<PAGE>
As filed with the Securities and Exchange Commission on October 8, 1999
Registration No. 333-84535
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SECURITIES AND EXCHANGE COMMISSION
--------------
AMENDMENT NO. 3
to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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BE FREE, INC.
(Exact name of registrant as specified in its charter)
Delaware 7374 04-3303188
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction Classification Code Number) Identification Number)
of incorporation or
organization)
154 Crane Meadow Road
Marlborough, Massachusetts 01752
(508) 357-8888
(Address, including zip code, telephone number, including area code, of
registrant's principal executive offices)
Gordon B. Hoffstein
President and Chief Executive Officer
BE FREE, INC.
154 Crane Meadow Road
Marlborough, Massachusetts 01752
(508) 357-8888
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------
Copies to:
JAY E. BOTHWICK, ESQ. MARK H. BURNETT, ESQ.
DAVID A. WESTENBERG, ESQ. JOCELYN M. AREL, ESQ.
HALE AND DORR LLP TESTA, HURWITZ & THIBEAULT, LLP
60 State Street 125 High Street
Boston, Massachusetts 02109 Boston, Massachusetts 02110
Telephone: (617) 526-6000 Telephone: (617) 248-7000
Telecopy: (617) 526-5000 Telecopy: (617) 248-7100
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date hereof.
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,
check the following box. [X]
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed
Proposed Maximum
Title of each Class of Maximum Aggregate Amount of
Securities to be Amount to Offering Price Offering Registration
Registered be Registered(1) Per Security(2) Price(1)(2) Fee
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<S> <C> <C> <C> <C>
Common Stock, $.01 par
value.................. 6,440,000 $10.00 $64,400,000 $17,904
</TABLE>
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(1) Includes 840,000 shares which the Underwriters have the option to purchase
to cover over-allotments of shares. See "Underwriting."
(2) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(a) under the Securities Act of 1933, as
amended.
(3) The fee of $16,625 was previously paid with the initial filing of this
Registration Statement with the Commission on August 5, 1999. A fee of
$1,279 is hereby paid in connection with this filing.
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 thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+We will amend and complete the information in this prospectus. Although we +
+are permitted by U.S. federal securities laws to offer these securities using +
+this prospectus, we may not sell them or accept your offer to buy them until +
+the documentation filed with the SEC relating to these securities has been +
+declared effective by the SEC. This prospectus is not an offer to sell these +
+securities or our solicitation of your offer to buy these securities in any +
+jurisdiction where that would not be permitted or legal. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION-OCTOBER 8, 1999
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Prospectus
, 1999
[Be Free logo appears here]
5,600,000 Shares of Common Stock
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The Company: The Offering:
. We are a leading . We are offering 5,600,000 shares of our common
provider of services stock.
that enable our
customers to generate, . The underwriters have an option to purchase up
place and manage to an additional 840,000 shares from us to
hyperlink promotions cover over-allotments.
for their products and
services in tens of . This is our initial public offering. We
thousands of locations anticipate that the initial public offering
on the Internet. Our price will be between $8.00 and $10.00 per
customers pay us for share.
these promotions only
when they generate . Closing: , 1999
sales or traffic.
Proposed Symbol & Market: . BFRE/NASDAQ
<TABLE>
<CAPTION>
-----------------------------------------
Per Share Total
-----------------------------------------
<S> <C> <C>
Public offering price: $ $
Underwriting fees:
Proceeds to Be Free:
-----------------------------------------
</TABLE>
This investment involves risk. See "Risk Factors" beginning on page 7.
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Neither the SEC nor any state securities commission has determined whether this
prospectus is truthful or complete. Nor have they made, nor will they make, any
determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
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Donaldson, Lufkin & Jenrette
Hambrecht & Quist
Dain Rauscher Wessels
a division of Dain Rauscher Incorporated
DLJdirect Inc.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 19
Dividend Policy........................................................... 19
Capitalization............................................................ 20
Dilution.................................................................. 21
Selected Consolidated Financial Data...................................... 22
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 24
Business.................................................................. 33
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Management................................................................. 47
Transactions with Related Parties.......................................... 54
Principal Stockholders..................................................... 57
Description of Capital Stock............................................... 59
Shares Eligible for Future Sale............................................ 63
Underwriting............................................................... 65
Legal Matters.............................................................. 67
Experts.................................................................... 68
Where You Can Find More Information........................................ 68
Index to Financial Statements.............................................. F-1
</TABLE>
<PAGE>
[Gatefold Artwork]
[Graphic of a promotion featured on the Web site of a marketing affiliate.
This graphic is being viewed by a crowd of miniature people and is connected by
arrows flowing through a graphic of Be Free's Data Interchange to a graphic of
an online merchant customer's Web site. These three graphics together represent
the exchange of information between Be Free, its customers and their marketing
partners, and illustrate how performance marketing works in the Internet.]
<PAGE>
PROSPECTUS SUMMARY
This summary may not contain all of the information that is important to
you. You should read the entire prospectus, including the financial statements
and related notes, before making an investment decision. Unless otherwise
indicated, all information in this prospectus:
. reflects a 1-for-2 reverse stock split effective October 6, 1999;
. assumes that the underwriters will not exercise their over-allotment
option;
. gives effect to the conversion of all outstanding shares of preferred
stock into 11,898,261 shares of common stock upon the completion of this
offering; and
. assumes the effectiveness of our amended and restated certificate of
incorporation.
Be Free
Our Business
We are a leading provider of services that enable our customers to generate,
place and manage hyperlink promotions for their products and services in tens
of thousands of locations on the Internet. Our customers pay us for these
promotions only when they generate sales or traffic. Our customers include both
online merchants, which sell goods or services over the Internet, and portals,
which are high traffic Web sites designed to provide content and Internet
search capabilities. Our leadership position is supported by the online traffic
or transaction levels of our customers. Our customers use our services to
establish and manage their own marketing relationships directly with third
parties that host Web sites or send e-mail messages. We refer to these third
parties as our customers' marketing partners and our customers sometimes refer
to them as their affiliates. We enable these marketing partners to choose from
among a variety of hyperlink promotions made available by our customers. These
marketing partners can then integrate the promotions they choose anywhere
within the content contained in their Web sites and e-mail messages that is
relevant to our customers' products or services being promoted. We track the
sales or traffic generated for our customers by these hyperlink promotions and
report this information to our customers and to their marketing partners.
Our customers pay their marketing partners only for those promotions that
perform by generating sales or traffic. We call this performance marketing. In
contrast, businesses that use more traditional Internet marketing, such as
banner advertising, pay for their promotions based upon the number of times the
advertisment is viewed, without regard to any sales or traffic generated.
Because of this difference and because marketing partners can choose the
promotions and the way they are integrated into relevant content in the
marketing partner's Web site or e-mail message, our customers generally view
their establishment of these marketing relationships as a separate online sales
channel for their goods and services. These are commonly known as performance
marketing sales channels. We provide customers with a solution that allows them
to cost-effectively establish, manage and reward these performance marketing
sales channels. We enable our customers to increase their sales and traffic and
decrease their cost of customer acquisition.
1
<PAGE>
Our services are critical to performance marketing because they:
. provide a data interchange, consisting of a centralized database, that
enables the exchange of data between our customers' catalog,
transactional and fulfillment systems with their marketing partners' Web
sites and e-mail messages;
. enable our customers to manage promotions that we store on our servers,
consisting of hyperlinks in a variety of formats for each of our
customers' products or services;
. enable each of our customer's marketing partners to select and generate
those promotions from our servers that are relevant to the content on
its Web site or within its e-mail messages and integrate those
promotions within that content;
. track the effectiveness of each individual promotion by recording each
time a user views it on a marketing partner's site, clicks on it and is
directed to our customer's site, and makes a purchase on that customer's
site; and
. collect, store and analyze viewing, click-through and sales data to
improve the effectiveness of online marketing and to reduce the cost of
customer acquisition.
Using our services, our customers pay only for those individual promotions
that generate sales or traffic. Our online merchant customers typically pay us
fees based upon the sales resulting from promotions hosted by their marketing
partners. Our portal customers typically pay us fees based upon the traffic
resulting from promotions hosted by their marketing partners. Our customers
enter into separate agreements directly with their marketing partners and pay
them separate fees based on the level of sales or traffic they generate by
hosting the promotions. As a result, our economic interests are closely aligned
with the economic interests of our customers and their marketing partners.
Our performance marketing services to date have focused on enabling our
customers to establish and manage marketing relationships with third party Web
sites that include on their sites hyperlinks to our customers' Web sites. We
also provide performance marketing services which enhance more traditional
online marketing, such as the serving of ad banners, by tracking their
effectiveness through to a sale rather than merely tracking the number of times
they are viewed. Recently, we expanded our services to enable the inclusion of
hyperlinks in e-mail messages sent by businesses and individuals and to track
their effectiveness through to a sale. To date, our banner ad serving and e-
mail services have not generated a material amount of our revenue.
The promotions we tracked for our customers were shown more than 400 million
times in September 1999 through our customers' more than one million
performance marketing relationships. Jupiter Communications, an Internet
research firm, estimates that online merchants that have established
performance marketing relationships with Web site publishers generate on
average 17% of their online sales through these relationships. We believe that
performance marketing sales channels will constitute an increasingly
significant revenue source for our customers.
2
<PAGE>
Our Market Opportunity
The Internet has experienced rapid growth both in terms of the number of
users online and in the amount and dispersion of content available to them
there. The Internet has also emerged as a significant sales channel for goods
and services to consumers, with total U.S. online consumer spending projected
to increase from $7.8 billion in 1998 to $108.0 billion in 2003.
Online merchants and portals use online promotions to reach a global
audience for their products and services, drive traffic to their Web sites,
attract customers and facilitate transactions. Initially, these online
promotions took the form of banner advertisements. Under this model an
advertiser pays fees based on the number of times its ad is displayed and
typically evaluates the performance of that ad based on the rate at which
viewers click on it and are directed to the advertiser's Web site.
As a result of decreases in these click-through rates and a need to reach a
broader audience viewing more widely dispersed content, online merchants and
portals sought to pay for their marketing programs based on the sales or
traffic they generated.
However, online merchants and portals face several challenges in
establishing and managing performance marketing sales channels. These
challenges include the internal development and operation of software and
hardware to exchange data with thousands of marketing partners that operate
disparate systems, generating and placing hyperlinks and managing relationships
with large numbers of marketing partners. In addition, marketing partners want
to minimize the time and expense associated with enrolling in performance
marketing sales channels and creating and changing hyperlinks for a particular
online merchant or portal. We believe these challenges provide a significant
opportunity for our comprehensive solutions that are designed to help online
merchants and portals establish and manage performance marketing sales channels
and to help marketing partners enhance their revenue.
Our Strategy
Our objective is to be the leading provider of online performance marketing
solutions. We are focusing on the following strategic initiatives to achieve
this objective:
. continue our technology leadership and expertise to enhance and extend
our comprehensive solutions for performance marketing programs;
. rapidly expand our targeted customer base, both in the U.S. and selected
markets abroad;
. continue to provide customer branded and controlled solutions;
. increase the size and effectiveness of our customers' sales channels; and
. expand our services to existing customers.
3
<PAGE>
Our History
We were incorporated in 1996 in Delaware under the name Freedom of
Information, Inc. and changed our name to Be Free, Inc. in March 1999. In
August 1998 we combined with two affiliated companies under common control and
management. One affiliated company was incorporated in 1985 in Pennsylvania and
the other was incorporated in 1996 in Delaware. All of our financial statements
and data in this prospectus are presented on a consolidated basis for all three
entities.
We have invested in the expansion of our business in order to become a
leading provider of performance marketing services and pursue our market
opportunity. As a result, we have a history of operating losses equaling an
accumulated deficit of $19.5 million as of September 30, 1999. See "Summary
Consolidated Financial Data" and "Risk Factors--We have a history of losses and
expect future losses."
----------------
Our principal executive office is located at 154 Crane Meadow Road,
Marlborough, Massachusetts 01752, and our telephone number is (508) 357-8888.
Our corporate Web sites are located at www.befree.com and
www.affiliaterecruiters.com. The information contained on our Web sites is not
a part of this prospectus.
Be Free, BFAST, BFIT, B-INTOUCH and e-nabled are our servicemarks. This
prospectus also contains other trademarks, servicemarks and tradenames that are
the property of other parties.
4
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered by Be Free.... 5,600,000 shares
Common stock to be outstanding
after this offering............... 26,218,444 shares
Use of proceeds.................... Working capital and other general corporate
purposes
Proposed Nasdaq National Market
symbol............................ BFRE
</TABLE>
The common stock outstanding after the offering is based on the number of
shares outstanding as of September 30, 1999, and excludes:
. 1,617,304 shares issuable upon the exercise of outstanding options with
a weighted average exercise price of $0.91 per share;
. 738,643 shares available for issuance and grant under our 1998 Stock
Incentive Plan, net of outstanding options and restricted stock;
. 1,749,000 shares issuable upon the exercise of outstanding warrants to
purchase shares of common stock at a weighted average exercise price of
$3.00 per share; and
. 350,000 shares issuable upon the exercise of outstanding warrants, which
previously had been warrants to purchase Series A preferred stock, at a
weighted average exercise price of $2.00 per share.
5
<PAGE>
Summary Consolidated Financial Data
(In thousands, except per share data)
The financial data set forth below should be read with "Selected
Consolidated Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our consolidated financial
statements and related notes, all included elsewhere in this prospectus.
Unaudited pro forma basic and diluted net loss per share have been
calculated assuming the conversion of all outstanding shares of preferred stock
into shares of common stock, as if the shares had converted immediately upon
issuance. Accordingly, accretion of preferred stock to redemption value has not
been included in the calculation of unaudited pro forma basic and diluted net
loss per share.
<TABLE>
<CAPTION>
Nine Months
Ended September
Year Ended December 31, 30,
------------------------- -----------------
1996 1997 1998 1998 1999
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue:
Performance marketing services.. $ -- $ 216 $ 1,319 $ 933 $ 2,709
Other........................... 196 60 8 8 --
------- ------- ------- ------- --------
Total revenue.................. 196 276 1,327 941 2,709
Total operating expenses......... 1,461 1,211 5,866 3,803 14,999
------- ------- ------- ------- --------
Operating loss................... (1,265) (935) (4,539) (2,862) (12,290)
Interest expense, net............ (26) (99) (224) (86) (193)
------- ------- ------- ------- --------
Net loss......................... (1,291) (1,034) (4,763) (2,948) (12,483)
Accretion of preferred stock to
redemption value................ -- -- (130) (32) (1,297)
------- ------- ------- ------- --------
Net loss attributable to common
stockholders.................... $(1,291) $(1,034) $(4,893) $(2,980) $(13,780)
======= ======= ======= ======= ========
Basic and diluted net loss per
share........................... $ (0.13) $ (0.08) $ (0.61) $ (0.35) $ (2.18)
Shares used in computing basic
and diluted net loss per share.. 9,772 13,569 8,009 8,547 6,331
Unaudited pro forma basic and
diluted net loss per share...... $ (0.49) $ (0.78)
Shares used in computing
unaudited pro forma basic and
diluted net loss per share...... 9,820 16,054
</TABLE>
The pro forma as adjusted balance sheet data as of September 30, 1999 give
effect to the conversion of all outstanding shares of preferred stock into
shares of common stock and have been adjusted to give effect to the sale of
5,600,000 shares of common stock offered hereby at the assumed initial public
offering price of $9.00 per share, after deducting estimated underwriting
discounts and offering expenses.
<TABLE>
<CAPTION>
As of September 30,
1999
---------------------
Pro Forma
Actual As Adjusted
<S> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and marketable securities......... $ 19,338 $65,210
Working capital.......................................... 10,775 56,647
Total assets............................................. 30,560 76,432
Long-term debt, net of current portion................... 5,453 5,453
Convertible preferred.................................... 35,028 --
Total stockholders' equity (deficit)..................... (21,291) 60,149
</TABLE>
6
<PAGE>
RISK FACTORS
You should consider carefully the following risks, together with all other
information included in this prospectus, before you decide to buy our common
stock. Please keep these risks in mind when reading this prospectus, including
any forward-looking statements appearing in this prospectus. If any of the
following risks actually occurs, our business, financial condition or results
of operations would likely suffer materially. As a result, the trading price of
our common stock may decline, and you could lose all or part of the money you
paid to buy our common stock.
Our limited operating history makes the evaluation of our business and
prospects difficult
We introduced our first performance marketing services and recorded our
first revenue from these services in the third quarter of 1997. Accordingly,
you have limited information about our company with which to evaluate our
business, strategies and performance and an investment in our common stock.
Before buying our common stock, you should consider the risks and difficulties
frequently encountered by early stage companies in new and rapidly evolving
markets, particularly those companies whose business depends on the Internet.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
We have a history of losses and expect future losses
Our accumulated deficit as of September 30, 1999 was $19.5 million. Our
current business has never achieved profitability and we expect to continue to
incur losses for the foreseeable future in light of the level of our planned
operating and capital expenditures. We also expect to experience negative
operating cash flow for the foreseeable future as we fund our operating losses
and capital expenditures. If our revenue grows more slowly than we anticipate,
or if our operating expenses exceed our expectations and cannot be adjusted in
a timely manner, our business, results of operations, financial condition and
prospects would be materially and adversely affected. To support our current
and future lines of business, we plan to invest in our technology and
infrastructure, including an expansion of our existing data center and the
opening of new data centers. We also intend to increase our expenditures
relating to sales and marketing and product development activities. The timing
of our investments and expansion could cause material fluctuations in our
results of operations. We also plan to purchase additional capital equipment,
which will result in additional depreciation expense. Our losses may increase
in the future and we may not be able to achieve or sustain profitability. We
will need to generate significant additional revenue to achieve profitability.
Even if we do achieve profitability, we may not be able to sustain or increase
profitability on a quarterly or annual basis in the future. See "Selected
Consolidated Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
If the Internet fails to grow as an advertising, marketing and sales medium,
our future revenue and business prospects would be materially and adversely
affected
Our future revenue and business prospects depend in part on a significant
increase in the use of the Internet as an advertising, marketing and sales
medium. Internet advertising and marketing is new and rapidly evolving, and it
cannot yet be compared with traditional advertising media or marketing
7
<PAGE>
programs to gauge its effectiveness. As a result, demand for and market
acceptance of Internet advertising and marketing solutions are uncertain.
Further, the Internet is still emerging as a significant channel for selling
goods and services to consumers. Our business and prospects will be materially
and adversely affected if the Internet does not become accepted as an
advertising and marketing medium or if consumers do not increasingly purchase
goods and services online. The adoption of Internet advertising and marketing,
particularly by entities that have historically relied upon more traditional
methods, requires the acceptance of a new way of advertising and marketing.
These customers may find Internet advertising and marketing to be less
effective for meeting their business needs than other methods of advertising
and marketing.
Because our business model is new and unproven, we do not know if we will
generate significant revenue on a sustained basis or achieve profitability
Substantially all of our revenue is derived from a new business model. Our
revenue depends on whether the online marketing that we facilitate generates
sales or traffic for our customers. In contrast, others earn fees based merely
on placing online advertisements for customers. Our customers' marketing
partners may not generate substantial volumes of sales or traffic for our
customers. Similarly, our customers' product and service offerings may not be
sufficient to attract or retain their marketing partners. In either situation,
we may lose revenue and, ultimately, customers. If the assumptions underlying
our business model are not valid or we are unable to implement our business
plan, achieve the predicted level of market penetration or obtain the desired
level of pricing of our services for sustained periods, our business,
prospects, results of operations and financial condition will be materially and
adversely affected.
Most of our revenue is derived from a small number of customers. If we lose any
of these major customers, our revenue could dramatically decline
We derive a substantial portion of our revenue from a small number of
customers. Our largest customer, barnesandnoble.com, represented 78%, 73% and
30% of our revenue in 1997, 1998 and the first nine months of 1999,
respectively. In the first nine months of 1999, GeoCities, a subsidiary of
Yahoo! Inc., and Network Solutions, Inc., each accounted for in excess of 10%
of our revenue. Our revenue would be materially and adversely affected by the
loss of any of these customers, any significant reduction in net revenue
generated from these customers or any system or other disruptions related to
these customers or their significant marketing partners. Our contract with
barnesandnoble.com expires in January 2001. Our contract with GeoCities expires
in January 2002 and our contract with Network Solutions, Inc. expires in July
2000. GeoCities has the right to terminate its contract prior to the expiration
of its term by giving us notice and paying a penalty. These contracts provide
that either party may terminate upon a material breach. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Note B to the Consolidated Financial Statements included elsewhere in this
prospectus.
System disruptions and failures may result in customer dissatisfaction,
customer loss or both, which could materially and adversely affect our
reputation and business
The continued and uninterrupted performance of the computer systems used by
us, our customers and their marketing partners is critical to our success.
Customers may become dissatisfied
8
<PAGE>
by any system failure that interrupts our ability to provide our services to
them. These failures could affect our ability to deliver and track promotions
quickly and accurately to the targeted audience and deliver reports to our
customers and their marketing partners. Sustained or repeated system failures
would reduce the attractiveness of our services significantly. Our operations
depend on our ability to protect our computer systems against damage from fire,
power loss, water damage, telecommunications failures, vandalism and similar
unexpected adverse events. In addition, interruptions in our services could
result from the failure of telecommunications providers to provide the
necessary data communications capacity in the time required. Our critical
computer hardware and software is housed at Exodus Communications, Inc., a
third party provider of Internet hosting and communication services located in
the Harborside, New Jersey area. Any system failure by us or Exodus, or any of
the above factors affecting the Harborside, New Jersey area specifically, would
have a material adverse effect on our business. Further, despite our efforts to
implement network security measures, our systems are vulnerable to computer
viruses, break-ins and similar disruptions from unauthorized tampering. We do
not carry enough business interruption insurance to compensate for any
significant losses that may occur as a result of any of these events.
We have experienced systems outages in the past, during which we were unable
to route transactions to our customers from their marketing partners or provide
reports. We expect to experience additional outages in the future. To date,
these outages have not had a material adverse effect on us. However, in the
future, a prolonged outage or frequent outages could cause harm to our
reputation and could cause our customers or their marketing partners to make
claims against us for damages allegedly resulting from an outage. The expansion
of our existing data center and the opening of additional data centers may not
eliminate systems outages or prevent the loss of sales when system outages
occur. Any damage or failure that interrupts or delays our operations could
result in material harm to our business and expose us to material liabilities.
See "Business--Technology Infrastructure."
Intense competition in our markets may reduce the number of our customers and
the pricing of our services
We compete in markets that are new, intensely competitive, highly fragmented
and rapidly changing. We compete against larger companies with respect to our
BFIT services, the banner ad serving portion of our business. We compete more
broadly against similar sized, private companies. We face competition in the
overall performance marketing solutions market, as well as in the affiliate
sales channel and banner advertising delivery segments of the Internet
advertising and marketing markets. In addition, we have recently entered the
online e-mail referral services market and expect to face competition in this
market. We have experienced and expect to continue to experience increased
competition from current and potential competitors. We believe our principal
competitors are Commission Junction, LinkShare and Microsoft's LinkExchange.
See "Business--Competition."
Our competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements than we can. In addition, our
current and potential competitors may bundle their products with other software
or services, including operating systems and Internet browsers, in a manner
that may discourage users from purchasing services offered by us. Also, many
current and potential competitors have greater name recognition and
significantly greater financial,
9
<PAGE>
technical, marketing and other resources than we do. Increased competition
could result in price reductions, fewer customer orders, reduced gross margins
and loss of market share.
Some online merchants and portals may regard information about their online
sales and traffic that result from their marketing partners to be too sensitive
to share with anyone outside their company, including Be Free. If this view
became widespread, our business and prospects would be materially and adversely
affected.
Our performance marketing services require our customers to permit us access
to their catalog, transactional and fulfillment systems, so we can track, store
and analyze the sales and traffic that result from their promotions on their
marketing partners' Web sites. Some online merchants and portals may regard
this information as too important from a business or competitive perspective to
share with any third-party, including Be Free. If this view became widespread,
businesses might forgo performance marketing services entirely or seek to
establish and manage their own performance marketing sales channel using
internal resources. This would materially and adversely affect our business and
prospects.
Any breach of our system's security measures that results in the release of
confidential customer data could cause customer dissatisfaction, customer loss,
or both and expose us to lawsuits
Third parties may attempt to breach our security. If they are successful,
they could obtain our customers' or their marketing partners' confidential
information, including marketing data, sales data, passwords, and financial
account, performance and contact information. A breach of security could
materially and adversely affect our reputation, business and prospects. We rely
on encryption technology licensed from third parties. Our systems are
vulnerable to computer viruses, physical or electronic break-ins and similar
disruptions, which could lead to interruptions, delays or loss or theft of
data. We may be required to expend significant capital and other resources to
license encryption technology and additional technologies to protect against
security breaches or to alleviate problems caused by any breach. We may be
liable for any breach in our security and any breach could harm our reputation,
reduce demand for our services or cause customers to terminate their
relationships with us.
If our system produces inaccurate information about the transactions we track,
we may experience customer dissatisfaction, customer loss, or both and be
exposed to lawsuits
Software defects or inaccurate data may cause incorrect recording, reporting
or display of information about transactions to our customers, their marketing
partners or both. This may cause us to pay, on our customer's behalf, incorrect
transaction fees to their marketing partners. See "Business--Services--Related
Services" on page 41 for a description of the payment service we offer our
customers. It may also provide us with an inaccurate basis on which to extend,
terminate or alter our customer relationships and may lead to customer
dissatisfaction. As a result, we could lose customers or mismanage our customer
relationships. We could also be sued for losses incurred by our customers,
their marketing partners or both caused by inaccurate data. Our services depend
on complex software that we have internally developed or licensed from third
parties. Software often contains defects, particularly when first introduced or
when new versions are released, which can
10
<PAGE>
adversely affect performance or result in inaccurate data. We may not discover
software defects that affect our new or current services or enhancements until
after they are deployed. In addition, our services depend on our customers and
their marketing partners supplying us with data regarding contacts, performance
and sales. They may provide us with erroneous or incomplete data.
To be competitive, we must continue to develop new and enhanced services, and
our failure to do so may adversely affect our prospects
Our market is characterized by rapid technological change, frequent new
service introductions, changes in customer requirements and evolving industry
standards. The introduction of services embodying new technologies and the
emergence of new industry standards could render our existing services
obsolete. Our revenue growth depends upon our ability to develop and introduce
a variety of new services and service enhancements to address the increasingly
sophisticated needs of our customers. We have experienced delays in releasing
new services and service enhancements and may experience similar delays in the
future. To date, these delays have not had a material effect on our business.
If we experience material delays in introducing new services and enhancements,
customers may forgo purchasing or renewing our services and purchase those of
our competitors.
If government regulations and legal uncertainties related to doing business on
the Internet cause a decline in e-commerce and Internet advertising and
marketing, our business and prospects could be materially and adversely
affected
Laws and regulations directly applicable to Internet communications,
commerce and marketing are becoming more prevalent. If any of these laws
hinders the growth in use of the Web generally or decreases the acceptance of
the Web as a medium of communications, commerce and marketing, our business and
prospects may suffer materially. The United States Congress has enacted
Internet laws regarding children's privacy, copyrights and taxation. Other laws
and regulations may be adopted covering issues such as user privacy, pricing,
content, taxation and quality of products and services. The governments of
states and foreign countries might attempt to regulate our transmissions or
levy sales or other taxes relating to our activities. The laws governing the
Internet remain largely unsettled, even in areas where legislation has been
enacted. It may take years to determine whether and how existing laws such as
those governing intellectual property, privacy, libel and taxation apply to the
Internet and Internet advertising and marketing services. In addition, the
growth and development of the market for Internet commerce may prompt calls for
more stringent consumer protection laws, both in the United States and abroad,
that may impose additional burdens on companies conducting business over the
Internet.
If privacy concerns prevent us from effectively tracking Internet users on the
Web sites of our customers, their marketing partners or both, our business
prospects could decline significantly
Our services depend on our being able to track when an Internet user views
our customers' promotions, clicks on them, and, in the case of our online
merchant customers, makes a purchase as a result of the click-through. If we
became unable to track this information effectively, our business and prospects
would be materially and adversely affected. Currently, we track this
information by a variety of methods including the use of "cookies" and the
assignment of unique tracking numbers when a user clicks on a promotion. A
cookie is a small file of information that uniquely identifies a
11
<PAGE>
user. It is stored on the hard drive of the user's computer and passed through
the user's browser. Due to privacy concerns, Internet users may avoid Web sites
where their online behavior is likely to be tracked. If this occurred on a
widespread basis, it could have a material adverse effect on our business and
prospects.
If a significant number of Internet users use software to block online
advertising, our business and prospects could decline materially
Software programs exist that limit or prevent advertising from being
delivered to a user's computer. Widespread adoption of this software by Web
users would significantly undermine the commercial viability of Internet
advertising and marketing. This development could cause our business and
prospects to decline materially.
If we fail to protect our intellectual property rights, our business and
prospects could be materially and adversely affected
We seek to protect our proprietary rights through a combination of patent,
copyright, trade secret and trademark law and assignment of invention and
confidentiality agreements. The unauthorized reproduction or other
misappropriation of our proprietary rights could enable third parties to
benefit from our technology without paying us for it. If this occurs, our
business could be materially and adversely affected. We have also filed
applications to register various servicemarks. We cannot assure you that any of
our servicemark registrations will be approved.
If we infringe upon the intellectual property rights of others, we could be
exposed to significant liability
We cannot assure you that our patent or any future patents or servicemark
registrations we receive will not be successfully challenged by others or
invalidated. In addition, we cannot assure you that we do not infringe any
intellectual property rights of third parties or that we will be able to
prevent misappropriation of our technologies, particularly in foreign countries
where laws or law enforcement practices may not protect our proprietary rights
as fully as in the United States.
If we fail to manage effectively the rapid growth in our operations, our
business and prospects will be materially and adversely affected
We have experienced rapid growth and expansion in our operations that have
placed a significant strain on our managerial, operational and financial
resources. Many members of our management have only recently joined us. We have
grown from 12 employees as of June 30, 1998 to 154 employees as of September
30, 1999, and we expect the number of employees to increase in the future. To
compete successfully, we must:
. continue to improve our financial and management controls;
. enhance our reporting systems and procedures;
. continue to scale our performance marketing systems;
. expand, train and manage our work force;
. integrate new customers effectively; and
. expand our sales, marketing and customer support departments.
12
<PAGE>
If we fail to attract and retain key personnel, our business will be materially
and adversely affected
We depend on the continued services of our key technical, sales and senior
management personnel, including our President and Chief Executive Officer,
Gordon B. Hoffstein. Any officer or employee can terminate his or her
relationship with us at any time. Our future business also depends on our
ability to attract, train, retain and motivate highly qualified technical,
marketing, sales and management personnel. Competition for these personnel is
intense, and we may not be able to attract and retain them.
If our services are disrupted by the year 2000 problem, our business would be
materially and adversely affected and we could be exposed to material
liabilities from lawsuits against us
Beginning in the year 2000, the date fields coded in some computer systems
and software products will need to accept four-digit entries in order to
distinguish between 21st century and 20th century dates. There is significant
uncertainty regarding the potential effects of this issue. We have not had any
independent verification of our Year 2000 readiness or assessment of potential
costs associated with Year 2000 risks. We also have not procured any Year 2000
specific insurance or made any contingency plans to address Year 2000 risks.
Unanticipated costs associated with any Year 2000 compliance may exceed our
present expectations and have a material adverse effect on our business,
results of operations and financial condition.
We depend on the uninterrupted availability of the Internet infrastructure
to conduct our business. We also rely on the continued operations of our
customers, in particular their e-commerce sites where commercial transactions
are performed, and our customers' marketing partners, in particular the Web
sites and e-mail systems that host and distribute promotions, for our revenue.
We are thus dependent upon the success of the Year 2000 compliance efforts of
the service providers that support the Internet, our customers and their
marketing partners. Interruptions in the Internet infrastructure affecting us,
our customers or their marketing partners, or the failure of the Year 2000
compliance efforts of one or more of our customers or their marketing partners,
could have a material adverse effect on our business, results of operations and
financial condition. Further, the marketing initiatives pursued by our
prospective customers could be affected by Year 2000 issues as companies expend
significant resources to correct their current systems for the year 2000. These
expenditures may result in reduced funds available for Internet advertising.
This could materially and adversely affect our business, results of operations
and financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000 Compliance."
We depend on a limited number of hardware and software vendors for essential
products. If we were unable to purchase or license these essential products on
acceptable terms or if we had to obtain substitutes for these essential
products from different vendors, we might suffer a loss of revenue due to
business interruption and might incur higher operating costs.
We buy and lease hardware, including our servers and storage arrays from Sun
Microsystems and EMC Corporation. We also license software, including our
servers' operating systems, Web server technology, database technology,
graphical user interface technology and encryption technology, primarily from
Sun Microsystems, Oracle Corporation and PowerSoft. If these vendors changed
the
13
<PAGE>
terms of our license arrangements with them so that it would be uneconomical to
purchase our essential products from them, or if they were unable or unwilling
to supply us with a sufficient quantity of properly functioning products, our
business could be materially and adversely affected due to:
. business interruption caused by any delay in product and service
development until equivalent technology can be identified; and
. the cost of integrating new technology.
We may be exposed to liability for information displayed on our customers' Web
sites or within their marketing partners' Web sites or e-mail messages
Because the provision of our services requires us to provide a connection to
the Web sites of our customers and their marketing partners, we may be
perceived as being associated with the content of these Web sites. We do not
and cannot screen all of the content generated by our customers and their
marketing partners. As a result, we may face potential liability for
defamation, negligence, copyright, patent or trademark infringement and other
claims based on the materials displayed on our customers' sites and on their
marketing partners' sites and e-mail messages. For example, if one of our
customers is sued for posting information on its Web site that is alleged to be
defamatory, we may also be named as a defendant in that legal action based
solely on our limited association with that customer's Web site. As a result,
we could be involved in legal proceedings and disputes that are costly to
resolve, regardless of their lack of merit. We may also suffer a loss of
customers or reputational harm based on this information or resulting from our
involvement in these legal proceedings. Furthermore, some foreign governments
have enforced laws and regulations related to content distributed over the
Internet that are more strict than those currently in place in the United
States.
Our insurance may not cover claims of these types or may not be adequate to
indemnify us for all liability that may be imposed. There is a risk that a
single claim or multiple claims, if successfully asserted against us, could
exceed the total of our coverage limits. There is also a risk that a single
claim or multiple claims asserted against us may not qualify for coverage under
our insurance policies as a result of coverage exclusions that are contained
within these policies. Any imposition of liability, particularly liability that
is not covered by insurance or is in excess of insurance coverage could have a
material adverse effect on our reputation and our business and operating
results, or could result in the imposition of criminal penalties.
We expect our operating results to fluctuate and the price of our common stock
could fall if quarterly results are lower than the expectations of securities
analysts or stockholders
We believe that quarter-to-quarter comparisons of our operating results are
not necessarily meaningful. You should not rely on the results of one quarter
as an indication of our future performance. If our quarterly operating results
fall below the expectations of securities analysts or stockholders, however,
the price of our common stock could fall. We have experienced significant
fluctuation in our quarterly operating results and may continue to experience
significant fluctuation. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations-- Consolidated Quarterly Results of
Operations" for a discussion of the factors causing fluctuation of quarterly
operating results.
14
<PAGE>
We may be unable to fund our operating and capital requirements and service our
debt satisfactorily
We expect the net proceeds from this offering, our current cash and cash
equivalents and borrowings to meet our operating and capital requirements and
service our debt for at least the next 12 months. After that, we may need to
raise additional funds. We cannot be certain that we will be able to obtain
additional financing on favorable terms, if at all. If we cannot raise funds
when needed, on acceptable terms, we may not be able to develop or enhance our
services, take advantage of future opportunities or respond to competitive
pressures or unanticipated requirements. This could seriously harm our
business, results of operations and financial condition.
We plan to devote substantial resources to expand our existing data center
and open additional data centers in 1999 and 2000. In addition, we expect to
make significant investments in sales and marketing and the development of new
services as part of our business strategy. The failure to generate sufficient
cash from operations or to raise sufficient funds to finance this growth could
require us to delay or abandon some or all of our plans or otherwise forgo
market opportunities. This could make it difficult for us to respond to
competitive pressures.
If we are not able to overcome the challenges of our planned international
expansion, our revenue and our prospects for profitability may be materially
and adversely affected
We intend to expand our international operations and international sales and
marketing efforts. To date, we have limited experience in developing localized
versions of our services and in marketing, selling and distributing our
services internationally. We have agreed to provide performance marketing
services for an existing customer in Europe and may agree to provide services
in additional European countries and Japan. Our success in these markets will
depend on the success of our customers in these countries.
International operations are subject to other inherent risks, including:
. the impact of recessions in economies outside the United States;
. changes in regulatory requirements;
. potentially adverse tax consequences;
. difficulties and costs of staffing and managing foreign operations;
. political and economic instability;
. compliance with foreign regulations regarding Internet privacy concerns;
. fluctuations in currency exchange rates; and
. seasonal reductions in business activity during the summer months in
Europe and some other parts of the world.
We have not identified specific uses for a substantial portion of the net
proceeds of this offering. Management may invest or spend the proceeds of this
offering in ways with which you may not agree
Our board of directors and management will have significant flexibility in
applying the net proceeds of this offering. As of the date of this prospectus,
we do not have plans for using most of
15
<PAGE>
the proceeds from this offering other than for working capital and general
corporate purposes, which may include the prepayment of our existing
indebtedness.
We depend on the continued viability of the Internet infrastructure
Our business depends upon the development and maintenance of a viable
Internet infrastructure. The current Internet infrastructure may be unable to
support an increased number of users. The timely development of products such
as high-speed modems and communications equipment will be necessary to continue
reliable Internet access. Furthermore, the Internet has experienced outages and
delays as a result of damage to portions of its infrastructure. Outages and
delays, including those resulting from Year 2000 problems, could adversely
affect Web sites, e-mail and the level of traffic on the Web sites of our
customers and their marketing partners. We also depend upon Internet access
providers that provide consumers with access to our services. In the past,
users have occasionally experienced difficulties due to system failures
unrelated to our systems. Any disruption in the Internet access provided by
third-party providers or any failure of third-party providers to handle higher
volumes of user traffic could have a material adverse effect on our business,
results of operations and financial condition. Finally, the effectiveness of
the Internet may decline due to delays in the development or adoption of new
standards and protocols designed to support increased levels of activity. If
new standards or protocols are developed, we may be required to incur
substantial expenditures to adapt our products.
Projections included in this prospectus relating to the growth of e-commerce
and the Internet are based on assumptions that could turn out to be incorrect
and actual results could be materially different from the projections
This prospectus contains various third-party data and projections, including
those relating to revenue generated by electronic commerce, the number of
Internet users and the amount of Internet advertising. See "Prospectus Summary-
- -Our Market Opportunity" on page 3 and "Business-Industry Background" on pages
33 and 34. These data and projections have been included in studies prepared by
independent market research firms, and the projections are based on surveys,
financial reports and models used by these firms. Actual results or
circumstances may be materially different from the projections. This could
reduce our revenue and harm our operating results. These data and projections
are inherently imprecise and investors are cautioned not to place undue
reliance on them.
Our stock price may be extremely volatile which may prevent you from reselling
your shares at or above the initial public offering price
The market price of the common stock after this offering may vary from the
initial public offering price. Fluctuations in market price and volume are
particularly common among securities of Internet and other technology
companies. As a result, you may not be able to resell your shares at or above
the initial offering price. The market price of our common stock may fluctuate
significantly in response to the following factors, some of which are beyond
our control:
. variations in quarterly operating results;
. changes in market valuations of Internet and other technology companies;
. our announcements of significant contracts, acquisitions, strategic
partnership, joint ventures or capital commitments;
16
<PAGE>
. failure to complete significant sales;
. additions or departures of key personnel;
. future sales of common stock; and
. changes in financial estimates by securities analysts.
If our stock price is volatile, we may be subject to securities class action
litigation
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
stock. We may in the future be the target of similar litigation. Securities
litigation could result in substantial costs and divert management's attention
and resources.
If substantial sales of our common stock occur, our stock price could decline
Sales of a substantial number of shares of common stock after this offering
could adversely affect the market price of the common stock. On completion of
this offering, we will have 26,218,444 shares of common stock outstanding,
1,617,304 shares subject to outstanding options and 2,099,000 shares subject to
outstanding warrants. The shares sold in this offering will be freely tradable
without restriction or further registration under the federal securities laws
unless purchased by our "affiliates" as that term is defined in Rule 144. The
remaining 20,618,444 shares, or 78.64 %, of common stock outstanding on
completion of the offering will be "restricted securities" as that term is
defined in Rule 144. Our directors, executive officers and existing
stockholders have entered into lock-up agreements that limit their ability to
sell common stock. These stockholders have agreed not to sell or otherwise
dispose of any shares of common stock for a period of 180 days after the date
of this prospectus without the prior written approval of Donaldson, Lufkin &
Jenrette Securities Corporation. When the lock-up agreements expire, most of
the restricted securities will become eligible for sale.
Our existing stockholders will be able to control all matters requiring
stockholder approval and could delay or prevent someone from acquiring or
merging with us on terms favored by a majority of our independent stockholders
On completion of this offering, our executive officers and directors and
their affiliates will beneficially own approximately 62.70% of our outstanding
common stock. As a result, these stockholders will be able to exercise control
over the company's operations and all matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions. This could delay or prevent a third party from acquiring or
merging with us.
If we issue more equity securities in the future, your influence over corporate
matters that require stockholder approval may be diluted
If we raise additional capital by selling more equity securities, your
percentage ownership may decrease and any additional equity securities may have
rights, preferences or privileges senior to those of existing holders of common
stock. As a result, your ability to influence corporate matters that require
stockholder approval may be reduced.
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<PAGE>
Anti-takeover provisions in our charter documents and Delaware law could
prevent or delay a change in control of our company
Some provisions of our amended and restated certificate of incorporation and
by-laws may discourage, delay or prevent a merger or acquisition that a
stockholder may consider favorable, which could reduce the market price of our
common stock. These provisions include:
. authorizing the issuance of blank check preferred stock or additional
shares of common stock;
. providing for a classified board of directors with staggered, three-year
terms;
. providing that directors may only be removed for cause by a two-thirds
vote of stockholders;
. limiting the persons who may call special meetings of stockholders;
. prohibiting stockholder action by written consent; and
. establishing advance notice requirements for nominations for election to
the board of directors or for proposing matters that can be acted on by
stockholders at stockholder meetings.
Delaware law may also discourage, delay or prevent a third party from
acquiring or merging with us.
Investors will experience immediate dilution in the book value of their shares
The initial public offering price is expected to be substantially higher
than the book value per share of the outstanding common stock immediately after
this offering. Accordingly, if you purchase common stock in the offering, you
will incur immediate dilution of approximately $6.71 in the book value per
share of the common stock from the price you pay for the common stock.
The forward-looking statements we make in this prospectus might prove
inaccurate. As a result, our actual results, levels of activity, performance or
achievements may differ materially from those expressed in the forward-looking
statements
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus constitute forward-
looking statements. In some cases, you can identify forward-looking statements
by terminology such as "may," "might," "will," "should," "could," "expects,"
"plans," "intends," "anticipates," "believes," "estimates," "predicts,"
"potential" or "continue" or other comparable terminology. These statements
involve known and unknown risks and uncertainties that may cause our actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by these forward-looking statements. These
factors include, among other things, the risk factors discussed above.
We cannot guarantee any future results, levels of activity, performance or
achievements. Moreover, neither we nor anyone else assumes responsibility for
the accuracy and completeness of these statements. We do not intend to update
any of the forward-looking statements after the date of this prospectus.
18
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from our sale of 5,600,000 shares of
common stock at an assumed initial public offering price of $9.00 per share to
be $45,872,000, after deducting estimated underwriting discounts and offering
expenses. If the underwriters' over-allotment option is exercised in full, we
estimate that the net proceeds will be approximately $52,903,000, after
deducting the estimated underwriters discounts and offering expenses.
Our primary purposes for this offering are to increase our equity capital,
create a public market for our common stock and facilitate our future access to
public equity markets. We intend to use our net proceeds of this offering for
working capital and other general corporate purposes, including expansion of
our existing data center and the addition of new data centers. As of September
30, 1999, we had outstanding the following principal amounts under our credit
arrangements with Comdisco, Inc. that we may repay, in whole or in part, with a
portion of the proceeds of this offering:
. $5,000,000 with an interest rate of 12% per annum under a subordinated
debt agreement, to be repaid in equal monthly installments of principal
beginning December 1999 and ending November 2001; and
. $1,905,258 with an interest rate of 6.8% per annum under a revolving
capital equipment line of credit with each borrowing under the line to
be repaid in equal monthly installments of principal over four years
from the date of that borrowing.
These borrowings were used to provide working capital and to acquire computer
equipment, furniture and fixtures.
We have not identified specific uses for a substantial portion of our net
proceeds of this offering, and we will have discretion over their use and
investment. Pending use of the net proceeds, we intend to invest these proceeds
in short-term, investment grade, interest-bearing securities.
DIVIDEND POLICY
We currently intend to retain future earnings, if any, to finance our
growth. We have not paid any cash dividends since January 1, 1996 and do not
anticipate paying cash dividends on our common stock in the foreseeable future.
Payment of future dividends, if any, will be at the discretion of our board of
directors after taking into account various factors, including our financial
condition, operating results, current and anticipated cash needs, restrictions
in financing agreements and plans for expansion.
Under the terms of our existing subordinated debt agreement, we are
prohibited from paying any cash dividends without the prior consent of our
lenders.
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<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 1999
on an actual basis and pro forma as adjusted basis. This information should be
read in conjunction with our consolidated financial statements and related
notes, all included elsewhere in this prospectus.
The pro forma as adjusted basis:
. gives effect to the automatic conversion of all outstanding shares of
preferred stock into 11,898,261 shares of common stock upon the closing
of this offering; and
. reflects our receipt and application of the estimated net proceeds from
the sale of 5,600,000 shares of common stock in this offering at an
assumed initial public offering price of $9.00 per share, after
deducting the estimated underwriting discounts and offering expenses
payable by us.
Shares of common stock reflected by this table exclude:
. 1,617,304 shares issuable upon the exercise of outstanding options with
a weighted average exercise price of $0.91 per share;
. 738,643 shares available for issuance and grant under our 1998 Stock
Incentive Plan, net of outstanding options and restricted stock;
. 1,749,000 shares issuable upon the exercise of outstanding warrants to
purchase shares of common stock at a weighted average exercise price of
$3.00 per share; and
. 350,000 shares issuable upon the exercise of outstanding warrants, which
previously had been warrants to purchase Series A preferred stock, at a
weighted average exercise price of $2.00 per share.
<TABLE>
<CAPTION>
As of September 30, 1999
-------------------------
Pro Forma
Actual As Adjusted
<S> <C> <C>
Cash, cash equivalents and marketable securities... $ 19,338,226 $65,210,226
============ ===========
Current portion of long-term debt.................. $ 2,501,895 $ 2,501,895
============ ===========
Long-term debt, net of current portion............. $ 5,452,825 $ 5,452,825
Series A Convertible Participating Preferred Stock;
$.01 par value; 11,300,000 shares authorized,
actual: 10,600,000 shares issued and outstanding,
actual; none authorized, issued and outstanding,
pro forma as adjusted............................. 9,077,519 --
Series A Convertible Participating Preferred Stock
Warrants: 700,000 warrants, exercise price $1.00.. 540,000 --
Series B Convertible Participating Preferred Stock;
$.01 par value; 13,196,522 shares authorized,
actual: 13,196,522 shares issued and outstanding,
actual; none authorized, issued and outstanding,
pro forma as adjusted............................. 25,950,155 --
Preferred stock, $0.01 par value; no shares
authorized, actual; 10,000,000 shares authorized,
pro forma as adjusted; no shares issued and
outstanding, actual and pro forma as adjusted..... -- --
Stockholders' equity (deficit):
Common stock, $0.01 par value; 27,500,000 shares
authorized, actual; 75,000,000 shares authorized,
pro forma as adjusted: 9,750,000 shares issued,
actual; 27,248,261 shares issued pro forma as
adjusted......................................... 97,500 272,483
Additional paid-in capital........................ 6,462,077 87,726,768
Unearned compensation............................. (6,503,315) (6,503,315)
Shareholders notes receivable..................... (208,072) (208,072)
Accumulated deficit............................... (19,524,994) (19,524,994)
Treasury stock, at cost (1,029,817 shares, actual
and pro forma as adjusted)....................... (1,613,860) (1,613,860)
------------ -----------
Total stockholders' equity (deficit)............... (21,290,664) 60,149,010
------------ -----------
Total capitalization............................... $ 19,729,835 $65,601,835
============ ===========
</TABLE>
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DILUTION
The pro forma net tangible book value of our common stock as of September
30, 1999 was $14,277,010, or $0.69 per share, after giving effect to the
automatic conversion of all outstanding shares of preferred stock into
11,898,261 shares of common stock upon the closing of this offering. After
giving effect to the sale of common stock pursuant to this offering at an
assumed initial public offering price of $9.00 per share, assuming the
underwriters' option to purchase additional shares in this offering is not
exercised, and after deducting estimated underwriting discounts and offering
expenses, the adjusted pro forma net tangible book value as of September 30,
1999 would have been $60,149,010 or $2.29 per share.
Pro forma net tangible book value per share before the offering has been
determined by dividing pro forma net tangible book value, which is calculated
as total tangible assets less total liabilities, by the pro forma number of
shares of common stock outstanding as of September 30, 1999. This offering will
result in an increase in pro forma net tangible book value per share of $1.60
to existing stockholders and dilution in pro forma net tangible book value per
share of $6.71 to new investors who purchase shares in this offering. Dilution
is determined by subtracting pro forma net tangible book value per share from
the assumed initial public offering price of $9.00 per share. The following
table illustrates this dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................. $9.00
Pro forma net tangible book value per share as of September 30,
1999............................................................ $0.69
Increase attributable to sale of common stock in this offering.. 1.60
-----
Pro forma net tangible book value per share after this offering.. 2.29
-----
Dilution of net tangible book value per share to new investors... $6.71
=====
</TABLE>
If the underwriters exercise their option to purchase additional shares in
this offering, the pro forma net tangible book value per share after the
offering would be $2.48 per share, the increase in net tangible book value per
share to existing stockholders would be $1.79 per share and the dilution to new
investors would be $6.52 per share.
The following table summarizes, on a pro forma basis as of September 30,
1999, the differences between the total consideration paid and the average
price per share paid by the existing stockholders and the new investors with
respect to the number of shares of common stock purchased from us based upon an
assumed initial public offering price of $9.00 per share:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average Price
------------------ ------------------- Per Share
Number Percent Amount Percent
<S> <C> <C> <C> <C> <C>
Existing stockholders...... 20,618,444 78.6% $36,358,436 41.9% $1.76
New investors.............. 5,600,000 21.4 50,400,000 58.1 $9.00
---------- ---- ----------- ----
Total.................... 26,218,444 100% $86,758,436 100%
========== ==== =========== ====
</TABLE>
These tables assume no exercise of stock options or warrants outstanding as
of September 30, 1999. At September 30, 1999, there were 1,617,304 shares of
common stock issuable upon exercise of outstanding stock options at a weighted
average exercise price of $0.91 per share. Upon completion of this offering,
there will be outstanding warrants to purchase 2,099,000 shares of common stock
at a weighted-average exercise price of $2.83 per share. To the extent that
outstanding options or warrants are exercised in the future, there will be
further dilution to new investors.
21
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and
related notes included elsewhere in this prospectus. The consolidated statement
of operations data for the fiscal years ended December 31, 1996, 1997 and 1998
and the consolidated balance sheet data as of December 31, 1997 and 1998 are
derived from our consolidated financial statements audited by
PricewaterhouseCoopers LLP, independent accountants. The consolidated statement
of operations data for the nine months ended September 30, 1998 and 1999 and
the consolidated balance sheet data as of September 30, 1999 are derived from
our unaudited consolidated financial statements included elsewhere in this
Prospectus. The consolidated statement of operations data for the years ended
December 31, 1994 and 1995 and the consolidated balance sheet data as of
December 31, 1994, 1995 and 1996 are derived from our unaudited consolidated
financial statements not included elsewhere in this prospectus. The unaudited
consolidated financial statements have been prepared on the same basis as our
audited consolidated financial statements and, in our opinion, include all
adjustments, consisting only of normal recurring adjustments, which we consider
necessary for a fair presentation of our results of operations and financial
position for these periods. These historical results are not necessarily
indicative of results to be expected for any future period.
In the third quarter of 1997 we began providing performance marketing
services. Prior to that time, we provided customers software development
services which are reflected as other revenue.
Unaudited pro forma basic and diluted net loss per share have been
calculated assuming the conversion of all outstanding shares of preferred stock
into shares of common stock, as if the shares had converted immediately upon
issuance. Accordingly, accretion of preferred stock to redemption value has not
been included in the calculation of unaudited pro forma basic and diluted net
loss per share.
22
<PAGE>
Selected Consolidated Financial Data
(In thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
----------------------------------------- ----------------------
1994 1995 1996 1997 1998 1998 1999
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue:
Performance marketing
services.............. $ -- $ -- $ -- $ 216 $ 1,319 $ 933 $ 2,709
Other.................. 587 481 196 60 8 8 --
------ ------ ------- ------- ------- ------- --------
Total revenue......... 587 481 196 276 1,327 941 2,709
Operating expenses:
Cost of revenue........ -- -- -- 273 424 226 437
Sales and marketing.... 83 49 398 180 1,454 539 8,334
Development and
engineering........... 210 274 505 426 728 398 3,135
General and
administrative........ 111 115 558 332 875 433 1,652
Equity related
compensation.......... -- -- -- -- 2,385 2,207 1,441
------ ------ ------- ------- ------- ------- --------
Total operating
expenses............. 404 438 1,461 1,211 5,866 3,803 14,999
Operating income (loss). 183 43 (1,265) (935) (4,539) (2,862) (12,290)
Interest income
(expense), net......... (5) (4) (26) (99) (224) (86) (193)
------ ------ ------- ------- ------- ------- --------
Net income (loss)....... 178 39 (1,291) (1,034) (4,763) (2,948) (12,483)
Accretion of preferred
stock to redemption
value.................. -- -- -- -- (130) (32) (1,297)
------ ------ ------- ------- ------- ------- --------
Net income (loss)
attributable to common
stockholders........... $ 178 $ 39 $(1,291) $(1,034) $(4,893) $(2,980) $(13,780)
====== ====== ======= ======= ======= ======= ========
Basic and diluted net
income (loss) per
share.................. $ 0.10 $ 0.02 $ (0.13) $ (0.08) $ (0.61) $ (0.35) $ (2.18)
Shares used in computing
basic and diluted net
income (loss) per
share.................. 1,761 1,761 9,772 13,569 8,009 8,547 6,331
Unaudited pro forma
basic and diluted net
loss per share......... $ (0.49) $ (0.78)
Shares used in computing
pro forma basic and
diluted net loss per
share.................. 9,820 16,054
<CAPTION>
As of December 31, As of
----------------------------------------- September 30,
1994 1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents
and marketable
securities............. $ 170 $ 90 $ 25 $ 76 $ 4,327 $ 19,338
Working capital
(deficit).............. 128 169 (443) (502) 3,422 10,775
Total assets............ 257 294 140 254 5,971 30,560
Long-term debt, net of
current portion........ 48 62 751 333 4,949 5,453
Convertible preferred... -- -- -- -- 8,786 35,028
Total stockholders'
equity (deficit)....... 129 168 (1,104) (1,897) (9,496) (21,291)
</TABLE>
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This prospectus contains forward-looking statements that involve risks and
uncertainties. Actual results may differ materially from those indicated in the
forward-looking statements.
Overview
We are a leading provider of services that enable our customers to promote
their products and services in tens of thousands of locations on the Internet
and to pay for these promotions based on performance. Our solutions-BFAST
affiliate marketing services, B-INTOUCH e-mail referral services and BFIT
advertising services-are designed to increase our customers' online sales or
traffic and to decrease their cost of customer acquisition.
We were originally incorporated in January 1996. Initially we provided
customized software development and support services for automating marketing
programs. Later in 1996 we began to change our focus to performance marketing
services, although we continued to provide customized software and support
services on a limited basis through the third quarter of 1998. The financial
statements and data for us and these two affiliated companies, including the
description of our financial condition and results of operations, are set forth
on a consolidated basis for all periods presented.
To date, we have generated our performance marketing services revenue
primarily from our BFAST affiliate marketing services. In general, we enter
into a standard service agreement that requires our BFAST customers to pay us a
one-time integration fee and monthly performance fees, subject to minimum
monthly or annual fees. For our online merchants, the performance fees are
generally based on either a percentage of the sales generated or on the number
of transactions or orders generated by their marketing partners. For our portal
customers, the performance fees are generally based on the volume of click-
throughs generated by their marketing partners. In addition to the core BFAST
service, we also offer related service options, such as affiliate commission
payment services, which customers may select on an item-by-item basis for set
fees. We also generate revenue through our other performance marketing
services-BFIT, a service that tracks the effectiveness of customers' banner
ads, launched in the second quarter of 1998, and B-INTOUCH, an e-mail referral
service, launched in the third quarter of 1999. Our BFIT customers pay us based
on the number of impressions served. Our B-INTOUCH customers typically pay us
based on the sales or traffic generated by these promotions. We are seeking to
develop additional performance marketing services.
We have incurred significant net losses and negative cash flows from
operations since the commencement of our performance marketing business, and as
of September 30, 1999, had an accumulated deficit of approximately $19.5
million. We had net losses of approximately $4.8 million for the year ended
December 31, 1998 and $12.5 million in the first nine months of 1999. These
losses have been funded primarily through the issuance of preferred stock and
borrowings. We intend to continue to invest in our technology and
infrastructure, including investment in our existing data center and new data
centers. We intend to increase our expenditures relating to sales and marketing
and product development activities. As a result, we believe that we will
continue to incur operating losses and negative cash flow from operations for
the foreseeable future and that the rate at which these losses will be incurred
may increase from current levels.
24
<PAGE>
Results of Operations
The following table sets forth consolidated statement of operations data as
a percentage of total revenue for the periods indicated. The historical results
are not necessarily indicative of results to be expected for any future period.
<TABLE>
<CAPTION>
Nine
Months
Ended
Year Ended September
December 31, 30,
------------------ -----------
1996 1997 1998 1998 1999
<S> <C> <C> <C> <C> <C>
Revenue:
Performance marketing services............ -- % 78 % 99 % 99 % 100 %
Other..................................... 100 22 1 1 --
---- ---- ---- ---- ----
Total revenue........................... 100 100 100 100 100
Operating expenses:
Cost of revenue........................... -- 99 32 24 16
Sales and marketing....................... 203 65 109 57 308
Development and engineering............... 258 154 55 42 116
General and administrative................ 284 120 66 46 61
Equity related compensation............... -- -- 180 235 53
---- ---- ---- ---- ----
Total operating expenses................ 745 438 442 404 554
Operating loss.............................. (645) (338) (342) (304) (454)
Interest expense (net)...................... (13) (36) (17) (9) (7)
---- ---- ---- ---- ----
Net loss.................................... (658)% (374)% (359)% (313)% (461)%
==== ==== ==== ==== ====
</TABLE>
Revenue
To date, performance marketing services revenue has included BFAST
integration fees and monthly service fees as well as BFIT monthly service fees.
Integration fees are recognized when the integration process is completed and a
customer begins accepting applications from potential marketing partners. BFAST
and BFIT service fees are recognized monthly. Other revenue reflects customized
software development and support services. We no longer offered these services
after September 30, 1998.
Revenue from performance marketing services was first recognized in 1997 and
increased to $1.3 million in 1998 from $216,000 in 1997 as a result of
increased customer activity. Other revenue declined to $60,000 in 1997 from
$196,000 in 1996 as a result of the continued reduction of customized software
development and support services. Other revenue declined to $8,000 in 1998 when
the final support contract for customized software expired.
Revenue from performance marketing services increased to $2.7 million for
the nine months ended September 30, 1999, from $933,000 for the nine months
ended September 30, 1998, as a result of increased customer activity. Other
revenue declined to zero for the nine months ended September 30, 1999 from
$8,000 for the nine months ended September 30, 1998 when the last support
contract for customized software expired.
25
<PAGE>
Cost of Revenue
Cost of revenue consists of expenses related to the operation of our data
interchange. These expenses primarily include depreciation for systems and
storage equipment, costs for a third-party data center facility and costs for
Internet connectivity to our customers and their marketing partners.
Cost of revenue was $273,000 in 1997 as a result of the introduction of
BFAST. Cost of revenue increased to $424,000 in 1998 as we expanded our server
and storage equipment and moved this equipment to a third-party facility.
However, cost of revenue decreased to 32% of total revenue in 1998 from 99% of
total revenue in 1997, primarily from the increased utilization of our server
and storage equipment resulting from an increased customer base and usage of
our services.
Cost of revenue increased to $437,000 for the nine months ended September
30, 1999, from $226,000 for the nine months ended September 30, 1998, as a
result of increased depreciation and amortization reflecting higher equipment
levels. As a percentage of total revenue, cost of revenue decreased to 16% of
total revenue from 24% of total revenue over these periods as a result of
higher utilization of our server and storage equipment. In order to maintain
targeted service levels, we will be required to add equipment in advance of
anticipated future growth and this growth may not materialize as expected. Cost
of revenue as a percentage of total revenue may increase in the future as we
add additional equipment to support anticipated future growth.
Sales and Marketing Expenses
Sales and marketing expenses consist of payroll and related costs for our
sales, customer service, marketing and business development groups. Also
included are the costs for marketing programs to promote our services to our
current and prospective customers, as well as programs to recruit marketing
partners for our current customers.
Sales and marketing expenses decreased to $180,000 in 1997 from $398,000 in
1996 primarily as a result of approximately $250,000 in marketing-related
license fees incurred in 1996. Sales and marketing expenses increased to $1.5
million in 1998 as the result of the establishment of direct sales and internal
telesales groups and the use of third party public relations services.
Sales and marketing expenses increased to $8.3 million for the nine months
ended September 30, 1999, from $539,000 for the nine months ended September 30,
1998, primarily as a result of personnel and related expenses which increased
by approximately $5.6 million. In addition, $595,000 was spent to establish a
recruitment program to assist customers in attracting marketing partners and an
increase in general marketing efforts resulted in incremental expenses of
approximately $610,000. We expect that sales and marketing expenses will
continue to increase in amount in future periods to support expected growth.
Development and Engineering Expenses
Development and engineering expenses primarily include payroll and related
costs for our product development and engineering groups and depreciation
related to equipment used for development purposes. The product development
group designs and develops the underlying technologies for our BFAST, B-INTOUCH
and BFIT services and the engineering group develops
26
<PAGE>
and manages the infrastructure necessary to support our services. Prior to
1998, development and engineering expenses also included the expenses related
to customized software development and support services.
Development and engineering expenses decreased to $426,000 in 1997 from
$505,000 in 1996 primarily as a result of engineering start-up expenses that
were incurred in 1996 with the initial development of our performance marketing
technologies. Development and engineering expenses increased to $728,000 in
1998 as a result of an increase in product development and engineering
personnel.
Development and engineering expenses increased to $3.1 million for the nine
months ended September 30, 1999, from $398,000 for the nine months ended
September 30, 1998. The change resulted from personnel and related cost
increases of $2.1 million, and an increase of $190,000 in computer maintenance
relating to additional equipment purchases.
General and Administrative Expenses
General and administrative expenses principally consist of payroll and
related costs and professional fees related to our general management, finance
and human resource functions. Facility and related costs are allocated to sales
and marketing, development and engineering and general and administrative
expenses based upon the relative number of employees in each area.
General and administrative expenses decreased to $332,000 in 1997 from
$558,000 in 1996 primarily as a result of a higher level of professional fees
incurred in 1996 in connection with a contemplated financing. General and
administrative expenses increased to $875,000 in 1998 as a result of $218,000
of professional fees related to financing efforts and $277,000 of increased
personnel and related costs resulting from the addition of a new executive
management team.
General and administrative expenses increased to $1.7 million for the nine
months ended September 30, 1999, from $433,000 for the nine months ended
September 30, 1998, as a result of increased personnel and related costs.
Equity Related Compensation Expenses
Equity related compensation expenses are non-cash charges representing the
difference between the exercise price of options to purchase common stock
granted to our employees and the price paid for restricted stock sold to our
employees and the fair value of these shares as of the date of grant, as
subsequently determined for financial reporting purposes. These expenses also
include the fair value of options granted to our consultants as of the date of
grant, as subsequently determined for financial reporting purposes. These fair
values were determined in accordance with Accounting Principles Board Opinion
25 and Statement of Financial Accounting Standards 123. We did not incur any
equity related compensation expenses in 1996 or in 1997. Equity related
compensation expenses were $2.2 million for the nine months ended September 30,
1998 and $1.4 million for the nine months ended September 30, 1999. We expect
to recognize additional equity related compensation expenses of at least
$475,000 per quarter through the end of 2002 as a result of earlier issuances
of stock and stock options to employees and others with exercise prices per
share subsequently determined to be
27
<PAGE>
below the fair market values per share of our common stock for financial
reporting purposes at the dates of grant. The stock compensation is being
expensed over the vesting period of the applicable stock awards or options.
Interest Expense (net)
Interest expense (net) is comprised of interest expense on our borrowings,
partially offset by interest income earned on our cash balances.
As a result of increased borrowings used to finance the growth of our
business, interest expense (net) increased from $26,000 in 1996 to $99,000 in
1997 and to $224,000 in 1998. Interest expense (net) increased from $86,000 for
the nine months ended September 30, 1998 to $193,000 for the nine months ended
September 30, 1999.
Consolidated Quarterly Results of Operations
The following table sets forth unaudited consolidated quarterly statement of
operations data for the eight quarters ended September 30, 1999. This unaudited
consolidated quarterly information has been derived from our unaudited
consolidated financial statements and, in the opinion of management, has been
prepared on a basis consistent with the financial statements contained
elsewhere in this prospectus and includes all adjustments, consisting of only
normal recurring adjustments, necessary for a fair presentation of the
information for the periods covered when read in conjunction with our financial
statements and related notes. The operating results for any quarter are not
necessarily indicative of the operating results for any future period.
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------------------------
Dec. 31, Mar. 31, Jun. 30, Sep. 30, Dec. 31, Mar. 31, Jun. 30, Sep. 30,
1997 1998 1998 1998 1998 1999 1999 1999
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Performance marketing
services............. $ 169 $ 237 $383 $ 313 $ 386 $ 533 $ 863 $ 1,313
Other................. 11 -- -- 8 -- -- -- --
----- ----- ---- ------- ------- ------- ------- -------
Total revenue....... 180 237 383 321 386 533 863 1,313
Operating expenses:
Cost of revenue....... 96 89 67 70 198 101 137 199
Sales and marketing... 33 125 147 267 915 1,734 2,762 3,838
Development and
engineering.......... 94 116 177 105 330 562 920 1,653
General and
administrative....... 154 47 59 327 442 351 503 798
Equity related
compensation......... -- -- -- 2,207 178 450 503 488
----- ----- ---- ------- ------- ------- ------- -------
Total operating
expenses........... 377 377 450 2,976 2,063 3,198 4,825 6,976
Operating loss.......... (197) (140) (67) (2,655) (1,677) (2,665) (3,962) (5,663)
Interest income
(expense), net......... (32) (33) (28) (25) (138) (216) 48 (25)
----- ----- ---- ------- ------- ------- ------- -------
Net loss................ $(229) $(173) $(95) $(2,680) $(1,815) $(2,881) $(3,914) $(5,688)
===== ===== ==== ======= ======= ======= ======= =======
</TABLE>
Some noteworthy aspects of the information in the table above include the
following:
. Cost of revenue changes resulted from fluctuations in connectivity costs
and increases in depreciation due to the addition of capital equipment;
. Sales and marketing expenses increased each consecutive quarter due to
the continuous addition of staff, which grew from 5 employees in
December 1997 to 95 employees in September 1999;
28
<PAGE>
. Development and engineering expense changes resulted from quarterly
fluctuations in computer maintenance and software purchases and the
increase in salary and related expenses due to the addition of staff;
. Revenue increases from 1998 forward resulted from an increase in the
number of customers as well as revenue growth of the existing clients;
. June 1998 revenue of $383,000 included non-recurring service fees of
$120,000, causing revenue to decline to $321,000 in September 1998; and
. General and Administrative expense fluctuations resulted from varying
professional service fees, legal expenses in connection with
unsuccessful financing efforts in 1996 and 1998 and the addition of a
senior management team during the third and fourth quarters of 1998.
Our quarterly operating results have fluctuated in the past and may
fluctuate significantly in the future due to a variety of factors, including:
. the continued acceptance of online commerce;
. demand for and the timing of sales of our services;
. changes in the rapidly evolving market for performance marketing
services;
. delays in introducing new services;
. the timing of when we initially integrate our services with our new
customers' systems and how long it takes them to generate significant
regular online sales or traffic;
. possible seasonality of sales of our online merchants, most of whom sell
goods and service at the retail level; and
. increased expenses, whether related to capital expenditures, sales and
marketing, product development or administration.
Liquidity and Capital Resources
We have financed our operations to date primarily through the private sale
of equity securities and borrowings. Net proceeds from financing activities
from January 1, 1998 through September 30, 1999 included:
. approximately $10.4 million received upon the sale of Series A preferred
stock and warrants to purchase shares of common stock in August and
September 1998;
. approximately $24.9 million received upon the sale of Series B preferred
stock in March 1999; and
. approximately $8.0 million in borrowings under various credit facilities
and capital lease agreements.
Cash used in operating activities was $2.4 million in 1998 and $9.1 million
for the nine months ended September 30, 1999. Cash used in operating activities
during 1998 resulted from net losses and deposits of $384,000 required
primarily for our new offices and related expenditures. These
29
<PAGE>
amounts were partially offset by an increase of $345,000 of accounts payable
and accrued expenses. In the nine months ended September 30, 1999, cash used
in operating activities resulted from net losses of $12.5 million, an increase
in accounts receivable of $778,000 and an increase of $801,000 in prepaid
expenses primarily relating to sales commissions paid for revenue to be
recognized in future periods and payments under annual hardware and software
maintenance contracts. These amounts were partially offset during the nine
months ended September 30, 1999 by an increase of $1.0 million in deferred
revenue for payments received from several customers for future services and
by an increase of $1.5 million of accounts payable.
Our investing activities for our business have included capital
expenditures totaling $610,000 and $1.1 million in 1998 and the nine months
ended September 30, 1999, respectively. These capital expenditures were
incurred primarily to acquire computer hardware and software for our
operations and our internal use. We expect that as our customer base and
employee base grow, we will require additional computer hardware and software
and our related capital expenditures will increase significantly.
During the third quarter, our capital purchases included $4.4 million of
computer hardware to be used in our data center. As of September 30, 1999,
this amount was included in accrued expenses. We intend to finance these
equipment purchases.
At September 30, 1999 we had $16.4 million in cash and cash equivalents,
$3.0 million in marketable securities and $10.8 million in working capital. In
addition, we have agreements for a $5.0 million line of credit that bears
interest at 12% per annum and a $2.0 million equipment line of credit that
bears interest at 6.8% per annum. The $5.0 million line of credit provides for
principal payments in equal monthly installments commencing in December 1999
and ending November 2001. The $2.0 million equipment line of credit provides
for principal payments in monthly installments over a period of four years
from the date of each borrowing. The credit agreements prohibit us from paying
cash dividends or from engaging in a merger or sale involving substantially
all our assets or stock without prior lender consent. They also contain
customary provisions regarding the maintenance of collateral, insurance and
the provision of financial data to the lender. At September 30, 1999 we had
borrowed substantially all of the amounts available under these lines of
credit.
We believe that the net proceeds of this offering, together with cash on
hand, cash equivalents and borrowings, will be sufficient to meet our debt
service, operating and capital requirements for at least the next 12 months.
After that, we may need to raise additional funds. We may seek to raise
additional funds through additional borrowings, public or private equity
financings or from other sources. There can be no assurance that additional
financing will be available at all or, if available, will be on terms
acceptable to us.
We have not entered into any financial derivative instruments that expose
us to material market risk.
30
<PAGE>
Year 2000 Compliance
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field. In order to distinguish
21st century dates from 20th century dates, the date code field needs to be
expanded to 4 digits. As a result, many companies' software and computer
systems may need to be upgraded or replaced in order to function properly with
dates after December 31, 1999. The use of software and computer systems that
are not Year 2000 compliant could result in system failures or miscalculations
resulting in disruptions of operations, including among other things, a
temporary inability to process transactions, send invoices, or engage in normal
business activities.
Our proprietary software has been developed to be Year 2000 compliant since
its first version. Our services also rely on technology provided by third
parties, such as Oracle-based databases, Sun Microsystems servers, and high-
capacity Internet connections through Exodus Communications. We have reviewed
the public written statements of Oracle, Sun Microsystems, and PowerSoft
regarding Year 2000 compliance and are using versions of their products that
they state will operate properly in the new millennium. Based on our review of
the public written statements of Exodus Communications regarding its Year 2000
compliance, we have no reason to believe that our Internet connections through
Exodus will fail to operate properly in the new millennium. We have tested
elements of our system to ascertain the Year 2000 compliance of our services
and expect to complete a system-wide test prior to December 31, 1999. Failure
of our current service offerings to operate properly with regard to the Year
2000 and thereafter could require us to incur significant unanticipated
expenses to remedy any problems or replace affected vendors and could have a
material adverse effect on our business, operating results and financial
condition.
We depend on the uninterrupted availability of the Internet infrastructure
to conduct our business. We also rely on the continued operations of our
customers, in particular their e-commerce sites where commercial transactions
are performed, and our customers' marketing partners, in particular the
affiliate sites and e-mail systems that host and distribute promotions, for our
revenue. We are thus dependent upon the success of the Year 2000 compliance
efforts of the service providers that support the Internet and the Year 2000
compliance efforts of our customers. Interruptions in the Internet
infrastructure affecting us, our customers or their marketing partners, or the
failure of the Year 2000 compliance efforts of one or more of our customers or
their marketing partners, could have a material adverse effect on our business,
results of operations and financial condition. Further, the marketing
initiatives pursued by our prospective customers could be affected by Year 2000
issues as companies expend significant resources to correct their current
systems for the year 2000. These expenditures may result in reduced funds
available for Internet advertising. This could materially and adversely affect
our business, results of operations and financial condition.
We have not reviewed our non-information technology systems for Year 2000
issues relating to embedded microprocessors and do not expect to conduct a
formal review. We have not contacted our customers to inquire of their Year
2000 compliance status and do not expect to do so. Because our online merchant
and portal customers operate computer-based businesses, we believe that they
are likely to take all necessary steps to ensure that their businesses will
function properly in the new millennium without any material interruption.
31
<PAGE>
Because our internal information systems, such as our payroll and accounting
systems, utilize relatively new equipment and mostly new standard software
applications, we believe that these internal information systems are currently
Year 2000 compliant, or will be timely made Year 2000 compliant with
commercially available patches or upgrades in the ordinary course of business.
We do not separately account for Year 2000 related expenses but estimate
that the expenses we have incurred to date to address Year 2000 issues have not
been material and we do not expect to incur material expenses in connection
with any required future remediation efforts.
At this time, we anticipate that the worst case scenario related to Year
2000 issues would involve a major shutdown of the Internet, which would result
in a total loss of revenue to us, or the significant online business
interruption of one or more of our larger customers, which could result in a
severe loss of revenue, until it was resolved. The most likely worst case
scenario would be that we would have a problem with our data interchange with
our customers that would reduce the flow of tracking information or cause this
information to be incorrect. This could result in substantial delays or
inaccuracies in reporting information to our customers, billing our customers,
paying marketing partner commissions and preparing our financial statements.
We have not developed a Year 2000 contingency plan. We expect to develop a
plan prior to December 31, 1999.
The information set forth above and elsewhere in this prospectus relating to
Year 2000 issues constitute "Year 2000 Readiness Disclosures," as the term is
defined by the Year 2000 Information and Readiness Disclosure Act of 1998,
enacted October 19, 1998 (Public Law 105-271, 112 Stat. 2386).
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and hedging activities. It requires that
an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. To
date, we have not engaged in derivative and hedging activities, and accordingly
do not believe that the adoption of the SFAS No. 133 will have a material
impact on our financial reporting and related disclosures. We will adopt SFAS
No. 133 as required by SFAS No. 137, "Deferral of the effective date of FASB
Statement No. 133," in fiscal year 2000.
32
<PAGE>
BUSINESS
We are a leading provider of services that enable our customers to market
their products and services online through tens of thousands of marketing
partners and to pay for these promotions based on performance. Our customers
use our services to establish and manage their own independent performance
marketing relationships directly with their marketing partners. Our online
merchant customers typically pay fees to their marketing partners based on the
sales they generate, as tracked through our services. Our portal customers
typically pay fees to their marketing partners based on the traffic sent to the
portal, as tracked through our services. We are typically paid fees by our
customers based upon the level of sales or traffic generated by these marketing
partners. We provide our customers a cost-effective solution for establishing,
managing and rewarding these performance marketing sales channels. We enable
our customers to increase their sales and traffic and decrease their cost of
customer acquisition.
Industry Background
The Internet has emerged as a significant communications and commerce
medium. Nua Internet Surveys estimates that the number of Internet users
worldwide has increased from 26 million in December 1995 to 201 million in
September 1999, and expects this growth to continue with the number of online
users reaching 350 million by 2005. In addition, as users gain online
experience, they tend to increase the amount of time they spend on the Internet
and spend their time online conducting a greater variety of activities.
Expansion and Dispersion of Content; Evolution of Internet User Habits
The content available to Internet users has increased dramatically and
become more widely dispersed. Increased ease and lower cost of Web publishing
has permitted smaller businesses, organizations and individuals to create and
host their own Web sites. The NEC Research Institute estimated that the number
of pages available on the Web grew from 320 million pages in December 1997 to
approximately 800 million pages in February 1999.
More experienced Internet users tend to rely increasingly on their own lists
or bookmarks of Web sites, rather than on search engines and directories to
access content that is of specific interest to them. While visits to high
traffic Web sites such as portals have grown in absolute numbers, they
represent a minority of all online traffic. Neilsen//NetRatings reports that
the top ten portals made up 20% of the average monthly page views as measured
in their home Internet user sample in June 1999.
Growth of E-commerce
The Internet has emerged as a significant sales channel for goods and
services to consumers. The Internet provides a cost-effective means for online
merchants to reach a global audience, and provides consumers with increased
information, broad selection and greater convenience.
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In November 1998, Forrester Research projected that total online U.S.
consumer spending will grow to $108 billion in 2003, accounting for about 6% of
the $1.8 trillion in expected overall consumer spending that year:
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002 2003
<S> <C> <C> <C> <C> <C> <C>
Total U.S. online consumer spending
(billions)........................... $ 7.8 $ 18.1 $ 33.0 $ 52.2 $ 76.3 $108.0
U.S. households online (millions)..... 28.6 33.5 38.3 43.5 48.6 52.8
U.S. households shopping online
(millions)........................... 8.7 13.1 17.7 23.1 30.3 40.3
Average online expenditures per U.S.
household............................ $ 899 $1,385 $1,864 $2,259 $2,518 $2,678
</TABLE>
We believe more experienced Internet users are more likely to purchase goods
or services online than new Internet users.
The Evolution of Internet Marketing
In response to increasing demand for online products and services, and as
the Internet and electronic commerce expand, online merchants and portals are
increasingly adopting online promotions to reach a global audience for their
products and services, drive traffic to their Web sites, attract customers and
facilitate transactions.
Initially, Internet advertising took the form of banner ads, similar to
advertising billboards, typically placed on portals and other high-traffic Web
sites. Advertising networks then emerged to allow banner ads to be placed
across multiple sites that did not have sufficient traffic individually to
appeal to larger advertisers. In order to allow different advertisements to
appear on the same space on a Web page, portals and advertising networks
require banner ads of specific size and format, generally in a rectangular
shape. Under this model, advertisers generally pay a fee each time an ad is
displayed on a cost-per-thousand-impressions basis. These pay-for-display
campaigns are typically evaluated based on the number of times a user clicks on
the banner ad and is directed to the online merchant's Web site.
Online merchants face an increasingly difficult and expensive task in
converting viewers of banner ads into shoppers and eventually buyers. Banner ad
click-through rates have decreased significantly from 2.11%, as reported by
I/Pro in October 1996, to 0.41%, as reported by Nielsen//NetRatings for the
week ended September 19, 1999. Forrester Research reported in September 1998
that only 38% of people online for more than 42 months have ever clicked on a
banner ad. We believe that decreasing click-through rates result from the lack
of integration and relevance of the banner ads with the content of the site
where they are displayed.
Online merchants also face an increasing challenge in reaching their
audience. More experienced Internet users, who are more likely to buy online,
spend a smaller percentage of their time on portals, and instead focus on
content sites that match their interests. With millions of sites displaying
hundreds of millions of pages of content, online merchants must identify and
form partnerships with an increasing number of Web sites that might appeal to
their buying audience. The decreased effectiveness of banner ads together with
the online merchant's desire to expand promotional reach have led to the
development of online promotions targeted to specific Web sites with relevant
content and consumers, with the marketing partners rewarded according to the
actual results they generate.
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The Emergence of Affiliate Sales Channels
By the end of 1996, a few leading online merchants began to develop
marketing relationships with third-party Web sites to incorporate into their
Web sites a variety of promotions via hyperlink for the online merchant's goods
and services. As these relationships grew, online merchants began to view them
as a separate sales channel for their goods and services and they became known
as affiliate sales channels. In establishing these new affiliate sales
channels, online merchants generally paid commissions to the Web site
publishers based on the sales generated by the ads or promotions. These
affiliate sales channels were the first widely introduced type of performance
marketing program.
These affiliate sales channels had benefits for both the online merchants
and the marketing partners. Online merchants could pay for their marketing
based upon the performance of the promotions, making it more cost-effective to
run promotions with a broader array of third parties than under pay-for-display
methods. Marketing partners could generate revenue from their Web pages at
little or no cost and use ad space that might otherwise go unsold, since there
was no limit to the number of promotions they could run. Marketing partners
could choose among a variety of promotions and the location for each, leading
to better merchandising and increased effectiveness of the promotions which
would benefit both the online merchant and the marketing partner.
Initially, online merchants developed their own software databases and used
their own servers for developing, managing and tracking affiliate sales
channels. Most of these internally developed systems track activity only on the
online merchant's site. Using internal techniques for tracking users to point
of sale, the online merchant could then determine the sales generated by
promotions hosted by each marketing partner and pay commissions accordingly.
The Challenges of Internally Developing and Managing Affiliate Sales Channels
Online merchants face many challenges in building an affiliate sales channel
on a broad scale. Tracking individual transactions through to point of sale
requires that online merchants and marketing partners exchange data. This is
usually done by creating hyperlinks that are specific to each marketing partner
and the online merchant's product or service being promoted. Recording orders,
order cancellations, sales and returns requires integration of data from
databases maintained on the online merchant's transactional and fulfillment
systems, which are often separate. Following an initial integration, ongoing
monitoring for success and accuracy is required. Developing and operating the
necessary software and hardware internally, which may involve tracking
promotions viewed millions of times on thousands of separate Web sites, is time
consuming and expensive.
Online merchants also face challenges in managing their relationships, often
with tens of thousands of marketing partners, including:
. creating a wide variety of promotions for each of its various products
or services;
. generating, placing and replacing the promotions selected by individual
marketing partners within the context of its Web site;
. measuring and managing the productivity and effectiveness of marketing
partners;
. analyzing and reporting on the data collected from thousands of sources
to permit better merchandising by both the online merchants and the
marketing partners;
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. communicating with and making payments to thousands of marketing
partners; and
. enhancing their systems to reflect changes in business models and
payment methods to influence the behavior of marketing partners.
These Web site publishers also face challenges in realizing the potential
benefits offered by joining an affiliate sales channel. They want to minimize
the time and expense associated with enrolling and creating and changing
hyperlinks for a particular online merchant. In addition, these Web site
publishers are looking for easy, cost-effective solutions for the delivery,
targeting and tracking of the promotional efforts that they run to enhance
their revenue.
The Be Free Solution
We provide a comprehensive solution specifically designed to enable our
customers to increase sales and decrease the cost of customer acquisition by
establishing and managing their own performance marketing sales channels. We
have developed, and continue to enhance, a broad set of technologies and
services that provide a data interchange between disparate databases utilized
by our customers and their thousands of marketing partners. Through this data
interchange, we track, store and analyze the effectiveness of individual
promotions and provide online data and analysis to both our customers and their
marketing partners.
Merchant Connection
We integrate our systems with each customer's often disparate catalog,
transactional and fulfillment systems by establishing standard data formats and
file transfer protocols. Through this connection, we receive and store
information about our customer's available products and services and its Web
site. We also receive order, order cancellation, sales and return data from our
customer.
Our data interchange also tracks each time a user views and clicks on a
specific hyperlink placed by any of our customers' marketing partners. We track
these individual viewings and clicks to unique transactions with our customers.
Promotions we tracked for our customers were shown more than 400 million times
in September 1999 through our customers' more than one million performance
marketing relationships. This combination of customer and marketing partner
data is stored at our central processing facilities and allows us to measure
the sales or traffic performance of each specific promotion.
Management Solutions
We have significant resources and expertise dedicated to the successful
implementation, development, management and control of online performance
marketing programs. These solutions include:
. Establishment of marketing relationships. We provide online, automated
application and approval processes for Web site publishers to become a
customer's marketing partner. We also help customers identify and
recruit potential marketing partners.
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. Customer control of sales channel. All of our services are designed to
enable a customer to maximize the efficiency of its performance
marketing sales channel. Each of our customers selects its marketing
partners and determines the terms of its relationships with these
marketing partners. We brand reports, communications and payments with
our customer's name.
. Development and placement of promotions. We store and deliver hyperlinks
for our customers on our servers. These hyperlinks are available in a
wide variety of formats, including text, dynamic displays, search boxes,
pull-down menus, banner ads and buttons. Each of our customer's
marketing partners can access our servers, choose among that customer's
available hyperlinks, and incorporate them into their Web sites or e-
mail messages through simple procedures.
. Replacement of promotions. Since all users viewing and clicking on
promotions are routed through our servers before being redirected to a
customer's Web site, changes in that customer's Web site only require
programming changes on our servers rather than the replacement of
hyperlinks by all of its marketing partners.
. Data collection and reporting. We collect and store data both from our
customers and their marketing partners, tracking specific promotions
through sales and returns. We provide extensive data and analyses
online, both to our customers and to their marketing partners. Analyses
can be configured to examine the performance of the entire performance
marketing sales channel, a specific hyperlink or a specific marketing
partner.
. Communication and payment services. We can generate e-mail
communications and payments to widely dispersed marketing partners on
behalf of customers. Communications can be automatically generated and
broadcast based upon customer selected criteria.
. Merchandising assistance. Our reporting and communication services
permit both our customers and their marketing partners to make and
implement more effective merchandising decisions. Our best practices
group monitors industry and competitive trends, as well as results
achieved by customers generally, and shares this expertise with
customers and their marketing partners. Our online merchant customers
can use our system to identify hyperlinks or sites that are leading to
high sales or return rates, manage product demand, and rank marketing
partners by effectiveness.
Using our services, our customers pay only for those individual promotions
that generate sales or traffic. Our online merchant customers typically pay us
fees based upon the sales resulting from promotions hosted by their marketing
partners. Our portal customers typically pay us fees based upon the traffic
resulting from promotions hosted by their marketing partners. Our customers
enter into separate agreements directly with their marketing partners and pay
them separate fees based on the level of sales or traffic they generate by
hosting the promotions. As a result, our economic interests are closely aligned
with the economic interests of our customers and their marketing partners.
Strategy
Our objective is to be the leading provider of online performance marketing
solutions. To achieve this objective we are focused on the following strategic
initiatives:
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Leverage Technology Leadership to Provide Comprehensive Solutions
We intend to continue our focus on performance marketing solutions. We plan
to both enhance our existing, as well as develop new, performance marketing
technologies, expertise and services. We have made significant investments in
technology and personnel to develop a comprehensive set of online services
specifically designed for the development of performance marketing programs,
including affiliate sales channels. We believe that customers will continue to
seek cost-effective solutions to establish and manage performance marketing
programs.
Rapidly Expand Our Targeted Customer Base
We seek continued expansion of our customer base nationally and
internationally, primarily through our direct sales force. Because our revenue
is tied to our customers' performance, we are currently targeting large online
merchants and portals in the U.S. as customers. We have recently begun to
expand our sales efforts to the emerging online markets in Europe.
Continue to Provide Customer Branded and Controlled Solutions
We enable each customer to extend its merchandising techniques to its
marketing partners, with which they contract directly. Services we provide on
our customers' behalf to their marketing partners, including analyses,
communications and payments, are customer branded. We believe customers will
find our merchant branded solutions more appealing and will invest more heavily
in the development and growth of these sales channels and in performance
marketing solutions provided by us.
Increase the Size of Our Customers' Sales Channels
We will continue to identify and recruit potential affiliates on behalf of
our customers. Increasing our customers' marketing reach and revenue increases
our revenue. We have launched an online affiliate recruiters program, located
at www.affiliaterecruiters.com, that allows Web site publishers to promote our
customers' affiliate sales channels. We are extending our Web site outreach for
customers by entering into strategic partnerships with companies that provide
Web site creation tools and hosting services. In addition, we are continuing to
develop relationships with syndicated content providers that permit them to
incorporate hyperlinks to our customers in syndicated content.
Increase Our Services to Existing Customers
We intend to continue to develop additional services to support new online
performance marketing programs and new revenue sources for our customers and
us, such as our recently developed e-mail referral services, B-INTOUCH. We are
working with ad serving companies to utilize our technology to track the banner
ads they deliver to point of sale on our customer sites.
Increase the Effectiveness of Our Customers' Sales Channels
We intend to continue and enhance services designed to help our customers
increase their sales. Our best practices research and consulting group helps
our customers generate better response rates by providing industry analysis,
benchmarks and merchandising expertise. We assist our customers' marketing
partners to increase their traffic through various tools and techniques, such
as search engine registration.
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Expand Internationally
We intend to be an early entrant and a leader in the development of
performance marketing programs outside the U.S. We have expanded our services
to Europe with our initial integration with Bertelsmann's online subsidiary,
BOL International. We have developed German, French and Dutch interfaces for
marketing partners in Europe. We will continue to develop foreign language
interfaces and may establish physical operations in Europe. We may also expand
our services to Japan. We will begin to target other large customers in Europe
during 2000.
Services
Our data interchange provides the communications link, technologies and
services for performance marketing generally and Web-based affiliate sales
channels in particular. Our customers select core transactional services--
BFAST, B-INTOUCH and BFIT--and may then select additional related services. Our
core services enable the collection and tracking of data that resides on our
servers in Oracle databases. Reports analyzing the data are accessible to our
customers and their marketing partners from desktop computers using standard
Internet protocols and standard Web browser protocols. Specifically, our core
transactional services include:
Serving and Tracking Promotions and Routing Users
. Tracking of selected links each time a link is displayed or delivery of
dynamic, rotating promotions and tracking of display of these promotions
each time a dynamic link is displayed;
. Directing users clicking on any promotions to the correct location on
our customer's site; and
. Collection of order, order cancellation, sales and return information
from our customer's systems and matching that information with marketing
partner data collected by our systems.
Reporting and Decision Support
. Online generation of daily customer-specific reports, including detail
on orders and order cancellations, sales and returns, traffic,
promotional success and payments due to marketing partners. A complete
decision support system allows our customers to filter and sort these
reports and to export this data for use in a spreadsheet or word
processing program;
. Modification of the available promotions and addition of new promotions
instantly; and
. Online generation of daily marketing partner reports including detail on
orders and order cancellations, sales and returns, traffic, promotions
used and success of each promotion, products purchased by the site's
audience and commissions due to the marketing partner. Marketing
partners may download these reports for use in a spreadsheet or word
processing program.
We provide these services through our BFAST, B-INTOUCH and BFIT services:
BFAST Affiliate Marketing Service
BFAST allows our customers to build and maintain their own, branded
performance marketing channels with third-party Web site publishers. Our
customers use BFAST to create and build these
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sales channels and to evaluate their marketing partners using more than 80
online analyses. BFAST enables customers to create and offer promotions,
including individual product hyperlinks, search links, product category links,
coupons and other incentives appearing in a variety of formats including text,
graphics, search boxes, regularly updated "top 10" lists and streaming video.
Each marketing partner can select the promotions that are most likely to appeal
to its audience and use BFAST to generate the code it needs to add those
hyperlinks to its site. These marketing partners can check the performance of
each hyperlink they implement with daily reporting.
We also provide optional services to help recruit marketing partners for our
customers and provide merchandising advice directly to marketing partners. Our
outreach services include recruitment by marketing partner recruiters, direct
mail to Web site managers who have requested this information, sponsorship of
newsletters, and banner advertising. We also offer marketing partner
application review and approval services, where we accept marketing partner
applications on behalf of our customers based upon their established criteria.
We can provide customer-branded support by telephone and e-mail to marketing
partners to assist with applications, hyperlink generation, merchandising and
analysis. We can also provide performance analysis and promotional and
merchandising recommendations for the largest 250 sites in our customers'
performance marketing sales channels. We have a best practices group that has
developed expertise by monitoring industry and customer specific trends and
provides strategic advice designed to improve the performance of these sales
channels.
In general, we enter into a standard service agreement that requires our
BFAST customer to pay us a one-time integration fee and monthly performance
fees, subject to minimum monthly or annual fees, for use of our data
interchange. For our online merchant customers, the performance fees are
generally based on either a percentage of the sales generated or a fee based on
the number of transactions or orders. For our portal customers, the performance
fees are generally based on the volume of click-throughs generated by their
marketing partners. We currently derive most of our revenue from BFAST
services.
B-INTOUCH E-mail Referral Services
Our recently introduced B-INTOUCH services allow our customers to create
performance marketing sales channels composed of individuals and corporations
that send e-mail messages. B-INTOUCH lets an approved sender of e-mail messages
include our customers' promotions in e-mail messages and receive fees for the
sales or traffic that result from these promotions. B-INTOUCH offers a simple
user interface for hyperlink placement and reporting, designed for the less
technologically sophisticated e-mail user. We charge our customers for B-
INTOUCH services based on the volume of sales or traffic that results from a
customer's e-mail referral program.
BFIT Advertising Services
BFIT is an enhanced banner ad delivery service that tracks our customers'
banner advertising through to point of sale and determines the performance for
a specific banner placed in a specific location. This may include ad placement
based on specifications provided by our customers on their ad agencies. By
integrating our BFIT and BFAST services, our customers' marketing partners can
dedicate space on their Web sites within which our customer may determine the
promotional
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initiative displayed and modify it at any time or upon the occurrence of
specified criteria. We charge for our BFIT services based on the number of
impressions served.
Related Services
We offer related services to complement BFAST, B-INTOUCH and BFIT. These
services are designed to automate aspects of the process of establishing and
managing performance marketing relationships. They include the following:
. Automated sign-up of potential marketing partners through an online
application;
. Definition and selection of marketing partners, compensation rules and
methods;
. Rapid review and approval of marketing partner applications by
customers;
. Generation of individualized messages from our customers to selected
marketing partners; and
. Payment of fees due to marketing partners. For a fixed fee per check, Be
Free will cut and distribute checks to a customer's marketing partners
in payment of their commissions. These checks are drawn against a Be
Free bank account, which is funded by the customer prior to release of
the checks.
Customers
Our principal customers are large online merchants and portals. We have
successfully targeted as customers leading online merchants and portals in a
wide variety of markets. The following is a list of many of our larger online
merchants and portals, all of whom have signed written contracts for our
services. We have not yet implemented our services for or received revenue from
all of these customers:
<TABLE>
<S> <C>
American Greetings Gap
Ameritech Lycos
Babbages, Etc. Micro Warehouse
BabyCenter MotherNature.com
barnesandnoble.com Multiple Zones International
Bertelsmann (bol.com) Network Solutions
CNET OneCore
Compaq Pets.com
Digital Chef priceline.com
eBags.com Reel.com
egghead.com SEND.com
Enews.com The SABRE Group (Travelocity.com)
eToys(R) toysmart.com
Franklin Covey Value America
Fogdog Sports Yahoo!
Furniture.com Visa, U.S.A.
</TABLE>
Our customers typically enter into a written agreement with us that runs for
one year from program launch and renews automatically for successive one-year
periods unless either party gives
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notice not to extend. We generally provide representations concerning our
system performance and discount our fees if we fail to meet specified
performance levels. We also agree to indemnify our customers for infringement
of third party intellectual property rights. Our customers agree to provide
information regarding merchandise or services they make available over the
Internet and transactional information.
For 1997 and 1998 and the nine months ended September 30, 1999,
barnesandnoble.com accounted for more than 10% of our revenue. For the nine
months ended September 30, 1999, GeoCities, a subsidiary of Yahoo!, and Network
Solutions, Inc. each accounted for more than 10% of our revenue. Our contract
with barnesandnoble.com expires in January 2001 and our contracts with
GeoCities and Network Solutions, Inc. expire in January 2002 and July 2000,
respectively. GeoCities has the right to terminate its contract prior to the
expiration of its term by giving notice and paying a penalty. These contracts
provide that either party may terminate upon a material breach. In addition, in
1997, Duquesne Light and Power, to whom we provided customized software
development and support, accounted for more than 10% of our revenue.
Sales and Marketing
We have a direct sales force that targets large online merchants and portals
as customers. The direct sales force is assigned to different geographical
regions and is supported by sales engineers. We maintain direct sales personnel
in seven major metropolitan areas throughout the United States. We also have a
telesales group, located in our Marlborough, Massachusetts headquarters, that
targets mid-sized online merchants as customers.
In order to achieve broader distribution of our services, we have contracted
with third parties to resell our services. These resellers typically receive a
percentage of our revenue derived from the online merchant accounts they
generate during specified periods.
We target potential customers through our public relations program, our Web
sites, conferences, trade shows and customer referrals. While we have primarily
focused on marketing efforts in the United States, we intend to extend these
efforts into Europe and may extend these efforts into Japan.
Customer Service
We provide comprehensive integration, training, consulting and support
services. We provide our customers with individualized customer services
designed to increase the performance of their performance marketing sales
channels and their overall satisfaction with our services. We assign dedicated,
knowledgeable customer development managers to each customer.
Our best practices consulting team gathers and analyzes data from industry
sources, our database and customer initiatives to provide our customers with
industry-wide performance results against which they can measure their own
success. This team formulates strategies for how our customers might more
effectively promote their products or services. We present our best practices
solutions through seminars, customer bulletins, case studies and one-on-one
dialogues with customers.
We provide integration services, both by telephone and in person, to new
customers. We work with new customers to create a reliable, automated data
transfer between their databases and our databases.
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We teach our customers to use our technology effectively and efficiently. We
provide business training to customers, which helps them better understand the
business decisions that they face in launching their performance marketing
programs. We also offer regular refresher and update training.
Our customer development managers assist our individual customers in
managing their performance marketing programs, developing and interpreting
their analyses, and testing new promotional methods. These customer development
managers also convey emerging customer strategies, communicate customer feature
requests, manage data requests and provide ongoing project management services
for special customer initiatives.
Technology Infrastructure
Our technologies are designed to provide the following advantages:
Performance, Scalability, Availability and Reliability
Our system infrastructure has been designed as a layered architecture to
yield significant benefits to our customers in performance, scalability,
availability and reliability. Our software and databases run on multiple high-
speed servers that are connected by high-capacity connections and are organized
into multiple tiers. Each tier functions to address specific data storage and
data traffic considerations to enhance reporting and real-time transactional
performance. We have recently upgraded this system by adding additional servers
or storage devices to each tier.
Scalability is a term used to describe the ability of an application to
handle greater traffic when additional servers are added to a system.
Scalability is particularly important for growth-stage Internet applications
where demand can grow rapidly and unpredictably. Our servers are connected not
only within a given tier but also between tiers. This multi-tiered server
design enables us to add, extend, duplicate or exchange the specific servers
requiring the enhancement within the system as needed, without recompiling the
rest of the system or interrupting services.
The multi-tiered server design better enables us to provide our customers
with highly-available and reliable uninterrupted service. Each tier is
comprised of multiple connected servers performing similar tasks, each of which
has its own power supply. If a server fails, that server's tasks are
automatically reassigned to another running computer. In addition, identical
data is also stored in various locations. This redundant design enhances the
ability of the system to tolerate the failure of an individual server or
failures in system storage without the loss of data or the ability of the
computers to give our customers' real-time operating capability.
The connections from the network data center into the multi-tiered servers
are also designed to provide customers with reliable, uninterrupted service. We
regularly test and maintain the multiple connections between our servers, and
regularly test the connections between the network data center and the
Internet. Our engineering and hosting center personnel monitor traffic patterns
and congestion points and reroute traffic flows in an effort to reduce end-user
response times. We provide monitoring and support services required to maintain
transaction availability 24 hours a day, 365 days a year.
Although our systems are designed to enhance reliability, system and
communication failures have caused both delays and cessation of services. We
recently experienced an 11-hour systems outage during which we were unable to
re-direct Internet users to our customers from their marketing partners or
provide reports.
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We have taken and are taking additional steps to decrease the likelihood of
future outages. These steps include installing additional server and storage
hardware, and adding an additional level of redundancy to all tiers of our
system architecture. Our development team is modifying our software to make it
more functional upon hardware failure. Even with these improvements, there can
be no assurance that our services will not be interrupted in the future.
Flexibility
Our system infrastructure uses platform systems with UNIX, a non-proprietary
open operating system, and is also compatible with Microsoft's proprietary
operating system, Windows NT. We currently use servers manufactured by Sun
Microsystems. While we are not dependent on any single server hardware system
or vendor, any change could be costly and time consuming.
Internet Access
Our systems are developed entirely for use over the Internet. Our customers
are able to access marketing, sales and merchandising data from our Oracle-
based databases using their desktop computers and their standard Internet
connection. Our reporting systems use standard Internet and Web protocols.
Central Operations Facility
Our network data center is designed to optimize performance and maintain
reliability. Our network data center is housed at Exodus Communications in
Harborside, New Jersey. This center has multiple, physically distinct, high-
capacity connections to the Internet designed to reduce the likelihood that
outages within the network will materially impact customer use. The center also
has duplicate systems for power, climate-control, fire protection, seismic
reinforcement and continuous security surveillance. The facility utilizes
manual and automated intrusion detection techniques to monitor the security of
the center and its hardware. We regularly use outside security professionals to
evaluate our physical and electronic security measures.
Development
Development of new services begins with our product marketing group. Based
upon customer, competitive and market analyses, our product marketing group
determines functions and specifications for future services and enhancements to
current services. Our development group develops new services and enhances
existing services based on specifications provided by the product marketing
group. Our development group is divided into strategic and tactical teams. Our
strategic team develops new performance marketing services and new generations
of current services. Our tactical development team focuses on extending
existing functions or developing additional functions within any given release.
We have developed a managed release process to assist customers in the
adoption of new releases. This process includes testing and evaluating
revisions, updating online and paper documentation to include new features,
training customer support personnel and notifying and training customers.
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Our development group consists of 23 full-time employees as of September
30, 1999. For the year ended December 31, 1998 and the nine months ended
September 30, 1999, we spent $304,100 and $1.6 million, respectively, on
research and development activities.
Competition
The market for online performance marketing solutions is new, rapidly
evolving and highly competitive. We do not currently compete against
established companies across the range of services we provide. We do, however,
compete against larger companies with respect to a portion of the services we
provide and compete more broadly against similar sized, private companies. We
expect to face future competition across a broad range of our services from
larger companies currently providing products or services that compete only
with respect to a portion of the services we provide.
For the provision of online merchant branded affiliate sales channel
solutions, we compete against internally-developed performance marketing
solutions and against enterprise software solution providers. Customers of
enterprise software solutions must develop and maintain databases and servers
to track their performance marketing channels. We also compete against multi-
merchant, shared affiliate program providers, including Commission Junction,
Linkshare and Microsoft's LinkExchange. A customer of a shared affiliate
program shares its marketing partners with potentially all of the other
customers of that program, even customers that may be competitors. We believe
that LinkExchange currently focuses on providing exchange services for banner
ads and, to a lesser extent, on providing services to midsize and smaller
merchants to enable payments for promotions based upon traffic generated.
Finally, we compete with ad server companies that provide banner ad services
that might be considered an alternative marketing solution.
We believe that the principal competitive factors in our market are:
. the provision of comprehensive, reliable services;
. the ability to offer a customer ownership of and control over a
significant sales channel;
. the provision of extensive online reports and analyses; and
. price.
We seek to compete against internally developed efforts and enterprise
software solutions by providing more comprehensive, cost-effective services
that are more easily managed. We seek to compete against multi-merchant,
shared affiliate program providers on the basis of our technology, by
permitting our customers greater control over their affiliate sales channel
and providing individualized customer service. We seek to compete against ad
serving companies by offering broader services and the ability to track
promotional efforts through to resulting sales rather than merely to the
number of times viewed.
Employees
As of September 30, 1999, we had a total of 154 employees, 95 of whom were
in sales and marketing, 41 in development and engineering and 18 in finance
and administration. Sales and marketing employees include salespeople, sales
administration personnel, customer service personnel, product marketing and
marketing communications personnel. From time to time we also employ
independent contractors to supplement our development staff. Our employees are
not represented by a labor union and we have never experienced a work
stoppage. We believe our relations with our employees are good.
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<PAGE>
Facilities
Our headquarters are located in Marlborough, Massachusetts, where we occupy
approximately 35,700 square feet under a lease that expires in August 2004. Our
development and engineering departments are located in Pittsburgh,
Pennsylvania, where we occupy approximately 12,000 square feet of office space
under a lease that expires in January 2004. In the future, we may lease
additional space as needed.
Legal Proceedings
From time to time, we may be involved in litigation incidental to the
conduct of our business. We are not currently a party to any legal proceedings.
46
<PAGE>
MANAGEMENT
Directors and Executive Officers
Our executive officers and directors, and their respective ages and
positions as of September 30, 1999, are set forth below:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Gordon B. Hoffstein..... 47 President, Chief Executive Officer and Director
Samuel P. Gerace, Jr.... 36 Executive Vice President, Research & Technology and Director
Thomas A. Gerace........ 28 Executive Vice President, Business Development
Stephen M. Joseph....... 40 Chief Financial Officer and Treasurer
Ellen M. Brezniak....... 40 Vice President, Product Marketing
W. Blair Heavey......... 37 Vice President, Sales
Steven D. Pike.......... 46 Vice President, Client Services
Patricia L. Travaline... 43 Vice President, Marketing Communications
Ted R.
Dintersmith(1)(2)...... 47 Director
W. Michael Humphreys(2). 47 Director
Daniel J. Nova(1)(2).... 38 Director
Jeffrey Rayport(1)...... 39 Director
</TABLE>
- ---------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Gordon B. Hoffstein has been our Chief Executive Officer and a director
since August 1998. From October 1991 to April 1997, he was a co-founder and the
Chief Executive Officer of PCs Compleat, Inc., a direct marketer of PCs and
related products now known as CompUSA Direct. From February 1991 to June 1991,
he was Chief Executive Officer of Edsun Laboratories, a semiconductor designer.
He was a co-founder and the Chief Executive Officer of Microamerica, Inc., a
distributor of computer hardware and software products, from November 1979 to
May 1990. He currently serves as a director of various private companies. Mr.
Hoffstein earned a B.S. from the University of Massachusetts and an M.B.A. from
Babson College.
Samuel P. Gerace, Jr. has been our Executive Vice President, Research &
Technology and a director since August 1998. He was a founder of and has been
involved in managing our business since the inception of one of our affiliated
companies in September 1985. Mr. Gerace holds an A.B. from Harvard College.
Samuel P. Gerace, Jr. is the brother of Thomas A. Gerace.
Thomas A. Gerace has been our Executive Vice President, Business Development
since August 1998. He was a founder of and has been involved in managing our
business since inception. Previously, he served as a research analyst for
Harvard Business School. During his time at Harvard Business School, he also
served as a consultant for the Technology for Effective Cooperation Network, a
non-profit organization, and Welty-Leger Corporation, a distribution and
warehouse software provider. Mr. Gerace received an A.B. from Harvard College.
Thomas A. Gerace is the brother of Samuel P. Gerace, Jr.
Stephen M. Joseph has been our Chief Financial Officer since August 1998.
From October 1991 to December 1997, he served as Chief Financial Officer of PCs
Compleat, Inc. From March 1991 to
47
<PAGE>
June 1991, he was Chief Financial Officer of Edsun Laboratories. Prior to that
time, he held various financial positions in private companies and Ingersoll-
Rand Company, a machinery and equipment manufacturer. Mr. Joseph earned a B.S.
from Bentley College.
W. Blair Heavey has been our Vice President, Sales since October 1998. From
April 1995 until joining us, he held sales positions at Open Market, Inc., an
Internet software developer, including Director of Sales and Director,
Strategic Channel Sales. From March 1989 until March 1995, he held several
sales and marketing positions at Hewlett-Packard Corporation, a manufacturer of
measurement, computation and communications systems and equipment. Mr. Heavey
received a B.A. from Boston College and an M.B.A. from Babson College.
Ellen M. Brezniak has been our Vice President, Product Marketing since
November 1998. From October 1996 until joining us, she was Vice President,
Business-To-Business Operating Unit at Open Market, Inc. From March 1994 until
September 1996, she was Director, Product Marketing and Planning with Progress
Software Corporation, a supplier of application development and management
technology. Prior to that time, she held various marketing positions at Cognos,
Inc., which offers application development software and EIS tools, and software
database companies such as Sybase, Inc. and Oracle Corporation. Ms. Brezniak
holds a B.S. from Rensselaer Polytechnic Institute.
Patricia L. Travaline has been our Vice President, Marketing Communications
since October 1998. From January 1992 to February 1998, she served in positions
at PCs Compleat, Inc. including Director of Marketing Communications and
Director, Extended Services Development. From December 1985 to September 1991,
she held positions at the public relations firm of Sharon Merrill Associates,
including Vice President, Investor Relations. Ms. Travaline earned a B.A. from
the University of Denver and an M.B.A. from Simmons College.
Steven D. Pike has been our Vice President, Client Services since April
1999. From July 1998 until joining us, he served as Vice President, Customer
Services at Internet Commerce Services, Inc., a commerce service provider. From
September 1995 to June 1998, he held the position of Director of Technical
Services at Open Market, Inc. From January 1995 to September 1995, he held the
position of Manager, Product & Program Management at Progress Software
Corporation and from September 1992 to January 1995 he was Manager, Product
Support and Business Management at Bay Networks, a manufacturer of data
networking products. Mr. Pike holds a B.S. from Franklin Pierce College.
Ted R. Dintersmith has been a director since August 1998. Since February
1996, he has been a General Partner of Charles River Partnership VIII, a
private venture capital firm. Prior to his association with Charles River, he
was a General Partner of Aegis Management Corporation, a venture capital firm.
Mr. Dintersmith is a director of Flycast Communications Corporation, an
Internet advertising company. Mr. Dintersmith holds a B.A. degree in Physics
and English from the College of William and Mary and a Ph.D. in Engineering
from Stanford University.
W. Michael Humphreys has been a director since August 1998. Mr. Humphreys
has been a partner of Matrix Partners, a private venture capital firm, since
1979. He received a B.S. from the University of Oregon and an M.B.A. from
Harvard Business School.
48
<PAGE>
Daniel J. Nova has been a director since March 1999. Since August 1996, Mr.
Nova has served as a general partner of Highland Capital Partners, a venture
capital firm. Previously, he was a general partner of CMG@Ventures from January
1995 to August 1996 and a Senior Associate at Summit Partners from June 1991 to
January 1995. Mr. Nova is a director of eToys, Inc., an online retailer of
toys, Lycos, Inc., an online portal, MapQuest.com, Inc., an online mapping
company, and Ask Jeeves, Inc., an Internet question answering service company.
Mr. Nova received a B.S. in Computer Science and Marketing with honors from
Boston College and an M.B.A. from Harvard Business School.
Jeffrey Rayport has been a director since December 1998. He has been a
faculty member at Harvard Business School in the Service Management Unit since
1991. He is currently on leave from Harvard and is working at Monitor Company,
a management consulting firm, as the founder and executive director of Monitor
Marketplace Center, an e-commerce research and media unit established in 1998.
Dr. Rayport is a director of Global Sports, Inc., a sporting goods company.
Dr. Rayport earned an A.B., A.M. and Ph.D. from Harvard University and an
M. Phil. from the University of Cambridge (U.K.).
Our board of directors is divided into three classes, with the members of
each class serving for a staggered three-year term. Our board currently
consists of two Class I directors, two Class II directors and two Class III
directors. At each annual meeting of stockholders, a class of directors will be
elected for a three-year term to succeed the directors of the same class whose
terms are then expiring. The term of the Class I directors (W. Michael
Humphreys and Daniel J. Nova) expires at the annual meeting of stockholders to
be held in 2000. The term of the Class II directors (Ted R. Dintersmith and
Jeffrey Rayport) expires at the annual meeting of stockholders to be held in
2001. The term of the Class III directors (Gordon B. Hoffstein and Samuel P.
Gerace, Jr.) expires at the annual meeting of stockholders to be held in 2002.
Each officer serves at the discretion of our board of directors and holds
office until his or her successor is elected and qualified or until his or her
earlier resignation or removal.
Messrs. Dintersmith, S. Gerace, Humphreys and Nova were elected to the board
of directors pursuant to an agreement among us and some of our stockholders.
The agreement obligating the stockholders to vote in favor of them as directors
will terminate upon the closing of this offering.
Committees of the Board of Directors
Our board of directors has established a compensation committee and an audit
committee. The compensation committee makes recommendations concerning salaries
and incentive compensation for our employees and consultants and administers
our employee incentive plans. The current members of the compensation committee
are Messrs. Dintersmith, Humphreys and Nova. The audit committee reviews the
results and scope of the audit and other services provided by our independent
public accountants. The current members of the audit committee are Messrs.
Dintersmith, Nova and Rayport.
Director Compensation
We have no present plans to pay cash compensation to directors but intend to
reimburse directors for reasonable out-of-pocket expenses incurred in
connection with attendance at meetings of the board of directors or committees
of the board. We have granted Mr. Rayport an option under the
49
<PAGE>
1998 Stock Incentive Plan to purchase 37,500 shares of common stock that vests
over four years. In addition, we may issue additional options to directors
under our 1998 Stock Incentive Plan, which options would vest and become
exercisable over time.
Compensation Committee Interlocks and Insider Participation
Prior to the appointment of the compensation committee in July 1999, Be
Free's full board of directors and Thomas A. Gerace were responsible for the
functions of a compensation committee. Thomas A. Gerace previously was a
director and Chief Executive Officer of Be Free and board members Gordon B.
Hoffstein and Samuel P. Gerace, Jr. are both executive officers of Be Free.
During 1998, none of our executive officers served as a member of the
compensation committee, or a committee serving an equivalent function, of any
entity whose executive officers served as a director of Be Free or otherwise
had compensation committee responsibilities.
Executive Compensation
The following table sets forth the total compensation paid or accrued for
the year ended December 31, 1998 to our chief executive officer and to Mr.
Thomas A. Gerace, an Executive Vice President, Business Development, who served
as our Chief Executive Officer from January 1998 through August 1998. Neither
has been granted an option to buy shares of Be Free. No other executive
officers received compensation in excess of $100,000 in 1998.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual
Compensation
---------------
Name and Principal Position Salary Bonus
<S> <C> <C>
Gordon B. Hoffstein(1)......................................... $49,573 $16,589
President and Chief Executive Officer
Thomas A. Gerace(2)............................................ $77,916 --
Executive Vice President, Business Development
</TABLE>
- ---------------------
(1) Mr. Hoffstein's current annual salary is $175,000.
(2) Mr. Thomas Gerace was Chief Executive Officer until August, 1998. His
current annual salary is $120,000.
We have never granted any stock options to Mr. Hoffstein or Mr. Thomas A.
Gerace. Mr. Hoffstein purchased 1,547,851 shares of restricted stock for a
purchase price of $0.30 per share under the 1998 Stock Incentive Plan on
December 31, 1998. See "Transactions with Related Parties."
Employment Agreements
On August 28, 1998 we entered into employment agreements with Samuel P.
Gerace, Jr. and Thomas A. Gerace that provide for an annual base salary of not
less than $110,000 and annual merit bonuses as may be determined by the board
of directors. These agreements contain customary noncompetition and
nonsolicitation provisions, and have an initial term of two years with a one
year renewal subject to the parties' agreement.
50
<PAGE>
Change of Control Arrangements
Shares subject to options or restricted stock awards granted under our 1998
Stock Incentive Plan generally vest over four years, with 25% of the shares
vesting after one year and the remaining shares vesting in equal monthly
installments over the next 36 months. The option agreements under this plan
generally provide accelerated vesting of 25% of the shares subject to the
option upon a change of control, and full acceleration upon the termination of
employment within two years after a change of control without "cause" or for
"good reason" as defined in the agreement. In general terms, change of control
would occur where any person acquires ownership of more than 50% of our voting
shares or upon any merger or acquisition where our stockholders before the
transaction hold less than a majority of the voting stock of the surviving
entity outstanding after the transaction. We have issued shares of restricted
stock to Gordon Hoffstein that provide for accelerated vesting of 50% of these
shares of restricted stock upon a change in control, and full acceleration upon
the termination of employment within two years after a change of control
without "cause" or for "good reason" as defined in the agreement.
1998 Stock Incentive Plan
Our 1998 Stock Incentive Plan was adopted by our board of directors and
stockholders in November 1998. In October 1999, our board of directors and
stockholders voted to increase the size of the plan by 287,500 shares. The plan
currently authorizes the issuance of up to 5,054,753 shares of our common
stock. As of September 30, 1999, shares of restricted stock and options to
purchase an aggregate of 4,028,611 shares of common stock at a weighted average
restricted stock purchase price of $0.32 per share and a weighted average
option exercise price of $0.91 per share were outstanding under the plan.
The stock incentive plan provides for the grant of incentive stock options
intended to qualify under Section 422 of the Internal Revenue Code and
nonstatutory stock options.
Our officers, employees, directors, consultants and advisors are eligible to
receive awards under the stock incentive plan. Under present law, however,
incentive stock options may only be granted to employees. No employee may
receive any award for more than 2,000,000 shares in any calendar year.
Optionees receive the right to purchase a specified number of shares of
common stock at a specified option price and subject to other terms and
conditions as are specified in connection with the option grant. We may grant
options at an exercise price less than, equal to or greater than the fair
market value of our common stock on the date of grant. Under present law,
incentive stock options and options intended to qualify as performance-based
compensation under Section 162(m) of the Internal Revenue Code may not be
granted at an exercise price less than the fair market value of the common
stock on the date of grant or less than 110% of the fair market value in the
case of incentive stock options granted to optionees holding more than 10% of
the voting power of the company. The stock incentive plan permits our board of
directors to determine how optionees may pay the exercise price of their
options, including by cash, check or in connection with a "cashless exercise"
through a broker, by surrender to us of shares of common stock, by delivery to
us of a promissory note, or by any combination of the permitted forms of
payment.
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<PAGE>
As of September 30, 1999, approximately 158 persons were eligible to receive
awards under the stock incentive plan, including eight executive officers and
four non-employee directors.
Our board of directors administers the stock incentive plan. Our board of
directors has the authority to adopt, amend and repeal the administrative
rules, guidelines and practices relating to the plan and to interpret its
provisions. It may delegate authority under the stock incentive plan to one or
more executive officers or committees of the board of directors. Our board of
directors has authorized the compensation committee to administer the stock
incentive plan, including the granting of options to our executive officers.
Subject to any applicable limitations contained in the stock incentive plan,
our board of directors, our compensation committee or any other committee to
whom our board of directors delegates authority, as the case may be, selects
the recipients of awards and determines:
. the number of shares of common stock covered by options and the dates
upon which the options become exercisable;
. the exercise price of options; and
. the duration of options.
In the event of a merger, liquidation or other acquisition event, our board
of directors is authorized to take one or more of the following actions:
. provide that outstanding options be assumed or substituted for by the
acquirer;
. in the event of an acquisition in which the holders of common stock
would receive a cash payment for each share surrendered, provide for a
cash payment to each option holder equal to the amount by which the
amount paid to common stock holders exceeds the option's exercise price,
multiplied by the total number of shares of common stock subject to the
option;
. provide that any or all outstanding options become fully exercisable as
of a specified time prior to the event; and
. provide that all unexercised options terminate immediately prior to the
event unless exercised before that time.
No award may be granted under the stock incentive plan after November 2008,
but the vesting and effectiveness of awards previously granted may extend
beyond that date. Our board of directors may at any time amend, suspend or
terminate the stock incentive plan.
1999 Employee Stock Purchase Plan.
Our 1999 Employee Stock Purchase Plan was adopted by our board of directors
on October 5, 1999 and approved by our stockholders on October 6, 1999. The
purchase plan authorizes the issuance of up to a total of 212,500 shares of our
common stock to participating employees.
All of our employees, including our directors who are employees, and all
employees of any participating subsidiaries, whose customary employment is more
than 20 hours per week and for more than five months in any calendar year, are
eligible to participate in the purchase plan. Employees who
52
<PAGE>
would immediately after the grant own 5% or more of the total combined voting
power or value of our stock or any subsidiary are not eligible to participate.
As of September 30, 1999, substantially all of our employees would have been
eligible to participate in the purchase plan.
During each designated payroll deduction period, or offering period, each
eligible employee may authorize us to deduct between 1% to 10%, in 1%
increments, of his or her base pay, including sales commissions. We will hold
the deducted money in a non-interest bearing account for each participating
employee. On the last business day of the offering period we will use the
amount in his or her account to buy shares of our common stock for each
participating employee at the following purchase price. The purchase price will
be 85% of the closing market price of our common stock on either (a) the first
business day of the offering period or (b) the last business day of the
offering period, whichever is lower. No employee is allowed to buy shares of
common stock worth more than $25,000, based on the fair market value of the
common stock on the first day of the offering period, in any calendar year
under the plan. Except for the first offering period, each offering period will
commence May 1 and November 1 and last for six months. The first offering will
begin on the day on which trading of our common stock begins on the Nasdaq
National Market and will end on April 30, 2000, and the closing price of the
common stock on the first business day of the first offering period will equal
the initial public offering price.
An employee must be a participant on the last day of an offering period in
order to purchase stock under the plan. An employee's participation in an
offering terminates upon:
. the employee's withdrawal of the balance accumulated in his or her
account;
. termination of employment;
. retirement;
. death;
. transfer to a subsidiary of the company which does not participate in
the plan; and
. the subsidiary for which the employee works no longer being a subsidiary
of the company.
In the event of the employee's death, the balance in the employee's account
will be refunded to the employee's beneficiary or the executor or administrator
of the employee's estate.
Because participation in the purchase plan is voluntary, we cannot now
determine the number of shares of our common stock to be purchased by any of
our current executive officers, by all of our current executive officers as a
group or by our non-executive employees as a group.
401(k) Plan
We have adopted an employee savings and retirement plan qualified under
Section 401 of the Internal Revenue Code and covering employees who are at
least 21 years of age and who have completed three months of service. Employees
may elect to reduce their current compensation by up to the statutorily
prescribed annual limit and have the amount of the reduction contributed to the
401(k) plan. Although not required, we may make matching or additional
contributions to the 401(k) plan in amounts to be determined annually by our
board of directors. To date we have not made any matching or additional
contributions.
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<PAGE>
TRANSACTIONS WITH RELATED PARTIES
All information below regarding common stock and warrants to purchase common
stock gives effect to Be Free's 1-for-2 reverse stock split, effective October
6, 1999. Upon the closing of this offering, all outstanding shares of Series A
and Series B preferred stock and warrants to purchase Series A preferred stock
will automatically convert into shares of common stock or warrants to purchase
common stock on a 1-for-2 basis.
Preferred Stock and Related Transactions
Sale of Preferred Stock. We sold preferred stock pursuant to the following
transactions:
. On August 28, 1998, we sold an aggregate of 10,500,000 shares of Series
A preferred stock at a price of $1.00 per share and issued warrants to
purchase 1,732,500 shares of common stock at an exercise price of $3.00
per share.
. On September 29, 1998, we sold 100,000 shares of Series A preferred
stock at a price of $1.00 per share and issued a warrant to purchase
16,500 shares of common stock at an exercise price of $3.00 and warrants
to purchase up to 700,000 shares of Series A preferred stock at an
exercise price of $1.00 per share; and
. On March 31, 1999, we sold an aggregate of 13,196,522 shares of Series B
preferred stock at a price of $1.89443 per share.
The following directors, executive officers, holders of more than 5% of a
class of voting securities and members of that person's immediate family
purchased these shares or received these warrants to purchase common stock or
Series A preferred stock.
<TABLE>
<CAPTION>
Warrants to
Shares of Warrants to Purchase Shares of
Series A Purchase Series A Series B
Preferred Common Preferred Preferred
Purchaser(1) Stock Stock Stock Stock
<S> <C> <C> <C> <C>
Gordon B. Hoffstein(2).............. 500,000 82,500 -- --
Charles River Partnership(2)(3)..... 5,000,000 825,000 -- 2,322,598
Highland Capital(2)(4).............. -- -- -- 5,070,139
Matrix Partners(2)(5)............... 5,000,000 825,000 -- 2,322,598
</TABLE>
- ---------------------
(1) See Notes to Table of Beneficial Ownership in "Principal Stockholders" for
information relating to the beneficial ownership of the referenced shares.
(2) A holder of more than 5% of Be Free's Common Stock.
(3) Of the securities listed, Charles River Partnership VIII owns 4,909,475
shares of Series A preferred stock, warrants to purchase 810,063 shares of
common stock and 2,280,547 shares of Series B preferred stock, and Charles
River VIII-A owns 90,525 shares of Series A preferred stock, warrants to
purchase 14,936 shares of common stock and 42,051 shares of Series B
preferred stock. Mr. Dintersmith, a director of Be Free, is a general
partner of Charles River Partnership VIII, the general partner of Charles
River Partnership VIII, L.P. and an officer of Charles River VII Friends,
Inc., the manager of Charles River VIII- A, LLC.
(4) Of the securities listed, Highland Capital Partners IV owns 4,867,333
shares of Series B preferred stock and Highland Entrepreneurs' Fund IV owns
202,806 shares of Series B preferred stock. Mr. Nova, a director of Be
Free, is a managing member of Highland Management Partners IV, LLC, the
general partner of Highland Capital Partners IV, LP and a managing member
of Highland Entrepreneurs' Fund IV LLC, the general partner of Highland
Entrepreneurs' Fund IV, LP.
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<PAGE>
(5) Of the securities listed above, Matrix Partners V, L.P. owns 4,500,000
shares of Series A preferred stock, warrants to purchase 742,500 shares of
common stock and 2,090,338 shares of Series B preferred stock, and Matrix V
Entrepreneurs Fund, L.P. owns 500,000 shares of Series A Preferred Stock,
warrants to purchase 82,500 shares of common stock and 232,260 shares of
Series B preferred stock. Mr. Humphreys, a director of Be Free, is a
general partner of Matrix V Management Co., LLC, the general partner of
both Matrix Partners V, L.P. and Matrix V Entrepreneurs' Fund.
In connection with the sale of Series A preferred stock, the following
transactions also occurred which involved executive officers, directors and/or
holders of more than 5% of a class of voting securities, including persons and
entities related to those listed:
Contribution Transactions. Samuel P. Gerace, Jr., a director and executive
officer, Thomas A. Gerace, an executive officer, their father Samuel P. Gerace,
Sr. and a limited partnership for the benefit of members of the Gerace family,
contributed to us shares of affiliated companies under common control and
management, in exchange for shares of our common stock, as follows:
<TABLE>
<CAPTION>
Shares
Contributor Received
<S> <C>
Samuel P. Gerace, Jr............................................ 2,447,978
Samuel P. Gerace, Sr............................................ 158,517
Gerace Family L.P............................................... 3,105,419
Thomas A. Gerace................................................ 2,447,978
</TABLE>
Redemption of Shares of Freedom of Information. On August 28, 1998, Be Free
redeemed for a price of $2.00 per share a portion of the outstanding common
stock, including the following shares of its common stock from executive
officers of Be Free, including related persons and entities, as well as other
stockholders of Be Free:
<TABLE>
<CAPTION>
Number of Purchases
Seller Shares Price
<S> <C> <C>
Samuel P. Gerace, Jr................................. 501,101 $1,002,202
Samuel P. Gerace, Sr................................. 94,523 189,047
Gerace Family L.P.................................... 1,851,764 3,703,528
Thomas A. Gerace..................................... 501,101 1,002,202
</TABLE>
Be Free paid the purchase price for the redeemed shares by issuing a
promissory note, which was paid in full on August 28, 1998 with a portion of
the proceeds from the sale of the Series A preferred stock.
Transfer Agreement. On August 28, 1998, the following executive officers,
including related persons and entities, of Be Free transferred shares of common
stock to a group of employees and advisors, including 24,042 shares to Kristin
L. Gerace, who is the sister of Samuel P. Gerace, Jr. and Thomas A. Gerace, and
6,649 shares to Jeffrey Rayport, a director of Be Free, in consideration for
services rendered to us.
<TABLE>
<CAPTION>
Number of
Shares
Transferor Transferred
<S> <C>
Gerace Family L.P............................................. 341,596
Samuel P. Gerace, Jr.......................................... 269,277
Thomas A. Gerace.............................................. 269,277
Samuel P. Gerace, Sr.......................................... 17,437
</TABLE>
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<PAGE>
Restricted Stock Awards
On December 30, 1998 Gordon B. Hoffstein, President and Chief Executive
Officer, and Stephen M. Joseph, Chief Financial Officer, purchased restricted
stock under the 1998 Stock Incentive Plan. Mr. Hoffstein purchased 1,547,850
shares of common stock and Mr. Joseph purchased 348,266 shares of common stock
each at a purchase price of $.30 per share. See "Management--Compensation
Committee Interlocks and Insider Participation."
Mr. Joseph paid for this restricted stock by paying $26,119 and by executing
a promissory note in the amount of $78,359 in favor of Be Free. The note is due
on June 30, 2003 and accrues interest at 7% per annum. The terms of the note
provide that interest accrues beginning on January 1, 1999, and payments of
interest commence on July 15, 1999. As of September 30, 1999, $78,360 in
principal was outstanding with respect to Mr. Joseph's promissory note.
Other
On August 28, 1998 Be Free entered into employment agreements with Samuel P.
Gerace, Jr. and Thomas A. Gerace that provide for an annual base salary of not
less than $110,000 and annual merit bonuses as may be determined by the board
of directors. These agreements contain customary noncompetition,
confidentiality and nonsolicitation provisions, and have an initial term of two
years with a one year renewal subject to the parties' agreement.
Be Free is a party to indemnification agreements with Ted R. Dintersmith,
Samuel P. Gerace, Jr., W. Michael Humphreys and Daniel J. Nova pursuant to
which it has agreed to indemnify these directors to the fullest extent possible
under Delaware Law from liabilities arising out of their respective service as
directors of Be Free.
All future transactions between us and our officers, directors, principal
stockholders and their affiliates will be approved by a majority of the board
of directors, including a majority of the disinterested directors, and will be
on terms no less favorable to us than could be obtained from unaffiliated third
parties.
56
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of September 30, 1999 and as adjusted to
reflect the sale of the shares of common stock in this offering, by:
. each person we know to own beneficially more than 5% of our common
stock;
. each of our directors;
. the Named Executive Officers; and
. all directors and executive officers as a group.
Unless otherwise indicated, each person named in the table has sole voting
power and investment power, or shares this power with his or her spouse, with
respect to all shares of capital stock listed as owned by such person. The
address of each of our executive officers and directors is c/o Be Free, Inc.,
154 Crane Meadow Road, Marlborough, Massachusetts 01752.
The number of shares beneficially owned by each stockholder is determined
under rules promulgated by the Securities and Exchange Commission. The
information is not necessarily indicative of beneficial ownership for any other
purpose. Under these rules, beneficial ownership includes any shares as to
which the individual has sole or shared voting power or investment power and
any shares as to which the individual has the right to acquire beneficial
ownership within 60 days after September 30, 1999 through the exercise of any
stock option or other right. The fact that we have included these shares,
however, does not constitute an admission that the named stockholder is a
direct or indirect beneficial owner of the shares.
<TABLE>
<CAPTION>
Percent of Ownership
-------------------------
Voting Shares Prior to After
Name of Beneficial Owner Beneficially Owned the Offering the Offering
<S> <C> <C> <C>
Five Percent Stockholders:
Charles River Partnership VIII, LP
(1)(5)........................... 4,486,299 20.92% 16.58%
Matrix Partners V, LP (2)(6)...... 4,486,299 20.92% 16.58%
Highland Capital Partners IV, LP
(3)(7)........................... 2,535,069 12.30% 9.67%
Directors and Named Executive
Officers:
Thomas A. Gerace.................. 1,702,140 8.26% 6.49%
Samuel P. Gerace, Jr.............. 1,702,140 8.26% 6.49%
Gordon B. Hoffstein (4)........... 1,880,350 9.08% 7.15%
Ted R. Dintersmith (5)............ 4,486,299 20.92% 16.58%
W. Michael Humphreys (6).......... 4,486,299 20.92% 16.58%
Daniel Nova (7)................... 2,535,069 12.30% 9.67%
Jeffrey Rayport (8)............... 16,024 * *
All directors and executive
officers as a group (12 persons). 17,601,562 78.32% 62.70%
</TABLE>
- ---------------------
* Less than 1%
57
<PAGE>
(1) Includes 66,288 shares owned by Charles River VIII-A, LLC, an affiliate of
Charles River Partnership VIII, LP, 14,936 shares issuable upon exercise
of a warrant in the name of Charles River VIII-A, LLC and 810,063 shares
issuable upon exercise of a warrant in the name of Charles River
Partnership VIII, LP. The address of Charles River Partnership VIII, LP is
1000 Winter Street, Suite 3300, Waltham, MA 02451.
(2) Includes 366,130 shares owned by Matrix V Entrepreneurs' Fund IV, LP, an
affiliate of Matrix Partners V, LP, 82,500 shares issuable upon exercise
of a warrant in the name of Matrix V Entrepreneurs' Fund IV, LP and
742,500 shares issuable upon exercise of a warrant in the name of Matrix
Partners V, LP. Matrix Partners V, LP is located at 1000 Winter Street,
Suite 4500, Waltham, MA 02451.
(3) Includes 101,403 shares owned by Highland Entrepreneurs' Fund IV, LP, an
affiliate of Highland Capital Partners IV, LP. Highland Capital Partners
IV, LP is located at Two International Place, Boston, MA 02110.
(4) Includes 82,500 shares issuable upon exercise of a warrant.
(5) Mr. Dintersmith, a member of the board of directors, is a general partner
of Charles River VIII GP, the general partner of Charles River Partnership
VIII, LP, and an officer of Charles River VII Friends, Inc., the manager
of Charles River VIII-A, LLC, and may be deemed to have beneficial
ownership of 4,486,299 shares. Mr. Dintersmith has shared voting power
with respect to these shares and disclaims beneficial ownership of these
shares, except to the extent of his pecuniary interest in the shares.
(6) Mr. Humphreys, a member of the board of directors, is a general partner of
Matrix V Management Co., LLC, the general partner of both Matrix Partners
V, L.P. and Matrix V Entrepreneurs' Fund and may be deemed to have
beneficial ownership of 4,486,299 shares. Mr. Humphreys has shared voting
and investment power over these shares and disclaims beneficial ownership
of these shares, except to the extent of his pecuniary interest in the
shares.
(7) Mr. Nova, a member of the board of directors, is a managing member of
Highland Management Partners IV, LLC, the general partner of Highland
Capital Partners IV, LP and a managing member of Highland Entrepreneurs'
Fund IV, LLC, the general partner of Highland Entrepreneurs' Fund IV, LP
and may be deemed to have beneficial ownership of 2,535,069 shares. Mr.
Nova has shared voting and investment power over these shares and
disclaims beneficial ownership of these shares, except to the extent of
his pecuniary interest in the shares.
(8) Includes 9,375 shares issuable upon the exercise of vested options under
the 1998 Stock Incentive Plan.
58
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
We will file our amended and restated certificate of incorporation at the
closing of this offering. It authorizes the issuance of up to 75.0 million
shares of common stock, par value $0.01 per share, and 10.0 million shares of
preferred stock, par value $0.01 per share. The rights and preferences of the
preferred stock may be established from time to time by our board of directors.
As of September 30, 1999, giving effect to the conversion of all outstanding
shares of preferred stock into common stock, 20,618,444 shares of common stock
were outstanding. As of September 30, 1999, we had 50 stockholders of record.
Common Stock
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of common stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of common stock are entitled to receive
proportionately any dividends as may be declared by our board of directors,
subject to any preferential dividend rights of outstanding preferred stock.
Upon our liquidation, dissolution or winding up, the holders of common stock
are entitled to receive proportionately our net assets available after the
payment of all debts and other liabilities and subject to the prior rights of
any outstanding preferred stock. Holders of common stock have no preemptive,
subscription, redemption or conversion rights. Our outstanding shares of common
stock are, and the shares offered by us in this offering will be, when issued
and paid for, fully paid and nonassessable. The rights, preferences and
privileges of holders of common stock are subject to, and may be adversely
affected by, the rights of the holders of shares of any series of preferred
stock which we may designate and issue in the future.
Preferred Stock
Under the terms of our certificate of incorporation, our board of directors
is authorized to issue shares of preferred stock in one or more series without
stockholder approval. Our board of directors has the discretion to determine
the rights, preferences, privileges and restrictions, including voting rights,
dividend rights, conversion rights, redemption privileges and liquidation
preferences, of each series of preferred stock.
The purpose of authorizing our board of directors to issue preferred stock
and determine its rights and preferences is to eliminate delays associated with
a stockholder vote on specific issuances. The issuance of preferred stock may
provide desirable flexibility in connection with possible acquisitions and
other corporate purposes, but could have the effect of making it more difficult
for a third party to acquire, or could discourage a third party from acquiring,
a majority of our outstanding voting stock. We have no present plans to issue
any shares of preferred stock.
59
<PAGE>
Warrants
As of September 30, 1999, Be Free had outstanding warrants to purchase
1,749,000 shares of common stock at an exercise price of $3.00 and, giving
effect to the conversion of all preferred stock into common stock, additional
warrants to purchase 350,000 shares at an exercise price of $2.00. The warrants
have a net exercise provision under which the holder may, in lieu of payment of
the exercise price in cash, surrender the warrant and receive a net amount of
shares, based on the fair market value of Be Free's stock at the time of the
exercise of the warrant, after deducting the aggregate exercise price. Of the
warrants to purchase 1,749,000 shares of common stock, warrants to purchase
1,732,500 shares of common stock will expire on September 29, 2008 and the
balance will expire on August 28, 2008. The additional warrants to purchase
16,500 shares of common stock will expire on the fifth anniversary of the
initial public offering of the common stock of Be Free.
Registration Rights
Pursuant to a Registration Rights Agreement, dated as of March 31, 1999, the
holders of approximately 12,040,810 shares of common stock, warrants to
purchase 2,016,500 shares of common stock and options to purchase 37,500 shares
of common stock have the right to register those shares under the Securities
Act of 1933. Subject to limitations in the Rights Agreement, some of the
holders, whose shares total at least 33 1/3% of all shares of common stock
then-held by the holders, or any lesser percentage with a price to the public
reasonably expected to exceed $5,000,000, may require, at any time 180 days
after this offering, that Be Free register these shares for public resale;
furthermore, the holders of shares with sale proceeds of at least $1,000,000
may require Be Free to register all or a portion of their registrable
securities on Form S-3 after this offering. Be Free shall not be required to
effect more than two of these demand registrations. In addition, if Be Free
registers any of its common stock for its own account or for the account of
other security holders, the parties to the Rights Agreement are entitled to
include their shares of common stock in the registration, subject to the
ability of the underwriters to limit the number of shares included in the
offering.
Pursuant to a Stock Purchase and Shareholders Agreement dated as of August
28, 1998, the holders of approximately 5,250,000 shares of common stock and
warrants to purchase 1,732,500 shares, have the right to demand that Be Free
register those shares under the Securities Act of 1933. All of these shares and
warrants, other than 250,000 shares of common stock and warrants to purchase
82,500 shares, are also entitled to be registered under the Rights Agreement.
Subject to limitations in the Stock Purchase and Shareholders Agreement, at any
time 180 days after this offering, any of these holders holding 33 1/3% of the
common stock then-held by these holders may require Be Free to register at
least 33 1/3% of the shares on Form S-1. In addition, at any time after the
closing of this offering, any of these holders may require Be Free to register
any of these shares with proceeds of at least $1,000,000 on Form S-3. Be Free
shall not be required to effect more than two of these demand registrations. In
addition, if Be Free registers any of its common stock for its own account or
for the account of other securityholders, the holders of approximately
10,664,556 shares of common stock and warrants to purchase 1,732,500 shares, of
which all but 4,925,707 shares and warrants to purchase 82,500 shares are
entitled to be registered under the Rights Agreement, are entitled to include
their shares of common stock in the registration, subject to the ability of the
underwriters to limit the number of shares included in the offering.
60
<PAGE>
Finally, pursuant to a Stock Purchase Agreement dated as of September 29,
1998, if Be Free registers any of its common stock for its own account or for
the account of other securityholders, a holder of 50,000 shares of common stock
and warrants to purchase 366,500 shares has the right to include those shares
in the registration, subject to the ability of the underwriters to limit the
number of shares issued in the offering. All of these shares are entitled to be
registered under the Registration Rights Agreement.
Be Free will bear all fees, costs and expenses of these registrations, other
than underwriting discounts and commissions. Upon the effectiveness of any
registration statement filed to register our common stock, these shares would
become freely tradable, without any restrictions imposed by the Securities Act.
Delaware Law and Our Charter and By-Law Provisions
We are subject to the provisions of Section 203 of the General Corporation
Law of Delaware. Section 203 prohibits a publicly held Delaware corporation
from engaging in a business combination with an interested stockholder for a
period of three years after the person became an interested stockholder, unless
the business combination is approved in a prescribed manner. A business
combination includes mergers, asset sales and other transactions resulting in a
financial benefit to the interested stockholder. An interested stockholder
generally is a person who, together with affiliates and associates, owns, or
within the prior three years did own, 15% or more of the corporation's voting
stock.
Our certificate of incorporation divides our board of directors into three
classes with staggered three-year terms. In addition, our certificate of
incorporation provides that directors may be removed only for cause by the
affirmative vote of the holders of two-thirds of our shares of capital stock
entitled to vote. Under our certificate of incorporation, any vacancy on our
board of directors, including a vacancy resulting from an enlargement of our
board of directors, may only be filled by vote of a majority of our directors
then in office. The classification of our board of directors and the
limitations on the removal of directors and filling of vacancies could make it
more difficult for a third party to acquire, or discourage a third party from
acquiring, control of the company.
Our certificate of incorporation also provides that any action required or
permitted to be taken by our stockholders at an annual meeting or special
meeting of stockholders may only be taken if it is properly brought before the
meeting and may not be taken by written action in lieu of a meeting. Our
certificate of incorporation further provides that special meetings of the
stockholders may only be called by our Chairman of the Board, President or
board of directors. Under our by-laws, in order for any matter to be considered
properly brought before a meeting, a stockholder must comply with advance
notice requirements. These provisions could have the effect of delaying until
the next stockholders' meeting stockholder actions which are favored by the
holders of a majority of our outstanding voting securities. These provisions
may also discourage a third party from making a tender offer for our common
stock, because even if it acquired a majority of our outstanding voting
securities, the third party would be able to take action as a stockholder (such
as electing new directors or approving a merger) only at a duly called
stockholders' meeting, and not by written consent.
The General Corporation Law of Delaware provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's certificate of incorporation or by-laws,
unless a corporation's certificate of incorporation or by-laws, as the case
61
<PAGE>
may be, requires a greater percentage. Our certificate of incorporation and
by-laws require the affirmative vote of the holders of at least 75% of the
shares of our capital stock issued and outstanding and entitled to vote to
amend or repeal any of the provisions described in the prior two paragraphs.
Our amended and restated certificate of incorporation contains provisions
permitted under the General Corporation Law of Delaware relating to the
liability of directors. The provisions eliminate a director's liability for
monetary damages for a breach of fiduciary duty, except in circumstances
involving wrongful acts, such as the breach of a director's duty of loyalty or
acts or omissions that involve intentional misconduct or a knowing violation
of law. Further, our amended and restated certificate of incorporation
contains provisions to indemnify our directors and officers to the fullest
extent permitted by the General Corporation Law of Delaware. We believe that
these provisions will assist us in attracting and retaining qualified
individuals to serve as directors.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Continental Stock
Transfer & Trust.
62
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Immediately prior to this offering, there was no public market for our
common stock. Future sales of substantial amounts of common stock in the public
market could adversely affect the market price of our common stock.
Upon completion of this offering, we will have outstanding an aggregate of
26,218,444 shares of common stock, assuming the issuance of 5,600,000 shares of
common stock offered hereby and no exercise of options after September 30,
1999. Of these shares, the 5,600,000 shares sold in this offering will be
freely tradable without restriction or further registration under the
Securities Act, except for any shares purchased by Affiliates of Be Free as
that term is defined in Rule 144 under the Securities Act. Sales of shares
purchased by affiliates would be subject to the limitations and restrictions
described below.
The remaining 20,618,444 shares of common stock held by existing
stockholders were issued and sold by us in reliance on exemptions from the
registration requirements of the Securities Act. On the date of this
prospectus, all of these shares will be subject to lock-up agreements described
below or lock-up agreements with Be Free. Upon expiration of the lock-up
agreements 180 days after the effective date of this offering, 938,499 shares
will become eligible for sale pursuant to Rule 144(k), and the remaining shares
will become eligible for sale subject in most cases to the limitations of
either Rule 144 or Rule 701. In addition, holders of stock options could
exercise the options and sell some or all of the shares issued upon exercise as
described below.
<TABLE>
<CAPTION>
Number of
Shares Date
<C> <S>
0 After the date of this prospectus
19,679,945 After 180 days from the date of this prospectus (subject in most
cases to the limitations of either Rule 144 or Rule 701)
938,499 After 180 days from the date of this prospectus without Rule 144
volume limitations
</TABLE>
As of September 30, 1999 there were a total of 1,617,304 options to purchase
shares of common stock outstanding under our 1998 Stock Incentive Plan,
approximately 217,732 of which were vested and exercisable. However, all of
these shares are subject to lock-up agreements. All options held by officers
and directors of Be Free are subject to 180 day lock-up agreements described
below. Immediately after the completion of this offering, we intend to file
registration statements on Form S-8 under the Securities Act to register all of
the shares of common stock issued or reserved for future issuance under the
1998 Stock Incentive Plan. Based on the options outstanding as of October 7,
1999, within 180 days after the effective date of this offering, a total of
approximately 573,669 shares of common stock subject to outstanding options
will be vested and exercisable. After the effective dates of the registration
statements on Form S-8, shares purchased upon exercise of options granted
pursuant to the 1998 Stock Incentive Plan generally would be available for
resale in the public market.
As of September 30, 1999, Be Free had outstanding warrants to purchase an
aggregate of 2,099,000 shares of common stock (after giving effect to the
conversion of all preferred stock into common stock). These warrants are
subject to lock-up agreements for a period of 180 days after the date of this
offering. After that time, under certain circumstances all the shares
underlying these warrants may be publicly sold under Rule 144. The holders of
these warrants also have registration rights. See "Description of Capital
Stock--Warrants."
63
<PAGE>
All officers and directors and substantially all of our existing
stockholders agreed not to sell or otherwise dispose of any of their shares for
a period of 180 days after the date of this offering. Donaldson, Lufkin &
Jenrette Securities Corporation, however, may in its sole discretion, at any
time without notice, release all or any portion of the shares subject to lock-
up agreements.
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 in broker's
transactions or to market makers, 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; or
. the average weekly trading volume in 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 the sale.
1% of the number of shares of common stock outstanding immediately after this
offering will equal approximately 262,184 shares. Sales under Rule 144 are
generally subject to the availability of current public information about Be
Free.
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been an affiliate of
Be Free 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, is
entitled to sell those shares without having to comply with the manner of sale,
public information, volume limitation or notice filing 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, any of our employees, directors, officers,
consultants or advisors who purchase shares from us in connection with a
compensatory stock or option plan or other written agreement before the
effective date of this offering is entitled to sell those shares 90 days after
the effective date of this offering in reliance on Rule 144, without having to
comply with the holding period and notice filing requirements of Rule 144 and,
in the case of non-affiliates, without having to comply with the public
information, volume limitation or notice filing provisions of Rule 144.
The SEC has indicated that Rule 701 will apply to typical stock options
granted by an issuer before it becomes subject to the reporting requirements of
the Securities Exchange Act of 1934, along with the shares acquired upon
exercise of those options, including options exercised after the issuer becomes
subject to the reporting requirements. Securities issued in reliance on Rule
701 are restricted securities and, subject to the contractual restrictions
described above, beginning 90 days after the date of this prospectus, may be
sold by persons other than affiliates, as that term is defined in Rule 144,
subject only to the manner of sale provisions of Rule 144 and by affiliates
under Rule 144 without compliance with its one year minimum holding period
requirements.
64
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement,
dated , 1999, the underwriters named below, who are represented by
Donaldson, Lufkin & Jenrette Securities Corporation, Hambrecht & Quist LLC,
Dain Rauscher Wessels, a division of Dain Rauscher Incorporated, and DLJdirect
Inc. have severally agreed to purchase from us the number of shares opposite
their names below:
<TABLE>
<CAPTION>
Number of
Underwriters Shares
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation...................
Hambrecht & Quist LLC.................................................
Dain Rauscher Wessels.................................................
DLJdirect Inc.........................................................
---------
Total............................................................... 5,600,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares included in this
offering are subject to approval of the legal matters and to other conditions
specified in the underwriting agreement. The underwriters are obligated to
purchase and accept delivery of all the shares, other than those shares covered
by the over-allotment option described below, if they purchase any of the
shares.
The underwriters propose to offer initially some of the shares directly to
the public at the initial public offering price on the cover page of this
prospectus and some of the shares to certain dealers at the initial public
offering price less a concession not in excess of $ per share. The
underwriters may allow, and those dealers may re-allow, a concession not in
excess of $ per share on sales to other dealers. After the initial offering
of the shares to the public, the representatives may change the public offering
price and those concessions. The underwriters do not intend to confirm sales to
any accounts over which they exercise discretionary authority.
The following table shows the underwriting fees to be paid to the
underwriters by us in connection with this offering. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares of our common stock.
<TABLE>
<CAPTION>
No Full
Exercise Exercise
<S> <C> <C>
Per share..................................................... $ $
Total.........................................................
</TABLE>
We will pay the offering expenses, estimated to be $1.0 million.
65
<PAGE>
We have granted to the underwriters an option, exercisable for 30 days after
the date of this prospectus, to purchase up to 840,000 additional shares at the
initial public offering price minus the underwriting fees. The underwriters may
exercise this option solely to cover over-allotments, if any, made in
connection with this offering. To the extent that the underwriters exercise
this option, each underwriter will become obligated, subject to certain
conditions, to purchase a number of additional shares approximately
proportionate to that underwriter's initial purchase commitments.
We have agreed to indemnify the underwriters against certain civil
liabilities, including liabilities under the Securities Act, or to contribute
to payments that the underwriters may be required to make in respect of any of
those liabilities.
We, our executive officers and directors, and substantially all of our
stockholders have agreed, for a period of 180 days from the date of this
prospectus, not to, without the prior written consent of Donaldson, Lufkin &
Jenrette Securities Corporation:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly, any shares of our common stock or any securities
convertible into or exercisable or exchangeable for our common stock; or
. enter into any swap or other arrangement that transfers all or a portion
of the economic consequences associated with the ownership of any common
stock, regardless of whether any of these transactions is to be settled
by the delivery of common stock, or other securities, in cash or
otherwise.
However, we may:
. grant stock options under the 1998 Stock Incentive Plan; and
. issue shares of our stock upon the exercise of options, warrants or
rights or the conversion of currently outstanding securities.
In addition, during this period, we have agreed not to file any registration
statement with respect to, and each of our executive officers, directors and
substantially all of our stockholders have agreed not to make any demand for,
or exercise any right with respect to, the registration of any shares of common
stock or any securities convertible into or exercisable or exchangeable for
common stock without the prior written consent of Donaldson, Lufkin & Jenrette
Securities Corporation.
At the request of Be Free, the underwriters have reserved at the initial
public offering price up to 450,000 additional shares of common stock for sale
to directors, employees and associates of Be Free. There can be no assurance
that any of the reserved shares will be purchased by those persons. The number
of shares available for sale to the general public in the offering will be
reduced by the number of reserved shares sold. Any reserved shares not
purchased by those persons will be offered to the general public on the same
basis as the other shares offered hereby.
Other than in the United States, no action has been taken by us or the
underwriters that would permit a public offering of the shares of our common
stock included in this offering in any
66
<PAGE>
jurisdiction where action for that purpose is required. The shares included in
this offering may not be offered or sold, directly or indirectly, nor may this
prospectus or any other offering material or advertisement in connection with
the offer and sale of any of these shares be distributed or published in any
jurisdiction, except under circumstances that will result in compliance with
the applicable rules and regulations of that jurisdiction. Persons who receive
this prospectus are advised to inform themselves about and to observe any
restrictions relating to the offering of our common stock and the distribution
of this prospectus. This prospectus is not an offer to sell or a solicitation
of an offer to buy any shares of our common stock included in this offering in
any jurisdiction where that would not be permitted or legal.
In connection with this offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of our
common stock. Specifically, the underwriters may overallot this offering,
creating a syndicate short position. In addition, the underwriters may bid for
and purchase shares of our common stock in the open market to cover syndicate
short positions or to stabilize the price of our common stock. These activities
may stabilize or maintain the market price of our common stock above
independent market levels. The underwriters are not required to engage in these
activities and may end any of these activities at any time.
Prior to this offering, there has been no established public market for our
common stock. The initial public offering price for the shares of our common
stock offered by this prospectus will be determined by negotiation between us
and the representatives of the underwriters. The factors to be considered in
determining the initial public offering price include:
. our history and the prospects for the industry in which we compete;
. our past and present operations;
. our historical results of operations;
. our prospects for future earnings;
. the recent market prices of securities of generally comparable companies;
and
. the general conditions of the securities market at the time of the
offering.
We have applied for quotation of our common stock on the Nasdaq National
Market under the symbol BFRE.
LEGAL MATTERS
The validity of the shares of common stock offered by us hereby will be
passed upon for us by Hale and Dorr LLP, Boston, Massachusetts. Legal matters
will be passed upon for the underwriters by Testa, Hurwitz & Thibeault, LLP,
Boston, Massachusetts.
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<PAGE>
EXPERTS
The consolidated financial statements as of December 31, 1997 and 1998 and
for each of the three years in the period ended December 31, 1998 included in
this prospectus and the registration statement relating to this prospectus have
been included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on their authority as experts in auditing and
accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1 with the SEC for the
common stock we are offering by this prospectus. This prospectus does not
include all of the information contained in the registration statement. You
should refer to the registration statement and its exhibits for additional
information. Whenever we make reference in this prospectus to any of our
contracts, agreements or other documents, the references are not necessarily
complete and you should refer to the exhibits attached to the registration
statement for copies of the actual contract, agreement or other document. When
we complete this offering, we will also be required to file annual, quarterly
and special reports, proxy statements and other information with the SEC.
You can read our SEC filings, including the registration statement, over the
Internet at the SEC's Web site at www.sec.gov. You may also read and copy any
document we file with the SEC at its public reference facilities at 450 Fifth
Street, N.W., Washington, D.C. 20549; Seven World Trade Center, Suite 1300, New
York, New York 10048; and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. You may also obtain copies of the documents at
prescribed rates by writing to the Public Reference Section of the SEC at 450
Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-
0330 for further information on the operation of the public reference
facilities.
68
<PAGE>
BE FREE, INC.
CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Accountants........................................ F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998 and as of
September 30, 1999 (unaudited) and pro forma as of September 30, 1999
(unaudited)............................................................. F-3
Consolidated Statements of Operations for the years ended December 31,
1996, 1997 and 1998, and for the nine months ended September 30, 1998
and 1999 (unaudited).................................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1996, 1997 and 1998 and for the nine months ended
September 30, 1999 (unaudited).......................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1997 and 1998 and for the nine months ended September 30, 1998 and
1999 (unaudited)........................................................ F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Be Free, Inc. and Subsidiaries:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows present fairly, in all material respects, the financial position of Be
Free, Inc. and its subsidiaries (the "Company") at December 31, 1997 and 1998,
and the results of their operations and their cash flows for each of the three
years in the period 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.
PricewaterhouseCoopers LLP
Boston, Massachusetts
July 2, 1999, except for Footnote M
which is dated October 6, 1999
F-2
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Pro Forma
December 31, (Note B)
------------------------ September 30, September 30,
1997 1998 1999 1999
ASSETS (Unaudited)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equiva-
lents.................. $ 75,843 $ 4,327,090 $ 16,406,076 $16,406,076
Marketable securities... -- -- 2,932,150 2,932,150
Accounts receivable,
net of allowance for
doubtful accounts of
$0, $14,000, $71,258
and $71,258 at
December 31, 1997,
1998, September 30,
1999, and
September 30, 1999 pro
forma, respectively.... 80,390 118,955 964,919 964,919
Prepaid expenses........ -- 144,517 1,301,985 1,301,985
Other current assets.... 343 23,222 -- --
----------- ----------- ------------ -----------
Total current assets. 156,576 4,613,784 21,605,130 21,605,130
Property and equipment,
net (Note D)........... 96,902 961,702 8,531,244 8,531,244
Deposits................ 550 384,991 340,012 340,012
Other assets............ -- 10,359 83,633 83,633
----------- ----------- ------------ -----------
Total assets......... $ 254,028 $ 5,970,836 $ 30,560,019 $30,560,019
=========== =========== ============ ===========
LIABILITIES, CONVERTIBLE
PARTICIPATING
PREFERRED STOCK AND
STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable........ 431,756 533,524 505,142 505,142
Accrued expenses........ 106,360 349,725 6,567,221 6,567,221
Deferred revenue........ -- 121,667 1,255,926 1,255,926
Current portion of
long-term debt......... 120,226 187,139 2,501,895 2,501,895
----------- ----------- ------------ -----------
Total current liabil-
ities............... 658,342 1,192,055 10,830,184 10,830,184
Notes payable to related
parties................ 1,159,938 -- -- --
Long-term debt, net of
current portion........ 333,040 4,949,198 5,452,825 5,452,825
----------- ----------- ------------ -----------
Total liabilities.... 2,151,320 6,141,253 16,283,009 16,283,009
Commitments and contin-
gencies (Note G)
Series A Convertible
Participating Preferred
Stock; $0.01 par value;
11,300,000 shares
authorized, 10,600,000
shares issued and
outstanding at December
31, 1998, and September
30,1999; none issued
and outstanding on a
pro forma basis
(liquidation preference
$10,600,000 at
December 31, 1998 and
September 30, 1999),
net of issuance costs
of $152,592............ -- 8,785,981 9,077,519 --
Series A Convertible
Participating Preferred
Stock Warrants......... -- 540,000 540,000 --
Series B Convertible
Participating Preferred
Stock; $0.01 par value;
13,196,522 shares
authorized, issued, and
outstanding at
September 30, 1999;
none issued and
outstanding on a pro
forma basis
(liquidation preference
$25,999,883 at
September 30, 1999),
net of issuance costs
of $55,253............. -- -- 25,950,155 --
Stockholders' equity
(deficit) (Note H):
Common stock, $0.01 par
value; 27,500,000
shares authorized;
8,806,506 shares
issued and outstanding
at December 31, 1997;
9,750,000 shares
issued at December 31,
1998 and September 30,
1999; 21,648,261
issued on a pro forma
basis.................. 88,065 97,500 97,500 216,483
Additional paid-in cap-
ital................... 292,839 5,461,646 6,462,077 41,910,768
Unearned compensation... -- (5,549,096) (6,503,315) (6,503,315)
Stockholders' notes re-
ceivable............... -- (779,558) (208,072) (208,072)
Accumulated deficit..... (2,278,196) (7,041,695) (19,524,994) (19,524,994)
----------- ----------- ------------ -----------
(1,897,292) (7,811,203) (19,676,804) 15,890,870
Treasury stock, at cost
(842,598 shares at
December 31, 1998;
1,029,817 shares at
September 30, 1999 and
on a pro forma basis).. -- (1,685,195) (1,613,860) (1,613,860)
----------- ----------- ------------ -----------
Total stockholders'
equity (deficit).... (1,897,292) (9,496,398) (21,290,664) 14,277,010
----------- ----------- ------------ -----------
Total liabilities,
convertible
participating
preferred stock and
stockholders'
equity (deficit)... $ 254,028 $ 5,970,836 $ 30,560,019 $30,560,019
=========== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
------------------------------------- -------------------------
1996 1997 1998 1998 1999
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenue:
Performance marketing
services............. $ -- $ 216,286 $ 1,319,183 $ 933,268 $ 2,708,873
Other................. 196,069 60,424 7,580 7,580 --
----------- ----------- ----------- ----------- ------------
Total revenue....... 196,069 276,710 1,326,763 940,848 2,708,873
----------- ----------- ----------- ----------- ------------
Operating expenses:
Cost of revenue....... -- 272,585 423,811 226,197 437,062
Sales and marketing... 397,819 180,108 1,453,706 538,670 8,334,835
Development and
engineering.......... 505,509 426,329 728,538 398,258 3,134,628
General and
administrative....... 557,760 332,376 875,153 433,057 1,651,747
Equity related
compensation......... -- -- 2,385,211 2,206,932 1,440,771
----------- ----------- ----------- ----------- ------------
Total operating
expenses........... 1,461,088 1,211,398 5,866,419 3,803,114 14,999,043
----------- ----------- ----------- ----------- ------------
Operating loss...... (1,265,019) (934,688) (4,539,656) (2,862,266) (12,290,170)
Interest income....... 1,324 6,293 34,577 11,523 521,399
Interest expense...... (27,566) (105,215) (258,420) (97,675) (714,528)
----------- ----------- ----------- ----------- ------------
Net loss................ (1,291,261) (1,033,610) (4,763,499) (2,948,418) (12,483,299)
Accretion of preferred
stock to redemption
value.................. -- -- (129,573) (32,393) (1,297,059)
----------- ----------- ----------- ----------- ------------
Net loss attributable to
common stockholders.... $(1,291,261) $(1,033,610) $(4,893,072) $(2,980,811) $(13,780,358)
=========== =========== =========== =========== ============
Basic and diluted net
loss per share......... $ (0.13) $ (0.08) $ (0.61) $ (0.35) $ (2.18)
Shares used in computing
basic and diluted net
loss per share......... 9,771,602 13,569,256 8,009,129 8,547,227 6,330,565
Unaudited pro forma
basic and diluted net
loss per share......... $ (0.49) $ (0.78)
Shares used in computing
pro forma basic and
diluted net loss per
share.................. 9,819,814 16,053,575
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
for the years ended December 31, 1996, 1997 and 1998 and for the nine months
ended September 30, 1999 (unaudited)
<TABLE>
<CAPTION>
Common Stock Treasury Stock
-------------------- Retained -----------------------
$0.01 Additional Stockholders' Earnings
Par Paid-in Unearned Notes (Accumulated
Shares Value Capital Compensation Receivable Deficit) Shares Value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January
1, 1996........... 1,761,300 $ 17,613 $ 33,387 $ -- $ -- $ 116,578 -- $ --
Issuance of
Common Stock.... 12,329,108 123,291 (33,387) -- -- (69,903) -- --
Net loss........ -- -- -- -- -- (1,291,261) -- --
---------- -------- ---------- ------------
Balance at
December 31, 1996. 14,090,408 140,904 -- -- -- (1,244,586)
Contribution of
capital by
stockholders.... -- -- 250,000 -- -- -- -- --
Acquisition and
retirement of
treasury stock.. (5,283,902) (52,839) 42,839 -- -- -- -- --
Net loss........ -- -- -- -- -- (1,033,610) -- --
---------- -------- ---------- ------------
Balance at
December 31, 1997. 8,806,506 88,065 292,839 -- -- (2,278,196) -- --
Stock issuance
in connection
with warrant
exercise........ 943,494 9,435 365,565 -- -- -- -- --
Acquisition of
treasury stock.. -- -- -- -- -- -- (3,088,441) (6,176,881)
Issuance of
restricted stock
to employees by
controlling
stockholders.... -- -- 2,145,000 (318,554) -- -- -- --
Issuance of
warrants to
purchase Common
Stock in
connection with
Series A
Convertible
Participating
Preferred Stock
financing....... -- -- 1,791,000 -- -- -- -- --
Exercise of call
option on Common
Stock........... -- -- -- -- -- -- (352,682) (705,364)
Forfeiture of
unvested shares
of restricted
stock........... -- -- (180,314) 180,314 -- -- -- --
Issuance of
restricted
stock........... -- -- -- (4,417,492) (779,558) -- 2,598,525 5,197,050
Unearned
compensation
related to
option
grants.......... -- -- 1,177,129 (1,177,129) -- -- -- --
Amortization of
unearned
compensation.... -- -- -- 183,765 -- -- -- --
Net loss........ -- -- -- -- -- (4,763,499) -- --
Accretion to
redemption value
of Series A
Preferred Stock. -- -- (129,573) -- -- -- -- --
---------- -------- ---------- ----------- --------- ------------ ---------- -----------
Balance at
December 31, 1998. 9,750,000 97,500 5,461,646 (5,549,096) (779,558) (7,041,695) (842,598) (1,685,195)
Acquisition of
treasury stock.. -- -- (453,995) 436,957 73,510 -- (262,219) (78,665)
Acceleration of
vesting of
restricted
stock........... -- -- 77,103 -- -- -- -- --
Issuance of
restricted
stock........... -- -- -- (97,500) (52,500) -- 75,000 150,000
Repayment of
receivable from
stockholder..... -- -- -- -- 550,476 -- -- --
Unearned
compensation
related to
option grants... -- -- 2,674,382 (2,674,382) -- -- -- --
Amortization of
unearned
compensation.... -- -- -- 1,380,706 -- -- -- --
Net loss........ -- -- -- -- -- (12,483,299) -- --
Series B
Preferred Stock
dividend........ -- -- (999,994) -- -- -- -- --
Accretion to
redemption value
of Series A and
B Preferred
Stock........... -- -- (297,065) -- -- -- -- --
---------- -------- ---------- ----------- --------- ------------ ---------- -----------
Balance at
September 30, 1999
(unaudited)....... 9,750,000 $ 97,500 $6,462,077 $(6,503,315) $(208,072) $(19,524,994) (1,029,817) $(1,613,860)
========== ======== ========== =========== ========= ============ ========== ===========
<CAPTION>
Total
<S> <C>
Balance at January
1, 1996........... $ 167,578
Issuance of
Common Stock.... 20,001
Net loss........ (1,291,261)
-------------
Balance at
December 31, 1996. (1,103,682)
Contribution of
capital by
stockholders.... 250,000
Acquisition and
retirement of
treasury stock.. (10,000)
Net loss........ (1,033,610)
-------------
Balance at
December 31, 1997. (1,897,292)
Stock issuance
in connection
with warrant
exercise........ 375,000
Acquisition of
treasury stock.. (6,176,881)
Issuance of
restricted stock
to employees by
controlling
stockholders.... 1,826,446
Issuance of
warrants to
purchase Common
Stock in
connection with
Series A
Convertible
Participating
Preferred Stock
financing....... 1,791,000
Exercise of call
option on Common
Stock........... (705,364)
Forfeiture of
unvested shares
of restricted
stock........... --
Issuance of
restricted
stock........... --
Unearned
compensation
related to
option
grants.......... --
Amortization of
unearned
compensation.... 183,765
Net loss........ (4,763,499)
Accretion to
redemption value
of Series A
Preferred Stock. (129,573)
-------------
Balance at
December 31, 1998. (9,496,398)
Acquisition of
treasury stock.. (22,193)
Acceleration of
vesting of
restricted
stock........... 77,103
Issuance of
restricted
stock........... --
Repayment of
receivable from
stockholder..... 550,476
Unearned
compensation
related to
option grants... --
Amortization of
unearned
compensation.... 1,380,706
Net loss........ (12,483,299)
Series B
Preferred Stock
dividend........ (999,994)
Accretion to
redemption value
of Series A and
B Preferred
Stock........... (297,065)
-------------
Balance at
September 30, 1999
(unaudited)....... $(21,290,664)
=============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
------------------------------------- -------------------------
1996 1997 1998 1998 1999
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows for operating
activities:
Net loss............... $(1,291,261) $(1,033,610) $(4,763,499) $(2,948,418) $(12,483,299)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation and
amortization......... 42,067 56,999 285,794 68,704 941,060
Compensation charge
and amortization of
unearned
compensation......... -- -- 2,385,211 2,206,932 1,440,771
Loss on disposal on
fixed assets......... -- 3,304 -- -- --
Acquisition of fixed
assets in exchange
for services......... -- -- (202,688) (202,688) --
Provisions for
doubtful accounts.... -- -- 14,000 -- 57,258
Changes in operating
assets and
liabilities:
Accounts receivable... 118,072 (54,717) (52,565) 31,518 (778,222)
Prepaid expenses...... -- -- (75,991) (91,368) (801,471)
Deposits.............. -- -- (384,441) (64,971) 44,979
Accounts payable...... 329,044 94,570 101,768 (131,584) (28,382)
Accrued expenses...... 25,261 46,085 243,365 (69,639) 1,537,011
Deferred revenue...... 24,508 (24,508) 121,667 266,667 1,009,259
Other, net............ (123) (343) (33,238) (5,866) (50,052)
----------- ----------- ----------- ----------- ------------
Net cash provided by
(used in) operating
activities............. (752,432) (912,220) (2,360,617) (940,713) (9,111,088)
----------- ----------- ----------- ----------- ------------
Cash flows for investing
activities:
Purchases of property
and equipment......... (71,232) (67,726) (610,064) (346,625) (1,078,609)
Purchases of marketable
securities............ -- -- -- -- (2,932,150)
----------- ----------- ----------- ----------- ------------
Net cash used in
investing activities... (71,232) (67,726) (610,064) (346,625) (4,010,759)
----------- ----------- ----------- ----------- ------------
Cash flows from
financing activities:
Proceeds from issuance
of Series A
Convertible
Participating
Preferred Stock, net
of issuance costs..... -- -- 8,656,408 8,656,408 --
Issuance of warrants
for Common Stock in
connection with Series
A Preferred Stock..... -- -- 1,791,000 1,791,000 --
Proceeds from issuance
of Series B
Convertible
Participating
Preferred Stock, net
of issuance costs..... -- -- -- -- 24,944,635
Proceeds from issuance
of Common Stock....... 20,001 250,000 -- -- --
Acquisition of common
stock and treasury
shares................ -- (10,000) (6,882,245) (6,176,881) (5,155)
Payments on notes
payable to related
parties............... -- -- (1,159,938) (840,463) --
Proceeds from notes
receivable from
stockholders.......... -- -- -- -- 550,476
Proceeds from
sales/leaseback....... -- -- -- -- 240,818
Proceeds from long-term
debt.................. 738,795 791,080 5,000,000 -- --
Payments on long-term
debt.................. -- -- (183,297) (61,588) (529,941)
----------- ----------- ----------- ----------- ------------
Net cash provided by
(used in) financing
activities............. 758,796 1,031,080 7,221,928 3,368,476 25,200,833
----------- ----------- ----------- ----------- ------------
Net increase (decrease)
in cash and cash
equivalents............ (64,868) 51,134 4,251,247 2,081,138 12,078,986
Cash and cash
equivalents at
beginning of period.... 89,577 24,709 75,843 75,843 4,327,090
----------- ----------- ----------- ----------- ------------
Cash and cash
equivalents at end of
period................. $ 24,709 $ 75,843 $ 4,327,090 $ 2,156,981 $ 16,406,076
=========== =========== =========== =========== ============
Supplemental disclosure
of cash flow
information:
Cash paid during the
period for interest... $ 22,823 $ 53,819 $ 284,561 $ 148,895 $ 631,753
Supplemental disclosures
of noncash
transactions:
Notes receivable for
Common Stock sold..... -- -- $ 779,558 -- $ 52,500
Elimination of note
receivable for
restricted stock...... -- -- -- -- $ 73,510
Issuance of warrants in
connection with
subordinated debt
agreement............. -- -- $ 540,000 -- --
Purchases of property
and equipment under
capital lease
obligations and
equipment financing... -- -- $ 285,000 -- $ 7,172,591
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(the information presented relating to the nine months ended September 30, 1998
and 1999 is unaudited)
A. The Company and Basis of Presentation:
Be Free, Inc. (the "Company") is a provider of services that enable
electronic commerce merchants and Internet portals to promote their products
and services on the Internet. As such, the Company is subject to a number of
risks similar to other companies in the Internet industry, including rapid
technological change, uncertainty of market acceptance of services, competition
from substitute services and larger companies, protection of proprietary
technology and dependence on key individuals.
The Company has a single operating segment, performance marketing services.
The Company has no organizational structure dictated by product lines,
geography or customer type. Revenue has been primarily derived from services
provided through the Company's BFAST technology, which have been provided to
domestic companies to date.
The Company was incorporated on January 25, 1996 as "Freedom of Information,
Inc." On March 31, 1999, the Company changed its name to Be Free, Inc.
Prior to August 28, 1998, the Company and two affiliated companies, PCX
Information Systems, Inc. ("PCX") and FOI, Inc. ("FOI"), were under common
ownership and management by members of the same immediate family. On August 28,
1998, stockholders of the affiliated companies exchanged their shares of
capital stock of the affiliated companies for shares of the Company's common
stock which resulted in the affiliated companies becoming wholly owned
subsidiaries of the Company (Note H). This combination was accounted for at
historical cost due to the common control of the entities.
B. Summary of Significant Accounting Policies:
Cash and Cash Equivalents
The Company considers all highly liquid investments with remaining
maturities of three months or less at the time of acquisition to be cash
equivalents. Cash equivalents, which consist of money market accounts and
commercial paper, are stated at cost, which approximates market value.
Marketable Securities
The Company's marketable securities are comprised entirely of commercial
paper which are classified as available for sale at the date of purchase.
Marketable securities with remaining maturities of less than twelve months from
the balance sheet date are classified as short-term. Marketable securities with
remaining maturities of more than twelve months from the balance sheet date are
classified as long-term. These securities are carried at amortized cost, which
approximates fair value.
Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of cash and cash equivalents,
marketable securities and accounts receivable. At
F-7
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(the information presented relating to the nine months ended September 30, 1998
and 1999 is unaudited)
December 31, 1998 and September 30, 1999, substantially all of the Company's
cash was invested in money market accounts and commercial paper at one and four
financial institutions, respectively, which the Company believes to be of high
credit quality. The Company had one customer in 1996 totaling 74% of revenue,
two customers in 1997 totaling 78% and 12% of revenue, respectively, one
customer in 1998 totaling 73% of revenue and three customers in the nine-month
period ended September 30, 1999 totaling 30%, 15% and 10% of revenue,
respectively. The Company had two customers that accounted for 40% and 11%,
respectively, of accounts receivable at December 31, 1998 and two customers
that accounted for 20% and 14%, respectively, of accounts receivable at
September 30, 1999.
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, which are five years for furniture and office
equipment and three to five years for computer equipment and software.
Leasehold improvements are depreciated over the shorter of related lease terms
or the estimated useful lives. The cost of maintenance and repairs is charged
to expense as incurred. When assets are retired or disposed, the assets and
related accumulated depreciation are eliminated from accounts and any related
gains or losses are reflected in income or loss for the period.
Revenue Recognition
The Company derives revenue primarily from providing performance marketing
services to customers. Customer contracts generally provide for fees on a per
transaction basis with a monthly or annual minimum. Revenue under service
contracts is recognized monthly over the contract period based on the
contractual minimum service fee or transaction volume when such transaction
volume exceeds monthly minimum requirements. The Company also charges a one
time integration fee for certain services. Revenue from integration fees is
recognized when the integration is complete and the service is available to the
customer up to the cost of providing such service. Revenue for integration fees
in excess of the cost is deferred and recognized ratably over the initial term
of the service contract. Costs related to performing integration services are
deferred and recognized when the integration is complete and the service is
available to the customer. Other revenue consists of customized software
development and support services which was recognized when the services were
provided.
The Company may discount the BFAST service fee by 5% for any calendar day
that Be Free's system response time did not meet the contractual performance
level for greater than 60 minutes during any calendar day. Any discounts
granted will be recorded as a reduction of revenue in the period issued.
Revenue under arrangements where multiple services are sold together under
one contract is allocated to each element based on the relative fair value of
each element, with fair value being determined using the price charged when the
element is sold separately.
F-8
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(the information presented relating to the nine months ended September 30, 1998
and 1999 is unaudited)
Cost of Revenue
Cost of Revenue represents direct expenses relating to delivering
performance marketing services to customers. Expenses primarily represent
depreciation for servers and storage equipment, costs for a third-party data
center facility and costs for Internet connectivity.
Development and Engineering
Development and Engineering costs are expensed as incurred and include labor
and related costs for product development and maintenance and support of system
infrastructure.
On January 1, 1999, the Company adopted American Institute of Certified
Public Accountants Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1").
Accordingly, the Company's policy is to capitalize costs associated with the
design and implementation of its operating systems, including internally and
externally developed software. To date, internal costs eligible for
capitalization under SOP 98-1 have been immaterial.
During the years ended December 31, 1996, 1997 and 1998, certain engineering
and development personnel performed software development services for third
parties. The cost of those services were approximately $221,000, $40,000 and $0
for the years ended December 31, 1996, 1997 and 1998, respectively.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense of
approximately $265,100, $3,100, $34,900, $5,200 and $166,000 were charged to
sales and marketing expenses for the years ended December 31, 1996, 1997, 1998
and the nine-month period ended September 30, 1998 and 1999, respectively.
Income Taxes
The Company provides for income taxes using the liability method whereby
deferred tax liabilities and assets are recognized based on temporary
differences between the amounts presented in the financial statements and the
tax bases of assets and liabilities using current statutory tax rates. A
valuation allowance is established against net deferred tax assets, if based on
the weighted available evidence, it is more likely than not that some or all of
the deferred tax assets will not be realized.
Accounting for Stock-Based Compensation
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," encourages but does not require companies to record
compensation cost for stock-based employee compensation at fair value. The
Company has chosen to account for stock-based
F-9
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(the information presented relating to the nine months ended September 30, 1998
and 1999 is unaudited)
compensation granted to employees using the intrinsic value method prescribed
in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Accordingly, compensation cost for
stock options granted to employees is measured as the excess, if any, of the
fair value of the Company's stock at the date of the grant over the amount that
must be paid to acquire the stock. Stock-based compensation issued to
nonemployees is measured and recorded using the fair value method prescribed in
SFAS No. 123.
Treasury Stock
The Company has delivered treasury shares upon issuance of restricted stock
and may deliver treasury shares upon the exercise of stock options. The
difference between the cost of the treasury shares, on a first-in, first-out
basis, and the exercise price of the options or purchase price of restricted
stock is reflected in additional paid in capital. Repurchase of treasury stock
is accounted for by using the cost method of accounting.
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 consolidated
financial statements and the reported amounts of revenue and expenses during
the reporting period. Estimates include accrued expenses and the valuation
allowance for deferred tax assets. Actual results could differ from those
estimates.
Recent Accounting Pronouncements
In June 1998, the FASB 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 and hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The Company, to
date, has not engaged in derivative and hedging activities, and accordingly
does not believe that the adoption of SFAS No. 133 will have a material impact
on the financial reporting and related disclosures of the Company. The Company
will adopt SFAS No. 133 as required by SFAS No. 137, "Deferral of the effective
date of FASB Statement No. 133," in fiscal year 2000.
Interim Financial Information
The consolidated financial statements of the Company as of September 30,
1999 and for the nine months ended September 30, 1998 and 1999 are unaudited.
All adjustments (consisting only of normal recurring adjustments) have been
made, which in the opinion of management, are necessary
F-10
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(the information presented relating to the nine months ended September 30, 1998
and 1999 is unaudited)
for a fair presentation. Results of operations for the nine months ended
September 30, 1999 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999 or for any other future period.
Pro Forma Balance Sheet (Unaudited)
Upon the closing of the Company's initial public offering, all of the
outstanding shares of Series A and B convertible participating preferred stock
will automatically convert on a 1-for-2 basis to shares (approximately
11,898,261 shares) of the Company's common stock assuming an offering price of
greater than $7.96 per share. Upon the closing of the Company's initial public
offering, warrants for the purchase of 700,000 shares of preferred stock will
become exercisable for 350,000 shares of common stock. The unaudited pro forma
presentation of the balance sheet has been prepared assuming the conversion of
the convertible preferred stock into common stock at September 30, 1999.
C. Net Loss Per Share and Pro Forma Loss Per Share:
Basic loss per share is computed using the weighted average number of common
shares outstanding during the period. Diluted loss per share is computed using
the weighted average number of common shares outstanding during the period,
plus the effect of any dilutive potential common shares. Dilutive potential
common shares consist of stock options, preferred stock and warrants. Potential
common shares were excluded from the calculation of net loss per share for the
periods presented since their inclusion would be antidilutive. During the year
ended December 31, 1996, there were no dilutive potential common shares. During
the year ended December 31, 1997, there were no options to purchase common
shares, no shares of preferred stock convertible into shares of common stock
and warrants to purchase 943,494 shares of common stock. During the year ended
December 31, 1998, there were options to purchase 692,429 shares of common
stock, 10,600,000 shares of preferred stock convertible into 5,300,000 shares
of common stock, warrants to purchase 1,749,000 shares of common stock and
warrants to purchase 700,000 shares of preferred stock convertible into 350,000
shares of common stock. During the nine-month period ended September 30, 1999,
there were options to purchase 1,617,304 shares of common stock, 23,796,522
shares of preferred stock convertible into 11,898,261 shares of common stock,
warrants to purchase 1,749,000 shares of common stock and warrants to purchase
700,000 shares of preferred stock convertible into 350,000 shares of common
stock.
Pro forma basic and diluted loss per share have been calculated assuming the
conversion of all outstanding shares of preferred stock into common stock, as
if the shares had converted immediately upon their issuance. Accordingly, net
loss has not been adjusted for the accrued dividends for preferred stock in the
calculation of pro forma loss per share.
F-11
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(the information presented relating to the nine months ended September 30, 1998
and 1999 is unaudited)
The following is a calculation of pro forma net loss per share (unaudited):
<TABLE>
<CAPTION>
For the Nine
Year Ended Months Ended
December 31, September 30,
1998 1999
<S> <C> <C>
Pro forma net loss:
Net loss attributable to common stockholders...... $(4,893,072) $(13,780,358)
Accretion of preferred stock to redemption value.. 129,573 1,297,059
----------- ------------
Pro forma net loss................................ $(4,763,499) $(12,483,299)
=========== ============
Shares used in computing pro forma basic and diluted
net loss per share:
Weighted average number of common shares
outstanding...................................... 8,009,129 6,330,565
Weighted average impact of assumed conversion of
preferred stock on issuance...................... 1,810,685 9,723,010
----------- ------------
Shares used in computing pro forma basic and
diluted net loss per share....................... 9,819,814 16,053,575
=========== ============
Basic and diluted pro forma net loss per common
share............................................ $ (0.49) $ (0.78)
=========== ============
</TABLE>
D. Property and Equipment:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------------- September 30,
1997 1998 1999
<S> <C> <C> <C>
Furniture and office equipment............. $ 1,803 $ 27,778 $ 569,297
Computer equipment and software............ 213,906 1,285,683 8,771,789
Leasehold improvements..................... -- -- 223,575
--------- ---------- ----------
215,709 1,313,461 9,564,661
Accumulated depreciation................... (118,807) (351,759) (1,033,417)
--------- ---------- ----------
Property and equipment, net................ $ 96,902 $ 961,702 $8,531,244
========= ========== ==========
</TABLE>
At December 31, 1998, cost and accumulated depreciation relating to computer
equipment under a long-term financing arrangement totaled $285,000 and $47,500,
respectively. At September 30, 1999, cost and accumulated depreciation relating
to furniture and office equipment under long-term financing arrangements
totaled $504,656 and $63,134, respectively. At September 30, 1999, cost and
accumulated depreciation relating to computer equipment and software under
long-term financing arrangements totaled $2,690,968 and $351,819, respectively.
At September 30, 1999, cost and accumulated depreciation relating to leasehold
improvements totaled $108,299 and $7,671, respectively. Depreciation expense
totaled $42,067, $56,999 and $232,952 for the years ended December 31, 1996,
1997 and 1998, respectively, and for the nine months ended September 30, 1998
and 1999 was $68,704 and $681,658, respectively.
F-12
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(the information presented relating to the nine months ended September 30, 1998
and 1999 is unaudited)
E. Accrued Expenses:
Accrued expenses include the following:
<TABLE>
<CAPTION>
December 31,
----------------- September 30,
1997 1998 1999
<S> <C> <C> <C>
Accrued interest.......................... $ 56,140 $ 50,000 $ 50,000
Professional fees......................... 42,500 135,395 1,246,202
Commissions............................... -- -- 49,165
Salaries and benefits..................... -- 27,876 460,886
Rent...................................... -- 67,644 86,975
Capital purchases......................... -- -- 4,394,485
Other..................................... 7,720 68,810 279,508
-------- -------- ----------
Accrued expenses........................ $106,360 $349,725 $6,567,221
======== ======== ==========
</TABLE>
F. Long-Term Debt:
The following table summarizes the Company's long-term borrowings:
<TABLE>
<CAPTION>
December 31,
--------------------- September 30,
1997 1998 1999
<S> <C> <C> <C>
Subordinated debt, net.............. $ -- $4,490,000 $4,625,000
Obligations under capital leases and
equipment financing................ -- 332,510 3,329,720
Term loans.......................... 453,266 313,827 --
--------- ---------- ----------
453,266 5,136,337 7,954,720
Less current portion................ (120,226) (187,139) (2,501,895)
--------- ---------- ----------
Long-term debt.................... $ 333,040 $4,949,198 $5,452,825
========= ========== ==========
</TABLE>
The Company entered into term loans during 1996 and 1997 that accrued
interest based on the lender's published prime rate, which was 9% and 8.5% at
December 31, 1997 and 1998, respectively. These loans were paid in full in
March 1999.
On August 25, 1998, the Company entered a software and support financing
arrangement with a lender totaling $376,368. Borrowings under this arrangement
have an implied interest rate of 13%. The repayment period for borrowings
outstanding under this arrangement concludes in September 2001.
On September 29, 1998, the Company entered into a subordinated debt
agreement totaling $5,000,000 which bears interest at 12% per annum. The
Company borrowed the full amount available under this agreement on October 23,
1998. The repayment period on this agreement
F-13
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(the information presented relating to the nine months ended September 30, 1998
and 1999 is unaudited)
concludes in November 2001. In connection with the subordinated debt financing,
the Company also granted warrants to purchase 700,000 shares of the Company's
Series A Preferred Stock at $1.00 per share. The fair value of the warrants,
estimated to be approximately $540,000 at issuance, has been recorded as a
discount on the carrying value of the debt to be amortized to interest expense
over the term of the debt. The value of the warrants was estimated assuming a
weighted average risk free interest rate of 4.51%, an expected life from date
of grant of four years, a volatility of 100% and no expected dividends. The
amount of expense recognized for the year ended December 31, 1998 and the nine-
month period ended September 30, 1999 totaled $30,000 and $135,000,
respectively.
On September 29, 1998, the Company established a capital equipment line of
credit totaling $2,000,000 which is available through September 29, 1999 and is
collateralized by the asset purchases made under the line. At December 31,
1998, no amounts had been borrowed under this line. At September 30, 1999, the
Company had $1,905,258 outstanding under this line which bears interest at
6.8%. Purchases under this line are financed as capital leases with terms of
four years.
During 1999, the Company entered into a sale/leaseback agreement with a
vendor for $240,818 in fixed assets. There was no gain or loss on the
transaction and the equipment has been accounted for as a capital lease.
The weighted average interest rate of outstanding long-term debt at December
31, 1997, 1998 and September 30, 1999 was 9%, 11.9% and 11.0%, respectively.
Principal payments on long-term debt are as follows:
<TABLE>
<CAPTION>
Long-Term
Debt
Year ended December 31, Payments
<S> <C>
1999.......................................................... $ 367,139
2000.......................................................... 2,563,314
2001.......................................................... 2,582,551
2002.......................................................... 57,143
2003.......................................................... 57,143
2004 and thereafter........................................... 19,047
----------
Total minimum debt payments................................. $5,646,337
==========
</TABLE>
G. Commitments and Contingencies:
The Company leases facilities and computer equipment under operating lease
agreements that expire on various dates through January 31, 2004. The Company
pays all insurance and pro-rated portions of certain operating expenses for
certain leases. Rent expense was $72,687, $113,025 and $307,575 for the years
ended December 31, 1996, 1997 and 1998, respectively, and $202,709 and $421,697
for the nine months ended September 30, 1998 and 1999, respectively.
F-14
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(the information presented relating to the nine months ended September 30, 1998
and 1999 is unaudited)
The future minimum lease payments at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Operating
Year ended December 31, Leases
<S> <C>
1999.......................................................... $ 449,944
2000.......................................................... 605,377
2001.......................................................... 662,361
2002.......................................................... 694,545
2003.......................................................... 706,421
2004 and thereafter........................................... 142,202
----------
Total minimum lease payments................................ $3,260,850
==========
</TABLE>
H. Capital Structure:
The authorized capital stock of the Company consists of (i) 27,500,000
shares of voting common stock ("Common Stock") authorized for issuance with a
par value of $0.01 and (ii) 24,496,522 shares of preferred stock with a par
value of $0.01, of which 11,300,000 shares are designated as Series A
Convertible Participating Preferred Stock ("Series A Preferred Stock") and
13,196,522 shares are designated as Series B Convertible Participating
Preferred Stock ("Series B Preferred Stock").
Common Stock
Prior to August 28, 1998, the Company and its affiliated companies, FOI,
Inc. and PCX were under common control and management by immediate members of
one family. On August 28, 1998, stockholders of the affiliated companies
exchanged their shares of capital stock of the affiliated companies for shares
of the Company's Common Stock which resulted in the affiliated companies
becoming wholly owned subsidiaries of the Company. The financial statements for
the Company, FOI and PCX are presented on a combined basis for the years ended
December 31, 1996, 1997 and 1998.
On August 28, 1998, the holders of warrants to purchase shares of Common
Stock exercised their warrants for 943,494 shares of Common Stock. Of these
shares, 352,682 shares were subject to a call option at the discretion of the
Company for $2.00 per share. On October 27, 1998, the Company exercised its
call option in full for $705,364.
On August 28, 1998, the Company repurchased 3,088,441 shares of Common Stock
from founders and employees of the Company in exchange for notes payable issued
by the Company for $6,176,881. These notes were paid in full on August 31,
1998.
On August 28, 1998, certain controlling stockholders of the Company
transferred 1,072,500 shares of Common Stock to employees in consideration of
past performance and as an incentive for continuing employment with the
Company. The stock was transferred subject to certain vesting
F-15
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(the information presented relating to the nine months ended September 30, 1998
and 1999 is unaudited)
restrictions and for no cash consideration. The fair value of these restricted
stock awards at the date of transfer totaled $2,145,000, which the Company is
recognizing as compensation expense over the defined vesting period. The
vesting for the transferred shares occurs over 4 years commencing with the
recipient's date of hire. The remaining unearned compensation will vest at
various dates through 2002. Upon the transfer of these shares, the Company
recorded a charge of $1,826,446 representing fully vested shares. In addition,
the Company recorded unearned compensation related to unvested shares totaling
$318,554. The Company recorded amortization of the unearned compensation
totaling $34,295 and $44,707 for the year ended December 31, 1998 and for the
nine months ended September 30, 1999, respectively.
On August 28, 1998, the Company's Board of Directors authorized a 35,226.01-
for-1 Common Stock split effected in the form of a stock dividend.
Stockholders' equity (deficit) has been restated for all periods presented to
give retroactive recognition to the split in prior periods by reclassifying
from additional paid-in capital to Common Stock the par value of the additional
shares arising from the split. In addition, all references in the consolidated
financial statements to the number of Common Stock shares and per share amounts
have been adjusted to reflect this split.
Preferred Stock
On August 28, 1998, the Company issued 10,500,000 shares of Series A
Preferred Stock for cash proceeds of $10,355,408, net of issuance costs of
$144,592. On September 29, 1998, the Company issued 100,000 shares of Series A
Preferred Stock for cash proceeds of $92,000, net of issuance costs of $8,000.
Each share of Series A Preferred Stock is convertible, at the option of the
holder, into one-half share of Common Stock, adjusted for certain events. The
Series A Preferred Stock automatically converts to Common Stock upon the
closing of a public offering raising an amount greater than $10,000,000 at a
price per share of at least $7.96. In addition, the Company can elect to
convert the Series A Preferred Stock to Common Stock if less than 25% of the
original shares are outstanding. The Company has reserved 5,650,000 shares of
Common Stock for the conversion of Series A Preferred Stock.
The holders of the Series A Preferred Stock are entitled to voting rights
equal to the number of shares of Common Stock into which the Series A Preferred
Stock could be converted at the time. Two of the holders of Series A Preferred
Stock have the right to elect one member each to the Board of Directors.
On or after March 31, 2004, the Company shall, at the written election of
the holders of at least a majority of the then outstanding shares of Series A
Preferred Stock, (i) redeem on the date specified by such holders one-third of
all the shares of Series A Preferred Stock outstanding on the date of such
election and (ii) redeem on the first anniversary of such date up to an
additional one-third of the shares of the Series A Preferred Stock outstanding
on such date (and not previously called for redemption) and (iii) redeem on the
second anniversary of such date all remaining shares
F-16
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(the information presented relating to the nine months ended September 30, 1998
and 1999 is unaudited)
of Series A Preferred Stock outstanding on such date (and not previously called
for redemption). The redemption price is equal to the sum of the original
purchase price (adjusted appropriately for any stock dividend, stock split or
similar event affecting the Series A Preferred Stock) plus the amount of any
declared but unpaid dividends.
In the event of liquidation of the Company, the holders of the Series A
Preferred Stock are entitled to be paid a liquidation amount equal to $1.00
(adjusted appropriately for any stock dividend, stock split or similar event
affecting the Series A Preferred Stock) plus any declared but unpaid dividends.
In addition, after the liquidation preferences of the Series A and Series B
Preferred Stock have been paid, the holders of Series A Preferred Stock are
entitled to share in the remaining proceeds, if any, as if their shares had
been converted into shares of Common Stock.
In connection with the issuance of Series A Preferred Stock, the Company
issued warrants to the holders of the Series A Preferred Stock, for the
purchase of up to 1,749,000 shares of Common Stock at $3.00 per share. Of these
warrants, 1,732,500 are exercisable from the date of issuance through August
28, 2008 and 16,500 are exercisable from the date of issuance through September
29, 2008. The fair value of these warrants at the date of issue was $1,791,000.
This amount has been recorded as a reduction of Series A Preferred Stock and an
increase to paid-in-capital. The value of the warrants was estimated assuming a
weighted average risk free interest rate of 4.51%, an expected life from date
of grant of four years, a volatility of 100% and no expected dividends.
On March 31, 1999, the Company issued 13,196,522 shares of Series B
Preferred Stock for cash proceeds of $24,944,635, net of issuance costs of
$55,253.
Each share of Series B Preferred Stock is convertible, at the option of the
holder, into one-half share of Common Stock, adjusted for certain events. The
Series B Preferred Stock automatically converts to Common Stock upon the
closing of a public offering raising an amount greater than $10,000,000 at a
price per share of at least $7.96. In addition, the Company can elect to
convert the Series B Preferred Stock to Common Stock if less than 25% of the
original shares of Series B Preferred Stock are outstanding. The Company has
and will continue to reserve a sufficient number of its Common Stock to satisfy
the conversion rights of the holders of the Series B Preferred Stock. The
holders of the Series B Preferred Stock are entitled to receive cumulative
dividends at a rate of 8% per annum.
The holders of the Series B Preferred Stock are entitled to voting rights
equal to the number of shares of Common Stock into which the Series B Preferred
Stock could be converted at the time. One of the holders of Series B Preferred
Stock has the right to elect one member to the Board of Directors.
On or after March 31, 2004, the Company shall, at the written election of
the holders of at least majority of the then outstanding shares of Series B
Preferred Stock, (i) redeem on the date specified
F-17
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(the information presented relating to the nine months ended September 30, 1998
and 1999 is unaudited)
by such holders one-third of all the shares of Series B Preferred Stock
outstanding on the date of such election (the "Election Date") and (ii) redeem
on March 31, 2005 one-third of the shares of the Series B Preferred Stock
outstanding on the Election Date (and not previously called for redemption) and
(iii) redeem on March 31, 2006 all remaining shares of Series B Preferred Stock
outstanding on such date (and not previously called for redemption). The
redemption price is equal to the sum of the original purchase price (adjusted
appropriately for any stock dividend, stock split or similar event affecting
the Series B Preferred Stock) plus the amount of any declared or accrued but
unpaid dividends.
In the event of liquidation of the Company, the holders of the Series B
Preferred Stock are entitled to be paid a liquidation amount equal to $1.89
(adjusted appropriately for any stock dividend, stock split or similar event
affecting the Series B Preferred Stock) per share plus any declared or accrued
but unpaid dividends. In addition, after the liquidation preference of the
Series A and B Preferred Stock has been paid, the holders of Series B Preferred
Stock are entitled to share in the remaining proceeds, if any, as if their
shares had been converted into Common Stock.
I. Stock Options and Restricted Stock Awards:
On November 19, 1998, the Company adopted its 1998 Stock Incentive Plan (the
"Option Plan"). The Option Plan is administered by the Company's Board of
Directors (the "Board"), and allows for the granting of awards in the form of
incentive stock options to employees and nonqualified options and restricted
stock to officers, employees, consultants, directors and advisors. The exercise
prices for awards and options granted were determined by the Board of Directors
of the Company to be equal to the fair value of the Common Stock on the date of
grant. In reaching this determination at the time of each such grant, the Board
considered a broad range of factors including the illiquid nature of an
investment in the Common Stock, the Company's historical financial performance
and financial position and the Company's future prospects and opportunity for
liquidity events. The option plan allows for the Company to grant up to
4,767,253 options for common shares and restricted stock. Stock options may not
be exercised after ten years from the date of grant. Options and restricted
stock awards normally vest over 48 months as follows: 25% after 12 months from
the date of grant, thereafter, an additional 2.0833% of shares vest at the end
of each month until all shares are fully vested. In the event of a change of
control of the Company (as defined by the Option Plan), the vesting for each
option and restricted stock award will automatically be accelerated with
respect to 25% of the shares subject to such options or restricted stock
awards.
During the year ended December 31, 1998, the Company granted incentive stock
options for the purchase of 701,204 shares with an exercise price of $0.30 per
share. During 1998, the Company sold 2,598,525 shares of restricted stock to
certain employees for $0.30 per share. The weighted-average grant-date fair
value of these shares of restricted stock was $2.00 per share. There were 8,775
stock option cancellations during the year ended December 31, 1998.
F-18
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(the information presented relating to the nine months ended September 30, 1998
and 1999 is unaudited)
During the nine months ended September 30, 1999, the Company granted
incentive stock options for the purchase of 895,225 shares and nonqualified
stock options for the purchase of 37,500 shares at a weighted average exercise
price of $1.36. There were 7,850 stock option cancellations during the nine
months ended September 30, 1999. During the nine months ended September 30,
1999, the Company issued 75,000 shares of restricted stock for $0.70 per share
in exchange for a note receivable totaling $52,500. The weighted-average grant-
date fair value of these shares of restricted stock was $2.00 per share.
The following table summarizes option activity under the Option Plan:
<TABLE>
<CAPTION>
Year ended December 31, Nine months ended
1998 September 30, 1999
------------------------ --------------------------
Weighted-average Weighted-average
Shares Exercise Price Shares Exercise Price
<S> <C> <C> <C> <C>
Outstanding at beginning of
period.................... -- -- 692,429 $0.30
Granted.................... 701,204 $0.30 932,725 1.36
Cancelled.................. 8,775 0.30 7,850 0.62
------- ---------
Outstanding at end of
period.................... 692,429 $0.30 1,617,304 $0.91
======= ===== ========= =====
Options exercisable at end
of period................. -- -- 217,732 $0.37
</TABLE>
All options granted during the year ended December 31, 1998 had exercise
prices which were below the estimated fair value of the Company's common stock
at the date of grant (as such fair market value was subsequently determined for
financial reporting purposes). During the nine months ended September 30, 1999,
770,165 options were granted below the estimated fair value of the Company's
common stock at the date of grant (as such fair market value was subsequently
determined for financial reporting purposes). The weighted average fair values
of options granted for the year ended December 31, 1998 and the nine months
ended September 30, 1999 were $1.78 and $3.68, respectively.
The following table summarized information about stock options outstanding
at September 30, 1999:
<TABLE>
<CAPTION>
Weighted
Average
Remaining
Exercise Contractual Shares
Price Shares Life (Years) Exercisable
<S> <C> <C> <C>
$0.30 690,429 9.1 180,232
$0.70 212,203 9.3 37,500
$1.20 108,957 9.5 --
$1.90 270,457 9.6 --
$2.80 172,696 9.8 --
$8.82 162,562 9.9 --
---------
1,617,304 9.4 --
=========
</TABLE>
No options were exercisable at December 31, 1998. The weighted average
remaining contractual life of the options at December 31, 1998 was 9.8 years.
F-19
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(the information presented relating to the nine months ended September 30, 1998
and 1999 is unaudited)
During the year ended December 31, 1998 and the nine months ended September
30, 1999 the Company recorded unearned compensation for restricted stock and
options granted to employees below fair value of $5,594,621 and $2,771,882
respectively. The Company is recognizing the compensation expense over the
vesting period. The Company recorded equity compensation expense including
amortization expense relating to unearned compensation of $149,470 and
$1,335,999 for the year ended December 31, 1998 and the nine months ended
September 30, 1999, respectively.
On April 30, 1999, the Company also accelerated the vesting with respect to
38,552 shares of restricted stock held by a former employee. The Company has
recorded a charge of $77,103 in connection with this acceleration.
Had compensation cost for the stock option grants been calculated based on
the fair value at the date of grant for options granted in 1998 consistent with
SFAS 123, the Company's net loss for the year ended December 31, 1998 would
have been increased to the pro forma amounts indicated below:
<TABLE>
<S> <C>
Net loss--as reported....................................... $(4,763,499)
Net loss--pro forma under SFAS 123.......................... $(4,767,752)
</TABLE>
The following table presents the significant assumptions used to estimate
the fair values of the options:
<TABLE>
<S> <C>
Weighted average risk free interest rate......................... 4.85%
Expected life from the date of grant............................. 7 years
Volatility....................................................... None
Expected dividends............................................... None
</TABLE>
The weighted average fair value of options on the date of grant for the
options granted in 1998 was $1.78.
The pro forma effects of applying SFAS 123 are not indicative of future
impacts. Additional grants in future years are anticipated.
F-20
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(the information presented relating to the nine months ended September 30, 1998
and 1999 is unaudited)
J. Income Taxes:
Deferred income taxes include the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
The components of the Company's deferred tax assets (liabilities) are as
follows:
<TABLE>
<CAPTION>
December 31,
---------------------- September 30,
Net deferred tax assets 1997 1998 1999
<S> <C> <C> <C>
Temporary differences............... $ 656,576 $ 518,421 $ 775,256
Net operating losses................ 261,896 1,563,194 5,742,198
--------- ----------- ----------
Total net deferred tax asset........ 918,472 2,081,615 6,517,454
Valuation allowance................. (918,472) (2,081,615) (6,517,454)
--------- ----------- ----------
Net deferred taxes................ $ -- $ -- $ --
========= =========== ==========
</TABLE>
A valuation allowance is established if it is more likely than not that all
or a portion of the deferred tax asset will not be realized. Accordingly, a
valuation allowance has been established for the full amount of the deferred
tax asset due to the uncertainty of realization.
The Company had net operating loss carryforwards of approximately $650,000,
$3,882,000 and $14,259,000 at December 31, 1997, 1998 and September 30, 1999,
respectively. These net operating loss carryforwards begin to expire in 2010.
Under the provisions of the Internal Revenue Code, certain substantial
changes in the Company's ownership may have limited, or may limit in the
future, the amount of net operating loss carryforwards which could be utilized
annually to offset future taxable income and income tax liabilities. The amount
of any annual limitation is determined based upon the Company's value prior to
an ownership change.
K. Employee Benefit Plan:
In January 1999, the Company established a savings plan for its employees
which it designed to be qualified under Section 401(k) of the Internal Revenue
Code. Eligible employees are permitted to contribute to the 401(k) plan through
payroll deduction within statutory and plan limits. The Company may make
contributions to the 401(k) plan in its discretion. No Company contributions
have been made to the savings plan to date.
F-21
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(the information presented relating to the nine months ended September 30, 1998
and 1999 is unaudited)
L. Related Party Transactions:
The Company had amounts due from related parties totaling $343, $813,139 and
$291,705 at December 31, 1997, 1998 and September 30, 1999, respectively.
Amounts due from related parties at December 31, 1997 related to employee
advances. Amounts due from related parties at December 31, 1998 was composed of
$779,558 related to notes receivable from stockholders for restricted stock and
$33,581 related to employee advances. The notes receivable from stockholders
for restricted stock are due in June 2003 and accrue interest monthly at 7% per
annum. The terms of the notes provide that interest accrues beginning January
1, 1999 and payments of interest commence on July 15, 1999. Amounts due from
related parties at September 30, 1999 was composed of $208,072 related to notes
receivable from stockholders executed in connection with the issuance of
restricted stock and $83,633 related to employee advances.
M. Subsequent Event:
In October 1999, the Company's Board of Directors and shareholders
authorized a 1-for-2 Common Stock split. Stockholders' equity (deficit) has
been restated for all periods presented to give retroactive recognition to the
reverse split in prior periods by reclassifying from Common Stock to additional
paid-in capital the par value of the shares removed by the split. In addition,
all references in the consolidated financial statements to the number of Common
Stock shares and per share amounts have been adjusted to reflect this reverse
split.
The Company's Board of Directors and shareholders also voted to increase the
number of shares available for issuance under the 1998 Stock Incentive Plan by
287,500 shares. Upon this vote, the Plan authorizes the issuance of up to
5,054,753 shares of common stock.
F-22
<PAGE>
[Inside Back Cover]
[Graphic of logos of several of Be Free's online merchant and portal
customers.]
The following text appears:
We earn fees when our online merchant customers generate sales and when our
portal customers generate traffic from the promotions we track. Our largest
customers include:
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
, 1999
[Be Free logo appears here]
5,600,000 Shares of Common Stock
----------------------
PROSPECTUS
----------------------
Donaldson, Lufkin & Jenrette
Hambrecht & Quist
Dain Rauscher Wessels
a division of Dain Rauscher Incorporated
DLJdirect Inc.
- --------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor
any sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of the company
have not changed since the date hereof.
- --------------------------------------------------------------------------------
Until , 1999 (25 days after the date of this prospectus), all dealers that
affect transactions in these securities may be required to deliver a prospectus
when acting as an underwriter in this offering and when selling previously
unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the various expenses, all of which will be
borne by the Registrant, in connection with the sale and distribution of the
securities being registered, other than the underwriting discounts. All amounts
shown are estimates except for the Securities and Exchange Commission
registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee.......................................... $ 16,625
NASD filing fee............................................... 6,940
Nasdaq National Market listing fee............................ 63,725
Blue Sky fees and expenses.................................... 5,000
Transfer Agent and Registrar fees............................. 15,000
Accounting fees and expenses.................................. 300,000
Legal fees and expenses....................................... 350,000
Printing and mailing expenses................................. 150,000
Miscellaneous................................................. 92,710
----------
Total....................................................... $1,000,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers
Article Seventh of the Registrant's Amended and Restated Certificate of
Incorporation provides that no director of the Registrant shall be personally
liable for any monetary damages for any breach of fiduciary duty as a director,
except to the extent that the Delaware General Corporation Law prohibits the
elimination or limitation of liability of directors for breach of fiduciary
duty.
Article Eighth of the Registrant's Amended and Restated Certificate of
Incorporation provides that a director or officer of the Registrant (a) shall
be indemnified by the Registrant against all expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement incurred in connection
with any litigation or other legal proceeding (other than an action by or in
the right of the Registrant) brought against him by virtue of his position as a
director or officer of the Registrant if he acted in good faith and in a manner
he reasonably believed to be in, or not opposed to, the best interests of the
Registrant, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful and (b) shall be
indemnified by the Registrant against all expenses (including attorneys' fees)
and amounts paid in settlement incurred in connection with any action by or in
the right of the Registrant brought against him by virtue of his position as a
director or officer of the Registrant if he acted in good faith and in a manner
he reasonably believed to be in, or not opposed to, the best interests of the
Registrant, except that no indemnification shall be made with respect to any
matter as to which such person shall have been adjudged to be liable to the
Registrant, unless a court determines that, despite such adjudication but in
view of all of the circumstances, he is entitled to indemnification of such
expenses. Notwithstanding the foregoing, to the extent that a director or
officer has been successful, on the merits or otherwise, including, without
II-1
<PAGE>
limitation, the dismissal of an action without prejudice, he is required to be
indemnified by the Registrant against all expenses (including attorneys' fees)
incurred in connection therewith. Expenses shall be advanced to a director or
officer at his request, provided that he undertakes to repay the amount
advanced if it is ultimately determined that he is not entitled to
indemnification for such expenses.
Indemnification is required to be made unless the Registrant determines that
the applicable standard of conduct required for indemnification has not been
met. In the event of a determination by the Registrant that the director or
officer did not meet the applicable standard of conduct required for
indemnification, or if the Registrant fails to make an indemnification payment
within 60 days after such payment is claimed by such person, such person is
permitted to petition the court to make an independent determination as to
whether such person is entitled to indemnification. As a condition precedent to
the right of indemnification, the director or officer must give the Registrant
notice of the action for which indemnity is sought and the Registrant has the
right to participate in such action or assume the defense thereof.
Article Eighth of the Registrant's Amended and Restated Certificate of
Incorporation further provides that the indemnification provided therein is not
exclusive, and provides that in the event that the Delaware General Corporation
Law is amended to expand the indemnification permitted to directors or officers
the Registrant must indemnify those persons to the fullest extent permitted by
such law as so amended.
Section 145 of the Delaware General Corporation Law provides that a
corporation has the power to indemnify a director, officer, employee or agent
of the corporation and other persons serving at the request of the corporation
in related capacities against amounts paid and expenses incurred in connection
with an action or proceeding to which he is or is threatened to be made a party
by reason of such position, if such person shall have acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, in any criminal proceeding, if such person
had no reasonable cause to believe his conduct was unlawful; provided that, in
the case of actions brought by or in the right of the corporation, no
indemnification shall be made with respect to any matter as to which such
person shall have been adjudged to be liable to the corporation unless and only
to the extent that the adjudicating court determines that such indemnification
is proper under the circumstances.
Under Section 7 of the Underwriting Agreement, the underwriters are
obligated, under circumstances, to indemnify directors and officers of the
Registrant against liabilities, including liabilities under the Securities Act.
Reference is made to the form of Underwriting Agreement to be filed as Exhibit
1 hereto.
The Registrant carries Directors and Officers liability insurance. Through
an agreement dated as of March 31, 1999 with Daniel J. Nova, and agreements
with Ted R. Dintersmith, W. Michael Humphreys and Samuel P. Gerace, Jr. dated
as of August 28, 1999 the Registrant has agreed to indemnify each director
against litigation risks and expenses arising out of his service to the
Registrant.
Finally, Ted Dintersmith, a director of the Registrant, is indemnified by
Charles River Partnership VIII for actions he takes on its behalf.
II-2
<PAGE>
Item 15. Recent Sales of Unregistered Securities
Set forth is information regarding shares of common stock and preferred
stock issued, and warrants issued and options granted by the Company since
January 1, 1996 (without giving effect to the Company's 1-for-2 reverse stock
split to be effected prior to the closing of this offering). Further included
is the consideration, if any, received by the Company for such shares, warrants
and options and information relating to the section of the Securities Act of
1933, as amended (the "Securities Act"), or rule of the Securities and Exchange
Commission under which exemption was claimed.
On August 28, 1998, we issued 399 shares of Freedom of Information, Inc.
("FOI") (the immediate predecessor of Be Free) common stock and $6,176,881 in
promissory notes (the "Redemption Notes") of FOI in consideration for the
exchange of all of the shares of Be Free, Inc. (an unrelated corporation, "Old
Be Free") and PCX Systems, Inc. by shareholders of such entities.
On August 28, 1998 we issued a total of 10,500,000 shares of Series A
Preferred Stock to five private investors (including three venture capitalist
firms, a bank and an individual investor) for an aggregate capital contribution
of $10,500,000 and warrants to purchase a total of 3,465,000 shares of common
stock at a purchase price of $1.50 per share.
On September 29, 1998, we issued 100,000 shares of Series A Convertible
Preferred Stock to Comdisco, Inc. for an aggregate capital contribution of
$100,000 and a warrant to purchase 33,000 shares of common stock at a purchase
price of $1.50 per share.
On September 29, 1998, we issued to Comdisco two warrants, one to purchase
100,000 shares of Series A Convertible Preferred Stock at a purchase price of
$1.00 and the other to purchase up to 600,000 shares of Series A Convertible
Preferred Stock at a purchase price of $1.00 per share. We issued these
warrants as partial consideration for certain financing transactions between
Comdisco and the Company.
On March 31, 1999, we issued a total of 13,196,522 shares of Series B
Convertible Preferred Stock to sixteen private investors for an aggregate
capital contribution of $24,999,888.06.
At various times since November 1998, we issued 5,347,050 shares of
restricted common stock, at purchase prices of $0.15 and $0.35 per share and
options to purchase 2,638,791 shares of common stock to employees at exercise
prices ranging from $0.15 to $4.41 per share, to consultants, advisors and a
director pursuant to our 1998 Stock Incentive Plan.
No underwriters were involved in the foregoing sale of securities. Such
sales were made in reliance upon an exemption from the registration provisions
of the Securities Act set forth in Section 4(2) thereof relative to sales by an
issuer not involving any public offering or the rules and regulations
thereunder, or, in the case of restricted common stock or options to purchase
common stock, Rule 701 under the Securities Act. All foregoing securities are
deemed restricted securities for the purpose of the Securities Act.
II-3
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
1 Form of Underwriting Agreement.
**3.1 Restated Certificate of Incorporation of the Registrant, as amended
and as currently in effect.
***3.2 Form of Amended and Restated Certificate of Incorporation of the
Registrant to be filed on or immediately subsequent to the date of
the closing of the Offering contemplated by this Registration
Statement.
**3.3 By-Laws of the Registrant, as amended to date
***3.4 Form of Amended and Restated By-Laws of the Registrant to be
effective on the date of the closing of the Offering.
3.5 Certificate of Amendment, dated October 6, 1999
*4 Specimen certificate for shares of Common Stock, $.01 par value per
share, of the Registrant.
**5 Form of Opinion of Hale and Dorr LLP.
**10.1 1998 Stock Incentive Plan
**10.2 Stock Purchase and Shareholders Agreement, as amended, dated as of
August 28, 1998
**10.3 Form of Warrant dated as of August 28, 1998
**10.4 Stock Purchase Agreement, as amended, dated as of September 29, 1998
**10.5 Warrant Certificate for the purchase of shares of common stock
issued to Comdisco, Inc.
**10.6 Warrant Certificate A-1 for the purchase of shares of Series A
Preferred Stock issued to Comdisco, Inc.
**10.7 Warrant Certificate A-2 for the purchase of shares of Series A
Preferred Stock issued to Comdisco, Inc.
**10.8 Subordinated Loan and Security Agreement dated as of September 29,
1998
**10.9 Registration Rights Agreement dated as of March 31, 1999
**10.10 Employment Agreement with Samuel P. Gerace, Jr., dated August 28,
1998
**10.11 Employment Agreement with Thomas A. Gerace dated August 28, 1998
**10.12 Lease dated as of November 9, 1998 with Southwestern Pennsylvania
Corporation
**10.13 Lease dated October 20, 1998 with LSOF Pooled Equity L.P.
+10.14 License and Services Agreement, effective January 13, 1999, with
GeoCites
+10.15 BFAST Service Order Form, as amended, with barnesandnoble.com, Inc.
dated January 31, 1998
**10.16 Director Indemnification Agreement dated as of March 31, 1999 with
Dan Nova
**10.17 Form of Indemnification Agreement dated August 28, 1998
**21 List of Subsidiaries
23.1 Consent of Independent Accountants.
**23.2 Consent of Hale and Dorr LLP (included in Exhibit 5).
****23.3 Consent of Neilsen/NetRatings
****23.4 Consent of Jupiter Communications
**24 Power of Attorney (see page II-5)
27 Financial Data Schedule
</TABLE>
- ---------------------
*To be filed by amendment
+Confidential Treatment Requested
**Filed with the initial filing of the Registration Statement on August 5,
1999.
***Filed with the filing of Amendment No. 1 to the Registration Statement on
September 14, 1999.
**** Filed with the filing of Amendment No. 2 to the Registration Statement on
September 29, 1999.
II-4
<PAGE>
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 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 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 underwriters
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, 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 part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose 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
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment to this Registration Statement on
Form S-1 to be signed on its behalf by the undersigned, thereunto duly
authorized, in Boston, Massachusetts, on this 8th day of October, 1999.
Be Free, Inc.
/s/ Gordon B. Hoffstein
By:__________________________________
Gordon B. Hoffstein
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<S> <C>
Signature Title Date
/s/ Gordon B. Hoffstein President and Chief October 8, 1999
- --------------------------------- Executive Officer
Gordon B. Hoffstein (Principal Executive
Officer) and Director
* Executive Vice October 8, 1999
- --------------------------------- President, Research &
Samuel P. Gerace, Jr. Technology and
Director
* Chief Financial October 8, 1999
- --------------------------------- Officer, Secretary and
Stephen M. Joseph Treasurer (Principal
Financial and
Accounting Officer)
* Director October 8, 1999
- ---------------------------------
Ted R. Dintersmith
* Director October 8, 1999
- ---------------------------------
W. Michael Humphreys
* Director October 8, 1999
- ---------------------------------
Jeffrey Rayport
/s/ Daniel Nova Director
- ---------------------------------
Daniel Nova
*By: /s/ Gordon B. Hoffstein
--------------------------------
Gordon B. Hoffstein
Attorney-in-Fact
</TABLE>
II-6
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
1 Form of Underwriting Agreement.
**3.1 Restated Certificate of Incorporation of the Registrant, as amended
and as currently in effect.
***3.2 Form of Amended and Restated Certificate of Incorporation of the
Registrant to be filed on or immediately subsequent to the date of
the closing of the Offering contemplated by this Registration
Statement.
**3.3 By-Laws of the Registrant, as amended to date
***3.4 Form of Amended and Restated By-Laws of the Registrant to be
effective on the date of the closing of the Offering.
3.5 Certificate of Amendment, dated October 6, 1999
*4 Specimen certificate for shares of Common Stock, $.01 par value per
share, of the Registrant.
**5 Form of Opinion of Hale and Dorr LLP.
**10.1 1998 Stock Incentive Plan
**10.2 Stock Purchase and Shareholders Agreement, as amended, dated as of
August 28, 1998
**10.3 Form of Warrant dated as of August 28, 1998
**10.4 Stock Purchase Agreement, as amended, dated as of September 29, 1998
**10.5 Warrant Certificate for the purchase of shares of common stock
issued to Comdisco, Inc.
**10.6 Warrant Certificate A-1 for the purchase of shares of Series A
Preferred Stock issued to Comdisco, Inc.
**10.7 Warrant Certificate A-2 for the purchase of shares of Series A
Preferred Stock issued to Comdisco, Inc.
**10.8 Subordinated Loan and Security Agreement dated as of September 29,
1998
**10.9 Registration Rights Agreement dated as of March 31, 1999
**10.10 Employment Agreement with Samuel P. Gerace, Jr., dated August 28,
1998
**10.11 Employment Agreement with Thomas A. Gerace dated August 28, 1998
**10.12 Lease dated as of November 9, 1998 with Southwestern Pennsylvania
Corporation
**10.13 Lease dated October 20, 1998 with LSOF Pooled Equity L.P.
+10.14 License and Services Agreement, effective January 13, 1999, with
GeoCites
+10.15 BFAST Service Order Form, as amended, with barnesandnoble.com, Inc.
dated January 31, 1998
**10.16 Director Indemnification Agreement dated as of March 31, 1999 with
Dan Nova
**10.17 Form of Indemnification Agreement dated August 28, 1998
**21 List of Subsidiaries
23.1 Consent of Independent Accountants.
**23.2 Consent of Hale and Dorr LLP (included in Exhibit 5).
****23.3 Consent of Nielson/NetRatings
****23.4 Consent of Jupiter Communications
**24 Power of Attorney (see page II-5)
27 Financial Data Schedule
</TABLE>
- ---------------------
*To be filed by amendment.
+Confidential Treatment Requested.
**Filed with the initial filing of the Registration Statement on August 5,
1999.
***Filed with the filing of Amendment No. 1 to the Registration Statement on
September 14, 1999.
**** Filed with the filing of Amendment No. 2 to the Registration Statement on
September 29, 1999.
<PAGE>
EXHIBIT 1
Draft of October 6, 1999
__________ Shares/1/
BE FREE, INC.
Common Stock
UNDERWRITING AGREEMENT
----------------------
__________ __, 1999
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
HAMBRECHT & QUIST LLC
DAIN RAUSCHER WESSELS
As representatives of the several Underwriters
named in Schedule I hereto
c/o Donaldson, Lufkin & Jenrette Securities Corporation
277 Park Avenue
New York, New York 10172
Dear Ladies and Gentlemen:
Be Free, Inc., a Delaware corporation (the "Company"), proposes to
issue and sell ____________ shares of its common stock, $.01 par value per share
(the "Firm Shares") to the several underwriters named in Schedule I hereto (the
"Underwriters"). The Company also proposes to issue and sell to the several
Underwriters not more than an additional _______ shares of its common stock,
$.01 par value per share (the "Additional Shares") if requested by the
Underwriters as provided in Section 2 hereof. The Firm Shares and the Additional
Shares are hereinafter referred to collectively as the "Shares". The shares of
common stock of the Company to be outstanding after giving effect to the sales
contemplated hereby are hereinafter referred to as the "Common Stock".
SECTION 1. Registration Statement and Prospectus. The Company has
prepared and filed with the Securities and Exchange Commission (the
"Commission") in accordance with the provisions of the Securities Act of 1933,
as amended, and the rules and regulations of the Commission thereunder
(collectively, the "Act"), a registration statement on Form S-1, including a
prospectus, relating to the Shares. The registration statement, as amended at
the time it became effective, including the information (if any) deemed to be
part of the registration statement at the time of effectiveness pursuant to Rule
430A under the Act, is hereinafter referred to as the
- --------
/1/ Insert number of shares to be sold (not including green shoe).
<PAGE>
"Registration Statement"; and the prospectus in the form first used to confirm
sales of Shares is hereinafter referred to as the "Prospectus". If the Company
has filed or is required pursuant to the terms hereof to file a registration
statement pursuant to Rule 462(b) under the Act registering additional shares of
Common Stock (a "Rule 462(b) Registration Statement"), then, unless otherwise
specified, any reference herein to the term "Registration Statement" shall be
deemed to include such Rule 462(b) Registration Statement.
SECTION 2. Agreements to Sell and Purchase and Lock-Up Agreements. On
the basis of the representations and warranties contained in this Agreement, and
subject to its terms and conditions, the Company agrees to issue and sell, and
each Underwriter agrees, severally and not jointly, to purchase from the Company
at a price per Share of $______ (the "Purchase Price") the number of Firm Shares
set forth opposite the name of such Underwriter in Schedule I hereto.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to issue
and sell the Additional Shares and the Underwriters shall have the right to
purchase, severally and not jointly, up to _______ Additional Shares from the
Company at the Purchase Price. Additional Shares may be purchased solely for the
purpose of covering over-allotments made in connection with the offering of the
Firm Shares. The Underwriters may exercise their right to purchase Additional
Shares in whole or in part from time to time by giving written notice thereof to
the Company within 30 days after the date of this Agreement. You shall give any
such notice on behalf of the Underwriters and such notice shall specify the
aggregate number of Additional Shares to be purchased pursuant to such exercise
and the date for payment and delivery thereof, which date shall be a business
day (i) no earlier than two business days after such notice has been given (and,
in any event, no earlier than the Closing Date (as hereinafter defined)) and
(ii) no later than ten business days after such notice has been given. If any
Additional Shares are to be purchased, each Underwriter, severally and not
jointly, agrees to purchase from the Company the number of Additional Shares
(subject to such adjustments to eliminate fractional shares as you may
determine) which bears the same proportion to the total number of Additional
Shares to be purchased from the Company as the number of Firm Shares set forth
opposite the name of such Underwriter in Schedule I bears to the total number of
Firm Shares.
The Company hereby agrees not to (i) offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant to purchase, or otherwise transfer
or dispose of, directly or indirectly, any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock or
(ii) enter into any swap or other arrangement that transfers all or a portion of
the economic consequences associated with the ownership of any Common Stock
(regardless of whether any of the transactions described in clause (i) or (ii)
is to be settled by the delivery of Common Stock, or such other securities, in
cash or otherwise), except to the Underwriters pursuant to this Agreement, for a
period of 180 days after the date of the Prospectus without the prior written
consent of Donaldson, Lufkin & Jenrette Securities Corporation. Notwithstanding
the foregoing, during such period (i) the Company may grant stock options
pursuant to the Company's existing stock option plans and (ii) the Company may
issue shares of Common Stock upon the exercise of an option or warrant or the
conversion of a security outstanding on the date hereof. The
2
<PAGE>
Company also agrees not to file any registration statement with respect to any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock for a period of 180 days after the date of the
Prospectus without the prior written consent of Donaldson, Lufkin & Jenrette
Securities Corporation; provided, however, that during such period the Company
may file one or more registration statements on Form S-8 registering shares of
Common Stock acquired or to be acquired pursuant to the Company's existing stock
options plan. The Company shall, prior to or concurrently with the execution of
this Agreement, deliver an agreement executed by (i) each of the directors and
officers of the Company and (ii) each stockholder listed on Annex I hereto to
the effect that such person will not, during the 180 day period commencing on
the date of the Prospectus, without the prior written consent of Donaldson,
Lufkin & Jenrette Corporation, (A) engage in any of the transactions described
in the first sentence of this paragraph or (B) make any demand for, or exercise
any right with respect to, the registration of any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock. The
Company further agrees not to release any stockholder of the Company bound by a
contractual agreement (lock-up) not to sell or otherwise transfer shares of
Company stock from such agreement. The Company has provided each such
stockholder with notice of such agreement.
SECTION 3. Terms of Public Offering. The Company is advised by you that
the Underwriters propose (i) to make a public offering of their respective
portions of the Shares as soon after the execution and delivery of this
Agreement as in your judgment is advisable and (ii) initially to offer the
Shares upon the terms set forth in the Prospectus.
SECTION 4. Delivery and Payment. The Shares shall be represented by
definitive certificates and shall be issued in such authorized denominations and
registered in such names as Donaldson, Lufkin & Jenrette Securities Corporation
shall request no later than two business days prior to the Closing Date (as
defined below) or the applicable Option Closing Date (as defined below), as the
case may be. The Company shall deliver the Shares to Donaldson, Lufkin &
Jenrette Securities Corporation through the facilities of The Depository Trust
Company ("DTC"), for the respective accounts of the several Underwriters,
against payment to the Company of the Purchase Price therefore by wire transfer
of Federal or other funds immediately available in New York City. The
certificates representing the Shares shall be made available for inspection not
later than 9:30 A.M., New York City time, on the business day prior to the
Closing Date or the applicable Option Closing Date, as the case may be, at the
office of DTC or its designated custodian (the "Designated Office"). The time
and date of delivery and payment for the Firm Shares shall be 9:00 A.M., New
York City time, on ________, 1999 or such other time on the same or such other
date as Donaldson, Lufkin & Jenrette Securities Corporation and the Company
shall agree in writing. The time and date of delivery for the Firm Shares are
hereinafter referred to as the "Closing Date". The time and date of delivery and
payment for any Additional Shares to be purchased by the Underwriters shall be
9:00 A.M., New York City time, on the date specified in the applicable exercise
notice given by you pursuant to Section 2 or such other time on the same or such
other date as Donaldson, Lufkin & Jenrette Securities Corporation and the
Company shall agree in writing. The time and date of delivery for the Option
Shares are hereinafter referred to as an "Option Closing Date".
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The documents to be delivered on the Closing Date or any Option Closing
Date on behalf of the parties hereto pursuant to Section 8 of this Agreement
shall be delivered at the offices of Hale & Dorr LLP, 60 State Street, Boston,
Massachusetts 02109 and the Shares shall be delivered at the Designated Office,
all on the Closing Date or such Option Closing Date, as the case may be.
SECTION 5. Agreements of the Company. The Company agrees with you:
(a) To advise you promptly and, if requested by you, to confirm such
advice in writing, (i) of any request by the Commission for amendments to the
Registration Statement or amendments or supplements to the Prospectus or for
additional information, (ii) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of the suspension
of qualification of the Shares for offering or sale in any jurisdiction, or the
initiation of any proceeding for such purposes, (iii) when any amendment to the
Registration Statement becomes effective, (iv) if the Company is required to
file a Rule 462(b) Registration Statement after the effectiveness of this
Agreement, when the Rule 462(b) Registration Statement has become effective and
(v) of the happening of any event during the period referred to in Section 5(d)
below which makes any statement of a material fact made in the Registration
Statement or the Prospectus untrue or which requires any additions to or changes
in the Registration Statement or the Prospectus in order to make the statements
therein not misleading. If at any time the Commission shall issue any stop order
suspending the effectiveness of the Registration Statement, the Company will use
its best efforts to obtain the withdrawal or lifting of such order at the
earliest possible time.
(b) To furnish to you four (4) signed copies of the Registration
Statement as first filed with the Commission and of each amendment to it,
including all exhibits, and to furnish to you and each Underwriter designated by
you such number of conformed copies of the Registration Statement as so filed
and of each amendment to it, without exhibits, as you may reasonably request.
(c) To prepare the Prospectus, the form and substance of which shall be
satisfactory to you, and to file the Prospectus in such form with the Commission
within the applicable period specified in Rule 424(b) under the Act; during the
period specified in Section 5(d) below, not to file any further amendment to the
Registration Statement and not to make any amendment or supplement to the
Prospectus of which you shall not previously have been advised or to which you
shall reasonably object after being so advised; and, during such period, to
prepare and file with the Commission, promptly upon your reasonable request, any
amendment to the Registration Statement or amendment or supplement to the
Prospectus which may be necessary or advisable in connection with the
distribution of the Shares by you, and to use its best efforts to cause any such
amendment to the Registration Statement to become promptly effective.
(d) Prior to 10:00 A.M., New York City time, on the first business day
after the date of this Agreement and from time to time thereafter for such
period as in the opinion of counsel for the Underwriters a prospectus is
required by law to be delivered in connection with sales by an Underwriter or a
dealer, to furnish in New York City to each Underwriter and any dealer as many
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copies of the Prospectus (and of any amendment or supplement to the Prospectus)
as such Underwriter or dealer may reasonably request.
(e) If during the period specified in Section 5(d), any event shall
occur or condition shall exist as a result of which, in the opinion of counsel
for the Underwriters, it becomes necessary to amend or supplement the Prospectus
in order to make the statements therein, in the light of the circumstances when
the Prospectus is delivered to a purchaser, not misleading, or if, in the
opinion of counsel for the Underwriters, it is necessary to amend or supplement
the Prospectus to comply with applicable law, forthwith to prepare and file with
the Commission an appropriate amendment or supplement to the Prospectus so that
the statements in the Prospectus, as so amended or supplemented, will not in the
light of the circumstances when it is so delivered, be misleading, or so that
the Prospectus will comply with applicable law, and to furnish to each
Underwriter and to any dealer as many copies thereof as such Underwriter or
dealer may reasonably request.
(f) Prior to any public offering of the Shares, to cooperate with you
and counsel for the Underwriters in connection with the registration or
qualification of the Shares for offer and sale by the several Underwriters and
by dealers under the state securities or Blue Sky laws of such jurisdictions as
you may request, to continue such registration or qualification in effect so
long as required for distribution of the Shares and to file such consents to
service of process or other documents as may be necessary in order to effect
such registration or qualification; provided, however, that the Company shall
not be required in connection therewith to qualify as a foreign corporation in
any jurisdiction in which it is not now so qualified or to take any action that
would subject it to general consent to service of process or taxation other than
as to matters and transactions relating to the Prospectus, the Registration
Statement, any preliminary prospectus or the offering or sale of the Shares, in
any jurisdiction in which it is not now so subject.
(g) To mail and make generally available to its stockholders as soon as
practicable an earnings statement covering a period of at least twelve months
beginning after the effective date of the Registration Statement that shall
satisfy the provisions of Section 11(a) of the Act and the rules and regulations
thereunder (including Rule 158), and to advise you in writing when such
statement has been so made available.
(h) During the period of three years after the date of this Agreement,
to furnish to you as soon as available copies of all reports or other
communications furnished to the record holders of Common Stock or furnished to
or filed with the Commission or any national securities exchange on which any
class of securities of the Company is listed and such other publicly available
information concerning the Company and its subsidiaries as you may reasonably
request.
(i) Whether or not the transactions contemplated in this Agreement are
consummated or this Agreement is terminated, to pay or cause to be paid all
expenses incident to the performance of its obligations under this Agreement,
including: (i) the fees, disbursements and expenses of the Company's counsel and
the Company's accountants in connection with the registration and delivery of
the Shares under the Act and all other fees and expenses in
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connection with the preparation, printing, filing and distribution of the
Registration Statement (including financial statements and exhibits), any
preliminary prospectus, the Prospectus and all amendments and supplements to any
of the foregoing, including the mailing and delivering of copies thereof to the
Underwriters and dealers in the quantities specified herein, (ii) all costs and
expenses related to the transfer and delivery of the Shares to the Underwriters,
including any transfer or other taxes payable thereon, (iii) all costs of
printing or producing this Agreement and any other agreements or documents in
connection with the offering, purchase, sale or delivery of the Shares, (iv) all
expenses in connection with the registration or qualification of the Shares for
offer and sale under the securities or Blue Sky laws of the several states and
all costs of printing or producing any Preliminary and Supplemental Blue Sky
Memoranda in connection therewith (including the filing fees and fees and
disbursements of counsel for the Underwriters in connection with such
registration or qualification and memoranda relating thereto), (v) the filing
fees and fees and disbursements of counsel for the Underwriters in connection
with the review and clearance of the offering of the Shares by the National
Association of Securities Dealers, Inc., (vi) all fees and expenses in
connection with the preparation and filing of the registration statement on Form
8-A relating to the Common Stock and all costs and expenses incident to the
listing of the Shares on the Nasdaq National Market, (vii) the cost of printing
certificates representing the Shares, (viii) the costs and charges of any
transfer agent, registrar and/or depositary, and (ix) all other costs and
expenses incident to the performance of the obligations of the Company hereunder
for which provision is not otherwise made in this Section.
(j) To use its best efforts to list for quotation the Shares on the
Nasdaq National Market and to maintain the listing of the Shares on the Nasdaq
National Market for a period of three years after the date of this Agreement.
(k) To use its best efforts to do and perform all things required or
necessary to be done and performed under this Agreement by the Company prior to
the Closing Date or any Option Closing Date, as the case may be, and to satisfy
all conditions precedent to the delivery of the Shares.
(l) If the Registration Statement at the time of the effectiveness of
this Agreement does not cover all of the Shares, to file a Rule 462(b)
Registration Statement with the Commission registering the Shares not so covered
in compliance with Rule 462(b) by 10:00 P.M., New York City time, on the date of
this Agreement and to pay to the Commission the filing fee for such Rule 462(b)
Registration Statement at the time of the filing thereof or to give irrevocable
instructions for the payment of such fee pursuant to Rule 111(b) under the Act.
SECTION 6. Representations and Warranties of the Company. The Company
represents and warrants to each Underwriter that:
(a) The Registration Statement has become effective (other than any
Rule 462(b) Registration Statement to be filed by the Company after the
effectiveness of this Agreement); any Rule 462(b) Registration Statement filed
after the effectiveness of this Agreement will become effective no later than
10:00 P.M., New York City time, on the date of this Agreement; and no
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stop order suspending the effectiveness of the Registration Statement is in
effect, and no proceedings for such purpose are pending before or threatened by
the Commission.
(b) (i) The Registration Statement (other than any Rule 462(b)
Registration Statement to be filed by the Company after the effectiveness of
this Agreement), when it became effective, did not contain and, as amended, if
applicable, will not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) the Registration Statement (other than
any Rule 462(b) Registration Statement to be filed by the Company after the
effectiveness of this Agreement) and the Prospectus comply and, as amended or
supplemented, if applicable, will comply in all material respects with the Act,
(iii) if the Company is required to file a Rule 462(b) Registration Statement
after the effectiveness of this Agreement, such Rule 462(b) Registration
Statement and any amendments thereto, when they become effective (A) will not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading and (B) will comply in all material respects with the Act and (iv)
the Prospectus does not contain and, as amended or supplemented, if applicable,
will not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, except that the
representations and warranties set forth in this paragraph do not apply to
statements or omissions in the Registration Statement or the Prospectus based
upon information relating to any Underwriter furnished to the Company in writing
by such Underwriter through you expressly for use therein.
(c) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Act, complied when so filed in all material
respects with the Act, and did not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading, except that the representations and warranties
set forth in this paragraph do not apply to statements or omissions in any
preliminary prospectus based upon information relating to any Underwriter
furnished to the Company in writing by such Underwriter through you expressly
for use therein.
(d) Each of the Company and its subsidiaries has been duly
incorporated, is validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation and has the corporate power and
authority to carry on its business as described in the Prospectus and to own,
lease and operate its properties, and each is duly qualified and is in good
standing as a foreign corporation authorized to do business in each jurisdiction
in which the nature of its business or its ownership or leasing of property
requires such qualification, except where the failure to be so qualified would
not have a material adverse effect on the business, prospects, financial
condition or results of operations of the Company and its subsidiaries, taken as
a whole.
(e) There are no outstanding subscriptions, rights, warrants, options,
calls, convertible securities, commitments of sale or liens granted or issued by
the Company or any of its subsidiaries relating to or entitling any person to
purchase or otherwise to acquire any shares of the capital stock of the Company
or any of its subsidiaries, except as otherwise disclosed in the Registration
Statement.
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(f) All the outstanding shares of capital stock of the Company have
been duly authorized and validly issued and are fully paid, non-assessable and
not subject to any preemptive or similar rights; and the Shares have been duly
authorized and, when issued and delivered to the Underwriters against payment
therefor as provided by this Agreement, will be validly issued, fully paid and
non-assessable, and the issuance of such Shares will not be subject to any
preemptive or similar rights.
(g) All of the outstanding shares of capital stock of each of the
Company's subsidiaries have been duly authorized and validly issued and are
fully paid and non-assessable, and are owned by the Company, directly or
indirectly through one or more subsidiaries, free and clear of any security
interest, claim, lien, encumbrance or adverse interest of any nature.
(h) The authorized capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus.
(i) Neither the Company nor any of its subsidiaries is (i) in violation
of its respective charter or by-laws, (ii) in default in the performance of any
obligation, agreement, covenant or condition contained in any indenture, loan
agreement, mortgage, lease or other agreement or instrument that is material to
the Company and its subsidiaries, taken as a whole, to which the Company or any
of its subsidiaries is a party or by which the Company or any of its
subsidiaries or their respective property is bound or (iii) in violation in any
material respect of any applicable law or any rule, regulation, judgment, order
or decree of any court or any governmental body or agency having jurisdiction
over the Company, any of its subsidiaries or their respective property.
(j) The execution, delivery and performance of this Agreement by the
Company, the compliance by the Company with all the provisions hereof and the
consummation of the transactions contemplated hereby will not (i) require any
consent, approval, authorization or other order of, or qualification with, any
court or governmental body or agency (except such as may be required under the
securities or Blue Sky laws of the various states, the Exchange Act or in
connection with the NASD's review of the underwriting arrangements of the
offering and sale of the Shares), (ii) conflict with or constitute a breach of
any of the terms or provisions of, or a default under, the charter or by-laws of
the Company or any of its subsidiaries or any indenture, loan agreement,
mortgage, lease or other agreement or instrument that is material to the Company
and its subsidiaries, taken as a whole, to which the Company or any of its
subsidiaries is a party or by which the Company or any of its subsidiaries or
their respective property is bound, (iii) violate or conflict with any
applicable law or any rule, regulation, judgment, order or decree of any court
or any governmental body or agency having jurisdiction over the Company, any of
its subsidiaries or their respective property or (iv) result in the suspension,
termination or revocation of any Authorization (as defined below) of the Company
or any of its subsidiaries or any other impairment of the rights of the holder
of any such Authorization.
(k) There are no legal or governmental proceedings pending or, to the
Company's knowledge, threatened to which the Company or any of its subsidiaries
is or could be a party or to which any of their respective property is or is
reasonably likely to be subject that are required
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to be described in the Registration Statement or the Prospectus and are not so
described; nor are there any statutes, regulations, contracts or other documents
that are required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement that are not
so described or filed as required.
(l) Neither the Company nor any of its subsidiaries has violated any
foreign, federal, state or local law or regulation relating to the protection of
human health and safety, the environment or hazardous or toxic substances or
wastes, pollutants or contaminants ("Environmental Laws"), any provisions of the
Employee Retirement Income Security Act of 1974, as amended, or any provisions
of the Foreign Corrupt Practices Act, or the rules and regulations promulgated
thereunder, except for such violations which, singly or in the aggregate, would
not have a material adverse effect on the business, prospects, financial
condition or results of operations of the Company and its subsidiaries, taken as
a whole.
(m) Each of the Company and its subsidiaries has such permits,
licenses, consents, exemptions, franchises, authorizations and other approvals
(each, an "Authorization") of, and has made all filings with and notices to, all
governmental or regulatory authorities and self-regulatory organizations and all
courts and other tribunals, including, without limitation, under any applicable
Environmental Laws, as are necessary to own, lease, license and operate its
respective properties and to conduct its business, except where the failure to
have any such Authorization or to make any such filing or notice would not,
singly or in the aggregate, have a material adverse effect on the business,
prospects, financial condition or results of operations of the Company and its
subsidiaries, taken as a whole. Each such Authorization is valid and in full
force and effect and each of the Company and its subsidiaries is in compliance
in all material respects with all the terms and conditions thereof and with the
rules and regulations of the authorities and governing bodies having
jurisdiction with respect thereto; and no event has occurred (including, without
limitation, the receipt of any notice from any authority or governing body)
which allows or, after notice or lapse of time or both, would allow, revocation,
suspension or termination of any such Authorization or results or, after notice
or lapse of time or both, would result in any other material impairment of the
rights of the holder of any such Authorization; and such Authorizations contain
no restrictions that are burdensome to the Company or any of its subsidiaries;
except where such failure to be valid and in full force and effect or to be in
compliance, the occurrence of any such event or the presence of any such
restriction would not, singly or in the aggregate, have a material adverse
effect on the business, prospects, financial condition or results of operations
of the Company and its subsidiaries, taken as a whole.
(n) There are no costs or liabilities associated with Environmental
Laws (including, without limitation, any capital or operating expenditures
required for clean-up, closure of properties or compliance with Environmental
Laws or any Authorization, any related constraints on operating activities and
any potential liabilities to third parties) which would, singly or in the
aggregate, have a material adverse effect on the business, prospects, financial
condition or results of operations of the Company and its subsidiaries, taken as
a whole.
(o) This Agreement has been duly authorized, executed and delivered by
the Company and constitutes the valid, legal and binding obligation of the
Company enforceable in accordance with its terms.
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(p) PricewaterhouseCoopers, LLP are independent public accountants with
respect to the Company and its subsidiaries as required by the Act.
(q) The consolidated financial statements included in the Registration
Statement and the Prospectus (and any amendment or supplement thereto), together
with related schedules and notes, present fairly the consolidated financial
position, results of operations and changes in financial position of the Company
and its subsidiaries on the basis stated therein at the respective dates or for
the respective periods to which they apply; such statements and related
schedules and notes have been prepared in accordance with generally accepted
accounting principles consistently applied throughout the periods involved,
except as disclosed therein; the supporting schedules, if any, included in the
Registration Statement present fairly in accordance with generally accepted
accounting principles the information required to be stated therein; the
assumptions used in preparing the pro forma financial statements included in the
Registration Statement provide a reasonable basis for presenting the significant
effects directly attributable to the transactions or events described therein,
the related pro forma adjustments give appropriate effect to those assumptions,
and the pro forma columns therein reflect the proper application of those
adjustments to the corresponding historical financial statements amounts; and
the other financial and statistical information and data set forth in the
Registration Statement and the Prospectus (and any amendment or supplement
thereto) are, in all material respects, accurately presented and prepared on a
basis consistent with such financial statements and the books and records of the
Company.
(r) The Company is not and, after giving effect to the offering and
sale of the Shares and the application of the proceeds thereof as described in
the Prospectus, will not be, an "investment company" as such term is defined in
the Investment Company Act of 1940, as amended.
(s) Except as disclosed in the Prospectus, there are no contracts,
agreements or understandings between the Company and any person granting such
person the right to require the Company to file a registration statement under
the Act with respect to any securities of the Company or to require the Company
to include such securities with the Shares registered pursuant to the
Registration Statement.
(t) Since the respective dates as of which information is given in the
Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement), (i)
there has not occurred any material adverse change or any development involving
a prospective material adverse change in the condition, financial or otherwise,
or the earnings, business, management or operations of the Company and its
subsidiaries, taken as a whole, (ii) there has not been any material adverse
change or any development involving a prospective material adverse change in the
capital stock or in the long-term debt of the Company or any of its subsidiaries
and (iii) neither the Company nor any of its subsidiaries has incurred any
material liability or obligation, direct or contingent.
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(u) Each certificate signed by any officer of the Company and delivered
to the Underwriters or counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to the Underwriters as to the matters
covered thereby.
(v) Neither the Company nor its subsidiaries own any real property. The
Company and its subsidiaries have good and marketable title to all personal
property owned by them which is material to the business of the Company and its
subsidiaries, in each case free and clear of all liens, encumbrances and defects
except such as are described in the Prospectus or such as do not materially
affect the value of such property and do not interfere with the use made and
proposed to be made of such property by the Company and its subsidiaries; and
any real property and buildings held under lease by the Company and its
subsidiaries are held by them under valid, subsisting and enforceable leases
with such exceptions as are not material and do not interfere with the use made
and proposed to be made of such property and buildings by the Company and its
subsidiaries, in each case except as described in the Prospectus.
(w) The Company and its subsidiaries own, or possess valid and
enforceable licenses to, all patents, patent rights, inventions, copyrights,
know-how (including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures), trademarks,
service marks and trade names ("Intellectual Property") currently employed by
the Company and its subsidiaries in connection with the business now operated by
them, except where the failure to own or possess such Intellectual Property
would not, singly or in the aggregate, have a material adverse effect on the
business, prospects, financial condition or results of operations of the Company
and its subsidiaries, taken as a whole. Neither the Company, nor its
subsidiaries, has received any notice of a claim, nor is any of them aware of
facts which would form a reasonable basis for any such claim, that: (i)
challenges the Company's or its subsidiaries' rights in or to any Intellectual
Property; (ii) challenges the validity or scope of any Intellectual Property;
(iii) any third party has or will be able to establish any rights in the
Intellectual Property, except for the ownership rights of the owners of the
Intellectual Property which is licensed to the Company or the rights of parties
to whom the Company has granted licenses of such Intellectual Property; (iv) the
Intellectual Property infringes or otherwise violates any patent, copyright,
trade secret, trademark or other proprietary right of any third party; or (v)
there is infringement of the Intellectual Property by any third party, which, in
the case of any such claim specified in clauses (i), (ii), (iii), (iv) or (v)
above, singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would have a material adverse effect on the business,
prospects, financial condition or results of operations of the Company and its
subsidiaries, taken as a whole. The Company has agreements in place with each
employee, consultant or other person or party engaged by the Company for the
assignment to the Company of all intellectual property and exploitation rights
in the work performed and the protection of the trade secrets and confidential
information of the Company and of third parties which have been developed by
such person for or on behalf of the Company.
Without limiting the generality of the foregoing paragraph: (i) the
Company has duly registered with all required authorities the domain name of its
sites on the World Wide Web ("Domain Names") located at http://www.befree.com,
http://www.affiliaterecruiters.com [others?] (the "Websites"), and is the sole
and exclusive owner of and possesses all rights necessary to use the Domain
Names; (ii) the Company has the sole and exclusive right to operate
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the Websites and to use, market, develop, sell, license, display, distribute,
publish and transmit all information, content, software and other materials
available at the Websites; (iii) none of the Websites, the Company's operation
thereof, the Domain Names or any of the information, content, software or other
materials available at any Website infringes upon, violates or constitutes a
misappropriation of any Intellectual Property or other right of any other person
or entity or of any applicable law or regulation; and (iv) no other person has
any interest in, or right or claim to, any Website or any part thereof.
(x) The Company and each of its subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in such
amounts as are prudent and customary in the businesses in which they are
engaged; and neither the Company nor any of its subsidiaries (i) has received
notice from any insurer or agent of such insurer that substantial capital
improvements or other material expenditures will have to be made in order to
continue such insurance or (ii) has any reason to believe that it will not be
able to renew its existing insurance coverage as and when such coverage expires
or to obtain similar coverage from similar insurers at a cost that would not
have a material adverse effect on the business, prospects, financial condition
or results of operations of the Company and its subsidiaries, taken as a whole.
(y) No relationship, direct or indirect, exists between or among the
Company or any of its subsidiaries on the one hand, and the directors, officers,
stockholders, customers or suppliers of the Company or any of its subsidiaries
on the other hand, which is required by the Act to be described in the
Registration Statement or the Prospectus which is not so described.
(z) There is no (i) significant unfair labor practice complaint,
grievance or arbitration proceeding pending or threatened against the Company or
any of its subsidiaries before the National Labor Relations Board or any state
or local labor relations board, (ii) strike, labor dispute, slowdown or stoppage
pending or threatened against the Company or any of its subsidiaries or (iii)
union representation question existing with respect to the employees of the
Company and its subsidiaries, except for such actions specified in clause (i),
(ii) or (iii) above, which, singly or in the aggregate, would not have a
material adverse effect on the business, prospects, financial condition or
results of operations of the Company and its subsidiaries, taken as a whole. To
the best of the Company's knowledge, no collective bargaining organizing
activities are taking place with respect to the Company or any of its
subsidiaries.
(aa) The Company and each of its subsidiaries maintains a system of
internal accounting controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or specific
authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability; (iii) access to
assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
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(bb) All material tax returns required to be filed by the Company and
each of its subsidiaries in any jurisdiction have been filed, other than those
filings being contested in good faith, and all material taxes, including
withholding taxes, penalties and interest, assessments, fees and other charges
due pursuant to such returns or pursuant to any assessment received by the
Company or any of its subsidiaries have been paid, other than those being
contested in good faith and for which adequate reserves have been provided.
(cc) The Company has reviewed its operations and those of any third
parties with which the Company has a material relationship to evaluate the
extent to which the business or operations of the Company will be affected by
the Year 2000 Problem. As a result of such review, the Company has no reason to
believe, and does not believe, that the Year 2000 Problem will have a material
adverse effect on the business, prospects, financial condition or results of
operations of the Company and its subsidiaries, taken as a whole. The "Year 2000
Problem" as used herein means any significant risk that computer hardware or
software used in the receipt, transmission, processing, manipulation, storage,
retrieval, retransmission or other utilization of data or in the operation of
mechanical or electrical systems of any kind will not be able to reliably
distinguish dates beginning on January 1, 2000 from dates prior to January 1,
2000.
(dd) The Company has not at any time during the last five (5) years (i)
made any unlawful contribution to any candidate for foreign office or failed to
disclose fully any contribution in violation of law, or (ii) made any payment to
any federal or state governmental officer or official, or other person charged
with similar public or quasi-public duties, other than payments required or
permitted by the laws of the United States or any jurisdiction thereof.
(ee) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might reasonably be expected to cause
or result in stabilization or manipulation of the price of Common Stock to
facilitate the sale or resale of the Shares.
(ff) The Company has filed a registration statement pursuant to Section
12(g) of the Exchange Act to register the Common Stock, has filed an application
to list the Shares on the Nasdaq National Market, and has received notification
that the listing has been approved, subject to notice of issuance.
(gg) The Company has not incurred any liability for a fee, commission,
or other compensation on account of the employment of a broker or finder in
connection with the transactions contemplated by this Agreement other than as
contemplated thereby.
SECTION 7. Indemnification. (a) The Company agrees to indemnify and
hold harmless each Underwriter, its directors, its officers and each person, if
any, who controls any Underwriter within the meaning of Section 15 of the Act or
Section 20 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), from and against any and all losses, claims, damages, liabilities and
judgments (including, without limitation, any legal or other expenses incurred
in connection with investigating or defending any matter, including any action,
that could give rise to any such losses, claims, damages, liabilities or
judgments) caused by any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement (or any amendment
thereto), the Prospectus (or any amendment or supplement thereto) or any
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preliminary prospectus, or caused by 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, except insofar as such losses, claims,
damages, liabilities or judgments are caused by any such untrue statement or
omission or alleged untrue statement or omission based upon information relating
to any Underwriter furnished in writing to the Company by such Underwriter
through you expressly for use therein; provided, however, that the foregoing
indemnity agreement with respect to any preliminary prospectus shall not inure
to the benefit of any Underwriter who failed to deliver a Prospectus (as then
amended or supplemented, provided by the Company to the several Underwriters in
the requisite quantity and on a timely basis to permit proper delivery on or
prior to the Closing Date) to the person asserting any losses, claims, damages
and liabilities and judgments caused by any untrue statement or alleged untrue
statement of a material fact contained in any preliminary prospectus, or caused
by 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, if
such material misstatement or omission or alleged material misstatement or
omission was cured in such Prospectus and such Prospectus was required by law to
be delivered at or prior to the written confirmation of sale to such person.
(b) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, its directors, its officers who sign the
Registration Statement and each person, if any, who controls the Company within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act, to the
same extent as the foregoing indemnity from the Company to such Underwriter but
only with reference to information relating to such Underwriter furnished in
writing to the Company by such Underwriter through you expressly for use in the
Registration Statement (or any amendment thereto), the Prospectus (or any
amendment or supplement thereto) or any preliminary prospectus.
(c) In case any action shall be commenced involving any person in
respect of which indemnity may be sought pursuant to Section 7(a) or 7(b) (the
"indemnified party"), the indemnified party shall promptly notify the person
against whom such indemnity may be sought (the "indemnifying party") in writing
and the indemnifying party shall assume the defense of such action, including
the employment of counsel reasonably satisfactory to the indemnified party and
the payment of all fees and expenses of such counsel, as incurred (except that
in the case of any action in respect of which indemnity may be sought pursuant
to both Sections 7(a) and 7(b), the Underwriter shall not be required to assume
the defense of such action pursuant to this Section 7(c), but may employ
separate counsel and participate in the defense thereof, but the fees and
expenses of such counsel, except as provided below, shall be at the expense of
such Underwriter). Any indemnified party shall have the right to employ separate
counsel in any such action and participate in the defense thereof, but the fees
and expenses of such counsel shall be at the expense of the indemnified party
unless (i) the employment of such counsel shall have been specifically
authorized in writing by the indemnifying party, (ii) the indemnifying party
shall have failed to assume the defense of such action or employ counsel
reasonably satisfactory to the indemnified party or (iii) the named parties to
any such action (including any impleaded parties) include both the indemnified
party and the indemnifying party, and the indemnified party shall have been
advised by such counsel that there may be one or more legal defenses available
to it which are different from or additional to those available to the
indemnifying party (in which
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case the indemnifying party shall not have the right to assume the defense of
such action on behalf of the indemnified party). In any such case, the
indemnifying party shall not, in connection with any one action or separate but
substantially similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances, be liable for the fees and
expenses of more than one separate firm of attorneys (in addition to any local
counsel) for all indemnified parties and all such fees and expenses shall be
reimbursed as they are incurred. Such firm shall be designated in writing by
Donaldson, Lufkin & Jenrette Securities Corporation, in the case of parties
indemnified pursuant to Section 7(a), and by the Company, in the case of parties
indemnified pursuant to Section 7(b). The indemnifying party shall indemnify and
hold harmless the indemnified party from and against any and all losses, claims,
damages, liabilities and judgments by reason of any settlement of any action (i)
effected with its written consent or (ii) effected without its written consent
if the settlement is entered into more than twenty business days after the
indemnifying party shall have received a request from the indemnified party for
reimbursement for the fees and expenses of counsel (in any case where such fees
and expenses are at the expense of the indemnifying party) and, prior to the
date of such settlement, the indemnifying party shall have failed to comply with
such reimbursement request. No indemnifying party shall, without the prior
written consent of the indemnified party, effect any settlement or compromise
of, or consent to the entry of judgment with respect to, any pending or
threatened action in respect of which the indemnified party is or could have
been a party and indemnity or contribution may be or could have been sought
hereunder by the indemnified party, unless such settlement, compromise or
judgment (i) includes an unconditional release of the indemnified party from all
liability on claims that are or could have been the subject matter of such
action and (ii) does not include a statement as to or an admission of fault,
culpability or a failure to act, by or on behalf of the indemnified party.
(d) To the extent the indemnification provided for in this Section 7
is unavailable to an indemnified party or insufficient in respect of any losses,
claims, damages, liabilities or judgments referred to therein, then each
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities and judgments (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the Underwriters on the other hand from the offering
of the Shares or (ii) if the allocation provided by clause 7(d)(i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause 7(d)(i) above but also the
relative fault of the Company on the one hand and the Underwriters on the other
hand in connection with the statements or omissions which resulted in such
losses, claims, damages, liabilities or judgments, as well as any other relevant
equitable considerations. The relative benefits received by the Company on the
one hand and the Underwriters on the other hand shall be deemed to be in the
same proportion as the total net proceeds from the offering (after deducting
underwriting discounts and commissions, but before deducting expenses) received
by the Company, and the total underwriting discounts and commissions received by
the Underwriters, bear to the total price to the public of the Shares, in each
case as set forth in the table on the cover page of the Prospectus. The relative
fault of the Company on the one hand and the Underwriters on the other hand
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact
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relates to information supplied by the Company or the Underwriters and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7(d) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph. The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities or judgments referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses incurred by such indemnified party in
connection with investigating or defending any matter, including any action,
that could have given rise to such losses, claims, damages, liabilities or
judgments. Notwithstanding the provisions of this Section 7, no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the Shares underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 7(d) are several in proportion to the respective number
of Shares purchased by each of the Underwriters hereunder and not joint.
(e) The remedies provided for in this Section 7 are not exclusive and
shall not limit any rights or remedies which may otherwise be available to any
indemnified party at law or in equity.
SECTION 8. Conditions of Underwriters' Obligations. The several
obligations of the Underwriters to purchase the Firm Shares under this Agreement
are subject to the satisfaction of each of the following conditions:
(a) All the representations and warranties of the Company contained in
this Agreement shall be true and correct on the Closing Date with the same force
and effect as if made on and as of the Closing Date.
(b) If the Company is required to file a Rule 462(b) Registration
Statement after the effectiveness of this Agreement, such Rule 462(b)
Registration Statement shall have become effective by 10:00 P.M., New York City
time, on the date of this Agreement; and no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been commenced or shall be pending
before or contemplated by the Commission.
(c) You shall have received on the Closing Date a certificate dated the
Closing Date, signed by Gordon B. Hoffstein and Stephen M. Joseph, in their
capacities as the President and Chief Executive Officer, and Chief Financial
Officer of the Company, confirming the matters set forth in Sections 6(t), 8(a)
and 8(b) and that the Company has complied with all of the
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agreements and satisfied all of the conditions herein contained and required to
be complied with or satisfied by the Company on or prior to the Closing Date.
(d) Since the respective dates as of which information is given in the
Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement), (i)
there shall not have occurred any change or any development involving a
prospective change in the condition, financial or otherwise, or the earnings,
business, management or operations of the Company and its subsidiaries, taken as
a whole, (ii) there shall not have been any change or any development involving
a prospective change in the capital stock or in the long-term debt of the
Company or any of its subsidiaries and (iii) neither the Company nor any of its
subsidiaries shall have incurred any liability or obligation, direct or
contingent, the effect of which, in any such case described in clause 8(d)(i),
8(d)(ii) or 8(d)(iii), in your judgment, is material and adverse and, in your
judgment, makes it impracticable to market the Shares on the terms and in the
manner contemplated in the Prospectus.
(e) You shall have received on the Closing Date an opinion
(satisfactory to you and counsel for the Underwriters), dated the Closing Date,
of Hale and Dorr LLP, counsel for the Company, to the effect that:
(i) each of the Company and its subsidiaries has been duly
incorporated, is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation and has the
corporate power and authority to carry on its business, and to own,
lease and operate its properties, as described in the Prospectus;
(ii) each of the Company and its subsidiaries is duly
qualified and is in good standing as a foreign corporation authorized
to do business in [the State of Delaware and] the Commonwealths of
Pennsylvania and Massachusetts;
(iii) all the outstanding shares of capital stock of the
Company have been duly authorized and validly issued and are fully
paid, non-assessable and not subject to any statutory preemptive or
similar statutory right or, to such counsel's knowledge after due
inquiry, any preemptive right, right of first refusal or first offer or
other similar right pursuant to any agreement to which the Company is a
party;
(iv) the Shares have been duly authorized and, when issued and
delivered to the Underwriters against payment therefor as provided by
this Agreement, will be validly issued, fully paid and non-assessable,
and the issuance of such Shares will not have been issued in violation
of or subject to any statutory preemptive or similar statutory right
or, to such counsel's knowledge after due inquiry, any preemptive
right, right of first refusal or first offer or other similar right
pursuant to any agreement to which the Company is a party;
(v) all of the outstanding shares of capital stock of each of
the Company's subsidiaries have been duly authorized and validly issued
and are fully paid and
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non-assessable, and are owned by the Company, directly or indirectly
through one or more subsidiaries, free and clear of any security
interest, claim, lien, encumbrance or adverse interest of any nature;
(vi) this Agreement has been duly authorized, executed and
delivered by the Company;
(vii) the authorized capital stock of the Company conforms as
to legal matters in all material respects to the description thereof
contained in the Prospectus;
(viii) the Registration Statement has become effective under
the Act, no stop order suspending its effectiveness has been issued and
no proceedings for that purpose are, to such counsel's knowledge,
pending before or contemplated by the Commission;
(ix) the statements under the captions "Shares Eligible for
Future Sale", "Management - Employment Agreements", "Management -
Change of Control Arrangements", "Management - 1998 Stock Incentive
Plan", "Transactions with Related Parties", "Description of Capital
Stock" and "Underwriting" in the Prospectus and Items 14 and 15 of Part
II of the Registration Statement, insofar as such statements constitute
a summary of legal matters or legal conclusions or a summary of
documents or proceedings referred to therein, fairly present the
information called for with respect to such legal matters, legal
conclusions, documents and proceedings;
(x) the execution, delivery and performance of this Agreement
by the Company, the compliance by the Company with all the provisions
hereof and the consummation by the Company of the transactions
contemplated hereby will not (A) require any consent, approval,
authorization or other order of, or qualification with, any court or
governmental body or agency (except such as may be required under the
securities or Blue Sky laws of the various states, the Exchange Act or
in connection with the NASD's review of the underwriting arrangements
for the offering and sale of the Shares), (B) conflict with or
constitute a breach of any of the terms or provisions of, or a default
under, the charter or by-laws of the Company, FOI, Inc. or PCX
Information Systems, Inc. or, with respect to the Company and its
subsidiaries, any indenture, loan agreement, mortgage, lease or other
agreement or instrument that is listed as an Exhibit to the
Registration Statement or (C) violate or conflict with any applicable
law or any rule or regulation, which in the experience of such counsel
is normally applicable in transactions of the type contemplated by this
Agreement, or any judgment, order or decree of any court or any
governmental body or agency having jurisdiction over the Company, any
of its subsidiaries or their property known to such counsel;
(xi) such counsel does not know of any legal or governmental
proceedings pending or threatened to which the Company or any of its
subsidiaries is or could be a party or to which any of their respective
property is or could be subject that are required by the Act or the
rules and regulations thereunder to be described in the Registration
Statement or the Prospectus and are not so described, or of any
contracts or other
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documents that are required by the Act or the rules and regulations
thereunder to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement
that are not so described or filed as required;
(xii) the Company is not and, after giving effect to the
offering and sale of the Shares and the application of the proceeds
thereof as described in the Prospectus, will not be, an "investment
company" as such term is defined in the Investment Company Act of 1940,
as amended;
(xiii) to such counsel's knowledge, except as set forth in the
Registration Statement and Prospectus, there are no contracts,
agreements or understandings between the Company and any person
granting such person the right to require the Company to file a
registration statement under the Act with respect to any securities of
the Company or to require the Company to include such securities with
the Shares registered pursuant to the Registration Statement, and all
persons having such rights known to such counsel to registration of
Company securities, because of the filing of the Registration Statement
by the Company have, with respect to the offering contemplated thereby,
waived such rights; and
(xiv) the Registration Statement and the Prospectus and any
supplement or amendment thereto (except for the financial statements,
including the notes and schedules thereto, and other financial or
accounting data included therein as to which no opinion need be
expressed) comply as to form in all material respects with the
requirements of the Act and the applicable rules and regulations of the
Commission thereunder.
In addition, such counsel shall state that, in connection with
the preparation of the Registration Statement and the Prospectus, such
counsel has participated in conferences with officers and
representatives of the Company, the Underwriters, counsel for the
Underwriters and the independent accountants of the Company, at which
conferences such counsel made inquiries of such persons and others and
discussed the contents of the Registration Statement and the
Prospectus; and that, while the limitations inherent in the independent
verification of factual matters and the character of determinations
involved in the registration process are such that such counsel is not
passing upon and does not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the
Registration Statement or the Prospectus, subject to the foregoing and
based on such participation, inquiries and discussions, no facts have
come to the attention of such counsel which have caused such counsel to
believe that the Registration Statement, at the time it became
effective (but after giving effect to changes incorporated pursuant to
Rule 430A under the Act), contained any untrue statement of a material
fact or omitted to state any material fact required to be stated
therein or necessary in order to make the statements therein not
misleading (except that such counsel need not express such view with
respect to the financial statements, including the notes and schedules
thereto, or any other financial or accounting data included therein),
or that the Prospectus, as of the date of such Prospectus and as of the
Closing Date, contained or contains any untrue statement of a material
fact or omitted or omits to state any material fact necessary in order
to make the statements therein,
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in light of the circumstances under which they were made, not
misleading (except that such counsel need not express such view with
respect to the financial statements, including the notes and schedules
thereto, or any other financial or accounting data included therein).
The opinion of Hale and Dorr LLP described in Section 8(e) above shall
be rendered to you at the request of the Company and shall so state therein.
(f) You shall have received on the Closing Date an opinion, dated the
Closing Date, of Testa, Hurwitz & Thibeault, LLP counsel for the Underwriters,
as to the matters referred to in Sections 8(e)(iv), 8(e)(vi), 8(e)(ix) (but only
with respect to the statements under the caption "Description of Capital Stock"
and "Underwriting"), 8(e)(xiv), and the penultimate paragraph of Section 8(e).
In giving such opinions with respect to the matters covered by Section
8(e)(xiv) Hale and Dorr LLP and Testa Hurwitz & Thibeault, LLP may state that
their opinion and belief are based upon their participation in the preparation
of the Registration Statement and Prospectus and any amendments or supplements
thereto and review and discussion of the contents thereof, but are without
independent check or verification except as specified.
(g) You shall have received, on each of the date hereof and the Closing
Date, a letter dated the date hereof or the Closing Date, as the case may be, in
form and substance satisfactory to you, from PricewaterhouseCoopers LLP,
independent public accountants, containing the information and statements of the
type ordinarily included in accountants' "comfort letters" to Underwriters with
respect to the financial statements and certain financial information contained
in the Registration Statement and the Prospectus.
(h) The Company shall have delivered to you the agreements specified in
Section 2 hereof which agreements shall be in full force and effect on the
Closing Date.
(i) The Shares shall have been duly listed for quotation on the Nasdaq
National Market.
(j) The Company shall not have failed on or prior to the Closing Date
to perform or comply with any of the agreements herein contained and required to
be performed or complied with by the Company on or prior to the Closing Date.
The several obligations of the Underwriters to purchase any Additional
Shares hereunder are subject to the delivery to you on the applicable Option
Closing Date of such documents as you may reasonably request with respect to the
good standing of the Company, the due authorization and issuance of such
Additional Shares and other matters related to the issuance of such Additional
Shares.
SECTION 9. Effectiveness of Agreement and Termination. This Agreement
shall become effective upon the execution and delivery of this Agreement by the
parties hereto.
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This Agreement may be terminated at any time on or prior to the Closing
Date by you by written notice to the Company if any of the following has
occurred: (i) any outbreak or escalation of hostilities or other national or
international calamity or crisis or change in economic conditions or in the
financial markets of the United States or elsewhere that, in your judgment, is
material and adverse and, in your judgment, makes it impracticable to market the
Shares on the terms and in the manner contemplated in the Prospectus, (ii) the
suspension or material limitation of trading in securities or other instruments
on the New York Stock Exchange, the American Stock Exchange, the Chicago Board
of Options Exchange, the Chicago Mercantile Exchange, the Chicago Board of Trade
or the Nasdaq National Market or limitation on prices for securities or other
instruments on any such exchange or the Nasdaq National Market, (iii) the
suspension of trading of any securities of the Company on any exchange or in the
over-the-counter market, (iv) the enactment, publication, decree or other
promulgation of any federal or state statute, regulation, rule or order of any
court or other governmental authority which in your opinion materially and
adversely affects, or will materially and adversely affect, the business,
prospects, financial condition or results of operations of the Company and its
subsidiaries, taken as a whole, (v) the declaration of a banking moratorium by
either federal or New York State authorities or (vi) the taking of any action by
any federal, state or local government or agency in respect of its monetary or
fiscal affairs which in your opinion has a material adverse effect on the
financial markets in the United States.
If on the Closing Date or on an Option Closing Date, as the case may
be, any one or more of the Underwriters shall fail or refuse to purchase the
Firm Shares or Additional Shares, as the case may be, which it has or they have
agreed to purchase hereunder on such date and the aggregate number of Firm
Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase is not more
than one-tenth of the total number of Firm Shares or Additional Shares, as the
case may be, to be purchased on such date by all Underwriters, each
non-defaulting Underwriter shall be obligated severally, in the proportion which
the number of Firm Shares set forth opposite its name in Schedule I bears to the
total number of Firm Shares which all the non-defaulting Underwriters have
agreed to purchase, or in such other proportion as you may specify, to purchase
the Firm Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase on such
date; provided that in no event shall the number of Firm Shares or Additional
Shares, as the case may be, which any Underwriter has agreed to purchase
pursuant to Section 2 hereof be increased pursuant to this Section 9 by an
amount in excess of one-ninth of such number of Firm Shares or Additional
Shares, as the case may be, without the written consent of such Underwriter. If
on the Closing Date any Underwriter or Underwriters shall fail or refuse to
purchase Firm Shares and the aggregate number of Firm Shares with respect to
which such default occurs is more than one-tenth of the aggregate number of Firm
Shares to be purchased by all Underwriters and arrangements satisfactory to you
and the Company for purchase of such Firm Shares are not made within 48 hours
after such default, this Agreement will terminate without liability on the part
of any non-defaulting Underwriter and the Company. In any such case which does
not result in termination of this Agreement, either you or the Company shall
have the right to postpone the Closing Date, but in no event for longer than
seven days, in order that the required changes, if any, in the Registration
Statement and the Prospectus or any other documents or
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arrangements may be effected. If, on an Option Closing Date, any Underwriter or
Underwriters shall fail or refuse to purchase Additional Shares and the
aggregate number of Additional Shares with respect to which such default occurs
is more than one-tenth of the aggregate number of Additional Shares to be
purchased on such date, the non-defaulting Underwriters shall have the option to
(i) terminate their obligation hereunder to purchase such Additional Shares or
(ii) purchase not less than the number of Additional Shares that such
non-defaulting Underwriters would have been obligated to purchase on such date
in the absence of such default. Any action taken under this paragraph shall not
relieve any defaulting Underwriter from liability in respect of any default of
any such Underwriter under this Agreement.
SECTION 10. Miscellaneous. Notices given pursuant to any provision of
this Agreement shall be addressed as follows: (i) if to the Company, to Be Free,
Inc., 154 Crane Meadow Road, Marlborough, Massachusetts 01752 and (ii) if to any
Underwriter or to you, to you c/o Donaldson, Lufkin & Jenrette Securities
Corporation, 277 Park Avenue, New York, New York 10172, Attention: Syndicate
Department, or in any case to such other address as the person to be notified
may have requested in writing.
The respective indemnities, contribution agreements, representations,
warranties and other statements of the Company and the several Underwriters set
forth in or made pursuant to this Agreement shall remain operative and in full
force and effect, and will survive delivery of and payment for the Shares,
regardless of (i) any investigation, or statement as to the results thereof,
made by or on behalf of any Underwriter, the officers or directors of any
Underwriter, any person controlling any Underwriter, the Company, the officers
or directors of the Company or any person controlling the Company, (ii)
acceptance of the Shares and payment for them hereunder and (iii) termination of
this Agreement.
If for any reason the Shares are not delivered by or on behalf of the
Company as provided herein (other than as a result of any termination of this
Agreement pursuant to Section 9), the Company agrees to reimburse the several
Underwriters for all reasonable out-of-pocket expenses (including the fees and
disbursements of counsel) incurred by them. Notwithstanding any termination of
this Agreement, the Company shall be liable for all expenses which it has agreed
to pay pursuant to Section 5(i) hereof. The Company also agrees to reimburse the
several Underwriters, their directors and officers and any persons controlling
any of the Underwriters for any and all reasonable fees and expenses (including,
without limitation, the fees and disbursements of counsel) incurred by them in
connection with enforcing their rights hereunder (including, without limitation,
pursuant to Section 7 hereof).
Except as otherwise provided, this Agreement has been and is made
solely for the benefit of and shall be binding upon the Company, the
Underwriters, the Underwriters' directors and officers, any controlling persons
referred to herein, the Company's directors and the Company's officers who sign
the Registration Statement and their respective successors and assigns, all as
and to the extent provided in this Agreement, and no other person shall acquire
or have any right under or by virtue of this Agreement. The term "successors and
assigns" shall not include a purchaser of any of the Shares from any of the
several Underwriters merely because of such purchase.
22
<PAGE>
This Agreement shall be governed and construed in accordance with the
laws of the State of New York.
This Agreement may be signed in various counterparts which together
shall constitute one and the same instrument.
[Signature Page Follows Immediately]
23
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement
between the Company and the several Underwriters.
Very truly yours,
BE FREE, INC.
By:
--------------------------------
Name:
Title:
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
HAMBRECHT & QUIST LLC
DAIN RAUSCHER WESSELS
Acting severally on behalf of
themselves and the several
Underwriters named in
Schedule I hereto
By: DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By:
-----------------------------------
Name:
Title:
24
<PAGE>
SCHEDULE I
Number of Firm Shares
Underwriters to be Purchased
------------ ---------------
Donaldson, Lufkin & Jenrette Securities Corporation
Hambrecht & Quist LLC
Dain Rauscher Wessels
------------------
Total
==================
25
<PAGE>
Annex I
[Insert names of stockholders of the Company who will be required to
sign lock ups]
26
<PAGE>
EXHIBIT 3.5
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
BE FREE, INC.
Be Free, Inc. (hereinafter called the "Corporation"), organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware, does hereby certify as follows:
By written action of the Board of Directors of the Corporation, dated
October 5, 1999, the Board of Directors duly adopted resolutions pursuant to
Sections 141(f) and 242 of the General Corporation Law of the State of Delaware
setting forth an amendment to the Restated Certificate of Incorporation of the
Corporation, as amended, implementing a 1-for-2 reverse split of its Common
Stock, $0.01 par value, and declaring such amendment to be advisable. The
stockholders of the Corporation duly approved by written consent said proposed
amendment in accordance with Section 228 of the General Corporation Law of the
State of Delaware.
The resolution setting forth the amendment is as follows:
RESOLVED: That upon the effective date of the filing of the Certificate of
- -------- Amendment to the Restated Certificate of Incorporation (the
"Effective Date") each two (2) shares of Common Stock , $0.01 par
value per share, outstanding, or held in treasury, on the Effective
Date shall be reclassified and changed into one (1) share of Common
Stock, $0.01 par value per share, so that, on and after the Effective
Date, each two (2) shares of Common Stock, $0.01 par value per share,
outstanding and held of record by each stockholder of the Company, or
held in treasury, immediately prior to the Effective Date shall
represent one (1) share of Common Stock, $0.01 par value per share,
upon the Effective Date.
[The Remainder of this Page is Intentionally Left Blank]
<PAGE>
IN WITNESS WHEREOF the Corporation has caused this Certificate of Amendment
to be signed by its Chief Executive Officer on this 6th day of October, 1999.
BE FREE, INC.
By:
--------------------------
Gordon B. Hoffstein
Chief Executive Officer
2
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in Amendment No. 3 to the Registration
Statement on Form S-1 (the "Registration Statement") of our report dated July
2, 1999, except for Footnote M which is dated October 6, 1999 relating to the
consolidated financial statements of Be Free, Inc. and its subsidiaries, which
appears in such Registration Statement. We also consent to the references to us
under the headings "Experts" and "Selected Consolidated Financial Data" in such
Registration Statement.
PricewaterhouseCoopers LLP
Boston, Massachusetts
October 8, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM REGISTRATION
STATEMENT FORM S-1 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 SEP-30-1999
<CASH> 4,327,090 16,406,076
<SECURITIES> 0 2,932,150
<RECEIVABLES> 132,955 1,036,177
<ALLOWANCES> (14,000) (71,258)
<INVENTORY> 0 0
<CURRENT-ASSETS> 4,613,784 21,605,130
<PP&E> 961,702 8,531,244
<DEPRECIATION> 232,952 681,658
<TOTAL-ASSETS> 5,970,836 30,560,019
<CURRENT-LIABILITIES> 1,192,055 10,830,184
<BONDS> 0 0
8,785,981 35,027,674
0 0
<COMMON> 97,500 97,500
<OTHER-SE> (9,593,898) (21,388,164)
<TOTAL-LIABILITY-AND-EQUITY> 5,970,836 30,560,019
<SALES> 1,326,763 2,708,873
<TOTAL-REVENUES> 1,326,763 2,708,873
<CGS> 423,811 437,062
<TOTAL-COSTS> 5,866,419 14,999,043
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 223,843 193,129
<INCOME-PRETAX> (4,763,499) (12,483,299)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (4,763,499) (12,483,299)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,893,072) (13,780,358)
<EPS-BASIC> (0.61) (2.18)
<EPS-DILUTED> (0.61) (2.18)
</TABLE>
