amending, enforcing or defending the Loan Documents (including fees and expenses of appeal), incurred before, during and after an Insolvency Proceeding, whether or not suit is brought. "Borrower's Books" means all of Borrower's books and records including: ledgers; records concerning Borrower's assets or liabilities, the Collateral, business operations or financial condition; and all computer programs, or tape files, and the equipment, containing such information. "Business Day" means any day that is not a Saturday, Sunday, or other day on which banks in the State of California or Washington are authorized or required to close. "Closing Date" means the date of this Agreement. 2 3 "Code" means the California Uniform Commercial Code. "Collateral" means the property described on Exhibit A attached hereto. "Committed Revolving Line" means a credit extension of up to Five Hundred Thousand Dollars ($500,000), increasing to Seven Hundred Fifty Thousand Dollars ($750,000) upon the occurrence of an Equity Event and Borrower's election to do so. "Contingent Obligation" means, as applied to any Person, any direct or indirect liability, contingent or otherwise, of that Person with respect to (i) any indebtedness, lease, dividend, letter of credit or other obligation of another, including, without limitation, any such obligation directly or indirectly guaranteed, endorsed, co-made or discounted or sold with recourse by that Person, or in respect of which that Person is otherwise directly or indirectly liable; (ii) any obligations with respect to undrawn letters of credit issued for the account of that Person; and (iii) all obligations arising under any interest rate, currency or commodity swap agreement, interest rate cap agreement, interest rate collar agreement, or other agreement or arrangement designated to protect a Person against fluctuation in interest rates, currency exchange rates or commodity prices; provided, however, that the term "Contingent Obligation" shall not include endorsements for collection or deposit in the ordinary course of business. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determined amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by such Person in good faith; provided, however, that such amount shall not in any event exceed the maximum amount of the obligations under the guarantee or other support arrangement. "Copyrights" means any and all copyright rights, copyright applications, copyright registrations and like protections in each work or authorship and derivative work thereof, whether published or unpublished and whether or not the same also constitutes a trade secret, now or hereafter existing, created, acquired or held. "Credit Extension" means each Advance, Equipment Advance, or any other extension of credit by Bank for the benefit of Borrower hereunder. "Current Assets" means, as of any applicable date, all amounts that should, in accordance with GAAP, be included as current assets on the consolidated balance sheet of Borrower and its Subsidiaries as at such date. "Current Liabilities" means, as of any applicable date, all amounts that should, in accordance with GAAP, be included as current liabilities on the consolidated balance sheet of Borrower and its Subsidiaries, as at such date, plus, to the extent not already included therein, all outstanding Advances made under this Agreement, including all Indebtedness that is payable upon demand or within one year from the date of determination thereof unless such Indebtedness is renewable or extendible at the option of Borrower or any Subsidiary to a date more than one year from the date of determination. "Daily Balance" means the amount of the Obligations owed at the end of a given day. 3 4 "Equipment" means all present and future machinery, equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments in which Borrower has any interest. "Equipment Advance" has the meaning set forth in Section 2.1.1. "Equity Event" means the sale or issuance by Borrower of its equity securities in which Borrower receives net cash proceeds of not less than Two Million Five Hundred Thousand Dollars ($2,500,000) from investors acceptable to Bank in its sole discretion or before December 31, 1998. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and the regulations thereunder. "Event of Default" has the meaning assigned in Article 8. "GAAP" means generally accepted accounting principles as in effect from time to time. "Indebtedness" means (a) all indebtedness for borrowed money or the deferred purchase price of property or services, including without limitation reimbursement and other obligations with respect to surety bonds and letters of credit, (b) all obligations evidenced by notes, bonds, debentures or similar instruments, (c) all capital lease obligations and (d) all Contingent Obligations. "Insolvency Proceeding" means any proceeding commenced by or against any person or entity under any provision of the United States Bankruptcy Code, as amended, or under any other bankruptcy or insolvency law, including assignments for the benefit of creditors, formal or informal moratoria, compositions, extension generally with its creditors, or proceedings seeking reorganization, arrangement, or other relief. "Intellectual Property Collateral" means: (a) Copyrights, Trademarks and Patents; (b) Any and all trade secrets, and any and all intellectual property rights in computer software and computer software products now or hereafter existing, created, acquired or held; (c) Any and all design rights which may be available to Borrower now or hereafter existing, created, acquired or held; (d) Any and all claims for damages by way of past, present and future infringement of any of the rights included above, with the right, but not the obligation, to sue for and collect such damages for said use or infringement of the intellectual property rights identified above; (e) All licenses or other rights to use any of the Copyrights, Patents or Trademarks, and all license fees and royalties arising from such use to the extent permitted by such license or rights; (f) All amendments, renewals and extensions of any of the Copyrights, Trademarks or Patents; and 4 5 (g) All proceeds and products of the foregoing, including without limitation all payments under insurance or any indemnity or warranty payable in respect of any of the foregoing. "Inventory" means all present and future inventory in which Borrower has any interest, including merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products intended for sale or lease or to be furnished under a contract of service, of every kind and description now or at any time hereafter owned by or in the custody or possession, actual or constructive, of Borrower, including such inventory as is temporarily out of its custody or possession or in transit and including any returns upon any accounts or other proceeds, including insurance proceeds, resulting from the sale or disposition of any of the foregoing and any documents of title representing any of the above, and Borrower's Books relating to any of the foregoing. "Investment" means any beneficial ownership of (including stock, partnership interest or other securities) any Person, or any loan, advance or capital contribution to any Person. "IRC" means the Internal Revenue Code of 1986, as amended, and the regulations thereunder. "Lien" means any mortgage, lien, deed of trust, charge, pledge, security interest or other encumbrance. "Loan Documents" means, collectively, this Agreement, any note or notes executed by Borrower, and any other agreement entered into between Borrower and Bank in connection with this Agreement, all as amended or extended from time to time. "Material Adverse Effect" means a material adverse effect on (i) the business operations or condition (financial or otherwise) of Borrower and its Subsidiaries taken as a whole or (ii) the ability of Borrower to repay the Obligations or otherwise perform its obligations under the Loan Documents. "Negotiable Collateral" means all of Borrower's present and future letters of credit of which it is a beneficiary, notes, drafts, instruments, securities, documents of title, and chattel paper, and Borrower's Books relating to any of the foregoing. "Obligations" means all debt, principal, interest, Bank Expenses and other amounts owed to Bank by Borrower pursuant to this Agreement or any other agreement, whether absolute or contingent, due or to become due, now existing or hereafter arising, including any interest that accrues after the commencement of an Insolvency Proceeding and including any debt, liability, or obligation owing from Borrower to others that Bank may have obtained by assignment or otherwise. "Patents" means all patents, patent applications and like protections including without limitation improvements, divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same. "Periodic Payments" means all installments or similar recurring payments that Borrower may now or hereafter become obligated to pay to Bank pursuant to the terms and provisions of any instrument, or agreement now or hereafter in existence between Borrower and Bank. 5 6 "Permitted Indebtedness" means: (a) Indebtedness of Borrower in favor of Bank arising under this Agreement or any other Loan Document; (b) Indebtedness existing on the Closing Date and disclosed in the Schedule; (c) Indebtedness secured by a lien described in clause (c) of the defined term "Permitted Liens," provided such Indebtedness does not exceed the lesser of the cost or fair market value of the equipment financed with such Indebtedness; (d) Subordinated Debt; (e) Indebtedness to trade creditors incurred in the ordinary course of business; and (f) Indebtedness (other than (a) through (e)) at any time outstanding in an amount not exceeding $100,000. "Permitted Investment" means: (a) Investments existing on the Closing Date disclosed in the Schedule; (b) (i) marketable direct obligations issued or unconditionally guaranteed by the United States of America or any agency or any State thereof maturing within one (1) year from the date of acquisition thereof, (ii) commercial paper maturing no more than one (1) year from the date of creation thereof and currently having rating of at least A-2 or P-2 from either Standard & Poor's Corporation or Moody's Investors Service, Inc., (iii) certificates of deposit maturing no more than one (1) year from the date of investment therein issued by Bank, (iv) Bank's money market accounts and (v) Investments made in connection with transactions permitted under Section 7.3; and (c) Loans to employees to purchase Borrower's capital stock. "Permitted Liens" means the following: (a) Any Liens existing on the Closing Date and disclosed in the Schedule or arising under this Agreement or the other Loan Documents; (b) Liens for taxes, fees, assessments or other governmental charges or levies, either not delinquent or being contested in good faith by appropriate proceedings, provided the same have no priority over any of Bank's security interests; (c) Liens (i) upon or in any equipment acquired or held by Borrower or any of its Subsidiaries to secure the purchase price of such equipment or indebtedness incurred solely for the purpose of financing the acquisition of such equipment, or (ii) existing on such equipment at the time of its acquisition, provided that the Lien is confined solely to the property so acquired and improvements thereon, and the proceeds of such equipment; 6 7 (d) Liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by Liens of the type described in clauses (a) through (c) above, provided that any extension, renewal or replacement Lien shall be limited to the property encumbered by the existing Lien and the principal amount of the indebtedness being extended, renewed or refinanced does not increase. "Person" means any individual, sole proprietorship, partnership, limited liability company, joint venture, trust, unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or governmental agency. "Prime Rate" means the variable rate of interest, per annum, most recently announced by Bank, as its "prime rate," whether or not such announced rate is the lowest rate available from Bank. "Quick Assets" means, at any date as of which the amount thereof shall be determined, the consolidated cash, cash-equivalents, accounts receivable and investments, with maturities not to exceed 90 days, of Borrower determined in accordance with GAAP. "Responsible Officer" means each of the Chief Executive Officer, the Chief Operating Officer, the Chief Financial Officer and the Controller of Borrower. "Revolving Maturity Date" means September 17, 1999. "Revolving Facility" means the facility under which Borrower may request Bank to issue Advances, as specified in Section 2.1.1 hereof. "Schedule" means the schedule of exceptions attached hereto, if any. "Subordinated Debt" means any debt incurred by Borrower that is subordinated to the debt owing by Borrower to Bank on terms reasonably acceptable to Bank (and identified as being such by Borrower and Bank). "Subsidiary" means any corporation or partnership in which (i) any general partnership interest or (ii) more than 50% of the stock of which by the terms thereof ordinary voting power to elect the Board of Directors, managers or trustees of the entity shall, at the time as of which any determination is being made, be owned by Borrower, either directly or through an Affiliate. "Trademarks" means any trademark and servicemark rights, whether registered or not, applications to register and registrations of the same and like protections, and the entire goodwill of the business of Borrower connected with and symbolized by such trademarks. 1.2 Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with GAAP and all calculations made hereunder shall be made in accordance with GAAP. When used herein, the terms "financial statements" shall include the notes and schedules thereto. 7 8 2. LOAN AND TERMS OF PAYMENT. 2.1 Credit Extensions. Borrower promises to pay to the order of Bank, in lawful money of the United States of America, the aggregate unpaid principal amount of all Credit Extensions made by Bank to Borrower hereunder. Borrower shall also pay interest on the unpaid principal amount of such Credit Extensions at rates in accordance with the terms hereof. 2.1.1 Revolving Advances (a) Subject to and upon the terms and conditions of this Agreement, Borrower may request Advances in an aggregate outstanding amount not to exceed the Committed Revolving Line. Borrower may elect to use any Advances for the purchase of Equipment (each an "Equipment Advance" and, collectively, the "Equipment Advances") Each Equipment Advance shall not exceed one hundred percent (100%) of the invoice amount of equipment, software and corporate purposes approved by Bank from time to time (which Borrower shall, in any case, have purchased within 180 days of the date of the corresponding Equipment Advance) , excluding taxes, shipping, warranty charges, freight discounts and installation expense. Subject to the terms and conditions of this Agreement, amounts borrowed pursuant to this Section may be repaid and reborrowed at any time prior to the Revolving Maturity Date, at which time all Advances under this Section shall be immediately due and payable. Borrower may prepay any Advances without penalty or premium. (b) Effective as of the Revolving Maturity Date, Borrower may elect to convert any outstanding Equipment Advances into a term loan. Such amount shall be payable in thirty-six (36) equal monthly installments of principal, plus all accrued interest, beginning on October 17, 1999, and continuing on the same day of each month thereafter through October 17, 2002, at which time all amounts due under this Section 2.1.1 and any other amounts due under this Agreement shall be immediately due and payable. Equipment Advances, once repaid, may not be reborrowed. Borrower may prepay any Equipment Advances without penalty or premium. (c) When Borrower desires to obtain an Advance or an Equipment Advance, Borrower shall notify Bank (which notice shall be irrevocable) by facsimile transmission to be received no later than 3:00 p.m. Pacific time one (1) Business Day before the day on which the Advance or Equipment Advance is to be made. Such notice shall be substantially in the form of Exhibit B. Any Equipment Advance notice shall be signed by a Responsible Officer or its designee and include a copy of the invoice for any Equipment to be financed. Bank is authorized to make Advances under this Agreement, based upon instructions received from a Responsible Officer or a designee of a Responsible Officer, or without instructions if in Bank's discretion such Advances are necessary to meet Obligations which have become due and remain unpaid. Bank shall be entitled to rely on any telephonic notice given by a person who Bank reasonably believes to be a Responsible Officer or a designee thereof, and Borrower shall indemnify and hold Bank harmless for any damages or loss suffered by Bank as a result of such reliance. Bank will credit the amount of Advances made under this Section to Borrower's deposit account. 8 9 2.2 Overadvances. If any Advances and Equipment Advances hereunder exceed the Committed Revolving Line, Borrower, upon written notice from Bank, shall immediately pay to Bank, in cash, the amount of such excess. 2.3 Interest Rates, Payments, and Calculations. (a) Interest Rates. Except as set forth in Section 2.3((b)), the Advances and Equipment Advances shall bear interest, on the outstanding daily balance thereof, at a rate equal to One and One-half Percent (1.5%) above the Prime Rate. (b) Late Fee; Default Rate. If any payment is not made within ten (10) days after the date such payment is due, Borrower shall pay Bank a late fee equal to the lesser of (i) five percent (5%) of the amount of such unpaid amount or (ii) the maximum amount permitted to be charged under applicable law. All Obligations shall bear interest, from and after the occurrence and during the continuance of an Event of Default, at a rate equal to five (5) percentage points above the interest rate applicable immediately prior to the occurrence of an Event of Default. (c) Payments. Interest on Advances and Equipment Advances shall be due and payable on the seventeenth calendar day of each month during the term hereof. Bank shall, at its option, charge such interest, all Bank Expenses, and all Periodic Payments against any of Borrower's deposit accounts or against the Committed Revolving Line, in which case those amounts shall thereafter accrue interest at the rate then applicable hereunder. Any interest not paid when due shall be compounded by becoming a part of the Obligations, and such interest shall thereafter accrue interest at the rate then applicable hereunder. Bank shall deliver to Borrower statements of account in the ordinary course of business reflecting charges made hereunder. (d) Computation. In the event the Prime Rate is changed from time to time hereafter, the applicable rate of interest hereunder shall be increased or decreased effective as of the day the Prime Rate is changed, by an amount equal to such change in the Prime Rate. All interest chargeable under the Loan Documents shall be computed on the basis of a three hundred sixty (360) day year for the actual number of days elapsed. 2.4 Crediting Payments. Prior to the occurrence of an Event of Default, Bank shall credit a wire transfer of funds, check or other item of payment to such deposit account or Obligation as Borrower specifies. After the occurrence of an Event of Default, the receipt by Bank of any wire transfer of funds, check, or other item of payment shall be immediately applied to conditionally reduce Obligations, but shall not be considered a payment on account unless such payment is of immediately available federal funds or unless and until such check or other item of payment is honored when presented for payment. Notwithstanding anything to the contrary contained herein, any wire transfer or payment received by Bank after 12:00 noon Pacific time shall be deemed to have been received by Bank as of the opening of business on the immediately following Business Day. Whenever any payment to Bank under the Loan Documents would otherwise be due (except by reason of acceleration) on a date that is not a Business Day, such payment shall instead be due on the next Business Day, and additional fees or interest, as the case may be, shall accrue and be payable for the period of such extension. 2.5 Fees. Borrower shall pay to Bank the following: (a) Facility Fee. On the Closing Date, a Facility Fee equal to One Thousand Two Hundred Fifty Dollars ($1,250) which shall be nonrefundable; upon the occurrence of an Equity 9 10 Event, and at Borrower's election, as a condition to increasing the Committed Revolving Line to $750,000, an additional Facility Fee of One Thousand Two Hundred Fifty Dollars ($1,250) which shall be non-refundable. (b) Bank Expenses. On the Closing Date, all Bank Expenses incurred through the Closing Date, including reasonable attorneys' fees and expenses and, after the Closing Date, all Bank Expenses, including reasonable attorneys' fees and expenses, as and when they become due. 2.6 Term. This Agreement shall become effective on the Closing Date and, subject to Section 12.7, shall continue in full force and effect for a term ending on the Term Maturity Date. Notwithstanding the foregoing, Bank shall have the right to terminate its obligation to make Credit Extensions under this Agreement immediately and without notice upon the occurrence and during the continuance of an Event of Default. Notwithstanding termination, Bank's Lien on the Collateral shall remain in effect for so long as any Obligations are outstanding. 3. CONDITIONS OF LOANS. 3.1 Conditions Precedent to Initial Credit Extension. The obligation of Bank to make the initial Credit Extension is subject to the condition precedent that Bank shall have received, in form and substance satisfactory to Bank, the following: (a) this Agreement; (b) a certificate of the Secretary of Borrower with respect to incumbency and resolutions authorizing the execution and delivery of this Agreement; (c) a financing statement (Form UCC-1); (d) an intellectual property security agreement; (e) a warrant; (f) a guaranty executed by Persons acceptable to Bank; and (g) such other documents, and completion of such other matters, as Bank may reasonably deem necessary or appropriate. 3.2 Conditions Precedent to all Credit Extensions. The obligation of Bank to make each Credit Extension, including the initial Credit Extension, is further subject to the following conditions: (a) timely receipt by Bank of the Payment/Advance Form as provided in Section 2.1; and (b) the representations and warranties contained in Section 5 shall be true and correct in all material respects on and as of the date of such Payment/Advance Form and on the effective date of each Credit Extension as though made at and as of each such date, and no Event of Default shall have occurred and be continuing, or would result from such Credit Extension (provided, however, that those representations and warranties expressly referring to another date shall be true, correct and complete in all material respects as of such date). The making of each Credit Extension shall 10 11 be deemed to be a representation and warranty by Borrower on the date of such Credit Extension as to the accuracy of the facts referred to in this Section 3.2((b)). 4. CREATION OF SECURITY INTEREST. 4.1 Grant of Security Interest. Borrower grants and pledges to Bank a continuing security interest in all presently existing and hereafter acquired or arising Collateral in order to secure prompt repayment of any and all Obligations and in order to secure prompt performance by Borrower of each of its covenants and duties under the Loan Documents. Except as set forth in the Schedule and for Permitted Liens, such security interest constitutes a valid, first priority security interest in the presently existing Collateral, and will constitute a valid, first priority security interest in Collateral acquired after the date hereof. 4.2 Delivery of Additional Documentation Required. Borrower shall from time to time execute and deliver to Bank, at the request of Bank, all Negotiable Collateral, all financing statements and other documents that Bank may reasonably request, in form satisfactory to Bank, to perfect and continue perfected Bank's security interests in the Collateral and in order to fully consummate all of the transactions contemplated under the Loan Documents. 4.3 Right to Inspect. Bank (through any of its officers, employees, or agents) shall have the right, upon reasonable prior notice, from time to time during Borrower's usual business hours but no more than once a year (unless an Event of Default has occurred and is continuing), to inspect Borrower's Books and to make copies thereof and to check, test, and appraise the Collateral in order to verify Borrower's financial condition or the amount, condition of, or any other matter relating to, the Collateral. 5. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants as follows: 5.1 Due Organization and Qualification. Borrower and each Subsidiary is a corporation duly existing under the laws of its state of incorporation and qualified and licensed to do business in any state in which the conduct of its business or its ownership of property requires that it be so qualified, except where failure to so qualify would not have a Material Adverse Effect. 5.2 Due Authorization; No Conflict. The execution, delivery, and performance of the Loan Documents are within Borrower's powers, have been duly authorized, and are not in conflict with nor constitute a breach of any provision contained in Borrower's Certificate of Incorporation or Bylaws, nor will they constitute an event of default under any material agreement to which Borrower is a party or by which Borrower is bound. Borrower is not in default under any agreement to which it is a party or by which it is bound, which default could have a Material Adverse Effect. 5.3 No Prior Encumbrances. Borrower has good and indefeasible title to the Collateral, free and clear of Liens, except for Permitted Liens. 5.4 Bona Fide Eligible Accounts. The Eligible Accounts are bona fide existing obligations. The services giving rise to such Eligible Accounts have been performed and the account debtor has an unconditional obligation to pay Borrower for such services. Borrower has not received notice of actual or imminent Insolvency Proceeding of any account debtor that is included in any Borrowing Base Certificate as an Eligible Account. 11 12 5.5 Merchantable Inventory. All Inventory is in all material respects of good and marketable quality, free from all material defects, except for Inventory for which adequate reserves have been made. 5.6 Name; Location of Chief Executive Office. Borrower has not done business under any name other than that specified on the signature page hereof. The chief executive office of Borrower is located at the address indicated in Section 10 hereof. 5.7 Litigation. Except as set forth in the Schedule, there are no actions or proceedings pending by or against Borrower or any Subsidiary before any court or administrative agency in which an adverse decision could have a Material Adverse Effect or a material adverse effect on Borrower's interest or Bank's security interest in the Collateral. 5.8 No Material Adverse Change in Financial Statements. All consolidated financial statements related to Borrower and any Subsidiary that are delivered by Borrower to Bank fairly present in all material respects Borrower's consolidated financial condition as of the date thereof and Borrower's consolidated results of operations for the period then ended. There has not been a material adverse change in the consolidated financial condition of Borrower since the date of the most recent of such financial statements submitted to Bank. 5.9 Solvency, Payment of Debts. Borrower is solvent and able to pay its debts (including trade debts) as they mature. 5.10 Regulatory Compliance. Borrower and each Subsidiary have met the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA. No event has occurred resulting from Borrower's failure to comply with ERISA that is reasonably likely to result in Borrower's incurring any liability that could have a Material Adverse Effect. Borrower is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940. Borrower is not engaged principally, or as one of the important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulations G, T and U of the Board of Governors of the Federal Reserve System). Borrower has complied with all the provisions of the Federal Fair Labor Standards Act. Borrower has not violated any statutes, laws, ordinances or rules applicable to it, violation of which could have a Material Adverse Effect. 12 13 5.11 Environmental Condition. Except as disclosed in the Schedule, none of Borrower's or any Subsidiary's properties or assets has ever been used by Borrower or any Subsidiary or, to the best of Borrower's knowledge, by previous owners or operators, in the disposal of, or to produce, store, handle, treat, release, or transport, any hazardous waste or hazardous substance other than in accordance with applicable law; to the best of Borrower's knowledge, none of Borrower's properties or assets has ever been designated or identified in any manner pursuant to any environmental protection statute as a hazardous waste or hazardous substance disposal site, or a candidate for closure pursuant to any environmental protection statute; to the best of Borrower's knowledge, no lien arising under any environmental protection statute has attached to any revenues or to any real or personal property owned by Borrower or any Subsidiary; and to the best of Borrower's knowledge, neither Borrower nor any Subsidiary has received a summons, citation, notice, or directive from the Environmental Protection Agency or any other federal, state or other governmental agency concerning any action or omission by Borrower or any Subsidiary resulting in the releasing, or otherwise disposing of hazardous waste or hazardous substances into the environment. 5.12 Taxes. Borrower and each Subsidiary has filed or caused to be filed all tax returns required to be filed, and has paid, or has made adequate provision for the payment of, all taxes reflected therein. 5.13 Subsidiaries. Borrower does not own any stock, partnership interest or other equity securities of any Person, except for Permitted Investments. 5.14 Government Consents. Borrower and each Subsidiary has obtained all consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all governmental authorities that are necessary for the continued operation of Borrower's business as currently conducted, the failure to obtain which could have a Material Adverse Effect. 5.15 Full Disclosure. No representation, warranty or other statement made by Borrower in any certificate or written statement furnished to Bank contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained in such certificates or statements not misleading. 6. AFFIRMATIVE COVENANTS. Borrower covenants and agrees that, until payment in full of all outstanding Obligations, and for so long as Bank may have any commitment to make a Credit Extension hereunder, Borrower shall do all of the following: 6.1 Good Standing. Borrower shall maintain its and each of its Subsidiaries' corporate existence in its jurisdiction of incorporation and maintain qualification in each jurisdiction in which the failure to so qualify could have a Material Adverse Effect. Borrower shall maintain, and shall cause each of its Subsidiaries to maintain in force all licenses, approvals and agreements, the loss of which could have a Material Adverse Effect. 6.2 Government Compliance. Borrower shall meet, and shall cause each Subsidiary to meet, the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA. Borrower shall comply, and shall cause each Subsidiary to comply, with all statutes, laws, ordinances and government rules and regulations to which it is subject, noncompliance with which 13 14 could have a Material Adverse Effect or a material adverse effect on the Collateral or the priority of Bank's Lien on the Collateral. 6.3 Financial Statements, Reports, Certificates. Borrower shall deliver to Bank: (a) as soon as available, but in any event within thirty (30) days after the end of each calendar month, a Borrower prepared consolidated balance sheet and income statement covering Borrower's consolidated operations during such period, in a form and certified by a Responsible Officer; (b) as soon as available, but in any event within one hundred twenty (120) days after the end of Borrower's fiscal year, audited consolidated financial statements of Borrower prepared in accordance with GAAP, consistently applied; (c) promptly upon receipt of notice thereof, a report of any legal actions pending or threatened against Borrower or any Subsidiary that could result in damages or costs to Borrower or any Subsidiary of Fifty Thousand Dollars ($50,000) or more; and (d) such budgets, sales projections, operating plans or other financial information as Bank may reasonably request from time to time generally prepared by Borrower in the ordinary course of business. Borrower shall deliver to Bank with the monthly financial statements a Compliance Certificate signed by a Responsible Officer in substantially the form of Exhibit C hereto. 6.4 Inventory; Returns. Borrower shall keep all Inventory in good and marketable condition, free from all material defects except for Inventory for which adequate reserves have been made. Returns and allowances, if any, as between Borrower and its account debtors shall be on the same basis and in accordance with the usual customary practices of Borrower, as they exist at the time of the execution and delivery of this Agreement. Borrower shall promptly notify Bank of all returns and recoveries and of all disputes and claims, where the return, recovery, dispute or claim involves more than Fifty Thousand Dollars ($50,000). 6.5 Taxes. Borrower shall make, and shall cause each Subsidiary to make, due and timely payment or deposit of all material federal, state, and local taxes, assessments, or contributions required of it by law, and will execute and deliver to Bank, on demand, appropriate certificates attesting to the payment or deposit thereof; and Borrower will make, and will cause each Subsidiary to make, timely payment or deposit of all material tax payments and withholding taxes required of it by applicable laws, including, but not limited to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal income taxes, and will, upon request, furnish Bank with proof satisfactory to Bank indicating that Borrower or a Subsidiary has made such payments or deposits; provided that Borrower or a Subsidiary need not make any payment if the amount or validity of such payment is contested in good faith by appropriate proceedings and is reserved against (to the extent required by GAAP) by Borrower. 6.6 Insurance. (a) Borrower, at its expense, shall keep the Collateral insured against loss or damage by fire, theft, explosion, sprinklers, and all other hazards and risks, and in such amounts, as ordinarily insured against by other owners in similar businesses conducted in the locations where Borrower's business is conducted on the date hereof. Borrower shall also maintain insurance relating to Borrower's ownership and use of the Collateral in amounts and of a type that are customary to businesses similar to Borrower's. (b) All such policies of insurance shall be in such form, with such companies, and in such amounts as reasonably satisfactory to Bank. All such policies of property insurance shall contain a lender's loss payable endorsement, in a form satisfactory to Bank, showing Bank as an additional loss 14 15 payee thereof and all liability insurance policies shall show the Bank as an additional insured, and shall specify that the insurer must give at least twenty (20) days notice to Bank before canceling its policy for any reason. Upon Bank's request, Borrower shall deliver to Bank certified copies of such policies of insurance and evidence of the payments of all premiums therefor. All proceeds over $50,000 payable under any such policy shall, at the option of Bank, be payable to Bank to be applied on account of the Obligations. 6.7 Principal Depository. Borrower shall maintain its principal banking and investment accounts with Bank. 6.8 Quick Ratio. Beginning as of January 31, 1999, Borrower shall maintain, as of the last day of each calendar month, a ratio of Quick Assets to Current Liabilities, less deferred revenue of at least .80 to 1.00. 6.9 Equity Infusion. On or before December 31, 1998, Borrower shall receive no less than Two Million Five Hundred Thousand Dollars ($2,500,000) in cash proceeds from investors acceptable to Bank. 6.10 Registration of Intellectual Property Rights. (a) Borrower shall register or cause to be registered on an expedited basis (to the extent not already registered) with the United States Patent and Trademark Office or the United States Copyright Office, as applicable, those intellectual property rights listed on Exhibits A, B and C to the Intellectual Property Security Agreement delivered to Bank by Borrower in connection with this Agreement within thirty (30) days of the date of this Agreement. Borrower shall register or cause to be registered with the United States Patent and Trademark Office or the United States Copyright Office, as applicable, those additional intellectual property rights developed or acquired by Borrower from time to time in connection with any product prior to the sale or licensing of such product to any third party, including without limitation major revisions or additions to the intellectual property rights listed on such Exhibits A, B and C. (b) Borrower shall execute and deliver such additional instruments and documents from time to time as Bank shall reasonably request to perfect Bank's security interest in the Intellectual Property Collateral. (c) Borrower shall (i) protect, defend and maintain the validity and enforceability of the Trademarks, Patents and Copyrights, (ii) use its best efforts to detect infringements of the Trademarks, Patents and Copyrights and promptly advise Bank in writing of material infringements detected and (iii) not allow any material Trademarks, Patents or Copyrights to be abandoned, forfeited or dedicated to the public without the written consent of Bank, which shall not be unreasonably withheld. (d) Bank may audit Borrower's Intellectual Property Collateral to confirm compliance with this Section 6.10, provided such audit may not occur more often than once per year, unless an Event of Default has occurred and is continuing. Bank shall have the right, but not the obligation, to take, at Borrower's sole expense, any actions that Borrower is required under this Section 6.10 to take but which Borrower fails to take, after fifteen (15) days' notice to Borrower. Borrower shall reimburse and indemnify Bank for all reasonable costs and reasonable expenses incurred in the reasonable exercise of its rights under this Section 6.10. 15 16 6.11 Further Assurances. At any time and from time to time Borrower shall execute and deliver such further instruments and take such further action as may reasonably be requested by Bank to effect the purposes of this Agreement. 7. NEGATIVE COVENANTS. Borrower covenants and agrees that, so long as any credit hereunder shall be available and until payment in full of the outstanding Obligations or for so long as Bank may have any commitment to make any Credit Extensions, Borrower will not do any of the following: 7.1 Dispositions. Convey, sell, lease, transfer or otherwise dispose of (collectively, a "Transfer"), or permit any of its Subsidiaries to Transfer, all or any part of its business or property, other than: (i) Transfers of Inventory in the ordinary course of business; (ii) Transfers of non-exclusive licenses and similar arrangements for the use of the property of Borrower or its Subsidiaries; (iii) Transfers of surplus, worn-out or obsolete Equipment; or (iv) Transfers of immaterial assets other than Accounts ($50,000 or less individually and $100,000 in the aggregate in each fiscal year) outside the ordinary course of business. 7.2 Change in Business. Engage in any business, or permit any of its Subsidiaries to engage in any business, other than the businesses currently engaged in by Borrower and any business substantially similar or related thereto (or incidental thereto). Borrower will not, without thirty (30) days prior written notification to Bank, relocate its chief executive office. 7.3 Mergers or Acquisitions. Merge or consolidate, or permit any of its Subsidiaries to merge or consolidate, with or into any other business organization, or acquire, or permit any of its Subsidiaries to acquire, all or substantially all of the capital stock or property of another Person in any transaction involving consideration of more than $100,000; provided, however, that Borrower or any Subsidiary may merge, consolidate or reorganize with or into another entity as long as Borrower or such Subsidiary is the surviving corporation and an Event of Default does not exist before or after giving effect to such transaction. 7.4 Indebtedness. Create, incur, assume or be or remain liable with respect to any Indebtedness, or permit any Subsidiary so to do, other than Permitted Indebtedness. 7.5 Encumbrances. Create, incur, assume or suffer to exist any Lien with respect to any of its property, or assign or otherwise convey any right to receive income, including the sale of any Accounts, or permit any of its Subsidiaries so to do, except for Permitted Liens. 7.6 Distributions. Pay any dividends or make any other distribution or payment on account of or in redemption, retirement or purchase of any capital stock, except that Borrower may (i) repurchase the stock of former employees pursuant to stock repurchase agreements and (ii) pay cash dividends relating to federal and state income taxes incurred by its shareholders as a result of Borrower's operations, as long as an Event of Default does not exist or would not exist after giving effect to such action. 7.7 Investments. Directly or indirectly acquire or own, or make any Investment in or to any Person, or permit any of its Subsidiaries so to do, other than Permitted Investments. 7.8 Transactions with Affiliates. Directly or indirectly enter into or permit to exist any material transaction with any Affiliate of Borrower except for transactions that are in the ordinary 16 17 course of Borrower's business, upon fair and reasonable terms that are no less favorable to Borrower than would be obtained in an arm's length transaction with a nonaffiliated Person. 7.9 Subordinated Debt. Make any payment in respect of any Subordinated Debt, or permit any of its Subsidiaries to make any such payment, except in compliance with the terms of such Subordinated Debt, or amend any provision contained in any documentation relating to the Subordinated Debt without Bank's prior written consent. 7.10 Inventory. Store the Inventory with a bailee, warehouseman, or similar party unless Bank has received a pledge of the warehouse receipt covering such Inventory; provided, however, that Borrower may deposit software code in escrow for customers in the ordinary course of business. Except for Inventory sold in the ordinary course of business and except for such other locations as Bank may approve in writing, Borrower shall keep the Inventory only at the location set forth in Section 10 hereof and such other locations of which Borrower gives Bank prior written notice and as to which Borrower signs and files a financing statement where needed to perfect Bank's security interest. 7.11 Compliance. Become an "investment company" or be controlled by an "investment company," within the meaning of the Investment Company Act of 1940, or become principally engaged in, or undertake as one of its important activities, the business of extending credit for the purpose of purchasing or carrying margin stock, or use the proceeds of any Credit Extension for such purpose. Fail to meet the minimum funding requirements of ERISA, permit a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur, fail to comply with the Federal Fair Labor Standards Act or violate any law or regulation, which violation could have a Material Adverse Effect or a material adverse effect on the Collateral or the priority of Bank's Lien on the Collateral, or permit any of its Subsidiaries to do any of the foregoing. 8. EVENTS OF DEFAULT. Any one or more of the following events shall constitute an Event of Default by Borrower under this Agreement: 8.1 Payment Default. If Borrower fails to pay, when due, any of the Obligations; 8.2 Covenant Default. If Borrower fails to perform any obligation under Article 6 or violates any of the covenants contained in Article 7 of this Agreement, or fails or neglects to perform, keep, or observe any other material term, provision, condition, covenant, or agreement contained in this Agreement, in any of the Loan Documents, or in any other present or future written agreement between Borrower and Bank and as to any default under such other term, provision, condition, covenant or agreement that can be cured, has failed to cure such default within twenty (20) days after Borrower receives written notice thereof or any officer of Borrower becomes aware thereof; provided, however, that if the default cannot by its nature be cured within the twenty (20) day period or cannot after diligent attempts by Borrower be cured within such twenty (20) day period, and such default is likely to be cured within a reasonable time, then Borrower shall have an additional reasonable period (which shall not in any case exceed forty-five (45) days) to attempt to cure such default, and within such reasonable time period the failure to have cured such default shall not be deemed an Event of Default (provided that no Credit Extensions will be required to be made during such cure period); 8.3 Material Adverse Change. If there occurs a material adverse change in Borrower's business or financial condition, or if there is a material impairment of the prospect of 17 18 repayment of any portion of the Obligations or a material impairment of the value or priority of Bank's security interests in the Collateral; 8.4 Attachment. If any material portion of Borrower's assets is attached, seized, subjected to a writ or distress warrant, or is levied upon, or comes into the possession of any trustee, receiver or person acting in a similar capacity and such attachment, seizure, writ or distress warrant or levy has not been removed, discharged or rescinded within twenty (20) days, or if Borrower is enjoined, restrained, or in any way prevented by court order from continuing to conduct all or any material part of its business affairs, or if a judgment or other claim becomes a lien or encumbrance upon any material portion of Borrower's assets, or if a notice of lien, levy, or assessment is filed of record with respect to any of Borrower's assets by the United States Government, or any department, agency, and the same is not paid within twenty (20) days after Borrower receives notice thereof, provided that note of the foregoing shall constitute an Event of Default where such action or event is stayed or an adequate bond has been posted pending a good faith contest by Borrower (provided that no Credit Extensions will be required to be made during such cure period); 8.5 Insolvency. If Borrower becomes insolvent, or if an Insolvency Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced against Borrower and is not dismissed or stayed within forty-five (45) days (provided that no Credit Extensions will be made prior to the dismissal of such Insolvency Proceeding); 8.6 Other Agreements. If there is a default in any agreement to which Borrower is a party with a third party or parties resulting in a right by such third party or parties, whether or not exercised, to accelerate the maturity of any Indebtedness in an amount in excess of One Hundred Thousand Dollars ($100,000) or that could have a Material Adverse Effect; 8.7 Subordinated Debt. If Borrower makes any payment on account of Subordinated Debt, except to the extent such payment is allowed under any subordination agreement entered into with Bank or otherwise consented to in writing by Bank; 8.8 Judgments. If a judgment or judgments for the payment of money in an amount, individually or in the aggregate, of at least Fifty Thousand Dollars ($50,000) shall be rendered against Borrower and shall remain unsatisfied and unstayed for a period of thirty (30) days (provided that no Credit Extensions will be made prior to the satisfaction or stay of such judgment); or 8.9 Misrepresentations. If any material misrepresentation or material misstatement exists now or hereafter in any warranty or representation set forth herein or in any certificate delivered to Bank by any Responsible Officer pursuant to this Agreement or to induce Bank to enter into this Agreement or any other Loan Document. 9. BANK'S RIGHTS AND REMEDIES. 9.1 Rights and Remedies. Upon the occurrence and during the continuance of an Event of Default, Bank may, at its election, without notice of its election and without demand, do any one or more of the following, all of which are authorized by Borrower: (a) Declare all Obligations, whether evidenced by this Agreement, by any of the other Loan Documents, or otherwise, immediately due and payable (provided that upon the occurrence of 18 19 an Event of Default described in Section 8.5 all Obligations shall become immediately due and payable without any action by Bank); (b) Cease advancing money or extending credit to or for the benefit of Borrower under this Agreement or under any other agreement between Borrower and Bank; (c) Settle or adjust disputes and claims directly with account debtors for amounts, upon terms and in whatever order that Bank reasonably considers advisable; (d) Make such payments and do such acts as Bank considers necessary or reasonable to protect its security interest in the Collateral. Borrower agrees to assemble the Collateral if Bank so requires, and to make the Collateral available to Bank as Bank may designate. Borrower authorizes Bank to enter the premises where the Collateral is located, to take and maintain possession of the Collateral, or any part of it, and to pay, purchase, contest, or compromise any encumbrance, charge, or lien which in Bank's determination appears to be prior or superior to its security interest and to pay all expenses incurred in connection therewith. With respect to any of Borrower's owned premises, Borrower hereby grants Bank a license to enter into possession of such premises and to occupy the same, without charge, in order to exercise any of Bank's rights or remedies provided herein, at law, in equity, or otherwise; (e) Set off and apply to the Obligations any and all (i) balances and deposits of Borrower held by Bank, or (ii) indebtedness at any time owing to or for the credit or the account of Borrower held by Bank; (f) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell (in the manner provided for herein) the Collateral. Bank is hereby granted a license or other right, solely pursuant to the provisions of this Section 9.1, to use, without charge, Borrower's labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, service marks, and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral and, in connection with Bank's exercise of its rights under this Section 9.1, Borrower's rights under all licenses and all franchise agreements shall inure to Bank's benefit; (g) Sell the Collateral at either a public or private sale, or both, by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including Borrower's premises) as Bank determines is commercially reasonable, and apply any proceeds to the Obligations in whatever manner or order Bank deems appropriate; (h) Bank may credit bid and purchase at any public sale; and (i) Any deficiency that exists after disposition of the Collateral as provided above will be paid immediately by Borrower. 9.2 Power of Attorney. Effective only upon the occurrence and during the continuance of an Event of Default, Borrower hereby irrevocably appoints Bank (and any of Bank's designated officers, or employees) as Borrower's true and lawful attorney to: (a) send requests for verification of Accounts or notify account debtors of Bank's security interest in the Accounts; (b) endorse Borrower's name on any checks or other forms of payment or security that may come into Bank's possession; (c) sign Borrower's name on any invoice or bill of lading relating to any Account, 19 20 drafts against account debtors, schedules and assignments of Accounts, verifications of Accounts, and notices to account debtors; (d) dispose of any Collateral; (e) make, settle, and adjust all claims under and decisions with respect to Borrower's policies of insurance; and (f) settle and adjust disputes and claims respecting the accounts directly with account debtors, for amounts and upon terms which Bank determines to be reasonable; provided Bank may exercise such power of attorney to sign the name of Borrower on any of the documents described in Section 4.2 regardless of whether an Event of Default has occurred. The appointment of Bank as Borrower's attorney in fact, and each and every one of Bank's rights and powers, being coupled with an interest, is irrevocable until all of the Obligations have been fully repaid and performed and Bank's obligation to provide advances hereunder is terminated. 9.3 Accounts Collection. Upon the occurrence and during the continuance of an Event of Default, Bank may notify any Person owing funds to Borrower of Bank's security interest in such funds and verify the amount of such Account. Borrower shall collect all amounts owing to Borrower for Bank, receive in trust all payments as Bank's trustee, and immediately deliver such payments to Bank in their original form as received from the account debtor, with proper endorsements for deposit. 9.4 Bank Expenses. If Borrower fails to pay any amounts or furnish any required proof of payment due to third persons or entities, as required under the terms of this Agreement, then Bank may do any or all of the following after reasonable notice to Borrower: (a) make payment of the same or any part thereof; (b) set up such reserves under the Revolving Facility as Bank deems necessary to protect Bank from the exposure created by such failure; or (c) obtain and maintain insurance policies of the type discussed in Section 6.6 of this Agreement, and take any action with respect to such policies as Bank deems prudent. Any amounts so paid or deposited by Bank shall constitute Bank Expenses, shall be immediately due and payable, and shall bear interest at the then applicable rate hereinabove provided, and shall be secured by the Collateral. Any payments made by Bank shall not constitute an agreement by Bank to make similar payments in the future or a waiver by Bank of any Event of Default under this Agreement. 9.5 Bank's Liability for Collateral. So long as Bank complies with reasonable banking practices, Bank shall not in any way or manner be liable or responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage thereto occurring or arising in any manner or fashion from any cause; (c) any diminution in the value thereof; or (d) any act or default of any carrier, warehouseman, bailee, forwarding agency, or other person whomsoever. All risk of loss, damage or destruction of the Collateral shall be borne by Borrower. 9.6 Remedies Cumulative. Bank's rights and remedies under this Agreement, the Loan Documents, and all other agreements shall be cumulative. Bank shall have all other rights and remedies not inconsistent herewith as provided under the Code, by law, or in equity. No exercise by Bank of one right or remedy shall be deemed an election, and no waiver by Bank of any Event of Default on Borrower's part shall be deemed a continuing waiver. No delay by Bank shall constitute a waiver, election, or acquiescence by it. No waiver by Bank shall be effective unless made in a written document signed on behalf of Bank and then shall be effective only in the specific instance and for the specific purpose for which it was given. 9.7 Demand; Protest. Borrower waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees at any time held by Bank on which Borrower may in any way be liable. 20 21 10. NOTICES. Unless otherwise provided in this Agreement, all notices or demands by any party relating to this Agreement or any other agreement entered into in connection herewith shall be in writing and (except for financial statements and other informational documents which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by a recognized overnight delivery service, certified mail, postage prepaid, return receipt requested, or by telefacsimile to Borrower or to Bank, as the case may be, at its addresses set forth below: If to Borrower: FreeShop International, Inc. 95 South Jackson, Suite 300 Seattle, WA 98104 Attn: John A. Wade FAX: (206) 441-9661 If to Bank: Imperial Bank 226 Airport Parkway San Jose, CA 95110-1024 Attn: Corporate Banking Center FAX: (408) 451-8523 with a copy to: Imperial Bank 777 108th Avenue NE, Suite 1670 Bellevue, WA 98004 Attn: J. P. Michael FAX: (425) 454-6224 Any notice received by Borrower shall be effective notwithstanding the lack of receipt by Borrower's counsel. The parties hereto may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to the other. 11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER. This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of California, without regard to principles of conflicts of law. Each of Borrower and Bank hereby submits to the nonexclusive jurisdiction of the state and Federal courts located in the County of Santa Clara, State of California. BORROWER AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. 21 22 12. GENERAL PROVISIONS. 12.1 Successors and Assigns. This Agreement shall bind and inure to the benefit of the respective successors and permitted assigns of each of the parties; provided, however, that neither this Agreement nor any rights hereunder may be assigned by Borrower without Bank's prior written consent, which consent may be granted or withheld in Bank's sole discretion. Bank shall have the right without the consent of or notice to Borrower to sell, transfer, negotiate, or grant participation in all or any part of, or any interest in, Bank's obligations, rights and benefits hereunder. 12.2 Indemnification. Borrower shall defend, indemnify and hold harmless Bank and its officers, employees, and agents against: (a) all obligations, demands, claims, and liabilities claimed or asserted by any other party in connection with the transactions contemplated by this Agreement; and (b) all losses or Bank Expenses in any way suffered, incurred, or paid by Bank as a result of or in any way arising out of, following, or consequential to transactions between Bank and Borrower whether under this Agreement, or otherwise (including without limitation reasonable attorneys fees and expenses), except for losses caused by Bank's gross negligence or willful misconduct. 12.3 Time of Essence. Time is of the essence for the performance of all obligations set forth in this Agreement. 12.4 Severability of Provisions. Each provision of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision. 12.5 Amendments in Writing, Integration. This Agreement cannot be amended or terminated orally. All prior agreements, understandings, representations, warranties, and negotiations between the parties hereto with respect to the subject matter of this Agreement, if any, are merged into this Agreement and the Loan Documents. 12.6 Counterparts. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement. 12.7 Survival. All covenants, representations and warranties made in this Agreement shall continue in full force and effect so long as any Obligations remain outstanding. The obligations of Borrower to indemnify Bank with respect to the expenses, damages, losses, costs and liabilities described in Section 12.2 shall survive until all applicable statute of limitations periods with respect to actions that may be brought against Bank have run. 13. JUDICIAL REFERENCE. (a) Other than (i) nonjudicial foreclosure and all matters in connection therewith regarding security interests in real or personal property; or (ii) the appointment of a receiver, or the exercise of other provisional remedies (any and all of which may be initiated pursuant to applicable law), each controversy, dispute or claim between the parties arising out of or relating to this Agreement, which controversy, dispute or claim is not settled in writing within thirty (30) days after the "Claim Date" (defined as the date on which a party subject to this Agreement gives written notice to all other parties that a controversy, dispute or claim exists), will be settled by a reference proceeding in California 22 23 in accordance with the provisions of Section 638 et seq. of the California Code of Civil Procedure, or their successor section ("CCP"), which shall constitute the exclusive remedy for the settlement of any controversy, dispute or claim concerning this Agreement, including whether such controversy, dispute or claim is subject to the reference proceeding and except as set forth above, the parties waive their rights to initiate any legal proceedings against each other in any court or jurisdiction other than the Superior Court in the County where the Real Property, if any, is located or Santa Clara County if none (the "Court"). The referee shall be a retired Judge of the Court selected by mutual agreement of the parties, and if they cannot so agree within forty-five (45) days after the Claim Date, the referee shall be promptly selected by the Presiding Judge of the Court (or his representative). The referee shall be appointed to sit as a temporary judge, with all of the powers for a temporary judge, as authorized by law, and upon selection should take and subscribe to the oath of office as provided for in Rule 244 of the California Rules of the Court (or any subsequently enacted Rule). Each party shall have one peremptory challenge pursuant to CCP Section 170.6. The referee shall (a) be requested to set the matter for hearing within sixty (60) days after the date of selection of the referee and (b) try any and all issues of law or fact and report a statement of decision upon them, if possible, within ninety (90) days of the Claim Date. Any decision rendered by the referee will be final, binding and conclusive and judgment shall be entered pursuant to CCP Section 644 in any court in the State of California having jurisdiction. Any party may apply for a reference proceeding at any time after thirty (30) days following notice to any other party of the nature of the controversy, dispute or claim, by filing a petition for a hearing and/or trial. All discovery permitted by this Agreement shall be completed no later than fifteen (15) days before the first hearing date established by the referee. The referee may extend such period in the event of a party's refusal to provide requested discovery or unavailability of a witness due to absence or illness. No party shall be entitled to "priority" in conducting discovery. Depositions may be taken by either party upon seven (7) days written notice, and request for production or inspection of documents which cannot be resolved by the parties shall be submitted to the referee as provided herein. The Superior Court is empowered to issue temporary and/or provisions remedies, as appropriate. (b) Except as expressly set forth in this Agreement, the referee shall determine the manner in which the reference proceeding is conducted including the time and place of all hearings, the order of presentation of evidence, and all other questions that arise with respect to the course of the reference proceeding. All proceedings and hearings conducted before the referee, except for trial, shall be conducted without a court reporter except that when any party so requests, a court reporter will be used at any hearing conducted before the referee. The party making such a request shall have the obligation to arrange for and pay for the court reporter. The costs of the court reporter at the trial shall be borne equally by the parties. (c) The referee shall be required to determine all issues in accordance with existing case law and the statutory laws of the State of California. The rules of evidence applicable to proceedings at law in the State of California will be applicable to the reference proceeding. The referee shall be empowered to enter equitable as well as legal relief, to provide all temporary and/or provisional remedies and to enter equitable orders that will be binding upon the parties. The referee shall issue a single judgment at the close of the reference proceeding which shall dispose of all of the claims of the parties that are the subject of the reference. The parties hereto expressly reserve the right to contest or appeal from the final judgment or any appealable order or appealable judgment entered by the referee. The parties hereto expressly reserve the right to findings of fact, conclusions of laws, a written statement of decision, and the right to move for a new trial or a different judgment, which new trial, if granted, is also to be a reference proceeding under this provisions. 23 24 (d) In the event that the enabling legislation which provides for appointment of a referee is repealed (and no successor statute is enacted), any dispute between the parties that would otherwise be determined by the reference procedure herein described will be resolved and determined by arbitration. The arbitration will be conducted by a retired judge of the Court, in accordance with the California Arbitration Act, Section 1280 through Section 1294.2 of the CCP as amended from time to time. The limitations with respect to discovery as set forth hereinabove shall apply to any such arbitration proceeding. 14. CONFIDENTIALITY. In handling any confidential information Bank shall exercise the same degree of care that it exercises with respect to its own proprietary information of the same types to maintain the confidentiality of any non-public information thereby received or received pursuant to this Agreement except that disclosure of such information may be made (i) to the Subsidiaries or Affiliates of Bank in connection with their present or prospective business relations with Borrower, (ii) to prospective transferees or purchasers of any interest in the Advances or Term Advances, provided that they have entered into a comparable confidentiality agreement in favor of Borrower and have delivered a copy to Borrower, (iii) as required by law, regulations, rule or order, subpoena, judicial order or similar order, (iv) as may be required in connection with the examination, audit or similar investigation of Bank and (v) as Bank may determine in connection with the enforcement of any remedies hereunder. Confidential information hereunder shall not include information that either: (a) is in the public domain or in the knowledge or possession of Bank when disclosed to Bank, as evidenced by Bank's records in existence at the time of such disclosure, or becomes part of the public domain after disclosure to Bank through no fault of Bank; or (b) is disclosed to Bank by a third party, provided Bank does not have actual knowledge that such third party is prohibited from disclosing such information and provided such disclosure is not otherwise in violation of Borrower's rights. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. FREESHOP INTERNATIONAL, INC. By: ____________________________________ Title: _________________________________ IMPERIAL BANK By: ____________________________________ Title: _________________________________ 24 25 EXHIBIT A COLLATERAL DESCRIPTION ATTACHMENT TO LOAN AND SECURITY AGREEMENT All personal property of Borrower (herein referred to as "Borrower" or "Debtor") whether presently existing or hereafter created, written, produced or acquired, including, but not limited to: (i) all accounts receivable, accounts, chattel paper, contract rights (including, without limitation, royalty agreements, license agreements and distribution agreements), documents, instruments, money, deposit accounts and general intangibles, including, without limitation, returns, repossessions, books and records relating thereto, and equipment containing said books and records, all investment property, including securities and securities entitlements; (ii) all software, computer source codes and other computer programs (collectively, the "Software Products"), and all common law and statutory copyrights and copyright registrations, applications for registration, now existing or hereafter arising, United States of America and foreign, obtained or to be obtained on or in connection with the Software Products, or any parts thereof or any underlying or component elements of the Software Products together with the right to copyright and all rights to renew or extend such copyrights and the right (but not the obligation) of Bank (herein referred to as "Bank" or "Secured Party") to sue in its own name and/or the name of the Debtor for past, present and future infringements of copyright; (iii) all goods, including, without limitation, equipment and inventory (including, without limitation, all export inventory); (iv) all guarantees and other security therefor; (v) all trademarks, service marks, trade names and service names and the goodwill associated therewith; (vi) (a) all patents and patent applications filed in the United States Patent and Trademark Office or any similar office of any foreign jurisdiction, and interests under patent license agreements, including, without limitation, the inventions and improvements described and claimed therein, (b) licenses pertaining to any patent whether Debtor is licensor or licensee, (c) all income, royalties, damages, payments, accounts and accounts receivable now or hereafter due and/or payable under and with respect thereto, including, without limitation, damages and payments for past, present or future infringements thereof, (d) the right (but not the obligation) to sue for past, present and future infringements thereof, (e) all rights corresponding thereto throughout the world in all jurisdictions in which such patents have been issued or applied for, and (f) the reissues, divisions, continuations, renewals, extensions and continuations-in-part with any of the foregoing (all of the foregoing patents and applications and interests under patent license agreements, together with the items described in clauses (a) through (f) in this paragraph are sometimes herein individually and collectively referred to as the "Patents"); and (vii) all products and proceeds, including, without limitation, insurance proceeds, of any of the foregoing. 26 EXHIBIT B LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., Pacific Time TO: EMERGING GROWTH INDUSTRIES DATE: ______________________________ FAX#: (425) 454-6224 TIME: ______________________________ ________________________________________________________________________________ FROM: __________________________________________________________________________ CLIENT NAME (BORROWER) REQUESTED BY: __________________________________________________________________ AUTHORIZED SIGNER'S NAME AUTHORIZED SIGNATURE: __________________________________________________________ PHONE NUMBER: __________________________________________________________________ FROM ACCOUNT # ___________________ TO ACCOUNT # ________________________________ REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT - -------------------------- --------------------- PRINCIPAL INCREASE (ADVANCE) $____________________________ PRINCIPAL PAYMENT (ONLY) $____________________________ INTEREST PAYMENT (ONLY) $____________________________ PRINCIPAL AND INTEREST (PAYMENT) $____________________________ OTHER INSTRUCTIONS: ____________________________________________________________ ________________________________________________________________________________ All representations and warranties of Borrower stated in the Loan Agreement are true, correct and complete in all material respects as of the date of the telephone request for and Advance confirmed by this Borrowing Certificate; provided, however, that those representations and warranties expressly referring to another date shall be true, correct and complete in all material respects as of such date. BANK USE ONLY TELEPHONE REQUEST: - ------------------ The following person is authorized to request the loan payment transfer/loan advance on the advance designated account and is known to me. ___________________________________________ ______________________________ Authorized Requester Phone # ___________________________________________ ______________________________ Authorized Requester Phone # ________________________________________________________________________________ Authorized Signature (Bank) 27 EXHIBIT C COMPLIANCE CERTIFICATE TO: IMPERIAL BANK FROM: FreeShop International, Inc. The undersigned authorized officer of FreeShop International, Inc. hereby certifies that in accordance with the terms and conditions of the Loan and Security Agreement between Borrower and Bank (the "Agreement"), (i) Borrower is in complete compliance for the period ending __________ with all required covenants except as noted below and (ii) all representations and warranties of Borrower stated in the Agreement are true and correct in all material respects as of the date hereof. Attached herewith are the required documents supporting the above certification. The Officer further certifies that these are prepared in accordance with Generally Accepted Accounting Principles (GAAP) and are consistently applied from one period to the next except as explained in an accompanying letter or footnotes. PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES" COLUMN.
REPORTING COVENANT REQUIRED COMPLIES ------------------ -------- -------- Monthly financial statements Monthly within 30 days Yes No Annual (CPA Audited) FYE within 120 days Yes No FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES ------------------ -------- ------ --------- Maintain on a Monthly Basis: Minimum Quick Ratio(1) .80:1.00(2) _____:1.00 Yes No Equity Infusion(3) $2,500,000 $________ Yes No
1 Less deferred revenue 2 Beginning 01/31/99 3 No later than 12/31/98 -------------------------------------------- COMMENTS REGARDING EXCEPTIONS: BANK USE ONLY See Attached. Sincerely, Received by: _____________________________ AUTHORIZED SIGNER ________________________________ Date: ____________________________________ SIGNATURE Verified: ________________________________ AUTHORIZED SIGNER ________________________________ Date: ____________________________________ TITLE ________________________________ Compliance Status: Yes No DATE -------------------------------------------- 25 28 CORPORATE RESOLUTIONS TO BORROW ________________________________________________________________________________ BORROWER: FreeShop International, Inc. ________________________________________________________________________________ I, the undersigned Secretary or Assistant Secretary of FreeShop International, Inc. (the "Corporation"), HEREBY CERTIFY that the Corporation is organized and existing under and by virtue of the laws of the State of Washington. I FURTHER CERTIFY that attached hereto as Attachments 1 and 2 are true and complete copies of the Articles of Incorporation, as amended and the Restated Bylaws of the Corporation, each of which is in full force and effect on the date hereof. I FURTHER CERTIFY that at a meeting of the Directors of the Corporation, duly called and held, at which a quorum was present and voting (or by other duly authorized corporate action in lieu of a meeting), the following resolutions were adopted. BE IT RESOLVED, that ANY ONE (1) of the following named officers, employees, or agents of this Corporation, whose actual signatures are shown below: NAMES POSITIONS ACTUAL SIGNATURES ________________________ ________________________ ________________________ ________________________ ________________________ ________________________ ________________________ ________________________ ________________________ ________________________ ________________________ ________________________ ________________________ ________________________ ________________________ acting for an on behalf of this Corporation and as its act and deed be, and they hereby are, authorized and empowered: BORROW MONEY. To borrow from time to time from Imperial Bank ("Bank"), on such terms as may be agreed upon between the officers, employees, or agents and Bank, such sum or sums of money as in their judgment should be borrowed, without limitation, including such sums as are specified in that certain Loan and Security Agreement dated as of September 18, 1998 (the "Loan Agreement"). EXECUTE LOAN AGREEMENT. To execute and deliver to Bank the Loan Agreement, and also to execute and deliver to Bank one or more renewals, extensions, modifications, refinancings, consolidations, or substitutions for one or more of the notes, or any portion of the notes. GRANT SECURITY. To grant a security interest to Bank in the Collateral described in the Loan Agreement, which security interest shall secure all of the Corporation's Obligations, as described in the Loan Agreement. NEGOTIATE ITEMS. To draw, endorse, and discount with Bank all drafts, trade acceptances, promissory notes, or other evidences of indebtedness payable to or belonging to the Corporation or in which the Corporation may have an interest, and either to receive cash for the same or to cause such proceeds to be credited to the account of the Corporation with Bank, or to cause such other disposition of the proceeds derived therefrom as they may deem advisable. 29 WARRANTS. To issue a warrant to purchase the Corporation's capital stock. FURTHER ACTS. In the case of lines of credit, to designate additional or alternate individuals as being authorized to request advances thereunder, and in all cases, to do and perform such other acts and things, to pay any and all fees and costs, and to execute and deliver such other documents and agreements as they may in their discretion deem reasonably necessary or proper in order to carry into effect the provisions of these Resolutions. BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these resolutions and performed prior to the passage of these resolutions are hereby ratified and approved, that these Resolutions shall remain in full force and effect and Bank may rely on these Resolutions until written notice of their revocation shall have been delivered to and received by Bank. Any such notice shall not affect any of the Corporation's agreements or commitments in effect at the time notice is given. I FURTHER CERTIFY that the officers, employees, and agents named above are duly elected, appointed, or employed by or for the Corporation, as the case may be, and occupy the positions set forth opposite their respective names; that the foregoing Resolutions now stand of record on the books of the Corporation; and that the Resolutions are in full force and effect and have not been modified or revoked in any manner whatsoever. IN WITNESS WHEREOF, I have hereunto set my hand on _______________, 19___ and attest that the signatures set opposite the names listed above are their genuine signatures. CERTIFIED TO AND ATTESTED BY: X___________________________________ ================================================================================ 30 IMPERIAL BANK MEMBER FDIC ITEMIZATION OF AMOUNT FINANCED DISBURSEMENT INSTRUCTIONS (REVOLVER) Name(s): Date: $ paid to you directly by Cashiers Check No. $ credited to deposit account No. ____________ when Advances are requested $ amounts paid to Bank for Amounts paid to others on your behalf: $1,250.00 to Imperial Bank for Loan Fee $ to Imperial Bank for Document Fee $ to Imperial Bank for accounts receivable audit (estimate) $ to Bank counsel fees and expenses $ to $ to $ TOTAL (AMOUNT FINANCED)
Upon consummation of this transaction, this document will also serve as the authorization for Imperial Bank to disburse the loan proceeds as stated above. _____________________________________ _____________________________________ Signature Signature 31 AGREEMENT TO PROVIDE INSURANCE TO: IMPERIAL BANK Date: September 18, 1998 226 Airport Parkway Borrower: FreeShop International, Inc. San Jose, California 95110 In consideration of a loan in the amount of up to $750,000, secured by all tangible personal property including inventory and equipment. I/We agree to obtain adequate insurance coverage to remain in force during the term of the loan. I/We also agree to advise the below named agent to add Imperial Bank as loss payee on the new or existing insurance policy, and to furnish Bank at above address with a copy of said policy/endorsements and any subsequent renewal policies. I/We understand that the policy must contain: 1. Fire and extended coverage in an amount sufficient to cover: (a) The amount of the loan, OR (b) All existing encumbrances, whichever is greater, But not in excess of the replacement value of the improvements on the real property. 2. Lender's "Loss Payable" Endorsement Form 438 BFU in favor of Imperial Bank, or any other form acceptable to Bank. INSURANCE INFORMATION Insurance Co./Agent Telephone No.: Agent's Address: Signature of Obligor: _______________________________________ Signature of Obligor: _______________________________________ ________________________________________________________________________________ - -------------------------------------------------- FOR BANK USE ONLY INSURANCE VERIFICATION: Date: _________________ Person Spoken to: _____________________________ Policy Number: ________________________________ Effective Form: __________ To: ________________ Verified By: __________________________________ - -------------------------------------------------- 32 - -------------------------------------------------------------------------------- IMPERIAL BANK CALIFORNIA'S BUSINESS BANKS AUTOMATIC DEBIT AUTHORIZATION MEMBER FDIC ________________________________________________________________________________ ________________________________________________________________________________ To: IMPERIAL BANK Re: LOAN # ___________________________________ You are hereby authorized and instructed to charge account No. _________________ in the name of FREESHOP INTERNATIONAL, INC. for principal and interest payments due on above referenced loan as set forth below and credit the loan referenced above. [SYMBOL] 3 Debit each interest payment as it becomes due according to the terms of the note and any renewals or amendments thereof. [SYMBOL] 4 Debit each principal payment is at becomes due according to the terms of the note and any renewals or amendments thereof. This Authorization is to remain in full force and effect until revoked in writing. ________________________________________________________________________________ - -------------------------------------------------------------------------------- Borrower Signature Date ________________________________________________________________________________ ________________________________________________________________________________ - -------------------------------------------------------------------------------- 33 TABLE OF CONTENTS (continued) TABLE OF CONTENTS
Page ---- 1. DEFINITIONS AND CONSTRUCTION........................................................1 1.1 Definitions..................................................................1 1.2 Accounting Terms.............................................................8 2. LOAN AND TERMS OF PAYMENT...........................................................8 2.1 Credit Extensions............................................................8 2.2 Overadvances.................................................................9 2.3 Interest Rates, Payments, and Calculations...................................9 2.4 Crediting Payments..........................................................10 2.5 Fees........................................................................10 2.6 Term........................................................................10 3. CONDITIONS OF LOANS................................................................10 3.1 Conditions Precedent to Initial Credit Extension............................10 3.2 Conditions Precedent to all Credit Extensions...............................11 4. CREATION OF SECURITY INTEREST......................................................11 4.1 Grant of Security Interest..................................................11 4.2 Delivery of Additional Documentation Required...............................11 4.3 Right to Inspect............................................................11 5. REPRESENTATIONS AND WARRANTIES.....................................................12 5.1 Due Organization and Qualification..........................................12 5.2 Due Authorization; No Conflict..............................................12 5.3 No Prior Encumbrances.......................................................12 5.4 Bona Fide Eligible Accounts.................................................12 5.5 Merchantable Inventory......................................................12 5.6 Name; Location of Chief Executive Office....................................12 5.7 Litigation..................................................................12 5.8 No Material Adverse Change in Financial Statements..........................12 5.9 Solvency, Payment of Debts..................................................12 5.10 Regulatory Compliance.......................................................13 5.11 Environmental Condition.....................................................13 5.12 Taxes.......................................................................13 5.13 Subsidiaries................................................................13 5.14 Government Consents.........................................................13 5.15 Full Disclosure.............................................................13 6. AFFIRMATIVE COVENANTS..............................................................13 6.1 Good Standing...............................................................14 6.2 Government Compliance.......................................................14 6.3 Financial Statements, Reports, Certificates.................................14 6.4 Inventory; Returns..........................................................14 6.5 Taxes.......................................................................14
i 34 TABLE OF CONTENTS (continued)
Page ---- 6.6 Insurance...................................................................15 6.7 Principal Depository........................................................15 6.8 Adjusted Quick Ratio........................................................15 6.9 Profitability...............................................................15 6.10 Liquidity; Debt Service Coverage............................................15 6.11 Registration of Intellectual Property Rights................................16 6.12 Further Assurances..........................................................16 7. NEGATIVE COVENANTS.................................................................16 7.1 Dispositions................................................................16 7.2 Change in Business..........................................................17 7.3 Mergers or Acquisitions.....................................................17 7.4 Indebtedness................................................................17 7.5 Encumbrances................................................................17 7.6 Distributions...............................................................17 7.7 Investments.................................................................17 7.8 Transactions with Affiliates................................................17 7.9 Subordinated Debt...........................................................17 7.10 Inventory...................................................................17 7.11 Compliance..................................................................17 8. EVENTS OF DEFAULT..................................................................18 8.1 Payment Default.............................................................18 8.2 Covenant Default............................................................18 8.3 Material Adverse Change.....................................................18 8.4 Attachment..................................................................18 8.5 Insolvency..................................................................18 8.6 Other Agreements............................................................19 8.7 Subordinated Debt...........................................................19 8.8 Judgments...................................................................19 8.9 Misrepresentations..........................................................19 9. BANK'S RIGHTS AND REMEDIES.........................................................19 9.1 Rights and Remedies.........................................................19 9.2 Power of Attorney...........................................................20 9.3 Accounts Collection.........................................................20 9.4 Bank Expenses...............................................................20 9.5 Bank's Liability for Collateral.............................................21 9.6 Remedies Cumulative.........................................................21 9.7 Demand; Protest.............................................................21 10. NOTICES............................................................................21 11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.........................................22
ii 35 TABLE OF CONTENTS (continued)
Page ---- 12. GENERAL PROVISIONS.................................................................22 12.1 Successors and Assigns......................................................22 12.2 Indemnification.............................................................22 12.3 Time of Essence.............................................................23 12.4 Severability of Provisions..................................................23 12.5 Amendments in Writing, Integration..........................................23 12.6 Counterparts................................................................23 12.7 Survival....................................................................23 13. JUDICIAL REFERENCE.................................................................23 14. CONFIDENTIALITY....................................................................24
iii 36 Debtor: FreeShop International, Inc. EXHIBIT A COLLATERAL DESCRIPTION ATTACHMENT TO LOAN AND SECURITY AGREEMENT All personal property of Borrower (herein referred to as "Borrower" or "Debtor") whether presently existing or hereafter created, written, produced or acquired, including, but not limited to: (i) all accounts receivable, accounts, chattel paper, contract rights (including, without limitation, royalty agreements, license agreements and distribution agreements), documents, instruments, money, deposit accounts and general intangibles, including, without limitation, returns, repossessions, books and records relating thereto, and equipment containing said books and records, all investment property, including securities and securities entitlements; (ii) all software, computer source codes and other computer programs (collectively, the "Software Products"), and all common law and statutory copyrights and copyright registrations, applications for registration, now existing or hereafter arising, United States of America and foreign, obtained or to be obtained on or in connection with the Software Products, or any parts thereof or any underlying or component elements of the Software Products together with the right to copyright and all rights to renew or extend such copyrights and the right (but not the obligation) of Bank (herein referred to as "Bank" or "Secured Party") to sue in its own name and/or the name of the Debtor for past, present and future infringements of copyright; (iii) all goods, including, without limitation, equipment and inventory (including, without limitation, all export inventory); (iv) all guarantees and other security therefor; (v) all trademarks, service marks, trade names and service names and the goodwill associated therewith; (vi) (a) all patents and patent applications filed in the United States Patent and Trademark Office or any similar office of any foreign jurisdiction, and interests under patent license agreements, including, without limitation, the inventions and improvements described and claimed therein, (b) licenses pertaining to any patent whether Debtor is licensor or licensee, (c) all income, royalties, damages, payments, accounts and accounts receivable now or hereafter due and/or payable under and with respect thereto, including, without limitation, damages and payments for past, present or future infringements thereof, (d) the right (but not the obligation) to sue for past, present and future infringements thereof, (e) all rights corresponding thereto throughout the world in all jurisdictions in which such patents have been issued or applied for, and (f) the reissues, divisions, continuations, renewals, extensions and continuations-in-part with any of the foregoing (all of the foregoing patents and applications and interests under patent license agreements, together with the items described in clauses (a) through (f) in this paragraph are sometimes herein individually and collectively referred to as the "Patents"); and (vii) all products and proceeds, including, without limitation, insurance proceeds, of any of the foregoing. EX-10.11 13 LEASE AGREEMENT 1 EXHIBIT 10.11 ================================================================================ 95 SOUTH JACKSON Seattle, Washington 98104 ------------------ LEASE AGREEMENT BETWEEN MERRILL PLACE, LLC Landlord And FREESHOP INTERNATIONAL, INC. Tenant ================================================================================ 2 TABLE OF CONTENTS
PAGE 1. LEASE DATA AND EXHIBITS............................................... 1 (a) BUILDING......................................................... 1 (b) PREMISES......................................................... 1 (c) TENANT'S PERCENTAGE OF THE BUILDING.............................. 1 (d) COMMENCEMENT DATE................................................ 1 (e) EXPIRATION DATE.................................................. 1 (f) RENT............................................................. 1 (g) SECURITY DEPOSIT................................................. 2 (h) PARKING.......................................................... 2 (i) NOTICE ADDRESSES................................................. 2 (j) EXHIBITS......................................................... 2 2. PREMISES.............................................................. 2 3. COMMENCEMENT AND EXPIRATION DATES..................................... 2 (a) COMMENCEMENT DATE................................................ 2 (b) TENANT OBLIGATIONS............................................... 2 (c) TENANT TERMINATION RIGHT......................................... 3 (d) CONFIRMATION OF COMMENCEMENT DATE................................ 3 (e) EXPIRATION DATE.................................................. 3 4. RENT.................................................................. 3 5. SECURITY DEPOSIT...................................................... 3 6. USES.................................................................. 3 7. SERVICES AND UTILITIES................................................ 4 (a) STANDARD SERVICES................................................ 4 (b) INTERRUPTION OF SERVICES......................................... 4 (c) ADDITIONAL SERVICES.............................................. 4 (d) SECURITY SERVICES................................................ 5 8. COSTS OF OPERATIONS AND REAL ESTATE TAXES............................. 4 (a) DEFINITIONS...................................................... 5 (b) BASE AMOUNTS..................................................... 6 (c) ADDITIONAL RENT FOR SERVICE AND UTILITY COSTS.................... 7 (d) ADDITIONAL RENT FOR REAL PROPERTY TAXES.......................... 7
-i- 3 (e) CALCULATIONS.......................................................8 (f) FURTHER ADJUSTMENT.................................................8 (g) BASE RENT..........................................................8 (i) PERSONAL PROPERTY TAXES............................................8 9. TENANT IMPROVEMENTS AND ALTERATIONS.....................................8 (a) TENANT IMPROVEMENTS................................................8 (b) ALTERATIONS........................................................8 10. CARE OF PREMISES........................................................9 (a) TENANT'S MAINTENANCE...............................................9 (b) LANDLORD'S MAINTENANCE.............................................9 11. ACCEPTANCE OF PREMISES..................................................9 12. ACCESS.................................................................10 13. DAMAGE OR DESTRUCTION..................................................10 (a) DAMAGE AND REPAIR.................................................10 (b) DESTRUCTION DURING LAST YEAR OF TERM..............................10 (c) BUSINESS INTERRUPTION.............................................10 (d) TENANT IMPROVEMENTS...............................................10 (e) EXPRESS AGREEMENT.................................................11 14. WAIVER OF SUBROGATION..................................................11 15. INDEMNIFICATION........................................................11 16. INSURANCE..............................................................11 (a) LIABILITY INSURANCE...............................................11 (b) PROPERTY INSURANCE................................................11 (c) INSURANCE POLICY REQUIREMENTS.....................................11 17. ASSIGNMENT AND SUBLETTING..............................................12 (a) ASSIGNMENT OR SUBLEASE............................................12 (b) ASSIGNEE OBLIGATIONS..............................................13 (c) SUBLESSEE OBLIGATIONS.............................................13 18. SIGNS..................................................................13
-ii- 4
PAGE 19. LIENS AND INSOLVENCY ............................................... 13 (a) LIENS ......................................................... 13 (b) INSOLVENCY....................................................... 13 20. DEFAULT .............................................................. 13 (a) CUMULATIVE REMEDIES.............................................. 13 (b) TENANT'S RIGHT TO CURE........................................... 13 (c) VACATION AND ABANDONMENT......................................... 14 (d) LANDLORDS RE-ENTRY............................................... 14 (e) RELETTING THE PREMISES........................................... 14 (f) WAIVER OF REDEMPTION RIGHTS...................................... 14 (g) NONPAYMENT OF ADDITIONAL RENT.................................... 15 21. PRIORITY.............................................................. 15 22. SURRENDER OF POSSESSION............................................... 15 23. REMOVAL OF PROPERTY................................................... 15 (a) SIGNS AND PERSONAL PROPERTY...................................... 15 (b) ALTERATIONS...................................................... 15 24. NON-WAIVER............................................................ 15 25. HOLDOVER.............................................................. 16 26. CONDEMNATION.......................................................... 16 (a) ENTIRE TAKING.................................................... 16 (b) CONSTRUCTIVE TAKING OF ENTIRE PREMISES........................... 16 (c) PARTIAL TAKING................................................... 16 (d) AWARDS AND DAMAGES............................................... 16 27. NOTICES............................................................... 16 28. COSTS AND ATTORNEYS' FEES............................................. 17 29. LANDLORD'S LIABILITY.................................................. 17 30. LANDLORD'S CONSENT.................................................... 17
-iii- 5 31. ESTOPPEL CERTIFICATES..................................................17 32. TRANSFER OF LANDLORD'S INTEREST........................................17 33. RIGHT TO PERFORM.......................................................17 34. AUTHORITY..............................................................18 (a) CORPORATE AUTHORITY...............................................18 (b) PARTNERSHIP AUTHORITY.............................................18 35. OPTION TO RENEW........................................................18 36. RIGHT OF FIRST OPPORTUNITY.............................................18 37. GENERAL................................................................18 (a) HEADINGS..........................................................18 (b) HEIRS AND ASSIGNS.................................................18 (c) NO BROKERS........................................................18 (d) ENTIRE AGREEMENT..................................................19 (e) SEVERABILITY......................................................19 (f) OVERDUE PAYMENTS..................................................19 (g) FORCE MAJEURE.....................................................19 (h) RIGHT TO CHANGE PUBLIC SPACES.....................................19 (i) GOVERNING LAW.....................................................19 (j) BUILDING DIRECTORY................................................19 (k) BUILDING NAME.....................................................20
-iv- 6 LEASE AGREEMENT 95 SOUTH JACKSON THIS LEASE made this 23rd day of September, 1997, between MERRILL PLACE LLC, a Washington limited liability company ("Landlord"), and FREESHOP INTERNATIONAL, INC. ("Tenant"). As parties hereto, Landlord and Tenant agree: 1. LEASE DATA AND EXHIBITS. The following terms as used herein shall have the meanings provided in this Section 1, unless otherwise specifically modified by provisions of this Lease. (a) BUILDING. The improvements situated on a portion of the real property (the "Property") more particularly described on Exhibit A attached hereto and incorporated herein by reference, with a postal address of 95 South Jackson, Seattle, Washington 98104. All of the structures on the property are referred to herein as the "Building." (b) PREMISES. Consisting of the 9,670 square feet of office floor area on the third floor and 2,117 square feet of balcony floor area of the Schwabacher Warehouse Building, as outlined on the floor plan(s) attached hereto as Exhibit B, attached hereto and incorporated herein by reference, including tenant improvements, if any, as described in Exhibit C, attached hereto and incorporated herein by reference. (c) TENANT'S PERCENTAGE OF THE BUILDING. _____% calculated by dividing the area of the Premises (________ net rentable square feet) by the area of the Building utilized for office space (______ net rentable square feet). In the event the rentable area of the Premises or the rentable area of the Building is altered, Landlord shall adjust "Tenant's Percentage of the Building" to properly reflect such event. (d) COMMENCEMENT DATE. The earlier of October 15, 1997, or the date Tenant occupies the Premises. (e) EXPIRATION DATE. September 30, 2000. (f) RENT. The rental per month set forth below which is payable on or before the first day of each month. Additional Rent shall be adjusted from time to time as provided in Section 7 and Section 8 hereof. Tenant has deposited with Landlord on the date hereof $5,238.00 to be applied to the first Rent payment due hereunder. Office Space:
Months Monthly Rate $/RSF/Year ------ ------------ ---------- 1-3 $ 5,238.00 $ 6.50 4-12 $16,117.00 $20.00 13-24 $16,923.00 $21.00 25-36 $17,728.00 $22.00
Tenant will pay to Landlord in addition to the monthly rate above of $5,238.00 for months 1-3, an amount equal to $10,879.00 per month for months 1-3 totaling $32,637.00 in Tenant's common stock valued at today's value of $0.41 per share or 79,602 shares. -1- 7 Balcony Space:
Months Monthly Rate $/RSF/Year ------ ------------ ---------- 1-36 $705.66 $4.00
(g) SECURITY DEPOSIT. $17,728.00. (h) PARKING. Tenant shall have the right to lease ten (10) parking stalls in the parking garage portion of the Building on an unassigned basis at the prevailing monthly rates as established by Landlord from time to time. The leasing of parking stalls by Tenant shall be subject to such rules and regulations as Landlord or its parking operator may adopt from time to time. In addition to the above-referenced ten (10) parking stalls, Landlord will provide up to twenty-five (25) parking stalls on a month-to-month basis at market rates; until such time that Landlord, at Landlord's sole discretion, needs up to said twenty-five (25) parking stalls for other building purposes. Landlord agrees that such time will not be prior to August 31, 1998. If Landlord needs such stalls for other building purposes, Landlord agrees to use its best efforts to assist Tenant in securing, at Tenant's sole cost and expense, additional parking stalls in the immediate vicinity of the Building. (i) NOTICE ADDRESSES. Landlord: 95 South Jackson Suite 100 Seattle, WA 98104 ______________________________ Tenant: ______________________________ ______________________________ ______________________________ (j) EXHIBITS. The following exhibits or riders are made a part of this Lease: Exhibit A - Legal Description of the Property Exhibit B - Floor Plan of Premises Exhibit C - Tenant Improvements Exhibit D - Memorandum of Lease Exhibit E - Additional Terms of Lease 2. PREMISES. Landlord does hereby lease to Tenant, and Tenant does hereby lease from Landlord, upon the terms and conditions herein set forth, the Premises described in Section 1(b) hereof as shown on Exhibit B, together with the appurtenances, including without limitation the right to use, in common with others, the lobbies, elevators and other common areas in the Building located on the Property. 3. COMMENCEMENT AND EXPIRATION DATES. (a) COMMENCEMENT DATE. The Commencement Date shall be the earlier of the date specified in Section 1(d) or the date Tenant occupies the Premises. (b) TENANT OBLIGATIONS. If Tenant's tenant improvements are not completed on the Commencement Date due to the failure of Tenant to fulfill any obligation pursuant to the terms of this Lease or any exhibit hereto, the Lease shall be deemed to have commenced upon the Commencement Date. -2- 8 (c) TENANT TERMINATION RIGHT. In the event, due to delays from any cause other than Tenant's failure to comply with the terms of this Lease, the Premises are not available for occupancy by Tenant within ninety (90) days following the date specified in Section 1(d), Tenant may terminate this Lease by written notice. Termination under this Section 3(c) shall be Tenant's sole remedy for such delay and Tenant shall have no other rights or claims hereunder at law or in equity. (d) CONFIRMATION OF COMMENCEMENT DATE. In the event the Commencement Date is established as a later or earlier date than the date provided in Section 1(d) hereof, Landlord shall confirm the Commencement Date to Tenant in writing and, at Landlord's request the parties will execute a Memorandum of Lease in the form attached hereto as Exhibit D. (e) EXPIRATION DATE. The Lease shall expire on the date specified in Section 1(e). 4. RENT. Tenant shall pay Landlord without notice the Rent stated in Section 1(f) hereof and Additional Rent as provided in Section 7 and Section 8 and any other additional payments due under this Lease without deduction or offset in lawful money of the United States in advance on or before the first day of each month at Landlord's Notice Address set forth in Section 1(i) hereof, or to such other party at such other place as Landlord may hereafter from time to time designate in writing. Rent and Addition Rent for any partial month at the beginning or end of the Lease term shall be adjusted for the proportionate fraction of the month. 5. SECURITY DEPOSIT. As security for the full and faithful performance of every covenant and condition of this Lease to be performed by Tenant, Tenant has paid to Landlord the Security Deposit as specified in Section 1(g) hereof, receipt of which is hereby acknowledged. If Tenant shall default with respect to any material covenant or condition of this Lease, including but not limited to the payment of Rent, Additional Rent or any other payment due under this Lease, Landlord may apply all or any part of the Security Deposit to the payment of any sum in default or any other sum which Landlord may be required or may in its reasonable discretion deem necessary to spend or incur by reason of Tenant's default. In such event, Tenant shall, within five (5) days of written demand therefor by Landlord, deposit with Landlord the amount so applied. If Tenant shall have fully complied with all of the covenants and conditions of this Lease, but not otherwise, the amount of the Security Deposit then held by Landlord shall be repaid to Tenant (or, at Landlord's option, to the last assignee of Tenant's interest hereunder) within thirty (30) days after the expiration or sooner termination of this Lease. In the event of Tenant's default under this Lease, Landlord's right to retain the Security Deposit shall be deemed to be in addition to any and all other rights and remedies at law or in equity available to Landlord. Landlord shall not be required to keep any Security Deposit separate from its general funds and Tenant shall not be entitled to any interest thereon. 6. USES. The third floor office portion of the Premises are to be used only for general office purposes, and the balcony portion of the Premises may only be used for storage and related business purposes ("Permitted Uses"), and for no other business or purpose without the prior written consent of Landlord, which consent may be reasonably withheld if Landlord, in its sole discretion, determines that any proposed use is inconsistent with or detrimental to the maintenance and operation of the Building as a first-class office building in Seattle, Washington or is inconsistent with any restriction on use of the Premises, the Building or the Property contained in any lease, mortgage or other agreement or instrument by which the Landlord is bound or to which any of such property is subject. Tenant shall not commit any act that will increase the then existing rate of insurance on the Building without Landlord's consent. Tenant shall promptly pay upon demand the amount of any increase in insurance rates caused by any act or acts of Tenant. Tenant shall not commit or allow to be committed any waste upon the Premises, or any public or nuisance or other act which disturbs the quiet enjoyment of any other tenant in the Building or which is unlawful. Tenant shall not, without the written consent of Landlord, use any apparatus, machinery or device in or about the Premises which will cause any substantial noise, vibration or fumes. If any of Tenant's office machines or equipment should disturb the quiet enjoyment of any other tenant in the Building, then Tenant shall provide adequate insulation or take other action as may be necessary to eliminate the disturbance. -3- 9 Tenant shall comply with all laws relating to its use or occupancy of the Premises and shall observe such reasonable rules and regulations (not inconsistent with the terms of this Lease) as may be adopted and made available to Tenant by Landlord from time to time for the safety, care and cleanliness of the Premises or the Building, and for the preservation of good order therein. 7. SERVICES AND UTILITIES. (a) STANDARD SERVICES. Landlord shall cause to be maintained the Premises and the public and common areas of the Building, such as lobbies, elevators, stairs, corridors and restrooms, in reasonably good order and condition consistent with the operation and maintenance of the Building as a first-class office building in Seattle, Washington, except for damage occasioned by any act or omission of Tenant or Tenant's officers, contractors, agents, invitees, licensees or employees, the repair of which damage shall be paid by Tenant. Landlord shall furnish the Premises with electricity for normal office use, including lighting and operation of personal computers, low power usage office machines, water and elevator service at all times during the term of the Lease. Landlord shall also provide lamp replacement service for building standard light fixtures, toilet room supplies, window washing at reasonable intervals and customary building janitorial service five (5) days each week. No janitorial service shall be provided Saturdays, Sundays or legal holidays. The Rent stated in Section 1(f) hereof does not include the costs of any janitorial or other services provided or caused to be provided by Landlord to Tenant which are in addition to the services ordinarily provided Building tenants and such costs for additional services, if any, shall be paid by Tenant as Additional Rent on the first day of the month following the month in which such additional services are provided. From 7:00 a.m. to 6:00 p.m. on weekdays and from 8:00 a.m. to 1:00 p.m. on Saturdays, excluding legal holidays ("Normal Business Hours"), Landlord shall furnish to the Premises heat and air conditioning at times other than Normal Business Hours and the cost of such services as established by Landlord shall be paid by Tenant as Additional Rent. During other than Normal Business Hours, Landlord may restrict access to the Building in accordance with the Building's security system, provided that Tenant shall have at all times during the term of this Lease (24 hours of all days) reasonable access to the Premises. (b) INTERRUPTION OF SERVICES. Landlord shall not be liable for any loss, injury or damage to person or property caused by or resulting from any variation, interruption, or failure of such service due to any cause whatsoever, unless such loss, injury or damage is caused by Landlord's negligence. No temporary interruption or failure of such services incident to the making of repair, alterations or improvements for a reasonable duration, or due to accident, strike or conditions or events beyond Landlord's reasonable control shall be deemed an eviction of Tenant or relieve Tenant from any Tenant's obligations hereunder. (c) ADDITIONAL SERVICES. The Building Standard mechanical system is designed to accommodate heating loads generated by lights and equipment using up to 3.0 watts per square foot. Before installing lights and equipment in the Premises which in the aggregate exceed such amount, Tenant shall obtain the written permission of Landlord. Landlord may refuse to grant such permission unless Tenant shall agree to pay the costs of Landlord for installation of supplementary air conditioning capacity or electrical systems as necessitated by such equipment or lights. In addition, Tenant shall in advance, on the first day of each month during the Lease term, pay Landlord the reasonable amount estimated by Landlord as the cost of furnishing electricity for the operation of such equipment or lights and the reasonable amount estimated by Landlord as the cost of operation and maintenance of supplementary air conditioning units necessitated by Tenant's use of such equipment or lights. The Rent stated in Section 1(f) hereof does not include any amount to cover the cost of furnishing electricity or such additional air conditioning for such purposes and such costs shall be paid by Tenant as Additional Rent. Landlord shall be entitled to install and operate at Tenant's cost a monitoring/metering system in the Premises to measure the added demands on electrical, heating, ventilation and air conditioning systems -4- 10 resulting from such equipment and lights and from Tenant's after-hours heating, ventilation and air conditioning service requirements. Landlord and Tenant shall mutually agree upon the cost of a monitoring/metering system in the Premises prior to installation. Tenant shall comply with Landlord's instructions for the use of thermostats in the Building. (d) SECURITY SERVICES. Landlord will provide security guards to patrol the Building and parking garage 24 hours per day. In addition, such security guards will be available to escort personnel to and from the Building upon request at any time of day or night. Entrance to the Building after hours will be controlled by a computerized cardkey entry/exit system which electronically records who enters and exits the Building, and also the date and time of entry. Landlord will provide CATV cameras to monitor the access points of the Building. 8. COSTS OF OPERATIONS AND REAL ESTATE TAXES. (a) DEFINITIONS. In addition to the Rent provided in Section 1(f) of this Lease, Tenant shall pay to Landlord increases under this Section 8 as "Additional Rent," utilizing the following definitions. (i) "OPERATING COSTS" shall include Real Property Taxes, Services and Utility Costs. (1) "REAL PROPERTY TAXES" shall mean taxes on real property and personal property; charges and assessments (or any installments thereof due during the Lease Year) levied with respect to the Property, the Building, any improvements, fixtures and equipment, and all other property of Landlord, real or personal, used directly in the operation of the Building and located in or on the Building; and any taxes levied or assessed (or any installment thereof due during the Lease Year) in addition to or in lieu of, in whole or in part, such real property or personal property taxes, or any other tax upon leasing of the Building or rents collected, but not including any federal or state income, estate, inheritance or franchise tax. (2) "SERVICE AND UTILITY COSTS" shall mean all other expenses paid or incurred by Landlord for obtaining services and products for maintaining, operating and repairing the Building and the personal property used in conjunction therewith, including, without limitation, the costs of refuse collection, water, sewer and other utilities services, electricity, gas and other similar energy sources, supplies, janitorial and cleaning services, window washing, landscape maintenance, services of independent contractors, compensation (including employment taxes and fringe benefits) of all persons who perform duties in connection with the operation, maintenance and repair of the Building, its equipment and the Property upon which it is situated, insurance premiums, licenses, permits, and inspection fees, customary management fees, legal and accounting expenses and any other reasonable expenses or charges whether or not hereinabove described, which in accordance with generally accepted accounting and management practices would be considered an expense of maintaining, operating or repairing the Building, excluding or deducting, as appropriate: (A) Costs of any special services rendered to individual tenants (including Tenant); (B) Depreciation or amortization of costs required to be capitalized in accordance with generally accepted accounting practices (except other Operating Costs shall include amortization of capital improvements made subsequent to the initial development of the Building which are designed with a reasonable probability of improving the operating efficiency of the Premises or the Building, provided that such amortization expense shall not exceed reasonably expected savings in operating costs resulting from such capital improvements). (C) Expenses incurred in leasing to or procuring new tenants; -5- 11 (D) Interest or amortization payments on any mortgage on the Premises or the Building; (E) Expenses for repairs or other work occasioned by fire, windstorm or other insured casualty; and (F) Legal expenses incurred in enforcing the terms of any lease. (ii) "LEASE YEAR" shall mean the twelve month period commencing January 1 and ending December 31. (iii) ACTUAL OPERATING COSTS. (A) "ACTUAL SERVICE AND UTILITY COSTS" shall mean the actual expenses paid or incurred by Landlord for Service and Utility Costs during any Lease Year of the term hereof. (B) "ACTUAL REAL PROPERTY TAXES" shall mean the amount of Real Property Tax paid or incurred by Landlord during any Lease Year of the term hereof. (iv) ACTUAL OPERATING COSTS ALLOCABLE TO THE PREMISES. (A) "ACTUAL SERVICE AND UTILITY COSTS ALLOCABLE TO THE PREMISES" shall mean the Tenant's share of the Actual Service and Utility Costs determined by multiplying Tenant's Percentage of the Building described in Section 1(c) by the Actual Service and Utility Costs except that, to the extent such costs vary depending upon occupancy of the areas served, the variable portion shall be allocated in accordance with Tenant's share of the weighted average leased area of the Building during the Lease Year. (B) "ACTUAL REAL PROPERTY TAXES ALLOCABLE TO THE PREMISES" shall mean the Tenant's share of the Actual Real Property Taxes determined by multiplying Tenant's Percentage of the Building described in Section 1(c) by the Actual Real Property Taxes. (v) ESTIMATED OPERATING COSTS ALLOCABLE TO THE PREMISES. (A) "ESTIMATED SERVICE AND UTILITY COSTS ALLOCABLE TO THE PREMISES" shall mean Landlord's estimate of Actual Service and Utility Costs Allocable to the Premises for the following Lease Year to be given by Landlord to Tenant pursuant to Section 8(c)(i) below. (B) "ESTIMATED REAL PROPERTY TAXES ALLOCABLE TO THE PREMISES" shall mean Landlord's estimate of Real Property Taxes Allocable to the Premises for the following Lease Year to be given by Landlord to Tenant pursuant to Section 8(c)(ii) below. (vi) "BASE SERVICE YEAR" shall mean 1997. (b) BASE AMOUNTS (i) REAL PROPERTY TAXES BASE AMOUNT. For purposes of this Section 8, the Real Property Taxes Base Amount for the initial lease term shall be the Actual Real Property Taxes Allocable to the Premises for the Base Service Year. -6- 12 (ii) SERVICE AND UTILITY COSTS BASE AMOUNT. For purposes of this Section 8, the Service and Utility Costs Base Amount for the initial lease term shall be an annualized amount equal to the Actual Service and Utility Costs Allocable to the Premises for the Base Service Year. (c) ADDITIONAL RENT FOR SERVICE AND UTILITY COSTS. (i) ADDITIONAL RENT FOR ESTIMATED INCREASES IN SERVICE AND UTILITY COSTS. At the beginning of each Lease Year after the Base Service Year, during the term hereof, Landlord shall furnish Tenant a written statement of the Estimated Service and Utility Costs Allocable to the Premises, for such Lease Year, and a calculation of the Additional Rent as follows: One-Twelfth (1/12) of the amount, if any, by which such amount exceeds the Service and Utility Costs Base Amount shall be Additional Rent payable by Tenant as provided in Section 4 for each month during such Lease Year. If at any time or times during such Lease Year, it appears to Landlord that the Actual Service and Utility Costs Allocable to the Premises will vary from the Estimated Service and Utility Costs Allocable to the Premises by more than five percent (5%) on an annual basis, Landlord may, by written notice to Tenant, revise its estimate for such Lease Year and Additional Rent payments by Tenant for the remainder of such Lease Year shall be based on such revised estimate. (ii) ACTUAL SERVICE AND UTILITY COSTS. Within ninety (90) days after the close of each Lease Year during the term hereof for which an estimated statement was delivered to Tenant pursuant to subsection (c)(i), or as soon thereafter as practicable, Landlord shall deliver to Tenant a written statement setting forth the Actual Service and Utility Costs Allocable to the Premises during the preceding Lease Year or such prorated portion thereof if this Lease commences or terminates on a day other than the first or last day of a Lease Year (based on a 365-day Lease Year). If such costs for any Lease Year exceed Estimated Service and Utility Costs Allocable to the Premises paid by Tenant to Landlord pursuant to subsection (c)(i), Tenant shall pay the amount of such excess to Landlord as Additional Rent within thirty (30) days after receipt of such statement by Tenant. If such statement shows such costs to be less than the amount paid by Tenant to Landlord pursuant to subsection (c)(i), then the amount of such overpayment by Tenant shall be credited by Landlord to the next Rent payable by Tenant or, if the Lease has terminated, will be paid to Tenant. (d) ADDITIONAL RENT FOR REAL PROPERTY TAXES. (i) ADDITIONAL RENT FOR ESTIMATED INCREASES IN REAL PROPERTY TAXES. At the beginning of each Lease Year during the term hereof, Landlord shall furnish Tenant a written statement of the Estimated Real Property Taxes Allocable to the Premises, for such Lease Year, and a calculation of the Additional Rent as follows: One-twelfth (1/12) of the amount, if any, by which such amount exceeds the Real Property Taxes Base Amount shall be Additional Rent payable by Tenant as provided in Section 4 for each month during such Lease Year. If at any time or times during such Lease Year it appears to Landlord that the Actual Real Property Taxes Allocable to the Premises will vary from the Estimated Real Property Taxes Allocable to the Premises by more than five percent (5%) on an annual basis, Landlord shall, by written notice to Tenant, revise its estimate for such Lease Year and Additional Rent payments by Tenant for the remainder of such Lease Year shall be based on such revised estimate. (ii) ACTUAL REAL PROPERTY TAXES. Within ninety (90) days after the close of each Lease Year during the term hereof for which an estimated statement was delivered to Tenant pursuant to subsection (d)(i), or as soon thereafter as practicable, Landlord shall deliver to Tenant a written statement setting forth the Actual Real Property Taxes Allocable to the Premises during the preceding Lease Year or such prorated portion thereof if this Lease commences or terminates on a day other than the first or last day of a Lease Year (based on a 365-day Lease Year). If such taxes for any Lease Year exceed Estimated Real Property Taxes Allocable to the Premises paid by Tenant to Landlord pursuant to subsection (d)(i), Tenant shall pay the amount of such excess to Landlord as Additional Rent within thirty (30) days after receipt of such statement by tenant. If -7- 13 such statement shows such cost to be less than the amount paid by Tenant to Landlord pursuant to subsection (d)(i), then the amount of such overpayment by Tenant shall be credited by Landlord to the next Rent payable by Tenant or, if the Lease has terminated, will be paid to Tenant. (e) CALCULATIONS. The calculation of Actual Costs and Taxes and Estimated Costs and Taxes Allocable to the Premises shall be made by Landlord. Landlord or its agent shall keep records in reasonable detail showing and supporting all expenditures made for the items enumerated above, which records and receipts shall be available for inspection by Tenant at any reasonable time. (f) FURTHER ADJUSTMENT. In the event the Building for any Lease Year is not fully occupied then the Estimated Costs and Actual Costs for such year shall be proportionately adjusted by Landlord to reflect those costs which would have occurred had the Building been fully occupied during such year. (g) BASE RENT. Notwithstanding anything to the contrary in this Section 8, the Rent payable by Tenant shall in no event be less than the Rent specified in Section 1(f) of this Lease. (i) PERSONAL PROPERTY TAXES. Tenant shall pay, prior to delinquency, all Personal Property Taxes payable with respect to all personal property of Tenant located on the Premises or the Building and promptly, upon request of Landlord, shall provide written proof of such payment. As used herein, "personal property of Tenant" shall include all improvements which are paid for by Tenant. "Personal Property Taxes" shall include all property taxes assessed against the property of Tenant, whether assessed as real or personal property. 9. TENANT IMPROVEMENTS AND ALTERATIONS. Prior to the Commencement Date, Landlord will, at its sole expense, paint the office space and clean the carpet in the Premises. In addition to this work, Landlord will provide Tenant with a tenant improvement allowance of $6.00 per rentable square feet of office space leased or $58,020.00. Said allowance is to be used solely for the improvement of the Premises and must be used within the first eighteen (18) months of the Lease term after which it becomes null and void. To utilize such allowance, Tenant will provide Landlord with written notice of the specific improvements Tenant desires to be made. It is agreed that Landlord, or a contractor reasonably approved in good faith by Landlord, will construct all such improvements, and Tenant will pay the cost of any improvements in excess of the tenant improvement allowance. (a) TENANT IMPROVEMENTS. Landlord shall deliver the Premises to Tenant with the improvements shown and/or described in Exhibit C, and will provide an allowance for additional improvements as described in Exhibit C. All of the work to be performed by Landlord shall be completed in a workman-like manner in conformance with all applicable building codes, laws, rules and regulations. Tenant shall, subject to the provisions of paragraph (b) below, also have the right to construct and install at its sole cost and expense such additional tenant improvements as are in its judgment necessary or convenient for its use of the Premises. (b) ALTERATIONS. Tenant shall not make any structural alterations or improvements in or additions ("Alterations") to the Premises or make any changes to locks on doors or add to, disturb or in any way change any of the wiring or plumbing in the Premises or the Building, without first obtaining the written consent of Landlord, and, when appropriate, in accordance with plans and specifications approved by Landlord, which consent shall not be unreasonably withheld. All such Alterations shall be at the sole cost and expense of Tenant and shall be performed by contractors or mechanics approved by Landlord, which consent shall not be unreasonably withheld. All work with respect to any such Alterations shall be done in good and workmanlike manner, shall be of a quality equal to or exceeding the then existing construction standards for the Building and must be of a type, and the floors and ceilings must be finished in a manner, customary for general office use and -8- 14 other uses common to similar office buildings in the vicinity. Such Alterations shall be diligently prosecuted to completion. All such Alterations shall be made strictly in accordance with all laws, regulations and ordinances relating thereto, and no interior improvements installed by Landlord in the Premises (including Tenant's Work) may be removed unless the same are promptly restored to a condition similar or better. Landlord hereby reserves the right to require any contractor or mechanic working the Premises to provide lien waivers and liability insurance covering such Alterations to the Premises. Tenant shall give Landlord ten (10) days' written notice of the commencement of any Alterations and agrees to allow Landlord and its Lender to enter the Premises at reasonable times and post appropriate notices to avoid liability to contractors or material suppliers for payment for such Alterations. Notwithstanding anything contained herein to the contrary. Tenant may make any nonstructural interior Alterations that do not adversely affect the value of the Premises, the structural integrity of the Building or any Building system without Landlord's consent. No Alterations shall adversely affect either the strength or exterior appearance, or the mechanical, electric or plumbing services of the Building. Tenant shall reimburse Landlord for any reasonable sums expended by Landlord for examinations and approval of architectural or mechanical plans and specifications of the Alterations. Tenant shall also reimburse Landlord for reasonable direct costs incurred during any inspection of the Alterations. All damages or injury done to the Premises or Building by Tenant or by any persons who may be in or upon the Premises or Building with the express or implied consent of Tenant, including but not limited to the cracking or breaking of any glass of windows and doors, shall be paid for by Tenant and Tenant shall pay for all damage to the Building caused by negligent acts or omissions of Tenant or Tenant's officers, contractors, agents, invitees, licenses, or employees. 10. CARE OF PREMISES. (a) TENANT'S MAINTENANCE. Tenant shall take good care of the Premises throughout the term of the Lease. (b) LANDLORD'S MAINTENANCE. Landlord shall make, at its sole cost and expense, all repairs and replacements and perform all maintenance necessary to keep the Premises, the Building and the common areas in good working order and repair and to maintain the Building and Premises in a clean, safe and tenantable condition comparable to other first class office buildings in Seattle, Washington. This maintenance and repair shall include without limitation the roof, foundation, exterior walls, interior walls, all structural components, utility lines, all systems, equipment and facilities serving the Premises and the Building, such as mechanical, electrical, HVAC, plumbing and sewer, replacement of lighting tubes, lamp ballasts and bulbs, and extermination and pest control when necessary, and snow and ice removal, unless such repair is Tenant's responsibility pursuant to Section 10(a). Landlord's work under this Section 10 shall be accomplished with the least possible amount of interference with the conduct of Tenant's business and, to the extent practicable, shall be done after normal business hours. 11. ACCEPTANCE OF PREMISES. If this Lease shall be entered into prior to the completion of tenant improvements in the Premises, the acceptance of the Premises by Tenant shall be deferred until Landlord informs Tenant of the completion of such construction. Within ten (10) days ("Inspection Period") after Landlord informs Tenant of such completion, Tenant shall make such inspection of the Premises as Tenant deems appropriate. Except as otherwise specified by Tenant in writing to Landlord within the Inspection Period, Tenant shall be deemed to have accepted the Premises in their then condition. If, as a result of such inspection, Tenant discovers minor deviations or variations from the plans and specifications for Tenant's improvements of a nature commonly found on a "punch list" (as the term is used in the construction industry), Tenant shall during the Inspection Period, notify Landlord of such deviations. Landlord shall promptly repair all punch list items. The existence of such punch list items, provided the correction thereof does not unreasonably interfere with Tenant's - 9 - 15 use of the Premises, shall not postpone the Commencement Date of this Lease or the obligation of Tenant to pay Rent. 12. ACCESS. Tenant shall permit Landlord and its agents to enter into and upon the Premises at all reasonable times upon timely notice to Tenant, except in emergencies, for the purpose of inspecting the same or for the purpose of cleaning, repairing, altering or improving the Premises or the Building. Nothing contained in this Section 12 shall be deemed to impose any obligation upon Landlord not expressly stated elsewhere in this Lease. When reasonably necessary Landlord may temporarily close entrances, doors, corridors, elevators or other facilities for a reasonable duration, without liability to Tenant by reason of such closure and without such action by Landlord being construed as an eviction of Tenant or release of Tenant from the duty of observing and performing any of the provisions of this Lease. Landlord shall have the right to enter the Premises upon timely notice to Tenant, except in emergencies, for the purpose of showing the Premises to prospective tenants within the period of one hundred eighty (180) days prior to the expiration or sooner termination of the Lease term. Landlord will use its best efforts to minimize the impact on Tenant's business of any entry by Landlord on the Premises. 13. DAMAGE OR DESTRUCTION. (a) DAMAGE AND REPAIR. If the Building or the Premises are damaged by fire or any other cause to such extent that the cost of restoration, as reasonably estimated by Landlord, will equal or exceed thirty percent (30%) of the replacement value of the Building (exclusive of foundations) just prior to the occurrence of the damage, or if insurance proceeds sufficient for restoration are for any reason unavailable, then Landlord may no later than the sixtieth day following the damage, give Tenant a notice of Landlord's election to terminate this Lease. In the event of such election this Lease shall be deemed to terminate on the third day after the giving of such notice, and Tenant shall surrender possession of the Premises within a reasonable time thereafter, and the Rent and Additional Rent shall be apportioned as of the date of Tenant's surrender and any Rent paid for any period beyond such date shall be repaid to Tenant. If the cost of restoration as estimated by Landlord shall amount to be less than thirty percent (30%) of said replacement value of the Building and insurance proceeds sufficient for restoration are available, or if Landlord does not elect to terminate this Lease, Landlord shall restore the Building and the Premises (to a functional unit similar to the Premises prior to such damages) with reasonable promptness, subject to delays beyond Landlord's control and delays in making of insurance adjustments by Landlord, and Tenant shall have no right to terminate this Lease except as provided in this Section 13. If the Premises are to be restored, the Rent shall be reduced, based on the proportion of the square footage of the Premises rendered untenantable, except in the event such damage resulted from or was contributed to, directly or indirectly, by the act, fault or neglect of Tenant, Tenant's officers, contractors, agents, employees, invitees or licensees, in which event Rent shall abate only to the extent Landlord receives proceeds from any rental income insurance policy to compensate Landlord for loss of Rent hereunder. (b) DESTRUCTION DURING LAST YEAR OF TERM. In case the Building shall be substantially destroyed by fire or other cause at any time during the last Lease Year of this Lease, either Landlord or Tenant may terminate this Lease by written notice to the other party. (c) BUSINESS INTERRUPTION. No damages, compensation or claim shall be payable by Landlord for inconvenience, loss of business or annoyance arising from any repair or restoration of any portion of the Premises or the Building. Landlord shall use its best efforts to effect such repairs promptly. (d) TENANT IMPROVEMENTS. Landlord will not be required to carry insurance of any kind for any improvement paid for by Tenant as provided in Exhibit C or for Tenant's furniture, furnishings, fixtures, equipment or appurtenances of Tenant under this Lease and Landlord shall not be obligated to repair any damage thereto or replace the same, unless such damage is caused by Landlord's negligence. - 10 - 16 (e) EXPRESS AGREEMENT. The provisions of this Section 13 shall be considered an express agreement governing any case of damage or destruction of the Building or Premises by fire or other casualty. 14. WAIVER OF SUBROGATION. Whether any loss or damage to the Premises, the Building, or any property therein, is due to the negligence of either Landlord or Tenant, their agents or employees, or any other cause, Landlord and Tenant do each hereby waive any rights each may have against the other on account of any loss or damage arising from any risk actually covered by insurance policies held by the damaged party. Each party shall use best efforts to cause its insurance carriers to consent to the foregoing waiver of rights of subrogation against the other party. This clause shall be effective if, and only to the extent, that it does not impair any insurance carried by either party, only if the required waiver of subrogation endorsements can be obtained at a commercially reasonable cost, and only to the extent of proceeds actually received. 15. INDEMNIFICATION. Each party shall indemnify and hold the other harmless from and against all common law or statutory liabilities, damages, injuries, obligations, losses, claims, civil actions, costs, or expenses, including attorneys fees, arising with respect to Tenant, from any act, omission, or negligence of Tenant or its officers, contractors, licensees, agents, servants, employees, guests, or invitees, in or about the Building or the Premises, with respect to Landlord, from any act, omission or negligence of Landlord or its officers, agents and employees, occurring in or about the Building or the Premises or with respect to either party arising from any breach or default under this Lease. As part of such indemnity, each party waives its immunity from suit under the provisions of RCW 51, et seq. Neither party shall be liable for any loss or damage to persons or property sustained by the other party or other persons, which may be caused by theft, or by any act or neglect of any tenant or occupant of the Building or any other third parties unless such loss or damage is due to the other party's negligence. 16. INSURANCE. (a) LIABILITY INSURANCE. Tenant shall, throughout the term of this Lease and any renewal hereof, at its own expense, keep and maintain in full force and effect, a policy of comprehensive general liability insurance including a contractual liability endorsement covering Tenant obligations under Section 15, insuring Tenant's activities upon, in or about the Premise, the Building, or the Property, against claims of bodily injury or death or property damage or loss with a limit of not less than One Million Dollars ($1,000,000) combined single limit. (b) PROPERTY INSURANCE. Tenant shall throughout the term of this Lease and any renewal hereof at its own expense, keep and maintain in full force and effect, what is commonly referred to as "all risk" coverage insurance (but excluding earthquake and flood) on the leasehold improvements constructed by Tenant in the Premises and on the personal property of Tenant in the Premises in an amount not less than the current one hundred percent (100%) replacement value thereof. (c) INSURANCE POLICY REQUIREMENTS. All insurance required under this Section 16 shall be with companies reasonably approved by Landlord. No insurance policy required under this Section 16 shall be cancelled or reduced in coverage and each insurance policy shall provide that it is not subject to cancellation or a reduction in coverage except after thirty (30) days prior written notice to Landlord. Tenant shall deliver to Landlord on or before the Commencement Date and from time to time thereafter, copies of policies of such insurance or certificates evidencing the existence and amounts of same and naming Landlord as additional insured thereunder. In no event shall the Limits of any insurance policy required under Section 16 be considered as limiting the liability of Tenant under this Lease. -11- 17 17. ASSIGNMENT AND SUBLETTING. (a) ASSIGNMENT OR SUBLEASE. Tenant shall not assign, mortgage, encumber or otherwise transfer this Lease or sublet the whole or any part of the Premises without in each case first obtaining Landlord's prior written consent. Such consent shall not be withheld except, (1) Landlord may withhold its consent if in Landlord's judgment occupancy by any proposed assignee, subtenant or other transferee; (i) is not consistent with the maintenance and operation of a first-class office building due to the proposed occupant's nature or manner of conducting business, (ii) is likely to cause disturbance to the customary use and occupancy of the Building by other tenants, their employees, customers, clients or other guests or visitors, or (iii) is not reasonably deemed by Landlord to be financially responsible, (2) Landlord may withhold, in its absolute and sole discretion, consent to any mortgage, hypothecation, pledge or other encumbrance of any interest in this Lease by Tenant or any subtenant, whereby this Lease or any interest therein becomes collateral for any obligation of Tenant or any other person; and (3) Landlord may withhold its consent to the extent Landlord determines necessary to comply with a restriction on use of the Premises, the Building or the Property contained in any lease, mortgage, or other agreement or instrument by which the Landlord is bound or to which any of such property is subject. No such assignment, subletting or other transfer shall relieve Tenant of any liability under this Lease. Consent to any such assignment, subletting or transfer shall not operate as a waiver of the necessity for consent to any subsequent assignment, subletting or transfer. Landlord reserves the right to terminate this Lease in the event of a requested assignment, subletting or transfer of this Lease by Tenant. In the event less than the entire Premises are to be subleased, Landlord retains the right to terminate this Lease with respect to the portion of the Premises for which such consent is requested, at the proposed effective date of such subletting, in which event Landlord shall enter into the relationship of Landlord and Tenant with any such subtenant or assignee as to the subleased portion, based on the rent (and/or other compensation) and the term agreed to by such subtenant or assignee and otherwise upon the terms and conditions of this Lease. In connection with an assignment or subletting, Tenant shall pay the reasonable cost of processing such assignment or subletting, including attorneys fees, upon demand of Landlord. Tenant shall provide Landlord with copies of all assignments, subleases and assumption instruments. If Tenant is a corporation, any transfer of this Lease by merger, consolidation or liquidation, or any change in the ownership of, a majority of its outstanding voting stock shall constitute an assignment for the purpose of this Section 17. Notwithstanding anything herein to the contrary, Landlord shall not reasonably withhold its consent to the following transfers: (i) the issuance and private placement of additional shares of Tenant's corporate stock for the sole purpose of infusing venture capital monies into the Tenant; or (ii) any transfer of shares of stock of Tenant which are publicly traded or listed or which constitute an initial public offering; or (iii) any sale or merger by Tenant with a corporation which is publicly traded; or (iv) any sale or transfer of shares of Tenant's stock which does not result in a change in the present control of Tenant by the person(s) now owning a majority of the Tenant's shares. If Tenant is a partnership, any transfer of this Lease by merger, consolidation liquidation, dissolution, or any change in the ownership of a majority of the partnership interests shall constitute an assignment for the purpose of this Section 17. -12- 18 (b) ASSIGNEE OBLIGATIONS. As a condition to Landlord's approval of any assignment, any potential assignee otherwise approved by Landlord shall assume in writing all obligations of Tenant under this Lease and shall be jointly and severally liable with Tenant for the payment of Rent and performance of all terms, covenants and conditions of this Lease. (c) SUBLESSEE OBLIGATIONS. Any sublessee shall assume all obligations of Tenant as to the portion of the Premises which is subleased to such sublessee and shall be jointly and severally liable with Tenant for rental and other payments and performance of all terms, covenants and conditions of such approved sublease. 18. SIGNS. Tenant shall not inscribe any inscription, or post, place, or in any manner display any sign, graphics, notice, picture, placard or poster, or any advertising matter whatsoever upon the glass panes or supports of the windows and doors, or upon the exterior walls of the Premises or the Building, or at any places visible (either directly or indirectly as an outline or shadow on a glass pane) from anywhere outside the Premises without first obtaining Landlord's written consent thereto, such consent to be at Landlord's sole discretion. Any such consent by Landlord shall be upon the understanding and condition that Tenant shall remove the same at the expiration or sooner termination of this Lease and Tenant shall repair any damage to the Premises or the Building caused thereby. 19. LIENS AND INSOLVENCY. (a) LIENS. Tenant shall keep its interest in this Lease and any property of Tenant in the Premises (other than unattached personal property), the Premises, the Property and the Building free from all liens arising out of any work performed or materials ordered or obligations incurred or on behalf of Tenant and Tenant hereby indemnifies and holds Landlord harmless from any liability from any such lien. In the event any lien is filed against the Building, the Property or the Premises by any person claiming by, through or under Tenant, Tenant shall, upon request of Landlord, at Tenant's expense, immediately either cause such lien to be released of record or furnish to Landlord a bond in form and amount and issued by a surety satisfactory to Landlord, indemnifying Landlord, the Property and the Building against all liability, costs and expenses, including attorneys fees, which Landlord may incur as a result thereof. Provided that such bond has been furnished to Landlord, Tenant, at its sole cost and expense and after written notice to Landlord, may contest, by appropriate proceedings conducted in good faith and with due diligence, any lien, encumbrance or charge against the Premises, the Property or the Building arising from work done or materials provided to and for Tenant, provided such proceedings suspend the collection thereof against Landlord, and the Premises, Building and Property, and neither the Premises, the Building, the Property nor any part thereof or interest therein is or will be in any danger of being sold, forfeited or lost. (b) INSOLVENCY. If Tenant becomes insolvent or voluntarily or involuntarily bankrupt, or if a receiver, assignee or other liquidating officer is appointed for the business of Tenant, Landlord at its option may terminate this Lease and Tenant's right of possession under this Lease and in no event shall this Lease or any rights or privileges hereunder be an asset of Tenant in any bankruptcy, insolvency or reorganization proceeding. 20. DEFAULT. (a) CUMULATIVE REMEDIES. All rights of Landlord and Tenant herein enumerated shall be cumulative, and none shall exclude any other right or remedy allowed by law. In addition to the other remedies in this Lease provided, either party shall be entitled to restrain by injunction the violation or attempted violation by the other party of any of the covenants, agreements or conditions of this Lease. (b) TENANT'S RIGHT TO CURE. Tenant shall have a period of ten (10) business days from the day of written notice from Landlord to Tenant within which to cure any default in the payment of Rent, Additional -13- 19 Rent or other sums due hereunder. Each party shall have a period of ten (10) days from the date of written notice from the other party within which to cure any other default hereunder, provided, however, that with respect to any such default which cannot be cured within ten (10) days, the default shall not be deemed to be uncured if the defaulting party commences to cure within ten (10) days and for so long as such party is diligently prosecuting the cure thereof. (c) VACATION AND ABANDONMENT. Vacation shall be defined as a prolonged absence from the Premises. Abandonment shall be defined as an absence from the Premises of five (5) business days or more while Tenant is in default after the expiration of all cure periods. Any vacation or abandonment by Tenant shall be considered a default with no right to cure, allowing Landlord to re-enter the Premises under Section 20(d). (d) LANDLORDS RE-ENTRY. Upon an uncured default of this Lease by Tenant, Landlord, besides other rights or remedies it may have, at its option, may enter the Premises or any part thereof, either with or without process of law, and expel, remove or put out Tenant or any other persons who may be thereon, together with all personal property found therein; and Landlord may terminate this Lease, or it may from time to time, without terminating this Lease and as agent of Tenant, rent the Premises or any part thereof for such term or terms (which may be for a term less than or extending beyond the term hereof), and at such rental or rentals and upon such other reasonable terms and conditions as Landlord in its sole discretion may deem advisable, with the right to repair, renovate, remodel, redecorate, alter and change the Premises, Tenant remaining liable for any deficiency computed as hereinafter set forth. In the case of any default, re-entry and/or dispossession, by summary proceedings or otherwise, all Rent and Additional Rent shall become due thereupon and be paid up to the time of such re-entry or dispossession together with such expenses as Landlord may reasonably incur for attorneys fees, advertising expenses, brokerage fees and/or putting the Premises in good order or preparing the same for re-rental together with interest thereon as provided in Section 35(f) hereof, accruing from the date of any such expenditure by Landlord. (e) RELETTING THE PREMISES. At the option of Landlord, rents received by Landlord from such reletting shall be applied first to the payment of any indebtedness from Tenant to Landlord other than Rent and Additional Rent due hereunder; second, to the payment of any costs and expenses of such reletting and including, but not limited to, attorneys fees and brokerage fees, and to the payment of any repairs, reasonable renovations, reasonable remodeling, reasonable redecoration, reasonable alterations and changes in the Premises; third, to the payment of Rent and Additional Rent due and to become due hereunder, and if after so applying said rents there is any deficiency in the Rent or Additional Rent to be part by Tenant under this Lease, Tenant shall pay any deficiency to Landlord monthly on the dates specified herein and any payment made or suits brought to collect the amount of the deficiency for any month shall not prejudice in any way the right of Landlord to collect the deficiency for any subsequent month. The failure of Landlord to relet the Premises or any part or parts thereof shall not release or affect Tenant's ability hereunder. In no event shall Tenant be entitled to receive any excess of net rents collected over sums payable by Tenant to Landlord hereunder. No such re-entry or taking possession of the Premises shall be construed as an election on Landlord's part to terminate this Lease unless a written notice of such intention be given to Tenant. Notwithstanding any such reletting without termination, Landlord may at any time thereafter elect to terminate this Lease for such pervious breach and default. Should Landlord at any time terminate this Lease by reason of any default, in addition to any other remedy it may have, it may recover from Tenant any deficiency in the Rent and Additional Rent reserved in this Lease for the balance of the Term, plus all court costs and attorneys fees incurred by Landlord in the collection of the same. (f) WAIVER OF REDEMPTION RIGHTS. Tenant, for itself, and on behalf of any and all persons claiming through or under it, including creditors of all kinds, does hereby waive and surrender all rights and privilege which they or any of them might have under or by reason of any present or future law, to redeem the Premises or to have a continuance of this Lease for the term hereof, as it may have been extended, after having -14- 20 been dispossessed or ejected therefrom by process of law or under the terms of this Lease or after the termination of this Lease as herein provided. (g) NONPAYMENT OF ADDITIONAL RENT. All costs and expenses which Tenant assumes or agrees to pay to Landlord pursuant to this Lease shall be deemed Additional Rent and, in the event of nonpayment thereof, Landlord shall have all the rights and remedies herein provided for in case of nonpayment of Rent. 21. PRIORITY. This Lease shall be subordinate to any first mortgage or deed of trust (and any other mortgage or deed of trust upon the written election of Landlord) now existing or hereafter placed upon the Property, the Building or the Premises, created by or at the instance of Landlord, and to any and all advances to be made thereunder and to interest thereon and all modifications, renewals and replacements or extensions thereof ("Landlord's Mortgage"), provided that, so long as Tenant is not in default under this Lease, Tenant's peaceable possession of the Premises and its rights under this Lease will not be disturbed on account thereof. In the event of any foreclosure or sale pursuant to the Landlord's Mortgage, Tenant agrees to attorn to such beneficiary or purchaser. Tenant shall properly execute, acknowledge and deliver documents which the holder of any Landlord's Mortgage may require to effectuate the provisions of this Section 21. 22. SURRENDER OF POSSESSION. Subject to the terms of Section 13 relating to damage and destruction, upon expiration of the term of this Lease, whether by lapse of time or otherwise Tenant shall promptly and peacefully surrender the Premises to Landlord in as good condition as when received by Tenant from Landlord or as thereafter improved, reasonable use, wear and tear and damage by casualty, described in Section 13 excepted. 23. REMOVAL OF PROPERTY. (a) SIGNS AND PERSONAL PROPERTY. Tenant shall remove (i) all identifying insignia and design elements which are unique to Tenant's business and installed by Tenant in or on the Premises, and (ii) all articles of personal property and all business and trade fixtures, machinery and equipment, furniture and movable partitions owned by Tenant or installed by Tenant at its expense in the Premises which can be removed without damage to the Premises at the expiration or sooner termination of this Lease. Tenant shall pay Landlord for any damages for injury to the Premises or Building resulting from such removal. If Tenant shall fail to remove any of its property of any nature whatsoever from the Premises or the Building within five (5) business days after the expiration or earlier termination of this Lease, Landlord may remove and store said property without liability for loss thereof or damage thereto, such storage to be for the account and at the expense of Tenant. If Tenant shall not pay the cost of storing any such property after it has been stored for a period of thirty (30) days or more, Landlord may, at its option, sell, or permit to be sold, any or all such property at public or sale, in such manner and at such times and places as Landlord in its sole discretion may deem proper, without notice to Tenant, unless notice is required under applicable statutes, and shall apply the proceeds of such sale: first, to the cost and expense of such sale, including reasonable attorneys fees actually incurred; second, to the payment of the costs or charges for storing any such property; third, to the payment of any other sums of money which may then be or thereafter become due Landlord from Tenant under any of the terms hereof; and, fourth, the balance, if any, to Tenant. (b) ALTERATIONS. All Alterations shall remain in and be surrendered with the Premises as a part thereof at the expiration or earlier termination of this Lease, without disturbance, molestation or injury, provided that Landlord may, together with the written notice consenting to the construction of any such Alterations notify Tenant that they be removed upon the expiration or earlier termination of this Lease. In such event, all expense to remove such Alterations and to restore the Premises to standards, prior to such Alterations, less normal wear and tear, shall be borne by Tenant. 24. NON-WAIVER. Waiver by either party of any term, covenant or condition herein contained any breach thereof shall not be deemed to be a waiver of such term, covenant, or condition or of any subsequent -15- 21 breach of the same or any other term, covenant, or condition herein contained. In addition, the subsequent acceptance of Rent or Additional Rent hereunder by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, other than the failure of Tenant to pay the particular Rent or Additional Rent so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such Rent or Additional Rent. 25. HOLDOVER. If Tenant shall, with the written consent of Landlord, hold over after the expiration of the term of this Lease, such tenancy shall be deemed a month-to-month tenancy which may be terminated as provided by applicable state law. During such tenancy, Tenant shall be bound by all of the terms, covenants and conditions herein so far as applicable, except rental which shall be greater of (a) the ten quoted rates for similar space in the Building, or (b) the Rent and Additional Rent stated herein. 26. CONDEMNATION. (a) ENTIRE TAKING. If all of the Premises or such portions of the Building as may be required for the reasonable use by Tenant of the Premises, are taken by eminent domain, this Lease shall automatically terminate as of the date title vests in the condemning authority and all Rent, Additional Rent and other payments shall be paid to or reimbursed as of that date. (b) CONSTRUCTIVE TAKING OF ENTIRE PREMISES. In the event of a taking of a material part of but less than all of the Building, where Landlord shall determine that the remaining portions of the Building cannot be economically and effectively used by it (whether on account of physical, economic, aesthetic or other reasons) or where the Landlord determines the Building should be restored in such a way as to materially alter the Premises, Landlord shall forward a written notice to Tenant of such determination not more than sixty (60) days after the date of taking. The terms of this Lease shall expire upon such date as Landlord shall specify in such notice but not earlier than sixty (60) days after the date of such notice. In the event of a taking of a material part, but less than all, of the Premises, Tenant shall have the right to terminate this Lease as of the date of such taking. (c) PARTIAL TAKING. Subject to the provisions of the preceding Section 26(b), in case of taking of a thirty percent (30%) or less of the square footage of the Premises, or a portion of the Building not required for the reasonable use of the Premises, than this Lease shall continue in full force and effect and the Rent shall be equitably reduced based on the proportion by which the square footage of the Premises is reduced, such Rent reduction to be effective as of the date title to such portion vests in the condemning authority. (d) AWARDS AND DAMAGES. Landlord reserves all rights to damages to the Premises for any partial, constructive, or entire taking by eminent domain, and Tenant hereby assigns to Landlord any right Tenant may have to such damages or award and Tenant shall make no claim against Landlord or the condemning authority for damages for termination of the leasehold interest. Tenant shall have the right, however, to claim and recover from the condemning authority compensation for any loss to which Tenant may be put for Tenant's moving expenses, business interruption or taking of Tenant's personal property (not including Tenant's leasehold interest) provided that such damages may be claimed only if they are awarded separately in the eminent domain proceedings and not out of or as part of the damages recoverable by Landlord. 27. NOTICES. All notices under this Lease shall be in writing and delivered in person or sent by registered or certified mail, postage prepaid, to Landlord and to Tenant at the Notice Addresses provided in Section 1(j) (provided that after the Commencement Date any such notice shall be mailed or delivered by hand to Tenant at the Premises) and to the holder of any Landlord's Mortgage at such place as such holder shall specify to Tenant in writing, or such other addresses as may from time to time be designated by any such party in writing. Notices mailed as aforesaid shall be deemed given on the date of such mailing. -16- 22 28. COSTS AND ATTORNEYS' FEES. If Tenant or Landlord shall bring any action for any relief against the other, declaratory or otherwise, arising out of this Lease, including any suit by Landlord for the recovery of Rent, Additional Rent or other payments hereunder or possession of the Premises, the losing party shall pay the prevailing party a reasonable sum for attorney's and paralegal's fees in such suit, at trial and on appeal, and such attorneys fees shall be deemed to have accrued on the commencement of such action. 29. LANDLORD'S LIABILITY. Anything in this Lease to the contrary notwithstanding, covenants, undertakings and agreements herein made on the part of Landlord are made and intended not as personal covenants, undertakings and agreements for the purpose of binding Landlord personally or the assets of Landlord but are made and intended for the purpose of binding only the Landlord's interest in the Premises, the Building, and the Property, as the same may from time to time be encumbered. No personal liability or personal responsibility is assumed by, nor shall at any time be asserted or enforceable against Landlord or its members or their respective heirs, legal representatives, successors or assigns on account of the Lease or on account of any covenant, undertaking or agreement of Landlord in this Lease contained. 30. LANDLORD'S CONSENT. Except as specified in other provisions of this Lease, whenever Landlord's consent is required under the terms hereof, such consent shall not be unreasonably withheld, provided, the withholding of Landlord's consent due to any mortgagee's refusal to grant its consent, shall not be deemed unreasonable. 31. ESTOPPEL CERTIFICATES. Tenant shall, from time to time, upon written request of Landlord, execute, acknowledge and deliver to Landlord or its designee a written statement stating the date this Lease was executed and the date it expires; the date the term commenced and the date Tenant accepted the Premises; the amount of minimum monthly Rent and the date to which such Rent has been paid; and certifying; that this Lease is in full force and effect and has not been assigned, ratified, supplemented or amended in any way (or specifying the date and terms of agreement so affecting this Lease); that this Lease represents the entire agreement between the parties as to this leasing; that all conditions under this Lease to be performed by the Landlord have been satisfied; that all required contributions by Landlord to Tenant on account of Tenant's improvements have been received; that on this date there are no existing claims, defenses or offsets which the Tenant has against the enforcement of this Lease by the Landlord; that no Rent has been paid more than one month in advance; and that no security has been deposited with Landlord (or, if so, the amount thereof). It is intended that any such statement delivered pursuant to this paragraph may be relied upon by a prospective purchaser of Landlord's interest or assignee of any mortgage upon Landlord's interest in the Building. If Tenant shall fail to respond within ten (10) days of receipt by Tenant of a written request by Landlord as herein provided, Tenant shall be deemed to have given such certificate as above provided without modification and shall be deemed to have admitted the accuracy of any information supplied by Landlord to a prospective purchaser or mortgagee and to have certified that this Lease is in full force and effect, that there are no uncured defaults in Landlord's performance, that the security deposit is as stated in the Lease, and that not more than one month's Rent has been paid in advance. 32. TRANSFER OF LANDLORD'S INTEREST. In the event of any transfer or transfers of Landlord's interest in the Premises, the Building, or the Property other than a transfer for security purposes only, the transferor shall be automatically relieved of any and all obligations and liabilities on the part of Landlord accruing from and after the date of such transfer, provided the transferee accepts the obligations of Landlord under the Lease, and such transferee shall have no obligation or liability with respect to any matter occurring or arising prior to the date of such transfer. Tenant agrees to attorn to the transferee. 33. RIGHT TO PERFORM. If Tenant shall fail to pay any sum of money required to be paid by it hereunder, or shall fail to perform any other act on its part to be performed hereunder, and such failure shall continue for ten (10) days after notice thereof by Landlord, Landlord may, but shall not be obligated so to do, and -17- 23 by any such broker, finder or other person on the basis of any arrangements or agreement made or alleged to have been made by or on behalf of Tenant. The provisions of this Section 37(c) shall not apply to brokers with whom Landlord has an express written broker agreement. (d) ENTIRE AGREEMENT. This Lease contains all covenants and agreements between Landlord and Tenant relating in any manner to the leasing, use and occupancy of the Premises, and to Tenant's use of the Building and other manners set forth in this Lease. No prior agreements or understanding pertaining to the same shall be valid or of any force or effect. The covenants and agreements of this Lease shall not be altered, modified or added to except in writing signed by Landlord and Tenant. (e) SEVERABILITY. Any provision of this Lease which shall prove to be invalid, void or illegal shall in no way affect, impair or invalidate any other provision hereof and the remaining provisions hereof shall nevertheless remain in full force and effect. (f) OVERDUE PAYMENTS. Any Rent, Additional Rent or other sums payable by Tenant to Landlord under this Lease which shall not be paid upon the due date thereof, shall bear interest at a rate equal to three percentage points above the prime rate of interest stated from time to time by Seattle-First National Bank or its successor, or, in the absence of an established prime rate, five percentage points over that bank's rate for one year certificates of deposit, but not in excess of the highest lawful rate permitted under applicable laws, calculated from the original due date thereof to the date of payment. (g) FORCE MAJEURE. Except for the payment of Rent, Additional Rent or other sums payable by Tenant to Landlord, time periods for Tenant's or Landlord's performance under any provision, of this Lease shall be extended for periods of time during which Tenant's or Landlord's performance is prevented due to circumstances beyond Tenant's or Landlord's control, including without limitation, strikes, embargoes, shortages of labor or materials, governmental regulations, acts of God, war or other strife. (h) RIGHT TO CHANGE PUBLIC SPACES. Landlord shall have the right at any time after the completion of the Building, without thereby creating an actual or constructive eviction or incurring any liability to Tenant therefor, to change the arrangement or location of such of the following as are not contained within the Premises or any part thereof: entrances, passageways, doors and doorways, corridors, stairs, toilets, and other like public service portions of the Building. Nevertheless, in no event shall Landlord diminish any service, change the arrangement or location of the elevators serving the Premises, make any change which shall diminish the area of the Premises, or make any change which shall change the character of the Building from that of a first-class office building. (i) GOVERNING LAW. This Lease shall be governed by and construed in accordance with the laws of the state of Washington. (j) BUILDING DIRECTORY. Landlord shall maintain in the lobby of Building a directory which shall include the name of Tenant and any other names reasonably requested by Tenant in proportion to the number of listings given to comparable tenants of the Building. -19- 24 (k) BUILDING NAME. The Building will be known by such name as Landlord may designate from time to time. IN WITNESS WHEREOF this Lease has been executed the day and year first above set forth. LANDLORD: MERRILL PLACE, LLC, a Washington limited liability company By /s/ [SIGNATURE ILLEGIBLE] ------------------------------------------ Its Manager --------------------------------------- TENANT: FREESHOP INTERNATIONAL, INC. By /s/ [SIGNATURE ILLEGIBLE] ------------------------------------------ Its President & CEO --------------------------------------- STATE OF WASHINGTON ) ) ss. COUNTY OF KING ) I certify that I know or have satisfactory evidence that Kevin Daniels is the person who appeared before me and said person acknowledged that he/she signed this instrument, on oath stated that he/she was authorized to execute the instrument as the Manager of MERRILL PLACE, LLC to be the free and voluntary act and deed of said limited liability company, for the uses and purposes mentioned in the instrument. WITNESS my hand and official seal hereto affixed this 23rd date of September, 1997. /s/ LINDA PIERATT -------------------------------------- (Print name) LINDA PIERATT -------------------------- Notary Public in and for the State of Washington. My appointment expires 8-19-00 ---------------- STATE OF WASHINGTON ) ) ss. COUNTY OF KING ) I certify that I know or have satisfactory evidence that Michael Schutzler is the person who appeared before me and said person acknowledged that he/she signed this instrument, on oath stated that he/she was authorized to execute the instrument as the President & CEO of -20- 25 FREESHOP INTERNATIONAL, INC. to be the free and voluntary act and deed of said corporation, for the uses and purposes mentioned in the instrument. WITNESS my hand and official seal hereto affixed this 23 day of September, 1997. /s/ JOAN MCCLAFLIN ---------------------------------------- (Print Name) Joan McClaflin Notary Public in and for the State of Washington. My appointment expires 1-10-99 -21- 26 EXHIBIT A LEGAL DESCRIPTION OF PROPERTY 27 EXHIBIT A LEGAL DESCRIPTION LEGAL DESCRIPTION: PARCEL 1: THAT PORTION OF BLOCK 4 OF D. S. MAYNARD'S PLAT OF SEATTLE, AS PER PLAT RECORDED IN VOLUME 1 OF PLATS, PAGE 23, RECORDS OF KING COUNTY, AND OF VACATED ALLEY IN SAID BLOCK, AND OF AN UNPLATTED STRIP OF LAND IN SECTION 6, TOWNSHIP 24 NORTH, RANGE 4 EAST W.M., DESCRIBED AS FOLLOWS: BEGINNING ON THE NORTHERLY LINE OF LOT 8 IN SAID BLOCK AT A POINT 9.0 FEET WESTERLY OF THE NORTHEAST CORNER THEREOF; THENCE SOUTHERLY PARALLEL WITH THE EASTERLY LINE OF SAID BLOCK, A DISTANCE OF 75.00 FEET; THENCE WESTERLY PARALLEL WITH THE NORTHERLY LINE OF SAID BLOCK, A DISTANCE OF 119.00 FEET TO THE CENTERLINE OF THE ALLEY THEREIN; THENCE SOUTHERLY ALONG THE CENTERLINE OF SAID ALLEY, 165.00 FEET TO THE EASTERLY PRODUCTION OF THE SOUTHERLY LINE OF SAID LOT 4 IN SAID BLOCK; THENCE CONTINUING SOUTHERLY ALONG THE PRODUCTION OF THE CENTERLINE OF SAID ALLEY, A DISTANCE OF 16.716 FEET TO THE GOVERNMENT MEANDER LINE, THENCE WEST ALONG SAID MEANDER LINE, 150.408 FEET TO AN ANGLE POINT IN SAID MEANDER LINE; THENCE NORTHERLY ALONG SAID MEANDER LINE TO A POINT DUE WEST OF THE NORTHWEST CORNER OF LOT 1 IN SAID BLOCK; THENCE EAST TO THE NORTHWEST CORNER OF SAID LOT 1; THENCE EASTERLY ALONG THE NORTHERLY LINE OF SAID BLOCK, A DISTANCE OF 247.00 FEET TO THE POINT OF BEGINNING; EXCEPT ALL COAL AND MINERALS AND THE RIGHT TO EXPLORE FOR AND MINE THE SAME, AS EXCEPTED BY DEED RECORDED UNDER KING COUNTY RECORDING NO. 3528837, COVERING THE SOUTH 45 FEET OF LOT 2, ALL OF LOTS 3 AND 4, THAT PORTION OF THE WEST 1/2 OF VACATED ALLEY ADJOINING, AND THOSE PORTIONS OF THE UNPLATTED STRIP IN SECTION 6 ADJOINING; SITUATE IN THE CITY OF SEATTLE, COUNTY OF KING, STATE OF WASHINGTON. PARCEL 2: THE WEST 111 FEET OF LOT 5 IN BLOCK 4 OF D. S. MAYNARD'S PLAT OF SEATTLE, AS PER PLAT RECORDED IN VOLUME 1 OF PLATS, PAGE 23, RECORDS OF KING COUNTY; TOGETHER WITH THAT PORTION OF UNPLATTED STRIP OF LAND IN SECTION 6, TOWNSHIP 24 NORTH, RANGE 4 EAST W.M., LYING BETWEEN THE WEST 111 FEET OF LOT 5 IN BLOCK 4 OF D. S. MAYNARD'S PLAT OF SEATTLE, AS PER PLAT RECORDED IN VOLUME 1 OF PLATS, PAGE 23, RECORDS OF KING COUNTY, AND THE GOVERNMENT MEANDER LINE, DESCRIBED AS FOLLOWS: BEGINNING AT THE SOUTHWEST CORNER OF SAID LOT 5; THENCE SOUTHERLY 16.801 FEET TO THE SAID MEANDER LINE; -16- 28 THENCE EASTERLY ALONG THE SAID MEANDER LINE 111.00 FEET, MORE OR LESS TO THE WEST MARGINAL LINE OF FIRST AVENUE SOUTH; THENCE NORTHERLY ALONG THE WEST MARGINAL LINE OF FIRST AVENUE SOUTH 17.971 FEET TO THE SOUTH MARGINAL LINE OF SAID LOT 5; THENCE WESTERLY 111.00 FEET TO THE POINT OF BEGINNING; AND TOGETHER WITH THAT PORTION OF THE EASTERLY 1/2 OF THE VACATED ALLEY IN BLOCK 4 OF D. S. MAYNARD'S PLAT OF SEATTLE, AS PER PLAT RECORDED IN VOLUME 1 OF PLATS, PAGE 23, RECORDS OF KING COUNTY, DESCRIBED AS FOLLOWS: BEGINNING AT THE NORTHWEST CORNER OF LOT 5 IN BLOCK 4 OF SAID PLAT; THENCE WEST 8 FEET; THENCE SOUTHERLY ALONG THE CENTERLINE OF SAID VACATED ALLEY 76.716 FEET TO THE GOVERNMENT MEANDER LINE; THENCE EASTERLY ALONG THE SAID MEANDER LINE 8 FEET, MORE OR LESS, TO THE EASTERLY MARGINAL LINE OF SAID VACATED ALLEY PRODUCED SOUTH; THENCE NORTHERLY 76.801 FEET TO THE POINT OF BEGINNING; SITUATE IN THE CITY OF SEATTLE, COUNTY OF KING, STATE OF WASHINGTON. PARCEL 3: THE WEST 111 FEET OF LOT 6 AND THE WEST 111 FEET OF THE SOUTH 45 FEET OF LOT 7 IN BLOCK 4 OF D. S. MAYNARD'S PLAT OF SEATTLE, AS PER PLAT RECORDED IN VOLUME 1 OF PLATS, PAGE 23, RECORDS OF KING COUNTY; TOGETHER WITH THE EAST 1/2 OF VACATED ALLEY ADJOINING; SITUATE IN THE CITY OF SEATTLE, COUNTY OF KING, STATE OF WASHINGTON. 29 EXHIBIT B FLOOR PLAN OF PREMISES 30 EXHIBIT B [OVERALL & DEMOLITION 3RD FLOOR PLAN] 31 EXHIBIT C TENANT IMPROVEMENTS 32 To be attached 33 EXHIBIT D MEMORANDUM OF LEASE 34 MEMORANDUM OF LEASE THIS MEMORANDUM OF LEASE, made as of 9/23, 1997, by and between MERRILL PLACE, LLC, a Washington limited liability company ("Landlord") and FREESHOP INTERNATIONAL, INC. ("Tenant"). WITNESSETH: IN CONSIDERATION of the rents reserved in that certain Lease Agreement between the parties dated September 23, 1997, and of the terms, covenants, conditions and agreements on the part of Tenant therein, Landlord leases to Tenant certain real property located in the City of Seattle, County of King, State of Washington, upon which Landlord owns a building to be used for Tenant's offices, which property is designated in said Lease Agreement and located on a portion of the real property described on Exhibit A attached hereto and made a part hereof; together with all and singular the building or buildings, privileges and advantages, with any and all appurtenances belonging or in any way appertaining to the real property hereby leased, including the right in Tenant, its successors, assigns, subtenants, employees, customers, licensees and invitees or use the sidewalks, common areas and access areas to and from public streets and highways. TO HAVE AND TO HOLD the premises for the initial term of three (3) years, ending September 30, 2000, with one option to extend the term for one (1) additional period of three (3) years each, upon the terms, covenants and conditions specified in the Lease Agreement. IN WITNESS WHEREOF, the parties executed this instrument the date first above written. "LANDLORD" MERRILL PLACE LLC By NSD, LLC, its Manager By: /s/ KEVIN DANIELS ------------------------------ Member "TENANT" FREESHOP INTERNATIONAL, INC. By: /s/ MICHAEL SCHUTZLER ----------------------------- Its President & CEO STATE OF WASHINGTON ) ) ss. COUNTY OF KING ) I certify that I know or have satisfactory evidence that Kevin Daniels is the person who appeared before me and said person acknowledged that he/she signed this instrument, on oath stated that he/she was authorized to execute the instrument as the Manager of MERRILL PLACE, LLC to be the free and voluntary act and deed of said limited liability company, for the uses and purposes mentioned in the instrument. 35 WITNESS my hand and official seal hereto affixed this 23rd day of September, 1997. /s/ LINDA PIERATT ---------------------------------------- (Print name) Linda Pieratt Notary Public in and for the State of Washington My appointment expires 8-19-00 STATE OF WASHINGTON ) ) ss. COUNTY OF KING ) I certify that I know or have satisfactory evidence that Michael Schutzler is the person who appeared before me and said person acknowledged that he/she signed this instrument, on oath stated that he/she was authorized to execute the instrument as the President & CEO of FREESHOP INTERNATIONAL, INC. to be the free and voluntary act and deed of said corporation, for the uses and purposes mentioned in the instrument. WITNESS my hand and official seal hereto affixed this 23 day of September, 1997. /s/ JOANN MCCLAFLIN ---------------------------------------- (Print name) Joann McClaflin Notary Public in and for the State of Washington. My appointment expires 1-10-99 36 EXHIBIT E ADDITIONAL TERMS OF LEASE 37 None 38 AMENDMENT TO LEASE THIS AMENDMENT TO LEASE (the "Amendment") is made and entered into this _____ day of February, 1999, by and between MERRILL PLACE, LLC, a Washington limited liability company ("Landlord"), and FREESHOP INTERNATIONAL, INC. ("Tenant"). RECITALS: A. On the 23rd day of September, 1997, Landlord and Tenant entered into a Lease Agreement (the "Lease"), which Lease provides for the lease by Landlord to Tenant of certain premises consisting of 9,670 square feet of office floor area on the third floor and 2,117 square feet of balcony floor area (the "Original Premises") of the Schwabacher Warehouse Building located at 95 South Jackson Street, Seattle, King County, Washington (the "Warehouse Building"). B. Tenant has exercised its right of first opportunity to lease additional space in the Building pursuant to Paragraph 36 of the Lease. C. The parties hereto desire by these presents to amend the Lease in certain respects to reflect the lease of such additional space by Landlord to Tenant. NOW, THEREFORE, for and in consideration of the recitals, which are incorporated herein, and other good and valuable consideration, the parties hereto agree that the Lease shall be, and the same is hereby amended as follows: 1. Additional Space. Landlord hereby leases to Tenant, and Tenant hereby leases from Landlord, approximately 900 rentable square feet of floor area on the first floor and approximately 8,233 rentable square feet of floor area on the second floor of the Warehouse Building (the "Additional Space") (hereinafter the Original Premises and Additional Space are collectively called the "Premises"), upon the same terms and conditions contained in the Lease, except as provided otherwise herein. The Additional Space is shown on the drawing attached hereto as Exhibit A and incorporated herein by this reference. 2. Rentable Area. The exact measurement of the Additional Space will be computed by an AIA architect based upon BOMA standards and, upon completion, the parties will execute an addendum to this Amendment setting forth the actual square footage of the Premises and the percentage of square footage of the Premises compared to the area of the Building utilized for office space. 3. Pocket Space. Tenant will be allowed to pocket up to 4,000 rentable square feet of the Additional Space shown on the drawing attached hereto as Exhibit B and incorporated herein by this reference (the "Pocket Space") through December 31, 1999, upon written notice to Landlord. The Pocket Space can be occupied by Tenant at any time but must be taken in increments of a minimum of 1,000 square feet. Tenant will commence paying rent for the Pocket Space upon the earlier to occur of the date of its occupancy of the Pocket Space or December 31, 1999. -1- 39 4. Commencement Date for Additional Space. The Lease commencement date for the Additional Space (the "Commencement Date for the Additional Space") shall be the later to occur of June 1, 1999, or the date of substantial completion of the Tenant Improvements (defined below); provided that if Tenant causes delays in the construction schedule set forth in paragraph 12 below, the Commencement Date for the Additional Space will be June 1, 1999. 5. Expiration Date. The expiration date of the Lease is hereby extended from September 30, 2000, to May 31, 2003 (the "Termination Date"). All of Tenant's rights to lease the Premises will terminate on the Termination Date. 6. No Further Options to Renew. Paragraph 35 of the Lease (Option to Renew) is hereby deleted in its entirety, and Tenant shall have no option to renew the Lease term after the Termination Date. 7. Early Termination. Tenant may terminate the Lease upon the second and third anniversary of the Commencement Date for the Additional Space, at no additional cost to Tenant, provided that Tenant gives at least 270 days prior written notice to Landlord. Notwithstanding the foregoing, this early termination right is contingent upon Landlord not being able to provide Tenant with additional expansion space within Merrill Place to meet Tenant's expansion requirements noted to in its termination notice. 8. Rent for Additional Space. Tenant shall pay Landlord rent based on the following schedule for all occupied office space commencing on the Commencement Date for the Additional Space:
ADDITIONAL SPACE ORIGINAL PREMISES MONTHS $/RSF/YEAR $/RSF/YEAR 1-12 $18.50 $21.00 13-24 $19.50 $22.00 25-36 $20.50 $23.00 37-48 $21.50 $24.00
Rent for the balcony space shall remain at $4.00 per square foot per year throughout the term of the Lease. 9. Right of First Opportunity. Paragraph 36 is hereby amended to read as follows: 36. RIGHT OF FIRST OPPORTUNITY. During the term of the Lease, provided Tenant is not in default, Tenant shall have the right of first opportunity to lease all office space in the Building (the "Expansion Space") when the same becomes available, prior to the Expansion Space being offered to a third party. Landlord will notify Tenant in writing of the availability of the Expansion Space, and Tenant shall have five (5) business days to accept the space. The Expansion Space will be leased on the terms and conditions to be negotiated by Landlord and Tenant prior to Tenant's occupancy of the Expansion Space. -2- 40 10. Operating Expenses. Paragraph 8(vi) of the Lease is hereby amended to read as follows: "Base Service Year" shall mean 1997 for the Original Premises and 1999 for the Additional Space. 11. Landlord Improvements. Landlord agrees to make the following improvements to or for the Additional Space and its systems (the "Landlord Improvements"): a. Landlord will provide adequate electrical capacity for normal office use to the main distribution panel. Distribution throughout the Additional Space is part of Tenant Improvement costs. b. Landlord will upgrade and add new HVAC equipment into the Additional Space at its sole cost, but distribution from each heat pump unit is part of the Tenant Improvement costs. c. Landlord will contribute up to a maximum of $20,000 for the installation of new windows on the south exterior of the Premises (either floor) or for improvements or repairs to the current windows. Any additional costs above $20,000 will be borne by Tenant as part of the Tenant Improvements. 12. Tenant Improvements. Landlord will construct all improvements to the Premises requested by Tenant (the "Tenant Improvements") according to plans and specifications approved by Landlord and Tenant. The Commencement Date for the Additional Space of June 1, 1999, is contingent upon Landlord and Tenant meeting the following construction schedule: FEBRUARY 15, 1999. Tenant's architect will deliver to Landlord an approved set of permit ready construction documents initialed by Tenant. Landlord will review said documents for completeness and then submit them to the City of Seattle for building permits immediately upon Landlord's approval of the drawings. MARCH 1, 1999. Demolition of the Additional Space commences. Tenant acknowledges that demolition and construction of the Tenant Improvements to the Additional Space could cause some inconvenience to its current occupancy of the Original Premises. MARCH 15, 1999. Anticipated date that building permit will be issued. Upon issuance of the building permit, construction of the Tenant Improvements will begin. JUNE 1, 1999. Anticipated delivery date of Additional Space. Landlord agrees to obtain a minimum of two (2) construction bids from qualified contractors, and to select the lowest bid, subject to bid qualification by Landlord. -3- 41 13. Tenant Improvement Allowance. Landlord will provide Tenant with an improvement allowance for the Tenant Improvements in the Additional Space of $13.00 per rentable square feet of Additional Space. Tenant agrees to pay, on or before the Commencement Date for the Additional Space, for all costs of the Tenant Improvements in excess of this tenant improvement allowance. 14. Parking. Paragraph 1(h) of the Lease is hereby amended to read as follows: (h) PARKING. During the term of this Lease, Landlord will provide parking stalls for up to eighteen (18) cars on a nonreserved basis for ninety percent (90%) of the posted market rental rate. This rental rate will commence on the date this Amendment is fully executed, but in any event, not later than March 1, 1999. Landlord will also provide Tenant with one Executive Reserved parking space at the same rental rate. Additional monthly parking stalls may be available to Tenant's employees and visitors on a first come, first served basis. 15. Counterparts. This Amendment may be executed in one or more counterparts, and all of the counterparts shall constitute but one and the same agreement, notwithstanding that all parties hereto are not signatories to the same or original counterpart. 16. All Other Terms Remain Unchanged. Except as amended herein, all other terms and conditions of the Lease shall remain unchanged and in full force and effect. IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first above written. "LANDLORD" MERRILL PLACE, LLC, a Washington limited liability company By: NSD, LLC, a Washington limited liability company, its manager By: /s/ KEVIN DANIELS ----------------------------------- Kevin Daniels, Member "TENANT" FREESHOP INTERNATIONAL, INC. By: /s/ JOHN WADE ----------------------------------- Its: Chief Financial Officer ----------------------------------- -4- 42 STATE OF WASHINGTON ) ) ss. COUNTY OF KING ) I certify that I know or have satisfactory evidence that KEVIN DANIELS is the person who appeared before me, and said person acknowledged that he signed this instrument, on oath stated that he was authorized to execute the instrument and acknowledged it as a Member of NSD, LLC, in its capacity as the Manager of MERRILL PLACE LLC, to be the free and voluntary act and deed of each of said limited liability companies, for the uses and purposes mentioned in the instrument. WITNESS my hand and official seal hereto affixed this 10th day of February, 1999. /s/ LINDA PIERATT --------------------------------------- (Signature of Notary) Linda Pieratt --------------------------------------- (Print or stamp name of Notary) NOTARY PUBLIC in and for the State of Washington My Appointment Expires: 8-19-00 --------------- STATE OF WASHINGTON ) ) ss. COUNTY OF KING ) I certify that I know or have satisfactory evidence that John Wade is the person who appeared before me, and said person acknowledged that he/she signed this instrument, on oath stated that he/she was authorized to execute the instrument and acknowledged it as the Chief Financial Officer of FREESHOP INTERNATIONAL, INC., to be the free and voluntary act and deed of said corporation, for the uses and purposes mentioned in the instrument. WITNESS my hand and official seal hereto affixed this 16th day of February, 1999. /s/ KAREN LEATHERS --------------------------------------- (Signature of Notary) Karen Leathers --------------------------------------- (Print or stamp name of Notary) NOTARY PUBLIC in and for the State of Washington My Appointment Expires: Oct. 2, 2002 -------------- -5- 43 EXHIBIT A (DRAWING OF ADDITIONAL SPACE) 44 EXHIBIT B (DRAWING OF POCKET SPACE) EX-10.12 14 PROMOTION AGREEMENT 1 EXHIBIT 10.12 PROMOTION AGREEMENT 1. This Promotion Agreement (the "Agreement") is dated as of May 18, 1998 between CNET, Inc. ("CNET") and FreeShop International, Inc. (the "Company"). Pursuant to this Agreement, CNET will provide various links, placements and other online promotions (collectively, the "Promotions") from Snap! Online and SEARCH.COM and will provide advertising media ("Advertising") to the Company to assist the Company in promoting its products and services and facilitating the sale of products to potential buyers through its Internet site. CNET will be compensated by the Company for providing the Promotions and Advertising. Accordingly, the parties hereby agree as follows: 2. Background. 2.1 The Company. The Company operates an electronic retailing operation through its Internet site located at www.freeshop.com (together with any successors or derivatives to such site, the "Company Site"). Through the Company Site, the Company distributes and sells or facilitates the distribution and sale of various products and services, either directly or as an agent for third party vendors. All products and services offered for distribution or sale through the Company Site are referred to as the "Products." 2.2 CNET. CNET produces television programs and operates a network of Internet sites on the World Wide Web. For purposes of this Agreement, the "CNET Sites" refer to the sites referenced in Section 3.3 and Exhibit A. 3. CNET's Obligations. 3.1 Advertising media. CNET will provide Advertising media to the Company during the Term on the CNET Sites and at the rates described in Exhibit A. 3.2 Retail Promotions. CNET will provide various retail Promotions on Snap! Online and SEARCH.COM, which may include text/HTML or graphical Promotions that include embedded links to co-branded pages on CNET Sites or the Company Site. 3.3 Placement of Promotions. CNET will determine the location and type of each Promotion displayed on Snap! Online and SEARCH.COM and may phase in certain types of Promotions as they are developed. CNET currently intends to display Promotions consisting of text/HTML links, pre-filled with an appropriate query string or link ("Pre-Filled Links"), as set forth in this Section. 3.3.1 On SEARCH.COM, CNET intends to display a Pre-Filled Link on all category doors and on the search query pages as appropriate and mutually agreed upon. 3.3.2 On the home version of Snap! Online and all partner versions with partner approval, CNET intends to display a Pre-Filled Link to Snap! Shopping's Free Stuff page above the fold on the front door at least 25% 1 2 of the time and on pages related to Snap! Shopping as appropriate and mutually agreed upon. The Company will also serve as the sole "Anchor Tenant" for Snap! Shopping's Free Stuff! page (or equivalent page if subsequently renamed). As Anchor Tenant, the Company will receive prominent Graphical Promotions above the "fold" on the Free Stuff! page. For the purposes of clarity, the "fold" is defined as the visible portion of the screen on a standard 640 x 480 screen size. 3.4 Design and Production of Promotions. The Company will design any graphics required for the Promotions and provide pre-filled query strings or links for all of the Pre-Filled Links, with reasonable assistance from CNET, and the Company will supply digital copies of such graphics and other materials to CNET. CNET will be responsible for incorporating the Promotions into the CNET Sites and for ensuring that the Promotions are accessible to users of the CNET Sites ("Users"). 3.5 Reporting. Within 30 days after the end of each month during the Term, CNET will provide a report to the Company indicating the number of impressions of Promotions displayed on the CNET Sites during such month. CNET will also provide standard "real-time" reporting for media Advertising. 3.6 Investment. One hundred twenty days after the date of this Agreement and on the first scheduled closing date of each subsequent equity financing by the Company (each such date being an "Investment Date"), CNET will purchase a Participating Amount (as defined below) of the Company's equity securities on the same terms and conditions, including price, as the Company is then closing the sale of such securities to other investors; provided, that if an Investment Date does not occur within nine months after the immediately prior Investment Date (a "Prior Investment Date"), then one business day after the end of the nine month period CNET will purchase a Participating Amount of the same type of equity securities as were sold to CNET on the Prior Investment Date at the same price per share (subject to adjustment for stock dividends, combinations or splits with respect to such securities) at which the Company last sold securities. For purposes of this Section 3.6, "Participating Amount" means such dollar amount as will bring CNET's aggregate purchases of the Company's equity securities, after its then current purchase, to an amount equal to 20% of all amounts paid or payable to CNET by the Company under the terms of this Agreement on or before the end of the calendar month which includes the Investment Date. CNET will execute the same purchase documentation as other investors in connection with each purchase. The Company will have no obligation to sell equity securities to CNET on an Investment Date unless the Company reasonably determines that such sale to CNET is in compliance with all applicable state and federal securities laws. 4. The Company's Obligations: 4.1 Operation of Company Site. The Company will be responsible for ensuring that each link embedded within a Promotion takes the User to the appropriate area within the Company Site, and that the Company Site functions with reasonable 2 3 reliability and in a commercially reasonable manner throughout the Term. In particular, the Company agrees that the Company Site will comply with the performance standards set forth in Exhibit B throughout the Term. Any failure by the Company to comply with this paragraph will be deemed to be a material breach of this Agreement. 4.2 Reporting. Within 30 days after the end of each month during the Term, the Company will provide a report to CNET indicating the aggregate number of referrals from Promotions on the CNET Sites to the Company Site during such month and the resulting number of buyers for which the Company has received payment ("CNET Sales"). CNET Sales includes lead generation offers for which FreeShop receives a "per lead" fee and excludes any advertising including banners, promotions or other advertising fees received by the Company. CNET and the Company will agree on technical procedures to allow the easy and accurate tracking and reporting of CNET Sales. The Company will make this information available in a manner that allows CNET and the Company to understand the performance of the various Promotions. 4.3 Cash Consideration. 4.3.1 For each month during the Term, the Company will purchase at least $100,000 of Advertising media on the CNET Sites identified in Exhibit A, at the rates (expressed as Net CPM) identified for such CNET Sites in Exhibit A. CNET will guarantee the availability of at least $100,000 worth of this media at these rates. Payments under this paragraph for a particular month will be due within 30 days after the end of such month. 4.3.2 For each month of the Term, the Company will pay CNET $[***] for each CNET Sale except CNET Sales for which the Company receives less than $[***] per sale. In the case that the revenue to Company from a CNET Sale is less than $[***], Company will instead pay CNET [***]% of lead generation revenue received on that CNET Sale. Such payments will be based on the reports prepared by the Company under Section 4.2 (although CNET may challenge such reports as contemplated by Section 10.5). Payments under this paragraph for a particular month will be due within 30 days after the end of such month. 4.4 User Information. At least once each calendar quarter, the Company will deliver to CNET aggregate data collected as a result of the CNET Sales, including but not limited to, demographic data, buying behavior as measured by conversion to sale, frequency of purchasing, and average order size, and a comparison to the average for the Company to the extent such information is collected by the Company. The Company and CNET agree to best efforts to evaluate the possible transfer of additional per user information to CNET on such terms and for such purposes as the parties may agree. To the extent provided, all such information will be provided by the Company to CNET at no charge. Additionally, the Company and CNET will conduct a review at least once per quarter to discuss the Company's business model and the way in which leads are collected and sold in order to ensure that the CNET Sales is an accurate reflection of the usage *** confidential material omitted 3 4 of the leads. 5. Term and Termination. The term of this Agreement (the "Term") will begin on May 18, 1998 and end on the first anniversary of the date of this Agreement; provided that (a) either party may terminate this Agreement, effective at any time after the first three months of the Term, by giving 30 days' written notice of termination to the other party, and (b) either party may terminate this Agreement at any time by giving written notice of termination to the other party, if the other party commits a material breach of its obligations hereunder that is not cured within 30 days after notice thereof from the non-breaching party. The provisions of Sections 8, 9 and 10, as well as any obligations arising prior to expiration or termination, will survive any expiration or termination of the Term. 6. Exclusivity. For purposes of this agreement "Competing Free Product Retailer " means any company (other than the Company and CNET and their respective affiliates) that is engaged primarily in the retail distribution and sale, through the Internet, of products and services that are offered without any initial payment required with the exclusion of software products and classifieds. During the Term, CNET will not enter into any agreements under which CNET receives consideration from a Competing Free Product Retailer for displaying permanent links to or other fixed promotions for such Competing Free Product Retailer on any CNET Site provided that the foregoing will not restrict the display of standard advertisements for any Competing Free Product Retailer. The parties acknowledge that the foregoing will not prevent CNET from displaying text links and other references to Competing Free Product Retailers as reasonably necessary to provide appropriate editorial and search related services on the CNET Sites or within the context of standard advertising promotions. 7. Trademark Licenses. 7.1 The Company hereby grants to CNET a non-exclusive, revocable, royalty-free license, effective as long as this Agreement is in effect, to use, display and publish any of the Company's trademarks, tradenames, service marks and logos ("Company Marks") that may be delivered by the Company to CNET expressly for inclusion in the Promotions, solely for use in connection with the Promotions. Any use of the Company Marks by CNET must comply with any reasonable usage guidelines communicated by the Company to CNET from time to time. Nothing contained in this Agreement will give CNET any right, title or interest in or to the Company Marks or the goodwill associated therewith, except for the limited usage rights expressly provided above. CNET acknowledges and agrees that, as between the Company and CNET, the Company is the sole owner of all rights in and to the Company Marks. 7.2 CNET hereby grants to Company a non-exclusive, revocable, royalty-free license, effective as long as this Agreement is in effect, to use, display and publish any of the CNET's trademarks, tradenames, service marks and logos ("CNET Marks") that may be delivered by CNET to the Company expressly for inclusion in the Snap! co-branded Company store. Any use of the CNET Marks by Company must comply with any reasonable usage guidelines communicated by CNET to the Company from time to time. Nothing contained in this 4 5 Agreement will give the Company any right, title or interest in or to the CNET Marks or the goodwill associated therewith, except for the limited usage rights expressly provided above. The Company acknowledges and agrees that, as between the Company and CNET, CNET is the sole owner of all rights in and to the CNET Marks. 7.3 The Company hereby represents and warrants to CNET that the Company has, and will have throughout the Term, all necessary rights in and to the Company Marks to grant CNET the licenses and usage rights contemplated by this Agreement without violating the rights of any third party. CNET hereby represents and warrants to the Company that CNET has, and will have throughout the Term, all necessary rights in and to the CNET Marks to grant the Company the licenses and usage rights contemplated by this Agreement without violating the rights of any third party. 8. Responsibility for the Company Products. The Company acknowledges and agrees that, as between the Company and CNET, the Company will be solely responsible for any claims or other losses associated with or resulting from the marketing or operation of the Company Site or the offer, distribution or sale of any Products by the Company or in connection with the Company Site. CNET is not authorized to make, and agrees not to make, any representations or warranties concerning the Products, except to the extent (if any) contained within Promotions delivered to CNET by the Company. 9. Mutual Indemnification. 9.1 Indemnification by CNET. CNET shall indemnify and hold the Company harmless from and against any costs, losses, liabilities and expenses, including all court costs, reasonable expenses and reasonable attorney's fees (collectively, "Losses") that the Company may suffer, incur or be subjected to by reason of any legal action, proceeding, arbitration or other claim by a third party, whether commenced or threatened, arising out of or as a result of (a) any breach or alleged breach by CNET of its representations, warranties or covenants hereunder; or (b) the operation of the CNET Sites (except in cases where the Company is required to indemnify CNET under the following paragraph), including claims of infringement or misappropriation of intellectual property rights. 9.2 Indemnification by the Company. The Company shall indemnify and hold CNET harmless from and against any Losses that CNET may suffer, incur or be subjected to by reason of any legal action, proceeding, arbitration or other claim by a third party, whether commenced or threatened, arising out of or as a result of (a) any breach or alleged breach by the Company of its representations, warranties or covenants hereunder; (b) the use by CNET of the Company Marks or any content provided by the Company to CNET expressly for display in connection with or as part of the Promotions, including claims of infringement or misappropriation of intellectual property rights; or (c) the operation of the Company Site or the offer, distribution or sale of the Products by the Company or in connection with the Company Site. 5 6 9.3 Indemnification Procedures. If any party entitled to indemnification under this section (an "Indemnified Party") makes an indemnification request to the other, the Indemnified Party shall permit the other party (the "Indemnifying Party") to control the defense, disposition or settlement of the matter at its own expense; provided that the Indemnifying Party shall not, without the consent of the Indemnified Party enter into any settlement or agree to any disposition that imposes an obligation on the Indemnified Party that is not wholly discharged or dischargeable by the Indemnifying Party, or imposes any conditions or obligations on the Indemnified Party other than the payment of monies that are readily measurable for purposes of determining the monetary indemnification or reimbursement obligations of Indemnifying Party. The Indemnified Party shall notify Indemnifying Party promptly of any claim for which Indemnifying Party is responsible and shall cooperate with Indemnifying Party in every commercially reasonable way to facilitate defense of any such claim; provided that the Indemnified Party's failure to notify Indemnifying Party shall not diminish Indemnifying Party's obligations under this Section except to the extent that Indemnifying Party is materially prejudiced as a result of such failure. An Indemnified Party shall at all times have the option to participate in any matter or litigation through counsel of its own selection and at its own expense. 10. Miscellaneous. 10.1 LIMITATION OF DAMAGES. NEITHER PARTY WILL BE LIABLE FOR ANY SPECIAL, INDIRECT, CONSEQUENTIAL OR INCIDENTAL DAMAGES ARISING OUT OF OR RELATED TO THIS AGREEMENT, HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY (INCLUDING NEGLIGENCE), AND EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. 10.2 Assignment. This Agreement may not be assigned by either party, except (a) to the transferee of substantially all of the business operations of such party (whether by asset sale, stock sale, merger or otherwise) or (b) to any entity that controls, is controlled by or is under common control with such party. 10.3 Relationship of Parties. This Agreement will not be construed to create a joint venture, partnership or the relationship of principal and agent between the parties hereto, nor to impose upon either party any obligations for any losses, debts or other obligations incurred by the other party except as expressly set forth herein. 10.4 Entire Agreement. This Agreement constitutes and contains the entire agreement between the parties with respect to the subject matter hereof and supersedes any prior oral or written agreements. This Agreement may not be amended except in writing signed by both parties. Each party acknowledges and agrees that the other has not made any representations, warranties or agreements of any kind, except as expressly set forth herein. 10.5 Audit Rights. Each party will have the right to engage an independent third party to audit the books and records of the other party relevant to the calculation of 6 7 Retail Impressions or CNET Sales, upon reasonable notice and during normal business hours, and the other party will provide reasonable cooperation in connection with any such audit. The party requesting the audit will pay all expenses of the auditor unless the audit reveals an underpayment by the other party of more than 5%, in which case the other party will reimburse all reasonable expenses of the auditor. 10.6 Applicable Law. This Agreement will be construed in accordance with and governed by the laws of the State of California, without regard to principles of conflicts of law. 10.7 Press Release. Each party may issue a press release concerning the business relationship contemplated by this Agreement, and each party will provide an appropriate quote from one of its senior executive officers for use in the other party's release. The Company agrees that CNET's press release may disclose the total consideration payable to CNET hereunder. Each party will provide the other with a reasonable opportunity to review and comment on its press release. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized representatives as of the date first written above. CNET, INC. FreeShop International, Inc. By: /s/ MARTIN GREEN By: /s/ TIM CHOATE --------------------------------- ------------------------------- Martin Green Tim Choate Title: Vice President Title: President & CEO ------------------------------ ---------------------------- 7 8 EXHIBIT A ADVERTISING MEDIA For each of the first 12 calendar months of the Term, the Company will purchase a minimum of $100,000 of Advertising media on the following sites, and CNET will sell such Advertising media at the Net CPM's indicated for such sites:
CNET ADVERTISING MEDIA NET CPM DOWNLOAD.COM business banners $ [***] DOWNLOAD.COM business window $ [***] DOWNLOAD.COM business title download $ [***] DOWNLOAD.COM development tools banners $ [***] DOWNLOAD.COM development tools window $ [***] DOWNLOAD.COM development tools title download $ [***] DOWNLOAD.COM education banners $ [***] DOWNLOAD.COM education window $ [***] DOWNLOAD.COM education title download $ [***] DOWNLOAD.COM games banners $ [***] DOWNLOAD.COM games window $ [***] DOWNLOAD.COM games title download $ [***] DOWNLOAD.COM home & personal banners $ [***] DOWNLOAD.COM home & personal window $ [***] DOWNLOAD.COM home & personal title download $ [***] DOWNLOAD.COM Internet banners $ [***] DOWNLOAD.COM Internet window $ [***] DOWNLOAD.COM Internet title download $ [***] DOWNLOAD.COM multimedia & design banners $ [***] DOWNLOAD.COM multimedia & design window $ [***] DOWNLOAD.COM multimedia & design title download $ [***] DOWNLOAD.COM utilities banners $ [***] DOWNLOAD.COM utilities window $ [***] DOWNLOAD.COM utilities title download $ [***] Snap! Run-of-site banners $ [***] Snap! Shopping banners $ [***] Snap! Keyword search $ [***] SEARCH.COM frontdoor portal $ [***] SEARCH.COM keywords $ [***]
*** confidential material omitted 8 9 Additionally, for each of the first 12 calendar months of the Term, CNET will provide the following Advertising media to the Company at no cost:
CNET ADVERTISING MEDIA IMPRESSIONS PER MONTH DOWNLOAD.COM run-of-site banners [***] Snap! run-of-site banners [***] SEARCH.COM run-of-site banners [***]
*** confidential material omitted 9 10 EXHIBIT B PERFORMANCE STANDARDS The Company Site and the Company's related operations must comply with the following performance standards throughout the Term 1. The Company Site will be operational and functional in all material respects (i.e. capable of displaying information, receiving purchases and conducting transactions as contemplated in the ordinary course of business). The Company shall use commercially reasonable efforts to maintain the functionality of the Site. Should, the Company Site fail to be operational and functional in all material respects, then for the period of time during such failure, CNET may remove the Retail Promotions without breaching the terms of this agreement and without any negative financial consequence to CNET. 2. Without limiting the effect of 1, the Company shall provide to Users coming to the Company Site from the Promotions at least the same level of service as is offered to users coming directly to the Company Site or from agreements with other distribution partners. 10 11 AMENDMENT TO PROMOTION AGREEMENT This Amendment to Promotion Agreement (the "Amendment") is dated to be effective as of June 30, 1998 between CNET, Inc. ("CNET") and FreeShop International, Inc. (the "Company"). CNET and the Company entered into a Promotion Agreement dated as of May 18, 1998 (the "Original Agreement" and, as amended hereby, the "Agreement"). Capitalization terms used in this Amendment and not otherwise defined have the meanings assigned to such terms in the Original Agreement. CNET and the Company desire to amend the Original Agreement as set forth in this Amendment. According, CNET and the Company hereby agree as follows: 1. Section 4.3.1 of the Original Agreement is hereby amended and restated in its entirety as follows: "4.3.1 During June, July, August, September, October, November and December of 1998, the Company will purchase at least $100,000, $50,000, $200,000, $100,000, $100,000 and $100,000, respectively, of Advertising media on the CNET Sites identified in Exhibit A. During January 1999 and for each subsequent month of the Term, the Company will purchase at least $100,000 of Advertising media on the CNET Sites identified in Exhibit A. The foregoing Advertising media will be purchased at the rates (expressed as Net CPM) identified for such CNET Sites in Exhibit A. CNET will guarantee the availability of at least these minimum amounts of media at these rates. Payments under this paragraph for a particular month will be due within 30 days after the end of such month." 2. The first sentence of Section 3.6 of the Original Agreement is hereby amended by replacing the phrase "One hundred twenty days after the date of this Agreement" with the phrase "On September 30, 1998". 3. Section 3 of the Original Agreement is hereby amended by replacing clause (a) thereof with the following: "(a) either party may terminate this Agreement, effective at any time on or after October 1, 1998, by giving 30 days' written notice of termination to the other party". 4. Except as expressly set forth in this Agreement, the Original Agreement remains in full force and effect in accordance with its terms. References in the Original Agreement to the "Agreement" are hereby amended to refer to the Original Agreement, as amended by this Amendment. This Amendment and the Original Agreement constitute and contain the entire agreement between the parties with respect to the subject matter hereof and thereof and supersede any prior oral or written agreements. This Amendment will be construed in accordance with and governed by the laws of the State of California, without regard to principles of conflicts of law. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized representatives as of the date first written above. CNET, INC. FREESHOP INTERNATIONAL, INC. 12 By: /s/ MARTIN GREEN By: /s/ TIM CHOATE ------------------------------ ---------------------------- Title: Vice President Title: President & CEO --------------------------- ------------------------- 13 SECOND AMENDMENT TO PROMOTION AGREEMENT This Second Amendment to Promotion Agreement (the "Amendment") is dated to be effective as of September 30, 1998 between CNET Inc. ("CNET") and FreeShop International, Inc. (the "Company"). CNET and the Company entered into a Promotion Agreement dated as of May 18, 1998, which was amended pursuant to an Amendment to Promotion Agreement dated as of June 30, 1998 (as so amended, the "Original Agreement" and, as further amended hereby, the "Agreement"). Capitalized terms used in this Amendment and not otherwise defined have the meanings assigned to such terms in the Original Agreement. CNET and the Company desire to amend the Original Agreement as set forth in this Amendment. Accordingly, CNET and the Company hereby agree as follows: 1. Section 4.3.1 of the Original Agreement is hereby amended and restated in its entirety as follows: "4.3.1 During June, July, August and September of 1998, the Company will purchase at least $100,000, $50,000, $50,000 and $200,000, respectively, of Advertising media on the CNET Sites identified in Exhibit A. During October 1998 and for each subsequent month of the Term, the Company will purchase at least $50,000 of Advertising media on the CNET Sites identified in Exhibit A. The foregoing Advertising media will be purchased at the rates (expressed as Net CPM) identified for such CNET Sites in Exhibit A. CNET will guarantee the availability of at least these minimum amounts of media at these rates. Payments under this paragraph for a particular month will be due within 30 days after the end of such month." 2. Section 5 of the Original Agreement is hereby amended by replacing clause (a) thereof with the following: "(a) either party may terminate this Agreement, effective at any time on or after January 1, 1999, by giving 30 days' written notice of termination to the other party". 3. The last paragraph of Exhibit A of the Original Agreement, which relates to Advertising to be provided to the Company at no cost, is hereby amended and restated in its entirety as follows: "Additionally, for each of the first 12 calendar months of the Term, CNET will provide the following Advertising media to the Company at no cost:
CNET ADVERTISING MEDIA IMPRESSIONS PER MONTH DOWNLOAD.COM run-of-site banners [***] Snap! Run-of-site banners [***] SEARCH.COM run-of-site banners [***]"
4. Except as expressly set forth in this Amendment, the Original Agreement remains in full force and effect in accordance with its terms. References in the Original Agreement to the "Agreement" are hereby amended to refer to the Original Agreement, as amended by this Amendment. This Amendment and the Original Agreement constitute and contain the entire agreement between the parties with respect to the subject matter hereof and thereof and supersede any prior oral or written agreements. This Amendment will be construed in accordance with and governed by the laws of the State of California, without regard to principles of conflicts of law. *** confidential material omitted 14 CNET, INC. FREESHOP INTERNATIONAL, INC. By: /s/ MARTIN GREEN By: /s/ TIM CHOATE ------------------------------ ---------------------------- Title: Vice President Title: President & CEO --------------------------- ------------------------- EX-10.13 15 LINKSHARE NETWORK MEMBERSHIP AGREEMENT 1 EXHIBIT 10.13 LINKSHARE NETWORK(TM) MEMBERSHIP AGREEMENT FOR MERCHANTS This Network Membership Agreement (the "Agreement") is dated September 23, 1998 and is made by and between LinkShare Corporation, a Delaware corporation ("We," "Us" or "LinkShare"), and FreeShop International, Inc., a Washington corporation and a merchant participant in The LinkShare Network(TM) ("You" or "Licensee"). In consideration of the mutual promises and covenants set forth below, LinkShare and Licensee agree as follows: Section 1. The Service 1.1 The LinkShare Network(TM) is an on-line service designed to facilitate collaboration by owners of sites on the World Wide Web (the "Web") and merchants in the marketing of goods and services on the Web. The LinkShare Network(TM) is based on use of our proprietary LinkShare Synergy(TM) software. 1.2 This Agreement is appropriate for You if You own a site on the Web through which You offer merchandise or services to customers and want third-party Web site owners who are participants in the LinkShare Network(TM) under separate agreements ("Owner/Participants") to include on their Web sites icons, buttons, textual links, advertisements or other links (collectively, "links") to Your Web site. You and other Web site merchants who enter into Agreements with us ("Participating Merchants") gain access to the LinkShare Network(TM) and the services, software, content and other products and items described in this Agreement (collectively, the "Service"). 1.3 For the sake of convenience (and because lawyers have a bizarre inability to write without using the things), this Agreement uses a number of defined terms, including the following: When the term "Network" is used, it means the electronic commerce Web site known as The LinkShare Network(TM) operated by LinkShare on the Internet and the network of relationships that exist between the users of that Web site. When the term "LinkShare Software" is used, it means all the LinkShare Synergy(TM) operating system files and software downloaded from the Internet and additional LinkShare Synergy(TM) files and software and new versions or upgrades (if any) provided to You by LinkShare, including without limitation, the executable code, installation guide, user guides and manuals; however, that term does not include any software licensed by LinkShare under a different name, even if such software contains portions of the functionality or code contained in LinkShare Synergy(TM) files and software. As part of the Service, You will have access to information, communications, software, photos, text, video, graphics, music, sounds, images and other material and services posted onto the Service or otherwise provided by LinkShare, You, and Network participants or other third parties. We sometimes refer to such items collectively as "Content". We use the term "LinkShare Product" to refer to any LinkShare Software, the Content and any associated media or printed material, any images, photographs, animations, video, audio, music, text, "applets" incorporated into software, any "on-line" or electronic documentation and any other related or associated materials and any copies of any of those items, regardless of the manner or medium of expression or embodiment and whether now existing or hereafter created, published or acquired. 2 The word "person" is intended to be broadly construed and includes natural persons and trusts, corporations, organizations, associations and similar legal entities or persons. 1.4 To facilitate establishment of links between Owner/Participants and Participating Merchants, You, as a Participating Merchant, will be entitled to post (on a bulletin board or similar on-line site maintained as part of the Service) offers and counter-offers ("Offers") to pay Owner/Participants a specified commission for each sale (a "Transaction") to an ultimate purchaser (a "Customer") of your merchandise or services covered by a Qualifying Link. You agree not to publicly post Offers on Your Site (as defined in Attachment A referred to below) that compete with the Offers You post on the Network. A "Qualifying Link" is a link from an Owner/Participant's site to Your site using a code as generated by a URL provided by You for use in the Service and the tracking code generated by the LinkShare Software, if it is the last link to Your site that the Customer uses during a Session where a sale of a produce or a service to that Customer occurs. A "Session" is the period of time beginning from a Customer's initial contact with a Participating Merchant's site via a link from an Owner/Participant's site and terminating when the Customer either returns to Your site via a link form a site other than the originating Owner/Participant's site or the expiration or termination of the applicable agreements between You and that Owner/Participant. 1.5 Owner/Participants may elect, in their sole discretion to respond to any of Your Offers by accepting that Offer or making counter-offers. Similarly, You may accept a counter-offer made by an Owner/Participant or propose your own counter-offer. Unless and until an Offer is accepted in the manner established in the Network Bylaws (as defined below), that Offer may be withdrawn or changed by the Network participant who made it, in its sole discretion. Each Offer You make will be an offer by You that may be accepted by an Owner/Participant in the manner established in the Network Bylaws, and if so accepted You will no longer have the option of withdrawing or changing that Offer. Your Acceptance of an Offer by an Owner/Participant, and an Owner/Participant's acceptance of an Offer You make, will in each case create a binding contract between You and such Owner/Participant (an "Engagement"). For convenience, We use the term "Your Participating Owner/Participant" to refer to any Owner/Participant with whom You establish a Qualifying Link. 1.6 Subject to the specific terms and conditions of the applicable Engagement and this Agreement, once You have established a Qualifying Link with an Owner/Participant and so long as such Qualifying Link is maintained, LinkShare will send You monthly reports ("Basic Reports") showing (a) the commission due to that Owner/Participant for that month under the applicable Engagement (assuming the commissions payable under such Engagements are based on gross sales), and (b) the payment due to LinkShare under this Agreement 3 Basic Reports will be sent to You as part of the Service, and ordinarily will be provided within ten business days after the end of each calendar month. Basic Reports will be sent by e-mail or postal mail to the most recent e-mail or postal mail address You furnish to Us by the same means, by posting on LinkShare's Web Site or by any other reliable available method. The form, content and frequency of the reports may vary from time to time in LinkShare's discretion. To permit accurate tracking, reporting and fee accrual, You and each of Your Owner/Participants must ensure that the special links between Your site and that Owner/Participant's site are properly established, formatted and maintained, and our obligation to provide Basic Reports or other reports is conditioned on satisfaction of that requirement. Upon Your written request, LinkShare will provide monthly reports containing registration information submitted by Your Owner/Participants. You also will have the option of ordering additional reports made available by the Network for additional fees ("Additional Reports"). Unless We otherwise agree in writing, any Additional Reports will be furnished to you as provided above for Basic Reports. 1.7 As a Participating Merchant, You agree to pay each of Your Owner/Participants the commissions due not less frequently than every January 31 and July 31 during each year, unless either (i) You and such Owner/Participant otherwise agree as provided below or (ii) You and We otherwise agree in writing. In addition, if We are notified that the Qualifying Link between You and any of Your Owner/Participants has expired or been terminated, You and that Owner/Participant will receive a final report for Transactions through the date of expiration or termination. You agree to pay such Owner/Participant all commissions due through the date of expiration or termination not later than 30 days after the final report is furnished by us. You and any of Your Owner/Participants can agree, in Your Engagement, for more frequent reports and payments or for different payment arrangements. LinkShare will accommodate commercially reasonable non-standard payment terms and furnish Basic Reports consistent with those terms, provided that You and Your Participating Merchant give us reasonable advance notice and that You and We agree those terms will not impose any unreasonable burdens on Us and You pay Us any applicable additional fees. Unless We otherwise agree in writing, if you enter into an Engagement providing that payment of commissions to an Owner/Participant will not be due unless and until the total amount earned under that particular Engagement exceeds a specified threshold amount, then unless such Owner/Participant and You otherwise agree and so notify Us, You agree that You will in any event pay, on every January 31 and July 31, all commissions earned by that Owner/Participant under that Engagement but not paid during the period ending on the preceding December 31 and June 30, respectively, even if those accrued commissions total less than the specified threshold amount. You agree that each of Your Owner/Participants is a "third party beneficiary" of Your agreements in this Section 1.7 and, as such, is given the right to enforce those agreements directly against You. 1.8 A link between You and an Owner/Participant may be established and maintained only if and so long as You and such Owner/Participant mutually agree, only if and so long as this Agreement 4 between LinkShare and You continues in effect and You continue to abide by its terms; and only if and so long as separate agreement between LinkShare and such Owner/Participant remains in effect and such Owner/Participant continues to abide by its terms. 1.9 LINKSHARE IS THE NEUTRAL HOST OF THE NETWORK AND HAS NO RESPONSIBILITY OR LIABILITY IN RELATION TO THE ENGAGEMENTS OR ANY OTHER ARRANGEMENTS AND AGREEMENTS THAT YOU ENTER INTO WITH OTHER PARTICIPANTS AS PART OF YOUR USE OF THE NETWORK. LINKSHARE'S OBLIGATIONS TO YOU ARE LIMITED TO MAKING THE NETWORK AVAILABLE AND ACCESSIBLE VIA THE INTERNET, PROVIDING THE BASIC REPORTS REFERRED TO ABOVE AND PROVIDING THE TELEPHONE SUPPORT REFERRED TO BELOW, IN EACH CASE ON THE TERMS AND SUBJECT TO THE CONDITIONS STATED IN THIS AGREEMENT AND FOR SO LONG AS THIS AGREEMENT REMAINS IN EFFECT AND YOU ABIDE BY ITS TERMS. 1.10 All determinations of whether Qualifying Links have been established and maintained, the number or amount of Sessions or Transactions, the commissions and other payments due from You to any or all of Your Owner/Participants or LinkShare and any other matters regarding Your rights and obligations as a Participating Merchant or otherwise relating to the Services that are made by LinkShare in good faith will be final and binding on You and Your Owner/Participants. Section 2. Telephone Support. LinkShare will provide reasonable telephone support as indicated on its Web site for the Service. SECTION 3. WHAT THE SERVICE DOES NOT INCLUDE. YOU UNDERSTAND AND AGREE THAT YOUR AND LINKSHARE'S RIGHTS AND OBLIGATIONS ARE THOSE EXPRESSLY STATED IN THIS AGREEMENT. PLEASE BE AWARE, IN PARTICULAR, THAT THE FOLLOWING DO NOT FORM PART OF THE SERVICE: INSTALLATION AND OPERATION OF ANY LINKSHARE PRODUCT. COLLECTING ANY PAYMENTS DUE TO YOU FROM ANOTHER MERCHANT OR ANY OWNER/PARTICIPANT OR CUSTOMER. ALL ASPECTS OF ORDER PROCESSING, CANCELLATIONS, RETURNS, CUSTOMER SERVICE AND FULFILLMENT. THE OFFERS, CONTENT, INFORMATION OR OTHER COMMUNICATIONS OR SUBMISSIONS FROM OTHER PARTICIPANTS IN THE NETWORK OR OTHER THIRD PARTIES. RESOLUTION OF DISPUTES BETWEEN PARTICIPANTS IN THE NETWORK, INCLUDING, BUT LIMITED TO, THOSE RELATING TO ENGAGEMENTS. Section 4. Registration; Additional Terms and Conditions; Network Bylaws. 4.1 As part of the registration process, You will select a password, a user name and provide the other registration information reasonably requested by LinkShare. You agree to provide Us with accurate, complete and updated registration information. As is the case for all other Owner/Participants, You may not select a screen name of another person with the intent to impersonate that person. 4.2 THE GENERAL TERMS AND CONDITIONS IN ATTACHMENT A TO THIS AGREEMENT (THE "GT&CS") ARE INCORPORATED INTO THIS AGREEMENT BY REFERENCE AND ARE AN INTEGRAL PART OF THIS AGREEMENT. BY ACCEPTING THIS AGREEMENT, YOU ALSO ACCEPT THOSE TERMS AND CONDITIONS, AND 5 REFERENCES IN THIS DOCUMENT OR THE GT&CS TO "THIS AGREEMENT" ARE TO "YOUR CONTRACT" AS DEFINED IN THE GT&CS. 4.3 Your rights and obligations as an Owner/Participant are subject to regulations governing the use of The LinkShare Network(TM) adopted from time to time by LinkShare (the "Network Bylaws"), as well as by this Agreement (including the GT&Cs incorporated into this Agreement) and the Engagements that are entered into by You. The Bylaws will be posted on The LinkShare Network(TM) and may be accessed by clicking on the "LinkShare Network(TM) Bylaws" button. You agree that LinkShare is and will be a third party beneficiary of Your promises and covenants in Your Engagements. 4.4 LinkShare reserves the right, at its sole discretion and at any time and from time to time change, add to, remove, suspend, discontinue or otherwise modify any of the Network Bylaws or aspect of the Service, including the availability to You or any of Your Participating Merchants of any Service feature, database or content. IF ANY SUCH FUTURE MODIFICATIONS OR OTHER ACTIONS RESULT IN A FUNDAMENTAL CHANGE IN THE SERVICE THAT ADVERSELY AFFECTS YOUR RIGHTS AS A PARTICIPATING MERCHANT, YOU MAY TERMINATE YOUR PARTICIPATION IN THE LINKSHARE NETWORK (TM) BY SENDING AN E-MAIL TO contact@linkcorp.net WITHIN TEN (10) BUSINESS DAYS AFTER WE POST THE CHANGE NOTICE REFERRED TO BELOW. IF ANY MODIFICATION IS UNACCEPTABLE TO YOU, YOUR ONLY RECOURSE IS SUCH TERMINATION. YOUR CONTINUED PARTICIPATION IN THE LINKSHARE NETWORK FOLLOWING THAT TEN-DAY PERIOD OF OUR POSTING OF A CHANGE NOTICE OR NEW AGREEMENT ON OUR SITE WILL CONSTITUTE BINDING ACCEPTANCE OF THE CHANGE. 5. Payments to LinkShare. 5.1 Promptly after execution of this Agreement, You agree to pay LinkShare the license fee set forth on the Pricing Schedule attached hereto in consideration of the license to use the LinkShare Product granted to You. On each anniversary of the date of this Agreement while this Agreement is in effect, you will pay the recurring license fee as provided on the Pricing Schedule. Each additional license to use the LinkShare Product for an additional server or otherwise will require You to execute another agreement and pay an additional fee. 5.2 In consideration of our provision of the Service, for each Transaction where You are the Participating Merchant and there has been a Qualifying Link as determined by LinkShare, You agree to pay to LinkShare the fees set forth on the Pricing Schedule attached hereto. Each such payment is not refundable or subject to offset or reduction in whole or part under any circumstances and is in addition to any commission arrangements You agree to with Owner/Participants and is exclusive of any taxes, duties and the like, which You also agree to pay. You further agree to indemnify LinkShare and its affiliates, officers, directors, employees and agents from any and all claims, costs and liabilities (including reasonable attorneys' fees) arising from any commission arrangements or taxes, duties or the like related to Your Site or Your sale of products and/or services. 5.3 In addition to the above, You agree to pay LinkShare, at its then-current rates, all additional fees, if any, contemplated by Section 1.6 above. 5.4 All payments to LinkShare will be made monthly in U.S. Dollars and will be due and payable upon LinkShare providing notice to You of the amounts due and You agree to make payments to LinkShare no later than thirty (30) days after such notice. Late payments will bear interest at the rate of 1.5% per month or, if lower, the maximum rate allowed by law. 6 5.5 LinkShare shall have the right to audit Your books and records as they relate to LinkShare and your relationship to Owner/Participants, at Your offices or any other place of keeping, during the term of this agreement and for one year thereafter. You will maintain accurate and complete books and records relating to such matters. Such audits shall be made during normal business hours of normal business and shall be at LinkShare's sole expense and may be made from time to time upon not less than 10 days prior notice. LinkShare and LinkShare's representatives, if any, shall observe reasonable restrictions imposed by You in order to maintain the confidentiality of such books and records. If We discover, through an audit or other method, errors and omissions of ten percent (10%) or more or the unauthorized modification of LinkShare Software or by-pass of its Transaction monitoring features caused or performed by You or Your agents or otherwise on Your behalf, You agree to pay us the reasonable cost of that audit or other investigation, as well as paying us the additional amounts due plus interest as provided above. 5.6 You shall have the right to audit LinkShare's books and records as they relate solely to You and your relationship to Owner/Participants at LinkShare's offices or any other place of keeping during the term of this agreement and for one year thereafter. LinkShare will maintain accurate and complete books and records relating to such matters. Such audits shall be made during normal business hours of normal business and shall be at Your sole expense and may be made from time to time by an independent certified accountant upon not less than 10 days prior notice. You and Your representatives, if any, shall observe reasonable restrictions imposed by LinkShare in order to maintain the confidentiality of such books and records. If You discover, through an audit or other method, errors and omissions of ten percent (10%) or more caused by LinkShare's actions, LinkShare agrees to pay You the reasonable cost of that audit or other investigation, as well as paying You the additional amounts due plus interest as provided above. Section 6. Term; Termination; Effects of Termination. 6.1 Unless terminated sooner in accordance with this Section 6, this Agreement will remain in effect for an initial term of twelve consecutive months beginning as of the date of this Agreement and, unless We give You or You give Us written notice of termination no later than ten business days prior to the expiration date of the prior Term, this Agreement will automatically renew for consecutive twelve month terms (the twelve months from the date this Agreement and each subsequent twelve month renewal period, a "Term"). 6.2 Either party may terminate this Agreement upon ten business days prior written notice (which notice must set forth reasonable details of the breach) for a material breach of this Agreement by the other, unless the other party cures such breach within the ten business day notice period. 6.3 LinkShare may, in its sole discretion and with cause (including without limitation utilization of the Service to disparage LinkShare, the Network or any of Web Site Owners participating in the Network) upon no less than ten (10) business days prior notice, terminate or suspend Your access to all or part of the Service by sending an e-mail to the last e-mail address You provide to LinkShare or by any other lawful means of delivery. 6.4 You also agree that if We terminate this Agreement pursuant to Section 6.2, You will continue to be subject to the protective provisions of Section 6.5 for a period equal to the balance of the Term. 6.5 You agree to be subject to the following provisions at all times during each Term and at all times during any applicable period under Section 6.4: 7 (a) You will not directly or indirectly (whether through third parties such as affiliates, consultants, agents or otherwise) provide any transaction-based advertising link verification products or services, (b) You will not enter into any transaction-based advertising arrangements with any Web site owners or operators who have contacted You through the Network (whether or not You entered into an Engagement with any such owner or operator), other than any such owner or operator with whom You had a then-current trading or advertising arrangement or other link prior to the first day of the first full month prior to the date of this Agreement (as evidenced by a contemporaneous written agreement or arrangement with that owner or operator). (c) You will not utilize a system, software, technology, network or service that competes with the Network, any of the LinkShare Product or the Service, and (d) You will not, directly or indirectly (whether through third parties such as affiliates, consultants, agents or otherwise) develop or actively assist a third party in the development of a system, software, technology, network or service that competes with the Network or the Services. 6.6 Upon expiration or termination, Your access to the Service will be suspended within ten days. You are responsible for all actions and charges incurred up to the time that the account is deactivated. Upon termination and during any period of suspension, You will no longer be entitled to use the Service or any of its components (including, but not limited to the LinkShare Synergy(TM) software), and the licenses granted under this Agreement will terminate and You will immediately return or destroy all LinkShare Product and all Proprietary Information (as defined in the GT&C's) in Your possession or control (regardless of medium of expression), all full or partial copies thereof and all other documents, notes, computer files and other materials based on or referring to any of the foregoing or any extracts thereof. The provisions of this Section 6.6 and Sections 1.7, 1.9, 1.10, 4 and 5 of this Agreement and all of the provisions of the GT&C's will survive indefinitely. Without limiting the generality of the immediately preceding sentence, Your payment obligations under Section 5 accruing before or after termination will survive. All rights or remedies arising out of a breach or violation of any terms of this Agreement will survive. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, as of the day and year first above written. LINKSHARE CORPORATION By: /s/ HEIDI MESSER ----------------------- Name: Heidi Messer Title: President 8 FREESHOP INTERNATIONS, INC. By: /s/ TIM CHOATE -------------------------- Name: Tim Choate Title: President and CEO 9 PRICING SCHEDULE For the licensing to you of the LinkShare Software for use on a single URL hosted on a single server as stated in Your Contract with Us and membership in The LinkShare NetworkTM: Software Fees: LICENSE FEE: $[***] payable in eighteen (18) equal installments of $[***] per month payable on the first day of the first month following the execution and delivery of Your Contract with Us SOFTWARE INSTALLATION CHARGES: 4 hours of free technical support ADDITIONAL SUPPORT CHARGES: $75 / hour Service Fees: BASIC SERVICE CHARGE: $[***] per Order. (An "Order" is an offer in FreeShop that generates paid lead fees less any other fees that FreeShop is required at law to withhold and excludes, fraudulent, redundant or incomplete orders). MONTHLY MINIMUM: $[***]/month (calculated including all license and service fees paid to LinkShare in a given month) BASIC REPORTS: Included with LinkShare NetworkTM membership MONTHLY INVOICE FEES: Included with LinkShare NetworkTM membership Optional Service Charges: Pay-per-CPM (image)*: $ [***] per CPM (image) Pay-per-CPM (text)*: $ [***] per CPM (text) Pay-per-Click through Charges*: $ [***] per click through Pay-per-Form Charges: $ [***] per form submitted Check Disbursement Fees: $ [***]/check per Owner Participant
* Service charges apply only to image or textual links served by LinkShare. *** confidential material omitted 10 ATTACHMENT A TO LINKSHARE NETWORK(TM) MEMBERSHIP AGREEMENT FOR SITE OWNERS AND LINKSHARE NETWORK(TM) MEMBERSHIP AGREEMENT FOR MERCHANTS GENERAL TERMS AND CONDITIONS 1. Capitalized Terms. Capitalized terms used, but not defined in this Attachment have the meanings assigned to them in Your Contract. When we refer to "Your Contract," we mean Your LINKSHARE NETWORK(TM) MEMBERSHIP AGREEMENT FOR SITE OWNERS or Your LINKSHARE NETWORK (TM) MEMBERSHIP AGREEMENT FOR MERCHANTS, as the case may be, including this Attachment and any other attachments, as amended from time to time. 2. Ownership. LinkShare's software, know-how and other intellectual property is its most important asset; therefore, we require You and all other participants in the Network as a condition to that participation, to agree to the following protective provisions: You agree that as between LinkShare and You and Your employees, agents, affiliates, successors and assigns, LinkShare Corporation is and will continue to be the sole owner of the Service as a whole and its components and associated materials and all intellectual property and proprietary rights that have been or may be acquired with respect to such items, including the Network and the LinkShare Product, as well as any LinkShare Software or materials to which you may gain access by reason of participating in the Network. You also similarly agree with respect to any of the LinkShare Product that is owned by a third-party licensor or supplier of LinkShare's. In addition, LinkShare Synergy(TM) and The LinkShare Network(TM) are trademarks of LinkShare Corporation. Other product and company names mentioned in the Service may be the trademarks of third parties. Use of the LinkShare Product and the Service and other dealings between You and LinkShare will not confer upon You any right to or interest in any LinkShare Product, except for the licenses specifically granted in Section 3 below. 3. Limited Licenses. As long as Your Contract is in effect and You are complying with its terms, LinkShare grants to You a personal, non-sublicensable, nonexclusive and revocable license to participate in the Service, subject to the following and all applicable provisions in Your Contract: If you are a Participating Merchant, You may download and use one copy of the LinkShare Synergy(TM) software and any other software that is or becomes LinkShare Software solely for your own use, only on a single URL hosted on up to three servers located in the United States or Canada ("Your Server") and solely for purposes of just one Web site operated by You ("Your Site") and through which You, participating in the Network, are engaged, as a merchant or commission agent for a merchant, in the sale of goods or services over the Internet, and for no other purpose. Such downloading and use is authorized only if done in accordance with Your Contract, the Bylaws and the documentation supplied by LinkShare. That license is for object code versions only and not for source code. 11 If you need information about any LinkShare Software in order to achieve interoperability, any such information we do provide will constitute Proprietary Information (as defined below). If so requested, We will use reasonable efforts to provide such information and assistance, all at LinkShare's then standard rates for such services. You acknowledge that notwithstanding such information and assistance from LinkShare, You will remain solely responsible and liable for installation of the Product. You may also download one copy of Content from the Service to a single computer for use in creating Qualifying Links or otherwise participating in the Network in accordance with your Contract and the Bylaws, and for no other purpose. Such license, however, extends only to such part of the Content that is intellectual property of LinkShare or that it otherwise is authorized to license to You. LinkShare is not responsible if any third party posts or provides Content that it does not own or have the right to license to LinkShare or You. The licenses given to You in this paragraph are personal, non-sublicensable, nonexclusive and revocable. You will not disassemble, decompile, reverse engineer, or copy or modify any LinkShare Software or other LinkShare Product or otherwise attempt to discover any LinkShare Software source code or underlying Proprietary Information (as that term is defined below), or otherwise tamper with the LinkShare Product, the Network or the data produced by the foregoing. You may not rent, sell, lease, or otherwise transfer the Service or any LinkShare Product to or for the benefit of a third party by operation of law or otherwise. All copying, distribution or transfer, use or other exploitation of any Content or any other LinkShare Product not expressly permitted by Your Contract are prohibited. Also prohibited are modifications of any LinkShare Product or its use to create derivative works, to mirror the Service or to offer any other service. 4. LinkShare Proprietary Information. In using the Service, You will obtain information relating to the Service and/or to LinkShare ("Proprietary Information," which term includes but is not limited to LinkShare Software and other LinkShare Product). Such Proprietary Information will belong solely to LinkShare and includes, but is not limited to, the features and mode of operation of the Service. You agree not to use (except as expressly authorized by Your Contract) or disclose Proprietary Information without the prior written consent of LinkShare, or unless such Proprietary Information becomes part of the public domain without breach of this Agreement by You or anyone acting for You or to whom You disclose such Proprietary Information. 5. Required Terms of Engagements. You agree that LinkShare is an intended third-party beneficiary of (but not obligated with respect to) each of Your Engagements. In addition, unless as otherwise expressly agreed by LinkShare, You agree that all Engagements You enter into with any Participating Merchant or Owner/Participant (as the case may be) will include the following provisions (with references to "Merchant" and to "Owner/Participant" being references to the Participating Merchant and the Owner/Participant that are parties to the particular Engagement, respectively). "Merchant and Owner/Participant jointly and severally agree to indemnify, defend, and hold harmless the Network and LinkShare Corporation and its affiliates, officers, directors, employees, and agents collectively, ("LinkShare) from and against any and all liability, claims, losses, damages, injuries or expenses (including reasonable attorneys' fees) directly or indirectly arising from or relating to installation or use of any LinkShare Software, any Offer, Response or 12 Engagement or any other matter relating to our respective agreements with LinkShare or our participation in the Network, and any dispute relating thereto." You further agree that even if, despite this paragraph, such provision is not so included, it nonetheless will fully apply with the same force and effect as if so included. You also agree that such provision will bind You even if, for any reason, it does not bind any of Your Participating Merchants or Your Owner/Participants, as the case may be. 6. Dealings With Third Parties. Links in the Service lead to sites maintained by individuals or organizations other than LinkShare and over whom LinkShare has no control. LinkShare is the neutral host of the Service and provides links merely as a convenience to You, and the inclusion of any link does not imply any endorsement by or liability or responsibility of LinkShare for the linked sites, their contents or owners. You also understand that participation in the Service involves You establishing contractual arrangements with third parties and LinkShare will not be responsible for acts or omissions of those third parties. It is up to You to take precautions to ensure that whatever You select for Your use is free of such items as viruses, worms, trojan horses and other items of a destructive nature. LinkShare will not have any liability or responsibility with respect to any Offer, Acceptance, Counter-Offer or Engagement or any breaches of contract or other acts or omissions of any Owner/Participant, Participating Merchant or other third party with whom You deal, including any liability or responsibility for any failure by the other party to a Qualifying Link to pay You commissions or other sums due or claimed to be due. You will not have any liability or responsibility with respect to any failure of the Service directly attributable to LinkShare's actions. You agree to indemnify, defend, and hold harmless the Network and LinkShare Corporation and its affiliates, officers, directors, employees and agents from and against any and all liability, claims, losses, damages, injuries or expenses (including reasonable attorneys' fees) directly or indirectly arising from or relating to any Offer, Acceptance, Counter-Offer, Engagement, and any dispute relating thereto. 7. "Cookies". The Service does not currently provide Participation Merchants or Owner/Participants with identifiers, tracers or other tracking tools for monitoring Internet usage by Customers (so-called "cookies"), except in the "Return" feature. If, however, you are a Participating Merchant, at your request, we may include other "cookies" if your site participating in the Network already uses a "cookie." The "cookie": in the "Return" feature, and any other "cookies" that the Service may include, can be disabled by Customers or other users. You should assume, therefore, that the Service does not itself incorporate any such identifiers or tracing or tracking tools available for Your use. You agree, however, that the Service may include one or more "cookies" that LinkShare itself uses for profiling and tracking. 8. Periodic Reports. Our ability and obligation to prepare and furnish the periodic reports referred to in Your Contract is subject to You and the parties with whom You establish Qualifying Links using the LinkShare Synergy((TM) )software correctly, establishing a link coded in accordance with Your Contract and documentation provided by LinkShare and complying with the Bylaws and the terms of the applicable Engagement. 13 9. Our Rights to Information About You. You grant LinkShare permission to obtain information from Your Server or any other source that is necessary to operate the Service, allow You to use the Network, to verify that You are operating the Product correctly or otherwise obtain information for purposes related to the Service and Your participation in the Network. You further agree that LinkShare will own any such data it obtains or develops. 10. Data You Provide. LinkShare, of course, cannot economically and practically review or police all Content and other messages uploaded to the Service, so we must rely on Service users to ensure that the Content and messages they originate will not violate law or third-party rights. You agree to remain solely responsible for the Content or messages originated by You or on Your behalf, and to indemnify and defend LinkShare and the other participants in the Service if any Content or other items that are uploaded or posted to or otherwise published or made available on or through the Service or their use as contemplated by Your Contract is libelous, defamatory, obscene, pornographic, infringes any third-party's intellectual property rights or otherwise violates any law or any third-party's rights. By uploading or otherwise providing Content to the Service, You will represent to us that you own it or are authorized to provide it by the owner, as well as that such Content and its use by LinkShare and other participants in the Network does not infringe upon any other person's rights. By submitting Content to any "Public Area" (e.g. public chat rooms, bulletin boards, etc.), You (individually and for any other owners for whom You are authorized to act) automatically grant to LinkShare a royalty-free, perpetual, irrevocable, non-exclusive right and license to use, reproduce, sell, modify, adapt, publish, translate, create derivative works from, distribute, perform and display such Content in whole or in part worldwide and/or to incorporate it in other works in any form, media, or technology now known or later developed for the full term of any rights that may exist in such Content. LinkShare provides some encryption to protect certain personal information that is transmitted, but You should act as though Your uploads and transmissions are susceptible to interception and use by others. You agree that all the risk associated therewith is solely Yours and that LinkShare will have no liability for any breach of the security of your account. You agree that LinkShare and each of the other participants in the Network may rely on any information, notice or other communication furnished by You or on Your behalf which is reasonably believed by the recipient to be genuine and to have been sent or presented by You or a person reasonably believed by the recipient to be authorized to act on Your behalf. You agree that You will not disparage (whether on any Web site or otherwise) LinkShare, the Network, the LinkShare Software or any component of the Service 11. Unsolicited Submissions. LinkShare welcomes comments regarding the Service; however, LinkShare's policy is not to accept or consider creative ideas, suggestions or other submissions in addition to those it may specifically request. LinkShare requests that You be specific with any of your comments on the Service You may wish to make and not submit any such item. We hope that You will understand that it is the intent of this policy to avoid misunderstandings when projects developed by LinkShare's very productive staff are similar to someone else's creative work. If, despite our request, You do submit any such creative ideas, suggestions or other submissions, we will not be subject to any confidentiality obligation or restriction on our use of those 14 submissions and we will be free to copy, use, disclose, distribute, publish, sell, modify, create derivative works from, exploit or otherwise deal with those submissions without liability or accountability to You or any third-party source. 12. Certain Notices From You. You agree to notify LinkShare at contact@linkcorp.net of any known or suspected unauthorized uses of Your account, or any known or suspected breach of security, including loss, theft or unauthorized disclosure of Your password. You agree that LinkShare does not have any liability or responsibility for any unauthorized use of Your account or loss, theft or unauthorized use of Your password. Maintaining the confidentiality of Your password is your responsibility, and You also are responsible for all usage and activity on Your account, including use of the account by a third party authorized by You to use Your account. 13. Privacy. You agree that You and Your Participating Merchants or Owner/Participants, as the case may be, will comply with all applicable requirements of law relating to privacy and will also comply with LinkShare's reasonable requirements relating to privacy as posted from time to time at LinkShare's Web site. 14. Off-Network Dealings. If You are a Website owner and You contact any Merchant through the Network or become aware of any Offer by any Merchant through the Network, You will not enter into any revenue-sharing advertising, collaborations or other commercial arrangements with that Merchant or any of its affiliates or related parties in connection with any of your or their respective sites on the Web except via the Network. If You are a Participating Merchant, You agree that You will not knowingly enter into any such arrangements with any Website owner or any of its affiliates or related parties. You also agree that you will not participate in any advertising collaborations or other arrangements or scheme that is intended to reduce payments to which LinkShare otherwise would be entitled or to otherwise take unfair advantage of the Service provided by LinkShare or that has any such effect. You also agree to promptly notify Us if asked to do so by a Merchant or Owner/Participant You have contacted through the Service. We hope that You understand our reason for including these provisions. We get paid on the basis of Transactions concluded using Qualifying Links. We necessarily depend on fair dealing by Owner/Participants and Participating Merchants. 15. No Warranties. The Service, its components, its and their use of the results of such use are provided "as is." TO THE FULLEST EXTENT PERMISSIBLE PURSUANT TO APPLICABLE LAW, LINKSHARE DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED, IN RELATION TO THE SERVICE, ITS COMPONENTS, ITS USE, THE RESULTS OF SUCH USE, LINKS AND LINKED SITES (INCLUDING, WITHOUT LIMITATION, WARRANTIES OF FITNESS FOR A PARTICULAR PURPOSE, MERCHANTABILITY OR NON-INFRINGEMENT OR ANY IMPLIED WARRANTIES WHATSOEVER ARISING OUT OF A COURSE OF PERFORMANCE, DEALING OR TRADE USAGE). Without limiting the foregoing, LinkShare specifically disclaims any warranty that the Service, or any LinkShare Software, Content or other Service component will be uninterrupted, error-free, accurate or correct, that defects will be corrected or that there are no viruses or other harmful components, and we will not be liable for the consequences for interruptions, errors, inaccuracies, viruses, or other harmful components. Applicable law may not allow the exclusion of implied warranties so the above exclusion may not apply to you. In such jurisdictions, LinkShare's liability is limited to the greatest extent permitted by law. 15 16. Limitation of Remedies and Liability. The obligations of LinkShare are solely corporate obligations, no affiliate, stockholder, director, officer, employee, consultant or agent of LinkShare shall be subject to any personal liability whatsoever to You or any of its affiliates, stockholders or creditors or any other person or entity, nor will any such claim be asserted (directly, or derivatively or otherwise) by or on behalf of You or any of Your successors and assigns. THE MAXIMUM AGGREGATE LIABLE OF LINKSHARE WITH RESPECT TO THE SERVICE, YOUR USE AND THE RESULTS OF YOUR USE UNDER ANY CONTRACT, NEGLIGENCE, STRICT LIABILITY OR OTHER THEORY WILL BE LIMITED EXCLUSIVELY TO REPAIR OR REPLACEMENT OR, IF REPLACEMENT IS INADEQUATE AS A REMEDY OR, IN LINKSHARE' S OPINION, IMPRACTICAL, TO A REFUND OF PAYMENTS RECEIVED FROM YOU DURING THE THIRTY DAY PERIOD PRIOR TO THE DATE THE LIABILITY AROSE. If the SERVICE omits any of your information or if your INFORMATION contains any error, your sole remedy for such error or omission shall be for linkshare to CORRECT such errors or omissions. LINKSHARE SHALL NOT BE LIABLE FOR (1) ANY INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING OUT OF OR IN CONNECTION WITH YOUR CONTRACT OR THE USE OF OR INABILITY TO USE THE LINKSHARE WEBSITE, SERVICE OR ANY INFORMATION PROVIDED ON LINKSHARE'S WEBSITE OR ANY OTHER HYPERLINKED WEBSITE, INCLUDING WITHOUT LIMITATION, ANY LOST PROFITS. bUSINESS INTERRUPTION, LOSS OF PROGRAMS OR OTHER DATA ON YOUR INFORMATION HANDLING SYSTEM OR OTHERWISE, EVEN IF LINKSHARE HAS BEEN ADVISED OF the POSSIBILITY OF SUCH DAMAGES OR OF ANY CLAIM ATTRIBUTABLE TO ERRORS, OMISSIONS OR OTHER INACCURACIES IN ANY CONTENT OR LINKSHARE'S SOFTWARE OR WEBSITE OR ANY HYPERLINKED WEBSITE. BECAUSE SOME JURISDICTIONS DO NOT ALLOW THE EXCLUSION OR LIMITATION OF INCIDENTAL OR CONSEQUENTIAL DAMAGES, THE ABOVE EXCLUSION MAY NOT APPLY TO YOU. THIS PARAGRAPH WILL SURVIVE THE FAILURE OF ANY EXCLUSIVE OR LIMITED REMEDY. Each party recognizes and agrees that the warranty disclaimers and liability and remedy limitations in this Agreement are material bargained for basis of this Agreement and that they have been taken into account and reflected in determining the consideration to be given by each party and in the decision by each party to enter into Your Contract. The obligations of LinkShare are solely corporate obligations, no affiliate, stockholder, director, officer, employee, consultant or agent of LinkShare shall be subject to any personal liability whatsoever to You or any of Your owners, affiliates, creditors, customers or World Wide Web site visitors, any Participating Owner or Participation Merchant with whom you establish a link or other relationship or any other person or entity, nor will any such claim be asserted (directly, derivatively or otherwise) by or on behalf of You, any of the other persons referred to above or any of Your or their heirs, legal representatives, successors or assignees. 17. Payments. LinkShare reserves the right to charge of any services available on the Network that You request in addition to the Service provided. LinkShare, however, will not be obligated to provide such additional service. 18. Governing Law. Except as provided below, You agree that Your Contract and its interpretation and enforcement, any claims arising out of the relationships You establish with Us and other participants 16 in the Network, the LinkShare Website, any Content or other matters are governed by the internal laws of the State of New York and the Federal laws of the Unites Sates of America applicable therein. You and We each attorns to the jurisdiction of the Federal and New York State courts sitting in New York County, New York (and the appellate courts to which judgments or orders of such Federal and State courts may be appealed), and agrees to commence any litigation which may arise hereunder in one of those courts. If You are based in Canada, the internal laws of the Province of Ontario, Canada will govern, and each of us attorns to the jurisdiction of the courts of the courts of the Province of Ontario, and further agrees to commence any litigation which may arise hereunder in the courts located in the Judicial District of York, Province of Ontario. LinkShare controls and operates its site from its offices in the state of New York, United States of America and makes no representations or warranties that these materials are appropriate or available for use in other locations, and access to them from territories where their contents are illegal is prohibited. You are responsible for reinsuring that Your participation in the Network complies with applicable laws, including those of the jurisdiction in which You are located. 19. Notices. All notices and communications under this Agreement shall be in writing (except where otherwise stated) by confirmed facsimile, electronic mail, or similar communication, by Express Mail, Federal Express or similar confirmed delivery service, or by certified or registered mail. Communications may be made orally between the parties when the nature of the communication does not require written notice. Except as otherwise expressly provided in Your Contract, notices and the official correspondence intended for LinkShare must be sent via certified or registered postal mail to: LinkShare Corporation, 165 West 46th, Suite 810, New York, NY 10036, USA. 20. Export Laws. You acknowledge that laws and regulations in the United States and elsewhere regulate the export and re-export of certain products, services, information and other items. You agree that You will not remove or export from the United States or re-export from anywhere any part of the Service or any part or product thereof in violation of any applicable law or regulation. 21. U.S. Government Restricted Rights. If the Service or any component of the Service, including any LinkShare Software is used by or for the U.S. Federal Government or any of its agencies, departments, bureaus or other instrumentalities or divisions (in each and every case, the "Government"), the Government hereby agrees as follows: The LinkShare software (including, but not limited to, documentation) qualifies as "commercial computer software" as that term is used in the applicable acquisition regulation, except that none of the LinkShare Software may be acquired by the Government in a contract incorporating clauses prescribed by DFARS Subpart 227.4, and in the case of any such contract the Government will not acquire such LinkShare Software. To the maximum extent permitted under applicable law, rules and regulations, the Government shall be bound by the commercial terms of the LINKSHARE NETWORK((TM) )MEMBERSHIP AGREEMENT FOR SITE OWNERS, or the LINKSHARE NETWORK((TM) ) MEMBERSHIP AGREEMENT FOR MERCHANTS, as the case may be, including this Attachment and any other attachments, as amended from time to time. 17 The LINKSHARE SOFTWARE (including, but not limited to, documentation) is provided with RESTRICTED RIGHTS. Use, duplication, or disclosure by the Government is subject to restrictions as set forth in subparagraph (c)(1)(ii) of the Rights in Technical Data and Computer Software clause as DFARS 252.227.7023 or subparagraphs (c)(1) and (2) of the Commercial Computer Software - Restricted Rights at 48 CFR 52.227-19, as applicable. If the Government is unable to agree to the foregoing or believes that any provisions applicable to the LINKSHARE SOFTWARE violate applicable Federal laws, rules or regulations, the Service (including the LINKSHARE SOFTWARE) should not be used by the Government. The Government may, in those circumstances, contact Us at LinkShare Corporation, 165 West 46th Street, Suite 107, New York, New York 10036 (212) 221-8100, Fax (212) 221-8341. 22. Miscellaneous. LinkShare may disclose information about You furnished to Us and about Your usage of the Service and the Internet in aggregate industry reports or for purposes related to the Service or as otherwise agreed to in writing by You. Nothing contained in Your Contract and no course of dealing between us will confer upon You any exclusive rights with respect to the Service or prevent us from contracting and dealing with any and all other persons (including Your competitors) to provide products and services (including any identical or similar to those provided to You) or in any other manner, in our sole discretion. You, We and other persons with whom you deal through the Network are independent contractors. Your Contract, any other agreements between Us and any other participants in the Network, any Engagements You enter into and any dealings among and between You, Us and other participants do and will not establish the relationship of a partnership, joint venture, principal and agent or employer/employee. You agree that You do not have any authority to, and You will not, incur obligations, make or accept offers or take other actions on behalf of LinkShare. You agree not to make any statements or take any action (on your Web site or otherwise) that reasonably could have the effect of creating the appearance of any such relationship or authority. None of Your rights or obligations under Your Contract are assignable or transferable by You without LinkShare's prior written consent except in the case of the sales of substantially all or all of Your assets. Subject to that restriction, Your Contract will be binding, inure to the benefit of and be enforceable by the parties and their respective successors and assigns. In the event that any of the provisions of this Agreement shall be held by a court or other tribunal of competent jurisdiction to be unenforceable, such provisions shall be limited or eliminated to the maximum extent necessary so that this Agreement shall otherwise remain in full force and effect and enforceable. Except as otherwise expressly provided in Your Contract, any modifications to Your Contract must be in writing and signed by You and LinkShare. This Agreement is the entire agreement between LinkShare and You pertaining to its subject matter, and all written or oral agreements, if any, previously existing between us are cancelled. Except if and to the extent expressly set forth in Your Contract, neither You nor We makes any representation, warranty, covenant, or agreement whatsoever. The statements about and 18 descriptions of the Service or any of its components made by LinkShare on its Web site or otherwise do not constitute representations, warranties or other contractual obligations. Neither party will be liable to the other by reason of any failure or delay in the performance eof its obligations hereunder on account of strikes, shortages, riots, insurrection, fires, flood, storm, explosions, acts of God, war governmental action labor conditions, earthquakes or any other cause which is beyond the reasonable control of such party. The section, paragraph and other headings in Your Contract are for reference only and shall not affect in any way the meaning of your interpretation of Your Contract. EX-10.14 16 ESCROW AGREEMENT 1 EXHIBIT 10.14 EXECUTION COPY ESCROW AGREEMENT This ESCROW AGREEMENT, dated as of June 18, 1999 (this "Agreement"), by and among FREESHOP.COM, INC., a Washington corporation ("Grantor"), FINGERHUT COMPANIES, INC., a Minnesota corporation ("Grantee"), and WHITMAN BREED ABBOTT & MORGAN LLP, solely in the capacity as escrow agent (the "Escrow Agent"). W I T N E S S E T H: WHEREAS, Grantee and Grantor have executed and delivered a Warrant Agreement, dated as of December 10, 1998 (the "Warrant Agreement"), as modified by a letter agreement dated June 18, 1999, between Grantee and Grantor (the "Letter Agreement") pursuant to which, and subject to the terms and conditions thereof, Grantee has elected to exercise its Third Tranche Investment Percentage Warrants, Anti-Dilution Warrants and Third Party Agreement Warrants (all as defined in the Warrant Agreement) for 404,858 shares (the "Warrant Shares") of Grantor's Series B convertible preferred stock ("Preferred Stock"); and WHEREAS, pursuant to the Letter Agreement Grantee has elected to purchase an additional 8,820 shares of Preferred Stock ("Additional Shares"); and WHEREAS, Grantor intends to file a registration statement (the "Registration Statement") in connection with the sale of shares of common stock in a proposed Qualified Public Offering, as such term is defined in the Warrant Agreement, with the Securities and Exchange Commission under the Securities Act of 1933; WHEREAS, Grantor intends to file such Registration Statement on or about June 18, 1999 and represents therein that Grantee intends to exercise certain of its Warrants and purchase the Additional Shares not later than the completion of the Qualified Public Offering; WHEREAS, Grantee and Grantor have agreed that on or about the date hereof Grantee shall cause to be deposited with the Escrow Agent $9,011,348 in cash (the Exercise Price") to be held in escrow by the Escrow Agent in accordance with the terms of this Agreement at the request of and as an accommodation to Grantee and Grantor; WHEREAS, Grantor and Grantee have agreed that on or about the date hereof Grantor shall cause to be deposited with the Escrow Agent a certificate for the Warrant Shares acquired in connection with the payment of the Exercise Price (the "Certificate"); NOW, THEREFORE, in consideration of the premises, the mutual covenants contained herein and in the Warrant Agreement and other valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows (capitalized terms used herein without definition shall have the meaning attributed thereto in the Warrant Agreement): 2 1. Escrow Funds and Shares. (a) On the date hereof, Grantee shall deliver to the Escrow Agent the amount of the Exercise Price (the "Escrow Funds") by wire transfer to the Whitman Breed Abbott & Morgan LLP Attorney Trust Account at Citibank, N.A. (153 East 53rd Street, New York, New York 10043) (ABA No. 021 000 089) (Account No. 43220732) (Attention: John Gunther at 212-559-8647) (the "Escrow Account"). (b) On the date hereof, Grantor shall deliver to the Escrow Agent the Certificate. (c) The Escrow Funds shall be held, invested and applied by the Escrow Agent pursuant to the terms of this Agreement. 2. Investment of Funds. As soon as practicable after the receipt thereof, the Escrow Agent shall cause the Escrow Funds to be invested in the Citibank Citiescrow Account or such other investment available to the Escrow Account at Citibank N.A. as Grantee may request. The Grantee shall bear and retain the sole responsibility for the selection of the investment hereunder and all risk of loss from such investment. All net interest earned on the Escrow Funds from investment as provided in this Section 2 shall be payable to Grantee at the time the Escrow Funds are disbursed in accordance with Section 3 hereof. 3. Disbursement of Escrow Funds. (a) Upon receipt of a notice from Grantee substantially in the form of Annex I hereto (the "Notice of Satisfaction of Grantee Conditions"), the Escrow Agent shall and is hereby directed to withdraw from the Escrow Account and pay to Grantor the Escrow Funds and to withdraw from the Escrow Account and pay to Grantee all net interest earned on the Escrow Funds. Receipt by the Escrow Agent of the Notice of Satisfaction of Grantee Conditions shall be deemed exercise by Grantee of the Third Tranche Investment Percentage Warrants, Anti-Dilution Warrants and Third Party Agreement Warrants. Grantee agrees that if closing of the Qualified Public Offering occurs not later than October 31, 1999, Grantee will send a Notice of Satisfaction of Grantee Conditions to the Escrow Agent not later than the date of such closing. (b) Upon payment of Escrow Funds by the Escrow Agent to Grantor, and payment of interest earned thereon by the Escrow Agent to Grantee, Escrow Agent shall deliver the Certificate to Grantee. (c) If the Escrow Agent does not receive from Grantee, on or before October 31, 1999, a duly executed Notice of Satisfaction of Grantee Conditions, the Escrow Agent shall withdraw from the Escrow Account and pay to Grantee the Escrow Funds and all net interest earned thereon promptly after October 31, 1999, and deliver the Certificate to Grantor. (d) Payments of Escrow Funds and interest earned thereon by the Escrow Agent shall, if Grantee so requests and provides appropriate instructions, be effected by wire transfer of immediately available funds and, absent such request or instructions, by check. 4. Escrow Agent's Duties and Fees. (a) The Escrow Agent shall be obligated to perform only such duties as are expressly set forth in this Agreement. The Escrow Agent may rely upon, and shall be protected in acting or refraining from acting upon, any written notice, instruction or request furnished to it under this Agreement and believed by it to be genuine and to have been signed or presented by the proper party or parties, provided that, as set forth below, -2- 3 any modification of this Agreement shall be required to be signed by each of the parties to this Agreement. The Escrow Agent acts under this Agreement as a depositary only and is not a party to or bound by any agreement or undertaking which may be evidenced by or arise out of any items deposited with or delivered to it pursuant to this Agreement and is not responsible or liable in any manner for the sufficiency, correctness, genuineness or validity of any such items and undertakes no responsibility or liability for the form of execution of such items or the identity, authority, title or rights of any person executing or depositing same. The Escrow Agent shall not be liable to Grantee or Grantor or their respective successors and assigns for any action taken or omitted to be taken hereunder in good faith; provided, however, that the Escrow Agent shall be and remain liable for any damages arising as a result of its willful misconduct or gross negligence. (b) Grantee and Grantor, jointly and severally, shall indemnify the Escrow Agent for and hold the Escrow Agent harmless against, any loss, damage, liability or expense incurred by the Escrow Agent not caused by its gross negligence or willful misconduct, arising out of or in connection with its entering into this Agreement and the performance of its duties under this Agreement, including the costs and expenses of defending itself against any claim or liability in any legal proceeding in connection with this Agreement (including reasonable attorneys' fees). The Escrow Agent may consult with counsel of its choice and shall have full and complete authorization and protection for any action taken or suffered by it under this Agreement in good faith and in accordance with the opinion of such counsel. (c) Grantee shall pay the reasonable compensation of the Escrow Agent for the services to the rendered by the Escrow Agent hereunder and shall pay to or reimburse the Escrow Agent for all expenses, disbursements and advances, including reasonable attorneys' fees, incurred or made by the Escrow Agent in connection with the performance of its duties hereunder. (d) Grantee and Grantor warrant to the Escrow Agent that, except as provided in Section 4(e), there are no Federal, state or local tax liability or filing requirements concerning the Escrow Agent's actions contemplated hereunder and warrants and represents to the Escrow Agent that the Escrow Agent has no duty to withhold or file any report or any tax liability under any Federal or state income tax, local or state property tax, local or state sales or use taxes, or any other tax by any taxing authority. Grantee and Grantor, jointly and severally, agree to indemnify the Escrow Agent fully for any tax liability, penalties or interest incurred by the Escrow Agent arising hereunder and agrees to pay in full any such tax liability together with penalty and interest if any is ultimately assessed against the Escrow Agent for any reason as a result of its action hereunder (except for the Escrow Agent's individual income tax liability). (e) Due to the requirement that all trust accounts have Taxpayer Identification Numbers documented by appropriate W-8 and W-9 forms, Escrow Agent shall promptly provide such forms to Grantee and Grantor, and Grantee and Grantor shall return such forms to the Escrow Agent, duly completed and signed, within five days of receipt thereof. Grantee and Grantor acknowledge that failure to provide such forms may prevent or delay disbursement of Escrow Funds hereunder. -3- 4 5. Notices. All notices, consents, requests, instruction, approvals and other communications provided for in this Agreement shall be in writing and shall become effective when delivered at the following addresses: (a) if to Grantee: Fingerhut Companies, Inc. 4400 Baker Road, #181 Minnetonka, MN 55343 Attention: Michael P. Sherman, Esq. (b) if to Grantor: FreeShop.com, Inc. Inc. 95 South Jackson Street, Suite 300 Seattle, WA 98104 Attention:Timothy C. Choate With a copy to: Bryce L. Holland, Jr. Dorsey & Whitney LLP U.S. Bank Building Center, Suite 4200 1420 Fifth Avenue Seattle, WA 98101 (c) if to the Escrow Agent: Whitman Breed Abbott & Morgan LLP 200 Park Avenue New York, New York 10166 Attention: David F. Kroenlein, Esq. 6. Miscellaneous Provisions. (a) This Agreement shall be governed by and construed in accordance with the internal, substantive laws of the State of New York without giving effect to the conflict of law rules thereof. (b) This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one in the same instrument. (c) This Agreement may not be assigned by Grantee or Grantor in any manner whatsoever. (d) Grantee and Grantor shall cooperate with the Escrow Agent and deliver to the Escrow Agent such additional information and documents as the Escrow Agent shall reasonably request in the performance of its obligations under this Agreement, including such documents as -4- 5 it shall reasonably request to evidence termination of this Agreement and to evidence consent to the final payment of the Escrow Funds and interest on the Escrow Funds in accordance with the terms of the Agreement. -5- 6 IN WITNESS WHEREOF, the parties to this Agreement have caused this Agreement to be duly executed as of the day and year first above written. By: ------------------------------------- Title: By: ------------------------------------- Title: WHITMAN BREED ABBOTT & MORGAN LLP By: ------------------------------------- A Partner -6- 7 Annex I to Escrow Agreement [Grantor's Letterhead] __, 1999 Notice of Satisfaction of Grantee's Condition Whitman Breed Abbott & Morgan LLP 200 Park Avenue New York, New York 10166 Attn: David F. Kroenlein, Esq. Re: Disbursement of Escrow Funds Dear Sirs: Pursuant to Section 3(a) of the Escrow Agreement, dated as of June 18, 1999 (the "Escrow Agreement"), among FreeShop.com, Inc. ("Grantor"), Fingerhut Companies, Inc. ("Grantee"), and Whitman Breed Abbott & Morgan LLP, solely in its capacity as escrow agent (the "Escrow Agent"), you are hereby notified that the condition that the closing of the Qualified Public Offering (as defined in the Escrow Agreement) has occurred on or before October 31, 1999 has been satisfied. Accordingly you are hereby directed to pay to Grantor the Escrow Funds and to Grantee all net interest earned thereon as provided in Section 3(a) of the Escrow Agreement and to deliver the Certificate to Grantee as provided in Section 3(e) of the Escrow Agreement. IN WITNESS WHEREOF, Grantee has duly caused this Notice to be delivered to you in accordance with the terms of the Escrow Agreement. By: ------------------------------------- Name: Title: -7- EX-23.1 17 CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in this Registration Statement on Form S-1 of our report dated April 16, 1999, except for paragraphs two through four of Note 13, as to which the date is June 18, 1999, relating to the financial statements of FreeShop.com, Inc., of our report dated May 6, 1999, relating to the financial statements of Commonsite LLC, and of our report dated May 24, 1999 relating to the financial statements of Travel Companions International, Inc. which appear in such Registration Statement. We also consent to the references to us under the heading "Experts," in such Registration Statement. PricewaterhouseCoopers LLP Seattle, Washington June 18, 1999 EX-27.1 18 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF FREESHOP AS OF DECEMBER 31, 1997 AND 1998 AND FOR THE YEARS ENDED JUNE 30, 1996 AND 1997, THE SIX MONTHS ENDED DECEMBER 31, 1997 AND THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM S-1. YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 2,892,144 0 381,830 42,651 0 3,261,820 598,000 216,704 3,686,570 1,248,056 0 0 0 7,816,328 (5,572,541) 3,686,570 0 1,250,940 0 216,557 4,111,203 56,551 65,654 (3,199,025) 0 (3,199,025) 0 0 0 (3,199,025) (0.21) (0.21)
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