<PAGE>
As filed with the Securities and Exchange Commission on June 20, 2000
Registration No. 333-37776
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SECURITIES AND EXCHANGE COMMISSION
--------------
Amendment No. 1
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 (I.R.S. Employer
jurisdiction Industrial Identification Number)
of incorporation or Classification Code
organization) Number)
154 Crane Meadow Road
Marlborough, Massachusetts 01752
(508) 480-4000
(Address, including zip code, telephone number, including area code, of
registrant's principal executive offices)
Gordon B. Hoffstein
President, Chief Executive Officer
and Chairman of the Board of Directors
BE FREE, INC.
154 Crane Meadow Road
Marlborough, Massachusetts 01752
(508) 480-4000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------
Copies to:
Jay E. Bothwick, Esq.
HALE AND DORR LLP
60 State Street
Boston, Massachusetts 02109
Telephone: (617) 526-6000
Telecopy: (617) 526-5000
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. [X]
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. [_]
--------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed Proposed
Maximum Maximum
Amount to be Offering Price Aggregate Amount of
Title of Shares to be Registered Registered(1) Per Share(2) Offering Price(1) Registration Fee
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.01 par
value per share........ 1,838,278 $10.359 $19,043,411 $5,028(3)
</TABLE>
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(1) Pursuant to Rule 416 of the Securities Act, this Registration Statement
shall also cover any additional shares of Common Stock that may be issued
to adjust the number of shares set forth herein as a result of any future
stock dividend, stock split, recapitalization or any other similar
transaction effected without the receipt of consideration which results in
an increase in the number of the Registrant's outstanding shares of Common
Stock.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) under the Securities Act and based upon the average of the
high and low prices on the Nasdaq National Market on June 16, 2000.
(3) The Registrant paid $4,914 in registration fees on May 25, 2000 in
connection with the original filing of this Registration Statement. The
balance of the registration fee, $114, is paid herewith.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. The +
+selling stockholders may not sell these securities until the registration +
+statement filed with the Securities and Exchange Commission is effective. +
+This prospectus is not an offer to sell these securities, and neither we nor +
+any of the selling stockholders are soliciting offers to buy these securities +
+in any jurisdiction where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JUNE 20, 2000
[Be Free logo]
1,838,278 Shares of Common Stock
-----------
This prospectus relates to resales of shares of common stock previously
issued by Be Free, Inc. to the former stockholders of TriVida Corporation in
connection with our acquisition of that company.
We will not receive any proceeds from the sale of the shares.
The selling stockholders identified in this prospectus, or their pledgees,
donees, transferees or other successors-in-interest, may offer the shares from
time to time through public or private transactions at prevailing market
prices, at prices related to prevailing market prices or at privately
negotiated prices.
We do not know when or in what amounts a selling stockholder may offer shares
for sale. The selling stockholders may not sell any or all of the shares
offered by this prospectus.
Our common stock is traded on the Nasdaq National Market under the symbol
"BFRE." On June 16, 2000, the closing sale price of the common stock on Nasdaq
was $10.06 per share.
-----------
Investing in our common stock involves a high degree of risk. See "Risk
Factors" beginning on page 6.
-----------
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
-----------
The date of this prospectus is , 2000.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary.................. 1
Risk Factors........................ 6
Use of Proceeds..................... 18
Selling Stockholders................ 18
Price Range of Common Stock......... 22
Dividend Policy..................... 22
Capitalization...................... 23
Dilution............................ 24
Selected Consolidated Financial
Data............................... 25
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 28
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Business............................ 36
Management.......................... 45
Transactions with Related Parties... 54
Principal Stockholders.............. 57
Description of Capital Stock........ 59
Shares Eligible for Future Sale..... 62
Plan of Distribution................ 64
Legal Matters....................... 66
Experts............................. 66
Where You Can Find More Information. 66
Index to Financial Statements....... F-1
</TABLE>
Be Free, Inc.'s executive offices are located at 154 Crane Meadow Road,
Marlborough, Massachusetts 01752, our telephone number is (508) 480-4000 and
our corporate Web sites are located at is www.befree.com,
www.affiliaterecruiters.com and www.sitetools.net. The information on our Web
sites is not incorporated by reference in this prospectus and should not be
considered to be part of this prospectus. Our Web site addresses are included
in this prospectus as inactive textual references only. Unless the context
otherwise requires references in this prospectus to "Be Free," "we," "us," and
"our" refer to Be Free, Inc. and its subsidiaries.
Be Free, BFAST, B2BFAST, BFIT, B-INTOUCH, AFFILIATE RECRUITERS, Performance
Marketing and e-nabled are our service marks. This prospectus also contains
other trademarks, service marks and trade names that are the property of other
parties.
We have not authorized anyone to provide you with information different from
that contained in this prospectus. The selling stockholders are offering to
sell, and seeking offers to buy, shares of our common stock only in
jurisdictions where offers and sales are permitted. The information contained
in this prospectus is accurate only as of the date of this prospectus,
regardless of the time of delivery of this prospectus or of any sale of common
stock.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights important features of this offering and the
information included in this prospectus. This summary does not contain all of
the information that you should consider before investing in our common stock.
You should read the entire prospectus carefully, especially the risks of
investing in our common stock discussed under "Risk Factors" on page 6 of this
prospectus. Unless otherwise indicated, all information in this prospectus
gives effect to our 2-for-1 common stock split effected as a 100% stock
dividend on March 8, 2000.
Be Free
Our Business
We are a leading provider of services which 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. We recently initiated new services designed to
enable similar marketing methods for the business-to-business marketplace.
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
advertisement 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. Our services also 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 1.5 billion
times in May 2000 through our customers' 3.9 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>
Recent Developments
On February 29, 2000, we acquired TriVida Corporation, a provider of
personalization services to online merchants and content sites. These
personalization services are designed to predict the buying behavior of a
unique but anonymous user based upon the past browsing and buying behavior of
that user as well as other anonymous users. As consideration for this
acquisition, we issued 2,933,276 shares of our common stock in exchange for all
of the outstanding shares of TriVida capital stock and assumed options to
purchase an additional 566,592 shares of our common stock. We also agreed to
register with the Securities and Exchange Commission the resale by the former
TriVida stockholders of the shares of Be Free, Inc. common stock we issued to
them as part of the acquisition. This prospectus is a part of the registration
statement which we filed for that purpose. See "The Offering."
We intend to integrate these personalization services with our existing
performance marketing services to enable our customers to deliver personalized
promotions to users visiting their marketing partners' Web sites. We intend to
enable our customers to deliver personalized promotions for selected goods or
services to users visiting their own Web sites, whether or not those users had
been directed to their Web sites by their marketing partners. We believe that
the delivery of more personalized promotions can increase the rate at which
promotions are converted into sales or result in increased traffic for our
customers, resulting in higher revenues for us.
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.
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 $34.4 million as of March 31, 2000. See "Summary
Consolidated Financial Data" and "Risk Factors--We have a history of losses and
expect future losses."
3
<PAGE>
The Offering
<TABLE>
<S> <C>
Common Stock offered by selling stockholders.... 1,838,278 shares
Use of proceeds................................. Be Free will not receive any proceeds
from the sale of shares in this offering
Nasdaq National Market symbol................... BFRE
</TABLE>
This prospectus relates to the resale of the shares of common stock
previously issued by Be Free, Inc. to the former stockholders of TriVida
Corporation in connection with our acquisition of that company, less the number
of such shares of Be Free, Inc. already resold by the former stockholders of
TriVida Corporation as part of our underwritten public offering of common stock
in March 2000.
4
<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 the consolidated financial
statements of Be Free and the related notes, TriVida's financial statements and
related notes, and the unaudited pro forma financial information and related
notes, all included elsewhere in this prospectus.
Unaudited supplemental 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 supplemental basic and diluted
net loss per share.
The unaudited pro forma statement of operations data set forth below gives
effect to our acquisition of the TriVida on February 29, 2000 as if it had been
consummated on January 1, 1999. Unaudited pro forma loss per share from
continuing operations excludes accretion of preferred stock to redemption value
of $0.07 per share.
<TABLE>
<CAPTION>
Pro Forma
Three Months Three Months Three
Year Ended December 31, Ended Ended Months Ended
-------------------------- March 31, March 31, March 31,
1997 1998 1999 1999 2000 2000
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue:
Performance marketing
services.............. $ 216 $ 1,319 $ 5,329 $ 533 $ 3,629 $ 3,629
Other.................. 60 8 -- -- -- --
------- ------- -------- ------- ------- --------
Total revenue.......... 276 1,327 5,329 533 3,629 3,629
Total operating
expenses............... 1,211 5,866 23,181 3,198 14,054 26,462
------- ------- -------- ------- ------- --------
Operating loss.......... (935) (4,539) (17,852) (2,665) (10,425) (22,833)
Interest income
(expense), net......... (99) (224) 348 (216) 1,081 1,021
------- ------- -------- ------- ------- --------
Net loss before
extraordinary item..... (1,034) (4,763) (17,504) (2,881) (9,344) (21,812)
------- ------- --------
Extraordinary item...... -- -- (330) -- -- --
------- ------- -------- ------- ------- --------
Net loss................ (1,034) (4,763) (17,834) (2,881) (9,344) $(21,812)
========
Accretion of preferred
stock to redemption
value.................. -- (130) (1,517) (97) --
------- ------- -------- ------- -------
Net loss attributable to
common stockholders.... $(1,034) $(4,893) $(19,351) $(2,978) $(9,344)
======= ======= ======== ======= =======
Basic and diluted net
loss per share......... $ (0.04) $ (0.31) $ (1.02) $ (0.24) $ (0.17)
Shares used in computing
basic and diluted net
loss per share......... 27,139 16,018 18,951 12,618 53,455
Unaudited supplemental
basic and diluted net
loss per share......... $ (0.24) $ (0.50)
Shares used in computing
unaudited supplemental
basic and diluted net
loss per share......... 19,640 35,713
Unaudited pro forma loss
per share from
continuing operations.. $ (0.41)
Shares used in computing
unaudited pro forma
basic and diluted net
loss per share......... 53,455
</TABLE>
<TABLE>
<CAPTION>
March 31, 2000
<S> <C>
Balance Sheet Data:
Cash, cash equivalents and marketable securities................. $174,919
Working capital.................................................. 155,532
Total assets..................................................... 352,539
Long-term debt, net of current portion........................... 2,933
Total stockholders' equity....................................... 339,938
</TABLE>
5
<PAGE>
RISK FACTORS
Investing in our common stock involves a high degree of risk. You should
carefully consider the risks and uncertainties described below before
purchasing our common stock. The risks and uncertainties described below are
not the only ones facing our company. Additional risks and uncertainties may
also impair our business operations. If any of the following risks actually
occur, our business, financial condition or results of operations would likely
suffer. In that case, the trading price of our common stock could fall, and you
may 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 March 31, 2000 was $34.4 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 amortization of
intangible assets and planned operating and capital expenditures. As a result
of our acquisition of TriVida, we currently expect to record amortization
expenses of approximately $55.0 million per year during the next three years
and additional expenses related to the integration of TriVida, which may
include employee severance and other restructuring charges, in the first-half
of 2000. We may incur additional expenses related to our acquisition of
TriVida. 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 will increase in the future, in part because
of the amortization of intangible assets, 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 "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
6
<PAGE>
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 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 services,
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 these situations,
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
20% of our revenue in 1997, 1998 and 1999, respectively. In 1999, GeoCities, a
subsidiary of Yahoo! Inc., accounted for 13% of our revenue. Our revenue would
be materially and adversely affected by the loss of either 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. 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.
7
<PAGE>
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 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.
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 privately held Commission Junction and LinkShare.
8
<PAGE>
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, 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. Inaccurate information could cause our customers to over-pay
or under-pay their marketing partners. As a result, we could be held liable for
any damages incurred by our customers or their marketing partners. In addition,
we provide an optional payment service for our customers. For a fixed fee, we
prepare and distribute checks to a customer's marketing partners in payment of
their commissions. These checks
9
<PAGE>
are drawn against a Be Free checking account that is funded by the customer
prior to release of the checks. Software defects and inaccurate data may cause
us to send these checks to the wrong party, in the wrong amounts, or on an
untimely basis, any of which could cause liability for us, lead to customer
dissatisfaction, or both. Software defects or inaccurate data 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. 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 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.
10
<PAGE>
The Internet generates privacy concerns which could result in market
perceptions or legislation which could harm our business, result in reduced
sales of our services, or both
We gather and maintain anonymous data related to consumer online browsing
and buying behavior. When a user first views or clicks on a customer's
promotion managed by our system, we create an anonymous profile for that user
and we add and change profile attributes based upon that user's behavior on our
customer's Web site and its marketing partners' Web sites. Recently, lawsuits
have been brought alleging, among other things, that at least one company,
which combines information from online and other sources regarding users, has
improperly collected and used information concerning Internet users in
violation of federal electronics privacy statutes and other privacy laws. The
United States Federal Trade Commission has launched an informal inquiry to
determine whether that company has engaged in unfair or deceptive practices in
collecting and maintaining information concerning Internet users. While we
believe the anonymous user profiles that we create do not raise these issues,
we may be sued or investigated regarding our practices. Any similar legal
actions, whether against us or others, could limit our ability to sell our
services or otherwise seriously harm our business.
Privacy concerns may cause visitors to avoid Web sites that track behavioral
information and even the perception of security and privacy concerns, whether
or not valid, may indirectly inhibit market acceptance of our services. In
addition, legislative or regulatory requirements may heighten these concerns if
businesses must notify users that the data captured after visiting Web sites
may be used to direct product promotions and advertising to that user. For
example, the European Union recently enacted its own privacy regulations that
may result in limits on the collection and use of some user information. The
United States and other countries may adopt similar legislation or regulatory
requirements. If privacy legislation is enacted or consumer privacy concerns
are not adequately addressed, our business, results of operations and financial
condition could be harmed. To date, these regulations and privacy concerns have
not materially restricted the use of our services or our business growth.
However, they may limit our ability to utilize the personalization technology
that we recently obtained through our acquisition of TriVida or our ability to
expand successfully our operations in Europe and abroad.
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
11
<PAGE>
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. Recently, there have been a number of patents
granted relating to online commerce, advertising and affiliate sales channels.
Further, we believe that an increased number of such patents may be filed in
the future. To date, we have not been notified that our technologies infringe
the intellectual property rights of third parties, but in the future third
parties may claim that we infringe on their past, current or future
intellectual property rights. Any such claim brought against us or our
customers, whether meritorious or not, could result in loss of revenue, be
time-consuming to defend, result in costly litigation, or require us to enter
into royalty or licensing agreements. If we were unable to enter into such
royalty or licensing agreements, it could result in the significant
modification or cessation of our business operations.
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. We have grown from 12 employees as of June 30, 1998 to 288 employees
as of May 31, 2000, including 30 employees added as a result of the TriVida
acquisition, 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.
We may not achieve the expected benefits of our acquisition of TriVida
In February 2000, we acquired TriVida, a provider of personalization
services to online merchants and content sites. To date, TriVida has not
released commercial products. Our failure to successfully address the
challenges associated with this acquisition, including the further development
and integration of these services with our existing services, could have a
material adverse affect on our ability to market services based on these
personalization technologies. We plan
12
<PAGE>
to devote significant resources to the development of personalization services.
If we are unable to successfully develop and market personalization services,
we may not achieve enhanced revenue and other anticipated benefits from the
TriVida acquisition.
The success of this acquisition will depend on:
. the acceptance of personalization services in online marketing among
merchants, their affiliates and Internet users;
. successfully integrating and managing TriVida's operations with ours;
. retaining the software developers and other key employees of TriVida;
. developing, integrating and marketing personalization services; and
. controlling costs and expenses, as well as the demands on our management
associated with the TriVida acquisition.
Our failure to successfully address these factors may have a material
adverse effect on our financial condition and could result in a decline in our
common stock price.
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 undetected Year 2000 compliance issues, our
business would be materially and adversely affected and we could be exposed to
material liabilities from lawsuits against us
Our business may suffer as a result of defects related to Year 2000
compliance issues that have not yet been detected. We have not had any
independent verification of our Year 2000 compliance efforts. We have not
procured any Year 2000 specific insurance or made any contingency plans to
address any undetected Year 2000 risks.
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 online 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.
13
<PAGE>
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 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.
14
<PAGE>
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" for a discussion of the factors causing
fluctuation of quarterly operating results.
We may be unable to fund our operating and capital requirements and service our
debt satisfactorily
We expect the net proceeds from our public offerings, our current cash, cash
equivalents and marketable securities 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 expanding our existing data
center and establishing additional data centers in 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 are expanding, and plan to continue 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 provide
performance marketing services for an existing customer in Europe and we intend
to offer our services in additional European countries. We may also offer our
services in 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;
15
<PAGE>
. 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 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 attempts to disable Web sites, such as
through targeted queries for data designed to overwhelm the servers for a Web
site, could adversely affect Web sites and our services, 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.
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
Our executive officers and directors and their affiliates beneficially own a
majority 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.
16
<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 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.
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.
17
<PAGE>
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares offered
pursuant to this prospectus.
The selling stockholders will pay any expenses incurred by the selling
stockholders for brokerage, accounting, tax or legal services or any other
expenses incurred by the selling stockholders in disposing of the shares. We
will bear all other costs, fees and expenses incurred in effecting the
registration of the shares covered by this prospectus, including, without
limitation, all registration and filing fees, Nasdaq listing fees and fees and
expenses of our counsel and our accountants.
SELLING STOCKHOLDERS
We issued the shares of common stock covered by this prospectus in a
private placement in connection with our acquisition of TriVida Corporation on
February 29, 2000. The following table sets forth, to our knowledge, certain
information about the selling stockholders as of May 31, 2000.
We do not know when or in what amounts a selling stockholder may offer
shares for sale. The selling stockholders may not sell any or all of the
shares offered by this prospectus. Because the selling stockholders may offer
all or some of the shares pursuant to this offering, and because there are
currently no agreements, arrangements or understandings with respect to the
sale of any of the shares, we can not estimate the number of the shares that
will be held by the selling stockholders after completion of the offering.
However, for purposes of this table, we have assumed that, after completion of
the offering, none of the shares covered by this prospectus will be held by
the selling stockholders.
Beneficial ownership is determined in accordance with the rules of the SEC,
and includes voting or investment power with respect to shares. Shares of
common stock issuable under stock options that are exercisable within 60 days
after May 31, 2000 are deemed outstanding for computing the percentage
ownership of the person holding the options but are not deemed outstanding for
computing the percentage ownership of any other person. Unless otherwise
indicated below, to our knowledge, all persons named in the table have sole
voting and investment power with respect to their shares of common stock,
except to the extent authority is shared by spouses under applicable law. The
inclusion of any shares in this table does not constitute an admission of
beneficial ownership for the person named below.
<TABLE>
<CAPTION>
Shares of Common Shares of Common
Stock Stock to be
Beneficially Number of Beneficially
Owned Prior to Shares of Owned After
Offering(2) Common Stock Offering(2)
----------------- Being -----------------
Name of Selling Stockholder(1) Number Percentage Offered Number Percentage
<S> <C> <C> <C> <C> <C>
Former TriVida Stockholders:
Alan Duncan................... 361 * 361 -- --
Alan Zafran................... 3,520 * 3,520 -- --
Alexander Jacobson(3)......... 7,592 * 7,592 -- --
Seymour Jacobson Trust 1989... 18,645 * 18,645 -- --
The Jacobson Family
Partnership.................. 64,477 * 64,477 -- --
Alexander D. Jacobson, as
trustee for the Jacobson
Trust........................ 48,323 * 48,323 -- --
Alson Chao.................... 1,382 * 1,382 -- --
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Shares of Common
Shares of Common Stock to be
Stock Beneficially Number of Beneficially
Owned Prior to Shares of Owned After
Offering(1) Common Stock Offering(1)(2)
------------------ Being -----------------
Name of Selling Stockholder Number Percentage Offered Number Percentage
<S> <C> <C> <C> <C> <C>
Andrew R. Stern............. 1,261 * 1,261 -- --
Andrew R. Whittaker......... 1,541 * 1,541 -- --
Morris Ventures............. 9,861 * 9,861 -- --
Barron Swankey.............. 12,996 * 12,996 -- --
Bradley P. Allen and Rebecca
J. Allen, trustees of the
Bradley & Rebecca Allen
Trust(4)................... 119,031 * 119,031 -- --
idealab!Capital Partners I-A
LP......................... 14,376 * 14,376 -- --
idealab!Capital Partners I-B
LP......................... 12,023 * 12,023 -- --
Brett Messing............... 12,432 * 12,432 -- --
Carey & Susan Melcher....... 11,430 * 11,430 -- --
Charlie L. Chau(3)(4)....... 1,325 * 1,325 -- --
Christina Tellez............ 367 * 367 -- --
Churchills.................. 773 * 773 -- --
Cormac Twomey(3)(4)......... 7,294 * 7,294 -- --
Chris M. Kanoff............. 1,541 * 1,541 -- --
Damon & Marian Lawrence,
trustees of the Lawrence
Living Trust............... 21,655 * 21,655 -- --
Daniel O. Conwill, IV....... 1,541 * 1,541 -- --
David A. Krinsky............ 8,963 * 8,963 -- --
David Adam.................. 12,089 * 12,089 -- --
David and Susan Lederman
Revocable Trust............ 9,525 * 9,525 -- --
David C. Hou................ 12,432 * 12,432 -- --
David Lee................... 2,598 * 2,598 -- --
David Mandel................ 11,403 * 11,403 -- --
Swat Investments, LLC....... 2,080 * 2,080 -- --
Cliff Goldist............... 1,541 * 1,541 -- --
Carlcom Investments, Inc. .. 4,961 * 4,961 -- --
Judicrest Holdings, Inc..... 4,921 * 4,921 -- --
Ruth Mandel................. 3,691 * 3,691 -- --
Larry Kolinsky.............. 1,541 * 1,541 -- --
Deborah Smallman............ 1,104 * 1,104 -- --
Diana Price................. 552 * 552 -- --
Eli Brody................... 1,443 * 1,443 -- --
Eli Sternheim............... 58,186 * 58,186 -- --
Frank Price................. 15,900 * 15,900 -- --
Gary Zimmerman(3)(4)........ 4,302 * 4,302 -- --
Gerard J. Kenny............. 7,219 * 7,219 -- --
Gilbert Simon............... 797 * 797 -- --
G. Simon Family Trust....... 280 * 280 -- --
Henry R. Theis, Jr. and
Sandra M. Theis, trustees
of the Theis Revocable
Intervivos Trust(3)(4)..... 2,647 * 2,647 -- --
Howard Morgan............... 9,886 * 9,886 -- --
Bradley P. Allen(3)(4)...... 26 * 26 -- --
Igor Turovsky(3)(4)......... 1,686 * 1,686 -- --
InnoCal, L.P. .............. 371,481 * 371,481 -- --
Irwin Allen & Joan S. Allen,
trustees of the Irwin &
Joan Allen Family Trust.... 24,700 * 24,700 -- --
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Shares of Common
Shares of Common Stock to be
Stock Beneficially Number of Beneficially
Owned Prior to Shares of Owned After
Offering(1) Common Stock Offering(1)(2)
------------------ Being -----------------
Name of Selling Stockholder Number Percentage Offered Number Percentage
<S> <C> <C> <C> <C> <C>
Jack N. Glover.............. 385 * 385 -- --
Hoak Ventures, LP........... 2,164 * 2,164 -- --
Janice D. Holland........... 359 * 359 -- --
Janis Wensley............... 552 * 552 -- --
Jeffrey M. Greif(3)(4)...... 2,366 * 2,366 -- --
Jefferies & Company, Inc. .. 18,484 * 18,484 -- --
John Bach Jensen(3)(4)...... 4,758 * 4,758 -- --
John Neville................ 552 * 552 -- --
John and Cynthia Chiles..... 578 * 578 -- --
Julian and Ruth Pregulman,
trustees of the Pregulman
Trust...................... 3,193 * 3,193 -- --
JPW Opportunity Fund, L.P. . 3,607 * 3,607 -- --
Kenneth A. Ragghanti........ 1,251 * 1,251 -- --
Lawrence J. Poynter(3)(4)... 5,958 * 5,958 -- --
Lewis D. Roth, trustee of
the Roth Graham Family
Trust(3)................... 517 * 517 -- --
Louis Stern, Jr., trustee of
the Louis A Stern, Jr.
Trust...................... 4,403 * 4,403 -- --
Silicon Valley Bank......... 10,603 * 10,603 -- --
M. Brent Stevens............ 1,541 * 1,541 -- --
Mace S. Simon............... 577 * 577 -- --
Mark E. Sear................ 11,894 * 11,894 -- --
Martin Sarafa............... 2,385 * 2,385 -- --
Melcher Family Trust,
Lucille Melcher as trustee. 4,425 * 4,425 -- --
Michael L. Stern............ 1,261 * 1,261 -- --
Michael and Aimee Lo(3)(4).. 4,758 * 4,758 -- --
MIS VC Partners, L.P. ...... 28,850 * 28,850 -- --
Oasis Ventures #5........... 80,220 * 80,220 -- --
Oasis Ventures #21.......... 49,191 * 49,191 -- --
Patrick Bultema............. 2,181 * 2,181 -- --
Paul Hinckley............... 552 * 552 -- --
Peter R. Price(3)........... 74,541 * 74,541 -- --
Philip Klahr and Anne Marie
Klahr, trustees of the
Klahr Family Trust -
1998(3).................... 37,839 * 37,839 -- --
Robert Blitz & Shirley
Blitz...................... 2,193 * 2,193 -- --
Robert H. Wass.............. 6,928 * 6,928 -- --
Roeder Johnson Corporation.. 10,907 * 10,907 -- --
Russell B. Kahn & Elayne G.
Kahn, trustees of the Kahn
Trust...................... 528 * 528 -- --
S.L. Alteri................. 4,965 * 4,965 -- --
Sarah Cassie................ 2,206 * 2,206 -- --
Smart Technology Ventures... 53,908 * 53,908 -- --
Edgar & Marilyn Simon
Intervivos Trust, Edgar
Simon and Marilyn Simon as
trustees................... 3,234 * 3,234 -- --
Thelma Birks(3)(4).......... 3,795 * 3,795 -- --
Walter S. Baer & Jeri L.
Weiss, trustees of Baer
Weiss Community Property
Trust...................... 7,382 * 7,382 -- --
Wellspring Angel Fund LLC .. 73,967 * 73,967 -- --
Woodside Fund III SBIC,
L.P. ...................... 358,613 * 358,613 -- --
</TABLE>
---------------------
* Less than one percent.
20
<PAGE>
(1) The term "selling stockholders" includes donees, pledges, transferees or
other successors-in-interest selling shares received after the date of
this prospectus from a selling stockholder as a gift, pledge, partnership
distribution or other non-sale related transfer.
(2) Of the total shares of common stock listed as owned by the TriVida
selling stockholders, a total of 273,048 shares are currently held in an
escrow account to secure indemnification obligations of the former
stockholders of TriVida to us. It is expected that these shares (less any
shares that may be distributed from the escrow account to us in
satisfaction of indemnification claims) will be released from escrow and
distributed to the selling stockholders on March 1, 2001. As of February
29, 2000, we received a distribution of 20,280 shares from escrow in
payment for an indemnification claim of $1,121,240 owed to Be Free. The
number of shares indicated as owned by each selling stockholders includes
those shares (representing approximately 9.3% of the number of shares
listed as beneficially owned by each selling stockholder) which such
selling stockholder is entitled to receive upon distribution of these
shares from the escrow account.
(3) Former or current employees of Be Free or TriVida.
(4) Certain of the shares held by the selling stockholders listed in the
table above totalling 69,328 shares in the aggregate are subject to a
right of repurchase in favor of Be Free pursuant to the 1998 TriVida
Equity Incentive Plan, as assumed by Be Free on February 29, 2000.
None of the selling stockholders has held any position or office with, or
has otherwise had a material relationship with, us or any of our subsidiaries
within the past three years, except that:
. the selling stockholders indicated have been employed by us and/or
TriVida; and
. in connection with our acquisition of TriVida, we entered into
employment agreements with Bradley P. Allen and Peter R. Price, and a
consulting agreement with Alexander D. Jacobson, each formerly of
TriVida, under which each will perform certain services for us.
21
<PAGE>
PRICE RANGE OF COMMON STOCK
Since our initial public offering on November 3, 1999, our common stock has
been traded on the Nasdaq National Market under the symbol "BFRE." The
following table sets forth, the high and low sales prices for our common stock
as reported by the Nasdaq National Market, as retroactively adjusted for our 2-
for-1 common stock split effectuated on March 8, 2000:
<TABLE>
<CAPTION>
Price Range
of
Common Stock
-------------
High Low
<S> <C> <C>
Year Ended December 31, 1999:
Fourth Quarter (since November 3, 1999)....................... $43.53 $10.75
Year Ending December 31, 2000:
First Quarter................................................. $60.88 $22.00
Second Quarter (through June 16, 2000)........................ $22.00 $ 6.62
</TABLE>
On June 16, 2000, the last reported sale price for our common stock on the
Nasdaq National Market was $10.06 per share. As of May 31, 2000, there were
approximately 487 holders of record of our common stock.
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.
22
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2000. This
information should be read in conjunction with our consolidated financial
statements and related notes, included elsewhere in this prospectus.
Shares of common stock reflected in this table exclude:
. 4,603,240 shares issuable upon the exercise of outstanding options under
our 1998 Stock Incentive Plan with a weighted average exercise price of
$7.41 per share;
. 995,408 shares available for issuance and grant under our 1998 Stock
Incentive Plan, net of outstanding options and restricted stock;
. 562,150 shares issuable upon the exercise of options assumed under the
TriVida 1998 Equity Incentive Plan with a weighted average exercise price
of $7.78 per share;
. 425,000 shares available for issuance under our 1999 Employee Stock
Purchase Plan; and
. 733,000 shares issuable upon the exercise of outstanding warrants to
purchase shares of common stock at a weighted average exercise price of
$1.02 per share.
<TABLE>
<CAPTION>
As of
March 31, 2000
-------------------
(In thousands,
except share
and per share data)
<S> <C>
Cash, cash equivalents and marketable securities........... $174,919
========
Current portion of long-term debt.......................... $ 1,585
========
Long-term debt, net of current portion..................... $ 2,933
Stockholders' equity:
Preferred stock, $0.01 par value; 10,000,000 shares
authorized, no shares issued and outstanding............. --
Common stock, $0.01 par value; 75,000,000 shares
authorized,
64,740,288 shares issued ................................ 647
Additional paid-in capital................................ 379,403
Unearned compensation..................................... (5,505)
Shareholders notes receivable............................. (208)
Accumulated other comprehensive loss...................... (39)
Accumulated deficit....................................... (34,360)
--------
Total stockholders' equity................................. 339,938
--------
Total capitalization....................................... $352,539
========
</TABLE>
On May 25, 2000, we amended our amended and restated certificate of
incorporation to increase the shares of common stock authorized for issuance
thereunder from 75,000,000 shares to 250,000,000 shares. See "Description of
Capital Stock."
23
<PAGE>
DILUTION
This offering is for sales of stock by existing Be Free stockholders on a
continuous or delayed basis in the future. Sales of common stock by
stockholders will not result in any substantial change to the net tangible book
value per share before and after the distribution of shares by the selling
stockholders. There will be no change in net tangible book value per share
attributable to cash payments made by purchasers of the shares being offered.
Prospective investors should be aware, however, that the price of Be Free
shares may not bear any rational relationship to net tangible book value per
share.
24
<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, TriVida's financial statements and related notes and the
unaudited pro forma financial information and related notes, all included
elsewhere in this prospectus. The consolidated statement of operations data for
the fiscal years ended December 31, 1997, 1998 and 1999 and the consolidated
balance sheet data as of December 31, 1998 and 1999 are derived from our
consolidated financial statements audited by PricewaterhouseCoopers LLP,
independent accountants. The consolidated statement of operations data for the
fiscal year ended December 31, 1996 and the consolidated balance sheet data as
of December 31, 1997 are derived from our consolidated financial statements
audited by PricewaterhouseCoopers LLP, independent accountants, not included
elsewhere in this prospectus. The consolidated statement of operations data for
the year ended December 31, 1995 and the consolidated balance sheet data as of
December 31, 1995 and 1996 are derived from our unaudited consolidated
financial statements not included elsewhere in this prospectus. The
consolidated statement of operations data for the three months ended March 31,
1999 and March 31, 2000 and the consolidated balance sheet data as of March 31,
2000 are derived from our unaudited consolidated financial statements 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 supplemental 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 supplemental basic and diluted
net loss per share.
The unaudited pro forma statement of operations data set forth below gives
effect to our acquisition of TriVida on February 29, 2000 as if it had been
consummated on January 1, 1999. The unaudited pro forma data is presented for
illustrative purposes only and is not necessarily indicative of the operating
results that would have occurred if the TriVida acquisition had been
consummated on this date or of future operating results of the combined company
following this transaction.
25
<PAGE>
Selected Consolidated Financial Data
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Pro Forma
Three Three Three
Months Months Months
Year Ended December 31, Ended Ended Ended
------------------------------------------ March 31, March 31, March 31,
1995 1996 1997 1998 1999 1999 2000 2000
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue:
Performance marketing
services.............. $ -- $ -- $ 216 $ 1,319 $ 5,329 $ 533 $ 3,629 $ 3,629
Other.................. 481 196 60 8 -- -- -- --
----- ------- ------- ------- -------- ------- -------- --------
Total revenue......... 481 196 276 1,327 5,329 533 3,629 3,629
----- ------- ------- ------- -------- ------- -------- --------
Operating expenses:
Cost of revenue........ -- -- 273 424 845 101 603 603
Sales and marketing
(exclusive of equity
related compensation
of $0, $0, $0, $56 and
$525 in 1995, 1996,
1997, 1998 and 1999,
respectively; and $101
and $153 for the three
months ended March 31,
1999 and 2000,
respectively)......... 49 398 180 1,154 9,329 1,265 3,559 4,012
Client services
(exclusive of equity
related compensation
of $0, $0, $0, $15 and
$238 for 1995, 1996,
1997, 1998 and 1999,
respectively; and $31
and $39 for the three
months ended March 31,
1999 and 2000,
respectively)......... -- -- -- 300 3,474 469 1,527 1,608
Development and
engineering (exclusive
of equity related
compensation of $0,
$0, $0, $1,865 and
$146 in 1995, 1996,
1997, 1998 and 1999,
respectively; and $34
and $40 for the three
months ended March 31,
1999 and 2000,
respectively)......... 274 505 426 728 4,767 562 1,568 1,907
General and
administrative
(exclusive of equity
related compensation
of $0, $0, $0, $450
and $1,033 in 1995,
1996, 1997, 1998 and
1999, respectively;
and $284 and $40 for
the three months ended
March 31, 1999 and
2000, respectively)... 115 558 332 875 2,825 351 1,176 3,542
Equity related
compensation........... -- -- -- 2,385 1,941 450 272 272
Amortization and merger
related expenses....... -- -- -- -- -- -- 5,349 14,518
----- ------- ------- ------- -------- ------- -------- --------
Total operating
expenses............... 438 1,461 1,211 5,866 23,181 3,198 14,054 26,462
----- ------- ------- ------- -------- ------- -------- --------
Operating income (loss). 43 (1,265) (935) (4,539) (17,852) (2,665) (10,425) (22,833)
Interest income
(expense), net......... (4) (26) (99) (224) 348 (216) 1,081 1,021
----- ------- ------- ------- -------- ------- -------- --------
Net income (loss) before
extraordinary item..... 39 (1,291) (1,034) (4,763) (17,504) (2,881) (9,344) $(21,812)
========
Extraordinary item--loss
on early extinguishment
of debt................ -- -- -- -- (330) -- --
----- ------- ------- ------- -------- ------- --------
Net loss................ 39 (1,291) (1,034) (4,763) (17,834) (2,881) (9,344)
Accretion of preferred
stock to redemption
value.................. -- -- -- (130) (1,517) (97) --
----- ------- ------- ------- -------- ------- --------
Net income (loss)
attributable to common
stockholders........... $ 39 $(1,291) $(1,034) $(4,893) $(19,351) $(2,978) $ (9,344)
===== ======= ======= ======= ======== ======= ========
Basic and diluted net
income (loss) per
share.................. $0.01 $ (0.07) $ (0.04) $ (0.31) $ (1.02) $ (0.24) $ (0.17)
Shares used in computing
basic and diluted net
income (loss) per
share.................. 3,522 19,544 27,139 16,018 18,951 12,618 53,455
Unaudited supplemental
basic and diluted net
loss per share......... $ (0.24) $ (0.50)
Shares used in computing
supplemental basic and
diluted net loss per
share.................. 19,640 35,713
Unaudited pro forma loss
per share from
continuing operations.. $ (0.41)
Shares used in computing
unaudited pro forma
basic and diluted net
loss per share......... 53,455
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
As of December 31, As of
--------------------------------------- March 31,
1995 1996 1997 1998 1999 2000
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and
marketable securities....... $ 90 $ 25 $ 76 $ 4,327 $79,692 $174,919
Working capital (deficit).... 169 (443) (502) 3,422 68,580 155,532
Total assets................. 294 140 254 5,971 90,837 352,539
Long-term debt, net of
current portion............. 62 751 333 4,949 2,507 2,933
Convertible preferred........ -- -- -- 8,786 -- --
Total stockholders' equity
(deficit)................... 168 (1,104) (1,897) (9,496) 82,561 339,938
</TABLE>
27
<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.
Results of Operations for the Three Months Ended March 31, 2000 and March 31,
1999
Revenue
To date, we have generated our performance marketing services revenue
primarily from our BFAST affiliate marketing services. Be Free's revenue
includes BFAST integration fees and monthly service fees for BFAST, BFIT and B-
INTOUCH. Revenue from performance marketing services for the three months ended
March 31, 2000 increased 581%, to $3.6 million from $533,000 for the three
months ended March 31, 1999. The revenue increase resulted from the initiation
of service for 214 additional customers during this period as well as increased
activity from existing customers.
Cost of Revenue
Cost of revenue consists of expenses related to the operation of our data
interchange. These expenses primarily include depreciation and operating lease
expense for systems and storage equipment, costs for third-party data center
facilities and costs for Internet connectivity to our customers and their
marketing partners.
Cost of revenue for the three months ended March 31, 2000 increased 497%, to
$603,000 from $101,000 for the same period last year. We added systems and
storage equipment to increase our capacity and redundancy and to accommodate
growth in the number and activity level of our customers. Cost of revenue
increased because this additional investment in equipment resulted in higher
depreciation, equipment lease and data center facilities expenses.
In order to maintain targeted service levels and establish additional data
centers for redundancy and expansion, 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 establish new data centers and 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, 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 for the three months ended March 31, 2000
increased 181%, to $3.6 million from $1.3 million during the same period last
year, due to the expansion of the direct sales and internal telesales groups
and the incurrence of additional marketing costs. Approximately $1.6 million of
the increase was due to higher personnel and related expense largely resulting
from 57 new employees. An additional $180,000 was spent to increase our
recruitment program to assist
28
<PAGE>
customers in attracting marketing partners. General marketing expenses
increased approximately $190,000. We expect that sales and marketing expenses
will continue to increase in future periods to support expected growth.
Client Services Expenses
Client services expenses primarily relate to the cost of assisting our
customers in managing their relationships with marketing partners, as well as
providing marketing integration, training and technical support to our
customers. These services are designed to increase the success of our
customer's performance marketing sales channels and their overall satisfaction
with our services by providing best practices techniques, channel analysis,
training and technical assistance. We also provide similar services to our
customers' affiliates on an optional basis for additional fees.
Client services expenses for the three months ended March 31, 2000 increased
226% to $1.5 million from $469,000 for the same period last year. We added 47
new employees during the period to accommodate the growth of our customer base
and the increased number of clients utilizing our optional services. We expect
that client services expenses will increase in the future to support
anticipated 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 services and the
engineering group develops and manages the infrastructure necessary to support
our services.
Development and engineering expenses for the three months ended March 31,
2000 increased 179%, to $1.6 million from $562,000 for the same period last
year. The increase is primarily due to personnel and related cost increases of
approximately $750,000 from the addition of 54 employees, including the
employees resulting from the acquisition of TriVida, and an increase of
$129,000 in computer supplies and maintenance costs relating to additional
equipment purchases. We expect to continue to invest in development and
engineering to support anticipated growth.
General and Administrative Expenses
General and administrative expenses principally consist of payroll and
related costs and professional fees related to our general management, investor
relations, 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 for the three month period ended March
31, 2000 increased 235%, to $1.2 million from $351,000 for the same period last
year. Increased personnel and related costs of approximately $524,000 resulted
largely from the addition of 21 employees to support the expansion of the
company. Professional services expenses increased $251,000 relating to legal,
investor relations and general fees associated with being a public company. We
expect that general and administrative expenses will increase in the future to
support anticipated growth.
29
<PAGE>
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 or the price paid for restricted stock sold to our
employees and the fair value of these shares as of the date of grant, as
determined for financial reporting purposes. These expenses also include the
fair value of options granted to consultants as of the date of grant, as
determined for financial reporting purposes. These fair values were determined
in accordance with Accounting Principles Board Opinion No. 25 and Statement of
Financial Accounting Standards No. 123. Equity related compensation expenses
for the three month period ended March 31, 2000 were $272,000 as compared to
$450,000 for the same period last year due to the repayment of certain
stockholder notes for the purchase of shares that were previously expensed.
We expect to recognize equity related compensation expenses of at least
$475,000 per quarter through the end of 2002 as a result of issuances of stock
and stock options to employees and others with exercise or purchase prices
subsequently determined to be below the fair market value at the dates of grant
or award for financial reporting purposes.
Interest Income (Expense), net
Interest income (expense), net consists of interest income earned on
marketable securities and cash, partially offset by interest expense on our
borrowings.
As a result of the partial investment of the net proceeds raised during our
public offerings, net interest income for the three month period ended March
31, 2000 was $1.1 million as compared to net interest expense of $216,000 for
the same period last year. Net interest income for the three months ended March
31, 1999 resulted from interest income of $1.2 million net of $85,000 in
interest expense for leases, as compared to interest income of $18,000 offset
by $234,000 interest expense on borrowings for the same prior year period.
Amortization and Merger Related Expenses
We incurred merger related expenses of $5.3 million during the first three
months ended March 31, 2000 in connection with the acquisition of TriVida
Corporation. These expenses include $765,000 of one-time acquisition-related
costs, primarily for employee severance, and $4.5 million of amortization
expense related to the writedown of the intangible assets acquired. We are
amortizing the approximately $165 million of intangible assets acquired on a
straight line basis over three years and expect to recognize amortization
expense of approximately $13.8 million per quarter through February 2002.
Results of Operations for the Years Ended December 31, 1997, 1998 and 1999
Revenue
Through December 31, 1999, performance marketing services revenue has
included BFAST integration fees and monthly service fees for BFAST, BFIT and B-
INTOUCH. Other revenue reflects customized software development and support
services. We no longer offered these services after September 30, 1998.
30
<PAGE>
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. Revenue from performance marketing services
increased to $5.3 million in 1999 as a result of initiating service for 145
additional customers in 1999, as well as increased customer activity. Other
revenue declined to $8,000 in 1998 from $60,000 in 1997 when the final support
contract for customized software development and support expired.
Cost of Revenue
Cost of revenue increased to from $273,000 in 1997 to $424,000 in 1998 as we
expanded our server and storage equipment and moved this equipment to a third-
party facility. Cost of revenue increased to $845,000 in 1999, as a result of
increased depreciation and amortization reflecting higher investment in
equipment. In order to maintain targeted service levels and establish
additional data centers for redundancy and expansion, 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 establish new data centers and add additional
equipment to support anticipated future growth.
Sales and Marketing Expenses
Sales and marketing expenses increased from $180,000 in 1997 to $1.2 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 $8.2 million to $9.3 million in 1999.
Approximately $5.6 million of the increase was due to increased personnel and
related expenses primarily resulting from 41 new employees. In addition,
$813,000 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 $730,000. We expect that
sales and marketing expenses will continue to increase in future periods to
support expected growth.
Client Services Expenses
Client services expenses increased from $0 in 1997 to $300,000 in 1998 as we
began to develop a service function to provide support services for our growing
customer base and the number of customers began to increase. Client services
expense increased to $3.5 million in 1999 as a result of adding 38 new
employees to the client services group. We expect that client services expenses
will increase in the future to support anticipated growth.
Development and Engineering Expenses
Development and engineering expenses increased from $426,000 in 1997 to
$728,000 in 1998 as a result of an increase in product development and
engineering personnel. Development and engineering expenses increased to $4.8
million in 1999, primarily due to personnel and related cost increases of $3.1
million from the addition of new employees and an increase of $451,000 in
computer supplies and maintenance costs relating to additional equipment
purchases. We expect to continue to invest in development and engineering to
support anticipated growth.
31
<PAGE>
General and Administrative Expenses
General and administrative expenses increased from $332,000 in 1997 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 $2.8 million in 1999 as a result of a $1.1
million increase in personnel costs, including the addition of 14 new
employees, and a $452,000 professional service fee increase relating to legal
and investor relations fees associated with being a public company. We expect
that general and administrative expenses will increase in the future to support
anticipated growth.
Equity Related Compensation Expenses
We did not incur any equity related compensation expenses in 1997. Equity
related compensation expenses were $2.4 million in 1998 and $1.9 million in
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 issuances
of stock and stock options to employees and others with exercise or purchase
prices subsequently determined to be below the fair market value at the dates
of grant or award for financial reporting purposes. The stock compensation is
being expensed over the vesting period of the applicable stock awards or
options.
Interest Income (Expense), net
As a result of increased borrowings used to finance the growth of our
business, interest expense, net increased from $99,000 in 1997 to $224,000 in
1998. Net interest income of $348,000 in 1999 resulted from $1.3 million of
interest income from the investment of a portion of the proceeds from our
initial public offering, partially offset by interest expense of $945,000
relating to debt obligations.
Extraordinary Item
The balance of deferred financing costs associated with a $5.0 million
subordinated debt financing resulted in an extraordinary loss of $330,000 upon
the early extinguishment of the debt in 1999.
Liquidity and Capital Resources
We have financed our operations primarily through the sale of equity
securities and borrowings. Net proceeds from financing activities from January
1, 1998 through March 31, 2000 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;
. approximately $8.4 million in borrowings under various credit facilities
and capital lease agreements, of which $5.0 million was repaid in
November 1999 with a portion of the proceeds of our initial public
offering;
32
<PAGE>
. approximately $70.6 million in proceeds from our initial public
offering, net of issuance costs; and
. approximately $105.5 million from the proceeds of the proceeds received
from Be Free's sale of 4,046,608 shares of its common stock through a
secondary offering in March 2000, net of underwriters commission and
offering expenses.
Cash used in operating activities was $13.0 million in 1999 and $6.6 million
for the three months ended March 31, 2000. Cash used in operating activities
during 1999 resulted from a net loss of $17.8 million, which included a non-
cash charge of $1.9 million for equity related compensation, an increase in
accounts receivable of $1.3 million and an increase of $880,000 in prepaid
expenses primarily relating to sales commissions and payments under annual
hardware and software maintenance contracts. These amounts were partially
offset by an increase of $821,000 in deferred revenue and by an increase of
$2.8 million of accounts payable and accrued expenses. Cash used in operating
activities for the three months ended March 31, 2000 resulted from a net loss
of $9.3 million, which included a $5 million increase in non-cash depreciation
and amortization expense primarily consisting of $4.5 million relating to the
amortization of intangible assets associated with the acquisition of TriVida.
Accounts receivable increased $1.1 million with the growth in our customer
base. Cash used for accounts payable was $2.1 million, primarily relating to
the payment of capital equipment purchases and operating expenses for TriVida,
subsequent to the acquisition. Deferred revenue increased $1.1 million, largely
as a result of a customer prepayment of annual BFAST service fees.
Cash used in investing activities was $25.5 million in 1999 and
$35.3 million for the three months ended March 31, 2000. Our investing
activities included capital expenditures totaling $4.9 million in 1999 and
$780,000 for the three months ended March 31, 2000. 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 and as we expand the number and capacity of our data
centers, we will require additional computer hardware and software and our
related capital expenditures will increase significantly. Investments in
marketable securities totaled $20.7 million in 1999 as a result of the
investment of a portion of the net proceeds from our initial public offering.
Investment in marketable securities as of March 31, 2000 totaled $31.4 million
from the proceeds of our secondary offering as well as a portion of the
proceeds raised in our initial public offering. Net cash used for investment
banker fees, legal fees and other costs associated with the TriVida
acquisition, totaled $3.1 million.
Cash provided by financing activities was $93.2 million in 1999 and $105.6
million for the three months ended March 31, 2000. Financing activities in 1999
included $24.9 million in net proceeds from the issuance of Series B preferred
stock, $70.6 million in net proceeds from our initial public offering of common
stock and $2.6 million from the exercise of stock options and warrants. These
proceeds were partially offset by a $5.7 million repayment of debt. Financing
activities for the three months ended March 31, 2000 include $105.5 million in
net proceeds from our public offering in March 2000.
As of March 31, 2000, Be Free's primary financial commitments consisted of
obligations outstanding under capital and operating leases for computer
equipment and office space of $4.5 million.
33
<PAGE>
As of March 31, 2000, Be Free had $122.6 million in cash and cash
equivalents, $52.3 million in marketable securities and $155.5 million in
working capital. Since its inception, Be Free has significantly increased its
operating expenses. Be Free anticipates that it will continue to experience
significant growth in its operating expenses for the foreseeable future and
that its operating expenses and capital expenditures will require the use of a
portion of Be Free's cash resources. Be Free may use a portion of its cash to
acquire additional businesses, products and technologies that are complementary
to its business.
The Company believes that its current cash balances and marketable
securities and borrowings will be sufficient to meet our debt service,
operating and capital requirements for at least the next 12 months. While we do
not anticipate that this would be necessary, if cash was insufficient to
satisfy Be Free's liquidity requirements, Be Free 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. The
issuance of additional equity securities could result in additional dilution to
our shareholders.
Market Risk
We do not currently use derivative financial instruments. We generally place
our marketable security investments in high credit quality instruments,
primarily U.S. government obligations, tax-exempt municipal obligations and
corporate obligations with contractual maturities of two years or less. We do
not expect any material loss from our marketable security investments and
therefore believe that our potential interest rate exposure is not material.
Year 2000 Issues
In prior periods, we have discussed how the Year 2000 computer problem
relates to our business, and the nature and progress of our preparations for
the Year 2000 transition. Although the transition from 1999 to 2000 has passed
and we are not aware of any Year 2000 problems with our services, our internal
systems or those of our customers or their affiliates, it is possible that
Year 2000 problems could be discerned in the future that might have a material
adverse effect on our business, financial condition and/or prospects. See "Risk
Factors". We will continue to monitor for Year 2000 issues affecting business
throughout the year 2000 in an attempt to ensure that any latent Year 2000
matters that may arise are addressed promptly.
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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 2001.
On December 3, 1999, the staff of the Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition
in Financial Statements." SAB 101 summarizes some of the staff's
interpretations of the application of generally accepted accounting principles
to revenue recognition. All registrants are expected to apply the accounting
and disclosure requirements that are described in SAB 101. Any changes in
accounting and disclosures relating to SAB 101 must be reported no later than
the second fiscal quarter of the fiscal year beginning after December 15, 1999.
Be Free adopted the provisions of SAB 101 in January 2000. The adoption did not
have a material impact.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions
Involving Stock Compensation--an Interpretation of APB Opinion No. 25". FIN 44
clarifies the application of APB Opinion No. 25 and, among other issues
clarifies the following: the definition of an employee for purposes of applying
APB Opinion No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequence of various modifications to
the terms of the previously fixed stock options or awards; and the accounting
for an exchange of stock compensation awards in a business combination. FIN 44
is effective July 1, 2000, but certain conclusions in FIN 44 cover specific
events that occurred after either December 15, 1998 or January 12, 2000. Be
Free does not expect the application of FIN 44 to have a material impact on the
company's financial position or results of operations.
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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.
Through our acquisition of TriVida Corporation consummated on February 29,
2000, we intend to offer services that will enable our customers to deliver
personalized promotions to unique but anonymous users visiting their marketing
partners' Web sites based upon the past browsing and buying behavior of such
users. We also intend to offer services that will enable our customers to
deliver personalized promotions for selected goods or services to users
visiting their own Web sites, whether or not those users were directed to their
Web sites by their marketing partners.
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. As a result of our acquisition of TriVida, we have
obtained, and continue to enhance, a new type of personalization technology
that creates product recommendations based on our observations.
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 1.5 billion times
in May 2000 through our customers' 3.9 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.
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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.
. 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
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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.
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, B2BFAST, 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, B2BFAST, B-INTOUCH and BFIT
services:
BFAST Affiliate Marketing Services
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 sales channels and to evaluate
their marketing partners using more than 80 online analyses. BFAST
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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.
B2BFAST Business-to-Business Affiliate Marketing Services
Our B2BFAST services are targeted to businesses that sell their products or
services to other businesses. These customers use our B2BFAST services to
create performance marketing sales channels that target their business
customers. These services include specific analysis, merchandising and
recruiting technologies and techniques designed to address the special needs of
business-to-business commerce. We charge our B2BFAST customers based on the
sales or volume of traffic generated from their performance marketing channels.
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.
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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 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, B2BFAST, 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 prepare and distribute checks to a customer's marketing
partners in payment of their commissions. These checks are drawn against
a Be Free checking account, which is funded by the customer prior to
release of the checks.
Personalization Services
We plan to launch two services that will enable our customers to deliver
real-time, personalized promotions to potential buyers based upon historical
browsing and buying behavior. These services will include:
. delivery by our customers of personalized product or product category
recommendations to visitors to their Web sites, whether or not that
visitor was directed to their Web site through a promotion hosted by
their marketing partners; and
. delivery by our customers of personalized product or product category
recommendations on the Web sites of their marketing partners.
These recommendations will be created at a centralized service bureau and
will be served directly to the user or to a customer's server for delivery to
the user.
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 nine major metropolitan areas throughout the United States, as
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well as in London. 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.
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
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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.
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 systems 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 and storage equipment manufactured by EMC. While we are not
dependent on any single server hardware system or vendor, any change could be
costly and time consuming.
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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 centers are designed to optimize performance and maintain
reliability. Our primary 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. We expect to
establish additional data centers in the western United States and in Europe.
These data centers all have duplicate systems for power, climate-control,
fire protection, seismic reinforcement and continuous security surveillance.
These facilities utilize 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.
For the years ended December 31, 1998 and 1999, we spent $304,100 and $2.4
million, respectively, on research and development activities.
Competition
The markets for online performance marketing solutions are 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
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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 and Linkshare. 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. 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 May 31, 2000, including those acquired from TriVida, we had a total
of 288 employees, 89 of whom were in sales and marketing, 77 in client
services, 91 in development and engineering, 31 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.
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 under
a lease that expires in January 2004 and in Culver City, California, where we
occupy approximately 16,000 square feet of office under a lease that expires
in December 2004. In the future, we may lease additional space as needed.
Legal Proceedings
From time to time, we are involved in litigation incidental to the conduct
of our business. While the outcome of these proceedings cannot be predicted
with certainty, management does not expect any pending matters to have a
material adverse effect on Be Free's financial condition or results of
operations.
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MANAGEMENT
Directors and Executive Officers
Our executive officers and directors, and their respective ages and
positions as of May 25, 2000, are set forth below:
<TABLE>
<CAPTION>
Name Age Position
<C> <C> <S>
Gordon B. Hoffstein...... 47 President, Chief Executive Officer and Chairman of the Board of Directors
Samuel P. Gerace, Jr..... 36 Executive Vice President, Research & Technology and Director
Thomas A. Gerace......... 29 Executive Vice President, Business Development
Stephen M. Joseph........ 41 Chief Financial Officer and Treasurer
Ellen M. Brezniak........ 41 Vice President, Product Marketing
W. Blair Heavey.......... 38 Vice President, Sales
Steven D. Pike........... 46 Vice President, Client Services
Patricia L. Travaline.... 44 Vice President, Marketing Communications
Kathleen L. Biro(1)...... 47 Director
Ted R. Dintersmith(1)(2). 47 Director
W. Michael Humphreys(2).. 48 Director
Jeffrey Rayport(1)....... 40 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, and was elected Chairman of the Board of Directors in
January 2000. 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
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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.
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.
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.
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.
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.
Kathleen L. Biro has been a director since January 2000. Since 1991, Ms.
Biro has been employed by Digitas Inc., an Internet professional services firm,
in a variety of capacities, including since December 1999 as its President and
a director and as Vice Chairman since April 1999. Ms. Biro, co-founded
Strategic Interactive Group, an interactive advertising firm and predecessor to
Digitas, and served as its Chief Executive Officer from its founding in April
1995 to December 1999. Ms. Biro also serves on the boards of directors of
NetGenesis Corp. and Digitas. She holds a B.S. and an M.S. in Educational
Administration from New York University and an M.B.A. in Marketing and Finance
from the Columbia University Graduate School of Business.
46
<PAGE>
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 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.
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, and
Agency.com, Ltd, a provider of Internet professional services. 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 (Kathleen L. Biro
and W. Michael Humphreys) expires at the annual meeting of stockholders to be
held in 2003. 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.
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 and Humphreys. 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, Rayport and Ms. Biro.
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. In December 1998, we granted Mr. Rayport an option under the 1998
Stock Incentive Plan to purchase 75,000 shares of common stock at $0.15 per
47
<PAGE>
share that vests over four years and a fully vested option to purchase 75,000
shares of common stock at $1.10 per share. In January 2000, we granted Ms. Biro
an option under the 1998 Stock Incentive Plan to purchase 160,000 shares of
common stock at $34.00 per share that vests over three 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 1999, 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 earned by our chief
executive officer and each of the four most highly compensated other executive
officers who received annual compensation in excess of $100,000 for the year
ended December 31, 1999, collectively referred to below as the Named Executive
Officers. In accordance with the rules of the Securities and Exchange
Commission the compensation set forth in the table below does not include
medical, group life, or other benefits which are available to all of our
salaried employees, and perquisites and other benefits, securities or property
which do not exceed the lesser of $50,000 or 10% of the person's salary and
bonus shown in the table. In the table below, columns required by the
regulations of the Securities and Exchange Commission have been omitted where
no information was required to be disclosed under those columns.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Long Term
Compensation Compensation
----------------- ---------------------
Restricted Securities
Stock Underlying
Name of Executive Year Salary Bonus Awards Options
<S> <C> <C> <C> <C> <C>
Gordon B. Hoffstein............... 1999 $165,000 $ 63,397 $ -- --
President, Chief Executive 1998 49,574 16,859 1,083,495 --
Officer and Chairman of the Board
of Directors
Samuel P. Gerace, Jr.............. 1999 $115,000 $ 18,126 -- --
Executive Vice President, 1998 19,906 -- -- --
Research & Technology and
Director
Thomas A. Gerace.................. 1999 $115,000 $ 23,914 -- --
Executive Vice President, 1998 77,823 -- -- --
Business Development
Ellen M. Brezniak................. 1999 $125,000 $ 16,173 $ -- 75,000
Vice President, Product Marketing 1998 19,906 -- 81,262 77,392
W. Blair Heavey................... 1999 $135,000 $163,992 $ -- --
Vice President, Sales 1998 26,380 -- 116,666 285,806
</TABLE>
48
<PAGE>
Option Grants in Last Fiscal Year
The following table sets forth each grant of stock options during the fiscal
year ended December 31, 1999 to each of the Named Executive Officers. No stock
appreciation rights were granted during such fiscal year.
<TABLE>
<CAPTION>
Individual Grants
--------------------------------------------
Potential
Realizable Value
at Assumed Annual
Percent of Rates of Stock
Number of Total Options Price
Securities Granted to Appreciation for
Underlying Employees in Option Term(3)
Options Fiscal Year Exercise Expiration -----------------
Granted 1999(1) Price(2) Date 5% 10%
<S> <C> <C> <C> <C> <C> <C>
Gordon B. Hoffstein..... -- -- -- -- -- --
Samuel P. Gerace, Jr.... -- -- -- -- -- --
Thomas A. Gerace........ -- -- -- -- -- --
Ellen M. Brezniak....... 75,000 3.25% $1.40 7/18/09 $171,034 $272,343
W. Blair Heavey......... -- -- -- -- -- --
</TABLE>
---------------------
(1) Based on options to purchase an aggregate of 2,310,442 shares granted to
our employees under the 1998 Stock Incentive Plan during the year ended
December 31, 1999.
(2) The exercise price was equal to the fair market value of our common stock
as valued by the board of directors on the date of grant.
(3) The potential realizable value is calculated based on the term of the
option at the time of grant. Stock price appreciation of 5% and 10% is
assumed pursuant to rules promulgated by the Securities and Exchange
Commission and does not represent our prediction of our stock price
performance. The potential realizable values at 5% and 10% appreciation are
calculated by assuming that the exercise price on the date of grant
appreciates at the indicated rate for the entire term of the option and
that the option is exercised at the exercise price and sold on the last day
of its term at the appreciated price.
Option Values
The following table sets forth for each of the Named Executive Officers
options exercised and the number and value of securities underlying unexercised
options that are held by the Named Executive Officers as of December 31, 1999.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options at
Shares December 31, 1999 December 31, 1999(1)
Acquired Value ------------------------- -------------------------
on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C> <C> <C>
Gordon B. Hoffstein..... -- -- -- -- -- --
Samuel P. Gerace, Jr. .. -- -- -- -- -- --
Thomas A. Gerace........ -- -- -- -- -- --
Ellen M. Brezniak....... 9,674 $346,208 11,286 131,432 $ 403,898 $4,609,873
W. Blair Heavey......... -- -- 83,360 202,446 $2,983,246 $7,245,036
</TABLE>
---------------------
(1) On December 31, 1999, the last sale price reported on the Nasdaq National
Market for our common stock was $35.94 per share.
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
49
<PAGE>
noncompetition and nonsolicitation provisions, and have an initial term of two
years with a one year renewal subject to the parties' agreement.
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 B. 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 originally adopted by our board of
directors and stockholders in November 1998, and was subsequently amended in
May 2000. As of June 1, 2000, a total of 3,256,440 shares of common stock are
reserved for issuance under the plan. The number of shares authorized for
issuance under the plan increases each June 1 in an amount equal to the lesser
of (i) the number of shares of common stock necessary so that the shares
available for grant thereunder (and not subject to issuance under any vested or
unvested option outstanding and in effect on such June 1) equals 5% of the
shares of our common stock outstanding on such June 1 and (ii) an amount
determined by the Board.
As of June 2, 2000, shares of restricted stock and options to purchase an
aggregate of 10,064,352 shares of common stock at a weighted average restricted
stock purchase price of $0.16 per share and a weighted average option exercise
price of $7.95 per share have been granted 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 4,000,000 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
50
<PAGE>
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.
As of May 31, 2000, approximately 301 persons were eligible to receive
options under the stock incentive plan, including eight executive officers and
five 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 stockholders 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.
51
<PAGE>
1998 TriVida Equity Incentive Plan
In connection with the acquisition of TriVida, we assumed TriVida's 1998
Equity Incentive Plan, which authorizes the issuance of options and restricted
stock awards covering 566,592 shares of our common stock. As of February 29,
2000, all of such options had been issued to TriVida employees at a weighted
average exercise price of $7.78 per share. In general, the terms of this plan
and the options granted under this plan are similar to those described above
for our 1998 Stock Incentive Plan. No new grants of options will be made under
this 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 425,000 shares of our
common stock to participating employees, of which 101,819 shares of common
stock have been issued as of May 31, 2000.
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 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 December 31,
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
period began on November 3, 1999, the date of our initial public offering, and
ended on April 28, 2000. At such time, we issued 101,819 shares of common stock
pursuant to purchases under our 1999 Employee Stock Purchase Plan.
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;
52
<PAGE>
. 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. In addition, TriVida currently has a 401(k) plan which we expect
will be terminated in the third quarter of 2000 and the TriVida employees will
join our plan.
53
<PAGE>
TRANSACTIONS WITH RELATED PARTIES
The share information provided below retroactively gives effect to all
common stock splits announced through the date of this prospectus. Upon the
consummation of our initial public offering in November 1999, all then
outstanding shares of, and warrants to purchase, preferred stock converted on a
1-for-1 basis into shares of, or warrants to purchase, common stock,
respectively.
Preferred Stock and Related Transactions
Sale of Preferred Stock. We sold preferred stock pursuant to the following
transactions:
. 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 3,465,000 shares of common stock at an exercise price of $1.50
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
33,000 shares of common stock at an exercise price of $1.50 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).............. 500,000 165,000 -- --
Charles River Partnership(2)(3)..... 5,000,000 1,650,000 -- 2,322,598
Highland Capital(2)(4).............. -- -- -- 5,070,139
Matrix Partners(2)(5)............... 5,000,000 1,650,000 -- 2,322,598
</TABLE>
---------------------
(1) See Notes to Table of Beneficial Ownership in "Principal and Selling
Stockholders" for information related to the beneficial ownership of the
referenced shares.
(2) A holder of more than 5% of our common stock.
(3) Of the securities listed, Charles River Partnership VIII acquired
4,909,475 shares of Series A preferred stock, warrants to purchase
1,620,126 shares of common stock and 2,280,547 shares of Series B
preferred stock, and Charles River VIII-A acquired 90,525 shares of Series
A preferred stock, warrants to purchase 29,872 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 acquired 4,867,333
shares of Series B preferred stock and Highland Entrepreneurs' Fund IV
owns 202,806 shares of Series B preferred stock.
54
<PAGE>
(5) Of the securities listed above, Matrix Partners V, L.P. acquired 4,500,000
shares of Series A preferred stock, warrants to purchase 1,485,000 shares
of common stock and 2,090,338 shares of Series B preferred stock, and
Matrix V Entrepreneurs Fund, L.P. acquired 500,000 shares of Series A
preferred stock, warrants to purchase 165,000 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. .......................................... 4,895,956
Samuel P. Gerace, Sr. .......................................... 317,034
Gerace Family L.P. ............................................. 6,210,838
Thomas A. Gerace................................................ 4,895,956
</TABLE>
Redemption of Shares of Freedom of Information. On August 28, 1998, Be Free
redeemed for a price of $1.00 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 Purchase
Seller Shares Price
<S> <C> <C>
Samuel P. Gerace, Jr. ............................... 1,002,202 $1,002,202
Samuel P. Gerace, Sr. ............................... 189,047 189,047
Gerace Family L.P. .................................. 3,703,528 3,703,528
Thomas A. Gerace..................................... 1,002,202 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 48,084 shares to Kristin
L. Gerace, who is the sister of Samuel P. Gerace, Jr. and Thomas A. Gerace, and
13,298 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. ........................................... 683,192
Samuel P. Gerace, Jr. ........................................ 538,554
Thomas A. Gerace.............................................. 538,554
Samuel P. Gerace, Sr. ........................................ 34,874
</TABLE>
55
<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 3,095,700
shares of common stock and Mr. Joseph purchased 696,532 shares of common stock
each at a purchase price of $0.15 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 $78,360 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 December 31, 1999, $78,360 in
principal was outstanding with respect to Mr. Joseph's promissory note.
Recent Warrant Exercises
On November 11, 1999, Charles River Partnership VIII and Charles River VIII-
A, which are affiliated with Ted R. Dintersmith, acquired an aggregate of
1,649,998 shares of common stock through the exercise of warrants to purchase
1,649,998 shares at $1.50 per share originally granted in August 1998.
On January 18, 2000, Gordon B. Hoffstein acquired 158,156 shares of common
stock through the cashless exercise of warrants to purchase 165,000 shares at
$1.50 per share originally granted in August 1998.
On February 25, 2000, Matrix Partners V, L.P. and Matrix V Entrepreneurs
Fund, L.P., which are affiliated with W. Michael Humphreys, acquired an
aggregate of 1,600,826 shares of common stock through the cashless exercise of
warrants to purchase 1,650,000 shares at $1.50 per share originally granted in
August 1998.
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 former director Daniel J. Nova
pursuant to which it has agreed to indemnify these individuals to the fullest
extent possible under Delaware Law from liabilities arising out of their
respective service as directors of Be Free.
56
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of June 2, 2000 by:
. each person we know to own beneficially more than 5% of our common stock;
. each of our directors and 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 June 2, 2000 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>
Amount and Nature of
Beneficial Ownership
---------------------
Number of Percent of
Name and Address of Beneficial Owner Shares Class
<S> <C> <C>
Five Percent Stockholders:
Charles River Ventures(1)................................ 7,851,578 12.05%
Matrix Partners(2)....................................... 7,802,682 11.98%
Highland Capital Partners(3)............................. 4,438,372 6.81%
Directors and Named Executive Officers:
Thomas A. Gerace......................................... 3,406,090 5.23%
Samuel P. Gerace, Jr..................................... 2,895,177 4.44%
Gordon B. Hoffstein(4)................................... 3,715,639 5.70%
Ted R. Dintersmith(5).................................... 7,893,610 12.11%
W. Michael Humphreys(6).................................. 7,841,174 12.03%
Jeffrey F. Rayport(7).................................... 117,983 *
Kathleen L. Biro......................................... -- --
Ellen M. Brezniak(8)..................................... 250,301 *
W. Blair Heavey(9)....................................... 394,095 *
All directors and executive officers as a group (12
persons)(11)............................................ 31,890,412 48.76%
</TABLE>
---------------------
* Less than 1%
(1) Includes 142,698 shares owned by Charles River VIII-A, LLC, of which
Charles River VII Friends, Inc. is the manager, of which Ted R.
Dintersmith is an officer and 7,708,880 shares owned by Charles River
Partnership VIII, a Limited Partnership, of which Charles River VIII GP
is the general partner, of which Ted R. Dintersmith is a general partner.
The address of Charles River VII Friends, Inc. and Charles River VIII GP
is 1000 Winter Street, Suite 3300, Waltham, MA 02451.
57
<PAGE>
(2) Includes 7,021,664 shares owned by Matrix Partners V, L.P., of which
Matrix V Management Co., LLC is a general partner. Includes 781,018
shares owned by Matrix V Entrepreneurs' Fund IV, LP, of which Matrix V
Management Co., LLC is a general partner. Mr. Humphreys is a general
partner of Matrix V Management Co., LLC. The address of Matrix V
Management Co., LLC is 1000 Winter Street, Suite 4500, Waltham, MA 02451.
(3) Includes 4,258,916 shares owned by Highland Capital Partners IV, LP.
Includes 179,456 shares owned by Highland Entrepreneurs' Fund IV, LP, an
affiliate of Highland Capital Partners IV, LP. The address of Highland
Capital Partners IV, LP and Highland Entrepreneurs' Fund IV, LP is Two
International Place, Boston, MA 02110.
(4) Excludes 38,217 shares held by the Hoffstein Family Trust for the benefit
of Mr. Hoffstein's children. Mr. Hoffstein disclaims any beneficial
ownership of the shares held by the trust.
(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 7,851,578 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. Excludes 24,348 shares owned by the Dintersmith Family
Limited Partnership. Mr. Dintersmith disclaims any beneficial ownership
of the shares held by the Dintersmith Family Limited Partnership.
(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 7,802,682 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) Includes 29,685 shares issuable upon the exercise of options that are
currently exercisable or exercisable within 60 days after June 2, 2000.
(8) Includes 31,945 shares issuable upon the exercise of options that are
currently exercisable or exercisable within 60 days after June 2, 2000.
(9) Includes 90,030 shares issuable upon the exercise of options that are
currently exercisable or exercisable within 60 days after June 2, 2000.
(10) Includes 248,346 shares issuable upon the exercise of options granted
under the 1998 Stock Incentive Plan that are currently exercisable or
exercisable within 60 days after April 30, 2000.
58
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
Our amended and restated certificate of incorporation authorizes the
issuance of up to 250 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 June 2, 2000, 65,156,193 shares of
common stock were outstanding and we had approximately 487 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.
Warrants
As of June 2, 2000, Be Free had outstanding warrants to purchase 700,000
shares of common stock at an exercise price of $1.00 and additional warrants to
purchase 33,000 shares at an exercise price of $1.50. The warrants have a net
exercise provision under which the holder may, in lieu of
59
<PAGE>
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.
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 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.
60
<PAGE>
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.
61
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
As of June 2, 2000, Be Free had 65,156,193 shares of common stock
outstanding, of which 39,812,165 are "restricted securities" under Rule 144.
Generally, restricted securities may be sold in the public market only if
registered or if they qualify for an exemption from registration, such as under
Rules 144 or 701 under the Securities Act. Of these restricted securities,
38,162,167 shares are currently salable under the conditions of Rule 144 and/or
Rule 701, as summarized below; however, 11,115,474 of these restricted shares
are subject to lock-up agreements with the underwriters of Be Free's public
offering on March 28, 2000 which expire on the close of business on July 26,
2000. The remaining 1,649,998 restricted securities become salable under the
conditions of Rule 144 commencing on November 11, 2000.
Stock Options, Employee Stock Purchase Plan and Warrants
As of June 2, 2000, there were a total of 4,811,402 options to purchase
shares of common stock outstanding under our 1998 Stock Incentive Plan,
approximately 564,354 of which are vested and exercisable as of the date of
this prospectus and approximately 210,965 more options will vest and become
exercisable within 60 days of June 2, 2000.
In November 1999, we registered the shares issuable upon the exercise of
options under our 1998 Stock Incentive Plan and the shares issuable pursuant to
our 1999 Employee Stock Purchase Plan. In March 2000, we registered the shares
issuable upon the exercise of the assumed options under the 1998 TriVida Equity
Incentive Plan. See "Management--1998 Stock Incentive Plan," "--1998 TriVida
Equity Incentive Plan" and "--1999 Employee Stock Purchase Plan". Pursuant to
such registration, the foregoing shares would be available for resale in the
public market as such options become exercisable.
As of June 2, 2000, Be Free had outstanding warrants to purchase an
aggregate of 733,000 shares of common stock. 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."
Rule 144
In general, under Rule 144 as currently in effect, 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 651,562 shares. Sales under Rule 144 are
generally subject to the availability of current public information about Be
Free.
62
<PAGE>
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 pursuant to exercising
options granted before we were a public company under a compensatory stock or
option plan or other written agreement are entitled to sell those shares
commencing 90 days after our initial public offering in reliance on Rule 144,
without having to comply with the holding period 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 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.
Registration Rights
Of the 65,156,193 shares of common stock outstanding as of June 2, 2000,
33,273,841 shares are currently entitled to registration rights which were
granted in connection with our Series A preferred stock and Series B preferred
stock financings. These registration rights generally entitle the holders to
demand and/or piggy-back registration rights under certain circumstances.
In connection with our acquisition of TriVida, we agreed with the selling
stockholders hereunder to file the registration statement of which this
prospectus constitutes a part and keep it effective until the earlier of (i)
February 28, 2001, (ii) the date on which all of the shares registered
hereunder by former TriVida stockholders are sold or (iii) the date on which
every former TriVida stockholder is able to sell within any 90 day period 100%
of his or her shares of Be Free Common Stock obtained in the merger in
compliance with Rule 144 under the Securities Act.
63
<PAGE>
PLAN OF DISTRIBUTION
The shares covered by this prospectus may be offered and sold from time to
time by the selling stockholders. The term "selling stockholders" includes
donees, pledgees, transferees or other successors-in-interest selling shares
received after the date of this prospectus from a selling stockholder as a
gift, pledge, partnership distribution or other non-sale related transfer. The
selling stockholders will act independently of us in making decisions with
respect to the timing, manner and size of each sale. Such sales may be made on
one or more exchanges or in the over-the-counter market or otherwise, at prices
and under terms then prevailing or at prices related to the then current market
price or in negotiated transactions. The selling stockholders may sell their
shares by one or more of, or a combination of, the following methods:
. purchases by a broker-dealer as principal and resale by such broker-
dealer for its own account pursuant to this prospectus;
. ordinary brokerage transactions and transactions in which the broker
solicits purchasers;
. block trades in which the broker-dealer so engaged will attempt to sell
the shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
. an over-the-counter distribution in accordance with the rules of the
Nasdaq National Market;
. in privately negotiated transactions; and
. in options transactions.
In addition, any shares that qualify for sale pursuant to Rule 144 may be
sold under Rule 144 rather than pursuant to this prospectus.
To the extent required, this prospectus may be amended or supplemented from
time to time to describe a specific plan of distribution. In connection with
distributions of the shares or otherwise, the selling stockholders may enter
into hedging transactions with broker-dealers or other financial institutions.
In connection with such transactions, broker-dealers or other financial
institutions may engage in short sales of the common stock in the course of
hedging the positions they assume with selling stockholders. The selling
stockholders may also sell the common stock short and redeliver the shares to
close out such short positions. The selling stockholders may also enter into
option or other transactions with broker-dealers or other financial
institutions which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such transaction). The
selling stockholders may also pledge shares to a broker-dealer or other
financial institution, and, upon a default, such broker-dealer or other
financial institution, may effect sales of the pledged shares pursuant to this
prospectus (as supplemented or amended to reflect such transaction).
In effecting sales, broker-dealers or agents engaged by the selling
stockholders may arrange for other broker-dealers to participate. Broker-
dealers or agents may receive commissions, discounts or concessions from the
selling stockholders in amounts to be negotiated immediately prior to the sale.
64
<PAGE>
In offering the shares covered by this prospectus, the selling stockholders
and any broker-dealers who execute sales for the selling stockholders may be
deemed to be "underwriters" within the meaning of the Securities Act in
connection with such sales. Any profits realized by the selling stockholders
and the compensation of any broker-dealer may be deemed to be underwriting
discounts and commissions.
In order to comply with the securities laws of certain states, if
applicable, the shares must be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
shares may not be sold unless they have been registered or qualified for sale
in the applicable state or an exemption from the registration or qualification
requirement is available and is complied with.
We have advised the selling stockholders that the anti-manipulation rules of
Regulation M under the Exchange Act may apply to sales of shares in the market
and to the activities of the selling stockholders and their affiliates. In
addition, we will make copies of this prospectus available to the selling
stockholders for the purpose of satisfying the prospectus delivery requirements
of the Securities Act. The selling stockholders may indemnify any broker-dealer
that participates in transactions involving the sale of the shares against
certain liabilities, including liabilities arising under the Securities Act.
At the time a particular offer of shares is made, if required, a prospectus
supplement will be distributed that will set forth the number of shares being
offered and the terms of the offering, including the name of any underwriter,
dealer or agent, the purchase price paid by any underwriter, any discount,
commission and other item constituting compensation, any discount, commission
or concession allowed or reallowed or paid to any dealer, and the proposed
selling price to the public.
We have agreed to indemnify the selling stockholders against certain
liabilities, including certain liabilities under the Securities Act.
We have agreed with the selling stockholders to keep the Registration
Statement of which this prospectus constitutes a part effective until the
earlier of (i) February 28, 2001, (ii) the date on which all of the shares
registered hereunder by former TriVida stockholders are sold or (iii) the date
on which every former TriVida stockholder is able to sell within any 90 day
period 100% of his or her shares of Be Free Common Stock obtained in the merger
in compliance with Rule 144 under the Securities Act.
65
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock offered by this prospectus has
been passed upon by Hale and Dorr LLP.
EXPERTS
The consolidated financial statements of Be Free, Inc. as of December 31,
1998 and 1999 and for each of the three years in the period ended December 31,
1999 included in 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.
Ernst & Young LLP, independent auditors, have audited the financial
statements of TriVida Corporation (a Development Stage Company) at March 31,
1999 and 1998, and for each of the two years in the period ended March 31,
1999, and for the period from January 7, 1997 (date of inception) to March 31,
1999 as set forth in their report thereon (which contains an explanatory
paragraph describing conditions that raise substantial doubt about TriVida's
ability to continue as a going concern as described in Note 2 to these
financial statements). These financial statements have been included in the
prospectus and elsewhere in the registration statement in reliance on Ernst &
Young LLP's report, given on their authority as experts in accounting and
auditing.
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. We
are also 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.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Be Free, Inc. and Subsidiaries:
(For each of the three years in the period ended December 31,1999 and the
three months ended March 31, 1999 and 2000 (unaudited))
Report of Independent Accountants.......................................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit).................. F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7
TriVida Corporation (a Development Stage Company):
(As of March 31, 1998 and 1999 and December 31, 1999 and for the years
ended March 31, 1998 and 1999 and January 7, 1997 (date of inception) to
March 31, 1999, the nine months ended December 31, 1998 and 1999 and
January 7, 1997 (date of inception) to December 31, 1999)
Report of Independent Auditors............................................. F-25
Balance Sheets............................................................. F-26
Statements of Operations................................................... F-27
Statements of Stockholders' Equity (Deficit)............................... F-28
Statements of Cash Flows................................................... F-29
Notes to Financial Statements.............................................. F-30
Unaudited Pro Forma Combined Condensed Financial Information:
(For the three months ended March 31, 2000 and the year ended December 31,
1999)
Unaudited Pro Forma Combined Condensed Financial Information............... F-41
Unaudited Pro Forma Combined Condensed Statement of Continuing Operations
for the three months ended March 31, 2000................................. F-42
Unaudited Pro Forma Combined Condensed Statement of Continuing Operations
for the year December 31, 1999............................................ F-43
Notes to Unaudited Pro Forma Combined Condensed Financial Information...... F-44
</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, 1998 and 1999,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1999 in conformity with accounting
principles generally accepted in the United States. 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 auditing standards
generally accepted in the United States, 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
February 8, 2000, except for Footnote N
which is dated March 8, 2000
F-2
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------ March 31,
1998 1999 2000
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............. $ 4,327,090 $58,975,906 $122,664,193
Marketable securities................. -- 12,761,659 37,825,305
Accounts receivable, net of allowances
of $14,000 and $96,607 at December
31, 1998 and 1999, respectively and
$202,477 at March 31, 2000........... 118,955 1,328,406 2,409,130
Prepaid expenses...................... 144,517 1,012,791 1,331,474
Other current assets.................. 23,222 269,526 969,637
----------- ----------- ------------
Total current assets................. 4,613,784 74,348,288 165,199,739
Marketable securities.................. -- 7,954,400 14,429,500
Property and equipment, net (Note E)... 961,702 7,966,868 11,783,573
Intangible assets, net................. -- -- 160,451,410
Deposits............................... 384,991 340,012 451,321
Other assets........................... 10,359 227,276 223,118
----------- ----------- ------------
Total assets......................... $ 5,970,836 $90,836,844 $352,538,661
=========== =========== ============
LIABILITIES, CONVERTIBLE PARTICIPATING
PREFERRED STOCK AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable...................... 533,524 966,592 1,025,450
Accrued expenses...................... 349,725 2,916,569 5,022,306
Deferred revenue...................... 121,667 942,537 2,035,140
Current portion of long-term debt..... 187,139 942,770 1,584,648
----------- ----------- ------------
Total current liabilities............ 1,192,055 5,768,468 9,667,544
Long-term debt, net of current portion. 4,949,198 2,507,357 2,933,355
----------- ----------- ------------
Total liabilities.................... 6,141,253 8,275,825 12,600,899
Commitments and contingencies (Note H)
Series A Convertible Participating
Preferred Stock; $0.01 par value;
11,300,000, 0 and 0 shares authorized
at December 31, 1998, 1999 and March
31, 2000, respectively; 10,600,000, 0
and 0 shares issued and outstanding at
December 31, 1998, 1999 and March 31,
2000, respectively.................... 8,785,981 -- --
Series A Convertible Participating
Preferred Stock Warrants.............. 540,000 -- --
Stockholders' equity (deficit) (Note
I):
Common stock, $0.01 par value;
27,500,000 shares authorized at
December 31, 1998, and 75,000,000
shares authorized at December 31,
1999 and March 31, 2000 respectively;
19,500,000, 56,176,498 and 64,740,288
shares issued at December 31, 1998,
1999, and March 31, 2000,
respectively......................... 195,000 561,765 647,403
Additional paid-in capital............ 5,505,050 113,273,840 379,402,777
Unearned compensation................. (5,549,096) (6,001,938) (5,505,071)
Stockholders' notes receivable........ (779,558) (208,072) (208,072)
Accumulated other comprehensive loss.. -- (10,818) (38,654)
Accumulated deficit................... (7,182,599) (25,017,011) (34,360,621)
----------- ----------- ------------
(7,811,203) 82,597,766 339,937,762
Treasury stock, at cost (1,685,195,
244,996 and 0 shares at December 31,
1998 and 1999 and March 31, 2000,
respectively)........................ (1,685,195) (36,747) --
----------- ----------- ------------
Total stockholders' equity (deficit). (9,496,398) 82,561,019 339,937,762
----------- ----------- ------------
Total liabilities, convertible
participating preferred stock and
stockholders' equity (deficit)..... $ 5,970,836 $90,836,844 $352,538,661
=========== =========== ============
</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>
Three Months Ended
Year Ended December 31, March 31,
-------------------------------------- ------------------------
1997 1998 1999 1999 2000
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenue:
Performance marketing
services.............. $ 216,286 $ 1,319,183 $ 5,328,675 $ 532,561 $ 3,628,529
Other.................. 60,424 7,580 -- -- --
----------- ----------- ------------ ----------- -----------
Total revenue.......... 276,710 1,326,763 5,328,675 532,561 3,628,529
----------- ----------- ------------ ----------- -----------
Operating expenses:
Cost of revenue........ 272,585 423,811 844,838 101,499 603,800
Sales and marketing
(exclusive of equity
related compensation
of $0, $56,428 and
$524,646 in 1997, 1998
and 1999, respectively
and $101,087 and
$152,739 in March 31,
1999 and 2000,
respectively)......... 180,108 1,153,306 9,329,446 1,265,143 3,558,424
Client services
(exclusive of equity
related compensation
of $0, $14,509 and
$238,351 in 1997, 1998
and 1999, respectively
and $39,459 and
$30,475 in March 31,
1999 and 2000,
respectively)......... -- 300,400 3,473,583 468,815 1,527,341
Development and
engineering (exclusive
of equity related
compensation of $0,
$1,864,667 and
$146,146 in 1997, 1998
and 1999, respectively
and $39,556 and
$33,936 in March 31,
1999 and 2000,
respectively)......... 426,329 728,538 4,767,382 562,514 1,567,832
General and
administrative
(exclusive of equity
related compensation
of $0, $449,606 and
$1,033,005 in 1997,
1998 and 1999,
respectively and
$40,114 and $284,016
in March 31, 1999 and
2000, respectively)... 332,376 875,153 2,823,412 350,319 1,175,315
Equity related
compensation.......... -- 2,385,211 1,942,147 449,515 271,869
Amortization and merger
related expenses...... -- -- -- -- 5,348,943
----------- ----------- ------------ ----------- -----------
Total operating
expenses.............. 1,211,398 5,866,419 23,180,808 3,197,805 14,053,524
----------- ----------- ------------ ----------- -----------
Operating loss......... (934,688) (4,539,656) (17,852,133) (2,665,244) (10,424,995)
Interest income........ 6,293 34,577 1,292,381 18,534 1,165,780
Interest expense....... (105,215) (258,420) (944,660) (234,370) (84,395)
----------- ----------- ------------ ----------- -----------
Net loss before
extraordinary item..... (1,033,610) (4,763,499) (17,504,412) (2,881,080) (9,343,610)
Extraordinary item--loss
on early extinguishment
of debt................ -- -- (330,000) -- --
----------- ----------- ------------ ----------- -----------
Net loss................ (1,033,610) (4,763,499) (17,834,412) (2,881,080) (9,343,610)
Accretion of preferred
stock to redemption
value.................. -- (129,573) (1,517,038) (97,179) --
----------- ----------- ------------ ----------- -----------
Net loss attributable to
common stockholders.... $(1,033,610) $(4,893,072) $(19,351,450) $(2,978,259) $(9,343,610)
=========== =========== ============ =========== ===========
Basic and diluted net
loss per share:
Net loss attributable to
common stockholders
without extraordinary
item................... $ (0.04) $ (0.31) $ (1.00) $ (0.24) $ (0.17)
Extraordinary item...... -- -- (0.02) -- --
----------- ----------- ------------ ----------- -----------
Net loss attributable to
common stockholders.... $ (0.04) $ (0.31) $ (1.02) $ (0.24) $ (0.17)
=========== =========== ============ =========== ===========
Shares used in computing
basic and diluted net
loss per share......... 27,138,512 16,018,258 18,951,340 12,617,755 53,454,823
</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, 1997, 1998 and 1999 and the three months
ended March 31, 2000
<TABLE>
<CAPTION>
Common Stock Accumulated
---------------------- Additional Stockholders' Other
$0.01 Par Paid-in Unearned Notes Comprehensive Accumulated
Shares Value Capital Compensation Receivable Loss Deficit
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December
31, 1996........... 28,180,816 $ 281,808 $ -- $ -- $ -- $ -- $ (1,385,490)
Contribution of
capital by
stockholders...... -- -- 250,000 -- -- -- --
Acquisition and
retirement of
treasury stock.... (10,567,804) (105,678) 95,678 -- -- --
Net loss.......... -- -- -- -- -- -- (1,033,610)
----------- --------- ------------ ----------- --------- -------- ------------
Balance at December
31, 1997........... 17,613,012 176,130 345,678 -- -- -- (2,419,100)
Stock issuance in
connection with
warrant exercise.. 1,886,988 18,870 356,130 -- -- --
Acquisition of
treasury stock.... -- -- -- -- -- -- --
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
Preferred Stock
financing......... -- -- 1,791,000 -- -- -- --
Exercise of call
option on Common
Stock............. -- -- -- -- -- -- --
Forfeiture of
unvested shares
of restricted
stock............. -- -- (180,314) 180,314 -- -- --
Issuance of
restricted stock.. -- -- -- (4,417,492) (779,558) -- --
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........... 19,500,000 195,000 5,505,050 (5,549,096) (779,558) -- (7,182,599)
Acquisition of
treasury stock.... -- -- (453,995) 436,957 73,510 -- --
Acceleration of
vesting of
restricted stock.. -- -- 77,103 -- -- -- --
Issuance of
restricted stock.. -- -- -- (97,500) (52,500) -- --
Repayment of
receivable from
stockholder....... -- -- -- -- 550,476 -- --
Unearned
compensation
related to option
grants............ -- -- 2,674,382 (2,674,382) -- -- --
Amortization of
unearned
compensation...... -- -- -- 1,882,083 -- -- --
Series B
Preferred Stock
dividend.......... -- -- (1,183,328) -- -- -- --
Accretion to
redemption value
of Series A and B
Preferred Stock... -- -- (333,710) -- -- -- --
Issuance of
Common Stock in
initial public
offering,
net of offering
costs............. 12,880,000 128,800 70,444,818 -- -- -- --
Conversion of
Series A and
Series B
Preferred Stock
and warrants...... 23,796,498 237,965 35,549,689 -- -- -- --
Stock issuance in
connection with
option and
warrant
exercises......... -- -- 993,831 -- -- -- --
Comprehensive
loss:
Net loss........ -- -- -- -- -- -- (17,834,412)
Other
comprehensive
loss.............. -- -- -- -- -- (10,818) --
----------- --------- ------------ ----------- --------- -------- ------------
Comprehensive
loss.............. -- -- -- -- -- (10,818) (17,834,412)
----------- --------- ------------ ----------- --------- -------- ------------
Balance at December
31, 1999........... 56,176,498 561,765 113,273,840 (6,001,938) (208,072) (10,818) (25,017,011)
Amortization of
unearned
compensation...... -- -- -- 496,867 -- -- --
Issuance of
Common Stock in
secondary public
offering,
net of offering
costs............. 4,046,608 40,466 105,221,437 -- -- -- --
Issuance of
Common Stock for
acquisition of
Trivida........... 2,912,996 29,130 160,934,645 -- -- -- --
Exercise of
options and
warrants.......... 1,604,186 16,042 (27,145) -- -- --
Comprehensive
income (loss):
Net loss........ -- -- -- -- -- -- (9,343,610)
Other
comprehensive
income (loss)... -- -- -- -- -- (27,836) --
----------- --------- ------------ ----------- --------- -------- ------------
Comprehensive
income (loss)..... -- -- -- -- -- (27,836) (9,343,610)
----------- --------- ------------ ----------- --------- -------- ------------
Balance at March
31, 2000
(unaudited)........ 64,740,288 $ 647,403 $379,402,777 $(5,505,071) $(208,072) $(38,654) $(34,360,621)
=========== ========= ============ =========== ========= ======== ============
<CAPTION>
Treasury Stock Total
----------------------- Stockholders'
Equity
Shares Value (Deficit)
<S> <C> <C> <C>
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) (6,176,881) (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
Preferred Stock
financing......... -- -- 1,791,000
Exercise of call
option on Common
Stock............. (705,364) (705,364) (705,364)
Forfeiture of
unvested shares
of restricted
stock............. -- -- --
Issuance of
restricted stock.. 5,197,050 5,197,050 --
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........... (1,685,195) (1,685,195) (9,496,398)
Acquisition of
treasury stock.... (524,437) (78,665) (22,193)
Acceleration of
vesting of
restricted stock.. -- -- 77,103
Issuance of
restricted stock.. 150,000 150,000 --
Repayment of
receivable from
stockholder....... -- -- 550,476
Unearned
compensation
related to option
grants............ -- -- --
Amortization of
unearned
compensation...... -- -- 1,882,083
Series B
Preferred Stock
dividend.......... -- -- (1,183,328)
Accretion to
redemption value
of Series A and B
Preferred Stock... -- -- (333,710)
Issuance of
Common Stock in
initial public
offering,
net of offering
costs............. -- -- 70,573,618
Conversion of
Series A and
Series B
Preferred Stock
and warrants...... -- -- 35,787,654
Stock issuance in
connection with
option and
warrant
exercises......... 1,814,636 1,577,113 2,570,944
Comprehensive
loss:
Net loss........ -- -- (17,834,412)
Other
comprehensive
loss.............. -- -- (10,818)
----------- ----------- --------------
Comprehensive
loss.............. -- -- (17,845,230)
----------- ----------- --------------
Balance at December
31, 1999........... (244,996) (36,747) 82,561,019
Amortization of
unearned
compensation...... -- -- 496,867
Issuance of
Common Stock in
secondary public
offering,
net of offering
costs............. -- -- 105,261,903
Issuance of
Common Stock for
acquisition of
Trivida........... -- -- 160,963,775
Exercise of
options and
warrants.......... 244,966 36,747 25,644
Comprehensive
income (loss):
Net loss........ -- -- (9,343,610)
Other
comprehensive
income (loss)... -- -- (27,836)
----------- ----------- --------------
Comprehensive
income (loss)..... -- -- (9,371,446)
----------- ----------- --------------
Balance at March
31, 2000
(unaudited)........ -- $ -- $339,937,762
=========== =========== ==============
</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>
Three Months Ended March
Year Ended December 31, 31,
-------------------------------------- -------------------------
1997 1998 1999 1999 2000
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows for operating
activities:
Net loss............... $(1,033,610) $(4,763,499) $(17,834,412) $(2,881,080) $ (9,343,610)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation and
amortization.......... 56,999 285,794 1,484,855 179,063 5,049,615
Extraordinary loss on
early extinguishment
of debt............... -- -- 330,000 -- --
Equity related
compensation.......... -- 2,385,211 1,942,147 450,000 271,867
Loss on disposal on
fixed assets.......... 3,304 -- -- -- --
Acquisition of fixed
assets in exchange for
services.............. -- (202,688) -- -- --
Provisions for doubtful
accounts.............. -- 14,000 82,607 17,000 83,877
Changes in operating
assets and
liabilities:
Accounts receivable... (54,717) (52,565) (1,292,058) (350,131) (1,175,859)
Prepaid expenses...... -- (75,991) (879,876) (185,270) (288,683)
Deposits.............. -- (384,441) 44,979 20,339 2,783
Accounts payable...... 94,570 101,768 433,068 346,658 (2,087,336)
Accrued expenses...... 46,085 243,365 2,352,902 366,877 509,581
Deferred revenue...... (24,508) 121,667 820,870 822,560 1,114,596
Other, net............ (343) (33,238) (463,221) 27,331 (708,996)
----------- ----------- ------------ ----------- ------------
Net cash used in
operating activities... (912,220) (2,360,617) (12,978,139) (1,186,653) (6,572,165)
----------- ----------- ------------ ----------- ------------
Cash flows for investing
activities:
Purchases of property
and equipment......... (67,726) (610,064) (4,850,420) (278,890) (779,785)
Purchases of marketable
securities............ -- -- (20,697,729) -- (31,410,083)
Cash paid for TriVida
acquisition net of
cash acquired......... (3,116,462)
----------- ----------- ------------ ----------- ------------
Net cash used in
investing activities... (67,726) (610,064) (25,548,149) (278,890) (35,306,330)
----------- ----------- ------------ ----------- ------------
Cash flows from
financing activities:
Proceeds from issuance
of Series A
Convertible
Participating Preferred
Stock, net of issuance
costs................. -- 8,656,408 -- -- --
Issuance of warrants
for Common Stock in
connection with Series
A Preferred Stock..... -- 1,791,000 -- -- --
Proceeds from issuance
of Series B
Convertible
Participating
Preferred Stock, net
of issuance costs..... -- -- 24,944,635 25,000,000 --
Proceeds from issuance
of Common Stock, net
of offering costs..... 250,000 -- 70,573,618 -- 105,545,447
Proceeds from exercise
of options and
warrants.............. -- -- 2,570,944 -- 250,648
Acquisition of common
stock and treasury
shares................ (10,000) (6,882,245) (5,155) -- --
Payments on notes
payable to related
parties............... -- (1,159,938) -- -- --
Proceeds from notes
receivable from
stockholders.......... -- -- 550,476 -- --
Proceeds from
sales/leaseback....... -- -- 240,818 240,818 --
Proceeds from long-term
debt.................. 791,080 5,000,000 -- -- --
Payments on long-term
debt.................. -- (183,297) (5,700,232) (313,827) (229,313)
----------- ----------- ------------ ----------- ------------
Net cash provided by
financing activities... 1,031,080 7,221,928 93,175,104 24,926,991 105,566,782
----------- ----------- ------------ ----------- ------------
Net increase in cash and
cash equivalents....... 51,134 4,251,247 54,648,816 23,461,448 63,688,287
Cash and cash
equivalents at
beginning of period.... 24,709 75,843 4,327,090 4,327,090 58,975,906
----------- ----------- ------------ ----------- ------------
Cash and cash
equivalents at end of
period................. $ 75,843 $ 4,327,090 $ 58,975,906 $27,788,538 $122,664,193
=========== =========== ============ =========== ============
Supplemental disclosure
of cash flow
information:
Cash paid during the
period for interest... $ 53,819 $ 284,561 $ 814,660 $ 189,370 $ 84,938
Supplemental disclosures
of noncash
transactions:
Notes receivable for
Common Stock sold..... -- $ 779,558 $ 52,500 $ 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 $ 3,068,804 $ 1,290,865 --
The Company issued
shares of Common Stock
to acquire all of the
capital stock of
TriVida Corporation. In
conjunction with the
acquisition, the fair
value of the assets
acquired and
liabilities assumed
were as follows:
Fair value of assets
acquired.............. -- -- -- -- $ 3,648,552
Liabilities assumed.... -- -- -- -- 3,963,298
------------
Net liabilities........ -- -- -- -- $ (314,746)
============
</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
(Information at March 31, 2000 and for the three months
ended March 31, 1999 and March 31, 2000 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 the
Company's BFAST services, which have been primarily 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 I). 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,
commercial paper, certificates of deposits and U.S. government obligations are
stated at cost, which approximates market value.
Marketable Securities
The Company's marketable securities consist of commercial paper, U.S.
government obligations and corporate bonds. At December 31, 1998, 1999 and
March 31, 2000, marketable debt and equity securities have been categorized as
available for sale under the provisions of Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," and, as a result, are stated at fair value based generally
on quoted market prices.
F-7
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at March 31, 2000 and for the three months
ended March 31, 1999 and March 31, 2000 is unaudited)
The amortized cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity or, in the case of asset-backed
securities, over the estimated life of the security. Such amortization and
accretion as well as interest are included in interest income or interest
expense. Realized gains and losses are included in other income, net in the
Consolidated Statements of Operations. The cost of securities sold is based on
the specific identification method. Unrealized holding gains and losses, net of
applicable deferred taxes, are included as a component of stockholders' equity
in accumulated other comprehensive income until realized.
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 December 31, 1998, 1999 and
March 31, 2000, substantially all of the Company's cash, cash equivalents and
marketable securities were invested in money market accounts, commercial paper,
certificates of deposit and U.S. government obligations at one and six
financial institutions, respectively. The Company believes these institutions
to be of high credit quality. The Company had two customers in 1997 totaling
78% and 12% of revenue, respectively, one customer in 1998 totaling 73% of
revenue, and two customers in 1999 totaling 20% and 13% of revenue,
respectively. The Company had two customers that accounted for 40% and 11%,
respectively, of accounts receivable at December 31, 1998. The Company had one
customer that accounted for 11% of accounts receivable at December 31, 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 and related costs from
integration are deferred and recognized ratably over the initial term of the
service contract, starting when the integration is complete and the service is
F-8
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at March 31, 2000 and for the three months
ended March 31, 1999 and March 31, 2000 is unaudited)
available to the customer. Other revenue consisted 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 does 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 incurred.
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.
Cost of Revenue
Cost of Revenue consists of expenses relating to the operation of our data
interchange. Expenses primarily represent depreciation and operating lease
expense for servers and storage equipment, costs for a third-party data center
facility and costs for Internet connectivity.
Client Services
Client services expenses primarily relate to the cost of assisting the
Company's customers in managing their relationship with their marketing
partners, as well as providing integration, training and technical support.
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. These capitalized costs are being amortized
using the straight-line method over the estimated useful life, which is
eighteen months.
During the year ended December 31, 1997, certain engineering and development
personnel performed software development services for third parties. The cost
of those services was approximately $40,000.
F-9
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at March 31, 2000 and for the three months
ended March 31, 1999 and March 31, 2000 is unaudited)
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense of
approximately $3,100, $34,900 and $210,000 were charged to sales and marketing
expense for the years ended December 31, 1997, 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 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. The Company calculates the fair value of options granted to employees in
accordance with SFAS No. 123 for disclosure purposes only. Stock-based
compensation issued to nonemployees is measured and recorded using the fair
value method prescribed in SFAS No. 123.
Accumulated Other Comprehensive Income (Loss)
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," establishes a standard for reporting and displaying
comprehensive income and its components within the financial statements. As of
December 31, 1999, accumulated other comprehensive loss, as reflected in the
Consolidated Statements of Stockholders' Equity (Deficit), consisted of net
unrealized losses on marketable securities.
Treasury Stock
The Company accounts for the purchase of treasury stock using the cost
method. The Company has reissued treasury shares upon issuance of shares
related to grants of restricted stock and exercises
F-10
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at March 31, 2000 and for the three months
ended March 31, 1999 and March 31, 2000 is unaudited)
of options and warrants and may deliver treasury shares upon the future grants
of restricted stock or the exercises of stock options and warrants. 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.
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.
Reclassifications
Certain prior year financial statement items have been reclassified to
conform to the current year's presentation.
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 balance sheet 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
2001.
On December 3, 1999, the staff of the Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition
in Financial Statements." SAB 101 summarizes some of the staff's
interpretations of the application of generally accepted accounting principles
to revenue recognition. On January 1, 2000, the Company adopted the provisions
in SAB 101. The adoption did not have a material impact.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions
Involving Stock Compensation--an Interpretation of APB Opinion No. 25". FIN 44
clarifies the application of APB Opinion No. 25 and, among other issues
clarifies the following: the definition of an employee for purposes of applying
APB Opinion No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory
F-11
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at March 31, 2000 and for the three months
ended March 31, 1999 and March 31, 2000 is unaudited)
plan; the accounting consequence of various modifications to the terms of the
previously fixed stock options or awards; and the accounting for an exchange of
stock compensation awards in a business combination. FIN 44 is effective July
1, 2000, but certain conclusions in FIN 44 cover specific events that occurred
after either December 15, 1998 or January 12, 2000. Be Free does not expect the
application of FIN 44 to have a material impact on the company's financial
position or results of operations.
C. Net Loss Per Share and Supplemental 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, unvested shares of
restricted 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.
Potential common shares excluded from the calculation of diluted loss per
share were as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------ March 31,
1997 1998 1999 2000
<S> <C> <C> <C> <C>
Options to purchase shares of common
stock................................ -- 1,384,858 3,485,852 4,603,240
Shares of Preferred Stock convertible
into shares of common stock.......... -- 10,600,000 -- --
Unvested shares of restricted stock... -- 5,197,050 3,500,678 3,175,978
Warrants to purchase shares of common
stock................................ 1,886,988 3,498,000 2,548,000 733,000
Warrants to purchase shares of
Preferred Stock convertible into
shares of common stock............... -- 700,000 -- --
</TABLE>
All outstanding shares of preferred stock were converted into common stock
in the initial public offering on November 3, 1999.
Supplemental 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 supplemental loss per share.
F-12
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at March 31, 2000 and for the three months
ended March 31, 1999 and March 31, 2000 is unaudited)
The following is a calculation of supplemental net loss per share
(unaudited):
<TABLE>
<CAPTION>
Three Three
Months Months
Year Ended December 31, Ended Ended
------------------------- March 31, March 31,
1998 1999 1999 2000
<S> <C> <C> <C> <C>
Supplemental net loss:
Net loss attributable to
common stockholders.... $(4,893,072) $(19,351,450) $(2,978,259) $(9,343,610)
Accretion of preferred
stock to redemption
value.................. 129,573 1,517,038 97,179 --
----------- ------------ ----------- -----------
Supplemental net loss... $(4,763,499) $(17,834,412) $(2,881,080) $(9,343,610)
=========== ============ =========== ===========
Shares used in computing
supplemental basic and
diluted net loss per
share:
Weighted average number
of common shares
outstanding............ 16,018,258 18,951,340 12,617,755 53,454,823
Weighted average impact
of assumed conversion
of preferred stock on
issuance............... 3,621,370 16,761,220 10,746,628 --
----------- ------------ ----------- -----------
Shares used in computing
supplemental basic and
diluted net loss per
share.................. 19,639,628 35,712,560 23,364,383 53,454,823
----------- ------------ ----------- -----------
Basic and diluted
supplemental net loss
per common share....... $ (0.24) $ (0.50) $(0.12) $ (0.17)
=========== ============ =========== ===========
</TABLE>
D. Marketable Securities:
The following is a summary of marketable securities at December 31, 1999:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
<S> <C> <C> <C> <C>
Current:
Commercial paper................ $ 8,369,057 $-- $ (258) $ 8,368,799
U.S. government obligations..... 1,998,401 -- (5,541) 1,992,860
Corporate bonds................. 2,400,536 -- (536) 2,400,000
----------- ---- -------- -----------
Total current................... 12,767,994 -- (6,335) 12,761,659
----------- ---- -------- -----------
Noncurrent:
Corporate bonds................. 5,958,883 317 -- 5,959,200
U.S. government obligations..... 2,000,000 -- (4,800) 1,995,200
----------- ---- -------- -----------
Total noncurrent................ 7,958,883 317 (4,800) 7,954,400
----------- ---- -------- -----------
Total............................. $20,726,877 $317 $(11,135) $20,716,059
=========== ==== ======== ===========
</TABLE>
All securities classified as current have contractual maturities less than
one year. All securities classified as noncurrent have contractual maturities
greater than one year, but less than two years. Expected maturities may differ
from contractual maturities because borrowers may have the right to
F-13
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at March 31, 2000 and for the three months
ended March 31, 1999 and March 31, 2000 is unaudited)
call or prepay obligations with or without call or prepayment penalties. There
were no gross realized gains and losses recognized during 1999.
E. Property and Equipment:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
Amounts under
capital
lease arrangements
December 31, December 31,
----------------------- --------------------
1998 1999 1998 1999
<S> <C> <C> <C> <C>
Furniture and office
equipment.............. $ 27,778 $ 804,421 $ -- $ 506,064
Computer equipment and
software............... 1,285,683 8,282,331 285,000 2,980,259
Leasehold improvements.. -- 359,875 -- 108,299
---------- ----------- -------- ----------
1,313,461 9,446,627 285,000 3,594,622
Accumulated
depreciation........... (351,759) (1,479,759) (47,500) (699,911)
---------- ----------- -------- ----------
Property and equipment,
net.................... $ 961,702 $ 7,966,868 $237,500 $2,894,711
========== =========== ======== ==========
</TABLE>
Depreciation expense totaled $56,999, $232,952 and $1,128,000 for the years
ended December 31, 1997, 1998 and 1999, respectively.
F. Accrued Expenses:
Accrued expenses include the following:
<TABLE>
<CAPTION>
December 31,
-------------------
1998 1999
<S> <C> <C>
Professional fees..................................... $135,395 $ 918,686
Salaries and benefits................................. 27,876 755,227
Commissions........................................... -- 195,120
Accrued taxes......................................... -- 222,671
Capital purchases..................................... -- 213,942
Rent.................................................. 67,644 204,375
Accrued interest...................................... 50,000 --
Other................................................. 68,810 406,548
-------- ----------
Accrued expenses.................................... $349,725 $2,916,569
======== ==========
</TABLE>
F-14
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at March 31, 2000 and for the three months
ended March 31, 1999 and March 31, 2000 is unaudited)
G. Long-Term Debt:
The following table summarizes the Company's long-term borrowings:
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1999
<S> <C> <C>
Subordinated debt, net........................... $4,490,000 $ --
Obligations under capital leases and equipment
financing....................................... 332,510 3,450,127
Term loans....................................... 313,827 --
---------- ----------
5,136,337 3,450,127
Less current portion............................. (187,139) (942,770)
---------- ----------
Long-term debt................................. $4,949,198 $2,507,357
========== ==========
</TABLE>
The Company entered into term loans during 1996 and 1997 that accrued
interest based on the lender's published prime rate, which was 8.5% at December
31, 1998. 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 incurred interest at 12% per annum. The
Company borrowed the full amount available under this agreement on October 23,
1998. This debt was paid in full in December 1999. 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.
Upon the closing of the Company's initial public offering, the warrants
converted into common stock warrants to purchase 700,000 shares of common stock
at $1.00 per share. The fair value of the warrants, estimated to be
approximately $540,000 at issuance, was recorded as a discount on the carrying
value of the debt and 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 interest expense
recognized for the years ended December 31, 1998 and 1999 totaled $30,000 and
$180,000, respectively. The remaining deferred financing costs of $330,000 was
expensed as an extraordinary loss upon the early retirement of the debt.
On September 29, 1998, the Company established a capital equipment line of
credit totaling $2,000,000 on which the Company could borrow through November
30, 1999. This line is collateralized by the asset purchases made under the
line. At December 31, 1998, no amounts had been borrowed under this line. At
December 31, 1999, the Company had $1,986,205 outstanding under this line which
bears interest at 6.8%. Purchases under this line are financed as capital
leases with terms of four years.
F-15
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at March 31, 2000 and for the three months
ended March 31, 1999 and March 31, 2000 is unaudited)
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, 1998 and 1999 was 11.9% and 9.2%, respectively.
Payments on long-term debt are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
<S> <C>
2000........................................................... $1,216,089
2001........................................................... 1,375,663
2002........................................................... 1,041,158
2003........................................................... 321,410
----------
Total payments................................................. 3,954,320
Less amounts representing interest............................. (504,193)
----------
Present value of net payments.................................. 3,450,127
Less current portion........................................... (942,770)
----------
Long-term debt, net of current portion......................... $2,507,357
==========
</TABLE>
H. Commitments and Contingencies:
The Company leases facilities and computer equipment under operating lease
agreements that expire on various dates through December 31, 2004. The Company
pays all insurance and pro-rated portions of certain operating expenses for
certain leases. Rent expense was $113,025, $307,575 and $1,142,556 for the
years ended December 31, 1997, 1998 and 1999, respectively.
The future minimum lease payments at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Operating
Year ended December 31, Leases
<S> <C>
2000........................................................... $1,752,914
2001........................................................... 1,296,467
2002........................................................... 1,218,267
2003........................................................... 990,849
2004........................................................... 417,814
----------
Total minimum lease payments................................. $5,676,311
==========
</TABLE>
I. Capital Structure:
Through November 3, 1999, the authorized capital stock of the Company
consisted of (i) 27,500,000 shares of voting common stock ("Common Stock")
authorized for issuance with a par
F-16
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at March 31, 2000 and for the three months
ended March 31, 1999 and March 31, 2000 is unaudited)
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 were designated as Series A Convertible
Participating Preferred Stock ("Series A Preferred Stock") and 13,196,522
shares designated as Series B Convertible Participating Preferred Stock
("Series B Preferred Stock"). Upon the closing of the Company's initial public
offering, all outstanding shares of Series A and B Preferred Stock converted
into 23,796,522 shares of Common Stock.
Effective November 3, 1999 the authorized capital stock of the Company
consists of (i) 75,000,000 shares of Common Stock authorized for issuance with
a par value of $0.01 and (ii) 10,000,000 shares of preferred stock with a par
value of $0.01.
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, 1997 and 1998.
On August 28, 1998, the holders of warrants to purchase shares of Common
Stock exercised their warrants for 1,886,988 shares of Common Stock. Of these
shares, 705,364 shares were subject to a call option at the discretion of the
Company for $1.00 per share. On October 27, 1998, the Company exercised its
call option in full for $705,364.
On August 28, 1998, the Company repurchased 6,176,881 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 2,145,000 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 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 four 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 $59,609
for the year ended December 31, 1998 and 1999, respectively.
F-17
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at March 31, 2000 and for the three months
ended March 31, 1999 and March 31, 2000 is unaudited)
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.
On October 13, 1999, the Company's Board of Directors and stockholders
authorized a 1-for-2 Common Stock split. Stockholder's 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.
On November 3, 1999, the Company sold 12,880,000 shares of Common Stock in
its initial public offering for cash proceeds of $70,573,618, net of offering
costs of $6,706,384.
On March 8, 2000, the Company effected a 2-for-1 Common Stock split in the
form of a 100% stock dividend to stockholders of record on March 1, 2000.
On March 28, 2000, the Company sold 4,046,608 shares of its Common Stock in
a secondary offering for approximately $105,262 in net cash proceeds, after
deducting underwriting commissions and offering expenses.
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.
The outstanding shares of Series A Preferred Stock with a value of
$9,113,151 converted into 10,600,000 shares of Common Stock upon the closing of
the Company's initial public offering.
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 3,498,000 shares of Common Stock at $1.50 per share. Of these
warrants, 3,465,000 are exercisable from the date of issuance through August
28, 2008 and 33,000 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 was 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
November 11, 1999, warrants to purchase 1,649,998 of Common Stock were
exercised.
F-18
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at March 31, 2000 and for the three months
ended March 31, 1999 and March 31, 2000 is unaudited)
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. The holders of the Series B Preferred Stock were entitled to receive
cumulative dividends at a rate of 8% per annum. One of the holders of Series B
Preferred Stock had the right to elect one member to the Board of Directors.
The outstanding shares of Series B Preferred Stock with a value of
$26,134,500 including dividends totaling $1,183,328, were converted into
13,196,522 shares of Common Stock upon the closing of the Company's initial
public offering.
J. 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, 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 grant, prior to the Company's
initial public offering, the Company's Board of Directors 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. On
October 13, 1999, Company's Board of Directors and shareholders voted to
increase the number of shares available for issuance under the Option Plan by
575,000 shares. Upon this vote, the option plan allows for the Company to grant
up to 10,109,506 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 sold 5,197,050 shares
of restricted stock to certain employees for $0.15 per share. The weighted-
average grant-date fair value of these shares of restricted stock was $1.00 per
share.
During the year ended December 31, 1999, the Company granted incentive stock
options for the purchase of 2,160,442 shares and nonqualified stock options for
the purchase of 150,000 shares at a weighted-average exercise price of $2.71.
During the year ended December 31, 1999, the Company issued 150,000 shares of
restricted stock for $0.35 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 $1.00 per share.
F-19
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at March 31, 2000 and for the three months
ended March 31, 1999 and March 31, 2000 is unaudited)
The following table summarizes option activity under the Option Plan:
<TABLE>
<CAPTION>
Exercise Price Exercise Price
Equals Grant Less Than Grant
Date Date
Stock Fair Value Stock Fair Value Total
---------------- ------------------ ------------------
Weighted Weighted Weighted
Number Average Average Average
of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at December
31, 1997............... -- $ -- -- $ -- -- $ --
Granted................. -- -- 1,402,408 0.15 1,402,408 0.15
Cancelled............... -- -- 17,550 0.15 17,550 0.15
------- --------- ---------
Outstanding at December
31, 1998............... -- -- 1,384,858 0.15 1,384,858 0.15
Granted................. 695,124 7.02 1,615,318 0.85 2,310,442 2.71
Exercised............... -- -- 164,638 0.59 164,638 0.59
Cancelled............... 14,000 4.41 30,810 0.52 44,810 1.74
------- --------- ---------
Outstanding at December
31, 1999............... 681,124 $7.08 2,804,728 $0.52 3,485,852 $1.80
======= ========= =========
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
Weighted
Average
Remaining
Exercise Contractual Shares
Price Shares Life (Years) Exercisable
<S> <C> <C> <C>
$ 0.15 1,288,102 8.8 224,506
$ 0.35 423,406 9.0 --
$ 0.60 217,914 9.2 --
$ 0.95 530,914 9.4 --
$ 1.40 344,392 9.5 --
$ 4.41 350,624 9.7 --
$ 4.50 258,500 9.8 --
$14.06 4,000 9.9 --
$22.00 17,000 9.9 --
$30.02 26,000 10.0 --
$35.94 25,000 10.0 --
--------- -------
3,485,852 9.2 224,506
========= =======
</TABLE>
No options were exercisable at December 31, 1998.
During the years ended December 31, 1998 and 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 $1,822,474 for the years ended December
31, 1998 and 1999, respectively.
F-20
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at March 31, 2000 and for the three months
ended March 31, 1999 and March 31, 2000 is unaudited)
On April 30, 1999, the Company also accelerated the vesting with respect to
77,103 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 Company's 1998 and 1999 stock option grants
been calculated consistent with SFAS 123, the Company's net loss and net loss
per share would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1999
<S> <C> <C>
Net loss as reported............................ $(4,893,072) $(19,351,450)
Net loss per share as reported.................. $ (0.31) $ (1.02)
Pro forma net loss under SFAS 123............... $(4,897,325) $(19,429,219)
Pro forma net loss per share under SFAS 123..... $ (0.31) $ (1.03)
</TABLE>
The following table presents the significant assumptions used to estimate
the fair values of the options:
<TABLE>
<CAPTION>
December 31,
----------------
1998 1999
<S> <C> <C>
Weighted-average risk free interest rate................. 4.85% 5.53%
Expected life from the date of grant..................... 7 years 5 years
Weighted-average volatility.............................. None 29%
Expected dividends....................................... None None
</TABLE>
No options granted in 1998 had an exercise price equal to grant date stock
fair value (as such fair value was subsequently determined for financial
reporting purposes). The weighted-average fair value of options on the date of
grant for the options granted in 1998 and 1999 with an exercise price less than
grant date stock fair value was $0.89 and $1.54, respectively. The weighted-
average fair value of options granted in 1999 with an exercise price equal to
grant date stock fair value was $5.27.
The pro forma effects of applying SFAS 123 are not indicative of future
impacts. Additional grants in future years are anticipated.
K. 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.
F-21
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at March 31, 2000 and for the three months
ended March 31, 1999 and March 31, 2000 is unaudited)
The components of the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1999
<S> <C> <C>
Startup costs.................................... $ 240,633 $ 171,880
Other temporary differences...................... 277,788 288,533
Net operating losses............................. 1,563,194 8,026,263
----------- -----------
Total net deferred tax asset..................... 2,081,615 8,486,676
Valuation allowance.............................. (2,081,615) (8,486,676)
----------- -----------
Net deferred taxes............................... $ -- $ --
=========== ===========
</TABLE>
A reconciliation of the United States federal statutory corporate rate to
the Company's effective tax rate is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------
1997 1998 1999
<S> <C> <C> <C>
Statutory federal corporate rate.................. 34% 34% 34%
Other............................................. 1 1 4
Increase in valuation allowance................... (35) (35) (38)
------- ------- -------
Effective tax rate................................ -- % -- % -- %
======= ======= =======
</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 $3,882,000
and $19,931,000 at December 31, 1998 and 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.
L. Employee Benefit Plans:
Defined Contribution 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-22
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at March 31, 2000 and for the three months
ended March 31, 1999 and March 31, 2000 is unaudited)
Employee Stock Purchase Plan
In October 1999, the Company established a qualified Employee Stock Purchase
Plan, the terms of which allow for qualified employees to participate in the
purchase of designated shares of the Company's common stock at a price equal to
the lower of 85% of the closing price at the beginning or end of each semi-
annual stock purchase period. The Company has designated a maximum of 425,000
shares for this plan. As of December 31, 1999, no Company shares have been
issued under this plan.
M. Related Party Transactions:
The Company had amounts due from related parties totaling $813,139 and
$286,477 at December 31, 1998 and 1999, respectively. 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 provided that interest accrued beginning January 1, 1999 and payments
of interest commenced July 15, 1999. Amounts due from related parties at
December 31, 1999 was composed of $208,072 related to notes receivable from
stockholders executed in connection with the issuance of restricted stock and
$78,405 related to employee advances.
N. Subsequent Events:
On February 15, 2000, the Company's Board of Directors approved a two-for-
one split of Common Stock in the form of a stock dividend. The stock dividend
was paid on March 8, 2000. 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.
On February 29, 2000, the Company acquired TriVida Corporation, a privately
held developer of online personalization technology. Be Free exchanged
2,933,276 shares of its Common Stock for all of the outstanding shares of
TriVida, and assumed outstanding options to acquire TriVida capital stock for
an additional 566,592 shares of Be Free Common Stock. This acquisition will be
recorded under the purchase method of accounting.
O. Acquisition (Unaudited)
On February 29, 2000, the Company acquired TriVida Corporation ("TriVida").
TriVida provides personalization services to online merchants and content
sites. These personalization services are designed to predict the buying
behavior of a unique but anonymous user based upon the
F-23
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information at March 31, 2000 and for the three months
ended March 31, 1999 and March 31, 2000 is unaudited)
past browsing and buying behavior of that user as well as other anonymous
users. In connection with the transaction, the Company issued common stock with
an approximate value of $165 million at the date of issuance. The acquisition
has been accounted for under the purchase method of accounting. The allocation
of purchase price for TriVida resulted in goodwill of $110 million and other
intangibles, including patents, developed technology and workforce, of $55
million. These items have been recorded as intangible assets within the
Consolidated Balance Sheet, and are being amortized on a straight line basis
over three years. In the period ended March 31, 2000, the Company recorded a
non-recurring charge to operations for acquisition-related costs of $765,000,
which primarily related to employee severence. As of March 31, 2000, $630,000
of the total acquisition-related costs were included in accrued expenses.
F-24
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
TriVida Corporation (a Development Stage Company)
We have audited the accompanying balance sheets of TriVida Corporation (a
Development Stage Company) as of March 31, 1998 and 1999, and the related
statements of operations, stockholders' equity (deficit) and cash flows for the
years ended March 31, 1998 and 1999, and for the period from January 7, 1997
(date of inception) to March 31, 1999. 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 in accordance with auditing standards generally
accepted in the United States. Those standards 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of TriVida Corporation (a
Development Stage Company) at March 31, 1998 and 1999, and the results of its
operations and its cash flows for the years ended March 31, 1998 and 1999, and
for the period from January 7, 1997 (date of inception) to March 31, 1999, in
conformity with accounting principles generally accepted in the United States.
As discussed in Note 2 to the financial statements, the Company's recurring
losses from operations and net capital deficiency raise substantial doubt about
its ability to continue as a going concern. Management's plans as to these
matters are also described in Note 2. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
October 15, 1999
Los Angeles, California
F-25
<PAGE>
TRIVIDA CORPORATION
(A Development Stage Company)
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
------------------------ December 31,
1998 1999 1999
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............. $ 107,010 $ 539,894 $ 1,308,291
Prepaid expenses and other current
assets............................... 1,471 8,958 --
----------- ----------- ------------
Total current assets................. 108,481 548,852 1,308,291
Computers and equipment, net of
accumulated depreciation of $90,516
and $399,675 at March 31, 1998, and
1999 respectively; and $706,795 at
December 31, 1999..................... 595,998 404,058 2,059,545
Deposits............................... 139,518 141,125 185,451
----------- ----------- ------------
Total assets......................... $ 843,997 $ 1,094,035 $ 3,553,287
=========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable...................... $ 100,629 $ 174,431 $ 387,156
Accrued expenses...................... 88,992 13,798 25,763
Related party payable................. 173,333 333,332 373,333
Credit line payable................... 42,825 99,825 99,825
Current portion of capital lease
obligation........................... 250,798 237,743 495,778
----------- ----------- ------------
Total current liabilities............ 656,577 859,129 1,381,855
Capital lease obligations, less current
portion............................... 224,067 52,475 807,251
Convertible notes...................... 580,355 741,600 --
Commitments
Stockholders' equity (deficit):
Preferred Stock, liquidation
preference of $0.60 per share,
4,000,000 and 11,000,000 shares
authorized, 3,898,810 and 10,723,694
Series A Convertible shares issued
and outstanding at March 31, 1998 and
1999, respectively; 11,000,000 shares
authorized, 10,723,694 Series A
Convertible shares issued and
outstanding at December 31, 1999..... 2,339,286 6,462,289 6,462,289
Preferred Stock, liquidation
preference of $0.81 per share,
8,223,694 shares authorized,
7,761,205 Series B Convertible shares
issued and outstanding at December
31, 1999............................. -- -- 6,356,576
Common stock, no par value, 6,000,000
and 16,000,000 shares authorized,
3,000,000 and 3,226,750 shares issued
and outstanding at March 31, 1998 and
1999, respectively; 16,000,000
authorized, 4,085,499 shares issued
and outstanding at December 31, 1999. 6,320 20,725 75,470
Additional paid-in capital on common
stock................................ 307,800 877,280 2,403,810
Deferred compensation................. (202,598) (517,500) (1,460,150)
Deficit accumulated during the
development stage.................... (3,067,810) (7,401,963) (12,473,814)
----------- ----------- ------------
Total stockholders' equity (deficit). (617,002) (559,169) 1,364,181
----------- ----------- ------------
Total liabilities and shareholders'
equity (deficit)...................... $ 843,997 $ 1,094,035 $ 3,553,287
=========== =========== ============
</TABLE>
See accompanying notes.
F-26
<PAGE>
TRIVIDA CORPORATION
(A Development Stage Company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
Period from Nine Months Ended January 7, 1997
Year ended March 31, January 7, 1997 December 31, (date of inception)
------------------------ (date of inception) ------------------------ to December 31,
1998 1999 to March 31, 1999 1998 1999 1999
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenues ............... $ -- $ 119,750 $ 119,750 $ 119,750 $ -- $ 119,750
Operating expenses:
Sales and marketing .. 577,500 931,546 1,509,046 731,326 1,536,422 3,045,468
Research and
development ......... 820,670 1,156,728 1,991,411 840,455 1,046,920 3,038,331
General and
administrative ...... 1,409,399 1,993,764 3,569,143 1,465,177 1,966,474 5,535,617
Amortization of
deferred equity-based
compensation......... 83,962 230,378 314,340 164,185 286,135 600,475
----------- ----------- ----------- ----------- ----------- ------------
Loss from operations ... (2,891,531) (4,192,666) (7,264,190) (3,081,393) (4,835,951) (12,100,141)
Other income (expense):
Interest income ...... 35,199 38,974 74,173 35,316 57,658 131,831
Interest expense ..... (29,885) (179,661) (209,546) (131,511) (292,758) (502,304)
----------- ----------- ----------- ----------- ----------- ------------
Total other income
(expense) ............. 5,314 (140,687) (135,373) (96,195) (235,100) (370,473)
----------- ----------- ----------- ----------- ----------- ------------
Net loss before taxes .. (2,886,217) (4,333,353) (7,399,563) (3,177,588) (5,071,051) (12,470,614)
Taxes .................. (800) (800) (2,400) (800) (800) (3,200)
----------- ----------- ----------- ----------- ----------- ------------
Net Loss ............... $(2,887,017) $(4,334,153) $(7,401,963) $(3,178,388) $(5,071,851) $(12,473,814)
=========== =========== =========== =========== =========== ============
</TABLE>
See accompanying notes.
F-27
<PAGE>
TRIVIDA CORPORATION
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Preferred Stock Preferred Stock Accumulated
Class A Class B Common Stock Additional Deficit During
--------------------- -------------------- ----------------- Paid-in Capital on Deferred Development
Shares Amount Shares Amount Shares Amount Common Stock Compensation Stage
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 7, 1997
(date of
inception)....... -- $ -- -- $ -- -- $ -- $ -- $ -- $ --
Initial
capitalization.. -- -- -- -- 2,625,000 6,000 -- -- --
Issuance of
Series A
Preferred Stock. 2,125,000 1,275,000 -- -- -- -- -- -- --
Issuance of
common stock.... -- -- -- -- 375,000 320 -- -- --
Net loss........ -- -- -- -- -- -- -- -- (180,793)
---------- ---------- --------- ---------- --------- ------- ---------- ----------- ------------
Balance at March
31, 1997......... 2,125,000 1,275,000 -- -- 3,000,000 6,320 -- -- (180,793)
Issuance of
Series A
Preferred Stock. 1,773,810 1,064,286 -- -- -- -- -- -- --
Stock options
issued to
consultants..... -- -- -- -- -- -- 21,240 -- --
Stock option
compensation.... -- -- -- -- -- -- 286,560 (286,560) --
Amortization of
deferred
compensation.... -- -- -- -- -- -- -- 83,962 --
Net loss........ -- -- -- -- -- -- -- -- (2,887,017)
---------- ---------- --------- ---------- --------- ------- ---------- ----------- ------------
Balance at March
31, 1998......... 3,898,810 2,339,286 -- -- 3,000,000 6,320 307,800 (202,598) (3,067,810)
Issuance of
Series A
Preferred Stock
(June 1998)..... 1,805,506 1,083,304 -- -- -- -- -- -- --
Conversion of
Promissory Notes
to Series A
Preferred Stock
(June 1998)..... 1,550,592 950,032 -- -- -- -- -- -- --
Issuance of
common stock.... -- -- -- -- 200,000 12,000 -- -- --
Issuance of
Series A
Preferred Stock
(August 1998)... 833,333 500,000 -- -- -- -- -- -- --
Conversion of
Promissory Notes
to Series A
Preferred Stock
(December 1998). 1,305,140 783,079 -- -- -- -- -- -- --
Stock options
issued to
consultants..... -- -- -- -- -- -- 24,200 -- --
Conversion of
Promissory Notes
to Series A
Preferred Stock
(March 1999).... 1,330,313 798,188 -- -- -- -- -- -- --
Issuance of
stock purchase
warrants........ -- 8,400 -- -- -- -- -- -- --
Exercise of
stock options... -- -- -- -- 26,750 2,405 -- -- --
Stock option
compensation.... -- -- -- -- -- -- 545,280 (545,280) --
Amortization of
deferred
compensation.... -- -- -- -- -- -- -- 230,378 --
Net loss........ -- -- -- -- -- -- -- -- (4,334,153)
---------- ---------- --------- ---------- --------- ------- ---------- ----------- ------------
Balance at March
31, 1999......... 10,723,694 $6,462,289 -- -- 3,226,750 20,725 877,280 (517,500) (7,401,963)
Issuance of
Series B
Preferred Stock
(August 1999)
(unaudited)..... -- -- 5,670,818 4,593,362 -- -- -- -- --
Conversion of
promissory notes
(August 1999)
(unaudited)..... -- -- 2,090,387 1,693,214 -- -- -- -- --
Issuance of
stock purchase
warrants
(unaudited)..... -- -- -- 70,000 -- -- 260,645 -- --
Exercise of
stock options
(unaudited)..... -- -- -- -- 858,749 54,745 -- -- --
Stock options
issued to
consultants
(unaudited)..... -- -- -- -- -- -- 37,100 -- --
Stock option
compensation
(unaudited)..... -- -- -- -- -- -- 1,228,785 (1,228,785) --
Amortization of
deferred
compensation
(unaudited)..... -- -- -- -- -- -- -- 286,135 --
Net loss
(unaudited)..... -- -- -- -- -- -- -- -- (5,071,851)
---------- ---------- --------- ---------- --------- ------- ---------- ----------- ------------
Balance at
December 31, 1999
(unaudited)...... 10,723,694 $6,462,289 7,761,205 $6,356,576 4,085,499 $75,470 $2,403,810 $(1,460,150) $(12,473,814)
========== ========== ========= ========== ========= ======= ========== =========== ============
<CAPTION>
Total
<S> <C>
Balance at
January 7, 1997
(date of
inception)....... $ --
Initial
capitalization.. 6,000
Issuance of
Series A
Preferred Stock. 1,275,000
Issuance of
common stock.... 320
Net loss........ (180,793)
-----------
Balance at March
31, 1997......... 1,100,527
Issuance of
Series A
Preferred Stock. 1,064,286
Stock options
issued to
consultants..... 21,240
Stock option
compensation.... --
Amortization of
deferred
compensation.... 83,962
Net loss........ (2,887,017)
-----------
Balance at March
31, 1998......... (617,002)
Issuance of
Series A
Preferred Stock
(June 1998)..... 1,083,304
Conversion of
Promissory Notes
to Series A
Preferred Stock
(June 1998)..... 950,032
Issuance of
common stock.... 12,000
Issuance of
Series A
Preferred Stock
(August 1998)... 500,000
Conversion of
Promissory Notes
to Series A
Preferred Stock
(December 1998). 783,079
Stock options
issued to
consultants..... 24,200
Conversion of
Promissory Notes
to Series A
Preferred Stock
(March 1999).... 798,188
Issuance of
stock purchase
warrants........ 8,400
Exercise of
stock options... 2,405
Stock option
compensation.... --
Amortization of
deferred
compensation.... 230,378
Net loss........ (4,334,153)
-----------
Balance at March
31, 1999......... (559,169)
Issuance of
Series B
Preferred Stock
(August 1999)
(unaudited)..... 4,593,362
Conversion of
promissory notes
(August 1999)
(unaudited)..... 1,693,214
Issuance of
stock purchase
warrants
(unaudited)..... 330,645
Exercise of
stock options
(unaudited)..... 54,745
Stock options
issued to
consultants
(unaudited)..... 37,100
Stock option
compensation
(unaudited)..... --
Amortization of
deferred
compensation
(unaudited)..... 286,135
Net loss
(unaudited)..... (5,071,851)
-----------
Balance at
December 31, 1999
(unaudited)...... $1,364,181
===========
</TABLE>
See accompanying notes.
F-28
<PAGE>
TRIVIDA CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
Period from Nine months ended January 7, 1997
Year ended March 31, January 7, 1997 December 31, (date of inception)
------------------------ (date of inception) ------------------------ to December 31,
1998 1999 to March 31, 1999 1998 1999 1999
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Operating activities
Net loss............... $(2,887,017) $(4,334,153) $(7,401,963) $(3,178,388) $(5,071,851) $(12,473,814)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation........... 90,516 309,159 402,074 254,334 307,120 709,194
Other common stock
expense............... 21,240 24,200 45,440 24,200 297,745 343,185
Interest converted to
equity................ -- 118,833 118,833 35,588 71,927 190,760
Amortization of
deferred equity-based
compensation.......... 83,962 230,378 314,340 164,185 286,135 600,475
Changes in operating
assets and
liabilities:
Prepaid expenses...... (1,471) (7,487) (8,958) (88,400) 8,958 --
Deposits.............. (137,668) (1,607) (141,125) (4,107) 25,673 (115,452)
Accounts payable...... 29,510 73,802 174,431 34 212,725 387,156
Accrued expenses...... 88,992 (75,194) 13,798 (18,997) 11,966 25,764
Related party payable. 160,000 159,999 333,332 120,000 40,001 373,333
----------- ----------- ----------- ----------- ----------- ------------
Net cash used in
operating activities... (2,551,936) (3,502,070) (6,149,798) (2,691,551) (3,809,601) (9,959,399)
Investing activities
Purchase of property and
equipment.............. (98,330) (40,548) (171,774) (56,704) (694,360) (866,134)
Proceeds from sales of
equipment.............. 30,497 -- 30,497 -- -- 30,497
----------- ----------- ----------- ----------- ----------- ------------
Net cash used in
investing activities... (67,833) (40,548) (141,277) (56,704) (694,360) (835,637)
Financing activities
Payments of capital
lease obligations...... (113,319) (261,318) (374,637) (195,639) (255,435) (630,072)
Credit line borrowings.. 42,825 57,000 99,825 57,000 -- 99,825
Issuance of Series A
Preferred Stock........ 1,064,286 1,583,304 3,922,590 1,583,304 -- 3,922,590
Issuance of Series B
Preferred Stock........ -- -- -- -- 4,593,362 4,593,362
Issuance of common
stock.................. -- 14,405 20,725 14,000 54,745 75,470
Issuance of convertible
promissory notes....... 580,355 2,582,111 3,162,466 1,832,111 879,687 4,042,153
----------- ----------- ----------- ----------- ----------- ------------
Net cash provided by
financing activities... 1,574,147 3,975,502 6,830,969 3,290,776 5,272,359 12,103,328
----------- ----------- ----------- ----------- ----------- ------------
Net increase (decrease)
in cash and cash
equivalents............ (1,045,622) 432,884 539,894 542,521 768,398 1,308,292
Cash and cash
equivalents, beginning
of period.............. 1,152,632 107,010 -- 107,010 539,893 539,893
----------- ----------- ----------- ----------- ----------- ------------
Cash and cash
equivalents, end of
period................. $ 107,010 $ 539,894 $ 539,894 $ 649,531 $ 1,308,291 $ 1,848,185
=========== =========== =========== =========== =========== ============
Supplemental
disclosures:
Interest paid.......... $ 23,562 $ 166,307 $ 189,869 $ 19,585 $ 73,026 $ 262,895
=========== =========== =========== =========== =========== ============
Supplemental disclosure
of non-cash
transactions:
During the years ended March 31, 1998 and 1999, the Company entered into capital lease
obligations totaling $588,184 and $76,671, respectively.
During the year ended March 31, 1999, $2,412,466 in convertible notes and $118,833 in
accrued interest were converted into 4,186,045 shares of Series A Preferred Stock.
During the nine months ended December 31, 1998 and 1999, the Company entered into capital
lease obligations totaling $64,863 and $1,268,242, respectively.
During the nine months ended December 31, 1998, $1,697,593 in convertible notes and $35,588
in accrued interest were converted into 1,330,313 shares of Series A Preferred Stock.
During the nine months ended December 31, 1999, $1,621,287 in convertible notes and $71,927
in accrued interest were converted into 2,090,387 shares of Series B Preferred Stock.
</TABLE>
See accompanying notes.
F-29
<PAGE>
TRIVIDA CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Information at December 31, 1999 and for the nine months ended December 31,
1998 and 1999 is unaudited)
1. Business Activity
TriVida Corporation (the Company), formally Nemogen Corporation, was
incorporated on January 7, 1997, in California. The Company was formed to
develop and market transactional stream analysis software products. The Company
has changed its business model from transactional stream analysis software
products to networked website personalization. Website personalization allows
companies to customize sales and marketing information on their websites, in
hopes of increasing sales, by predicting customer preferences from comparing a
customer's selections to those made by other customers previously. The
Company's service is provided over the Internet, in real time. To date the
Company has devoted the majority of its efforts to product development
activities and the raising of capital. As such, the Company is considered to be
in the development stage at March 31, 1999.
2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The Company has experienced recurring operating losses and has a deficiency
in working capital and stockholders' equity. The Company's growth and product
development have required significant capital, which historically has been met
primarily through the sale of stock and the issuance of convertible promissory
notes. Management believes that additional capital will be needed to fund the
Company's ongoing product development and marketing efforts. Management
believes that the necessary capital to fund these efforts for the next twelve
months will be raised through the sale of additional shares of the Company's
Series B Preferred Stock or other securities of the Company. However, there can
be no assurance that such financing will be completed. Without additional
financing, the Company will be required to reduce its product development and
marketing efforts. These conditions raise substantial doubt about the Company's
ability to continue as a going concern.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern and do not include any adjustments to
reflect the net realizable value of the Company's net assets in the event that
the Company is unable to sustain its operations.
Unaudited Interim Results
The accompanying balance sheet as of December 31, 1999, the statements of
operations and cash flows for the nine months ended December 31, 1998 and 1999
and the statement of stockholders' equity (deficit) for the nine months ended
December 31, 1999 are unaudited. The unaudited interim financial statements
have been prepared on the same basis as the annual financial statements and, in
the opinion of management, reflect all adjustments, which included only normal
recurring adjustments, necessary to present fairly the Company's financial
position, results of
F-30
<PAGE>
TRIVIDA CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information at December 31, 1999 and for the nine months
ended December 31, 1998 and 1999 is unaudited)
operations and cash flows as of December 31, 1999 and for the nine months ended
December 31, 1998 and 1999. The financial data and other information disclosed
in these notes to the financial statements related to these periods are
unaudited.
Cash and Cash Equivalents
Cash equivalents include highly liquid investments with maturities of three
months or less from the date of purchase.
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents approximates fair value due
to the short maturities of those instruments. The carrying amount of the
Company's credit line payable approximates fair value due to its variable rate
nature. There is no established market for the Company's convertible promissory
notes; however, management believes that the carrying amount approximates fair
value.
Computers and Equipment
Computers and equipment, including assets recorded under capital leases, are
stated at cost. These assets are depreciated using the straight-line method
over the estimated useful life of three years or over the period of the lease,
whichever is shorter.
Long-Lived Assets
The Company accounts for long-lived assets in accordance with Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of." The Company reviews
for the impairment of long-lived assets and certain identifiable intangibles
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Under Statement No. 121, an impairment loss
would be recognized when estimated future cash flows expected to result from
the use of the asset and its eventual disposition is less than its carrying
amount. No such impairment losses have been identified by the Company.
Income Taxes
The Company accounts for income taxes using the liability method, as
required by Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." Deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities, and are measured using enacted tax rates and laws expected to be
in effect when the
F-31
<PAGE>
TRIVIDA CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information at December 31, 1999 and for the nine months
ended December 31, 1998 and 1999 is unaudited)
differences are expected to reverse. Valuation allowances are established when
necessary to reduce the carrying amount of deferred tax assets to their net
realizable value.
Accounting for Stock Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB No. 25), and related
interpretations in accounting for its stock options as permitted under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" (SFAS No. 123). The required pro forma disclosure for
compensation expense under SFAS No. 123 are disclosed in Note 4.
Research and Development Costs
Pursuant to the Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed," the Company is required to capitalize software development costs
when "technological feasibility" of the product has been established and
anticipated future revenues assure recovery of the capitalized amounts. Because
the Company's product is still in the development phase, software development
costs have been charged to product development expenses in the accompanying
statements of operations.
Estimates and Assumptions
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 in the
financial statements and the accompanying notes. Actual results could differ
from those estimates.
Reclassifications
Certain prior year financial statement items have been reclassified to
conform to the current period's presentation.
3. Stockholders' Equity (Deficit) and Convertible Notes
The Company was initially capitalized in January 1997, with the issue of
2,625,000 shares of common stock for a total of $6,000. On March 14, 1997, the
Company issued 2,125,000 shares of Series A Preferred Stock at a purchase price
of $0.60 per share to Woodside Fund III, L.P. (Woodside) and InnoCal L.P.
(InnoCal). The Company issued an additional 375,000 shares of common stock to
Woodside for a total of $320. An additional 1,773,810 shares of Series A
Preferred Stock at $0.60 per share were issued to Woodside and InnoCal and
certain other Series A Preferred Stockholders in August 1997.
F-32
<PAGE>
TRIVIDA CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information at December 31, 1999 and for the nine months
ended December 31, 1998 and 1999 is unaudited)
In February 1998, the Company issued to Woodside, Innocal and several
existing Series A Preferred shareholders convertible promissory note totaling
$580,355. The notes were non-interest bearing and payable upon demand of the
holders. In connection with the issuance of the convertible notes, warrants to
purchase common shares at $0.10 per share upon the closing of an equity
financing with proceeds of at least $5 million, were issued to Woodside and
InnoCal. The number of shares subject to the warrant will be equivalent to the
number of shares which would equal $75,000 of fair value of common stock at the
time of the financing, as determined by the Company's Board of Directors. These
warrants will expire in February 2004, to the extent not previously exercised.
As of March 31, 1999, such a financing has not occurred and no warrants have
been exercised. The conversion feature of the convertible promissory notes was
later amended to allow for conversion upon the next round of equity financing.
In April, May and June 1998, the Company issued convertible promissory notes
to Woodside and InnoCal totaling $670,000. These notes bore an interest rate of
10% per annum and were due upon demand. These notes were convertible into
shares of the Company's Series A Preferred Stock at the option of the holder.
In June 1998, the Company entered into a Series A Preferred Stock Agreement
whereby the Company issued 1,805,506 shares of Series A Preferred Stock at a
purchase price of $0.60 per shares. Concurrent with this equity financing,
$930,355 in outstanding convertible notes and $19,677 in accrued interest were
converted into 1,550,592 shares of the Company's Series A Preferred Stock.
Also in June 1998, the Company issued additional convertible promissory
notes totaling $998,024 to Woodside, InnoCal and several other existing
shareholders. These notes bore an interest rate of 10% per annum and were due
upon demand. These notes were convertible into shares of the Company's Series A
Preferred Stock upon the next round of equity financing.
On July 28, 1998, InnoCal purchased 200,000 shares of the Company's common
stock for $12,000.
On July 31, 1998, the Company issued to idealab! Capital Partners I-A and I-
B, L.P. (idealab!) convertible promissory notes totaling $500,000 and bearing
an interest rate of 10% per annum. The unpaid balance and accrued interest on
the notes will be converted into shares of the Company's Series A Preferred
Stock at a rate of $0.60 per shares. Additionally, in August 1998, the Company
issued to idealab! 833,333 shares of Series A Preferred Stock for a price of
$0.60 per share.
On December 31, 1998, pursuant to the provisions of the promissory note
agreements, $749,012 in outstanding convertible promissory notes, plus $34,067
in accrued interest were converted into 1,305,140 shares of the Company's
Series A Preferred Stock.
F-33
<PAGE>
TRIVIDA CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information at December 31, 1999 and for the nine months
ended December 31, 1998 and 1999 is unaudited)
On March 12, 1999, the Company issued to InnoCal, Woodside and idealab!
convertible promissory notes totaling $750,000 and bearing an interest rate of
10% per annum. The unpaid principal and accrued interest will convert into
shares of the Company's Series A Preferred Stock at a rate of $0.60 per share.
In connection with the issuance of these convertible notes, 240,000 warrants
for the purchase of common stock at a price of $0.60 per share were issued to
Woodside, InnoCal, and idealab! In addition, the holders of the warrants may
convert the warrants into common stock, without any additional consideration
paid. The number of shares of common stock into which the warrants convert is
dependent upon the fair market value of the Company's common stock at the date
of conversion. These warrants expire in March 2004, to the extent not
previously exercised. At the date of grant, the warrants have been valued at
$8,400 and have been treated as a discount to the convertible notes issued and
as additional Preferred Stock contribution.
Also on March 12, 1999, $749,012 in outstanding convertible promissory
notes, plus $49,176 in accrued interest, were converted into 1,330,313 shares
of the Company's Series A Preferred Stock.
On April 5, 1999, the Company issued to Oasis Ventures (Oasis) and other
investors $767,187 in convertible promissory notes, bearing interest at a rate
of 10% per annum. The unpaid principal balance and accrued interest will
convert into shares of the Company's Series B Preferred Stock at a rate of
$0.81 per share. In connection with the issuance of these convertible notes,
265,730 warrants for the purchase of common stock at a price of $0.06 per share
were issued to Oasis and other investors. In addition, the holders of the
warrants may convert the warrants into common stock, without any additional
consideration paid. The number of shares of common stock into which the
warrants convert is dependent upon the fair market value of the Company's
common stock at the date of conversion. These warrants expire in March 2004, to
the extent not previously exercised. At the date of grant, the warrants have
been valued at $152,794 and have been treated as a discount to convertible
notes issued and as additional paid-in capital.
On July 28, 1999, the Company issued to InnoCal, Woodside and idealab!
$112,500 in convertible promissory notes. The notes are due upon demand and
bear interest at a rate of 8% per annum. The unpaid principal balance and
accrued interest will automatically be converted into shares of the Company's
Series B Preferred Stock at a rate of $0.81 per share.
In August 1999, the Company issued 5,670,818 shares of Series B Preferred
Stock at a price of $0.81 per share, for $4,593,362. Additionally, $1,693,214
in outstanding convertible promissory notes were converted into 2,090,387
shares of the Company's Series B Preferred Stock.
The Series A Preferred Stock is convertible into common stock at the
holder's option at any time after issuance. The rate of conversion into common
stock is determined by the product of multiplying the number of Series A
Preferred shares being converted by the Series A Preferred Conversion Rate,
which shall initially be 1:1 but may change pursuant to the terms of the Stock
F-34
<PAGE>
TRIVIDA CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information at December 31, 1999 and for the nine months
ended December 31, 1998 and 1999 is unaudited)
Purchase Agreement. All Series A Preferred Stock will be automatically
converted into common stock upon the affirmative election of the holders of at
least a majority of the outstanding shares of Series A Preferred Stock or upon
the completion of a public offering with proceeds of at least $15 million and a
total Company valuation of at least $75 million. The voting rights of the
Series A Preferred Stock are equal to the number of shares of common stock into
which such shares may be converted on a 1:1 basis. Each share of Series A
Preferred Stock entitles the holder to receive cash dividends at a rate of 8%
per annum of the original issue price of $0.60 per share. The dividends are
payable at the declaration and discretion of the Board of Directors and are
non-cumulative.
The Series B Preferred Stock is convertible into common stock at the
holder's option at any time after issuance. The rate of conversion into common
stock is determined by the product of the number of Series B Preferred shares
being converted and the Series B Preferred Conversion Rate, which shall
initially be 1:1 but may change pursuant to the terms of the Series B Preferred
Stock Purchase Agreement. All Series B Preferred Stock will automatically be
converted into common stock upon the affirmative election of the holders of at
least a majority of the outstanding shares of Series B Preferred Stock or upon
the completion of a public offering with proceeds of at least $15 million and a
total Company valuation of at least $75 million. The voting rights of the
Series B Preferred Stock are equal to the number of shares into which such
shares may be converted on a 1:1 basis. Each share of Series B Preferred Stock
entitles the holder to receive cash dividends at a rate of 8% per annum of the
original purchase price of $0.81 per share. Dividends are payable at the
declaration and discretion of the Board of Directors and are non-cumulative.
The Company's Articles of Incorporation have been amended from time to time
to, among other matters, adjust its authorized number of shares of preferred
and common stock. In addition, in June 1998, the Company authorized a stock
split of its Series A Preferred Stock, whereby every three shares of Series A
Preferred Stock became five shares. All information in these financial
statements related to shares of Series A Preferred Stock has been adjusted to
reflect this stock split.
At March 31, 1999, 12,773,250 shares of common stock were reserved for
future issuance, of which 1,900,000 were reserved for issuance under the
Company's stock option plan, 11,000,000 were reserved for issuance upon the
conversion of Preferred Stock, 1,250,000 were reserved for issuance upon the
conversion of the convertible promissory notes and 365,000 were reserved for
issuance upon the exercise of stock purchase warrants. In July 1999, the
Company amended its Articles of Incorporation to increase the authorized number
of shares of common stock to 30,000,000 shares.
4. Stock Option Plan
The Company has adopted a Stock Option Plan (the Plan), which provides for
the granting of options for the purchase of up to 1,900,000 (1,000,000 at March
31, 1998) shares of the Company's common stock. Under the Plan, incentive
options to purchase shares may be granted to employees of the Company.
Nonqualified options to purchase shares may be issued to employees, directors,
and
F-35
<PAGE>
TRIVIDA CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information at December 31, 1999 and for the nine months
ended December 31, 1998 and 1999 is unaudited)
consultants of the Company. Under the terms of the Plan, the exercise price of
the incentive and nonqualified options cannot be less than the fair market
value at the date of grant. Options principally vest over a period of four
years from the date of grant and generally expire ten years from such grant.
The Company has granted 11,800 and 45,000 options to certain consultants for
services rendered as of March 31, 1998 and 1999, respectively. As of March 31,
1999, 11,800 of these options have an exercise price of $1.80 per share, 5,000
have an exercise price of $0.60 per share and 40,000 have an exercise price of
$0.06 per share. The estimated fair value of these options has been recognized
as additional paid-in capital and related expense in the amounts of $21,240 and
$24,200 for the years ended March 31, 1998 and 1999, respectively.
The Company has granted 70,000 options and 127,084 warrants for the purchase
of the Company's common stock to certain consultants for services rendered
during the nine month period ended December 31, 1999. As of December 31, 1999,
the 70,000 options have an exercise price of $0.20 per share. The estimated
fair market value of these options has been recognized as additional paid-in
capital and related expense in the amount of $37,100 for the nine month period
ended December 31, 1999. At the date of grant, the warrants have been valued at
$107,851 and have been recognized as additional paid-in capital and related
expense.
A summary of the Company's stock option activity and related information is
as follows:
<TABLE>
<CAPTION>
Outstanding Stock Options
------------------------------
Weighted
Average
Exercise
Price Exercise
Number of Per Price Per
Options Share Share
<S> <C> <C> <C>
Outstanding at March 31, 1997.............. -- $ -- $ --
Granted.................................. 664,800 0.09 0.06-1.80
--------- ----- ----------
Outstanding at March 31, 1998.............. 664,800 0.09 0.06-1.80
Granted.................................. 1,231,000 0.06 0.06
Exercised................................ (26,750) 0.06 0.06
Forfeited................................ (79,250) 0.06 0.06
--------- ----- ----------
Outstanding at March 31, 1999.............. 1,789,800 $0.07 $0.06-1.80
Granted.................................. 2,436,500 0.19 0.06-0.20
Exercised................................ (858,749) 0.06 0.06-0.20
Forfeited................................ (30,667) 0.16 0.06-0.20
--------- ----- ----------
Outstanding at December 31, 1999........... 3,336,884 0.16 0.06-1.80
========= ===== ==========
Exercisable at:
March 31, 1998........................... 14,800 $1.45 $0.06-1.80
March 31, 1999........................... 334,540 $0.13 $0.06-1.80
December 31, 1999........................ 835,220 $0.10 $0.06-1.80
========= ===== ==========
</TABLE>
F-36
<PAGE>
TRIVIDA CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information at December 31, 1999 and for the nine months
ended December 31, 1998 and 1999 is unaudited)
At March 31, 1998 and 1999, 335,200 and 110,200 shares, respectively, were
available for future grant. The weighted average remaining contractual life for
the outstanding options was 8.46 years at March 31, 1999.
The excess of the deemed fair value of the Company's common stock over the
exercise price of options granted during the years ended March 31, 1998 and
1999 and the nine months ended December 31, 1999, at the date of grant amounted
to $286,560, $545,280 and $1,228,725, respectively. The deemed fair value of
the common stock was determined by the Company based on the selling prices of
contemporaneous sales of Series A Preferred Stock considering the relative
rights and privileges of each security, the stages of development of the
Company's business, and the inherent risks and perceived future potential of
the Company at the time of grant or issuance. The typical vesting period of the
options is 25% after the first year from grant with the remaining balance
vesting evenly over the following three years. The amortization of deferred
compensation will be charged to operations on a graded methodology basis,
consistent with the method described in Financial Accounting Standards Board
Interpretation No. 28, over the vesting period of the options. During the years
ended March 31, 1998 and 1999 and the nine month period ended December 31,
1999, amortization of deferred compensation of $83,962, $230,378 and $286,135,
respectively, was recorded. Had compensation cost for the Company's stock-based
compensation plan been determined consistent with the fair value approach set
forth in SFAS No. 123, the Company's net losses for the years ended March 31,
1998 and 1999, would have been as follows:
<TABLE>
<CAPTION>
1998 1999
<S> <C> <C>
Net loss as reported............................ $(2,887,017) $(4,334,153)
APB No. 25 compensation expense recorded........ 83,962 230,378
Stock-based compensation under SFAS No. 123..... (5,447) (45,726)
----------- -----------
Pro forma net loss.............................. $(2,808,502) $(4,149,501)
=========== ===========
</TABLE>
The fair value of options granted during the years ended March 31, 1998 and
1999, are estimated on the date of grant using the minimum value method with
the following weighted-average assumptions: no dividend yield; risk-free
interest rates ranging from 4.5% to 5.5%; and an expected life of four years.
At March 31, 1998 and 1999, deferred compensation of $202,598 and $517,500,
respectively, was reflected as a reduction of stockholders' equity. The
deferred compensation amortization relates only to stock options awarded to
employees; the salaries and related benefits of these employees are included in
the applicable operating expense line item.
5. Line of Credit
On May 30, 1997, the Company entered into a QuickStart Loan Agreement (Loan
Agreement) with Silicon Valley Bank, which was amended on November 30, 1998.
The Loan Agreement allows for borrowings up to $99,825 and matures on May 30,
1999. Borrowings bear interest at the
F-37
<PAGE>
TRIVIDA CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information at December 31, 1999 and for the nine months
ended December 31, 1998 and 1999 is unaudited)
prevailing prime rate, as defined, plus 2.0% (10.5% at March 31, 1998, and
9.75% at March 31, 1999).
In connection with the renewal of the Loan Agreement in November 1999, the
Company issued to Silicon Valley Bank 86,420 warrants to purchase the shares of
the Company's Series B Preferred Stock at a price of $0.81 per share. In
addition, the warrants may be converted, on a net basis, into shares of Series
B Preferred Stock without any additional consideration paid. These warrants
expire in November 2009, to the extent not previously exercised. At the date of
grant, the warrants have been valued at $70,000 and have been treated as a
deferred financing cost and as an additional Series B Preferred Stock
contribution.
6. Commitments
The Company conducts its operations in a leased facility. The lease expires
in December 2004. Rent expense related to this lease amounted to $88,372 and
$184,104 for the years ended March 31, 1998 and 1999, respectively. In
addition, the Company leases certain computer equipment and furniture under
capital leases. The cost and accumulated depreciation related to equipment
under capital leases totaled $328,451 and $664,859, and $71,519 and $588,184,
respectively, at March 31, 1998 and 1999. Future minimum payments under these
leases consisted of the following at March 31, 1999:
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
<S> <C> <C>
2000................................................ $ 184,104 $301,399
2001................................................ 184,104 44,510
2002................................................ 184,104 19,152
2003................................................ 184,104 --
2004................................................ 184,104 --
Thereafter.......................................... 122,736 --
---------- --------
Total minimum lease payments........................ $1,043,256 365,061
----------
Amounts representing interest....................... (74,843)
--------
Present value of net minimum lease payments
(including current portion of $237,743)............ $290,218
========
</TABLE>
7. Income Taxes
No provision for income taxes, other than the state minimum tax of $800, was
recognized for the years ended March 31, 1998, 1999 and December 31, 1999, as a
result of the net loss incurred during such periods.
F-38
<PAGE>
TRIVIDA CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information at December 31, 1999 and for the nine months
ended December 31, 1998 and 1999 is unaudited)
The components of the Company's deferred tax assets (and related valuation
reserve) are as follows:
<TABLE>
<CAPTION>
March 31,
------------------------
1998 1999
<S> <C> <C>
Net operating loss carryforwards................ $ 1,097,508 $ 2,665,106
Other........................................... 86,390 150,790
----------- -----------
Total deferred tax assets....................... 1,183,898 2,815,896
Valuation reserve............................... (1,183,898) (2,815,896)
----------- -----------
Net deferred tax assets......................... $ -- $ --
=========== ===========
</TABLE>
The Company's income tax expense differs from income tax (benefit) computed
at the U.S. federal statutory rate due to deferred tax assets not benefited.
The Company's net operating loss carryforwards could be limited in
circumstances involving a significant change in equity ownership.
At March 31, 1999 and December 31, 1999, the Company had net operating loss
carryforwards for both federal and state income tax purposes of approximately
$6,700,000 and $11,400,000, respectively. The net operating loss carryforwards
will expire at various dates beginning in 2005 through 2019, if not utilized.
8. Employee Benefit Plans
Employees of the Company who are at least 21 years of age and have completed
one month of service, are eligible to participate in a defined contribution
retirement plan, under the provisions of Section 401(k) of the Internal Revenue
Code. Employees may contribute 15% of their eligible compensation, up to a
maximum of $10,000. The plan does provide for matching or discretionary
contributions by the Company; however, no such contributions have been made
through March 31, 1999.
9. Related Party Transactions
The Company has entered into agreements with two of its executives and
shareholders, whereby a portion of their salaries be loaned to the Company.
These loans will be repaid upon the closing of a Third Party Financing, defined
as an equity financing from institutional investors with proceeds of at least
$5 million. As of March 31, 1999, no such Third Party Financing has occurred.
Amounts accrued under these agreements total $173,333, $333,332 and $40,000 for
the years ended March 31, 1998 and 1999 and the nine month period ended
December 31, 1999, respectively.
F-39
<PAGE>
TRIVIDA CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information at December 31, 1999 and for the nine months
ended December 31, 1998 and 1999 is unaudited)
10. Year 2000 (Unaudited)
The Company has assessed its Year 2000 business risks and its exposure to
computer systems which are date sensitive. Year 2000 risks results from certain
computer programs that were written using two digits rather than four digits to
define the year (for example "99" for 1999). Computer systems and operating
equipment that utilize two digit date definitions may experience processing
problems or failure when the last two digits of a year become "00," as did
occur on January 1, 2000. Based on its evaluation, the Company determined that
certain of its information systems were not Year 2000 compliant and elected to
upgrade or replace such systems. These systems were replaced during fiscal year
1999 and the Company has determined that it is fully Year 2000 compliant. The
cost of this replacement was not material.
11. Event Subsequent to Date of Report of Independent Auditors (Unaudited)
On February 15, 2000 the Company signed a definitive agreement with Be Free,
Inc. (Be Free), whereby Be Free would acquire all of the Company's issued and
outstanding shares of capital stock for approximately 2,933,276 shares of Be
Free common stock. In addition, Be Free would assume all outstanding options to
acquire the Company's capital stock, pursuant to which an additional 566,592
shares of Be Free common stock may be issued. The sale was completed on
February 29, 2000.
F-40
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL INFORMATION
On February 29, 2000, Be Free acquired TriVida Corporation, a privately held
developer of online personalization technology. Be Free exchanged 2,912,996
shares of its Common Stock, net of an escrow distribution, for all of the
outstanding shares of TriVida, and assumed outstanding options to acquire
TriVida capital stock for an additional 566,592 shares of Be Free Common Stock.
The following unaudited pro forma combined condensed financial information
gives effect to the acquisition by Be Free of TriVida in a transaction which
has been accounted for as a purchase. The unaudited pro forma combined
condensed statement of continuing operations for the three months ended March
31, 2000 is based on combining the historical statement of continuing
operations of Be Free for the three months ended March 31, 2000, which includes
the results of TriVida since the date of acquisition, and the historical
statement of continuing operations of TriVida for the two months ended
February 29, 2000, as if the acquisition occurred on January 1, 2000. The
unaudited pro forma combined condensed statement of continuing operations for
the year ended December 31, 1999 is based on the historical statements of
continuing operations of Be Free and TriVida, and combines the results of
continuing operations of Be Free for the year ended December 31, 1999 and the
twelve months ended December 31, 1999 of TriVida, as if the acquisition
occurred on January 1, 1999. TriVida's fiscal year ends on March 31. The
results of continuing operations for TriVida for the twelve months ended
December 31, 1999 were created using the unaudited results of operations of
TriVida for the nine months ended December 31, 1999 and adding the unaudited
results of operations of TriVida for its three months ended March 31, 1999.
The pro forma combined condensed financial information is presented for
illustrative purposes only and is not necessarily indicative of the financial
position or operating results that would have been achieved if the acquisition
had been consummated as of the beginning of the period presented, nor are they
necessarily indicative of the future financial position or operating results of
Be Free. The pro forma combined condensed financial information does not give
effect to any cost savings or restructuring and integration costs which may
result from the integration of Be Free and TriVida operations.
The unaudited pro forma combined condensed financial information is based on
continuing operations only and excludes the results of extraordinary items.
The unaudited pro forma combined condensed financial information should be
read in conjunction with the financial statements and notes thereto of Be Free
and TriVida included elsewhere in this prospectus.
F-41
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT
OF CONTINUING OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Be Free TriVida Adjustments Combined
<S> <C> <C> <C> <C>
Revenue................. $ 3,628,529 $ -- $ -- $ 3,628,529
Operating expenses:
Cost of revenue....... 603,800 -- -- 603,800
Sales and marketing... 3,558,424 453,696 -- 4,012,120
Client services....... 1,527,341 80,588 -- 1,607,929
Development and
engineering.......... 1,567,832 339,321 -- 1,907,153
General and
administrative....... 1,175,315 2,366,214 -- 3,541,529
Equity related
compensation......... 271,869 -- -- 271,869
Amortization of
goodwill and
intangible assets.... 5,348,943 -- 9,168,652(1) 14,517,595
------------ ----------- ----------- ------------
Total operating
expenses........... 14,053,524 3,239,819 9,168,652 26,461,995
------------ ----------- ----------- ------------
Operating loss...... (10,424,995) (3,239,819) (9,168,652) (22,833,466)
Interest income
(expense), net......... 1,081,385 (59,833) -- 1,021,552
------------ ----------- ----------- ------------
Loss from continuing
operations............. $ (9,343,610) $(3,299,652) $(9,168,652) $(21,811,914)
============ =========== =========== ============
Basic and diluted loss
from continuing
operations per common
share(2)............... $ (0.17) $ (0.41)
Basic and diluted
weighted average number
of common shares(2).... 53,454,823 53,454,823
</TABLE>
See accompanying notes to the unaudited pro forma combined
condensed financial information.
F-42
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT
OF CONTINUING OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Be Free TriVida Adjustments Combined
<S> <C> <C> <C> <C>
Revenue................. $ 5,328,675 $ -- $ -- $ 5,328,675
Operating expenses:
Cost of revenue....... 844,838 -- -- 844,838
Sales and marketing... 9,329,446 1,736,642 -- 11,066,088
Client services....... 3,473,583 -- -- 3,473,583
Development and
engineering.......... 4,767,382 1,328,112 -- 6,095,494
General and
administrative....... 2,823,412 2,530,149 -- 5,353,561
Equity related
compensation......... 1,942,147 352,328 -- 2,294,475
Amortization of
goodwill and
intangible assets.... -- -- 54,452,270(1) 54,452,270
------------ ----------- ------------ ------------
Total operating
expenses........... 23,180,808 5,947,231 54,452,270 83,580,309
------------ ----------- ------------ ------------
Operating loss...... (17,852,133) (5,947,231) (54,452,270) (78,251,634)
Interest income
(expense), net......... 347,721 (279,585) -- 68,136
Provision for income
taxes.................. -- (800) -- (800)
------------ ----------- ------------ ------------
Loss from continuing
operations............. $(17,504,412) $(6,227,616) $(54,452,270) $(78,184,298)
============ =========== ============ ============
Basic and diluted loss
from continuing
operations per common
share(2)............... $ (0.92) $ (3.58)
Basic and diluted
weighted average number
of common shares(2).... 18,951,340 21,864,336
</TABLE>
See accompanying notes to the unaudited pro forma combined
condensed financial information.
F-43
<PAGE>
NOTES TO PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
A. Pro forma Basis of Presentation and Adjustments
On February 29, 2000, Be Free issued 2,912,996 shares of its Common Stock,
net of an escrow distribution, in exchange for all outstanding shares of common
and preferred stock of TriVida. Be Free also issued options exercisable for
566,592 shares of common stock in replacement of outstanding options for common
stock of TriVida.
The following unaudited pro forma combined condensed financial information
gives effect to the acquisition by Be Free of TriVida in a transaction which
has been accounted for as a purchase. The unaudited pro forma combined
condensed statement of continuing operations for the three months ended March
31, 2000 is based on combining the historical statement of continuing
operations of Be Free for the three months ended March 31, 2000, which includes
the results of TriVida since the date of acquisition, and the historical
statement of continuing operations of TriVida for the two months ended
February 29, 2000, as if the acquisition occurred on January 1, 2000. The
unaudited pro forma combined condensed statement of continuing operations for
the year ended December 31, 1999 is based on the historical statements of
continuing operations of Be Free and TriVida, and combines the results of
continuing operations of Be Free for the year ended December 31, 1999 and the
twelve months ended December 31, 1999 of TriVida, as if the acquisition
occurred on January 1, 1999. TriVida's fiscal year ends on March 31. The
results of continuing operations for TriVida for the twelve months ended
December 31, 1999 were created using the unaudited results of operations of
TriVida for the nine months ended December 31, 1999 and adding the unaudited
results of operations of TriVida for its three months ended March 31, 1999.
B. Pro Forma Adjustments to Pro Forma Combined Condensed Financial Information
1. The purchase price for TriVida is approximately $165.0 million based on
the consideration paid to TriVida shareholders including common stock
and options, plus acquisition related expenses. For purposes of
measuring the value of the transaction, the value of the common stock
issued was based on the average closing price of Be Free's common stock
two days before and after the parties agreed to the terms of the
acquisition and the terms were announced. The value of options issued
was estimated using the Black Scholes valuation model. For the purposes
of the preparation of the pro forma combined condensed financial
information, Be Free has allocated approximately $1.4 million of the
purchase price to tangible assets acquired and liabilities assumed
based on the book value as of December 31, 1999. The remainder has been
allocated to intangible assets which include: completed technology,
workforce and goodwill. Based on an estimated useful life of three
years for such intangible assets, the unaudited pro forma combined
condensed financial information includes an adjustment for amortization
expense of approximately $54.5 million for the twelve months ended
December 31, 1999 and $13.8 million for the three months ended March
31, 2000.
2. The unaudited pro forma combined per share amounts are based on the pro
forma combined weighted average number of common shares which equals Be
Free's weighted average number of common shares outstanding for the
period plus the 2,933,276 shares of Be Free common stock issued in
connection with the acquisition of TriVida. All dilutive potential
F-44
<PAGE>
common shares of Be Free and TriVida have been excluded from the
calculation of pro forma loss from continuing operations per common
share as their inclusion would be antidilutive. Unaudited pro forma loss
per share from continuing operations for the twelve months ended
December 31, 1999 excludes accretion of preferred stock to redemption
value of $0.07 per share.
F-45
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the various expenses to be incurred in
connection with the sale and distribution of the securities being registered
hereby, all of which will be borne by Be Free. All amounts shown are estimates
except the Securities and Exchange Commission registration fee.
<TABLE>
<S> <C>
Filing Fee--Securities and Exchange Commission.................. $ 5,028
Legal fees and expenses......................................... $ 60,000
Accounting fees and expenses.................................... $ 20,000
Printing and Engraving Expenses................................. $ 15,000
Miscellaneous expenses.......................................... $ 14,972
--------
Total Expenses................................................ $115,000
========
</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
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.
II-1
<PAGE>
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.
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.
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, as retroactively adjusted for all stock splits occurring to
date. 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.
II-2
<PAGE>
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.
On February 29, 2000, the Company consummated the merger (the "Merger") of a
wholly-owned subsidiary ("Merger Sub") with and into TriVida Corporation, a
California corporation ("TriVida"), pursuant to the Agreement and Plan of
Merger, dated February 15, 2000, by and among the Company, Merger Sub and
TriVida. As a result of the consummation of the Merger, we issued 2,933,276
shares of common and reserved for issuance an additional 566,592 shares
pursuant to assumed options.
At various times from November 1998 through our initial public offering, 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
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
2 Agreement and Plan of Merger, dated February 15, 2000 by and among the
Company, Cyrano Acquisition Corp., a Delaware corporation and wholly
owned subsidiary of the Company and TriVida Corporation, a California
corporation (Incorporated by reference to Exhibit 2 to the Company's
Registration Statement on Form S-1 (File No. 333-31916) as declared
effective by the SEC on March 28, 2000 (the "Secondary Registration
Statement")).
3 Amendment, dated May 25, 2000, to the Amended and Restated Certificate
of Incorporation of the Registrant.
3.1 Amended and Restated Certificate of Incorporation of the Registrant
(Incorporated by reference to Exhibit 3.2 of the Company's
Registration Statement on Form S-1 (File No. 333-84535) as declared
effective by the SEC on November 2, 1999 (the "IPO Registration
Statement")).
3.2 Amended and Restated By-Laws of the Registrant (Incorporated by
reference to Exhibit 3.4 of the IPO Registration Statement).
4 Specimen certificate for shares of Common Stock, $.01 par value per
share, of the Registrant (Incorporated by reference to Exhibit 4 of
the IPO Registration Statement).
5 Opinion of Hale and Dorr LLP (Incorporated by reference to Exhibit 5
to this Registration Statement as filed on May 25, 2000).
10.1 Amended and Restated 1998 Stock Incentive Plan, dated May 25, 2000.
10.2 Stock Purchase and Shareholders Agreement, as amended, dated as of
August 28, 1998 (Incorporated by reference to Exhibit 10.2 of the IPO
Registration Statement).
10.3 Form of Warrant dated as of August 28, 1998 (Incorporated by reference
to Exhibit 10.3 of the IPO Registration Statement).
10.4 Stock Purchase Agreement, as amended, dated as of September 29, 1998
(Incorporated by reference to Exhibit 10.4 of the IPO Registration
Statement).
10.5 Warrant Certificate for the purchase of shares of common stock issued
to Comdisco, Inc. (Incorporated by reference to Exhibit 10.5 of the
IPO Registration Statement).
10.6 Warrant Certificate A-1 for the purchase of shares of Series A
Preferred Stock issued to Comdisco, Inc. (Incorporated by reference to
Exhibit 10.6 of the IPO Registration Statement).
10.7 Warrant Certificate A-2 for the purchase of shares of Series A
Preferred Stock issued to Comdisco, Inc. (Incorporated by reference to
Exhibit 10.7 of the IPO Registration Statement).
10.8 Subordinated Loan and Security Agreement dated as of September 29,
1998 (Incorporated by reference to Exhibit 10.8 of the IPO
Registration Statement).
10.9 Registration Rights Agreement dated as of March 31, 1999 (Incorporated
by reference to Exhibit 10.9 of the IPO Registration Statement).
10.10 Employment Agreement with Samuel P. Gerace Jr., dated August 28, 1998
(Incorporated by reference to Exhibit 10.10 of the IPO Registration
Statement).
10.11 Employment Agreement with Thomas A. Gerace dated August 28, 1998
(Incorporated by reference to Exhibit 10.11 of the IPO Registration
Statement).
10.12 Lease dated as of November 9, 1998 with Southwestern Pennsylvania
Corporation (Incorporated by reference to Exhibit 10.12 of the IPO
Registration Statement).
10.13 Lease dated October 20, 1998 with LSOF Pooled Equity L.P.
(Incorporated by reference to Exhibit 10.13 of the IPO Registration
Statement).
+10.14 License and Services Agreement, effective January 13, 1999, with
GeoCities (Incorporated by reference to Exhibit 10.14 of the IPO
Registration Statement).
+10.15 BFAST Service Order Form, as amended, with barnesandnoble.com, Inc.
dated January 31, 1998 (Incorporated by reference to Exhibit 10.15 of
the IPO Registration Statement).
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.16 Director Indemnification Agreement dated as of March 31, 1999 with
Dan Nova (Incorporated by reference to Exhibit 10.16 of the IPO
Registration Statement).
10.17 Form of Indemnification Agreement dated August 28, 1998 (Incorporated
by reference to Exhibit 10.17 of the IPO Registration Statement).
21 List of Subsidiaries (Incorporated by reference to Exhibit 21 of the
Secondary Registration Statement).
23 Consent of Hale and Dorr LLP (Contained in Exhibit 5)
23.1 Consent of PricewaterhouseCoopers LLP (Incorporated by reference to
Exhibit 23.1 to this Registration Statement as filed on May 25,
2000).
23.2 Consent of Ernst & Young LLP (Incorporated by reference to Exhibit
23.2 to this Registration Statement as filed on May 25, 2000).
24 Power of Attorney (Incorporated by reference to page II-7 to this
Registration Statement as filed on May 25, 2000).
</TABLE>
---------------------
+ Confidential materials omitted and filed separately with the Securities and
Exchange Commission pursuant to a Confidential Treatment Order granted in
connection with the IPO Registration Statement.
Item 17. Undertakings.
Item 512(a) of Regulation S-K. The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Securities Act");
(ii) To reflect in the prospectus any facts or events arising after the
effective date of this Registration Statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in this
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in the volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective Registration Statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or any
material change to such information in this Registration Statement;
provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
information required to be included is a post-effective amendment by those
paragraphs is contained in periodic reports filed by the Company pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), that are incorporated by reference in this Registration
Statement.
(2) That, for the purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at the time shall be deemed to be
the initial bona fide offering thereof.
II-5
<PAGE>
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
Item 512(h) of Regulation S-K. Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the indemnification
provisions described herein, 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.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-1 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Marlborough, Commonwealth of Massachusetts, on
June 19, 2000.
Be Free, Inc.
By: /s/ Gordon B. Hoffstein
----------------------------------
Gordon B. Hoffstein
President, Chief Executive
Officer and Chairman of the Board
of Directors
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Gordon B. Hoffstein President, Chief Executive June 19, 2000
______________________________________ Officer and Chairman of
Gordon B. Hoffstein the Board of Directors
(Principal Executive
Officer)
/s/ Stephen M. Joseph* Chief Financial Officer and June 19, 2000
______________________________________ Treasurer (Principal
Stephen M. Joseph Financial and Accounting
Officer)
/s/ Samuel P. Gerace, Jr.* Executive Vice President, June 19, 2000
______________________________________ Research & Technology and
Samuel P. Gerace, Jr. Director
Director June 19, 2000
______________________________________
Ted R. Dintersmith
/s/ W. Michael Humphreys* Director June 19, 2000
______________________________________
W. Michael Humphreys
/s/ Jeffrey Rayport* Director June 19, 2000
______________________________________
Jeffrey Rayport
Director June 19, 2000
______________________________________
Kathleen L. Biro
</TABLE>
/s/ Gordon B. Hoffstein
-------------------------------------
Gordon B. Hoffstein
* As Attorney-in-Fact
II-7
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
2 Agreement and Plan of Merger, dated February 15, 2000 by and among the
Company, Cyrano Acquisition Corp., a Delaware corporation and wholly
owned subsidiary of the Company and TriVida Corporation, a California
corporation (Incorporated by reference to Exhibit 2 to the Company's
Registration Statement on Form S-1 (File No. 333-31916) as declared
effective by the SEC on March 28, 2000 (the "Secondary Registration
Statement").
3 Amendment, dated May 25, 2000, to the Amended and Restated Certificate
of Incorporation of the Registrant.
3.1 Amended and Restated Certificate of Incorporation of the Registrant
(Incorporated by reference to Exhibit 3.2 of the Company's
Registration Statement on Form S-1 (File No. 333-84535) as declared
effective by the SEC on November 2, 1999 (the "IPO Registration
Statement")).
3.2 Amended and Restated By-Laws of the Registrant (Incorporated by
reference to Exhibit 3.4 of the IPO Registration Statement).
4 Specimen certificate for shares of Common Stock, $.01 par value per
share, of the Registrant (Incorporated by reference to Exhibit 4 of
the IPO Registration Statement).
5 Opinion of Hale and Dorr LLP (Incorporated by reference to Exhibit 5
to this Registration Statement as filed on May 25, 2000).
10.1 Amended and Restated 1998 Stock Incentive Plan, dated May 25, 2000.
10.2 Stock Purchase and Shareholders Agreement, as amended, dated as of
August 28, 1998 (Incorporated by reference to Exhibit 10.2 of the IPO
Registration Statement).
10.3 Form of Warrant dated as of August 28, 1998 (Incorporated by reference
to Exhibit 10.3 of the IPO Registration Statement).
10.4 Stock Purchase Agreement, as amended, dated as of September 29, 1998
(Incorporated by reference to Exhibit 10.4 of the IPO Registration
Statement).
10.5 Warrant Certificate for the purchase of shares of common stock issued
to Comdisco, Inc. (Incorporated by reference to Exhibit 10.5 of the
IPO Registration Statement).
10.6 Warrant Certificate A-1 for the purchase of shares of Series A
Preferred Stock issued to Comdisco, Inc. (Incorporated by reference to
Exhibit 10.6 of the IPO Registration Statement).
10.7 Warrant Certificate A-2 for the purchase of shares of Series A
Preferred Stock issued to Comdisco, Inc. (Incorporated by reference to
Exhibit 10.7 of the IPO Registration Statement).
10.8 Subordinated Loan and Security Agreement dated as of September 29,
1998 (Incorporated by reference to Exhibit 10.8 of the IPO
Registration Statement).
10.9 Registration Rights Agreement dated as of March 31, 1999 (Incorporated
by reference to Exhibit 10.9 of the IPO Registration Statement).
10.10 Employment Agreement with Samuel P. Gerace Jr., dated August 28, 1998
(Incorporated by reference to Exhibit 10.10 of the IPO Registration
Statement).
10.11 Employment Agreement with Thomas A. Gerace dated August 28, 1998
(Incorporated by reference to Exhibit 10.11 of the IPO Registration
Statement).
10.12 Lease dated as of November 9, 1998 with Southwestern Pennsylvania
Corporation (Incorporated by reference to Exhibit 10.12 of the IPO
Registration Statement).
10.13 Lease dated October 20, 1998 with LSOF Pooled Equity L.P.
(Incorporated by reference to Exhibit 10.13 of the IPO Registration
Statement).
+10.14 License and Services Agreement, effective January 13, 1999, with
GeoCities (Incorporated by reference to Exhibit 10.14 of the IPO
Registration Statement).
+10.15 BFAST Service Order Form, as amended, with barnesandnoble.com, Inc.
dated January 31, 1998 (Incorporated by reference to Exhibit 10.15 of
the IPO Registration Statement).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.16 Director Indemnification Agreement dated as of March 31, 1999 with
Dan Nova (Incorporated by reference to Exhibit 10.16 of the IPO
Registration Statement).
10.17 Form of Indemnification Agreement dated August 28, 1998 (Incorporated
by reference to Exhibit 10.17 of the IPO Registration Statement).
21 List of Subsidiaries (Incorporated by reference to Exhibit 21 of the
Secondary Registration Statement).
23 Consent of Hale and Dorr LLP (contained in Exhibit 5).
23.1 Consent of PricewaterhouseCoopers LLP (Incorporated by reference to
Exhibit 23.1 to this Registration Statement as filed on May 25,
2000).
23.2 Consent of Ernst & Young LLP (Incorporated by reference to Exhibit
23.2 to this Registration Statement as filed on May 25, 2000).
24 Power of Attorney (Incorporated by reference to page II-7 to this
Registration Statement as filed on May 25, 2000).
</TABLE>
---------------------
+ Confidential materials omitted and filed separately with the Securities and
Exchange Commission pursuant to a Confidential Treatment Order granted in
connection with the IPO Registration Statement.
