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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
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Percentage Warrant and the purchase price for each Percentage Warrant are as
follows (except as otherwise specified in this Agreement):
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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 xxxxx 0% interest (as any or all such percentage
interests may be adjusted pursuant to this Agreement).
(d) The Percentage Warrants, the Anti-Dilution Warrants and the
Third Party Agreement Warrants are referred to collectively as the "Warrants,"
and each individually, a "Warrant," and the shares of Common Stock issuable upon
exercise of the
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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, Xxx Xxxxxx and Xxxx Xxxxxxxxxx (the
"Stockholders Agreement").
(e) Notwithstanding anything to the contrary in this Agreement,
the Warrants shall expire at the closing of a Qualified Public Offering if they
are not exercised at or before such time. For purposes of this Agreement
"Qualified Public Offering" shall have the meaning set forth in the Stockholders
Agreement.
(f) In determining the number of shares to be issued to Grantee
upon exercise of a Warrant, there shall be included in the number of shares
owned by Grantee prior to such issuance only those shares acquired by Grantee
through (i) the purchase of shares pursuant to the Investment Agreement and (ii)
the exercise of the Warrants.
(g) The Percentage Ownership numbers set forth in Section 1(a)
and the percentage set forth in Section 1(b) are subject to adjustment as set
forth in Section 3(c) below.
(h) In lieu of receiving shares of Common Stock upon exercise of
the Percentage Warrant for the First Tranche Investment, Grantee may elect to
receive a zero coupon convertible subordinated note, convertible into the same
number of shares of Common Stock as are issuable upon exercise of the Percentage
Warrant for the First Tranche Investment, in form similar to the Convertible
Promissory Note made as of December 4, 1998 by Grantor in favor of Grantee but
maturing on the earlier to occur of a Qualified Public Offering and December 31,
2001, which is otherwise acceptable in form and terms to Grantor.
SECTION 2. Exercise of Warrants.
(a) Grantee may exercise the Warrants, in whole or in part (but,
with respect to Percentage Warrants exercisable at the same Exercise Price, all
Percentage Warrants at such Exercise Price), by giving to Grantor notice to such
effect, specifying a date not later than ten business days from the date such
notice is given for the closing of the purchase. Percentage Warrants may only be
exercised in the order shown in the above table. Such closing may be by mail or
by transfer of funds as specified on such notice.
(b) Upon notice from Grantor that it intends to file a
registration statement with respect to a Qualified Public Offering, Grantee will
promptly advise Grantor as to its intentions with respect to exercise of
Grantee's rights under this Agreement.
(c) Grantor shall make any request that Grantee exercise its
Warrants pursuant to this Section 2 or otherwise by providing written notice of
its request to Grantee by overnight mail or by facsimile.
SECTION 3. Investments.
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(a) Upon a determination by Grantor's Board of Directors that
additional equity funds are needed for the operations of Grantor's business, on
or after February 1, 1999, Grantor may request in writing that Grantee exercise
its Percentage Warrant for the First Tranche Investment. Within ten days
following receipt of such written request, Grantee shall advise Grantor in
writing whether: (i) it will exercise its Percentage Warrant for the First
Tranche Investment; (ii) it will offer to purchase a zero coupon convertible
note, maturing on December 31, 2001, but otherwise consistent with the terms of
the note specified in Section 1(g) above, subject to Grantee's acceptance of the
form and terms of such convertible note; or (iii) it will participate in a
private placement of Grantor's stock (the "First Private Placement") as
hereinafter described. If Grantee does not choose to exercise its Percentage
Warrant for the First Tranche Investment and no convertible note is purchased,
Grantor may seek to raise funds in an amount of up to $10 million in the First
Private Placement. Grantee shall subscribe for 19.9% of the shares offered in
such First Private Placement on the same terms and conditions offered to and
accepted by all other potential investors in the First Private Placement. If the
deemed valuation of Grantor is $40 million or less immediately following the
closing of the First Private Placement, Grantee shall continue to have all
rights granted under this Agreement with respect to the Percentage Warrant for
the First Tranche Investment. If the deemed valuation of Grantor is in excess of
$40 million immediately following the closing of the First Private Placement,
Grantee's rights under this Agreement with respect to the Percentage Warrant for
the First Tranche Investment shall expire.
(b) In the event that Grantor seeks to raise funds in a private
placement subsequent to the First Private Placement (the "Subsequent Private
Placement"), Grantor may request in writing that Grantee exercise any or all of
its remaining Warrant(s) and/or subscribe for shares in the Subsequent Private
Placement. Within ten days following receipt of such written request, Grantee
shall advise Grantor in writing whether Grantee wishes to exercise such
Warrant(s) or subscribe for such shares. If Grantee declines to exercise such
Warrant(s) and subscribe for shares in the Subsequent Private Placement, Grantee
shall use its reasonable best efforts (other than exercise of such Warrant(s))
to assist Grantor in the Subsequent Private Placement.
(c) In the event Grantee's Percentage Ownership is diluted as a
result of Grantee's decision not to exercise any or all of its rights to
purchase shares under this Agreement or under the Stockholders Agreement, (i) if
Grantee subsequently exercises its Percentage Warrants for the First Tranche
Investment, the Second Tranche Investment and/or the Third Tranche Investment,
Grantee shall have the right to purchase in connection with each such exercise
only such number of shares of Common Stock, at the respective purchase price per
share specified in the table at Section 1(a) above, as will result in Grantee's
Percentage Ownership after the First Tranche Investment being 10.1% higher than
Grantee's Percentage Ownership immediately prior to such First Tranche
Investment, Grantee's Percentage Ownership after the Second Tranche Investment
being 5% higher than Grantee's Percentage Ownership immediately prior to such
Second Tranche Investment and Grantee's Percentage Ownership after the Third
Tranche Investment being 5% higher than Grantee's Percentage Ownership
immediately prior to such Third Tranche Investment and (ii) if Grantee
subsequently exercises its Anti-Dilution Warrants, Grantee shall have the right
to purchase in
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connection with such exercise only up to such number of shares of Common Stock,
at the purchase price of $2.20919 per share, as is equal to a percentage of the
Additional Shares equal to Grantee's Percentage Ownership immediately prior to
exercise of the Anti-Dilution Warrants.
SECTION 4. Adjustment of Warrant Shares Issuable.
(a) In case at any time or from time to time after the date of
this Agreement Grantor shall (i) declare or pay any dividend or make any other
distribution upon any capital stock of Grantor which is payable in Common Stock
or securities convertible into Common Stock ("Convertible Securities"), or (ii)
effect a subdivision of the outstanding shares of Common Stock into a greater
number of shares of Common Stock (by reclassification or otherwise than by
payment of a dividend in Common Stock), then, in any such event, the total
number of additional shares of Common Stock, or (in the case of any such
dividend or distribution payable in Convertible Securities) Convertible
Securities, issuable in payment of such dividend or distribution or to give
effect to such subdivision shall be deemed to have been issued immediately after
the close of business on the record date (or other date) for the determination
of holders of any class of securities in connection with such subdivision.
(b) In case the outstanding shares of Common Stock shall be
combined or consolidated, by reclassification or otherwise, into a lesser number
of shares of Common Stock, the purchase price per share in effect for each
Warrant immediately prior to such combination or consolidation shall,
concurrently with the effectiveness of such combination or consolidation, be
proportionately increased.
(c) In case Grantor shall take any of the actions set forth in
Sections 4(a) and (b) above, the number of Warrant Shares purchasable upon
exercise of each Warrant immediately prior thereto shall be adjusted so that
Grantee shall be entitled to receive the kind and number of Warrant Shares which
it would have owned or have been entitled to receive after any of the events
described above, had each such Warrant been exercised immediately prior to such
event or any record date with respect thereto. An adjustment made pursuant to
this clause (c) shall become effective immediately after the effective date of
such event retroactive to the record date, if any for such event.
(d) This Section 4 shall not be applicable to the Third Party
Agreement Warrants.
SECTION 5. Payment and Delivery of Warrant Shares. At any closing
hereunder, (a) Grantee shall make payment to Grantor of the purchase price per
share, and (b) Grantor shall issue the Warrant Shares to Grantee and register
such issuance on Grantor's stock ledger.
SECTION 6. Representations and Warranties of Grantor.
(a) Organization. Grantor is a corporation duly incorporated,
validly existing and in good standing under the laws of Washington.
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(b) Authorization; No Contravention. The execution, delivery and
performance by Grantor of this Agreement are within Grantor's corporate powers,
have been duly authorized by all necessary corporate action, require no action
by or in respect of, or filing with, any governmental body, agency or official
(other than as may be required by state and federal securities laws) and do not
contravene, or constitute a default under, any provision of applicable law or
regulation or of the certificate of incorporation or bylaws of Grantor or of any
other agreement, judgment, injunction, order, decree or other instrument binding
upon Grantor.
(c) Binding Effect. This Agreement constitutes a valid and
binding agreement of Grantor, enforceable in accordance with its terms.
(d) Private Offering. Neither Grantor nor any person acting on
its behalf has offered the Warrant Shares or any similar securities for sale, or
solicited any offer to buy any of the same from, or otherwise approached or
negotiated in respect thereof with, any persons. Neither Grantor nor any person
acting on its behalf has taken, or will take, any action which would subject the
issuance or sale of the Warrant Shares to the registration requirements of
Section 5 of the Securities Act of 1933, as amended (the "Securities Act").
(e) Issuance of Shares. Upon the exercise of the Warrants
pursuant to this Agreement, the Warrant Shares reserved for issuance hereunder
will be duly and validly authorized, issued, fully paid and non-assessable, free
of preemptive rights and free and clear of any lien and any other limitation or
restriction (including any restriction on the right to vote, sell or otherwise
dispose of the Warrant Shares), other than such limitations or restrictions
imposed by the Stockholders Agreement and by the Securities Act.
(f) Capital Stock. On the date hereof, the authorized capital
stock of Grantor consists of 100,000,000 shares of Common Stock, of which
16,295,587 shares of Common Stock are outstanding, and 10,000,000 shares of
Preferred Stock, of which 1,935,484 shares were previously designated and issued
as Series A Convertible Preferred Stock and have been converted into outstanding
shares of Common Stock. Assuming all Warrants are exercised, the Warrant Shares
and the 4,048,467 shares of Common Stock to be issued to Grantee on the date
hereof pursuant to the Investment Agreement will represent 40.0% of Grantor's
outstanding Common Stock on a fully diluted basis, after the issuance of the
Warrant Shares (subject to adjustment as provided in this Agreement).
SECTION 7. Covenants of Grantor. Grantor will at all times reserve and
keep available, solely for issuance pursuant to the exercise of the Warrant, the
number of shares of Common Stock which from time to time shall be issuable to
Grantee upon the exercise of the Warrant. Grantor shall take all action to
assure that all such shares shall be duly authorized and, when issued pursuant
to the exercise of the Warrant, shall be validly issued, fully paid and
non-assessable with no liability on the part of the holders thereof.
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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.
00 Xxxxx Xxxxxxx - Xxxxx 000
Xxxxxxx, Xxxxxxxxxx 00000
Attn: Mr. Xxx Xxxxxx
If to Grantee:
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Fingerhut Companies, Inc.
0000 Xxxxx Xxxx
Xxxxxxxxxx, XX 00000
Attn: Xxxxxxx X. Xxxxxxx, Esq.
Each such notice, request or other communication shall be effective (i) if given
by telex or telecopy, when such telex or telecopy is transmitted to the telex or
telecopy number specified on the signature pages hereof and the appropriate
answerback is received (in the case of telex) or telephonic confirmation of
receipt thereof is obtained (in the case of telecopy) or (ii) if given by mail,
prepaid overnight courier or any other means, when received at the address
specified on the signature pages hereof or when delivery at such address is
refused.
(e) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Washington and all rights
and remedies shall be governed by such laws without regard to principles of
conflict of laws.
(f) Counterparts. This Agreement may be executed in
counterparts, each of which shall be an original, but all of which together
shall constitute one and the same Warrant.
(g) Headings. The paragraph headings herein are for convenience
only and shall not affect the construction hereof.
(h) Assignment. This Agreement shall not be assignable by either
party.
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IN WITNESS WHEREOF, Grantor and Grantee have caused this Agreement to be
duly executed as of the day and year first above written.
FREESHOP INTERNATIONAL, INC.
By: /s/ XXX XXXXXX
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FINGERHUT COMPANIES, INC.
By: /s/ XXXXXXX XXXXXXX
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