<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
FOR QUARTERLY AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File 000-27271
Be Free, Inc.
(Exact name of registrant as specified in its charter)
Delaware 04-3303188
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
154 Crane Meadow Road
Marlborough, Massachusetts 01752
(Address of principal executive offices)
(508) 480-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to ile such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of June 30, 2000 the registrant had outstanding 65,204,794 shares of voting
common stock, $0.01 par value per share.
1
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TABLE OF CONTENTS
FORM 10-Q QUARTERLY REPORT
QUARTER ENDED JUNE 30, 2000
PART 1 - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
Consolidated Balance Sheets (unaudited) as of
June 30, 2000 and December 31, 1999 3
Consolidated Statements of Operations
(unaudited) for the three months and
six months ended June 30, 2000 and 1999 4
Consolidated Statements of Cash Flows
(unaudited) for the six months ended
June 30, 2000 and 1999 5
Notes to Consolidated Financial
Statements (unaudited) 6
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 24
PART II - OTHER INFORMATION
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS 25
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 25
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 26
SIGNATURE PAGE 27
EXHIBIT INDEX 28
2
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PART 1 - FINANCIAL INFORMATION
ITEM 1. Financial Statements
BE FREE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
-------------- -----------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................................... $ 38,428 $ 58,976
Marketable securities............................................................... 82,530 12,762
Accounts receivable, net of allowances of $380 at June 30, 2000 and $97 at
December 31, 1999, respectively.................................................... 3,251 1,328
Prepaid expenses.................................................................... 1,555 1,013
Other current assets................................................................ 1,850 269
-------- --------
Total current assets............................................................ 127,614 74,348
Marketable securities.................................................................. 47,561 7,954
Property and equipment, net............................................................ 15,655 7,967
Intangible assets, net................................................................. 146,698 --
Deposits............................................................................... 1,072 340
Other assets, net...................................................................... 746 228
-------- --------
Total assets.................................................................... $339,346 $ 90,837
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................... 3,754 967
Accrued expenses.................................................................... 5,891 2,916
Deferred revenue.................................................................... 1,951 943
Current portion of long-term debt................................................... 2,390 943
-------- --------
Total current liabilities........................................................ 13,986 5,769
Long-term debt, net of current portion................................................. 3,694 2,507
-------- --------
Total liabilities................................................................ 17,680 8,276
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value; 250,000,000 and 75,000,000 shares authorized
at June 30, 2000 and December 31, 1999 respectively; 65,204,794 and 56,176,498
shares issued at June 30, 2000 and December 31, 1999 respectively................... 652 562
Additional paid-in capital........................................................... 379,704 113,274
Unearned compensation................................................................ (5,011) (6,002)
Stockholders' notes receivable....................................................... (116) (208)
Accumulated other comprehensive loss................................................. (83) (11)
Accumulated deficit.................................................................. (53,480) (25,017)
-------- --------
321,666 82,598
Treasury stock, at cost (244,996 shares at December 31, 1999)........................... -- (37)
-------- --------
Total stockholders' equity.............................................................. 321,666 82,561
-------- --------
Total liabilities, stockholders' equity................................................. $339,346 $ 90,837
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
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BE FREE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Performance marketing services..................................... $ 4,320 $ 863 $ 7,949 $ 1,396
Operating expenses:
Cost of revenue................................................. 852 137 1,455 238
Sales and marketing (exclusive of equity related compensation
of $153 and $121 for the three months ended June 2000 and 1999,
respectively, and $305 and $222 for the six months
ended June 2000 and 1999, respectively)........................ 4,746 2,085 8,305 3,350
Client services (exclusive of equity related compensation
of $39 and $126 for the three months ended June 2000 and 1999,
respectively, and $79 and $156 for the six months ended
June 2000 and 1999, respectively............................... 1,798 677 3,325 1,146
Development and engineering (exclusive of equity related
compensation of $36 and $42 for the three months ended
June 2000 and 1999, respectively and $76 and $76 for
the six months ended June 2000 and 1999, respectively.......... 2,729 920 4,297 1,482
General and administrative (exclusive of equity related
compensation of $160 and $214 for the three months ended
June 2000 and 1999, respectively, and $200 and $499 for
the six months ended June 2000 and 1999, respectively) ........ 1,755 503 2,931 854
Equity related compensation..................................... 388 503 660 953
Amortization and merger related expenses ....................... 13,754 -- 19,103 --
----------- ----------- ----------- -----------
Total operating expenses ............................. 26,022 4,825 40,076 8,023
----------- ----------- ----------- -----------
Operating loss ....................................... (21,702) (3,962) (32,127) (6,627)
Interest income................................................. 2,688 259 3,854 277
Interest expense................................................ (104) (211) (189) (445)
----------- ----------- ----------- -----------
Net loss.............................................................. (19,118) (3,914) (28,462) (6,795)
Accretion of preferred stock to redemption value...................... -- (604) -- (701)
----------- ----------- ----------- -----------
Net loss attributable to common stockholders.......................... $ (19,118) $ (4,518) $ (28,462) $ (7,496)
=========== =========== =========== ===========
Basic and diluted net loss per share
attributable to common stockholders.................................. $ (0.31) $ (0.36) $ (0.49) $ (0.59)
Shares used in computing basic and diluted net
loss per share attributable to common stockholders................... 61,962,583 12,669,634 58,242,508 12,643,838
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
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BE FREE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------
2000 1999
--------- -------
Cash flows for operating activities:
<S> <C> <C>
Net loss........................................................................... $ (28,462) $(6,795)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization.................................................... 19,812 482
Equity related compensation...................................................... 660 953
Provisions for doubtful accounts................................................. 283 14
Changes in operating assets and liabilities net of the effects
from the purchase of TriVida Corporation:
Accounts receivable........................................................ (2,195) (543)
Prepaid expenses........................................................... (202) (533)
Deposits................................................................... 3 (39)
Accounts payable........................................................... (852) 49
Accrued expenses........................................................... 413 729
Deferred revenue........................................................... 1,008 1,052
Other, net................................................................. (2,166) (55)
--------- -------
Net cash used in operating activities................................................. (11,698) (4,686)
--------- -------
Cash flows for investing activities:
Purchases of property and equipment................................................ (2,018) (598)
Cash paid for TriVida acquisition, net of cash acquired............................ (3,446) --
Proceeds from the sale of marketable securities.................................... 30,411 --
Purchases of marketable securities................................................. (139,503) (2,932)
--------- -------
Net cash used in investing activities (114,556) (3,530)
--------- -------
Cash flows from financing activities:
Proceeds from issuance of Series B Convertible Participating
Preferred Stock, net of issuance costs............................................ -- 24,945
Proceeds from issuance of Common Stock, net of offering costs ..................... 105,122 --
Proceeds from exercise of options and warrants..................................... 668 --
Proceeds from Employee Stock Purchase Plan......................................... 519 --
Proceeds from notes receivable from stockholders................................... 92 464
Proceeds from sales/leaseback...................................................... -- 241
Payment on long-term debt.......................................................... (693) (386)
--------- -------
Net cash provided by financing activities............................................. 105,708 25,264
--------- -------
Effect of exchange rate changes on cash............................................... (2) --
--------- -------
Net increase (decrease) in cash and cash equivalents................................. (20,548) 17,048
Cash and cash equivalents at beginning of period...................................... 58,976 4,327
--------- -------
Cash and cash equivalents at end of period............................................ $ 38,428 $21,375
========= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS - Be Free, Inc. (the "Company") provides services that enable
customers to generate, place and manage hyperlink promotions for their products
and services in tens of thousands of locations on the Internet.
BASIS OF PRESENTATION - The accompanying unaudited consolidated financial
statements have been prepared by the Company in accordance with generally
accepted accounting principles for interim reporting and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Consequently, the statements do
not include all disclosures normally required by generally accepted accounting
principles for annual financial statements or those normally made in the
company's Annual Report on Form 10-K. The December 31, 1999 consolidated
balance sheet was derived from audited financial statements, but does not
include all disclosures required by generally accepted accounting principles. In
the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments, consisting only of those of a normal
recurring nature, necessary for a fair presentation of the Company's financial
position, results of operations and cash flows at the dates and for the periods
indicated. The results of operations for the period presented herein are not
necessarily indicative of the results of operations to be expected for the
entire fiscal year, which ends on December 31, 2000, or for any other future
period.
These consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto, for the year ended December
31, 1999 included in the Company's Annual Report on Form 10-K filed with the
Securites and Exchange Commission on March 30, 2000.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
B. ACQUISITION
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 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 approximate value of $165,000. The
acquisition has been accounted for under the purchase method of accounting. The
allocation of purchase price for TriVida resulted in goodwill of $110,000 and
other intangibles, including patents, developed technology and workforce, of
$55,000. 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, which
primarily related to employee severence. During the period ended June 30, 2000
the Company paid $201 and $336 in acquisition-related costs during the
respective three and six months ended June 30, 2000. As of June 30, 2000, $429
of the total acquisition-related costs were included in accrued expenses.
6
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The following unaudited pro forma consolidated results are presented as if the
TriVida acquisition had occurred on January 1, 2000 and 1999, respectively.
Based on an estimated useful life of three years for the intangible assets, the
unaudited proforma consolidated results include an adjustment of approximately
$9,168 and $27,506 for amortization expense for the six months ended June 30,
2000 and 1999 respectively, and $765,000 in non-recurring acquisition related
expense for the six months ended June 30, 1999.
FOR THE SIX MONTHS ENDED JUNE 30
--------------------------------
2000 1999
-------- ---------
Net sales ...................................... $ 7,949 $ 1,396
Net loss ....................................... (40,930) (37,321)
Basic and diluted net loss per share ........... $ (0.69) $ (2.65)
The unaudited consolidated pro forma information is not necessarily indicative
of the combined results that would have occurred had the purchase been made at
the beginning of the period presented or the future results of the combined
operations.
C. NET 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>
June 30,
----------------------------
2000 1999
--------- ----------
<S> <C> <C>
Options to purchase shares of common stock.................................. 6,155,581 2,638,792
Shares of Preferred Stock convertible into shares of common stock........... -- 23,796,522
Unvested shares of restricted stock......................................... 3,082,053 5,347,050
Warrants to purchase shares of common stock................................. 733,000 3,498,000
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.
7
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D. STOCKHOLDERS' EQUITY
In connection with its acquisition of TriVida (see Note B), the Company
issued 2,912,996 shares of its Common Stock for all of the outstanding shares of
TriVida (valued at approximately $165,000).
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. All
financial statements presented give effect to this stock dividend.
On March 28, 2000, the Company sold 4,046,608 shares of its Common Stock in a
secondary offering for approximately $104,696 in net cash proceeds, after
deducting underwriting commissions and offering expenses.
E. COMPREHENSIVE INCOME (LOSS)
The following table reflects the components of comprehensive income (loss):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED
----------------------------- ---------------------
JUNE 30 JUNE 30
-------
2000 1999 2000 1999
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Net loss................................................................ $(19,118) $(3,914) $(28,462) $(6,795)
Other comprehensive income:
Change in unrealized loss on marketable
securities during the period......................................... (42) -- (70) --
Foreign currency translation adjustments.............................. (2) -- (2) --
-------- ------- -------- -------
Comprehensive loss...................................................... $(19,162) $(3,914) $(28,534) $(6,795)
======== ======= ======== =======
</TABLE>
F. SUPPLEMENTAL CASH FLOW DISCLOSURES
<TABLE>
<CAPTION>
Six months ended June 30,
---------------------------------------
2000 1999
------ ------
<S> <C> <C>
Supplemental schedule of noncash investing and financing activities:
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 --
Liabilities assumed............................................................... 3,963 --
------
Net liabilities................................................................... $ (315) --
======
Purchase of property and equipment under capital lease
obligations and equipment financing.................................................. $1,098 $2,675
</TABLE>
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements. Any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the foregoing, the
words "believes," "anticipates," "plans," "expects," and similar expressions are
intended to identify forward-looking statements. There are a number of
important factors that could cause the Company's actual results to differ
materially from those indicated by such forward-looking statements. These
factors include, without limitation, those set forth below under the caption
"Certain Factors That May Affect Future Results."
Overview
We are a leading provider of performance marketing services which enable our
customers to promote their products and services in tens of thousands of
locations on the Internet and to pay for these promotions based on performance.
Our solutions--BFAST and B2BFAST affiliate marketing services, BSELECT
personalization services, B-INTOUCH e-mail referral services and BFIT
advertising services--are designed to increase our customers' online sales or
traffic and to decrease their cost of customer acquisition. We are seeking to
develop additional performance marketing services and plan to further our
service offerings in 2000.
RESULTS OF OPERATIONS
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
June 30, 2000 increased 401%, to $4.3 million from $863,000 for the three
months ended June 30, 1999. For the six months ended June 30, 2000 total revenue
increased 469% to $7,949 million from $1,396 million for the six months ended
June 30, 1999. The revenue increase resulted from the initiation of service for
267 additional customers during this period as well as increased customer
activity.
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 June 30, 2000 increased 522%, to
$852,000 from $137,000 for the same period last year. For the six months ended
June 30, 2000, cost of revenue increased 511% to $1.5 million from $238,000 for
the six months ended, June 30, 1999. 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 since this additional
investment in equipment resulted in higher depreciation, equipment lease and
data center facilities expenses.
9
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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 June 30, 2000
increased 128%, to $4.7 million from $2.1 million during the same period last
year. For the six months ended June 30, 2000, sales and marketing expenses
increased 148%, to $8.3 million from $3.4 million for the six months ended June
30, 1999.
The increase was primarily due to the expansion of the direct sales and
internal telesales groups and the incurrence of additional marketing costs.
Approximately $1.5 million of the increase was due to higher personnel and
related expense largely resulting from 46 new employees. An additional $218,000
was spent to increase our recruitment program to assist customers in attracting
marketing partners. General marketing expenses increased approximately $552,000
which included advertising, direct mail and user conference expenses in the
second quarter of 2000 primarily designed to sign new customers before the
holiday buying season. We expect that sales and marketing expenses will
decrease as a percentage of revenue in future periods.
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 June 30, 2000 increased
166% to $1.8 million from $677,000 for the same period last year. For the six
months ended June 30, 2000, client services expenses increased 190%, to $3.3
million from $1.1 million for the six months ended June 30, 1999. The number of
client service employees increased to 78 as of June 30, 2000 from 29 as of June
30, 1999 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 decrease as a percentage of revenue in the future as we continue
to automate certain client services processes.
10
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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 June 30, 2000
increased 196% to $2.7 million from $920,000 for the same quarter last year. For
the six months ended June 30, 2000, development and engineering expenses
increased 190%, to $4.3 million from $1.5 million for the six months ended June
30, 1999. The increase in the current quarter is primarily due to personnel and
related cost increases of approximately $1.1 million from the addition of 64
employees including the employees resulting from the acquisition of TriVida, and
an increase of $166,000 in computer supplies and maintenance costs relating to
additional equipment purchases. We do not anticipate significant changes in
development and engineering costs as a percentage of revenue over the next
several quarters.
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 months ended June 30, 2000
increased 249%, to $1.8 million from $503,000 for the same period last year.
For the six months ended June 30, 2000, general and administrative expenses
increased 243%, to $2.9 million from $854,000 for the six months ended June 30,
1999. Increased personnel and related costs of approximately $419,000 for the
current quarter resulted largely from the addition of 17 employees to support
the expansion of the company. Professional services expenses for the quarter
increased $373,000 relating to legal, investor relations and general fees
associated with being a public company. We do not expect significant changes in
general and administrative expenses as a percentage of revenue in future
quarters.
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 months ended June 30, 2000, were $388,000 as compared to $503,000 for
the same period last year. For the six months ended June 30, 2000, equity
related compensation expenses were $660,000 as compared to $953,000 for the same
period last year due to the repayment of certain stockholder notes for the
purchase of shares that were previously expensed.
11
<PAGE>
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.
Amortization and merger related expenses
Merger related expenses of $13.7 during the three months ended June 30, 2000
and $19.1 million during the six months ended June 30, 2000 resulted from the
acquisition of TriVida Corporation. These expenses include $765,000 of
estimated one time acquisition related costs, primarily for employee severance,
and $18.3 million of amortization expense related to the intangible assets
acquired. We are amortizing the approximate $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.
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 months ended June 30, 2000
was $2.6 million as compared to net interest income of $48,000 for the same
period last year. Net interest income for the six months ended June 30, 2000
resulted from interest income of $3.9 million net of $189,000 in interest
expense for leases, as compared to interest income of $277,000 offset by
$445,000 interest expense on borrowings for the same prior year period.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities for the six months ended June 30, 2000,
totaled $11.7 million. Our net loss of $28.5 million included a $19.8 million
increase in non-cash depreciation and amortization expense including $18.3
million in expenses relating to the amortization of intangible assets associated
with the acquisition of TriVida. Accounts receivable increased $2.2 million
with the growth in our customer base and a slight deterioration of accounts
receivable aging. Deferred revenue increased $1.0 million due to the deferral
of implementation fees and an increase in the number of customers. Other, net
increased $2.2 million due in part to net capitalized costs associated with
software developed for internal use of approximately $716,000 and interest
receivable on marketable securities of approximately $1.2 million.
Cash used in investing activities for the six months ended June 30, 2000
totaled $114.6 million. Purchases and sales of marketable securities totaled
$139.5 million and $30.4 million, respectively. Investment activity in
marketable securities is a result of the proceeds of our secondary offering, as
well as, a portion of the proceeds raised in our initial public offering.
Capital expenditures for the period totaled approximately $2.0 million and were
largely related to the purchase of additional system and storage equipment. We
expect that capital expenditures will increase significantly as our customer and
employee base grow and as we expand the number and capacity of our data centers.
We expect to secure a new line of credit for future capital expenditures.
12
<PAGE>
Cash provided by financing activities for the six months ended June 30, 2000
totaled $105.7 million, of which, $105.1 million was from the proceeds received
from Be Free's sale of 4,046,608 shares of its common stock through a public
offering in March 2000, net of underwriters commission and offering expenses.
Prior to the March 2000 public offering, Be Free financed its operations through
net cash proceeds from its initial public offering in November 1999, the private
sale of securities and borrowings. In May 2000, Be Free entered into a capital
lease agreement for software licenses and support of approximately $2.0 million.
As of June 30, 2000, Be Free's primary financial commitments consisted of
obligations outstanding under capital and operating leases for computer
equipment and office space of approximately $12 million.
As of June 30, 2000, Be Free had $38.4 million in cash and cash equivalents,
$130.1 million in marketable securities and $113.6 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.
Be Free 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 were 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.
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 "Factors
That May Affect Future Results". We will continue to monitor for Year 2000
issues affecting business throughout the year 2000 to ensure that any latent
Year 2000 matters that may arise are addressed promptly.
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.
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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 fourth fiscal
quarter of the fiscal year beginning after December 15, 1999. The Company
believes that it complies with the requirements of SAB 101.
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. The Company
does not expect the application of FIN 44 to have a material impact on the
company's financial position or results of operations.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Be Free operates in a rapidly changing environment that involves a number of
risks, some of which are beyond its control. The following discussion highlights
some of the risks which may affect future operating results.
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.
WE HAVE A HISTORY OF LOSSES AND EXPECT FUTURE LOSSES
Our accumulated deficit as of June 30, 2000 was $53.5 million. Our current
business has never achieved profitability and we expect to continue to incur
losses for the foreseeable future in light of the level of our 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. 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 expansion of our existing data
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centers and the opening of a 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.
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.
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
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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.
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
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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 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
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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.
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
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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 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
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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 293 employees
as of June 30, 2000, including 23 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:
o continue to improve our financial and management controls;
o enhance our reporting systems and procedures;
o continue to scale our performance marketing systems;
o expand, train and manage our work force;
o integrate new customers effectively; and
o 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. Until June 2000, TriVida had 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 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:
o the acceptance of personalization services in online marketing among
merchants, their affiliates and Internet users;
o successfully integrating and managing TriVida's operations with ours;
o retaining the software developers and other key employees of TriVida;
o developing, integrating and marketing personalization services; and
o 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
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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.
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:
o business interruption caused by any delay in product and service
development until equivalent technology can be identified; and
o 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
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Because the provision of our services requires us to provide a connection to
the Web sites of our customers and their marketing partners, we may be perceived
as being associated with the content of these Web sites. We do not and cannot
screen all of the content generated by our customers and their marketing
partners. As a result, we may face potential liability for defamation,
negligence, copyright, patent or trademark infringement and other claims based
on the materials displayed on our customers' sites and on their marketing
partners' sites and e-mail messages. For example, if one of our customers is
sued for posting information on its Web site that is alleged to be defamatory,
we may also be named as a defendant in that legal action based solely on our
limited association with that customer's Web site. As a result, we could be
involved in legal proceedings and disputes that are costly to resolve,
regardless of their lack of merit. We may also suffer a loss of customers or
reputational harm based on this information or resulting from our involvement in
these legal proceedings. Furthermore, some foreign governments have enforced
laws and regulations related to content distributed over the Internet that are
more strict than those currently in place in the United States.
Our insurance may not cover claims of these types or may not be adequate to
indemnify us for all liability that may be imposed. There is a risk that a
single claim or multiple claims, if successfully asserted against us, could
exceed the total of our coverage limits. There is also a risk that a single
claim or multiple claims asserted against us may not qualify for coverage under
our insurance policies as a result of coverage exclusions that are contained
within these policies. Any imposition of liability, particularly liability that
is not covered by insurance or is in excess of insurance coverage could have a
material adverse effect on our reputation and our business and operating
results, or could result in the imposition of criminal penalties.
WE EXPECT OUR OPERATING RESULTS TO FLUCTUATE AND THE PRICE OF OUR COMMON STOCK
COULD FALL IF QUARTERLY RESULTS ARE LOWER THAN THE EXPECTATIONS OF SECURITIES
ANALYSTS OR STOCKHOLDERS
We believe that quarter-to-quarter comparisons of our operating results are
not necessarily meaningful. You should not rely on the results of one quarter as
an indication of our future performance. If our quarterly operating results fall
below the expectations of securities analysts or stockholders, however, the
price of our common stock could fall. We have experienced significant
fluctuation in our quarterly operating results and may continue to experience
significant fluctuation.
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
centers and establishing an additional data center in the future. 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.
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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:
o the impact of recessions in economies outside the United States;
o changes in regulatory requirements;
o potentially adverse tax consequences;
o difficulties and costs of staffing and managing foreign operations;
o political and economic instability;
o compliance with foreign regulations regarding Internet privacy concerns;
o fluctuations in currency exchange rates; and
o 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.
23
<PAGE>
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.
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:
o authorizing the issuance of blank check preferred stock or additional
shares of common stock;
o providing for a classified board of directors with staggered, three-year
terms;
o providing that directors may only be removed for cause by a two-thirds
vote of stockholders;
o limiting the persons who may call special meetings of stockholders;
o prohibiting stockholder action by written consent; and
o establishing advance notice requirements for nominations for election to
the board of directors or for proposing matters that can be acted on by
stockholders at stockholder meetings.
Delaware law may also discourage, delay or prevent a third party from
acquiring or merging with us.
Item 3. Quantitative and Qualititative Disclosures about Market Risk
We do not currently use derivative financial instruments. Be Free generally
invests its excess cash in marketable securitity 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.
24
<PAGE>
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On November 2, 1999, the Securities and Exchange Commission declared
effective Be Free's Registration Statement on Form S-1 (File No. 333-84535)
relating to the initial public offering of Be Free's Common Stock, $0.01 par
value per share. The offering commenced on November 3, 1999 and a total of
12,880,000 shares (retroactively adjusted for Be Free's 2-for-1 stock split paid
on March 8, 2000) covered by the Registration Statement were sold, including the
exercise in full of the underwriters' over-allotment option. The proceeds to Be
Free, net of underwriting commissions and offering expenses, was approximately
$70.5 million. As of June 30, 2000, Be Free spent approximately $5.0 million to
repay certain subordinated debt, $1.9 million in capital expenditures, $10.2
million for sales and marketing, $4.5 million for client services expense, $5.4
million for development and engineering costs and $3.8 million for other working
capital for general corporate purposes. Pending their use the proceeds from Be
Free's initial public offering are invested a in investment grade, interest-
bearing securities. None of the net proceeds from the initial public offering
were used to pay, directly or indirectly, directors, officers, persons owning
ten percent or more of Be Free's equity securities, or affiliates of Be Free.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the 2000 Annual Meeting of Stockholders of the Company (the "Annual
Meeting") on May 25, 2000, the following matters were acted upon by the
stockholders of the Company:
1. the election of two Class I Directors;
2. the approval of an amendment to the Company's Amended and Restated
Certificate of Incorporation to increase the number of authorized
shares of common stock;
3. the approval of the continuance of, and an amendment to, the Company's
1998 Stock Incentive Plan; and
4. the ratification of the appointment of PricewaterhouseCoopers LLP as
the Company's independent auditors for the current fiscal year.
The number of shares of Common Stock issued, outstanding and eligible to vote as
of the record date of March 27, 2000 was 60,693,680. The other directors of the
Company, whose terms of office as directors continued after the Annual Meeting
are Ted R. Dintersmith, Jeffrey F. Rayport, Gordon B. Hoffstein and Samuel P.
Gerace, Jr. The results of the voting on each of the matters presented to
stockholders at the Annual Meeting are set forth below:
<TABLE>
<CAPTION>
VOTES VOTES VOTES BROKER
FOR WITHHELD AGAINST ABSTENTIONS NON-VOTES
<S> <C> <C> <C> <C> <C> <C>
1. Election of two Class I Directors:
W. Michael Humphreys 47,587,454 35,599 N.A. N.A. N.A.
Kathleen L. Biro 47,582,854 40,199 N.A. N.A. N.A.
2. Approval of Amendment to the Amended
and Restated Certificate of
Incorporation 46,612,523 N.A. 493,588 516,892 N.A.
3. Continuance of and Amendment to 1998
Stock Incentive Plan 37,713,468 N.A. 5,360,723 560,132 3,988,730
4. Ratification of the Appointment of
Auditors 47,618,668 N.A. 3,185 1,200 N.A.
</TABLE>
25
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3. Amendment, dated May 25, 2000, to the Amended and Restated
Certificate of Incorporation of the Registrant (Incorporated herein by
reference to Exhibit 3 of the Registrants' Amendment No. 1 to its
Registration Statement on Form S-1 (333-37776) filed with the Commission
on June 20, 2000 ("Amendment No. 1").
3.1 Amended and Restated Certificate of Incorporation of the
Registrant (Incorporated herein by reference to Exhibit 3.2 of the
Registrant's Registration Statement on Form S-1 (File No. 333-84535) as
declared effective by the Commission on November 2, 1999)
10.1 Amended and Restated 1998 Stock Incentive Plan, dated May 25, 2000
(Incorporated herein by reference to Exhibit 10.1 of Amendment No. 1).
27. Financial Data Schedule
(b) Reports on Form 8-K - During the quarter ended June 30, 2000, the
Registrant filed no Current Reports on Form 8-K with the Commission.
26
<PAGE>
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934, THIS REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
BE FREE, INC.
(Registrant)
Date: August 14, 2000 /s/ Gordon B. Hoffstein
-----------------------
Gordon B. Hoffstein
Chief Executive Officer, President and
Chairman
(Principal Executive Officer)
Date: August 14, 2000 /s/ Stephen M. Joseph
---------------------
Stephen M. Joseph
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
27
<PAGE>
EXHIBIT INDEX
3. Amendment, dated May 25, 2000, to the Amended and Restated
Certificate of Incorporation of the Registrant (Incorporated herein by
reference to Exhibit 3 of the Registrants' Amendment No. 1 to its
Registration Statement on Form S-1 (333-37776) filed with the Commission
on June 20, 2000 ("Amendment No. 1").
3.1 Amended and Restated Certificate of Incorporation of the Registrant
(Incorporated herein by reference to Exhibit 3.2 of the Registrant's
Registration Statement on Form S-1 (File No. 333-84535) as declared
effective by the Commission on November 2, 1999)
10.1 Amended and Restated 1998 Stock Incentive Plan, dated May 25, 2000
(Incorporated herein by reference to Exhibit 10.1 of Amendment No. 1).
27. Financial Data Schedule
28
