<PAGE>
As filed with the Securities and Exchange Commission on March 8, 2000
Registration No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
--------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
BE FREE, INC.
(Exact name of registrant as specified in its charter)
Delaware 7374 04-3303188
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction Classification Code Number) Identification Number)
of incorporation or
organization)
154 Crane Meadow Road
Marlborough, Massachusetts 01752
(508) 357-8888
(Address, including zip code, telephone number, including area code, of
registrant's principal executive offices)
Gordon B. Hoffstein
President and Chief Executive Officer
BE FREE, INC.
154 Crane Meadow Road
Marlborough, Massachusetts 01752
(508) 357-8888
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------
Copies to:
JAY E. BOTHWICK, ESQ. MARK H. BURNETT, ESQ.
DAVID A. WESTENBERG, ESQ. JOCELYN M. AREL, ESQ.
HALE AND DORR LLP TESTA, HURWITZ & THIBEAULT, LLP
60 State Street 125 High Street
Boston, Massachusetts 02109 Boston, Massachusetts 02110
Telephone: (617) 526-6000 Telephone: (617) 248-7000
Telecopy: (617) 526-5000 Telecopy: (617) 248-7100
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date hereof.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [X]
--------------
CALCULATION OF REGISTRATION FEE
<TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<CAPTION>
Proposed Proposed
Maximum Maximum Aggregate
Title of Each Class of Amount Offering Price Aggregate Amount of
Securities to be to be Per Offering Registration
Registered Registered(1) Security(2) Price(1)(2) Fee
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par
value................. 5,175,000 $91.50 $473,512,500 $125,008
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
(1)Includes 675,000 shares which the Underwriters have the option to purchase
to cover over-allotments of shares (see "Underwriting").
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(c) under the Securities Act of 1933,
based on the average of the high and low sales prices reported by the
Nasdaq National Market on March 1, 2000.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+We will amend and complete the information in this prospectus. Although we +
+are permitted by US federal securities laws to offer these securities using +
+this prospectus, we may not sell them or accept your offer to buy them until +
+the documentation filed with the SEC relating to these securities has been +
+declared effective by the SEC. This prospectus is not an offer to sell these +
+securities or our solicitation of your offer to buy these securities in any +
+jurisdiction where that would not be permitted or legal. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SUBJECT TO COMPLETION-- MARCH 8, 2000
Prospectus
, 2000
[beFree logo appears here]
Shares of Common Stock
- --------------------------------------------------------------------------------
The Company:
The Offering:
. We are a leading . We are offering shares of our common stock,
provider of services and the selling stockholders identified in this
that enable our prospectus are offering shares of our
customers to generate, common stock.
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.
. The underwriters have an option to purchase up
to an additional shares from us and
shares from selling stockholders to cover over-
allotments.
. Closing: , 2000
Symbol & Market:
. BFRE/Nasdaq National
Market
Last Reported Sale Price:
. $
----------------------------------------------
<TABLE>
<CAPTION>
Per Share Total
----------------------------------------------------
<S> <C> <C>
Public offering price: $ $
Underwriting fees:
Proceeds to Be Free:
Proceeds to selling stockholders:
----------------------------------------------------
</TABLE>
This investment involves risk. See "Risk Factors" beginning on page 8.
- --------------------------------------------------------------------------------
Neither the SEC nor any state securities commission has determined whether this
prospectus is truthful or complete. Nor have they made, nor will they make, any
determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
- --------------------------------------------------------------------------------
Donaldson, Lufkin & Jenrette
Chase H&Q
Robertson Stephens
Dain Rauscher Wessels
DLJdirect Inc.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary.................. 1
Risk Factors........................ 8
Use of Proceeds..................... 22
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
Business............................ 38
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Management.......................... 53
Transactions with Related Parties... 62
Principal and Selling Stockholders.. 65
Description of Capital Stock........ 67
Shares Eligible for Future Sale..... 70
Underwriting........................ 74
Legal Matters....................... 76
Experts............................. 76
Where You Can Find More Information. 77
Index to Financial Statements....... F-1
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
This summary may not contain all of the information that is important to
you. You should read the entire prospectus, including the financial statements
and related notes, before making an investment decision. Unless otherwise
indicated, all information in this prospectus:
. does not reflect a 2-for-1 stock split which is expected to be
distributed on or about March 8, 2000; and
. assumes that the underwriters will not exercise their over-allotment
option.
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 896 million
times in February 2000 through our customers' more than 3.5 million performance
marketing relationships. Jupiter Communications, an Internet research firm,
estimates that online merchants that have established performance marketing
relationships with Web site publishers generate on average 17% of their online
sales through these relationships. We believe that performance marketing sales
channels will constitute an increasingly significant revenue source for our
customers.
2
<PAGE>
Our Market Opportunity
The Internet has experienced rapid growth both in terms of the number of
users online and in the amount and dispersion of content available to them
there. The Internet has also emerged as a significant sales channel for goods
and services to consumers and businesses. Total U.S. online consumer spending
is projected to increase from $7.8 billion in 1998 to $184.5 billion in 2004.
Total U.S. online business-to-business transactions are projected to increase
from $406.2 billion in 2000 to $2.7 trillion in 2004.
Online merchants and portals use online promotions to reach a global
audience for their products and services, drive traffic to their Web sites,
attract customers and facilitate transactions. Initially, these online
promotions took the form of banner advertisements. Under this model an
advertiser pays fees based on the number of times its ad is displayed and
typically evaluates the performance of that ad based on the rate at which
viewers click on it and are directed to the advertiser's Web site.
As a result of decreases in these click-through rates and a need to reach a
broader audience viewing more widely dispersed content, online merchants and
portals sought ways to pay for their marketing programs based on the sales or
traffic they generated.
However, online merchants and portals face several challenges in
establishing and managing performance marketing sales channels. These
challenges include the internal development and operation of software and
hardware to exchange data with thousands of marketing partners that operate
disparate systems, generating and placing hyperlinks and managing relationships
with large numbers of marketing partners. In addition, marketing partners want
to minimize the time and expense associated with enrolling in performance
marketing sales channels and creating and changing hyperlinks for a particular
online merchant or portal. We believe these challenges provide a significant
opportunity for our comprehensive solutions that are designed to help online
merchants and portals establish and manage performance marketing sales channels
and to help marketing partners enhance their revenue.
Our Strategy
Our objective is to be the leading provider of online performance marketing
solutions. We are focusing on the following strategic initiatives to achieve
this objective:
. continue our technology leadership and expertise to enhance and extend
our comprehensive solutions for performance marketing programs;
. expand our performance marketing services to allow personalized
recommendations across our customers' performance marketing channels and
on their Web sites;
. expand our targeted customer base, both in the U.S. and selected markets
abroad;
. continue to provide customer branded and controlled solutions;
. increase the size and effectiveness of our customers' sales channels; and
3
<PAGE>
. expand our services to existing customers.
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 1,436,085 shares of our common stock in exchange for all
of the outstanding shares of TriVida capital stock and assumed options to
purchase an additional 313,894 shares of our common stock.
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.
On February 15, 2000, we announced a two-for-one stock split payable on
March 8, 2000. Share and price information in this prospectus do not reflect
the effect of this stock split.
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 $24.9 million as of December 31, 1999. See "Summary
Consolidated Financial Data" and "Risk Factors--We have a history of losses and
expect future losses."
----------------
Our principal executive office is located at 154 Crane Meadow Road,
Marlborough, Massachusetts 01752, and our telephone number is (508) 357-8888.
Our corporate Web sites are located at www.befree.com,
www.affiliaterecruiters.com and www.sitetools.net. The information contained on
our Web sites is not a part of this prospectus.
4
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered by Be Free.... . shares
Common stock offered by selling
stockholders...................... . shares
Common stock to be outstanding
after this offering............... . shares
Use of proceeds.................... Working capital and other general corporate
purposes. We will not receive any proceeds
from the sale of the shares of common stock
being offered by the selling stockholders.
Nasdaq National Market symbol...... BFRE
</TABLE>
The common stock outstanding after the offering is based on the number of
shares outstanding as of February 29, 2000, and excludes:
. 2,002,866 shares issuable upon the exercise of outstanding options under
our 1998 Stock Incentive Plan with a weighted average exercise price of
$14.15 per share;
. 531,204 shares available for issuance and grant under our 1998 Stock
Incentive Plan, net of outstanding options and restricted stock;
. 313,894 shares issuable upon the exercise of outstanding options assumed
under the TriVida 1998 Equity Incentive Plan with a weighted average
exercise price of $14.29 per share;
. 212,500 shares available for issuance under our 1999 Employee Share
Purchase Plan; and
. 366,500 shares issuable upon the exercise of outstanding warrants to
purchase shares of common stock at a weighted average exercise price of
$2.05 per share.
----------------
Be Free, BFAST, B2BFAST, BFIT, B-INTOUCH, AFFILIATE RECRUITERS, Performance
Marketing and e-nabled are our servicemarks. This prospectus also contains
other trademarks, servicemarks and tradenames that are the property of other
parties.
5
<PAGE>
Summary Consolidated Financial Data
(In thousands, except per share data)
The financial data set forth below should be read with "Selected
Consolidated Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and 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 $0.14 per share.
<TABLE>
<CAPTION>
Pro Forma
Year Ended December 31, Year Ended
-------------------------- December 31,
1997 1998 1999 1999
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenue:
Performance marketing services....... $ 216 $ 1,319 $ 5,329 $ 5,329
Other................................ 60 8 -- --
------- ------- -------- --------
Total revenue....................... 276 1,327 5,329 5,329
Total operating expenses.............. 1,211 5,866 23,181 83,009
------- ------- -------- --------
Operating loss........................ (935) (4,539) (17,852) (77,680)
Interest income (expense), net........ (99) (224) 348 68
Provision for income taxes............ -- -- -- (1)
------- ------- -------- --------
Net loss before extraordinary item.... (1,034) (4,763) (17,504) $(77,613)
========
Extraordinary item.................... -- -- (330)
------- ------- --------
Net loss.............................. (1,034) (4,763) (17,834)
Accretion of preferred stock to
redemption value..................... -- (130) (1,517)
------- ------- --------
Net loss attributable to common
stockholders......................... $(1,034) $(4,893) $(19,351)
======= ======= ========
Basic and diluted net loss per share.. $ (0.08) $ (0.61) $ (2.04)
Shares used in computing basic and
diluted net loss per share........... 13,569 8,009 9,476
Unaudited supplemental basic and
diluted net loss per share........... $ (0.49) $ (1.00)
Shares used in computing unaudited
supplemental basic and diluted net
loss per share....................... 9,820 17,856
Unaudited pro forma loss per share
from continuing operations........... $ (7.11)
</TABLE>
6
<PAGE>
The unaudited pro forma balance sheet data gives effect to our acquisition
of TriVida as if it had occurred on December 31, 1999. The unaudited pro forma
as adjusted data has also been adjusted to give effect to the sale of .
shares of common stock offered by us at the assumed public offering price of
$ . per share (the last reported sale price of our common stock on March . ,
2000), after deducting estimated underwriting discounts and estimated offering
expenses.
<TABLE>
<CAPTION>
As of December 31, 1999
-----------------------------
Pro Forma
Actual Pro Forma As Adjusted
<S> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and marketable
securities..................................... $79,692 $81,000 $
Working capital................................. 68,580 65,641
Total assets.................................... 90,837 256,032
Long-term debt, net of current portion.......... 2,507 3,315
Total stockholders' equity...................... 82,561 242,702
</TABLE>
7
<PAGE>
RISK FACTORS
You should consider carefully the following risks, together with all other
information included in this prospectus, before you decide to buy our common
stock. Please keep these risks in mind when reading this prospectus, including
any forward-looking statements appearing in this prospectus. If any of the
following risks actually occurs, our business, financial condition or results
of operations would likely suffer materially. As a result, the trading price of
our common stock may decline, and you could lose all or part of the money you
paid to buy our common stock.
OUR LIMITED OPERATING HISTORY MAKES THE EVALUATION OF OUR BUSINESS AND
PROSPECTS DIFFICULT
We introduced our first performance marketing services and recorded our
first revenue from these services in the third quarter of 1997. Accordingly,
you have limited information about our company with which to evaluate our
business, strategies and performance and an investment in our common stock.
Before buying our common stock, you should consider the risks and difficulties
frequently encountered by early stage companies in new and rapidly evolving
markets, particularly those companies whose business depends on the Internet.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
WE HAVE A HISTORY OF LOSSES AND EXPECT FUTURE LOSSES
Our accumulated deficit as of December 31, 1999 was $24.9 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 $54.0 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. These estimates are preliminary and may change materially
as a result of the completion of our evaluation of the fair market value of the
net assets acquired. 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 "Selected Consolidated Financial
Data" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
8
<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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note B to the Consolidated
Financial Statements included elsewhere in this prospectus.
9
<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.
See "Business--Technology Infrastructure."
INTENSE COMPETITION IN OUR MARKETS MAY REDUCE THE NUMBER OF OUR CUSTOMERS AND
THE PRICING OF OUR SERVICES
We compete in markets that are new, intensely competitive, highly fragmented
and rapidly changing. We compete against larger companies with respect to our
BFIT services, the banner ad serving portion of our business. We compete more
broadly against similar sized, private companies. We face competition in the
overall performance marketing solutions market, as well as in the affiliate
sales channel and banner advertising delivery segments of the Internet
advertising and marketing markets. In addition, we have recently entered the
online e-mail referral services market and expect to face competition in this
market. We have experienced and expect to continue to experience increased
competition from current and potential competitors. We believe our principal
competitors are privately held Commission Junction and LinkShare. See
"Business--Competition."
10
<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
11
<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.
12
<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 third parties to
benefit from our technology without paying us for it. If this occurs, our
business could be
13
<PAGE>
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. Many members of our management have only recently joined us. We have
grown from 12 employees as of June 30, 1998 to 236 employees as of February 29,
2000, including 34 employees of TriVida, 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
14
<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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Year 2000
Compliance."
15
<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.
16
<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-- Consolidated Quarterly 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 this offering, 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;
17
<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 have not identified specific uses for a substantial portion of our net
proceeds of this offering. Management may invest or spend our proceeds of this
offering in ways with which you may not agree
Our board of directors and management will have significant flexibility in
applying our net proceeds of this offering. As of the date of this prospectus,
we do not have plans for using a substantial portion of our proceeds from this
offering. We expect to use our proceeds from this offering for working capital
and general corporate purposes. See "Use of Proceeds."
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.
PROJECTIONS INCLUDED IN THIS PROSPECTUS RELATING TO THE GROWTH OF E-COMMERCE
AND THE INTERNET ARE BASED ON ASSUMPTIONS THAT COULD TURN OUT TO BE INCORRECT
AND ACTUAL RESULTS COULD BE MATERIALLY DIFFERENT FROM THE PROJECTIONS
This prospectus contains various third-party data and projections, including
those relating to revenue generated by electronic commerce, the number of
Internet users and the amount of Internet advertising. See "Prospectus
Summary--Our Market Opportunity" on page 3 and "Business-- Industry Background"
on pages 38 and 39. These data and projections have been included in studies
prepared by independent market research firms, and the projections are based on
surveys, financial reports and models used by these firms. Actual results or
circumstances may be materially different
18
<PAGE>
from the projections. This could reduce our revenue and harm our operating
results. These data and projections are inherently imprecise and investors are
cautioned not to place undue reliance on them.
OUR STOCK PRICE MAY BE EXTREMELY VOLATILE WHICH MAY PREVENT YOU FROM RESELLING
YOUR SHARES AT OR ABOVE THE PUBLIC OFFERING PRICE
The market price of the common stock after this offering may vary from the
public offering price. Fluctuations in market price and volume are particularly
common among securities of Internet and other technology companies. As a
result, you may not be able to resell your shares at or above the public
offering price. The market price of our common stock may fluctuate
significantly in response to the following factors, some of which are beyond
our control:
. variations in quarterly operating results;
. changes in market valuations of Internet and other technology companies;
. our announcements of significant contracts, acquisitions, strategic
partnership, joint ventures or capital commitments;
. failure to complete significant sales;
. additions or departures of key personnel;
. future sales of common stock; and
. changes in financial estimates by securities analysts.
IF OUR STOCK PRICE IS VOLATILE, WE MAY BE SUBJECT TO SECURITIES CLASS ACTION
LITIGATION
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
stock. We may in the future be the target of similar litigation. Securities
litigation could result in substantial costs and divert management's attention
and resources.
IF SUBSTANTIAL SALES OF OUR COMMON STOCK OCCUR, OUR STOCK PRICE COULD DECLINE
Sales of a substantial number of shares of our common stock in the public
market after this offering could depress the market price of our common stock
and could impair our ability to raise capital through the sale of additional
equity securities. For a more detailed description, see "Shares Eligible for
Future Sale" on page 70.
OUR EXISTING STOCKHOLDERS WILL BE ABLE TO CONTROL ALL MATTERS REQUIRING
STOCKHOLDER APPROVAL AND COULD DELAY OR PREVENT SOMEONE FROM ACQUIRING OR
MERGING WITH US ON TERMS FAVORED BY A MAJORITY OF OUR INDEPENDENT STOCKHOLDERS
On completion of this offering, our executive officers and directors and
their affiliates will beneficially own approximately .% 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.
19
<PAGE>
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:
. authorizing the issuance of blank check preferred stock or additional
shares of common stock;
. providing for a classified board of directors with staggered, three-year
terms;
. providing that directors may only be removed for cause by a two-thirds
vote of stockholders;
. limiting the persons who may call special meetings of stockholders;
. prohibiting stockholder action by written consent; and
. establishing advance notice requirements for nominations for election to
the board of directors or for proposing matters that can be acted on by
stockholders at stockholder meetings.
Delaware law may also discourage, delay or prevent a third party from
acquiring or merging with us.
INVESTORS WILL EXPERIENCE IMMEDIATE DILUTION IN THE BOOK VALUE OF THEIR SHARES
The public offering price is expected to be substantially higher than the
book value per share of the outstanding common stock immediately after this
offering. Accordingly, if you purchase common stock in the offering, you will
incur immediate dilution of approximately $. in the book value per share of the
common stock from the price you pay for the common stock.
The forward-looking statements we make in this prospectus might prove
inaccurate. As a result, our actual results, levels of activity, performance or
achievements may differ materially from those expressed in the forward-looking
statements
Some of the statements under "Prospectus Summary," "Use of Proceeds," "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
20
<PAGE>
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.
21
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from our sale of . shares of common
stock at the assumed public offering price of $ . per share (the last reported
sale price of our common stock on March . , 2000) to be $ . , after deducting
estimated underwriting discounts and estimated offering expenses. If the
underwriters' over-allotment option is exercised from us in full, we estimate
that the net proceeds will be approximately $ . , after deducting estimated
underwriters discounts and estimated offering expenses. We will not receive any
of the proceeds from the sale of shares of common stock being offered by the
selling stockholders in this prospectus.
We intend to use the net proceeds of this offering, together with cash, cash
equivalents and marketable securities and borrowings, for working capital and
other general corporate purposes. As a result, we will retain broad discretion
in the allocation of the net proceeds of this offering. Pending use of the net
proceeds, we intend to invest these proceeds in short-term, investment grade,
interest-bearing securities.
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, for the periods indicated, the high and low sales
prices for our common stock as reported by the Nasdaq National Market:
<TABLE>
<CAPTION>
Price Range of
Common Stock
--------------
High Low
<S> <C> <C>
Year Ended December 31, 1999:
Fourth Quarter (since November 3, 1999)......................... $ 87.06 $21.50
Year Ending December 31, 2000:
First Quarter (through March 7, 2000)........................... 121.75 60.50
</TABLE>
On March . , 2000, the last reported sale price for our common stock on the
Nasdaq National Market was $ . per share. As of March . , 2000, there were
approximately . 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 December 31, 1999 on
an actual basis, a pro forma basis and a pro forma as adjusted basis. This
information should be read in conjunction with our consolidated financial
statements and related notes, TriVida's financial statements and related notes,
and the pro forma financial information and related notes, all included
elsewhere in this prospectus. The pro forma basis gives effect to our
acquisition of TriVida as if it occurred on December 31, 1999. The pro forma as
adjusted basis also gives effect to the sale of . shares of common stock
offered by us at the assumed public offering price of $ . per share (the last
reported sale price of our common stock on March . , 2000), after deducting
estimated underwriting discounts and estimated offering expenses.
Shares of common stock reflected in this table exclude:
. 1,742,926 shares issuable upon the exercise of outstanding options under
our 1998 Stock Incentive Plan with a weighted average exercise price of
$3.60 per share;
. 818,204 shares available for issuance and grant under our 1998 Stock
Incentive Plan, net of outstanding options and restricted stock;
. 313,894 shares issuable upon the exercise of options assumed under the
TriVida 1998 Equity Incentive Plan with a weighted average exercise
price of $14.29 per share;
. 212,500 shares available for issuance under our 1999 Employee Stock
Purchase Plan; and
. 1,274,001 shares issuable upon the exercise of outstanding warrants to
purchase shares of common stock at a weighted average exercise price of
$2.73 per share.
<TABLE>
<CAPTION>
As of December 31, 1999
-------------------------------
(In thousands, except share
and per share data)
Pro Forma
As
Actual Pro Forma Adjusted
<S> <C> <C> <C>
Cash, cash equivalents and marketable
securities.................................... $ 79,692 $ 81,000 $
========= ========= ========
Current portion of long-term debt.............. $ 943 $ 1,912 $ 1,912
========= ========= ========
Long-term debt, net of current portion......... $ 2,507 $ 3,315 $ 3,315
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, actual, pro forma and pro
forma as adjusted: 28,088,249 shares issued,
actual; 29,524,334 shares issued pro forma
and . shares issued pro forma as adjusted.. 281 295
Additional paid-in capital.................... 113,414 273,541
Unearned compensation......................... (6,002) (6,002) (6,002)
Shareholders notes receivable................. (208) (208) (208)
Accumulated other comprehensive loss.......... (11) (11) (11)
Accumulated deficit........................... (24,876) (24,876) (24,876)
Treasury stock, at cost (122,499 shares,
actual pro forma and pro forma as adjusted).. (37) (37) (37)
--------- --------- --------
Total stockholders' equity..................... 82,561 242,702
--------- --------- --------
Total capitalization........................... $ 85,068 $ 246,017 $
========= ========= ========
</TABLE>
23
<PAGE>
DILUTION
The pro forma net tangible book value of our common stock as of December 31,
1999 was $ . , or $ . per share, after giving effect to the acquisition of
TriVida as if it had occured on December 31, 1999. After giving effect to the
sale of common stock pursuant to this offering at the assumed public offering
price of $ . per share (the last reported sale price of our common stock on
March . 2000), assuming the underwriters' option to purchase additional
shares in this offering is not exercised, and after deducting estimated
underwriting discounts and estimated offering expenses, the adjusted pro forma
net tangible book value as of December 31, 1999 would have been $ . , or $ .
per share.
Pro forma net tangible book value per share before the offering has been
determined by dividing pro forma net tangible book value, which is calculated
as total tangible assets less total liabilities, by the pro forma number of
shares of common stock outstanding as of December 31, 1999. This offering will
result in an increase in pro forma net tangible book value per share of $ . to
existing stockholders and dilution in pro forma net tangible book value per
share of $ . to new investors who purchase shares in this offering. Dilution
is determined by subtracting pro forma net tangible book value per share from
the assumed public offering price. The following table illustrates this
dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share............................ $ .
Pro forma net tangible book value per share as of December 31,
1999.............................................................. $ .
Increase attributable to sale of common stock in this offering.... .
----
Pro forma net tangible book value per share after this offering.... .
----
Dilution of net tangible book value per share to new investors..... $ .
====
</TABLE>
If the underwriters exercise from us their option to purchase additional
shares in this offering, the pro forma net tangible book value per share after
the offering would be $ . per share, the increase in net tangible book value
per share to existing stockholders would be $ . per share and the dilution to
new investors would be $ . per share.
The information above assumes no exercise of stock options or warrants
outstanding as of December 31, 1999. At December 31, 1999, there were 1,742,926
shares of common stock issuable upon exercise of outstanding stock options at a
weighted average exercise price of $3.60 per share and 1,274,001 shares of
common stock issuable upon the exercise of outstanding warrants at a weighted
average exercise price of $2.73. After giving effect to the acquisition of
TriVida, options to purchase an additional 313,894 shares of common stock would
be outstanding at a weighted average exercise price of $14.29 per share. To the
extent that outstanding options or warrants have been or are exercised after
December 31, 1999, there will be further dilution to new investors.
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.
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 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 in the case of statement of operations data, and on December 31, 1999 in
the case of balance sheet data. The unaudited pro forma data is presented for
illustrative purposes only and is not necessarily indicative of the operating
results or financial position that would have occurred if the TriVida
acquisition had been consummated on these dates or of future operating results
or financial position of the combined company following this transaction.
Unaudited pro forma loss per share from continuing operations excludes
accretion of preferred stock to redemption value of $0.14 per share.
25
<PAGE>
Selected Consolidated Financial Data
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Pro Forma
Year Ended December 31, Year Ended
------------------------------------------- December 31,
1995 1996 1997 1998 1999 1999
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue:
Performance marketing
services.............. $ -- $ -- $ 216 $ 1,319 $ 5,329 $ 5,329
Other.................. 481 196 60 8 -- --
------ ------- ------- ------- -------- --------
Total revenue......... 481 196 276 1,327 5,329 5,329
------ ------- ------- ------- -------- --------
Operating expenses:
Cost of revenue........ -- -- 273 424 845 845
Sales and marketing
(exclusive of equity
related compensation
of $0, $0, $0, $56 and
$525 in 1995, 1996,
1997, 1998 and 1999,
respectively) ........ 49 398 180 1,154 9,329 11,066
Client services
(exclusive of equity
related compensation
of $0, $0, $0, $15 and
$238 for 1995, 1996,
1997, 1998 and 1999,
respectively.......... -- -- -- 300 3,474 3,474
Development and
engineering (exclusive
of equity related
compensation of $0,
$0, $0, $1,865 and
$146 in 1995, 1996,
1997, 1998 and 1999,
respectively)......... 274 505 426 728 4,767 6,095
General and
administrative
(exclusive of equity
related compensation
of $0, $0, $0, $450
and $1,033 in 1995,
1996, 1997, 1998 and
1999, respectively)... 115 558 332 875 2,825 5,354
Equity related
compensation.......... -- -- -- 2,385 1,941 2,294
Amortization of
goodwill and
intangible assets..... -- -- -- -- -- 53,881
------ ------- ------- ------- -------- --------
Total operating
expenses............. 438 1,461 1,211 5,866 23,181 83,009
------ ------- ------- ------- -------- --------
Operating income (loss). 43 (1,265) (935) (4,539) (17,852) (77,680)
Interest income
(expense), net......... (4) (26) (99) (224) 348 68
Provision for income
taxes.................. -- -- -- -- -- (1)
------ ------- ------- ------- -------- --------
Net income (loss) before
extraordinary item..... 39 (1,291) (1,034) (4,763) (17,504) $(77,613)
========
Extraordinary item--loss
on early extinguishment
of debt................ -- -- -- -- (330)
------ ------- ------- ------- --------
Net loss................ 39 (1,291) (1,034) (4,763) (17,834)
Accretion of preferred
stock to redemption
value.................. -- -- -- (130) (1,517)
------ ------- ------- ------- --------
Net income (loss)
attributable to common
stockholders........... $ 39 $(1,291) $(1,034) $(4,893) $(19,351)
====== ======= ======= ======= ========
Basic and diluted net
income (loss) per
share.................. $ 0.02 $ (0.13) $ (0.08) $ (0.61) $ (2.04)
Shares used in computing
basic and diluted net
income (loss) per
share.................. 1,761 9,772 13,569 8,009 9,476
Unaudited supplemental
basic and diluted net
loss per share......... $ (0.49) $ 1.00
Shares used in computing
supplemental basic and
diluted net loss per
share.................. 9,820 17,856
Pro forma loss per share
from continuing
operations............. $ (7.11)
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Pro Forma as
As of December 31, of
--------------------------------------- December 31,
1995 1996 1997 1998 1999 1999
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and
marketable securities.... $ 90 $ 25 $ 76 $ 4,327 $79,692 $ 81,000
Working capital (deficit). 169 (443) (502) 3,422 68,580 65,641
Total assets.............. 294 140 254 5,971 90,837 256,032
Long-term debt, net of
current portion.......... 62 751 333 4,949 2,507 3,315
Convertible preferred..... -- -- -- 8,786 -- --
Total stockholders' equity
(deficit)................ 168 (1,104) (1,897) (9,496) 82,561 242,702
</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.
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, B-INTOUCH e-mail
referral services and BFIT advertising services--are designed to increase our
customers' online sales or traffic and to decrease their cost of customer
acquisition.
We were originally incorporated in January 1996. Initially we provided
customized software development and support services for automating marketing
programs. Later in 1996 we began to change our focus to performance marketing
services, although we continued to provide customized software and support
services on a limited basis through the third quarter of 1998. The financial
statements and data for us and two affiliated companies, including the
description of our financial condition and results of operations, are set forth
on a consolidated basis for all periods presented.
To date, we have generated our performance marketing services revenue
primarily from our BFAST affiliate marketing services. In general, we enter
into a standard service agreement that requires our BFAST customers to pay us a
one-time integration fee and monthly performance fees, subject to minimum
monthly or annual fees. For our online merchants, the performance fees are
generally based on either a percentage of the sales generated or on the number
of transactions or orders generated by their marketing partners. For our portal
customers, the performance fees are generally based on the volume of click-
throughs generated by their marketing partners. In addition to the core BFAST
service, we also offer related service options, such as affiliate management
and affiliate commission payment services, which customers may select on an
item-by-item basis for set fees. We also generate revenue through our other
performance marketing services--BFIT, a service that tracks the effectiveness
of customers' banner ads, launched in the second quarter of 1998, and
B-INTOUCH, an e-mail referral service, launched in the third quarter of 1999.
Our BFIT customers pay us based on the number of impressions served. Our B-
INTOUCH customers typically pay us based on the sales or traffic generated by
these promotions.
We recently initiated a new performance marketing service designed for
online businesses that sell goods and services to other businesses. Our B2BFAST
services enable businesses to market their products and services in a similar
manner as our BFAST services. We are seeking to develop additional performance
marketing services and plan to expand our service offerings in 2000 to include
personalization services as a result of our recent acquisition of TriVida.
We have incurred significant net losses and negative cash flows from
operations since the commencement of our performance marketing business, and as
of December 31, 1999, we had an accumulated deficit of approximately $24.9
million. We had net losses of approximately $4.8 and $19.4 million for the
years ended December 31, 1998 and 1999, respectively. These losses have been
funded primarily through the issuance of preferred stock, borrowings and more
recently, our initial
28
<PAGE>
public offering of common stock. Through our initial public offering on
November 3, 1999, an additional $70.6 million of funds were raised, net of
issuance costs. We intend to continue to invest in our technology and
infrastructure, including investment in our existing data center as well as the
development of new data centers. We intend to increase our expenditures
relating to sales and marketing and product development activities, invest in
additional development and productization of the personalization technology
recently acquired, and expand our operations internationally. As a result, we
believe that we will continue to incur operating losses and negative cash flow
from operations for the foreseeable future and that the rate at which these
losses will be incurred may increase from current levels.
On February 29, 2000, we acquired TriVida in exchange for 1,436,085 shares
of our common stock. In addition, we assumed options to purchase 313,894 shares
of our common stock. We have estimated the purchase price to be approximately
$163.0 million which will be allocated to approximately $1.4 million of
tangible assets and approximately $161.6 million to intangible assets. We
expect to amortize intangible assets over three years which will result in
amortization expense of approximately $54.0 million per year. The allocation of
the purchase price to tangible and intangible assets, as well as the related
amortization expense, is based on preliminary estimates and may change
materially as a result of the completion of our evaluation of the fair market
value of the net assets acquired. We may also incur additional expenses related
to the integration of TriVida, which may include employee severance and other
restructuring charges, in the first half of 2000.
TriVida's revenue and net loss were $0 and $6.2 million, respectively, for
the twelve months ended December 31, 1999. Our expenses may increase with
additional investments to develop personalization services.
Results of Operations
The following table sets forth consolidated statement of operations data as
a percentage of total revenue for the periods indicated. The historical results
are not necessarily indicative of results to be expected for any future period.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1997 1998 1999
<S> <C> <C> <C>
Revenue:
Performance marketing services.................. 78 % 99 % 100 %
Other........................................... 22 1 --
------- ------- -------
Total revenue................................. 100 100 100
Operating expenses:
Cost of revenue................................. 99 32 16
Sales and marketing............................. 65 87 175
Client services ................................ -- 22 65
Development and engineering..................... 154 55 89
General and administrative...................... 120 66 54
Equity related compensation..................... -- 180 36
------- ------- -------
Total operating expenses...................... 438 442 435
Operating loss.................................... (338) (342) (335)
Interest income (expense), net.................... (36) (17) 7
------- ------- -------
Net loss before extraordinary item................ (374)% (359)% (328)%
======= ======= =======
</TABLE>
29
<PAGE>
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.
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 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 a third-party data center
facility and costs for Internet connectivity to our customers and their
marketing partners.
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 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 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.
30
<PAGE>
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 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 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. Prior to 1998, development and engineering expenses also included
the expenses related to customized software development and support services.
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.
General and Administrative Expenses
General and administrative expenses principally consist of payroll and
related costs and professional fees related to our general management, finance
and human resource functions. Facility and related costs are allocated to sales
and marketing, development and engineering and general and administrative
expenses based upon the relative number of employees in each area.
General and administrative expenses 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.
31
<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 25 and Statement of
Financial Accounting Standards 123. 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
Interest income (expense), net consists of interest expense on our
borrowings, partially offset by interest income earned on our cash balances.
As a result of increased borrowings used to finance the growth of our
business, interest expense, net increased from $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.
32
<PAGE>
Consolidated Quarterly Results of Operations
The following table sets forth unaudited consolidated quarterly statement of
operations data for the eight quarters ended December 31, 1999. This unaudited
consolidated quarterly information has been derived from our consolidated
financial statements and, in the opinion of management, has been prepared on a
basis consistent with the financial statements contained elsewhere in this
prospectus and includes all adjustments, consisting of only normal recurring
adjustments, necessary for a fair presentation of the information for the
periods covered when read in conjunction with our financial statements and
related notes. The operating results for any quarter are not necessarily
indicative of the operating results for any future period.
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------------------------------
Mar. 31, Jun. 30, Sep. 30, Dec. 31, Mar. 31, Jun. 30, Sep. 30, Dec. 31,
1998 1998 1998 1998 1999 1999 1999 1999
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Performance marketing
services............. $ 237 $383 $ 313 $ 386 $ 533 $ 863 $ 1,313 $ 2,620
Other................. -- -- 8 -- -- -- -- --
----- ---- ------- ------- ------- ------- ------- -------
Total revenue....... 237 383 321 386 533 863 1,313 2,620
Operating expenses:
Cost of revenue....... 89 67 70 198 101 137 199 408
Sales and marketing... 125 147 236 646 1,265 2,085 2,695 3,284
Client services....... -- -- 31 269 469 677 1,143 1,185
Development and
engineering.......... 116 177 105 330 562 920 1,653 1,632
General and
administrative....... 47 59 327 442 351 503 798 1,172
Equity related
compensation......... -- -- 2,207 178 450 503 488 501
----- ---- ------- ------- ------- ------- ------- -------
Total operating
expenses........... 377 450 2,976 2,063 3,198 4,825 6,976 8,182
----- ---- ------- ------- ------- ------- ------- -------
Operating loss.......... (140) (67) (2,655) (1,677) (2,665) (3,962) (5,663) (5,562)
Interest income
(expense), net......... (33) (28) (25) (138) (216) 48 (25) 541
----- ---- ------- ------- ------- ------- ------- -------
Net loss before
extraordinary item..... (173) (95) (2,680) (1,815) (2,881) (3,914) (5,688) (5,021)
Extraordinary item...... -- -- -- -- -- -- -- (330)
----- ---- ------- ------- ------- ------- ------- -------
Net loss................ $(173) $(95) $(2,680) $(1,815) $(2,881) $(3,914) $(5,688) $(5,351)
===== ==== ======= ======= ======= ======= ======= =======
</TABLE>
Some noteworthy aspects of the information in the table above include the
following:
. Cost of revenue changes resulted from fluctuations in connectivity costs
and increases in depreciation due to the addition of capital equipment;
. Sales and marketing and client services expenses increased each
consecutive quarter due to the continuous addition of staff and higher
levels of spending associated with our growth;
33
<PAGE>
. Development and engineering expense changes resulted from quarterly
fluctuations in computer maintenance and software purchases and the
increase in salary and related expenses due to the addition of staff;
. Revenue increases from 1998 forward resulted from an increase in new
customers coupled with revenue growth of the existing customers;
. June 1998 revenue of $383,000 included non-recurring service fees of
$120,000, causing revenue to decline to $321,000 in September 1998; and
. General and administrative expense fluctuations resulted from varying
professional service fees, legal expenses in connection with unsuccessful
financing efforts in 1998, the addition of a senior management team
during the third and fourth quarters of 1998 and the addition of
employees in 1999. Certain expenses for investor relations, insurance and
various legal and professional service were incurred in 1999 as a result
of becoming a publicly traded company.
Our quarterly operating results have fluctuated in the past and may
fluctuate significantly in the future due to a variety of factors, including:
. the continued acceptance of online commerce;
. demand for and the timing of sales of our services;
. changes in the rapidly evolving market for performance marketing
services;
. delays in introducing new services;
. the timing of when we initially integrate our services with our new
customers' systems and how long it takes them to generate significant
regular online sales or traffic;
. changes in the regulations governing online commerce and privacy;
. seasonality of sales of our online merchants, most of whom sell goods and
service at the retail level; and
. increased expenses, whether related to capital expenditures, sales and
marketing, product development or administration.
Liquidity and Capital Resources
We have financed our operations primarily through the sale of equity
securities and borrowings. Net proceeds from financing activities from January
1, 1998 through December 31, 1999 included:
. approximately $10.4 million received upon the sale of Series A preferred
stock and warrants to purchase shares of common stock in August and
September 1998;
. approximately $24.9 million received upon the sale of Series B preferred
stock in March 1999;
. 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; and
34
<PAGE>
. approximately $70.6 million in proceeds from our initial public offering,
net of issuance costs.
Cash used in operating activities was $2.4 million in 1998 and $13 million
in 1999. Cash used in operating activities during 1998 resulted from net losses
and deposits of $384,000 required primarily for our new offices and related
expenditures. These amounts were partially offset by an increase of $345,000 of
accounts payable and accrued expenses. In 1999, cash used in operating
activities resulted from net losses of $17.8 million, 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 investing activities was $610,000 and $25.5 million in 1998 and
1999, respectively. Our investing activities included capital expenditures
totaling $610,000 and $4.9 million in 1998 and 1999, respectively. These
capital expenditures were incurred primarily to acquire computer hardware and
software for our operations and our internal use. We expect that as our
customer base and employee base grow 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 $0 in 1998 and $20.7 million in 1999 as a
result of the investment of a portion of the net proceeds from our initial
public offering.
At December 31, 1999 we had $59.0 million in cash and cash equivalents,
$20.7 million in marketable securities and $68.6 million in working capital. In
addition, we have an agreement for a $2.0 million equipment line of credit that
bears interest at 6.8% per annum and provides for principal payments in monthly
installments over a period of four years from the date of each borrowing. The
credit agreement prohibits us from paying cash dividends or from engaging in a
merger or sale involving substantially all our assets or stock without prior
lender consent. It also contains customary provisions regarding the maintenance
of collateral, insurance and the provision of financial data to the lender. At
December 31, 1999 we had borrowed substantially all of the amounts available
under this line of credit.
We believe that the net proceeds of this offering, together with cash on
hand, cash equivalents and borrowings, will be sufficient to meet our debt
service, operating and capital requirements for at least the next 12 months.
After that, we may need to raise additional funds. We may seek to raise
additional funds through additional borrowings, public or private equity
financings or from other sources. There can be no assurance that additional
financing will be available at all or, if available, will be on terms
acceptable to us.
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
35
<PAGE>
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 Compliance
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field. In order to distinguish
21st century dates from 20th century dates, the date code field needs to be
expanded to 4 digits. The use of software and computer systems that are not
Year 2000 compliant could result in system failures or miscalculations
resulting in disruptions of operations, including among other things, a
temporary inability to process transactions, send invoices, or engage in normal
business activities. 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 our customers or their affiliates, it is possible that Year 2000
problems could be discerned in the future.
Our proprietary software has been developed to be Year 2000 compliant since
its first version. Our services also rely on technology provided by third
parties, such as Oracle-based databases, Sun Microsystems servers, and high-
capacity Internet connections through Exodus Communications. We have reviewed
the public written statements of Oracle, Sun Microsystems, and PowerSoft
regarding Year 2000 compliance and are using versions of their products that
they state will operate properly in the new millennium. Based on our review of
the public written statements of Exodus Communications regarding its Year 2000
compliance, we have no reason to believe that our Internet connections through
Exodus will fail to operate properly in the new millennium. We have tested
elements of our system to ascertain the Year 2000 compliance of our services
and believe that they are Year 2000 compliant. Despite testing and
investigation by us, our systems and underlying software and protocols running
our services may contain errors or defects associated with Year 2000 date
functions. Our customers and vendors may also experience Year 2000 problems
that could affect our business. We are unable to predict to what extent our
business may be affected if our systems experience a material Year 2000 failure
or if our customers or their affiliates experience Year 2000 problems. Failure
of our current service offerings to operate properly in the Year 2000 and
beyond could require us to incur significant unanticipated expenses to remedy
any problems or replace affected vendors and could have a material adverse
effect on our business, operating results and financial condition.
We depend on the uninterrupted availability of the Internet infrastructure
to conduct our business. We also rely on the continued operations of our
customers, in particular their e-commerce sites where commercial transactions
are performed, and our customers' marketing partners, in particular the
affiliate sites and e-mail systems that host and distribute promotions, for our
revenue. We are thus dependent upon the success of the Year 2000 compliance
efforts of the service providers that support the Internet and the Year 2000
compliance efforts of our customers. Interruptions in the Internet
infrastructure affecting us, our customers or their marketing partners, or the
failure of the Year 2000 compliance efforts of one or more of our customers or
their marketing partners, could have a material adverse effect on our business,
results of operations and financial condition. Further, the marketing
initiatives pursued by our prospective customers could be affected by Year 2000
issues as companies expend significant resources to correct their current
systems for the year 2000. These
36
<PAGE>
expenditures may result in reduced funds available for Internet advertising.
This could materially and adversely affect our business, results of operations
and financial condition.
We have not reviewed our non-information technology systems for Year 2000
issues relating to embedded microprocessors and do not expect to conduct a
formal review. We have not contacted our customers to inquire of their Year
2000 compliance status and do not expect to do so. Because our online merchant
and portal customers operate computer-based businesses, we believe that they
are likely to have taken or will take all necessary steps to ensure that their
businesses will continue to function properly in the new millennium without any
material interruption.
Because our internal information systems, such as our payroll and accounting
systems, utilize relatively new equipment and mostly new standard software
applications, we believe that these internal information systems are currently
Year 2000 compliant.
The total cost of our Year 2000 compliance activities was not material to
our business, results of operations and financial conditions. While we believe
that we have completed our Year 2000 readiness process, we cannot assure you
that we have identified and remedied all significant Year 2000 problems, that
we will not incur significant additional time and expense or that such problems
will not harm our business.
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 first fiscal quarter of the fiscal year beginning after December 15, 1999.
We are in the process of evaluating the impact of this bulletin on our
financial statements.
37
<PAGE>
BUSINESS
We are a leading provider of services that enable our customers to market
their products and services online through tens of thousands of marketing
partners and to pay for these promotions based on performance. Our customers
use our services to establish and manage their own independent performance
marketing relationships directly with their marketing partners. Our online
merchant customers typically pay fees to their marketing partners based on the
sales they generate, as tracked through our services. Our portal customers
typically pay fees to their marketing partners based on the traffic sent to the
portal, as tracked through our services. We are typically paid fees by our
customers based upon the level of sales or traffic generated by these marketing
partners. We provide our customers a cost-effective solution for establishing,
managing and rewarding these performance marketing sales channels.
Through our acquisition of TriVida, 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.
Industry Background
The Internet has emerged as a significant communications and commerce
medium. Nua Internet Surveys estimates that the number of Internet users
worldwide has increased from 26 million in December 1995 to 275 million in
February 2000. In addition, as users gain online experience, they tend to
increase the amount of time they spend on the Internet and spend their time
online conducting a greater variety of activities.
Expansion and Dispersion of Content; Evolution of Internet User Habits
The content available to Internet users has increased dramatically and
become more widely dispersed. Increased ease and lower cost of Web publishing
has permitted smaller businesses, organizations and individuals to create and
host their own Web sites. The NEC Research Institute estimated that the number
of pages available on the Web grew from 320 million pages in December 1997 to
approximately 800 million pages in February 1999.
More experienced Internet users tend to rely increasingly on their own lists
or bookmarks of Web sites, rather than on search engines and directories to
access content that is of specific interest to them. While visits to high
traffic Web sites such as portals have grown in absolute numbers, they
represent a minority of all online traffic. Neilsen//NetRatings reports that
the top ten portals made up 20% of the average monthly page views as measured
in their home Internet user sample in June 1999.
Growth of E-commerce
The Internet has emerged as a significant sales channel for goods and
services to consumers and businesses. The Internet provides a cost-effective
means for online merchants to reach a global
38
<PAGE>
audience, and provides consumers with increased information, broad selection
and greater convenience.
Total U.S. online consumer spending is projected to increase from $7.8
billion in 1998 to $184.5 billion in 2004, and actual online consumer sales
were reported to be $2.8 billion in January 2000. Total U.S. online business-
to-business transactions are projected to grow from $406.2 billion in 2000 to
$2.7 trillion in 2004. We believe more experienced Internet users are more
likely to purchase goods or services online than new Internet users.
The Evolution of Internet Marketing
In response to increasing demand for online products and services, and as
the Internet and electronic commerce expand, online merchants and portals are
increasingly adopting online promotions to reach a global audience for their
products and services, drive traffic to their Web sites, attract customers and
facilitate transactions.
Initially, Internet advertising took the form of banner ads, similar to
advertising billboards, typically placed on portals and other high-traffic Web
sites. Advertising networks then emerged to allow banner ads to be placed
across multiple sites that did not have sufficient traffic individually to
appeal to larger advertisers. In order to allow different advertisements to
appear on the same space on a Web page, portals and advertising networks
require banner ads of specific size and format, generally in a rectangular
shape. Under this model, advertisers generally pay a fee each time an ad is
displayed on a cost-per-thousand-impressions basis. These pay-for-display
campaigns are typically evaluated based on the number of times a user clicks on
the banner ad and is directed to the online merchant's Web site.
Online merchants face an increasingly difficult and expensive task in
converting viewers of banner ads into shoppers and eventually buyers. Banner ad
click-through rates have decreased significantly from 2.11%, as reported by
I/Pro in October 1996, to 0.33%, as reported by Nielsen//NetRatings for the
week ended February 2, 2000. Forrester Research reported in September 1998 that
only 38% of people online for more than 42 months have ever clicked on a banner
ad. We believe that decreasing click-through rates result from the lack of
integration and relevance of the banner ads with the content of the site where
they are displayed.
Online merchants also face an increasing challenge in reaching their
audience. More experienced Internet users, who are more likely to buy online,
spend a smaller percentage of their time on portals, and instead focus on
content sites that match their interests. With millions of sites displaying
hundreds of millions of pages of content, online merchants must identify and
form partnerships with an increasing number of Web sites that might appeal to
their buying audience. The decreased effectiveness of banner ads together with
the online merchant's desire to expand promotional reach have led to the
development of online promotions targeted to specific Web sites with relevant
content and consumers, with the marketing partners rewarded according to the
actual results they generate.
39
<PAGE>
The Emergence of Affiliate Sales Channels
By the end of 1996, a few leading online merchants began to develop
marketing relationships with third-party Web sites to incorporate into their
Web sites a variety of promotions via hyperlink for the online merchant's goods
and services. As these relationships grew, online merchants began to view them
as a separate sales channel for their goods and services and they became known
as affiliate sales channels. In establishing these new affiliate sales
channels, online merchants generally paid commissions to the Web site
publishers based on the sales generated by the ads or promotions. These
affiliate sales channels were the first widely introduced type of performance
marketing program.
These affiliate sales channels had benefits for both the online merchants
and the marketing partners. Online merchants could pay for their marketing
based upon the performance of the promotions, making it more cost-effective to
run promotions with a broader array of third parties than under pay-for-display
methods. Marketing partners could generate revenue from their Web pages at
little or no cost and use ad space that might otherwise go unsold, since there
was no limit to the number of promotions they could run. Marketing partners
could choose among a variety of promotions and the location for each, leading
to better merchandising and increased effectiveness of the promotions which
would benefit both the online merchant and the marketing partner.
Initially, online merchants developed their own software databases and used
their own servers for developing, managing and tracking affiliate sales
channels. Most of these internally developed systems track activity only on the
online merchant's site. Using internal techniques for tracking users to point
of sale, the online merchant could then determine the sales generated by
promotions hosted by each marketing partner and pay commissions accordingly.
The Challenges of Internally Developing and Managing Affiliate Sales Channels
Online merchants face many challenges in building an affiliate sales channel
on a broad scale. Tracking individual transactions through to point of sale
requires that online merchants and marketing partners exchange data. This is
usually done by creating hyperlinks that are specific to each marketing partner
and the online merchant's product or service being promoted. Recording orders,
order cancellations, sales and returns requires integration of data from
databases maintained on the online merchant's transactional and fulfillment
systems, which are often separate. Following an initial integration, ongoing
monitoring for success and accuracy is required. Developing and operating the
necessary software and hardware internally, which may involve tracking
promotions viewed millions of times on thousands of separate Web sites, is time
consuming and expensive.
Online merchants also face challenges in managing their relationships, often
with tens of thousands of marketing partners, including:
. creating a wide variety of promotions for each of its various products
or services;
. generating, placing and replacing the promotions selected by individual
marketing partners within the context of its Web site;
. targeting promotions to individual users based on their browsing and
buying behavior;
. measuring and managing the productivity and effectiveness of marketing
partners;
40
<PAGE>
. analyzing and reporting on the data collected from thousands of sources
to permit better merchandising by both the online merchants and the
marketing partners;
. communicating with and making payments to thousands of marketing
partners; and
. enhancing their systems to reflect changes in business models and
payment methods to influence the behavior of marketing partners.
These Web site publishers also face challenges in realizing the potential
benefits offered by joining an affiliate sales channel. They want to minimize
the time and expense associated with enrolling and creating and changing
hyperlinks for a particular online merchant. In addition, these Web site
publishers are looking for easy, cost-effective solutions for the delivery,
targeting and tracking of the promotional efforts that they run to enhance
their revenue.
Despite the broad reach that performance marketing channels can provide,
converting browsers into buyers remains a significant challenge for online
merchants. Today, most merchants show the same products or services to their
entire audience, both on their marketing partners' site and their own site,
regardless of whether they are appropriate for only a small subset of that
audience. Most online merchants face challenges understanding user purchasing
behavior on Web sites other than their own Web site and in developing
technology to effectively target their products or services to increase
customer conversion.
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 896 million times
in February 2000 through our customers' more than 3.5 million performance
marketing relationships. This combination of customer and marketing partner
data is stored at our
41
<PAGE>
central processing facilities and allows us to measure the sales or traffic
performance of each specific promotion.
Management Solutions
We have significant resources and expertise dedicated to the successful
implementation, development, management and control of online performance
marketing programs. These solutions include:
. Establishment of marketing relationships. We provide online, automated
application and approval processes for Web site publishers to become a
customer's marketing partner. We also help customers identify and
recruit potential marketing partners.
. 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.
42
<PAGE>
Using our services, our customers pay only for those individual promotions
that generate sales or traffic. Our online merchant customers typically pay us
fees based upon the sales resulting from promotions hosted by their marketing
partners. Our portal customers typically pay us fees based upon the traffic
resulting from promotions hosted by their marketing partners. Our customers
enter into separate agreements directly with their marketing partners and pay
them separate fees based on the level of sales or traffic they generate by
hosting the promotions. As a result, our economic interests are closely aligned
with the economic interests of our customers and their marketing partners.
Strategy
Our objective is to be the leading provider of online performance marketing
solutions. To achieve this objective we are focused on the following strategic
initiatives:
Leverage Technology Leadership to Provide Comprehensive Solutions
We intend to continue our focus on performance marketing solutions. We plan
to both enhance our existing, as well as develop new, performance marketing
technologies, expertise and services. We have made significant investments in
technology and personnel to develop a comprehensive set of online services
specifically designed for the development of performance marketing programs,
including affiliate sales channels. We believe that customers will continue to
seek cost-effective solutions to establish and manage performance marketing
programs.
Rapidly Expand Our Targeted Customer Base
We seek continued expansion of our customer base nationally and
internationally, primarily through our direct sales force. Because our revenue
is tied to our customers' performance, we are currently targeting large online
merchants and portals in the U.S. as customers. We have recently begun to
expand our sales efforts to the emerging online markets in Europe.
Continue to Provide Customer Branded and Controlled Solutions
We enable each customer to extend its merchandising techniques to its
marketing partners, with which they contract directly. Services we provide on
our customers' behalf to their marketing partners, including analyses,
communications and payments, are customer branded. We believe customers will
find our merchant branded solutions more appealing and will invest more heavily
in the development and growth of these sales channels and in performance
marketing solutions provided by us.
Increase the Size of Our Customers' Sales Channels
We will continue to identify and recruit potential affiliates on behalf of
our customers. Increasing our customers' marketing reach and revenue increases
our revenue. We have launched an online affiliate recruiters program, located
at www.affiliaterecruiters.com, that allows Web site publishers to promote our
customers' affiliate sales channels. We have also created a free tools site for
Web site publishers, located at www.sitetools.net, where we provide useful
tools for Web publishing and promote our customers' performance marketing sales
channels. We are extending our Web site outreach for customers by entering into
strategic partnerships with companies that provide Web site creation tools and
hosting services. In addition, we are continuing to develop relationships
43
<PAGE>
with syndicated content providers that permit them to incorporate hyperlinks to
our customers in syndicated content.
Increase Our Services to Existing Customers
We intend to continue to develop additional services to support new online
performance marketing programs and new revenue sources for our customers and
us, such as our recently developed e-mail referral services, B-INTOUCH. We are
working with ad serving companies to utilize our technology to track the banner
ads they deliver to point of sale on our customer sites.
Increase the Effectiveness of Our Customers' Sales Channels
We intend to continue and enhance services designed to help our customers
increase their sales. Our best practices research and consulting group helps
our customers generate better response rates by providing industry analysis,
benchmarks and merchandising expertise. We assist our customers' marketing
partners to increase their traffic through various tools and techniques, such
as search engine registration.
We assemble data collected across our customers' Web sites and their
marketing partners' Web sites into unique, anonymous user profiles. We plan to
deliver new services based on these profiles, that will enable us to recommend
specific products and services to unique but anonymous users based on their
past browsing and buying behavior. These recommendations will be delivered both
on the online merchants' sites, as well as on their marketing partners' sites.
Expand Internationally
We intend to be an early entrant and a leader in the development of
performance marketing programs outside the U.S. We have expanded our services
to Europe with our initial integration with Bertelsmann's online subsidiary,
BOL International. We have developed Spanish, German, French and Dutch
interfaces for our international customers' marketing partners. We will
continue to develop foreign language interfaces. We plan to extend our physical
operations in Europe and may also offer our services in Japan.
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:
44
<PAGE>
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 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
45
<PAGE>
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.
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;
46
<PAGE>
. 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.
Customers
Our principal customers are large online merchants and portals. We have
successfully targeted as customers leading online merchants and portals in a
wide variety of markets. The following is a list of many of our larger online
merchants and portals, all of whom have signed written contracts for our
services. We have implemented our services for, and recognized revenue from
substantially all of these customers:
<TABLE>
<S> <C>
American Greetings Gap
Ameritech Lycos
Babbages, Etc. Micro Warehouse
BabyCenter MotherNature.com
barnesandnoble.com Multiple Zones International
Bertelsmann (bol.com) Network Solutions
CNET OneCore
Compaq Pets.com
eBags.com Reel.com
egghead.com SEND.com
Enews.com toysmart.com
eToys(R) Value America
Franklin Covey Yahoo!
Fogdog Sports Visa, U.S.A.
Furniture.com
</TABLE>
47
<PAGE>
Our customers typically enter into a written agreement with us that runs for
one year from program launch and renews automatically for successive one-year
periods unless either party gives notice not to extend. We generally provide
representations concerning our system performance and discount our fees if we
fail to meet specified performance levels. We also agree to indemnify our
customers for infringement of third party intellectual property rights. Our
customers agree to provide information regarding merchandise or services they
make available over the Internet and transactional information.
For 1997, 1998 and 1999, barnesandnoble.com accounted for more than 10% of
our revenue. For 1999, GeoCities, a subsidiary of Yahoo!, accounted for more
than 10% of our revenue. For the fiscal quarter ended December 31, 1999, no
customer accounted for more than 10% of our revenue. Our contract with
barnesandnoble.com expires in January 2001 and 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 notice and paying a penalty.
These contracts provide that either party may terminate upon a material breach.
In addition, in 1997, Duquesne Light and Power, to whom we provided customized
software development and support, accounted for more than 10% of our revenue.
Sales and Marketing
We have a direct sales force that targets large online merchants and portals
as customers. The direct sales force is assigned to different geographical
regions and is supported by sales engineers. We maintain direct sales personnel
in nine major metropolitan areas throughout the United States, as 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.
48
<PAGE>
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 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.
49
<PAGE>
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.
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
50
<PAGE>
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 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.
51
<PAGE>
Employees
As of February 29, 2000, we had a total of 236 employees, 128 of whom were
in sales and marketing, 52 in development and engineering, 22 in finance and
administration, and 34 employees of TriVida. 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 space
under a lease that expires in January 2004. As a result of our acquisition of
TriVida, we now have offices in Culver City, California and in Windsor,
England. In the future, we may lease additional space as needed.
Legal Proceedings
From time to time, we may be involved in litigation incidental to the
conduct of our business. We are not currently a party to any legal proceedings.
52
<PAGE>
MANAGEMENT
Directors and Executive Officers
Our executive officers and directors, and their respective ages and
positions as of February 29, 2000, are set forth below:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
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......... 37 Vice President, Sales
Steven D. Pike.......... 46 Vice President, Client Services
Patricia L. Travaline... 43 Vice President, Marketing Communications
Kathleen L. Biro........ 47 Director
Ted R.
Dintersmith(1)(2)...... 47 Director
W. Michael Humphreys(2). 48 Director
Daniel J. Nova(1)(2).... 38 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.
53
<PAGE>
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 June 1991, he was Chief Financial Officer of
Edsun Laboratories. Prior to that time, he held various financial positions in
private companies and Ingersoll-Rand Company, a machinery and equipment
manufacturer. Mr. Joseph earned a B.S. from Bentley College.
W. Blair Heavey has been our Vice President, Sales since October 1998. From
April 1995 until joining us, he held sales positions at Open Market, Inc., an
Internet software developer, including Director of Sales and Director,
Strategic Channel Sales. From March 1989 until March 1995, he held several
sales and marketing positions at Hewlett-Packard Corporation, a manufacturer of
measurement, computation and communications systems and equipment. Mr. Heavey
received a B.A. from Boston College and an M.B.A. from Babson College.
Ellen M. Brezniak has been our Vice President, Product Marketing since
November 1998. From October 1996 until joining us, she was Vice President,
Business-To-Business Operating Unit at Open Market, Inc. From March 1994 until
September 1996, she was Director, Product Marketing and Planning with Progress
Software Corporation, a supplier of application development and management
technology. Prior to that time, she held various marketing positions at Cognos,
Inc., which offers application development software and EIS tools, and software
database companies such as Sybase, Inc. and Oracle Corporation. Ms. Brezniak
holds a B.S. from Rensselaer Polytechnic Institute.
Patricia L. Travaline has been our Vice President, Marketing Communications
since October 1998. From January 1992 to February 1998, she served in positions
at PCs Compleat, Inc. including Director of Marketing Communications and
Director, Extended Services Development. From December 1985 to September 1991,
she held positions at the public relations firm of Sharon Merrill Associates,
including Vice President, Investor Relations. Ms. Travaline earned a B.A. from
the University of Denver and an M.B.A. from Simmons College.
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.
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.
54
<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 is a director of Flycast Communications Corporation, an
Internet advertising company. Mr. Dintersmith holds a B.A. degree in Physics
and English from the College of William and Mary and a Ph.D. in Engineering
from Stanford University.
W. Michael Humphreys has been a director since August 1998. Mr. Humphreys
has been a partner of Matrix Partners, a private venture capital firm, since
1979. He received a B.S. from the University of Oregon and an M.B.A. from
Harvard Business School.
Daniel J. Nova has been a director since March 1999. Since August 1996, Mr.
Nova has served as a general partner of Highland Capital Partners, a venture
capital firm. Previously, he was a general partner of CMG@Ventures from January
1995 to August 1996 and a Senior Associate at Summit Partners from June 1991 to
January 1995. Mr. Nova is a director of eToys, Inc., an online retailer of
toys, Lycos, Inc., an online portal, MapQuest.com, Inc., an online mapping
company, and Ask Jeeves, Inc., an Internet question answering service company.
Mr. Nova received a B.S. in Computer Science and Marketing with honors from
Boston College and an M.B.A. from Harvard Business School.
Jeffrey Rayport has been a director since December 1998. He has been a
faculty member at Harvard Business School in the Service Management Unit since
1991. He is currently on leave from Harvard and is working at Monitor Company,
a management consulting firm, as the founder and executive director of Monitor
Marketplace Center, an e-commerce research and media unit established in 1998.
Dr. Rayport is a director of Global Sports, Inc., a sporting goods company.
Dr. Rayport earned an A.B., A.M. and Ph.D. from Harvard University and an
M. Phil. from the University of Cambridge (U.K.).
Our board of directors is divided into three classes, with the members of
each class serving for a staggered three-year term. Our board currently
consists of two Class I directors, two Class II directors and two Class III
directors. At each annual meeting of stockholders, a class of directors will be
elected for a three-year term to succeed the directors of the same class whose
terms are then expiring. The term of the Class I directors (Kathleen L. Biro,
W. Michael Humphreys and Daniel J. Nova) expires at the annual meeting of
stockholders to be held in 2000. The term of the Class II directors (Ted R.
Dintersmith and Jeffrey Rayport) expires at the annual meeting of stockholders
to be held in 2001. The term of the Class III directors (Gordon B. Hoffstein
and Samuel P. Gerace, Jr.) expires at the annual meeting of stockholders to be
held in 2002.
Each officer serves at the discretion of our board of directors and holds
office until his or her successor is elected and qualified or until his or her
earlier resignation or removal.
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
55
<PAGE>
of the compensation committee are Messrs. Dintersmith, Humphreys and Nova. The
audit committee reviews the results and scope of the audit and other services
provided by our independent public accountants. The current members of the
audit committee are Messrs. Dintersmith, Nova and Rayport.
Director Compensation
We have no present plans to pay cash compensation to directors but intend to
reimburse directors for reasonable out-of-pocket expenses incurred in
connection with attendance at meetings of the board of directors or committees
of the board. In December 1998, we granted Mr. Rayport an option under the 1998
Stock Incentive Plan to purchase 37,500 shares of common stock at $.30 per
share that vests over four years and a fully vested option to purchase 37,500
shares of common stock at $2.20 per share. In January 2000, we granted Ms. Biro
an option under the 1998 Stock Incentive Plan to purchase 80,000 shares of
common stock at $68.00 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 1998, none of our executive officers served as a member of the
compensation committee, or a committee serving an equivalent function, of any
entity whose executive officers served as a director of Be Free or otherwise
had compensation committee responsibilities.
Executive Compensation
The following table sets forth the total compensation 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.
56
<PAGE>
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 $ 63,387 -- --
President, Chief Executive Officer 1998 49,574 16,859 1,083,495 --
and Chairman of the Board of
Directors
Samuel P. Gerace, Jr. ............. 1999 $115,000 $ 16,126 -- --
Executive Vice President, Research 1998 19,906 -- -- --
&
Technology and Director
Thomas A. Gerace................... 1999 $116,000 $ 23,914 -- --
Executive Vice President, 1998 77,823 -- -- --
Business Development
Ellen M. Brezniak.................. 1999 $125,000 $ 18,173 -- 37,500
Vice President, Product Marketing 1998 19,906 -- 81,262 33,859
W. Blair Heavey.................... 1999 $135,000 $163,992 -- --
Vice President, Sales 1998 26,380 -- 116,666 142,903
</TABLE>
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
Percent of Annual Rates of
Number of Total Options Stock 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....... 37,500 2% $2.80 7/18/99 $171,034 $272,343
W. Blair Heavey......... -- -- -- -- -- --
</TABLE>
- ---------------------
(1) Based on options to purchase an aggregate of 1,755,221 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.
57
<PAGE>
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
Shares Options at In-the-Money Options at
Acquired Value December 31, 1999 December 31, 1999(1)
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....... 4,837 $346,208 5,643 65,716 $ 403,898 $4,609,873
W. Blair Heavey......... -- -- 41,680 101,223 $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 $71.875 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 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 adopted by our board of directors and
stockholders in November 1998. The plan currently authorizes the issuance of up
to 5,054,753 shares of our common stock. As of December 31, 1999, shares of
restricted stock and options to purchase an aggregate of 4,154,230 shares of
common stock at a weighted average restricted stock purchase price of $0.31 per
58
<PAGE>
share and a weighted average option exercise price of $3.60 per share were
outstanding under the plan.
The stock incentive plan provides for the grant of incentive stock options
intended to qualify under Section 422 of the Internal Revenue Code and
nonstatutory stock options.
Our officers, employees, directors, consultants and advisors are eligible to
receive awards under the stock incentive plan. Under present law, however,
incentive stock options may only be granted to employees. No employee may
receive any award for more than 2,000,000 shares in any calendar year.
Optionees receive the right to purchase a specified number of shares of
common stock at a specified option price and subject to other terms and
conditions as are specified in connection with the option grant. We may grant
options at an exercise price less than, equal to or greater than the fair
market value of our common stock on the date of grant. Under present law,
incentive stock options and options intended to qualify as performance-based
compensation under Section 162(m) of the Internal Revenue Code may not be
granted at an exercise price less than the fair market value of the common
stock on the date of grant or less than 110% of the fair market value in the
case of incentive stock options granted to optionees holding more than 10% of
the voting power of the company. The stock incentive plan permits our board of
directors to determine how optionees may pay the exercise price of their
options, including by cash, check or in connection with a "cashless exercise"
through a broker, by surrender to us of shares of common stock, by delivery to
us of a promissory note, or by any combination of the permitted forms of
payment.
As of February 29, 2000, approximately 241 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;
59
<PAGE>
. in the event of an acquisition in which the holders of common stock
would receive a cash payment for each share surrendered, provide for a
cash payment to each option holder equal to the amount by which the
amount paid to common stock holders exceeds the option's exercise price,
multiplied by the total number of shares of common stock subject to the
option;
. provide that any or all outstanding options become fully exercisable as
of a specified time prior to the event; and
. provide that all unexercised options terminate immediately prior to the
event unless exercised before that time.
No award may be granted under the stock incentive plan after November 2008,
but the vesting and effectiveness of awards previously granted may extend
beyond that date. Our board of directors may at any time amend, suspend or
terminate the stock incentive plan.
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 313,894 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 $14.29 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 212,500 shares of our
common stock to participating employees.
All of our employees, including our directors who are employees, and all
employees of any participating subsidiaries, whose customary employment is more
than 20 hours per week and for more than five months in any calendar year, are
eligible to participate in the purchase plan. Employees who 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
60
<PAGE>
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
will end on April 30, 2000.
An employee must be a participant on the last day of an offering period in
order to purchase stock under the plan. An employee's participation in an
offering terminates upon:
. the employee's withdrawal of the balance accumulated in his or her
account;
. termination of employment;
. retirement;
. death;
. transfer to a subsidiary of the company which does not participate in
the plan; and
. the subsidiary for which the employee works no longer being a subsidiary
of the company.
In the event of the employee's death, the balance in the employee's account
will be refunded to the employee's beneficiary or the executor or administrator
of the employee's estate.
Because participation in the purchase plan is voluntary, we cannot now
determine the number of shares of our common stock to be purchased by any of
our current executive officers, by all of our current executive officers as a
group or by our non-executive employees as a group.
401(k) Plan
We have adopted an employee savings and retirement plan qualified under
Section 401 of the Internal Revenue Code and covering employees who are at
least 21 years of age and who have completed three months of service. Employees
may elect to reduce their current compensation by up to the statutorily
prescribed annual limit and have the amount of the reduction contributed to the
401(k) plan. Although not required, we may make matching or additional
contributions to the 401(k) plan in amounts to be determined annually by our
board of directors. To date we have not made any matching or additional
contributions. 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.
61
<PAGE>
TRANSACTIONS WITH RELATED PARTIES
Preferred Stock and Related Transactions
Sale of Preferred Stock. We sold preferred stock pursuant to the following
transactions:
. On August 28, 1998, we sold an aggregate of 10,500,000 shares of Series
A preferred stock at a price of $1.00 per share and issued warrants to
purchase 1,732,500 shares of common stock at an exercise price of $3.00
per share.
. On September 29, 1998, we sold 100,000 shares of Series A preferred
stock at a price of $1.00 per share and issued a warrant to purchase
16,500 shares of common stock at an exercise price of $3.00 and warrants
to purchase up to 700,000 shares of Series A preferred stock at an
exercise price of $1.00 per share; and
. On March 31, 1999, we sold an aggregate of 13,196,522 shares of Series B
preferred stock at a price of $1.89443 per share.
The following directors, executive officers, holders of more than 5% of a
class of voting securities and members of that person's immediate family
purchased these shares or received these warrants to purchase common stock or
Series A preferred stock.
<TABLE>
<CAPTION>
Warrants to
Shares of Warrants to Purchase Shares of
Series A Purchase Series A Series B
Preferred Common Preferred Preferred
Purchaser(1) Stock Stock Stock Stock
<S> <C> <C> <C> <C>
Gordon B. Hoffstein(2).............. 500,000 82,500 -- --
Charles River Partnership(2)(3)..... 5,000,000 825,000 -- 2,322,598
Highland Capital(2)(4).............. -- -- -- 5,070,139
Matrix Partners(2)(5)............... 5,000,000 825,000 -- 2,322,598
</TABLE>
- ---------------------
(1) See Notes to Table of Beneficial Ownership in "Principal and Selling
Stockholders" for information relating 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 owns 4,909,475
shares of Series A preferred stock, warrants to purchase 810,063 shares of
common stock and 2,280,547 shares of Series B preferred stock, and Charles
River VIII-A owns 90,525 shares of Series A preferred stock, warrants to
purchase 14,936 shares of common stock and 42,051 shares of Series B
preferred stock. Mr. Dintersmith, a director of Be Free, is a general
partner of Charles River Partnership VIII, the general partner of Charles
River Partnership VIII, L.P. and an officer of Charles River VII Friends,
Inc., the manager of Charles River VIII-A, LLC.
(4) Of the securities listed, Highland Capital Partners IV owns 4,867,333
shares of Series B preferred stock and Highland Entrepreneurs' Fund IV owns
202,806 shares of Series B preferred stock. Mr. Nova, a director of Be
Free, is a managing member of Highland Management Partners IV, LLC, the
general partner of Highland Capital Partners IV, LP and a managing member
of Highland Entrepreneurs' Fund IV LLC, the general partner of Highland
Entrepreneurs' Fund IV, LP.
(5) Of the securities listed above, Matrix Partners V, L.P. owns 4,500,000
shares of Series A preferred stock, warrants to purchase 742,500 shares of
common stock and 2,090,338 shares of Series B preferred stock, and Matrix V
Entrepreneurs Fund, L.P. owns 500,000 shares of Series A preferred stock,
warrants to purchase 82,500 shares of common stock and 232,260 shares of
Series B preferred stock. Mr. Humphreys, a director of Be Free, is a
general partner of Matrix V Management Co., LLC, the general partner of
both Matrix Partners V, L.P. and Matrix V Entrepreneurs' Fund.
62
<PAGE>
In connection with the sale of Series A preferred stock, the following
transactions also occurred which involved executive officers, directors and/or
holders of more than 5% of a class of voting securities, including persons and
entities related to those listed:
Contribution Transactions. Samuel P. Gerace, Jr., a director and executive
officer, Thomas A. Gerace, an executive officer, their father Samuel P. Gerace,
Sr. and a limited partnership for the benefit of members of the Gerace family,
contributed to us shares of affiliated companies under common control and
management, in exchange for shares of our common stock, as follows:
<TABLE>
<CAPTION>
Shares
Contributor Received
<S> <C>
Samuel P. Gerace, Jr............................................ 2,447,978
Samuel P. Gerace, Sr............................................ 158,517
Gerace Family L.P............................................... 3,105,419
Thomas A. Gerace................................................ 2,447,978
</TABLE>
Redemption of Shares of Freedom of Information. On August 28, 1998, Be Free
redeemed for a price of $2.00 per share a portion of the outstanding common
stock, including the following shares of its common stock from executive
officers of Be Free, including related persons and entities, as well as other
stockholders of Be Free:
<TABLE>
<CAPTION>
Number of Purchases
Seller Shares Price
<S> <C> <C>
Samuel P. Gerace, Jr................................. 501,101 $1,002,202
Samuel P. Gerace, Sr................................. 94,523 189,047
Gerace Family L.P.................................... 1,851,764 3,703,528
Thomas A. Gerace..................................... 501,101 1,002,202
</TABLE>
Be Free paid the purchase price for the redeemed shares by issuing a
promissory note, which was paid in full on August 28, 1998 with a portion of
the proceeds from the sale of the Series A preferred stock.
Transfer Agreement. On August 28, 1998, the following executive officers,
including related persons and entities, of Be Free transferred shares of common
stock to a group of employees and advisors, including 24,042 shares to Kristin
L. Gerace, who is the sister of Samuel P. Gerace, Jr. and Thomas A. Gerace, and
6,649 shares to Jeffrey Rayport, a director of Be Free, in consideration for
services rendered to us.
<TABLE>
<CAPTION>
Number of
Shares
Transferor Transferred
<S> <C>
Gerace Family L.P............................................. 341,596
Samuel P. Gerace, Jr.......................................... 269,277
Thomas A. Gerace.............................................. 269,277
Samuel P. Gerace, Sr.......................................... 17,437
</TABLE>
Restricted Stock Awards
On December 30, 1998 Gordon B. Hoffstein, President and Chief Executive
Officer, and Stephen M. Joseph, Chief Financial Officer, purchased restricted
stock under the 1998 Stock Incentive Plan. Mr. Hoffstein purchased 1,547,850
shares of common stock and Mr. Joseph
63
<PAGE>
purchased 348,266 shares of common stock each at a purchase price of $.30 per
share. See "Management--Compensation Committee Interlocks and Insider
Participation."
Mr. Joseph paid for this restricted stock by paying $26,119 and by executing
a promissory note in the amount of $78,360 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
824,999 shares of common stock through the exercise of warrants to purchase
824,999 shares at $3.00 per share originally granted in August 1998.
On January 18, 2000, Gordon B. Hoffstein acquired 79,078 shares of common
stock through the cashless exercise of warrants to purchase 82,500 shares at
$3.00 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 800,413 shares of common stock through the cashless exercise of
warrants to purchase 825,000 shares at $3.00 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 Daniel J. Nova pursuant to
which it has agreed to indemnify these directors to the fullest extent possible
under Delaware Law from liabilities arising out of their respective service as
directors of Be Free.
All future transactions between us and our officers, directors, principal
stockholders and their affiliates will be approved by a majority of the board
of directors, including a majority of the disinterested directors, and will be
on terms no less favorable to us than could be obtained from unaffiliated third
parties.
64
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of February 29, 2000 and as adjusted to
reflect the sale of the shares of common stock in this offering, by:
. each person we know to own beneficially more than 5% of our common
stock;
. each of our directors;
. the Named Executive Officers; and
. all directors and executive officers as a group.
Unless otherwise indicated, each person named in the table has sole voting
power and investment power, or shares this power with his or her spouse, with
respect to all shares of capital stock listed as owned by such person. The
address of each of our executive officers and directors is c/o Be Free, Inc.,
154 Crane Meadow Road, Marlborough, Massachusetts 01752.
The number of shares beneficially owned by each stockholder is determined
under rules promulgated by the Securities and Exchange Commission. The
information is not necessarily indicative of beneficial ownership for any other
purpose. Under these rules, beneficial ownership includes any shares as to
which the individual has sole or shared voting power or investment power and
any shares as to which the individual has the right to acquire beneficial
ownership within 60 days after February 29, 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>
Shares Shares
Beneficially Owned Beneficially
Prior to the Owned After
Offering the Offering
------------------ Shares --------------
Name of Beneficial Owner Number Percent Offered Number Percent
<S> <C> <C> <C> <C> <C>
Five Percent Stockholders:
Charles River Ventures (1)........... 3,925,789 12.92%
Matrix Partners (2).................. 3,900,926 12.51%
Highland Capital Partners (3)........ 2,535,069 8.35%
Directors and Named Executive
Officers:
Thomas A. Gerace..................... 1,703,045 5.61%
Samuel P. Gerace, Jr................. 1,703,045 5.61%
Gordon B. Hoffstein (4).............. 1,861,428 6.13%
Ted R. Dintersmith (5)............... 3,946,805 12.99%
W. Michael Humphreys (6)............. 3,916,181 12.56%
Daniel Nova (7)...................... 2,535,069 8.35%
Jeffrey Rayport (8).................. 56,648 *
Kathleen L. Biro..................... -- --
Ellen M. Brezniak (9)................ 129,793 *
W. Blair Heavey (10)................. 220,251 *
All directors and executive officers
as a group
(13 persons) (11)................... 16,380,030 52.36%
Other Selling Stockholders:
[Name]...............................
</TABLE>
- ---------------------
* Less than 1%
65
<PAGE>
(1) Includes 71,349 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 3,854,440 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.
(2) Includes 3,510,832 shares owned by Matrix Partners V, L.P., of which
Matrix V Management Co., LLC is a general partner. Includes 390,094 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 2,433,666 shares owned by Highland Capital Partners IV, LP.
Includes 101,403 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 15,500 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 3,925,789 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 12,174 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 3,900,926 shares. Mr. Humphreys has shared voting
and investment power over these shares and disclaims beneficial ownership
of these shares, except to the extent of his pecuniary interest in the
shares.
(7) Mr. Nova, a member of the board of directors, is a managing member of
Highland Management Partners IV, LLC, the general partner of Highland
Capital Partners IV, LP and a managing member of Highland Entrepreneurs'
Fund IV, LLC, the general partner of Highland Entrepreneurs' Fund IV, LP
and may be deemed to have beneficial ownership of 2,535,069 shares. Mr.
Nova has shared voting and investment power over these shares and
disclaims beneficial ownership of these shares, except to the extent of
his pecuniary interest in the shares.
(8) Includes 12,499 shares issuable upon the exercise of options that are
currently exercisable or exercisable within 60 days after February 29,
2000.
(9) Includes 8,867 shares issuable upon the exercise of options that are
currently exercisable or exercisable within 60 days after February 29,
2000.
(10) Includes 53,585 shares issuable upon the exercise of options that are
currently exercisable or exercisable within 60 days after February 29,
2000.
(11) Includes 104,243 shares issuable upon the exercise of options granted
under the 1998 Stock Incentive Plan that are currently exercisable or
exercisable within 60 days after February 29, 2000.
66
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
We will file our amended and restated certificate of incorporation at the
closing of this offering. It authorizes the issuance of up to 75.0 million
shares of common stock, par value $0.01 per share, and 10.0 million shares of
preferred stock, par value $0.01 per share. The rights and preferences of the
preferred stock may be established from time to time by our board of directors.
As of February 29, 2000, 30,376,764 shares of common stock were outstanding and
we had . 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 February 29, 2000, Be Free had outstanding warrants to purchase
350,000 shares of common stock at an exercise price of $2.00 and additional
warrants to purchase 16,500 shares at an exercise price of $3.00. The warrants
have a net exercise provision under which the holder may, in
67
<PAGE>
lieu of payment of the exercise price in cash, surrender the warrant and
receive a net amount of shares, based on the fair market value of Be Free's
stock at the time of the exercise of the warrant, after deducting the aggregate
exercise price.
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.
68
<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.
69
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, based on the number of shares outstanding
at February 29, 2000, we will have . shares of common stock outstanding,
assuming no exercise of the underwriters' overallotment option. Upon the
completion of this offering . shares will be freely tradable without
restriction or further registration under the Securities Act, except that any
shares held by our affiliates, as that term is defined in Rule 144 under the
Securities Act, may generally only be sold in compliance with the limitations
of Rule 144 described below.
The remaining shares of common stock held by existing stockholders are
"restricted securities" under Rule 144 other than shares issued upon exercise
of options after the date of our initial public offering. Generally, restricted
securities may be sold in the public market only if registered or if they
qualify for an exemption from registration under Rules 144 or 701 under the
Securities Act, which are summarized below. Substantially all of these
remaining shares are subject to "lock up" agreements that expire on May 1,
2000, 60 days after the date of this prospectus or 90 days after the date of
this prospectus. Sales of these restricted securities in the public market, or
the availability of these shares for sale, could cause the trading price of our
common stock to decline.
The amounts of restricted securities that will be available for sale in the
public market, subject in some cases to the volume limitations and other
restrictions of Rule 144, will be as follows:
<TABLE>
<CAPTION>
Approximate
Shares that
become
Eligible
for
Date Future Sale Comment
---- ----------- -------
<S> <C> <C>
Currently.......................... . Freely tradable shares
On the date of this prospectus..... . Shares sold in this offering
Beginning on May 2, 2000........... . May 1, 2000 lock-up expires
Beginning 61 days after the date of
this prospectus................... . 60-day lock-up expires
Beginning 91 days after this .
prospectus........................ 90-day lock-up expires
</TABLE>
Stock Options, Employee Stock Purchase Plan and Warrants
As of February 29, 2000, there were a total of 1,742,926 options to purchase
shares of common stock outstanding under our 1998 Stock Incentive Plan,
approximately 112,253 of which were vested and exercisable. However, all of
these shares are subject to lock-up agreements. Based on the options
outstanding as of February 29, 2000, within . days after the effective date
of this offering, a total of approximately . shares of common stock subject
to outstanding options will be vested and exercisable.
In November 1999, we registered the shares issuable upon the exercise of
options under our 1998 Stock Incentive Plan and 212,500 shares issuable
pursuant to our 1999 Employee Stock Purchase Plan. By the end of March 2000, we
plan to register the 313,894 shares issuable upon the exercise of the assumed
options under the 1998 TriVida Equity Incentive Plan. Pursuant to such
registration, the foregoing shares would be available for resale in the public
market as such options become exercisable.
70
<PAGE>
As of February 29, 2000, Be Free had outstanding warrants to purchase an
aggregate of 366,500 shares of common stock. These warrants are subject to
lock-up agreements for a period of . days after the date of this offering.
After that time, under certain circumstances all the shares underlying these
warrants may be publicly sold under Rule 144. The holders of these warrants
also have registration rights. See "Description of Capital Stock--Warrants."
Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell in broker's
transactions or to market makers, within any three-month period, a number of
shares that does not exceed the greater of:
. 1% of the number of shares of common stock then outstanding; or
. the average weekly trading volume in the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to the sale.
1% of the number of shares of common stock outstanding immediately after this
offering will equal approximately . shares. Sales under Rule 144 are
generally subject to the availability of current public information about Be
Free.
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been an affiliate of
Be Free at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years, is
entitled to sell those shares without having to comply with the manner of sale,
public information, volume limitation or notice filing provisions of Rule 144.
Therefore, unless otherwise restricted, 144(k) shares may be sold immediately
upon the completion of this offering.
Rule 701
In general, under Rule 701, any of our employees, directors, officers,
consultants or advisors who purchase shares from us in connection with a
compensatory stock or option plan or other written agreement before the
effective date of this offering is entitled to sell those shares 90 days after
the effective date of this offering in reliance on Rule 144, without having to
comply with the holding period and notice filing requirements of Rule 144 and,
in the case of non-affiliates, without having to comply with the public
information, volume limitation or notice filing provisions of Rule 144.
The SEC has indicated that Rule 701 will apply to typical stock options
granted by an issuer before it becomes subject to the reporting requirements of
the Securities Exchange Act of 1934, along with the shares acquired upon
exercise of those options, including options exercised after the issuer becomes
subject to the reporting requirements. Securities issued in reliance on Rule
701 are restricted securities and, subject to the contractual restrictions
described above, beginning 90 days after the date of this prospectus, may be
sold by persons other than affiliates, as that term is defined in Rule 144,
subject only to the manner of sale provisions of Rule 144 and by affiliates
under Rule 144 without compliance with its one year minimum holding period
requirements.
71
<PAGE>
Registration Rights
Pursuant to a Registration Rights Agreement, dated as of March 31, 1999, the
holders of approximately 12,040,810 shares of common stock, warrants to
purchase 2,016,500 shares of common stock and options to purchase 37,500 shares
of common stock have the right to register those shares under the Securities
Act of 1933. Subject to limitations in the Registration Rights Agreement, some
of the holders, whose shares total at least 33 1/3% of all shares of common
stock then-held by the holders, or any lesser percentage with a price to the
public reasonably expected to exceed $5,000,000, may require, at any time after
May 3, 2000, that we register these shares for public resale; furthermore, the
holders of shares with sale proceeds of at least $1,000,000 may require us to
register all or a portion of their registrable securities on Form S-3. Be Free
shall not be required to effect more than two of these demand registrations. In
addition, if we register any of our common stock for our own account or for the
account of other security holders, the parties to the Registration Rights
Agreement are entitled to include their shares of common stock in the
registration, subject to the ability of the underwriters to limit the number of
shares included in the offering.
Pursuant to a Stock Purchase and Shareholders Agreement dated as of August
28, 1998, the holders of approximately 5,250,000 shares of common stock and
warrants to purchase 1,732,500 shares, have the right to demand that we
register those shares under the Securities Act of 1933. All of these shares and
warrants, other than 250,000 shares of common stock and warrants to purchase
82,500 shares, are also entitled to be registered under the Rights Agreement.
Subject to limitations in the Stock Purchase and Shareholders Agreement, at any
time after May 3, 2000, any of these holders holding 33 1/3% of the common
stock then held by these holders may require us to register at least 33 1/3% of
the shares on Form S-1. In addition, any of these holders may require us to
register any of these shares with proceeds of at least $1,000,000 on Form S-3.
We shall not be required to effect more than two of these demand registrations.
In addition, if we register any of our common stock for our own account or for
the account of other securityholders, the holders of approximately 10,664,556
shares of common stock and warrants to purchase 1,732,500 shares, of which all
but 4,925,707 shares and warrants to purchase 82,500 shares are entitled to be
registered under the Registration Rights Agreement, are entitled to include
their shares of common stock in the registration, subject to the ability of the
underwriters to limit the number of shares included in the offering.
Pursuant to a Stock Purchase Agreement dated as of September 29, 1998, if we
register any of our common stock for our own account or for the account of
other securityholders, a holder of 50,000 shares of common stock and warrants
to purchase 366,500 shares has the right to include those shares in the
registration, subject to the ability of the underwriters to limit the number of
shares issued in the offering. All of these shares are entitled to be
registered under the Registration Rights Agreement.
Pursuant to an Agreement and Plan of Merger dated as of February 15, 2000,
we granted certain registration rights to the former shareholders of TriVida
with respect to approximately 1,436,085 shares of our common stock issued in
the acquisition. These include our obligation to file a registration statement
to register the resale of such shares and to have it effective 90 days after
this offering and to keep it effective until March 1, 2001 or until all such
shares are sold. In addition, the holders of such shares have the right to have
them included in this offering, subject to the ability of the underwriters to
limit the number of shares included.
72
<PAGE>
The shares being sold in this offering by selling stockholders that are
parties to the agreement described above have been included pursuant to the
exercise of such registration rights.
We will bear all fees, costs and expenses of these registrations, other than
underwriting discounts and commissions. Upon the effectiveness of any
registration statement filed to register our common stock, these shares would
become freely tradable, without any restrictions imposed by the Securities Act.
73
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement,
dated , 2000, the underwriters named below, who are represented by
Donaldson, Lufkin & Jenrette Securities Corporation, Chase Securities Inc.,
FleetBoston Robertson Stephens Inc., Dain Rauscher Incorporated and DLJdirect
Inc. have severally agreed to purchase from us the number of shares opposite
their names below:
<TABLE>
<CAPTION>
Number
of
Underwriters Shares
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation......................
Chase Securities Inc.....................................................
FleetBoston Robertson Stephens Inc.......................................
Dain Rauscher Incorporated...............................................
DLJdirect Inc............................................................
----
Total..................................................................
====
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares included in this
offering are subject to approval of the legal matters and to other conditions
specified in the underwriting agreement. The underwriters are obligated to
purchase and accept delivery of all the shares, other than those shares covered
by the over-allotment option described below, if they purchase any of the
shares.
The underwriters propose to offer initially some of the shares directly to
the public at the initial public offering price on the cover page of this
prospectus and some of the shares to certain dealers at the initial public
offering price less a concession not in excess of $ . per share. The
underwriters may allow, and those dealers may re-allow, a concession not in
excess of $ . per share on sales to other dealers. After the initial offering
of the shares to the public, the representatives may change the public offering
price and those concessions. The underwriters do not intend to confirm sales to
any accounts over which they exercise discretionary authority.
The following table shows the underwriting fees to be paid to the
underwriters by us in connection with this offering. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares of our common stock.
<TABLE>
<CAPTION>
No Exercise Full Exercise
<S> <C> <C>
Per share............................................. $ $
Total.................................................
</TABLE>
74
<PAGE>
We will pay the offering expenses, estimated to be $ . million.
We have granted to the underwriters an option, exercisable for 30 days after
the date of this prospectus, to purchase up to . additional shares at the
initial public offering price minus the underwriting fees. The underwriters may
exercise this option solely to cover over-allotments, if any, made in
connection with this offering. To the extent that the underwriters exercise
this option, each underwriter will become obligated, subject to certain
conditions, to purchase a number of additional shares approximately
proportionate to that underwriter's initial purchase commitments.
We have agreed to indemnify the underwriters against certain civil
liabilities, including liabilities under the Securities Act, or to contribute
to payments that the underwriters may be required to make in respect of any of
those liabilities.
We and all of the selling stockholders have agreed, for a period of 90 days
from the date of this prospectus, not to, without the prior written consent of
Donaldson, Lufkin & Jenrette Securities Corporation:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly, any shares of our common stock or any securities
convertible into or exercisable or exchangeable for our common stock; or
. enter into any swap or other arrangement that transfers all or a portion
of the economic consequences associated with the ownership of any common
stock, regardless of whether any of these transactions is to be settled
by the delivery of common stock, or other securities, in cash or
otherwise.
However, we may:
. grant stock options under the 1998 Stock Incentive Plan; and
. issue shares of our stock upon the exercise of options, warrants or
rights or the conversion of currently outstanding securities.
In connection with our initial public offering, our executive officers and
directors and substantially all of our stockholders entered into lock-up
agreements expiring on May 1, 2000 with respect to . shares of common stock.
Executive officers, directors and certain other stockholders that in each case
are not selling stockholders entered into lock-up agreements expiring 60 days
after the date of this prospectus with respect to . shares of common stock.
In addition, during this period, we have agreed not to file any registration
statement (other than registration statements relating to employee benefit
plans or pursuant to the shelf registration statement for the former TriVida
stockholders) with respect to, and each of our executive officers, directors
and substantially all of our stockholders have agreed not to make any demand
for, or exercise any right with respect to, the registration of any shares of
common stock or any securities convertible into or exercisable or exchangeable
for common stock without the prior written consent of Donaldson, Lufkin &
Jenrette Securities Corporation.
75
<PAGE>
Other than in the United States, no action has been taken by us or the
underwriters that would permit a public offering of the shares of our common
stock included in this offering in any jurisdiction where action for that
purpose is required. The shares included in this offering may not be offered or
sold, directly or indirectly, nor may this prospectus or any other offering
material or advertisement in connection with the offer and sale of any of these
shares be distributed or published in any jurisdiction, except under
circumstances that will result in compliance with the applicable rules and
regulations of that jurisdiction. Persons who receive this prospectus are
advised to inform themselves about and to observe any restrictions relating to
the offering of our common stock and the distribution of this prospectus. This
prospectus is not an offer to sell or a solicitation of an offer to buy any
shares of our common stock included in this offering in any jurisdiction where
that would not be permitted or legal.
In connection with this offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of our
common stock. Specifically, the underwriters may overallot this offering,
creating a syndicate short position. In addition, the underwriters may bid for
and purchase shares of our common stock in the open market to cover syndicate
short positions or to stabilize the price of our common stock. These activities
may stabilize or maintain the market price of our common stock above
independent market levels. The underwriters are not required to engage in these
activities and may end any of these activities at any time.
Donaldson, Lufkin & Jenrette Securities Corporation was engaged by us to
serve as our financial advisor in connection with the acquisition of TriVida
and earned a fee of $250,000 upon the consummation of the acquisition on
February 29, 2000. Each of Donaldson, Lufkin & Jenrette Securities Corporation,
Chase Securities Inc., Dain Rauscher Incorporated and DLJdirect Inc. served as
managing underwriters of the initial public offering of our common stock.
LEGAL MATTERS
The validity of the shares of common stock offered by us hereby will be
passed upon for us by Hale and Dorr LLP, Boston, Massachusetts. Legal matters
will be passed upon for the underwriters by Testa, Hurwitz & Thibeault, LLP,
Boston, Massachusetts.
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 ended March 31, 1998 and 1999, and
for the period from January 7, 1997 (date of inception) to March 31, 1999 as
set forth in their report. These financial statements have been included in the
prospectus and elsewhere the registration statement in reliance on Ernst &
Young LLP's report, given on their authority as experts in accounting and
auditing.
76
<PAGE>
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.
77
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Be Free, Inc. and Subsidiaries:
(As of December 31, 1998 and 1999 and for each of the three years in the
period ended December 31, 1999)
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-23
Balance Sheets............................................................ F-24
Statements of Operations.................................................. F-25
Statements of Stockholders' Equity (Deficit).............................. F-26
Statements of Cash Flows.................................................. F-27
Notes to Financial Statements............................................. F-28
Unaudited Pro Forma Combined Condensed Financial Information:
(As of December 31, 1999 and for the year ended December 31, 1999)
Unaudited Pro Forma Combined Condensed Financial Information.............. F-39
Unaudited Pro Forma Combined Condensed Balance Sheet...................... F-40
Unaudited Pro Forma Combined Condensed Statement of Continuing Operations. F-41
Notes to Unaudited Pro Forma Combined Condensed Financial Information..... F-42
</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 February 29, 2000
F-2
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1999
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................. $4,327,090 $58,975,906
Marketable securities.................................. -- 12,761,659
Accounts receivable, net of allowances of $14,000 and
$96,607 at December 31, 1998 and 1999, respectively... 118,955 1,328,406
Prepaid expenses....................................... 144,517 1,012,791
Other current assets................................... 23,222 269,526
---------- -----------
Total current assets.................................. 4,613,784 74,348,288
Marketable securities................................... -- 7,954,400
Property and equipment, net (Note E).................... 961,702 7,966,868
Deposits................................................ 384,991 340,012
Other assets............................................ 10,359 227,276
---------- -----------
Total assets.......................................... $5,970,836 $90,836,844
========== ===========
<CAPTION>
LIABILITIES, CONVERTIBLE PARTICIPATING
PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(DEFICIT)
<S> <C> <C>
Current liabilities:
Accounts payable................................... 533,524 966,592
Accrued expenses................................... 349,725 2,916,569
Deferred revenue................................... 121,667 942,537
Current portion of long-term debt.................. 187,139 942,770
----------- ------------
Total current liabilities......................... 1,192,055 5,768,468
Long-term debt, net of current portion.............. 4,949,198 2,507,357
----------- ------------
Total liabilities................................. 6,141,253 8,275,825
Commitments and contingencies (Note H)
Series A Convertible Participating Preferred Stock;
$0.01 par value; 11,300,000 and 0 shares authorized
at December 31, 1998 and 1999, respectively;
10,600,000 and 0 shares issued and outstanding at
December 31, 1998 and 1999, 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 and
75,000,000 shares authorized at December 31, 1998
and 1999 respectively; 9,750,000 and 28,088,249
shares issued at December 31, 1998 and 1999,
respectively...................................... 97,500 280,882
Additional paid-in capital......................... 5,461,646 113,413,819
Unearned compensation.............................. (5,549,096) (6,001,938)
Stockholders' notes receivable..................... (779,558) (208,072)
Accumulated other comprehensive loss............... -- (10,818)
Accumulated deficit................................ (7,041,695) (24,876,107)
----------- ------------
(7,811,203) 82,597,766
Treasury stock, at cost (842,598 and 122,499 shares
at December 31, 1998 and 1999, respectively)...... (1,685,195) (36,747)
----------- ------------
Total stockholders' equity (deficit)............... (9,496,398) 82,561,019
----------- ------------
Total liabilities, convertible participating
preferred stock and stockholders' equity
(deficit)........................................ $ 5,970,836 $ 90,836,844
=========== ============
</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>
Year Ended December 31,
--------------------------------------
1997 1998 1999
<S> <C> <C> <C>
Revenue:
Performance marketing services........ $ 216,286 $ 1,319,183 $ 5,328,675
Other ................................ 60,424 7,580 --
----------- ----------- ------------
Total revenue........................ 276,710 1,326,763 5,328,675
----------- ----------- ------------
Operating expenses:
Cost of revenue...................... 272,585 423,811 844,838
Sales and marketing (exclusive of
equity related compensation of $0,
$56,428 and $524,646 in 1997, 1998
and 1999, respectively)............. 180,108 1,153,306 9,329,446
Client services (exclusive of equity
related compensation of $0, $14,509
and $238,351 in 1997, 1998 and 1999,
respectively)....................... -- 300,400 3,473,583
Development and engineering
(exclusive of equity related
compensation of $0, $1,864,667 and
$146,146 in 1997, 1998 and 1999,
respectively)....................... 426,329 728,538 4,767,382
General and administrative (exclusive
of equity related compensation of
$0, $449,606 and $1,033,005 in 1997,
1998 and 1999, respectively)........ 332,376 875,153 2,823,412
Equity related compensation.......... -- 2,385,211 1,942,147
----------- ----------- ------------
Total operating expenses........... 1,211,398 5,866,419 23,180,808
----------- ----------- ------------
Operating loss..................... (934,688) (4,539,656) (17,852,133)
Interest income...................... 6,293 34,577 1,292,381
Interest expense..................... (105,215) (258,420) (944,660)
----------- ----------- ------------
Net loss before extraordinary item..... (1,033,610) (4,763,499) (17,504,412)
Extraordinary item--loss on early
extinguishment of debt................ -- -- (330,000)
----------- ----------- ------------
Net loss............................... (1,033,610) (4,763,499) (17,834,412)
Accretion of preferred stock to
redemption value...................... -- (129,573) (1,517,038)
----------- ----------- ------------
Net loss attributable to common
stockholders.......................... $(1,033,610) $(4,893,072) $(19,351,450)
=========== =========== ============
Basic and diluted net loss per share:
Net loss attributable to common
stockholders without extraordinary
item.................................. $ (0.08) $ (0.61) $ (2.01)
Extraordinary item..................... -- -- (0.03)
----------- ----------- ------------
Net loss attributable to common
stockholders.......................... $ (0.08) $ (0.61) $ (2.04)
=========== =========== ============
Shares used in computing basic and
diluted net loss per share............ 13,569,256 8,009,129 9,475,670
</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
<TABLE>
<CAPTION>
Common Stock
-------------------- Accumulated
$0.01 Additional Stockholders' Other
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........... 14,090,408 $140,904 $ -- $ -- $ -- $ -- $ (1,244,586)
Contribution of
capital by
stockholders...... -- -- 250,000 -- -- -- --
Acquisition and
retirement of
treasury stock.... (5,283,902) (52,839) 42,839 -- -- -- --
Net loss.......... -- -- -- -- -- -- (1,033,610)
---------- -------- ------------ ----------- --------- -------- ------------
Balance at December
31, 1997........... 8,806,506 88,065 292,839 -- -- -- (2,278,196)
Stock issuance in
connection with
warrant exercise.. 943,494 9,435 365,565 -- -- -- --
Acquisition of
treasury stock.... -- -- -- -- -- -- --
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........... 9,750,000 97,500 5,461,646 (5,549,096) (779,558) -- (7,041,695)
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.... 6,440,000 64,400 70,509,218 -- -- -- --
Conversion of
Series A and
Series B
Preferred Stock
and warrants...... 11,898,249 118,982 35,668,672 -- -- -- --
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........... 28,088,249 $280,882 $113,413,819 $(6,001,938) $(208,072) $(10,818) $(24,876,107)
========== ======== ============ =========== ========= ======== ============
<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.... (3,088,441) (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............. (352,682) (705,364) (705,364)
Forfeiture of
unvested shares
of restricted
stock............. -- -- --
Issuance of
restricted stock.. 2,598,525 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........... (842,598) (1,685,195) (9,496,398)
Acquisition of
treasury stock.... (262,219) (78,665) (22,193)
Acceleration of
vesting of
restricted stock.. -- -- 77,103
Issuance of
restricted stock.. 75,000 150,000 --
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......... 907,318 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........... (122,499) $ (36,747) $ 82,561,019
=========== ============ ==============
</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>
Year Ended December 31,
--------------------------------------
1997 1998 1999
<S> <C> <C> <C>
Cash flows for operating activities:
Net loss.............................. $(1,033,610) $(4,763,499) $(17,834,412)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization......... 56,999 285,794 1,484,855
Extraordinary loss on early
extinguishment of debt............... -- -- 330,000
Equity related compensation........... -- 2,385,211 1,942,147
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
Changes in operating assets and
liabilities:
Accounts receivable.................. (54,717) (52,565) (1,292,058)
Prepaid expenses..................... -- (75,991) (879,876)
Deposits............................. -- (384,441) 44,979
Accounts payable..................... 94,570 101,768 433,068
Accrued expenses..................... 46,085 243,365 2,352,902
Deferred revenue..................... (24,508) 121,667 820,870
Other, net........................... (343) (33,238) (463,221)
----------- ----------- ------------
Net cash used in operating activities.. (912,220) (2,360,617) (12,978,139)
----------- ----------- ------------
Cash flows for investing activities:
Purchases of property and equipment... (67,726) (610,064) (4,850,420)
Purchases of marketable securities.... -- -- (20,697,729)
----------- ----------- ------------
Net cash used in investing activities.. (67,726) (610,064) (25,548,149)
----------- ----------- ------------
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
Proceeds from issuance of Common
Stock, net of offering costs......... 250,000 -- 70,573,618
Proceeds from exercise of options and
warrants............................. -- -- 2,570,944
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
Proceeds from long-term debt.......... 791,080 5,000,000 --
Payments on long-term debt............ -- (183,297) (5,700,232)
----------- ----------- ------------
Net cash provided by financing
activities............................ 1,031,080 7,221,928 93,175,104
----------- ----------- ------------
Net increase in cash and cash
equivalents........................... 51,134 4,251,247 54,648,816
Cash and cash equivalents at beginning
of year............................... 24,709 75,843 4,327,090
----------- ----------- ------------
Cash and cash equivalents at end of
year.................................. $ 75,843 $ 4,327,090 $ 58,975,906
=========== =========== ============
Supplemental disclosure of cash flow
information:
Cash paid during the period for
interest............................. $ 53,819 $ 284,561 $ 814,660
Supplemental disclosures of noncash
transactions:
Notes receivable for Common Stock
sold................................. -- $ 779,558 $ 52,500
Elimination of note receivable for
restricted stock..................... -- -- $ 73,510
Issuance of warrants in connection
with subordinated debt agreement..... -- $ 540,000 --
Purchases of property and equipment
under capital lease obligations
and equipment financing.............. -- $ 285,000 $ 3,068,804
</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
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 and 1999,
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.
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.
F-7
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 and 1999,
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 from integration fees, up to
the cost of providing such service, is recognized when the integration is
complete and the service is available to the customer. Revenue from integration
fees, in excess of the cost, is deferred and recognized ratably over the
initial term of the service contract. Any loss on integration services is
recognized in the period that it is known. Other revenue consisted of
customized software development and support services which was recognized when
the services were provided.
F-8
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. To date, internal costs eligible for
capitalization under SOP 98-1 have been immaterial.
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.
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
F-9
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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.
F-10
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. 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 first fiscal quarter of the fiscal year beginning after December 15, 1999.
The Company is in the process of evaluating the impact of this bulletin on its
financial statements.
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,
----------------------------
1997 1998 1999
<S> <C> <C> <C>
Options to purchase shares of common stock........ -- 692,429 1,742,926
Shares of Preferred Stock convertible into shares
of common stock.................................. -- 10,600,000 --
Unvested shares of restricted stock............... -- 2,598,525 1,750,339
Warrants to purchase shares of common stock....... 943,494 1,749,000 1,274,001
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.
F-11
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
The following is a calculation of supplemental net loss per share
(unaudited):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1998 1999
<S> <C> <C>
Supplemental net loss:
Net loss attributable to common stockholders...... $(4,893,072) $(19,351,450)
Accretion of preferred stock to redemption value.. 129,573 1,517,038
----------- ------------
Supplemental net loss............................. $(4,763,499) $(17,834,412)
=========== ============
Shares used in computing supplemental basic and
diluted net loss per share:
Weighted average number of common shares
outstanding...................................... 8,009,129 9,475,670
Weighted average impact of assumed conversion of
preferred stock on issuance...................... 1,810,685 8,380,610
----------- ------------
Shares used in computing supplemental basic and
diluted net loss per share....................... 9,819,814 17,856,280
----------- ------------
Basic and diluted supplemental net loss per common
share............................................ $ (0.49) $ (1.00)
=========== ============
</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 call or
prepay obligations with or without call or prepayment penalties. There were no
gross realized gains and losses recognized during 1999.
F-12
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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>
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>
F-13
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 350,000 shares of common stock
at $2.00 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.
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.
F-14
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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 shares of Series A and B Preferred
Stock converted into 11,898,261 shares of Common Stock.
F-15
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 943,494 shares of Common Stock. Of these
shares, 352,682 shares were subject to a call option at the discretion of the
Company for $2.00 per share. On October 27, 1998, the Company exercised its
call option in full for $705,364.
On August 28, 1998, the Company repurchased 3,088,441 shares of Common Stock
from founders and employees of the Company in exchange for notes payable issued
by the Company for $6,176,881. These notes were paid in full on August 31,
1998.
On August 28, 1998, certain controlling stockholders of the Company
transferred 1,072,500 shares of Common Stock to employees in consideration of
past performance and as an incentive for continuing employment with the
Company. The stock was transferred subject to certain vesting 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.
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. Stockholders' equity (deficit) has
been restated for all periods presented
F-16
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 6,440,000 shares of Common Stock in
its initial public offering for cash proceeds of $70,573,618, net of offering
costs of $6,706,384.
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 5,300,000 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 1,749,000 shares of Common Stock at $3.00 per share. Of these
warrants, 1,732,500 are exercisable from the date of issuance through August
28, 2008 and 16,500 are exercisable from the date of issuance through September
29, 2008. The fair value of these warrants at the date of issue was $1,791,000.
This amount 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 824,999 of Common Stock were exercised.
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
6,598,261 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
F-17
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 287,500
shares. Upon this vote, the option plan allows for the Company to grant up to
5,054,753 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 2,598,525 shares
of restricted stock to certain employees for $0.30 per share. The weighted-
average grant-date fair value of these shares of restricted stock was $2.00 per
share.
During the year ended December 31, 1999, the Company granted incentive stock
options for the purchase of 1,080,221 shares and nonqualified stock options for
the purchase of 75,000 shares at a weighted-average exercise price of $5.42.
During the year ended December 31, 1999, the Company issued 75,000 shares of
restricted stock for $0.70 per share in exchange for a note receivable totaling
$52,500. The weighted-average grant-date fair value of these shares of
restricted stock was $2.00 per share.
The following table summarizes option activity under the Option Plan:
<TABLE>
<CAPTION>
Exercise Price Exercise Price
Equals Grant Date Less Than Grant Date
Stock Fair Value Stock Fair Value Total
------------------------ ------------------------ ------------------------
Weighted Weighted Weighted
Number of Average Number of Average Number of Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
<S> <C> <C> <C> <C> <C> <C>
Oustanding at December
31, 1997............... -- $ -- -- $ -- -- $ --
Granted................. -- -- 701,204 0.30 701,204 0.30
Cancelled............... -- -- 8,775 0.30 8,775 0.30
------- --------- ---------
Outstanding at December
31, 1998............... -- -- 692,429 0.30 692,429 0.30
Granted................. 347,562 14.04 807,659 1.69 1,155,221 5.42
Exercised............... -- -- 82,319 1.17 82,319 1.17
Cancelled............... 7,000 8.82 15,405 1.04 22,405 3.47
------- --------- ---------
Outstanding at December
31, 1999............... 340,562 $14.15 1,402,364 $1.04 1,742,926 $3.60
======= ========= =========
</TABLE>
F-18
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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>
$ 0.30 644,051 8.8 112,253
$ 0.70 211,703 9.0 --
$ 1.20 108,957 9.2 --
$ 1.90 265,457 9.4 --
$ 2.80 172,196 9.5 --
$ 8.82 175,312 9.7 --
$ 9.00 129,250 9.8 --
$28.12 2,000 9.9 --
$44.00 8,500 9.9 --
$60.03 13,000 10.0 --
$71.88 12,500 10.0 --
--------- -------
1,742,926 9.2 112,253
========= =======
</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.
On April 30, 1999, the Company also accelerated the vesting with respect to
38,552 shares of restricted stock held by a former employee. The Company has
recorded a charge of $77,103 in connection with this acceleration.
Had compensation cost for the 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 ................ $ (0.61) $ (2.04)
Pro forma net loss under SFAS 123.............. $(4,897,325) $(19,429,219)
Pro forma net loss per share under SFAS 123.... $ (0.61) $ (2.05)
</TABLE>
F-19
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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> <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 $1.78 and $3.07, respectively. The weighted-
average fair value of options granted in 1999 with an exercise price equal to
grant date stock fair value was $10.53.
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.
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>
F-20
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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 212,500
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.
F-21
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
will be payable on or around March 8, 2000. Stockholders' equity (deficit) will
be 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.
On February 29, 2000, the Company acquired TriVida Corporation, a privately
held developer of online personalization technology. Be Free exchanged
1,436,085 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 313,894 shares of Be Free Common Stock. This acquisition will be
recorded under the purchase method of accounting.
F-22
<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-23
<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-24
<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-25
<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-26
<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-27
<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-28
<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-29
<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-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)
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-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)
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-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)
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-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)
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-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)
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-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)
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-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)
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-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)
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 1,436,085 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 313,894
shares of Be Free common stock may be issued. The sale was completed on
February 29, 2000.
F-38
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL INFORMATION
The following unaudited pro forma combined condensed financial information
gives effect to the acquisition by Be Free of TriVida in a transaction which
will be accounted for as a purchase. The unaudited pro forma combined condensed
balance sheet is based on the historical balance sheets of Be Free and TriVida
and has been prepared to reflect the acquisition by Be Free of TriVida as if it
had occurred at December 31, 1999. The unaudited pro forma combined condensed
statement of continuing operations 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. Such costs
related to restructuring and integration have not yet been determined and Be
Free expects to charge such costs to operations during the quarter incurred.
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-39
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED
BALANCE SHEET AS OF DECEMBER 31, 1999
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Be Free TriVida Adjustments Combined
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents........... $ 58,975,906 $ 1,308,291 $ -- $ 60,284,197
Marketable securities.. 12,761,659 -- -- 12,761,659
Accounts receivable,
net................... 1,328,406 -- -- 1,328,406
Prepaid expenses....... 1,012,791 -- -- 1,012,791
Other current assets... 269,526 -- -- 269,526
------------ ------------ ------------ ------------
Total current assets.. 74,348,288 1,308,291 -- 75,656,579
Marketable securities... 7,954,400 -- -- 7,954,400
Property and equipment,
net.................... 7,966,868 2,059,545 -- 10,026,413
Intangible assets, net.. -- -- 161,641,951 (1) 161,641,951
Other assets............ 567,288 185,451 -- 752,739
------------ ------------ ------------ ------------
Total assets.......... $ 90,836,844 $ 3,553,287 $161,641,951 $256,032,082
============ ============ ============ ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and
accrued expenses...... $ 3,883,161 $ 412,919 $ 2,865,000 (2) $ 7,161,080
Deferred revenue....... 942,537 -- -- 942,537
Current portion of
long-term debt........ 942,770 968,936 -- 1,911,706
------------ ------------ ------------ ------------
Total current
liabilities.......... 5,768,468 1,381,855 2,865,000 10,015,323
Long-term debt, net of
current portion........ 2,507,357 807,251 -- 3,314,608
------------ ------------ ------------ ------------
Total liabilities..... 8,275,825 2,189,106 2,865,000 13,329,931
------------ ------------ ------------ ------------
Stockholders' equity:
Series A and B
convertible preferred
stock................. -- 12,818,865 (12,818,865)(3) --
Common stock........... 280,882 75,470 14,361 (4) 295,243
(75,470)(3)
Additional paid-in
capital............... 113,413,819 2,403,810 160,126,771 (4) 273,540,590
(2,403,810)(3)
Stockholders' notes
receivable............ (208,072) -- -- (208,072)
Unearned compensation.. (6,001,938) (1,460,150) 1,460,150 (3) (6,001,938)
Accumulated other
comprehensive loss.... (10,818) -- -- (10,818)
Accumulated deficit.... (24,876,107) (12,473,814) 12,473,814 (3) (24,876,107)
------------ ------------ ------------ ------------
82,597,766 1,364,181 158,776,951 242,738,898
Treasury stock, at
cost.................. (36,747) -- -- (36,747)
------------ ------------ ------------ ------------
Total stockholders'
equity............... 82,561,019 1,364,181 158,776,951 242,702,151
------------ ------------ ------------ ------------
Total liabilities and
stockholders' equity. $ 90,836,844 $ 3,553,287 $161,641,951 $256,032,082
============ ============ ============ ============
</TABLE>
See accompanying notes to the unaudited pro forma combined condensed financial
information.
F-40
<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.... -- -- 53,880,650(1) 53,880,650
------------ ----------- ------------ ------------
Total operating
expenses........... 23,180,808 5,947,231 53,880,650 83,008,689
------------ ----------- ------------ ------------
Operating loss...... (17,852,133) (5,947,231) (53,880,650) (77,680,014)
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) $(53,880,650) $(77,612,678)
============ =========== ============ ============
Basic and diluted loss
from continuing
operations per common
share(5)............... $ (1.85) $ (7.11)
Basic and diluted
weighted average number
of common shares(5).... 9,475,670 10,911,755
</TABLE>
See accompanying notes to the unaudited pro forma combined condensed financial
information.
F-41
<PAGE>
NOTES TO PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
A. Pro forma Basis of Presentation and Adjustments
The following unaudited pro forma combined condensed financial information
gives effect to the acquisition by Be Free of TriVida in a transaction which
will be accounted for as a purchase. The unaudited pro forma combined condensed
balance sheet is based on the balance sheets of Be Free and TriVida and has
been prepared to reflect the acquisition by Be Free of TriVida as if it had
occurred at December 31, 1999. The unaudited pro forma combined condensed
statement of continuing operations is based on the individual 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.
On February 29, 2000, Be Free issued 1,436,085 shares of Be Free common
stock in exchange for all outstanding shares of common and preferred stock of
TriVida. Be Free also issued options exercisable for 313,894 shares of common
stock in replacement of outstanding options for common stock of TriVida.
B. Pro Forma Adjustments to Pro Forma Combined Condensed Financial Information
1. Be Free estimates the purchase price for TriVida to be approximately
$163.0 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. Be Free is
currently in the process of performing a full assessment of the fair
value of the net assets acquired. 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 are expected to include: completed technology, workforce,
trademarks 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 of approximately
$54.0 million for amortization expense. The allocation of the purchase
price to tangible and intangible assets, as well as the related
amortization expense, may change materially as a result of the
completion of Be Free's evaluation of the fair value of the net assets
acquired.
F-42
<PAGE>
2. Increase in accrued expenses for the estimated acquisition related
expenses of $2,865,000.
3. Elimination of TriVida equity accounts.
4. Increase in stockholders' equity for the issuance of 1,436,085 shares of
Be Free common stock and for the assumption of options to purchase
313,894 shares of Be Free common stock in connection with the
acquisition. As a result, the carrying value of common stock and
additional paid-in capital increased by $14,361 and $160,126,771,
respectively.
5. 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 1,436,085 shares of Be Free common stock issued in
connection with the acquisition of TriVida. All dilutive potential
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 excludes accretion of preferred
stock to redemption value of $0.14 per share.
F-43
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
, 2000
[beFree logo appears here]
Shares of Common Stock
----------------------
PROSPECTUS
----------------------
Donaldson, Lufkin & Jenrette
Chase H&Q
Robertson Stephens
Dain Rauscher Wessels
DLJdirect Inc.
- --------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor
any sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of Be Free
have not changed since the date hereof.
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the various expenses, all of which will be
borne by the Registrant, in connection with the sale and distribution of the
securities being registered, other than the underwriting discounts. All amounts
shown are estimates except for the Securities and Exchange Commission
registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee............................................ $125,008
NASD filing fee................................................. 30,500
Nasdaq National Market listing fee.............................. *
Blue Sky fees and expenses...................................... *
Transfer Agent and Registrar fees............................... *
Accounting fees and expenses.................................... *
Legal fees and expenses......................................... *
Printing and mailing expenses................................... *
Miscellaneous................................................... *
--------
Total......................................................... $
========
</TABLE>
- ---------------------
* To be included by amendment.
Item 14. Indemnification of Directors and Officers
Article Seventh of the Registrant's Amended and Restated Certificate of
Incorporation provides that no director of the Registrant shall be personally
liable for any monetary damages for any breach of fiduciary duty as a director,
except to the extent that the Delaware General Corporation Law prohibits the
elimination or limitation of liability of directors for breach of fiduciary
duty.
Article Eighth of the Registrant's Amended and Restated Certificate of
Incorporation provides that a director or officer of the Registrant (a) shall
be indemnified by the Registrant against all expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement incurred in connection
with any litigation or other legal proceeding (other than an action by or in
the right of the Registrant) brought against him by virtue of his position as a
director or officer of the Registrant if he acted in good faith and in a manner
he reasonably believed to be in, or not opposed to, the best interests of the
Registrant, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful and (b) shall be
indemnified by the Registrant against all expenses (including attorneys' fees)
and amounts paid in settlement incurred in connection with any action by or in
the right of the Registrant brought against him by virtue of his position as a
director or officer of the Registrant if he acted in good faith and in a manner
he reasonably believed to be in, or not opposed to, the best interests of the
Registrant, except that no indemnification shall be made with respect to any
matter as to which such person shall have been adjudged to be liable to the
Registrant, unless a court determines that, despite such adjudication but in
view of all of the circumstances, he is entitled to indemnification of such
expenses. Notwithstanding the foregoing, to the extent that a director or
officer has been successful, on the merits or otherwise, including, without
II-1
<PAGE>
limitation, the dismissal of an action without prejudice, he is required to be
indemnified by the Registrant against all expenses (including attorneys' fees)
incurred in connection therewith. Expenses shall be advanced to a director or
officer at his request, provided that he undertakes to repay the amount
advanced if it is ultimately determined that he is not entitled to
indemnification for such expenses.
Indemnification is required to be made unless the Registrant determines that
the applicable standard of conduct required for indemnification has not been
met. In the event of a determination by the Registrant that the director or
officer did not meet the applicable standard of conduct required for
indemnification, or if the Registrant fails to make an indemnification payment
within 60 days after such payment is claimed by such person, such person is
permitted to petition the court to make an independent determination as to
whether such person is entitled to indemnification. As a condition precedent to
the right of indemnification, the director or officer must give the Registrant
notice of the action for which indemnity is sought and the Registrant has the
right to participate in such action or assume the defense thereof.
Article Eighth of the Registrant's Amended and Restated Certificate of
Incorporation further provides that the indemnification provided therein is not
exclusive, and provides that in the event that the Delaware General Corporation
Law is amended to expand the indemnification permitted to directors or officers
the Registrant must indemnify those persons to the fullest extent permitted by
such law as so amended.
Section 145 of the Delaware General Corporation Law provides that a
corporation has the power to indemnify a director, officer, employee or agent
of the corporation and other persons serving at the request of the corporation
in related capacities against amounts paid and expenses incurred in connection
with an action or proceeding to which he is or is threatened to be made a party
by reason of such position, if such person shall have acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, in any criminal proceeding, if such person
had no reasonable cause to believe his conduct was unlawful; provided that, in
the case of actions brought by or in the right of the corporation, no
indemnification shall be made with respect to any matter as to which such
person shall have been adjudged to be liable to the corporation unless and only
to the extent that the adjudicating court determines that such indemnification
is proper under the circumstances.
Under Section 7 of the Underwriting Agreement, the underwriters are
obligated, under circumstances, to indemnify directors and officers of the
Registrant against liabilities, including liabilities under the Securities Act.
Reference is made to the form of Underwriting Agreement to be filed as Exhibit
1 hereto.
The Registrant carries Directors and Officers liability insurance. Through
an agreement dated as of March 31, 1999 with Daniel J. Nova, and agreements
with Ted R. Dintersmith, W. Michael Humphreys and Samuel P. Gerace, Jr. dated
as of August 28, 1999 the Registrant has agreed to indemnify each director
against litigation risks and expenses arising out of his service to the
Registrant.
Finally, Ted Dintersmith, a director of the Registrant, is indemnified by
Charles River Partnership VIII for actions he takes on its behalf.
II-2
<PAGE>
Item 15. Recent Sales of Unregistered Securities
Set forth is information regarding shares of common stock and preferred
stock issued, and warrants issued and options granted by the Company since
January 1, 1996 (without giving effect to the Company's 1-for-2 reverse stock
split to be effected prior to the closing of this offering). Further included
is the consideration, if any, received by the Company for such shares, warrants
and options and information relating to the section of the Securities Act of
1933, as amended (the "Securities Act"), or rule of the Securities and Exchange
Commission under which exemption was claimed.
On August 28, 1998, we issued 399 shares of Freedom of Information, Inc.
("FOI") (the immediate predecessor of Be Free) common stock and $6,176,881 in
promissory notes (the "Redemption Notes") of FOI in consideration for the
exchange of all of the shares of Be Free, Inc. (an unrelated corporation, "Old
Be Free") and PCX Systems, Inc. by shareholders of such entities.
On August 28, 1998 we issued a total of 10,500,000 shares of Series A
Preferred Stock to five private investors (including three venture capitalist
firms, a bank and an individual investor) for an aggregate capital contribution
of $10,500,000 and warrants to purchase a total of 3,465,000 shares of common
stock at a purchase price of $1.50 per share.
On September 29, 1998, we issued 100,000 shares of Series A Convertible
Preferred Stock to Comdisco, Inc. for an aggregate capital contribution of
$100,000 and a warrant to purchase 33,000 shares of common stock at a purchase
price of $1.50 per share.
On September 29, 1998, we issued to Comdisco two warrants, one to purchase
100,000 shares of Series A Convertible Preferred Stock at a purchase price of
$1.00 and the other to purchase up to 600,000 shares of Series A Convertible
Preferred Stock at a purchase price of $1.00 per share. We issued these
warrants as partial consideration for certain financing transactions between
Comdisco and the Company.
On March 31, 1999, we issued a total of 13,196,522 shares of Series B
Convertible Preferred Stock to sixteen private investors for an aggregate
capital contribution of $24,999,888.06.
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 1,436,085
shares of common and reserved for issuance an additional 313,894 shares
pursuant to assumed options.
At various times since November 1998, we issued 5,347,050 shares of
restricted common stock, at purchase prices of $0.15 and $0.35 per share and
options to purchase 2,638,791 shares of common stock to employees at exercise
prices ranging from $0.15 to $4.41 per share, to consultants, advisors and a
director pursuant to our 1998 Stock Incentive Plan.
No underwriters were involved in the foregoing sale of securities. Such
sales were made in reliance upon an exemption from the registration provisions
of the Securities Act set forth in Section 4(2) thereof relative to sales by an
issuer not involving any public offering or the rules and regulations
thereunder, or, in the case of restricted common stock or options to purchase
common stock, Rule 701 under the Securities Act. All foregoing securities are
deemed restricted securities for the purpose of the Securities Act.
II-3
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
1 Form of Underwriting Agreement (to be included in an amendment).
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.
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 "Registration
Statement")).
3.2 Amended and Restated By-Laws of the Registrant (Incorporated by
reference to Exhibit 3.4 of the 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 Registration Statement).
5 Form of Opinion of Hale and Dorr LLP.
10.1 1998 Stock Incentive Plan (Incorporated by reference to Exhibit 10.1
of the Registration Statement).
10.2 Stock Purchase and Shareholders Agreement, as amended, dated as of
August 28, 1998 (Incorporated by reference to Exhibit 10.2 of the
Registration Statement).
10.3 Form of Warrant dated as of August 28, 1998 (Incorporated by reference
to Exhibit 10.3 of the Registration Statement).
10.4 Stock Purchase Agreement, as amended, dated as of September 29, 1998
(Incorporated by reference to Exhibit 10.4 of the 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
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 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 Registration Statement).
10.8 Subordinated Loan and Security Agreement dated as of September 29,
1998 (Incorporated by reference to Exhibit 10.8 of the Registration
Statement).
10.9 Registration Rights Agreement dated as of March 31, 1999 (Incorporated
by reference to Exhibit 10.9 of the Registration Statement).
10.10 Employment Agreement with Samuel P. Gerace, Jr., dated August 28, 1998
(Incorporated by reference to Exhibit 10.10 of the Registration
Statement).
10.11 Employment Agreement with Thomas A. Gerace dated August 28, 1998
(Incorporated by reference to Exhibit 10.11 of the Registration
Statement).
10.12 Lease dated as of November 9, 1998 with Southwestern Pennsylvania
Corporation (Incorporated by reference to Exhibit 10.12 of the
Registration Statement).
10.13 Lease dated October 20, 1998 with LSOF Pooled Equity L.P.
(Incorporated by reference to Exhibit 10.13 of the Registration
Statement).
+10.14 License and Services Agreement, effective January 13, 1999, with
GeoCites (Incorporated by reference to Exhibit 10.14 of the
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 Registration Statement).
10.16 Director Indemnification Agreement dated as of March 31, 1999 with Dan
Nova (Incorporated by reference to Exhibit 10.16 of the Registration
Statement).
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.17 Form of Indemnification Agreement dated August 28, 1998 (Incorporated
by reference to Exhibit 10.17 of the Registration Statement).
10.18 TriVida 1998 Equity Incentive Plan (to be included in an amendment).
21 List of Subsidiaries (to be included in an amendment).
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Ernst & Young LLP.
23.3 Consent of Hale and Dorr LLP (included in Exhibit 6).
24 Power of Attorney (see page II-6).
27 Financial Data Schedule
</TABLE>
- ---------------------
+ Confidential materials omitted and filed separately with the Securities and
Exchange Commission pursuant to a Confidential Treatment Order granted in
connection with the Registration Statement.
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement on Form S-1 to be signed
on its behalf by the undersigned, thereunto duly authorized, in Boston,
Massachusetts, on this 7th day of March 2000.
Be Free, Inc.
By: /s/ Gordon B. Hoffstein
----------------------------
Gordon B. Hoffstein
President, Chief Executive
Officer and Chairman of the
Board of Directors
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature appears
below hereby constitutes and appoints Gordon B. Hoffstein, Stephen M. Joseph,
Thomas A. Gerace and Samuel P. Gerace, Jr., each of them, their true and lawful
attorneys and agents, with full power of substitution, each with power to act
alone, to sign and execute on behalf of the undersigned any amendment or
amendments to this Registration Statement on Form S-1, and any subsequent
Registration Statement for the same offering which may be filed under Rule
462(b), and to perform any acts necessary to enable Be Free, Inc. to comply
with the provisions of the Securities Act of 1933, as amended, and all
requirements of the Securities and Exchange Commission, and each of the
undersigned does hereby ratify and confirm that said attorneys and agents, or
their or his or her substitutes, shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<S> <C>
</TABLE>
Signature Title Date
/s/ Gordon B. Hoffstein President, Chief March 7, 2000
- --------------------------------- Executive Officer and
Gordon B. Hoffstein Chairman of the Board
of Directors
/s/ Samuel P. Gerace, Jr. Executive Vice March 7, 2000
- --------------------------------- President, Research &
Samuel P. Gerace, Jr. Technology and
Director
/s/ Stephen M. Joseph Chief Financial March 7, 2000
- --------------------------------- Officer, Secretary and
Stephen M. Joseph Treasurer (Principal
Financial and
Accounting Officer)
/s/ Ted R. Dintersmith Director March 7, 2000
- ---------------------------------
Ted R. Dintersmith
II-6
<PAGE>
<TABLE>
<S> <C> <C>
Signature Title Date
--------- ----- ----
/s/ W. Michael Humphreys Director March 7, 2000
- --------------------------------
W. Michael Humphreys
/s/ Jeffrey Rayport Director March 7, 2000
- --------------------------------
Jeffrey Rayport
/s/ Daniel Nova Director March 7, 2000
- --------------------------------
Daniel Nova
Director March , 2000
- --------------------------------
Kathleen L. Biro
</TABLE>
II-7
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
1 Form of Underwriting Agreement (to be included in an amendment).
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.
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 "Registration
Statement")).
3.2 Amended and Restated By-Laws of the Registrant (Incorporated by
reference to Exhibit 3.4 of the 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 Registration Statement).
5 Form of Opinion of Hale and Dorr LLP.
10.1 1998 Stock Incentive Plan (Incorporated by reference to Exhibit 10.1
of the Registration Statement).
10.2 Stock Purchase and Shareholders Agreement, as amended, dated as of
August 28, 1998 (Incorporated by reference to Exhibit 10.2 of the
Registration Statement).
10.3 Form of Warrant dated as of August 28, 1998 (Incorporated by reference
to Exhibit 10.3 of the Registration Statement).
10.4 Stock Purchase Agreement, as amended, dated as of September 29, 1998
(Incorporated by reference to Exhibit 10.4 of the 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
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 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 Registration Statement).
10.8 Subordinated Loan and Security Agreement dated as of September 29,
1998 (Incorporated by reference to Exhibit 10.8 of the Registration
Statement).
10.9 Registration Rights Agreement dated as of March 31, 1999 (Incorporated
by reference to Exhibit 10.9 of the Registration Statement).
10.10 Employment Agreement with Samuel P. Gerace, Jr., dated August 28, 1998
(Incorporated by reference to Exhibit 10.10 of the Registration
Statement).
10.11 Employment Agreement with Thomas A. Gerace dated August 28, 1998
(Incorporated by reference to Exhibit 10.11 of the Registration
Statement).
10.12 Lease dated as of November 9, 1998 with Southwestern Pennsylvania
Corporation (Incorporated by reference to Exhibit 10.12 of the
Registration Statement).
10.13 Lease dated October 20, 1998 with LSOF Pooled Equity L.P.
(Incorporated by reference to Exhibit 10.13 of the Registration
Statement).
+10.14 License and Services Agreement, effective January 13, 1999, with
GeoCites (Incorporated by reference to Exhibit 10.14 of the
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 Registration Statement).
10.16 Director Indemnification Agreement dated as of March 31, 1999 with Dan
Nova (Incorporated by reference to Exhibit 10.16 of the Registration
Statement).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
10.17 Form of Indemnification Agreement dated August 28, 1998
(Incorporated by reference to Exhibit 10.17 of the Registration
Statement).
10.18 TriVida 1998 Equity Incentive Plan (to be included in an
amendment).
21 List of Subsidiaries.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Ernst & Young LLP.
23.3 Consent of Hale and Dorr LLP (included in Exhibit 5).
24 Power of Attorney (see page II-6).
27 Financial Data Schedule.
</TABLE>
- ---------------------
+ Confidential materials omitted and filed separately with the Securities
and Exchange Commission pursuant to a Confidential Treatment Order granted
in connection with the Registration Statement.
<PAGE>
EXHIBIT 2
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
BE FREE, INC.,
CYRANO ACQUISITION CORP.,
AND
TRIVIDA CORPORATION
FEBRUARY 15, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I. THE MERGER................................................... 1
1.1 The Merger......................................................... 1
1.2 The Closing........................................................ 1
1.3 Actions at the Closing............................................. 1
1.4 Additional Action.................................................. 2
1.5 Conversion of Shares............................................... 2
1.6 Dissenting Shares.................................................. 3
1.7 Fractional Shares.................................................. 4
1.8 Options and Warrants............................................... 4
1.9 Escrow............................................................. 5
1.10 Articles of Incorporation and By-laws............................. 6
1.11 No Further Rights................................................. 6
1.12 Closing of Transfer Books......................................... 6
1.13 Surrender of Certificates and Exchange of Shares.................. 6
1.14 No Further Ownership Rights in Company Shares..................... 7
1.15 Lost, Stolen or Destroyed Certificates............................ 7
1.16 Tax Consequences.................................................. 7
ARTICLE II. REPRESENTATIONS AND WARRANTIES OF THE COMPANY............... 8
2.1 Organization, Qualification and Corporate Power.................... 8
2.2 Capitalization..................................................... 8
2.3 Authorization of Transaction....................................... 9
2.4 Noncontravention................................................... 9
2.5 Subsidiaries....................................................... 10
2.6 Financial Statements............................................... 10
2.7 Absence of Certain Changes......................................... 10
2.8 Undisclosed Liabilities............................................ 10
2.9 Tax Matters........................................................ 11
2.10 Assets............................................................ 12
2.11 Real Property..................................................... 12
2.12 Real Property Leases.............................................. 12
2.13 Intellectual Property............................................. 13
2.14 Year 2000 Compliance.............................................. 14
2.15 Contracts......................................................... 15
2.16 Powers of Attorney................................................ 16
2.17 Insurance......................................................... 16
2.18 Litigation........................................................ 17
2.19 Warranties........................................................ 17
2.20 Employees......................................................... 17
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C>
2.21 Employee Benefits...................................................... 18
2.22 Environmental Matters.................................................. 19
2.23 Legal Compliance....................................................... 20
2.24 Suppliers.............................................................. 20
2.25 Permits................................................................ 20
2.26 Certain Business Relationships With Affiliates......................... 21
2.27 Brokers' Fees.......................................................... 21
2.28 Books and Records...................................................... 21
2.29 Proxy Statement........................................................ 21
2.30 Disclosure............................................................. 21
ARTICLE III. REPRESENTATIONS AND WARRANTIES OF THE BUYER AND THE
TRANSITORY SUBSIDIARY........................................................ 22
3.1 Organization, Qualification and Corporate Power......................... 22
3.2 Capitalization.......................................................... 22
3.3 Authorization of Transaction............................................ 22
3.4 Noncontravention........................................................ 23
3.5 Reports and Financial Statements........................................ 23
3.6 Interim Operations of the Transitory Subsidiary......................... 24
3.7 Brokers' Fees........................................................... 24
3.8 Proxy Statement......................................................... 24
3.9 Absence of Certain Changes.............................................. 24
3.10 Disclosure............................................................. 24
ARTICLE IV. COVENANTS........................................................ 24
4.1 Closing Efforts......................................................... 24
4.2 Governmental and Third-Party Notices and Consents....................... 24
4.3 Shareholder Approval.................................................... 25
4.4 Operation of Business................................................... 26
4.5 Access to Information................................................... 27
4.6 Notice of Breaches...................................................... 28
4.7 Exclusivity............................................................. 28
4.8 Expenses................................................................ 28
4.9 [Intentionally Omitted]................................................. 29
4.10 Listing of Merger Shares............................................... 29
4.11 S-8 Registration....................................................... 29
4.12 Retention Options...................................................... 29
4.13 Employee Benefits...................................................... 29
4.14 Indemnification........................................................ 29
ARTICLE V. CONDITIONS TO CONSUMMATION OF MERGER.............................. 30
5.1 Conditions to Each Party's Obligations.................................. 30
</TABLE>
-ii-
<PAGE>
<TABLE>
<S> <C>
5.2 Conditions to Obligations of the Buyer and the Transitory Subsidiary........ 30
5.3 Conditions to Obligations of the Company.................................... 31
ARTICLE VI. INDEMNIFICATION...................................................... 32
6.1 Indemnification by the Company Shareholders................................. 32
6.2 Indemnification by the Buyer................................................ 33
6.3 Indemnification Claims...................................................... 33
6.4 Survival of Representations and Warranties.................................. 36
6.5 Limitations................................................................. 37
ARTICLE VII. TERMINATION......................................................... 37
7.1 Termination of Agreement.................................................... 37
7.2 Effect of Termination....................................................... 38
ARTICLE VIII. REGISTRATION RIGHTS................................................ 38
8.1 Certain Definitions......................................................... 38
8.2 Resale Holder Registration.................................................. 39
8.3 Company Registration........................................................ 41
8.4 Suspension of Prospectus.................................................... 42
8.5 Expenses.................................................................... 42
8.6 Indemnification............................................................. 42
8.7 Limitation on Assignment of Registration Rights............................. 44
ARTICLE IX. DEFINITIONS.......................................................... 45
ARTICLE X. MISCELLANEOUS......................................................... 47
10.1 Press Releases and Announcements........................................... 47
10.2 No Third Party Beneficiaries............................................... 47
10.3 Entire Agreement........................................................... 47
10.4 Succession and Assignment.................................................. 47
10.5 Counterparts; Facsimile Signature.......................................... 48
10.6 Headings................................................................... 48
10.7 Notices.................................................................... 48
10.8 Governing Law.............................................................. 49
10.9 Amendments and Waivers..................................................... 49
10.10 Severability.............................................................. 49
10.11 Construction.............................................................. 49
</TABLE>
-iii-
<PAGE>
Exhibit A - Escrow Agreement
Exhibit B - Voting Agreement and Irrevocable Proxy
Exhibit C - Employment Agreement
Exhibit D - Opinion of Counsel to the Company
Exhibit E - Opinion of Counsel to the Buyer and the Transitory Subsidiary
-i-
<PAGE>
AGREEMENT AND PLAN OF MERGER
Agreement entered into as of February 15, 2000 by and among Be Free, Inc.,
a Delaware corporation (the "Buyer"), Cyrano Acquisition Corp., a Delaware
corporation and a wholly-owned subsidiary of the Buyer (the "Transitory
Subsidiary"), and TriVida Corporation, a California corporation (the "Company").
The Buyer, the Transitory Subsidiary and the Company are referred to
collectively herein as the "Parties."
This Agreement contemplates a merger of the Transitory Subsidiary into the
Company. In such merger, the shareholders of the Company will receive common
stock of the Buyer in exchange for their capital stock of the Company.
Now, therefore, in consideration of the representations, warranties and
covenants herein contained, the Parties agree as follows.
ARTICLE I.
THE MERGER
1.1 The Merger. Upon and subject to the terms and conditions of this
Agreement, the Transitory Subsidiary shall merge with and into the Company (with
such merger referred to herein as the "Merger") at the Effective Time (as
defined below). From and after the Effective Time, the separate corporate
existence of the Transitory Subsidiary shall cease and the Company shall
continue as the surviving corporation in the Merger (the "Surviving
Corporation"). The "Effective Time" shall be the time at which the Surviving
Corporation files the agreement of merger or other appropriate documents
prepared and executed in accordance with Section 1103 of the California General
Corporation Law and Section 252 of the Delaware General Corporation Law (the
"Certificate of Merger") with the Secretaries of State of the States of
California and Delaware. The Merger shall have the effects set forth in Section
1107 of the California General Corporation Law and Section 259 of the Delaware
General Corporation Law.
1.2 The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Hale and Dorr LLP
in Boston, Massachusetts, commencing at 9:00 a.m. local time on February 29,
2000, or, if all of the conditions to the obligations of the Parties to
consummate the transactions contemplated hereby have not been satisfied or
waived by such date, on such mutually agreeable later date as soon as
practicable (and in any event not later than three business days) after the
satisfaction or waiver of all conditions (excluding the delivery of any
documents to be delivered at the Closing by any of the Parties) set forth in
Article V hereof (the "Closing Date").
1.3 Actions at the Closing. At the Closing:
(a) the Company shall deliver to the Buyer and the Transitory
Subsidiary the various certificates, instruments and documents referred to in
Section 5.2;
(b) the Buyer and the Transitory Subsidiary shall deliver to the
Company the various certificates, instruments and documents referred to in
Section 5.3;
<PAGE>
(c)the Surviving Corporation shall file with the Secretaries of State
of the States of California and Delaware the Certificate of Merger;
(d) the Buyer, James Houlihan, Alex Jacobson and Peter Price (the
"Indemnification Representatives") and a financial institution selected by the
Buyer prior to the Effective Time and reasonably acceptable to the
Indemnification Representatives (the "Escrow Agent") shall execute and deliver
the Escrow Agreement attached hereto as Exhibit A (the "Escrow Agreement") and
the Buyer shall deliver to the Escrow Agent a certificate for the Escrow Shares
(as defined below) being placed in escrow on the Closing Date pursuant to
Section 1.9.
1.4 Additional Action. The Surviving Corporation may, at any time after the
Effective Time, take any action, including executing and delivering any
document, in the name and on behalf of either the Company or the Transitory
Subsidiary, in order to consummate the transactions contemplated by this
Agreement.
1.5 Conversion of Shares. At the Effective Time, by virtue of the Merger
and without any action on the part of any Party or the holder of any of the
following securities:
(a) Each share of (i) common stock, without par value, of the Company
("Common Shares"), (ii) Series A Preferred Stock, without par value, of the
Company ("Series A Shares"), and (iii) Series B Preferred Stock without par
value, of the Company ("Series B Shares" and collectively with the Series A
Shares, the "Preferred Shares") issued and outstanding immediately prior to the
Effective Time (other than Common Shares or Preferred Shares owned beneficially
by the Buyer or the Transitory Subsidiary, Dissenting Shares (as defined below)
and Common Shares or Preferred Shares held in the Company's treasury) shall be
converted into and represent the right to receive (subject to the provisions of
Section 1.10) that number of shares of common stock, $.01 par value per share,
of the Buyer ("Buyer Common Stock") as is set forth in Section 1.5(c) below,
which number shall be based upon the Conversion Ratio (as defined below). The
Preferred Shares and the Common Shares are collectively referred to herein as
"Company Shares."
(b) The "Conversion Ratio" shall be the result obtained by dividing (i)
1,634,504 by (ii) the sum of (A) the number of outstanding Company Shares
immediately prior to the Effective Time and (B) the number of Company Shares
issuable upon exercise of all Options and Warrants outstanding immediately prior
to the Effective Time. The Conversion Ratio shall be subject to equitable
adjustment in the event of any stock split, stock dividend, reverse stock split,
recapitalization or similar event affecting the Buyer Common Stock between the
date hereof and the Effective Time(including without limitation the 2-for-1
stock split to be effected in the form of a 100% stock dividend announced by the
Buyer on the date hereof (the "Buyer Stock Split") if the Effective Time is
after the record date for such Stock Split and shall be subject to equitable
adjustment in the event of any increase or decrease in the number of Preferred
Shares from the amounts set forth in Section 2.2 hereof. The shareholders of
record of the Company immediately prior to the Effective Time (the "Company
Shareholders") shall be entitled to receive immediately 90% of the shares of
Buyer Common Stock into which their Company Shares were converted pursuant to
this Section 1.5 (the "Initial Shares"); the
-2-
<PAGE>
remaining 10% of the shares of Buyer Common Stock into which their Company
Shares were converted pursuant to this Section 1.5, rounded to the nearest whole
number (the "Escrow Shares"), shall be deposited in escrow pursuant to Section
1.9 and shall be held and disposed of in accordance with the terms of the Escrow
Agreement. The Initial Shares and the Escrow Shares shall together be referred
to herein as the "Merger Shares."
(c) The number of shares of Buyer Common Stock into which each Company
Share shall be converted is as follows:
Fraction of a Share of Buyer
Common Stock into Which
Type of Company Share Company Share is Converted
--------------------- --------------------------
Common Share............... Conversion Ratio
Series A Share............. Conversion Ratio + 0.005381
Series B Share............. Conversion Ratio + 0.007265
(d) Each Company Share held in the Company's treasury immediately prior
to the Effective Time and each Company Share owned beneficially by the Buyer or
the Transitory Subsidiary shall be cancelled and retired without payment of any
consideration therefor.
(e) Each share of common stock, $.01 par value per share, of the
Transitory Subsidiary issued and outstanding immediately prior to the Effective
Time shall be converted into and thereafter evidence one share of common stock,
$.01 par value per share, of the Surviving Corporation.
1.6 Dissenting Shares.
(a) For purposes of this Agreement, "Dissenting Shares" means Company
Shares held as of the Effective Time by a Company Shareholder who has not voted
such Company Shares in favor of the adoption of this Agreement and the Merger
and with respect to which appraisal shall have been duly demanded and perfected
in accordance with Chapter 13 of the California General Corporation Law and not
effectively withdrawn or forfeited prior to the Effective Time. Dissenting
Shares shall not be converted into or represent the right to receive Merger
Shares, unless such Company Shareholder shall have forfeited his, her or its
right to appraisal under the California General Corporation Law or properly
withdrawn, his, her or its demand for appraisal. If such Company Shareholder has
so forfeited or withdrawn his, her or its right to appraisal of Dissenting
Shares, then (i) as of the occurrence of such event, such holder's Dissenting
Shares shall cease to be Dissenting Shares and shall be converted into and
represent the right to receive the Merger Shares issuable in respect of such
Company Shares pursuant to Section 1.5, and (ii) promptly following the
occurrence of such event, the Buyer shall deliver to such Company Shareholder a
certificate representing 90% of the Merger Shares to which such holder is
entitled pursuant to Section 1.5 (which shares shall be considered Initial
Shares for all purposes of this Agreement) and shall deliver to the Escrow Agent
a certificate representing the
-3-
<PAGE>
remaining 10% of the Merger Shares to which such holder is entitled pursuant to
Section 1.5 (which shares shall be considered Escrow Shares for all purposes of
this Agreement).
(b) The Company shall give the Buyer (i) prompt notice of any written
demands for appraisal of any Company Shares, withdrawals of such demands, and
any other instruments that relate to such demands received by the Company and
(ii) the opportunity to direct all negotiations and proceedings with respect to
demands for appraisal under the California General Corporation Law. The Company
shall not, except with the prior written consent of the Buyer, make any payment
with respect to any demands for appraisal of Company Shares or offer to settle
or settle any such demands.
1.7 Fractional Shares. No certificates or scrip representing fractional
Initial Shares shall be issued to former Company Shareholders upon the surrender
for exchange of certificates that, immediately prior to the Effective Time,
represented Company Shares converted into Merger Shares pursuant to Section 1.5
(including any Company Shares referred to in the last sentence of Section
1.6(a)) ("Certificates"), and such former Company Shareholders shall not be
entitled to any voting rights, rights to receive any dividends or distributions
or other rights as a stockholder of the Buyer with respect to any fractional
Initial Shares that would have otherwise been issued to such former Company
Shareholders. In lieu of any fractional Initial Shares that would have otherwise
been issued, each former Company Shareholder that would have been entitled to
receive a fractional Initial Share shall, upon proper surrender of such person's
Certificates, receive such whole number of Initial Shares as is equal to the
precise number of Initial Shares to which such person would be entitled, rounded
up or down to the nearest whole number (with a fractional interest equal to .5
rounded to the nearest odd number); provided that each such holder shall receive
at least one Initial Share.
1.8 Options and Warrants.
(a) As of the Effective Time, the Company's 1998 Equity Incentive Plan,
as adopted July 24, 1998 and amended October 15, 1998 and October 7, 1999
("Option Plan") and all options to purchase Company Shares issued by the Company
pursuant to Option Plan or otherwise ("Options"), whether vested or unvested,
shall be assumed by the Buyer. Immediately after the Effective Time, each Option
outstanding immediately prior to the Effective Time shall be deemed to
constitute an option to acquire, on the same terms and conditions as were
applicable under such Option at the Effective Time, such number of shares of
Buyer Common Stock as is equal to the number of Company Shares subject to the
unexercised portion of such Option multiplied by the Conversion Ratio (with any
fraction resulting from such multiplication to be rounded down to the nearest
whole number). The exercise price per share of each such assumed Option shall be
equal to the exercise price of such Option immediately prior to the Effective
Time, divided by the Conversion Ratio (rounded up to the nearest whole cent).
The term, exercisability, vesting schedule, status as an "incentive stock
option" under Section 422 of the Internal Revenue Code of 1986 (as amended, the
"Code"), if applicable, and all of the other terms of the Options shall
otherwise remain unchanged.
(b) As soon as practicable after the Effective Time, the Buyer or the
Surviving Corporation shall deliver to the holders of Options appropriate
notices setting forth
-4-
<PAGE>
such holders' rights pursuant to such Options, as amended by this Section 1.8,
and the agreements evidencing such Options shall continue in effect on the same
terms and conditions (subject to the amendments provided for in this Section 1.8
and such notice).
(c) The Buyer shall take all corporate action necessary to reserve for
issuance a sufficient number of shares of Buyer Common Stock for delivery upon
exercise of the Options assumed in accordance with this Section 1.8.
(d) The Company shall cause the termination, as of the Effective Time,
of all warrants to acquire any capital stock of the Company (the "Warrants")
which remain unexercised; except that the Warrants to acquire 86,240 Series B
Shares dated November 16, 1999 held by Silicon Valley Bank (the "SVB Warrant")
may not be terminated and in accordance with the terms thereof shall be
exercisable for shares of Buyer Common Stock. The number of shares of Buyer
Common Stock that may be purchased under this SVB Warrant shall equal the number
of Series B Shares issuable thereunder multiplied by the fraction of a share of
Buyer Common Stock per Series B Share set forth in Section 1.5(c) (with any
fraction resulting from such multiplication to be rounded down to the nearest
whole number) and the exercise per share of Buyer Common Stock that may be
purchased under the SVB Warrant shall equal the exercise price immediately prior
to the Effective Time, divided by the fraction of a share of Buyer Common Stock
per Series B Share set forth in Section 1.5(c) (rounded up to the nearest whole
cent).
(e) The Company shall obtain, prior to the Closing, the consent from
each holder of an Option or a Warrant to the amendment (in the case of Options
or the SVB Warrant) or termination (in the case of Warrants other than the SVB
Warrant) of such Option or Warrant pursuant to this Section 1.8 (unless such
consent is not required under the terms of the applicable agreement, instrument
or plan).
(f) Shareholder Loans. In the event that any Company Shareholder owes
monies to the Company under outstanding loans from the Company as of the
Effective Time (except for expense advances), the consideration payable to such
Company Shareholder pursuant to Section 1.5 shall be reduced by an amount equal
to the outstanding principal plus accrued interest of such shareholder's loans
as of the Effective Time.
1.9 Escrow.
(a) On the Closing Date, the Buyer shall deliver to the Escrow Agent a
certificate (issued in the name of the Escrow Agent or its nominee) representing
the Escrow Shares, as described in Section 1.5, for the purpose of securing the
indemnification obligations of the Indemnifying Shareholders (as defined in
Section 6.1) set forth in this Agreement. The Escrow Shares shall be held by the
Escrow Agent under the Escrow Agreement pursuant to the terms thereof. The
Escrow Shares shall be held as a trust fund and shall not be subject to any
lien, attachment, trustee process or any other judicial process of any creditor
of any party, and shall be held and disbursed solely for the purposes and in
accordance with the terms of the Escrow Agreement.
-5-
<PAGE>
(b) The adoption of this Agreement and the approval of the Merger by
the Company Shareholders shall constitute approval of the Escrow Agreement and
of all of the arrangements relating thereto, including without limitation the
placement of the Escrow Shares in escrow and the appointment of the
Indemnification Representatives.
1.10 Articles of Incorporation and By-laws.
(a) The Articles of Incorporation of the Surviving Corporation
immediately following the Effective Time shall be the same as the Articles of
Incorporation of the Company immediately prior to the Effective Time, except
that the authorized capitalization shall be reduced to 100,000 Company Common
Shares.
(b) The By-laws of the Surviving Corporation immediately following the
Effective Time shall be the same as the By-laws of the Company immediately prior
to the Effective Time.
1.11 No Further Rights. From and after the Effective Time, no Company
Shares shall be deemed to be outstanding, and holders of Certificates shall
cease to have any rights with respect thereto, except as provided herein or by
law.
1.12 Closing of Transfer Books. At the Effective Time, the stock transfer
books of the Company shall be closed and no transfer of Company Shares shall
thereafter be made. If, after the Effective Time, Certificates are presented to
the Buyer or the Surviving Corporation, they shall be cancelled and exchanged
for Initial Shares in accordance with Section 1.5, subject to Section 1.9 and to
applicable law in the case of Dissenting Shares.
1.13 Surrender of Certificates and Exchange of Shares.
(a) The Corporate Secretary of the Buyer or the Buyer's transfer agent
shall serve as the exchange agent (the "Exchange Agent") for the Merger.
Promptly after the Effective Time, the Buyer shall make available to the
Exchange Agent for exchange in accordance with this Article I the shares of
Buyer Common Stock issuable in exchange for outstanding Company Shares; provided
that, on behalf of the Company Shareholders, the Buyer shall issue to the Escrow
Agent a certificate for the Escrow Shares pursuant to Section 1.9. On or
promptly after the Effective Time, the Company Shareholders will surrender the
Certificates to the Exchange Agent for cancellation together with a letter of
transmittal in such customary form and having such customary provisions that the
Buyer may reasonably request. Upon such surrender of a Certificate for
cancellation to the Exchange Agent together with such letter of transmittal,
subject to the terms of Section 1.13(c) hereof, the holder of such Certificate
shall be entitled to receive from the Exchange Agent in exchange therefor a
certificate representing the number of Initial Shares of Buyer Common Stock, and
the Certificate so surrendered shall be canceled. Until so surrendered, each
outstanding Certificate will be deemed from and after the Effective Time and for
all corporate purposes, to evidence only the ownership of the number of full
shares of Buyer Common Stock into which such Company Shares shall have been so
converted.
-6-
<PAGE>
(b) No dividends or other distributions declared or made after the
Effective Time with respect to Buyer Common Stock with a record date after the
Effective Time will be paid to the holder of any unsurrendered Certificate with
respect to the shares of Buyer Common Stock represented thereby until the holder
of record of such Certificate shall surrender such Certificate. Subject to
applicable law, following surrender of any such Certificate, there shall be paid
to the record holder of the certificates representing whole shares of Buyer
Common Stock issued in exchange therefor, without interest, at the time of such
surrender, the amount of dividends or other distributions with a record date
after the Effective Time theretofore paid with respect to such whole shares of
Buyer Common Stock.
(c) If any certificate for shares of Buyer Common Stock is to be issued
in a name other than that in which the certificate surrendered in exchange
therefor is registered, it will be a condition of the issuance and/or delivery
thereof that the certificate so surrendered will be properly endorsed and
otherwise in proper form for transfer and that the person requesting such
exchange will have paid to the Buyer or any agent designated by it any transfer
or other taxes required by reason of the issuance of a certificate for shares of
Buyer Common Stock in any name other than that of the registered holder of the
certificate surrendered, or established to the satisfaction of the Buyer or any
agent designated by it that such tax has been paid or is not payable.
(d) Notwithstanding anything to the contrary in this Section 1.13,
neither the Buyer, the Surviving Corporation nor any party hereto shall be
liable to a holder of Company Shares for any amount properly paid to a public
official pursuant to any applicable abandoned property, escheat or similar law.
1.14 No Further Ownership Rights in Company Shares. The shares of Buyer
Common Stock paid in respect of the surrender for exchange of Company Shares in
accordance with the terms hereof, shall be deemed to be full satisfaction of all
rights pertaining to such Company Shares, and there shall be no further
registration of transfers on the records of the Surviving Corporation of Company
Shares which were outstanding immediately prior to the Effective Time. If, after
the Effective Time, Certificates are presented to the Surviving Corporation for
any reason, they shall be canceled and exchanged as provided in this Article I.
1.15 Lost, Stolen or Destroyed Certificates. In the event any Certificates
shall have been lost, stolen or destroyed, the Buyer shall issue in exchange for
such lost, stolen or destroyed Certificates, upon the making of an affidavit of
that fact by the holder thereof, such number of Initial Shares and Escrow Shares
as provided in Section 1.5; provided, however, that the Buyer may, in its
discretion and as a condition precedent to the issuance thereof, require the
stockholder who is the owner of such lost, stolen or destroyed certificates to
deliver a bond in such amount as it may reasonably direct against any claim that
may be made against the Buyer with respect to the certificates alleged to have
been lost, stolen or destroyed.
1.16 Tax Consequences. It is intended by the parties hereto that the Merger
shall constitute a reorganization within the meaning of Section 368(a) of the
Code. The Buyer and the Company will report the Merger as a reorganization
described in Section 368(a) of the Code, and comply with the provisions of
Treasury Regulation Section 1.368-3.
-7-
<PAGE>
ARTICLE II.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Buyer that the statements
contained in this Article II are true and correct, except as set forth in the
disclosure schedule provided by the Company to the Buyer on the date hereof and
accepted in writing by the Buyer (the "Disclosure Schedule"). The Disclosure
Schedule shall be arranged in paragraphs corresponding to the numbered and
lettered paragraphs contained in this Article II, and the disclosures in any
paragraph of the Disclosure Schedule shall qualify other paragraphs in this
Article II only to the extent it is reasonably clear from a reading of the
disclosure that such disclosure is applicable to such other paragraphs. For
purposes of this Article II, the phrase "to the knowledge of the Company" or any
phrase of similar import shall be deemed to refer to the actual knowledge of the
officers of the Company (other than the Secretary) and Mr. Ivan Ivankovich after
making reasonable inquiry.
2.1 Organization, Qualification and Corporate Power. The Company is a
corporation duly organized, validly existing and in corporate and tax good
standing under the laws of the State of California. The Company is duly
qualified to conduct business and is in corporate and tax good standing under
the laws of each jurisdiction in which the nature of its businesses or the
ownership or leasing of its properties requires such qualification, except where
the failure to be so qualified or in good standing, individually or in the
aggregate, has not had and could not reasonably be expected in the future to
have a Company Material Adverse Effect (as defined below). The Company has all
requisite corporate power and authority to carry on the businesses in which it
is engaged and to own and use the properties owned and used by it. The Company
has furnished to the Buyer complete and accurate copies of its Articles of
Incorporation and By-laws. The Company is not in default under or in violation
of any provision of its Articles of Incorporation or By-laws. For purposes of
this Agreement, "Company Material Adverse Effect" means a material adverse
effect on the assets, business, condition (financial or otherwise), or results
of operations of the Company other than any effect primarily and directly
resulting from (a) the execution of this Agreement or the announcement or
pendency of the transactions contemplated hereby, (b) conditions generally
affecting the Company's industry as a whole or (c) the failure to obtain any
additional funding that may be required.
2.2 Capitalization. The authorized capital stock of the Company consists of
30,000,000 Common Shares and 19,223,694 Preferred Shares, of which, as of the
date of this Agreement, (a) 4,469,499 Common Shares were issued and outstanding,
of which 831,325 shares are subject to a repurchase right in favor of the
Company, (b) 10,723,694 Series A Shares were issued and outstanding, (c)
7,761,205 Series B Shares were issued and outstanding, (d) 18,484,899 Common
Shares were reserved for issuance upon conversion of the Preferred Shares,
3,052,884 Common Shares were reserved for issuance upon exercise of Options and
193,893 shares of Series B Preferred Stock and 632,814 Common Shares were
reserved for issuance upon exercise of Warrants, and (e) no shares were held in
the treasury of the Company. Section 2.2 of the Disclosure Schedule sets forth a
complete and accurate list as of the date of this Agreement of (i) all
shareholders of the Company, indicating the number of Company Shares held by
each shareholder, (ii) all outstanding Options and Warrants, indicating (A) the
holder thereof, (B) the number of Company Shares subject to each Option and
Warrant, (C) the exercise
-8-
<PAGE>
price, date of grant, vesting schedule and expiration date for each Option or
Warrant, and (D) any terms regarding the acceleration of vesting, and (iii) all
stock option plans and other stock or equity-related plans of the Company. All
of the issued and outstanding Company Shares are, and all Company Shares that
may be issued upon exercise of Options or Warrants will be (upon issuance in
accordance with their terms), duly authorized, validly issued, fully paid,
nonassessable and free of all preemptive rights. Other than the Options and
Warrants listed in Section 2.2 of the Disclosure Schedule, as of the date of
this Agreement there are no outstanding or authorized options, warrants, rights,
agreements or commitments to which the Company is a party or which are binding
upon the Company providing for the issuance or redemption of any of its capital
stock. There are no outstanding or authorized stock appreciation, phantom stock
or similar rights with respect to the Company. There are no agreements to which
the Company is a party or by which it is bound with respect to the voting
(including without limitation voting trusts or proxies), registration under the
Securities Act of 1933, as amended (the "Securities Act"), or sale or transfer
(including without limitation agreements relating to pre-emptive rights, rights
of first refusal, co-sale rights or "drag-along" rights) of any securities of
the Company. To the knowledge of the Company, there are no agreements among
other parties, to which the Company is not a party and by which it is not bound,
with respect to the voting (including without limitation voting trusts or
proxies) or sale or transfer (including without limitation agreements relating
to rights of first refusal, co-sale rights or "drag-along" rights) of any
securities of the Company. All of the issued and outstanding Company Shares were
issued in compliance with applicable federal and state securities laws.
2.3 Authorization of Transaction. The Company has all requisite power and
authority to execute and deliver this Agreement and to perform its obligations
hereunder. The execution and delivery by the Company of this Agreement and,
subject to the adoption of this Agreement and the approval of the Merger by
holders of (a) a majority of the Common Shares, (b) a majority of the Series A
Shares, and (c) a majority of the Series B Shares entitled to vote on this
Agreement and the Merger (the "Requisite Shareholder Approval"), the
consummation by the Company of the transactions contemplated hereby have been
duly and validly authorized by all necessary corporate action on the part of the
Company. Without limiting the generality of the foregoing, the Board of
Directors of the Company, at a meeting duly called and held, by the unanimous
vote of all directors (i) determined that the Merger is fair and in the best
interests of the Company and its shareholders, (ii) adopted this Agreement in
accordance with the provisions of the California General Corporation Law, and
(iii) directed that this Agreement and the Merger be submitted to the
shareholders of the Company for their adoption and approval and resolved to
recommend that the shareholders of Company vote in favor of the adoption of this
Agreement and the approval of the Merger. This Agreement has been duly and
validly executed and delivered by the Company and constitutes a valid and
binding obligation of the Company, enforceable against the Company in accordance
with its terms.
2.4 Noncontravention. Neither the execution and delivery by the Company of
this Agreement, nor the consummation by the Company of the transactions
contemplated hereby, will (a) conflict with or violate any provision of the
Articles of Incorporation or By-laws of the Company, (b) require on the part of
the Company any filing with, or any permit, authorization, consent or approval
of, any court, arbitrational tribunal, administrative agency or commission or
other governmental or regulatory authority or agency (a "Governmental Entity"),
except for the
-9-
<PAGE>
filing of the Certificate of Merger as required by the California General
Corporation Law, (c) conflict with, result in a breach of, constitute (with or
without due notice or lapse of time or both) a default under, result in the
acceleration of obligations under, create in any party the right to terminate,
modify or cancel, or require any notice, consent or waiver under, any contract
or instrument to which the Company is a party or by which the Company is bound
or to which any of its assets is subject, (d) result in the imposition of any
Security Interest (as defined below) upon any assets of the Company or (e)
violate any order, writ, injunction, decree, statute, rule or regulation
applicable to the Company or any of its properties or assets, subject to the
filing of the Certificate of Merger as required by the California General
Corporation Law. For purposes of this Agreement: "Security Interest" means any
mortgage, pledge, security interest, encumbrance, charge or other lien (whether
arising by contract or by operation of law), other than (i) mechanic's,
materialmen's, and similar liens, (ii) liens arising under worker's
compensation, unemployment insurance, social security, retirement, and similar
legislation, and (iii) liens on goods in transit incurred pursuant to
documentary letters of credit, in each case arising in the Ordinary Course of
Business (as defined below) of the Company and not material to the Company; and
"Ordinary Course of Business" means the ordinary course of the Company's
business, consistent with past custom and practice.
2.5 Subsidiaries. The Company does not control directly or indirectly or
have any direct or indirect equity participation or similar interest in any
corporation, partnership, limited liability company, joint venture, trust or
other business association.
2.6 Financial Statements. The Company has provided to the Buyer (a) the
audited consolidated balance sheets and statements of income, changes in
shareholders' equity and cash flows of the Company as of and for the fiscal
years ended March 31, 1998 and March 31, 1999; and (b) the unaudited
consolidated balance sheet and statements of income, changes in shareholders'
equity and cash flows as of and for the month ended as of January 31, 2000 (the
"Most Recent Balance Sheet Date"). Such financial statements (collectively, the
"Financial Statements") have been prepared in accordance with United States
generally accepted accounting principles ("GAAP") applied on a consistent basis
throughout the periods covered thereby (except as may be indicated therein or in
the notes thereto), fairly present the financial condition, results of
operations and cash flows of the Company as of the respective dates thereof and
for the periods referred to therein and are consistent with the books and
records of the Company; provided, however, that the Financial Statements
referred to in clause (b) above are subject to normal recurring year-end
adjustments (which will not in the aggregate be material) and do not include
footnotes.
2.7 Absence of Certain Changes. Since the Most Recent Balance Sheet Date,
(a) there has occurred no event or development which has had, or could
reasonably be expected to have in the future, a Company Material Adverse Effect,
and (b) the Company has not taken any of the actions set forth in paragraphs (a)
through (n) of Section 4.4 (except that the dollar amounts in Section 4.4(k)
shall be deemed to be $5,000 and $25,000 rather than $2,000 and $10,000,
respectively).
2.8 Undisclosed Liabilities. The Company does not have any liability
(whether known or unknown, whether absolute or contingent, whether liquidated or
unliquidated and
-10-
<PAGE>
whether due or to become due), except for (a) liabilities shown on the balance
sheet referred to in clause (b) of Section 2.6 (the "Most Recent Balance
Sheet"), (b) liabilities (other than claims for breach of contracts or tort)
which have arisen since the Most Recent Balance Sheet Date in the Ordinary
Course of Business and which are similar in nature and amount to the liabilities
which arose during the comparable period of time in the immediately preceding
fiscal period and (c) liabilities (other than claims for breach of contracts or
tort) incurred in the Ordinary Course of Business which are not required by GAAP
to be reflected on a balance sheet.
2.9 Tax Matters.
(a) For purposes of this Agreement, the following terms shall have the
following meanings:
(i) "Taxes" means all taxes, charges, fees, levies or other similar
assessments or liabilities, including without limitation income, gross receipts,
ad valorem, premium, value-added, excise, real property, personal property,
sales, use, transfer, withholding, employment, unemployment insurance, social
security, business license, business organization, environmental, workers
compensation, payroll, profits, license, lease, service, service use, severance,
stamp, occupation, windfall profits, customs, duties, franchise and other taxes
imposed by the United States of America or any state, local or foreign
government, or any agency thereof, or other political subdivision of the United
States or any such government, and any interest, fines, penalties, assessments
or additions to tax resulting from, attributable to or incurred in connection
with any tax or any contest or dispute thereof.
(ii) "Tax Returns" means all reports, returns, declarations, statements
or other information required to be supplied to a taxing authority in connection
with Taxes.
(b) The Company has filed on a timely basis all Tax Returns that it was
required to file, and all such Tax Returns were complete and accurate in all
material respects. The Company is not nor has ever been a member of a group of
corporations with which it has filed (or been required to file) consolidated,
combined or unitary Tax Returns, other than a group of which only the Company is
or was a member. The Company has paid on a timely basis all Taxes that were due
and payable. The unpaid Taxes of the Company for tax periods through the Most
Recent Balance Sheet Date do not exceed the accruals and reserves for Taxes
(excluding accruals and reserves for deferred Taxes established to reflect
timing differences between book and Tax income) set forth on the Most Recent
Balance Sheet. The Company does not have any actual or potential liability for
any Tax obligation of any taxpayer (including without limitation any affiliated
group of corporations or other entities that included the Company during a prior
period) other than the Company. All Taxes that the Company is or was required by
law to withhold or collect have been duly withheld or collected and, to the
extent required, have been paid to the proper Governmental Entity.
(c) The Company has delivered to the Buyer complete and accurate copies
of all federal income Tax Returns, examination reports and statements of
deficiencies assessed against or agreed to by the Company since its inception.
The Company has delivered or made available to the Buyer complete and accurate
copies of all other Tax Returns of the Company
-11-
<PAGE>
together with all related examination reports and statements of deficiency for
all periods since the Company's inception. No examination or audit of any Tax
Return of the Company by any Governmental Entity is currently in progress or, to
the knowledge of the Company, threatened or contemplated. The Company has not
been informed by any jurisdiction that the jurisdiction believes that the
Company was required to file any Tax Return that was not filed. The Company has
not waived any statute of limitations with respect to Taxes or agreed to an
extension of time with respect to a Tax assessment or deficiency.
(d) The Company: (i) is not a "consenting corporation" within the
meaning of Section 341(f) of the Code, and none of the assets of the Company are
subject to an election under Section 341(f) of the Code; (ii) has not been a
United States real property holding corporation within the meaning of Section
897(c)(2) of the Code during the applicable period specified in Section
897(c)(l)(A)(ii) of the Code; (iii) has not made any payments, is not obligated
to make any payments, and is not a party to any agreement that could obligate it
to make any payments that may be treated as an "excess parachute payment" under
Section 280G of the Code; (iv) does not have any actual or potential liability
for any Taxes of any person (other than the Company) under Treasury Regulation
Section 1.1502-6 (or any similar provision of federal, state, local, or foreign
law), or as a transferee or successor, by contract, or otherwise; or (v) is not
nor has been required to make a basis reduction pursuant to Treasury Regulation
Section 1.1502-20(b) or Treasury Regulation Section 1.337(d)-2(b).
(e) None of the assets of the Company: (i) is property that is required
to be treated as being owned by any other person pursuant to the provisions of
former Section 168(f)(8) of the Code; (ii) is "tax-exempt use property" within
the meaning of Section 168(h) of the Code; or (iii) directly or indirectly
secures any debt the interest on which is tax exempt under Section 103(a) of the
Code.
(f) The Company has not undergone a change in its method of accounting
resulting in an adjustment to its taxable income pursuant to Section 481 of the
Code.
2.10 Assets. The Company owns or leases all tangible assets necessary for
the conduct of its business as presently conducted. No asset of the Company
(tangible or intangible) is subject to any Security Interest. All of the
tangible assets of the Company are located at the offices of the Company at 3524
Hayden Avenue, Culver City, California.
2.11 Real Property. The Company does not own any real property.
2.12 Real Property Leases. Section 2.15(a)(iv) of the Disclosure Schedule
lists all real property leased or subleased to or by the Company and lists the
term of such lease, any extension and expansion options, and the rent payable
thereunder. The Company has delivered to the Buyer complete and accurate copies
of all leases and subleases (as amended to date). The Company has not assigned,
transferred, conveyed, mortgaged, deeded in trust or encumbered any interest in
the leasehold or subleasehold.
-12-
<PAGE>
2.13 Intellectual Property.
(a) The Company owns or has the right to use all Intellectual Property
(as defined below) necessary (i) to use, manufacture, market and distribute (A)
the products manufactured, marketed, sold or licensed, and to provide the
services provided, and (B) those products or services under development
described in Section 2.13(a) of the Disclosure Schedule (in the case of products
or services so described in such Section 2.13(a), subject to obtaining standard
licenses for commercially available, off the shelf products) (together, the
"Customer Deliverables") or (ii) to operate the Company's internal systems that
are material to the business or operations of the Company, including, without
limitation, computer hardware systems, software applications and embedded
systems (the "Internal Systems"; the Intellectual Property owned by or licensed
to the Company and incorporated in or underlying the Customer Deliverables or
the Internal Systems is referred to herein as the "Company Intellectual
Property"). Each item of Company Intellectual Property will be owned or
available for use by the Surviving Corporation immediately following the Closing
on substantially identical terms and conditions as it was immediately prior to
the Closing. The Company has taken all reasonable measures to protect the
proprietary nature of each item of Company Intellectual Property, and to
maintain in confidence all trade secrets and confidential information that it
owns or uses. To the knowledge of the Company, (a) no other person or entity has
any rights to any of the Company Intellectual Property owned by the Company
(except pursuant to agreements or licenses specified in Section 2.13(c) of the
Disclosure Schedule), and (b) no other person or entity is infringing, violating
or misappropriating any of the Company Intellectual Property. For purposes of
this Agreement, "Intellectual Property" means all (i) patents and patent
applications, (ii) copyrights and registrations thereof, (iii) mask works and
registrations and applications for registration thereof, (iv) computer software,
data and documentation, (v) trade secrets and confidential business information,
whether patentable or unpatentable and whether or not reduced to practice,
know-how, manufacturing and production processes and techniques, research and
development information, copyrightable works, financial, marketing and business
data, pricing and cost information, business and marketing plans and customer
and supplier lists and information, (vi) trademarks, service marks, trade names,
domain names and applications and registrations therefor and (vii) other
proprietary rights relating to any of the foregoing. Section 2.13(a) of the
Disclosure Schedule lists each patent, patent application, copyright
registration or application therefor, mask work registration or application
therefor, and trademark, service mark and domain name registration or
application therefor of the Company.
(b) To the Company's knowledge, none of the Customer Deliverables, or
the marketing, distribution, provision or use thereof, infringes or violates, or
constitutes a misappropriation of, any Intellectual Property rights of any
person or entity. To the Company's knowledge, none of the Internal Systems, or
the use thereof, infringes or violates, or constitutes a misappropriation of,
any Intellectual Property rights of any person or entity. Section 2.13(b) of the
Disclosure Schedule lists any complaint, claim or notice, or written threat
thereof, received by the Company alleging any such infringement, violation or
misappropriation; and the Company has provided to the Buyer complete and
accurate copies of all written documentation in the possession of the Company
relating to any such complaint, claim, notice or threat. The Company has
provided to the Buyer complete and accurate copies of all written documentation
-13-
<PAGE>
in the Company's possession relating to claims or disputes known to the Company
concerning any Company Intellectual Property.
(c) Section 2.13(c) of the Disclosure Schedule identifies each license
or other agreement (or type of license or other agreement) pursuant to which the
Company has licensed, distributed or otherwise granted any rights to any third
party with respect to, any Company Intellectual Property other than
non-exclusive licenses entered into in the Ordinary Course of Business in
substantially the terms as the licenses identified on, or as otherwise described
in, Section 2.13(c) of the Disclosure Schedule.
(d) Section 2.13(d) of the Disclosure Schedule identifies each item of
Company Intellectual Property that is owned by a party other than the Company,
and the license or agreement pursuant to which the Company uses it (excluding
off-the-shelf software programs licensed by the Company pursuant to "shrink
wrap" or "click wrap" licenses).
(e) The Company has not disclosed the source code for any of the
software owned by the Company (the "Software") to any person or entity, except
(i) to its employees, (ii) to consultants or agents pursuant to agreements
prohibiting the disclosure of the Software to third parties and protecting the
confidentiality thereof, or (iii) pursuant to the agreements listed in Section
2.13(e) of the Disclosure Schedule, and the Company has taken reasonable
measures to prevent disclosure of such source code to any third parties.
(f) All of the copyrightable materials (including Software)
incorporated in or bundled with the Customer Deliverables have been created by
employees of the Company within the scope of their employment by the Company or
by independent contractors of the Company who have executed agreements expressly
assigning all right, title and interest in such copyrightable materials to the
Company. No portion of such copyrightable materials was jointly developed with
any third party.
(g) To the knowledge of the Company, the Customer Deliverables
(excluding those under development) and the Internal Systems are free from
significant defects or programming errors and the Customer Deliverables
(excluding those under development) conform in all material respects to the
written documentation and specifications therefor.
2.14 Year 2000 Compliance.
(a) All of the Customer Deliverables currently being marketed,
distributed or licensed by the Company or which were marketed, distributed or
licensed by the Company since its inception, and to the Company's knowledge all
Internal Systems, are Year 2000 Compliant. The Company is not aware of any
failure to be Year 2000 Compliant of any third-party system that is material to
the business or operations of the Company, including without limitation any
system belonging to any of the Company's suppliers, service providers or
customers.
(b) The Company has not provided any express guaranty or warranty for
any service or product or to the effect that such service or product is Year
2000 Compliant or has not been adversely affected by virtue of the arrival of
Year 2000.
-14-
<PAGE>
(c) For purposes of this Agreement, "Year 2000 Compliant" means that
the applicable system or item:
(i) accurately receives, records, stores, provides, recognizes and
processes all date and time data from, during, into and between the twentieth
and twenty-first centuries, the years 1999 and 2000 and all leap years;
(ii) accurately performs all date-dependent calculations and
operations (including, without limitation, mathematical operations, sorting,
comparing and reporting) from, during, into and between the twentieth and
twenty- first centuries, the years 1999 and 2000 and all leap years; and
(iii) does not malfunction, cease to function or provide invalid or
incorrect results as a result of (x) the change of years from 1999 to 2000, (y)
date data, including date data which represents or references different
centuries, different dates during 1999 and 2000, or more than one century or (z)
the occurrence of any particular date; in each case without human intervention,
other than original data entry.
2.15 Contracts.
(a) Section 2.15 of the Disclosure Schedule lists the following
agreements (written or oral) to which the Company is a party as of the date of
this Agreement:
(i) any agreement (or group of related agreements) providing for
payments in excess of $50,000 per annum in the Ordinary Course of Business
(other than non-exclusive licenses entered into in the Ordinary Course of
Business on substantially the terms as the licensed identified on, or as
otherwise described in, Section 2.13(c) of the Disclosure Schedule) or $25,000
per annum not in the Ordinary Course of Business;
(ii) any agreement (or group of related agreements) for the purchase
or sale of products or for the furnishing or receipt of services (A) which calls
for performance over a period of more than one year, (B) which involves more
than the sum of $50,000 per annum in the Ordinary Course of Business or $25,000
per annum not in the Ordinary Course of Business, or (C) in which the Company
has granted "most favored nation" pricing provisions or marketing or
distribution rights relating to any products or territory or has agreed to
purchase a minimum quantity of goods or services or has agreed to purchase goods
or services exclusively from a certain party;
(iii) any agreement establishing a partnership or joint venture;
(iv) any lease or sublease of real property;
(v) any agreement (or group of related agreements) under which it has
created, incurred, assumed or guaranteed (or may create, incur, assume or
guarantee) indebtedness (including capitalized lease obligations) or under which
it has imposed (or may impose) a Security Interest on any of its assets,
tangible or intangible;
-15-
<PAGE>
(vi) any agreement concerning noncompetition;
(vii) any employment or consulting agreement;
(viii) any agreement with any officer, director or 5% or greater
shareholder of the Company or any affiliate (an "Affiliate"), as defined in Rule
12b-2 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), thereof;
(ix) any agreement under which the consequences of a default or
termination would reasonably be expected to have a Company Material Adverse
Effect;
(x) any agreement which contains any provisions requiring the Company
to indemnify any other party thereto (excluding indemnities contained in
agreements for the purchase, sale or license of products or services entered
into in the Ordinary Course of Business); and
(xi) any other material agreement (or group of related agreements) not
entered into in the Ordinary Course of Business.
(b) The Company has delivered to the Buyer a complete and accurate copy
of each agreement (as amended to date) listed in Section 2.13 or Section 2.15 of
the Disclosure Schedule. With respect to each agreement so listed: (i) the
agreement is legal, valid, binding and enforceable and in full force and effect;
(ii) the agreement will continue to be legal, valid, binding and enforceable and
in full force and effect immediately following the Closing in accordance with
the terms thereof as in effect immediately prior to the Closing; and (iii)
neither the Company nor, to the knowledge of the Company, any other party, is in
breach or violation of, or default under, any such agreement, and no event has
occurred which, after the giving of notice, with lapse of time, or otherwise,
would constitute a breach or default by the Company or, to the knowledge of the
Company, any other party under such contract.
(c) There is no agreement (non-compete or otherwise), commitment,
judgment, injunction, order or decree to which the Company is a party or
otherwise binding upon the Company which prohibits or impairs any acquisition of
property (tangible or intangible) by the Company, or the conduct of business by
the Company or otherwise limits the freedom of the Company to engage in any line
of business or to compete with any person. Without limiting the generality of
the foregoing, the Company has not entered into any agreement under which the
Company is restricted from selling, licensing or otherwise distributing any of
its technology or products to or providing services to, customers or potential
customers or any class of customers, in any geographic area, during any period
of time or in any segment of the market.
2.16 Powers of Attorney. There are no outstanding powers of attorney
executed on behalf of the Company.
2.17 Insurance. Section 2.17 of the Disclosure Schedule lists each
insurance policy (including fire, theft, casualty, general liability, workers
compensation, business interruption, environmental, product liability and
automobile insurance policies and bond and surety arrangements) to which the
Company is a party. Such insurance policies are of the type and in
-16-
<PAGE>
amounts reasonably believed by the Company to be prudent for organizations
conducting businesses or owning assets similar to those of the Company. There is
no material claim pending under any such policy as to which coverage has been
questioned, denied or disputed by the underwriter of such policy. All premiums
due and payable under all such policies have been paid, the Company is not
liable for retroactive premiums or similar payments, and the Company is in
compliance in all material respects with the terms of such policies. The Company
has no knowledge of any threatened termination of, or material premium increase
with respect to, any such policy.
2.18 Litigation. There is no action, suit, proceeding, claim, arbitration
or investigation before any Governmental Entity or before any arbitrator (a
"Legal Proceeding") which is pending or has been threatened against the Company
in a writing delivered to the Company or otherwise to the Company's knowledge.
2.19 Warranties. No product or service manufactured, sold, leased, licensed
or delivered by the Company is subject to any guaranty, warranty, right of
return, right of credit or other indemnity other than (i) the applicable
standard terms and conditions of sale, license or lease of the Company, which
are set forth in Section 2.19 of the Disclosure Schedule or are on terms
substantially consistent therewith; (ii) manufacturers' warranties for which the
Company does not have any liability; and (iii) warranties implied under law.
2.20 Employees.
(a) Section 2.20 of the Disclosure Schedule contains a list of all
employees of the Company, along with the position and the annual rate of
compensation of each such person. Each employee has entered into a
confidentiality and assignment of inventions agreement with the Company,
substantially in the form previously delivered to the Buyer. Each such agreement
(i) is legal, valid, binding and enforceable and in full force and effect; and
(ii) will continue to be legal, valid, binding and enforceable and in full force
and effect immediately following the Closing in accordance with the terms
thereof as in effect immediately prior to the Closing. Neither the Company nor,
to the knowledge of the Company, any other party, is in breach or violation of,
or default under, any such agreement and no event has occurred which, after the
giving of notice, with the lapse of time, or otherwise, would constitute a
breach or default by the Company or, to the knowledge of the Company, any other
party to such agreement. To the knowledge of the Company, as of the date hereof
no officer or member of the development staff, and no material number of other
employees, has any plans to terminate employment with the Company.
(b) The Company is not party to or bound by any collective bargaining
agreement, nor has any of them experienced any strikes, grievances, claims of
unfair labor practices or other collective bargaining disputes. The Company has
no knowledge of any organizational effort made or threatened, either currently
or within the past two years, by or on behalf of any labor union with respect to
employees of the Company.
-17-
<PAGE>
2.21 Employee Benefits.
(a) Section 2.21(a) of the Disclosure Schedule contains a complete and
accurate list of all Employee Benefit Plans (as defined below) maintained, or
contributed to, by the Company. Complete and accurate copies of all Employee
Benefit Plans have been delivered to the Buyer. The Company has complied in all
material respects, in the administration and operation of each Employee Benefit
Plan, with the terms of such Plan and the requirements of applicable law
(including without limitation the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), and the Code and the regulations thereunder). The
Company has no monetary liability in excess of $25,000 under any Employee
Benefit Plan, except for those set forth on the Most Recent Balance Sheet or
those that have arisen since the date of the Most Recent Balance Sheet in the
Ordinary Course of Business. "Employee Benefit Plan" means any "employee pension
benefit plan" (as defined in Section 3(2) of ERISA), any "employee welfare
benefit plan" (as defined in Section 3(1) of ERISA), and any other written or
oral plan, agreement or arrangement involving direct or indirect compensation,
including without limitation insurance coverage, severance benefits, disability
benefits, deferred compensation, bonuses, stock options, stock purchase, phantom
stock, stock appreciation or other forms of incentive compensation or
post-retirement compensation.
(b) All the Employee Benefit Plans that are intended to be qualified
under Section 401(a) of the Code have received determination letters from the
Internal Revenue Service to the effect that such Employee Benefit Plans are
qualified and the plans and the trusts related thereto are exempt from federal
income taxes under Sections 401(a) and 501(a), respectively, of the Code, no
such determination letter has been revoked and revocation has not been
threatened, and no such Employee Benefit Plan has been amended or operated since
the date of its most recent determination letter or application therefor in any
respect, and no act or omission has occurred, that would adversely affect its
qualification or materially increase its cost. Each Employee Benefit Plan which
is required to satisfy Section 401(k)(3) or Section 401(m)(2) of the Code, and
satisfies the requirements of, Section 401(k)(3) and Section 401(m)(2) of the
Code for each plan year ending prior to the Closing Date.
(c) There are no unfunded obligations under any Employee Benefit Plan
providing benefits after termination of employment to any employee of the
Company (or to any beneficiary of any such employee), including but not limited
to retiree health coverage and deferred compensation, but excluding continuation
of health coverage required to be continued under Section 4980B of the Code or
other applicable law and insurance conversion privileges under state law. The
assets of each Employee Benefit Plan which is funded are reported at their fair
market value on the books and records of such Employee Benefit Plan.
(d) Each Employee Benefit Plan is amendable and terminable unilaterally
by the Company at any time without liability to the Company as a result thereof
and no Employee Benefit Plan, plan documentation or agreement, summary plan
description or other written communication distributed generally to employees by
its terms prohibits the Company from amending or terminating any such Employee
Benefit Plan.
-18-
<PAGE>
(e) Section 2.21(e) of the Disclosure Schedule discloses each: (i)
agreement with any shareholder, consultant, director, officer or other employee
of the Company (A) the benefits of which are contingent, or the terms of which
are materially altered, upon the occurrence of a transaction involving the
Company of the nature of any of the transactions contemplated by this Agreement,
(B) providing any term of employment or compensation guarantee or (C) providing
severance benefits or other benefits after the termination of employment of such
director, officer or employee; (ii) agreement, plan or arrangement under which
any person may receive payments from the Company that may be subject to the tax
imposed by Section 4999 of the Code or included in the determination of such
person's "parachute payment" under Section 280G of the Code; and (iii) agreement
or plan binding the Company, including without limitation any stock option plan,
stock appreciation right plan, restricted stock plan, stock purchase plan,
severance benefit plan or Employee Benefit Plan, any of the benefits of which
will be increased, or the vesting of the benefits of which will be accelerated,
by the occurrence of any of the transactions contemplated by this Agreement or
the value of any of the benefits of which will be calculated on the basis of any
of the transactions contemplated by this Agreement.
(f) Section 2.21(f) of the Disclosure Schedule sets forth the policy of
the Company with respect to accrued vacation, accrued sick time and earned
time-off and the amount of such liabilities as of January 31, 2000.
2.22 Environmental Matters.
(a) The Company has complied in all material respects with all
applicable Environmental Laws (as defined below). There is no pending or, to the
knowledge of the Company, threatened civil or criminal litigation, written
notice of violation, formal administrative proceeding, or investigation, inquiry
or information request by any Governmental Entity, relating to any Environmental
Law involving the Company. For purposes of this Agreement, "Environmental Law"
means any federal, state or local law, statute, rule or regulation or the common
law relating to the environment or occupational health and safety, including
without limitation any statute, regulation, administrative decision or order
pertaining to (i) treatment, storage, disposal, generation and transportation of
industrial, toxic or hazardous materials or substances or solid or hazardous
waste; (ii) air, water and noise pollution; (iii) groundwater and soil
contamination; (iv) the release or threatened release into the environment of
industrial, toxic or hazardous materials or substances, or solid or hazardous
waste, including without limitation emissions, discharges, injections, spills,
escapes or dumping of pollutants, contaminants or chemicals; (v) the protection
of wild life, marine life and wetlands, including without limitation all
endangered and threatened species; (vi) storage tanks, vessels, containers,
abandoned or discarded barrels, and other closed receptacles; (vii) health and
safety of employees and other persons; and (viii) manufacturing, processing,
using, distributing, treating, storing, disposing, transporting or handling of
materials regulated under any law as pollutants, contaminants, toxic or
hazardous materials or substances or oil or petroleum products or solid or
hazardous waste. As used above, the terms "release" and "environment" shall have
the meaning set forth in the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended ("CERCLA").
-19-
<PAGE>
(b) There have been no releases of any Materials of Environmental
Concern (as defined below) into the environment at any parcel of real property
or any facility formerly or currently owned, operated or controlled by the
Company in violation of any Environmental Law. With respect to any such releases
of Materials of Environmental Concern, the Company has given all required
notices to Governmental Entities (copies of which have been provided to the
Buyer). The Company is not aware of any releases of Materials of Environmental
Concern at parcels of real property or facilities other than those owned,
operated or controlled by the Company that could reasonably be expected to have
a material impact on the real property or facilities owned, operated or
controlled by the Company. For purposes of this Agreement, "Materials of
Environmental Concern" means any chemicals, pollutants or contaminants,
hazardous substances (as such term is defined under CERCLA), solid wastes and
hazardous wastes (as such terms are defined under the Resource Conservation and
Recovery Act), toxic materials, oil or petroleum and petroleum products or any
other material subject to regulation under any Environmental Law.
(c) Set forth in Section 2.22(c) of the Disclosure Schedule is a list
of all documents (whether in hard copy or electronic form) that contain any
environmental reports, investigations and audits relating to premises currently
or previously owned or operated by the Company (whether conducted by or on
behalf of the Company or a third party, and whether done at the initiative of
the Company or directed by a Governmental Entity or other third party) which the
Company has possession of or access to. A complete and accurate copy of each
such document has been provided to the Buyer.
2.23 Legal Compliance. The Company, and the conduct and operations of its
business, are each in compliance in all material respects with each applicable
law (including rules and regulations thereunder) of any federal, state, local or
foreign government, or any Governmental Entity.
2.24 Suppliers. Section 2.24 of the Disclosure Schedule sets forth a list
of each supplier that is the sole supplier of any significant product or service
to the Company. No such supplier has indicated within the past year that it will
stop, or decrease the rate of, supplying products or services to the Company. No
unfilled customer order or commitment obligating the Company to process,
manufacture or deliver products or perform services is currently expected to
result in a loss to the Company upon completion of performance, except for any
such orders or commitments that may be canceled by the Company unilaterally
without further obligation upon 30 days' or less notice.
2.25 Permits. Section 2.25 of the Disclosure Schedule sets forth a list of
all material permits, licenses, registrations, certificates, orders or approvals
from any Governmental Entity (including without limitation those issued or
required under Environmental Laws and those relating to the occupancy or use of
owned or leased real property) ("Permits") issued to or held by the Company.
Such listed Permits are the only Permits that are required for the Company to
conduct its business as presently conducted or as proposed to be conducted,
except for those the absence of which, individually or in the aggregate, have
not had and would not reasonably be expected to have a Company Material Adverse
Effect. Each such Permit is in full force and effect and, to the knowledge of
the Company, no suspension or cancellation of such Permit is
-20-
<PAGE>
threatened. Each such Permit will continue in full force and effect immediately
following the Closing.
2.26 Certain Business Relationships With Affiliates. No Affiliate of the
Company (a) owns any property or right, tangible or intangible, which is used in
the business of the Company, (b) has any claim or cause of action against the
Company, or (c) owes any money to, or is owed any money by, the Company other
than compensation for services rendered as an officer or director. Section 2.26
of the Disclosure Schedule describes any transactions or relationships between
the Company and any Affiliate thereof which have occurred or existed since the
Company's inception.
2.27 Brokers' Fees. Except for the fee payable to Broadview International
L.L.C. pursuant to the letter agreement dated December 30, 2000 (a true and
complete copy of which, insofar as it relates to the Buyer or the transactions
contemplated hereby, has been provided to the Buyer), the Company does not have
any liability or obligation to pay any fees or commissions to any broker, finder
or agent with respect to the transactions contemplated by this Agreement.
2.28 Books and Records. The minute books and other similar records of the
Company contain complete and accurate records of all actions taken at any
meetings of the Company's shareholders, Board of Directors or any committee
thereof and of all written consents executed in lieu of the holding of any such
meeting. The books and records of the Company accurately reflect in all material
respects the assets, liabilities, business, financial condition and results of
operations of the Company and have been maintained in accordance with reasonable
business and bookkeeping practices.
2.29 Proxy Statement. The information in or accompanying the proxy
statement (except for information supplied by the Buyer for inclusion therein,
as to which the Company makes no representation) to be sent to the Company
Shareholders in connection with the meeting (the "Company Meeting") of the
Company Shareholders to consider this Agreement and the Merger (the "Proxy
Statement"), shall not, on the date that the Proxy Statement is first mailed to
the Company Shareholders, at the time of the Company Meeting and at the
Effective Time, contain any statement which, at such time and in light of the
circumstances under which it shall be made, is false or misleading with respect
to any material fact, or omit to state any material fact necessary in order to
make the statements made in the Proxy Statement not false or misleading, or omit
to state any material fact necessary to correct any statement in any earlier
communication with respect to the solicitation of proxies for the Company
Meeting which has become false or misleading. If at any time prior to the
Effective Time any event relating to the Company or any of its Affiliates,
officers or directors should be discovered by the Company which should be set
forth in an amendment to the Proxy Statement, the Company shall promptly inform
the Buyer.
2.30 Disclosure. The representations and warranties by the Company
contained in this Agreement, and the statements contained in the Disclosure
Schedule, do not contain any untrue statement of a material fact or omit to
state any material fact necessary, in light of the circumstances under which
they were made, in order to make the statements herein or therein not
-21-
<PAGE>
misleading. The Company has delivered to the Buyer true and complete copies of
all documents which are referred to in Sections 2.12, 2.13, 2.15 and 2.21 or in
the Disclosure Schedule.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF THE BUYER
AND THE TRANSITORY SUBSIDIARY
Each of the Buyer and the Transitory Subsidiary represents and warrants to
the Company as follows:
3.1 Organization, Qualification and Corporate Power. Each of the Buyer and
the Transitory Subsidiary is a corporation duly organized, validly existing and
in good standing under the laws of the state of its incorporation. The Buyer is
duly qualified to conduct business and is in corporate and tax good standing
under the laws of each jurisdiction in which the nature of its businesses or the
ownership or leasing of its properties requires such qualification, except where
the failure to be so qualified or in good standing would not have a Buyer
Material Adverse Effect (as defined below). The Buyer has all requisite
corporate power and authority to carry on the businesses in which it is engaged
and to own and use the properties owned and used by it. The Buyer has furnished
or made available to the Company complete and accurate copies of its Certificate
of Incorporation and By-laws. For purposes of this Agreement, "Buyer Material
Adverse Effect" means a material adverse effect on the assets, business,
condition (financial or otherwise), results of operations or future prospects of
the Buyer and its subsidiaries, taken as a whole, other than any effect
primarily and directly resulting from (a) the execution of this Agreement or the
announcement or pendency of transactions contemplated hereby or (b) conditions
generally effecting the Buyer's industry as a whole; provided, that a drop in
the Buyer's stock price shall not, in and of itself, constitute such a material
adverse effect.
3.2 Capitalization. The authorized capital stock of the Buyer consists of
(a) 75,000,000 shares of Buyer Common Stock, of which 28,048,251 shares were
issued and outstanding of record as of February 14, 2000, and (b) 10,000,000
shares of Preferred Stock, $.01 par value per share, of which no shares were
issued or outstanding of record as of February 14, 2000. All of the issued and
outstanding shares of Buyer Common Stock are duly authorized, validly issued,
fully paid, nonassessable and free of all preemptive rights. All of the Merger
Shares will be, when issued in accordance with this Agreement, duly authorized,
validly issued, fully paid, nonassessable and free of all preemptive rights.
3.3 Authorization of Transaction. Each of the Buyer and the Transitory
Subsidiary has all requisite power and authority to execute and deliver this
Agreement and (in the case of the Buyer) the Escrow Agreement and to perform its
obligations hereunder and thereunder. The execution and delivery by the Buyer
and the Transitory Subsidiary of this Agreement and (in the case of the Buyer)
the Escrow Agreement and the consummation by the Buyer and the Transitory
Subsidiary of the transactions contemplated hereby and thereby have been duly
and validly authorized by all necessary corporate action on the part of the
Buyer and Transitory Subsidiary, respectively. This Agreement has been duly and
validly executed and delivered by
-22-
<PAGE>
the Buyer and the Transitory Subsidiary and constitutes a valid and binding
obligation of the Buyer and the Transitory Subsidiary, enforceable against them
in accordance with its terms.
3.4 Noncontravention. Subject to compliance with the applicable
requirements of the Securities Act and any applicable state securities laws and
the filing of the Certificate of Merger as required by the California General
Corporation Law, neither the execution and delivery by the Buyer or the
Transitory Subsidiary of this Agreement or (in the case of the Buyer) the Escrow
Agreement, nor the consummation by the Buyer or the Transitory Subsidiary of the
transactions contemplated hereby or thereby, will (a) conflict with or violate
any provision of the charter or By-laws of the Buyer or the Transitory
Subsidiary, (b) require on the part of the Buyer or the Transitory Subsidiary
any filing with, or permit, authorization, consent or approval of, any
Governmental Entity, (c) conflict with, result in breach of, constitute (with or
without due notice or lapse of time or both) a default under, result in the
acceleration of obligations under, create in any party any right to terminate,
modify or cancel, or require any notice, consent or waiver under, any contract
or instrument to which the Buyer or the Transitory Subsidiary is a party or by
which either is bound or to which any of their assets are subject, or (d)
violate any order, writ, injunction, decree, statute, rule or regulation
applicable to the Buyer or the Transitory Subsidiary or any of their properties
or assets.
3.5 Reports and Financial Statements. The Buyer has previously furnished or
made available to the Company complete and accurate copies, as amended or
supplemented, of its (a) Prospectus dated November 3, 1999 (as filed with the
Securities and Exchange Commission (the "SEC") pursuant to Rule 424 under the
Securities Act), and (b) all other reports filed by the Buyer under Section 13
or subsections (a) or (c) of Section 14 of the Exchange Act with the SEC since
November 3, 1999 (such reports are collectively referred to herein as the "Buyer
Reports"). The Buyer Reports constitute all of the documents required to be
filed by the Buyer under Section 13 or subsections (a) or (c) of Section 14 of
the Exchange Act with the SEC from November 3, 1999 through the date of this
Agreement. The Buyer Reports filed prior to the date of this Agreement complied,
and the Buyer reports filed after the date of this Agreement will comply, in all
material respects with the requirements of the Exchange Act and the rules and
regulations thereunder when filed. As of their respective dates the Buyer
Reports did not, and as of the date hereof and as of the Closing Date the Buyer
Reports, taken as a whole, do not and will not (except for disclosure relating
to the transactions contemplated hereby and the financial results for the Buyer
for the year ended December 31, 1999 as disclosed to the Company prior to the
date hereof) contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The audited financial statements and unaudited interim financial
statements of the Buyer included in the Buyer Reports (i) complied as to form in
all material respects with applicable accounting requirements and the published
rules and regulations of the SEC with respect thereto when filed, (ii) were
prepared in accordance with GAAP applied on a consistent basis throughout the
periods covered thereby (except as may be indicated therein or in the notes
thereto, and in the case of quarterly financial statements, as permitted by Form
10-Q under the Exchange Act), (iii) fairly present the consolidated financial
condition, results of operations and cash flows of the Buyer as of the
respective dates thereof and for the periods referred to therein, and (iv) are
consistent with the books and records of the Buyer.
-23-
<PAGE>
3.6 Interim Operations of the Transitory Subsidiary. The Transitory
Subsidiary was formed solely for the purpose of engaging in the transactions
contemplated by this Agreement and has engaged in no business activities other
than as contemplated by this Agreement.
3.7 Brokers' Fees. Except for any fee that may be payable to Donaldson,
Lufkin & Jenrette Securities Corporation, neither the Buyer nor the Transitory
Subsidiary has any liability or obligation to pay any fees or commissions to any
broker, finder or agent with respect to the transactions contemplated by this
Agreement.
3.8 Proxy Statement. The information to be supplied by the Buyer for
inclusion in the Proxy Statement shall not, on the date that the Proxy Statement
is first mailed to the Company Shareholders, at the time of the Company Meeting
and at the Effective Time, contain any statement which, at such time and in
light of the circumstances under which it shall be made, is false or misleading
with respect to any material fact, or omit to state any material fact necessary
in order to make the statements made in the Proxy Statement not false or
misleading, or omit to state any material fact necessary to correct any
statement in any earlier communication with respect to the solicitation of
proxies for the Company Meeting which has become false or misleading. If at any
time prior to the Effective Time any event relating to the Buyer or any of its
Affiliates, officers or directors should be discovered by the Buyer which should
be set forth in an amendment to the Proxy Statement, the Buyer shall promptly
inform the Company.
3.9 Absence of Certain Changes. Since September 30, 1999, there has
occurred no event or development which has had, or could reasonably be expected
to have in the future, a Buyer Material Adverse Effect.
3.10 Disclosure. The representations and warranties by the Buyer or the
Transitory Subsidiary contained in this Agreement contains any untrue statement
of a material fact or omit to state any material fact necessary, in light of the
circumstances under which they were made, in order to make the statements herein
or therein not misleading.
ARTICLE IV.
COVENANTS
4.1 Closing Efforts. Each of the Parties shall use its best efforts, to the
extent commercially reasonable ("Reasonable Best Efforts"), to take all actions
and to do all things necessary, proper or advisable to consummate the
transactions contemplated by this Agreement, including without limitation using
its Reasonable Best Efforts to ensure that (i) its representations and
warranties remain true and correct in all material respects through the Closing
Date and (ii) the conditions to the obligations of the other Parties to
consummate the Merger are satisfied.
4.2 Governmental and Third-Party Notices and Consents.
(a) Each Party shall use its Reasonable Best Efforts to obtain, at its
expense, all waivers, permits, consents, approvals or other authorizations from
Governmental Entities, and to effect all registrations, filings and notices with
or to Governmental Entities, as may be
-24-
<PAGE>
required for such Party to consummate the transactions contemplated by this
Agreement and to otherwise comply with all applicable laws and regulations in
connection with the consummation of the transactions contemplated by this
Agreement.
(b) The Company shall use its Reasonable Best Efforts to obtain, at its
expense, all such waivers, consents or approvals from third parties, and to give
all such notices to third parties, as are required to be listed in Section 2.4
of the Disclosure Schedule.
4.3 Shareholder Approval.
(a) The Company shall use its Reasonable Best Efforts to obtain, as
promptly as practicable, the Requisite Shareholder Approval at the Company
Meeting, all in accordance with the applicable requirements of the California
General Corporation Law. Promptly after the date hereof, Company will take all
action necessary in accordance with the California General Corporation Law to
convene the Company Meeting to be held as promptly as practicable, and in any
event (to the extent permissible under applicable law) within 15 days after the
date hereof, for the purpose of voting upon this Agreement and the Merger. The
Company will use its Reasonable Best Efforts to solicit from its shareholders
proxies in favor of the adoption and approval of this Agreement and the approval
of the Merger and will take all other action necessary or advisable to secure
the Requisite Shareholder Vote. Notwithstanding anything to the contrary
contained in this Agreement, the Company may adjourn or postpone the Company
Meeting to the extent necessary to ensure that any necessary supplement or
amendment to the Proxy Statement is provided to the Company Shareholders in
advance of a vote on the Merger and this Agreement. The Company shall ensure
that the Company Meeting is called, noticed, convened, held and conducted, and
that all proxies solicited by the Company in connection with the Company Meeting
are solicited, in compliance with the California General Corporation Law and all
other applicable legal requirements.
(b) In connection with the Company Meeting, the Company shall provide
to its shareholders the Proxy Statement which shall include (A) a summary of the
Merger and this Agreement (which summary shall include a summary of the terms
relating to the indemnification obligations of the Company Shareholders, the
escrow arrangements and the authority of the Indemnification Representatives,
and a statement that the adoption of this Agreement by the shareholders of the
Company shall constitute approval of such terms), (B) all of the information
required by Rule 502(b)(2) of Regulation D under the Securities Act and (C) a
statement that appraisal rights are available for the Company Shares pursuant to
Chapter 13 of the California General Corporation Law and a copy of such Chapter
13. The Buyer agrees to cooperate with the Company in the preparation of the
Proxy Statement. The Company agrees not to distribute the Proxy Statement until
the Buyer has had a reasonable opportunity to review and comment on the Proxy
Statement and the Proxy Statement has been approved by the Buyer (which approval
may not be unreasonably withheld or delayed).
(c) The Company, acting through its Board of Directors, shall include
in the Proxy Statement the unanimous recommendation of its Board of Directors
that the shareholders of the Company vote in favor of the adoption of this
Agreement and the approval of the Merger.
-25-
<PAGE>
(d) The Company shall ensure that the Proxy Statement does not contain
any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the circumstances
under which they were made, not misleading (provided that the Company shall not
be responsible for the accuracy or completeness of any information furnished by
the Buyer in writing for inclusion in the Proxy Statement).
(e) The Buyer shall ensure that any information furnished by the Buyer
to the Company in writing for inclusion in the Proxy Statement does not contain
any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the circumstances
under which they were made, not misleading.
(f) Simultaneous with the execution of this Agreement, the Company
Shareholders set forth in Schedule I hereto shall each have executed a Voting
Agreement and Irrevocable Proxy in the form attached hereto as Exhibit B.
4.4 Operation of Business. Except as contemplated by this Agreement, during
the period from the date of this Agreement to the Effective Time, the Company
shall conduct its operations in the Ordinary Course of Business and in
compliance in all material respects with all applicable laws and regulations
and, to the extent consistent therewith, use its Reasonable Best Efforts to
preserve intact its current business organization, keep its physical assets in
good working condition, keep available the services of its current officers and
employees and preserve its relationships with customers, suppliers and others
having business dealings with it to the end that its goodwill and ongoing
business shall not be impaired in any material respect. Without limiting the
generality of the foregoing, prior to the Effective Time, the Company shall not,
without the written consent of the Buyer:
(a) except as set forth in Section 4.4(a) of the Disclosure Schedule,
issue or sell, or redeem or repurchase, any stock or other securities of the
Company or any rights, warrants or options to acquire any such stock or other
securities (except pursuant to the exercise of Options or Warrants outstanding
on the date hereof and except for the issuance of Retention Options (as defined
below and as set forth in Section 4.4(a) of the Disclosure Schedule)), or amend
any of the terms of (including without limitation the vesting of) any such
Options or Warrants;
(b) split, combine or reclassify any shares of its capital stock;
declare, set aside or pay any dividend or other distribution (whether in cash,
stock or property or any combination thereof) in respect of its capital stock;
(c) create, incur or assume any indebtedness (including obligations in
respect of capital leases) except for the borrowing of up to $225,000 from
Silicon Valley Bank under existing credit facilities if the Effective Time shall
not have occurred on or before February 29, 2000; assume, guarantee, endorse or
otherwise become liable or responsible (whether directly, contingently or
otherwise) for the obligations of any other person or entity; or make any loans,
advances or capital contributions to, or investments in, any other person or
entity other than advances to employees and investments in money market
instruments made in the Ordinary Course of Business;
-26-
<PAGE>
(d) except for the grant of Retention Options or as otherwise set forth
in Section 4.4(d) of the Disclosure Schedule, hire any new employees, enter
into, adopt or amend any Employee Benefit Plan or any employment or severance
agreement or arrangement of the type described in Section 2.21(e) or increase in
any manner the compensation or fringe benefits of, or modify the employment
terms of, its directors, officers or employees, generally or individually, or
pay any bonus or other benefit to its directors, officers or employees (except
for existing payment obligations listed in Section 2.20 of the Disclosure
Schedule);
(e) acquire, sell, lease, license or dispose of any assets or property
(including without limitation any shares or other equity interests in or
securities of any corporation, partnership, association or other business
organization or division thereof), other than purchases, licenses and sales of
assets in the Ordinary Course of Business;
(f) mortgage or pledge any of its property or assets or subject any
such property or assets to any Security Interest;
(g) discharge or satisfy any Security Interest or pay any obligation or
liability other than in the Ordinary Course of Business;
(h) amend its charter, by-laws or other organizational documents;
(i) change in any material respect its accounting methods, principles
or practices, except insofar as may be required by a generally applicable change
in GAAP;
(j) amend, terminate, take or omit to take any action that would
constitute a violation of or default under, or waive any rights under, any
material contract or agreement or enter into any material contract or agreement
other than in the Ordinary Course of Business;
(k) make or commit to make any capital expenditure in excess of $2,000
per item or $10,000 in the aggregate;
(l) institute or settle any Legal Proceeding;
(m) take any action or fail to take any action permitted by this
Agreement with the knowledge that such action or failure to take action would
result in (i) any of the representations and warranties of the Company set forth
in this Agreement becoming untrue or (ii) any of the conditions to the Merger
set forth in Article V not being satisfied; or
(n) agree in writing or otherwise to take any of the foregoing actions.
4.5 Access to Information. The Company shall permit representatives of the
Buyer to have full access (at all reasonable times, and in a manner so as not to
interfere with the normal business operations of the Company) to all premises,
properties, financial and accounting records, contracts, other records and
documents, and personnel, of or pertaining to the Company.
-27-
<PAGE>
4.6 Notice of Breaches.
(a) From the date of this Agreement until the Effective Time, the
Company shall promptly deliver to the Buyer supplemental information concerning
events or circumstances occurring subsequent to the date hereof which would
render any representation, warranty or statement in this Agreement or the
Disclosure Schedule inaccurate or incomplete at any time after the date of this
Agreement until the Closing Date. No such supplemental information shall be
deemed to cure any misrepresentation or breach of warranty or constitute an
amendment of any representation, warranty or statement in this Agreement or the
Disclosure Schedule.
(b) From the date of this Agreement until the Effective Time, the Buyer
shall promptly deliver to the Company supplemental information concerning events
or circumstances occurring subsequent to the date hereof which would render any
representation or warranty in this Agreement inaccurate or incomplete at any
time after the date of this Agreement until the Closing Date. No such
supplemental information shall be deemed to cure any misrepresentation or breach
of warranty or constitute an amendment of any representation or warranty in this
Agreement.
4.7 Exclusivity.
(a) The Company shall not, and the Company shall require each of its
officers, directors, employees, representatives and agents not to, directly or
indirectly, (i) initiate, solicit, encourage or otherwise facilitate any
inquiry, proposal, offer or discussion with any party (other than the Buyer)
concerning any merger, reorganization, consolidation, recapitalization, business
combination, liquidation, dissolution, share exchange, sale of stock (other than
discussions after March 15, 2000 with venture capitalists (or similar investors)
with respect to the issuance of convertible preferred stock that, if issued,
would constitute less than 35% of the outstanding capital stock of the Company),
sale of material assets or similar business transaction involving the Company or
any division of the Company, (ii) furnish any non-public information concerning
the business, properties or assets of the Company or any division of the Company
to any party (other than the Buyer) or (iii) engage in discussions or
negotiations with any party (other than the Buyer) concerning any such
transaction.
(b) The Company shall immediately notify any party with which
discussions or negotiations of the nature described in paragraph (a) above were
pending that the Company is terminating such discussions or negotiations. If the
Company receives any inquiry, proposal or offer of the nature described in
paragraph (a) above, the Company shall, within one business day after such
receipt, notify the Buyer of such inquiry, proposal or offer, including the
identity of the other party and the terms of such inquiry, proposal or offer.
4.8 Expenses. Except as set forth in Article VI and the Escrow Agreement,
each of the Parties shall bear its own costs and expenses (including legal fees
and expenses) incurred in connection with this Agreement and the transactions
contemplated hereby; provided, however, that if the Merger is consummated, the
Buyer and Surviving Corporation shall not be obligated to pay more than an
aggregate of $2,000,000 in costs and expenses (including without limitation
-28-
<PAGE>
legal, accounting and financial advisor fees) incurred by the Company in
connection with the Merger ("Third Party Expenses") and any such Third Party
Expenses incurred in excess of such amounts shall be subject to the
indemnification provisions of Article VI hereof.
4.9 [Intentionally Omitted].
4.10 Listing of Merger Shares. The Buyer shall have the Merger Shares
approved for quotation on the Nasdaq National Market subject only to official
notice of issuance.
4.11 S-8 Registration. Not later than thirty (30) days after the Effective
Time, the Buyer agrees to file, if available for use by the Buyer, with the SEC
a registration statement on Form S-8 registering a number of shares of Buyer
Common Stock equal to the number of shares of Buyer Common Stock issuable upon
the exercise of all Options assumed by the Buyer pursuant to Section 1.8(a)
hereof.
4.12 Retention Options. Prior to the Effective Time, the Company shall
issue to the persons listed on Section 4.4(b) of the Disclosure Schedule options
to acquire the number of Common Shares at the exercise price indicated thereon
(the "Retention Options") provided, that the form of the option agreement
governing such Retention Options shall have been delivered to the Buyer prior to
being furnished to such person and such agreement shall provide for vesting over
a four year period commencing on the first anniversary of the Effective Time,
shall provide that the Merger shall not constitute a "Corporate Transaction" for
purposes of Section 17 of the Option Plan and shall otherwise be reasonably
satisfactory to the Buyer.
4.13 Employee Benefits. The Buyer will have no obligation to retain any
employee or group of employees of the Company following the Effective Time. As
soon as practicable after the execution of this Agreement, the Company and the
Buyer shall confer and work together in good faith to agree upon mutually
acceptable employee benefit and compensation arrangements (and terminate Company
employee plans immediately prior to the Effective Time, if appropriate) so as to
provide benefits to Company employees initially upon the Merger which are
generally equivalent to those being provided to employees of Company immediately
preceding the Effective Time, as well as to determine appropriate termination
benefits for Company employees generally and certain members of Company
management in particular, in addition to any and all severance, separation,
retention and salary continuation plans, programs or arrangements disclosed on
the Company Disclosure Schedule. Continuous employment with the Company or its
subsidiaries shall be credited to Company employees who become Buyer employees
for all purposes of eligibility and vesting of Benefits (to the extent permitted
by applicable law), but not for purposes of accrual of benefits.
4.14 Indemnification. For a period of three years from and after the
Effective Time, the Buyer will, or will cause the Surviving Corporation to,
fulfill and honor in all respects the indemnification obligations of the Company
to its directors and officers under the articles of incorporation and by-laws as
in effect on the date hereof, except that the Buyer shall treat its assets as
the Company's assets for purposes of fulfilling its obligations under this
Section 4.14.
-29-
<PAGE>
ARTICLE V.
CONDITIONS TO CONSUMMATION OF MERGER
5.1 Conditions to Each Party's Obligations. The respective obligations of
each Party to consummate the Merger are subject to the satisfaction of the
following conditions:
(a) this Agreement and the Merger shall have received the Requisite
Shareholder Approval;
(b) no Governmental Entity shall have enacted, issued, promulgated,
enforced or entered any statute, rule, regulation, executive order, decree,
injunction or other order (whether temporary, preliminary or permanent) which is
in effect and which has the effect of making the Merger illegal or otherwise
prohibiting consummation of the Merger;
(c) no temporary restraining order, preliminary or permanent injunction
or other order issued by any court of competent jurisdiction or other legal
restraint or prohibition preventing the consummation of the Merger shall be in
effect, nor shall any proceeding brought by an administrative agency or
commission or other governmental authority or instrumentality, domestic or
foreign, seeking any of the foregoing be pending; and
(d) approvals from any court, administrative agency or commission or
other federal, state, county, local or other foreign governmental authority,
instrumentality, agency or commission that are required to consummate the Merger
shall have been timely obtained.
5.2 Conditions to Obligations of the Buyer and the Transitory Subsidiary.
The obligation of each of the Buyer and the Transitory Subsidiary to consummate
the Merger is subject to the satisfaction (or waiver by the Buyer) of the
following additional conditions:
(a) the Dissenting Shares, if any, shall constitute less than 5% of the
outstanding Company Shares;
(b) there shall not be more than 30 Company Shareholders that are not
"accredited investors" as that term is defined in Rule 501 promulgated by the
SEC pursuant to the Securities Act;
(c) the Company shall have obtained (and shall have provided copies
thereof to the Buyer) all of the waivers, permits, consents, approvals or other
authorizations, and effected all of the registrations, filings and notices,
referred to in Section 5.2 to the Disclosure Schedule which are required on the
part of the Company;
(d) the representations and warranties of the Company contained in this
Agreement shall have been true and correct as of the date of this Agreement and
as of the Effective Time except (i) to the extent that the failure of such
representations and warranties to be true and correct in each case or in the
aggregate does not constitute and could not reasonably be expected to constitute
in the future a Company Material Adverse Effect, (ii) for changes contemplated
by this Agreement and (iii) for those representations and warranties which
address matters only as of the date of this Agreement or any other particular
date (which shall have been
-30-
<PAGE>
true and correct as of such particular date except to the extent that the
failure of such representations and warranties to be true and correct as of such
particular date does not, or could not reasonably be expected in the future to,
constitute a Company Material Adverse Effect) (it being understood that, for
purposes of determining the accuracy of such representations and warranties all
"Material Adverse Effect" qualifications and other qualifications based on the
word "material" or concepts of materiality contained in such representations and
warranties shall be disregarded);
(e) the Company shall have performed or complied in all material
respects with its agreements and covenants required to be performed or complied
with under this Agreement as of or prior to the Effective Time;
(f) no Legal Proceeding shall be pending or threatened wherein an
unfavorable judgment, order, decree, stipulation or injunction would (i) prevent
consummation of any of the transactions contemplated by this Agreement or (ii)
cause any of the transactions contemplated by this Agreement to be rescinded
following consummation;
(g) the Company shall have delivered to the Buyer and the Transitory
Subsidiary a certificate (the "Company Certificate") to the effect that each of
the conditions specified in clause (a) of Section 5.1 and clauses (a) through
(e) (insofar as clause (e) relates to Legal Proceedings involving the Company)
of this Section 5.2 is satisfied in all respects;
(h) The individuals listed on Section 5.2(g) of the Disclosure Schedule
shall have executed and delivered to the Buyer an Employment Agreement in the
form attached hereto as Exhibit C, and all of such agreements shall be in full
force and effect;
(i) the Buyer shall have received from counsel to the Company an
opinion with respect to the matters set forth in Exhibit D attached hereto,
addressed to the Buyer and dated as of the Closing Date;
(j) The Escrow Agreement shall have been executed and delivered by each
of the parties thereto;
(k) the Buyer shall have received copies of the resignations, effective
as of the Effective Time, of each director of the Company (other than any such
resignations which the Buyer designates, by written notice to the Company, as
unnecessary); and
(l) the Buyer shall have received such certificates of good standing of
the Company in its jurisdiction of organization and the various foreign
jurisdictions in which it is qualified, certified charter documents and
certificates as to the incumbency of officers and the adoption of authorizing
resolutions, as it shall reasonably request in connection with the Closing.
5.3 Conditions to Obligations of the Company. The obligation of the Company
to consummate the Merger is subject to the satisfaction of the following
additional conditions:
(a) the Merger Shares shall have been authorized for listing on the
Nasdaq National Market upon official notice of issuance;
-31-
<PAGE>
(b) the Buyer shall have effected all of the registrations, filings and
notices referred to in Section 4.2 which are required on the part of the Buyer;
(c) The representations and warranties of the Buyer and the Transitory
Subsidiary contained in this Agreement shall have been true and correct as of
the date of this Agreement and as of the Effective Time except (i) to the extent
that the failure of such representations and warranties to be true and correct
in each case or in the aggregate does not constitute a Buyer Material Adverse
Effect, (ii) for changes contemplated by this Agreement and (iii) for those
representations and warranties which address matters only as of the date of this
Agreement or any other particular date (which shall have been true and correct
as of such particular date except to the extent that the failure of such
representations and warranties to have been true and correct as of such
particular date does not constitute a Buyer Material Adverse Effect) (it being
understood that, for purposes of determining the accuracy of such
representations and warranties all "Material Adverse Effect" qualifications and
other qualifications based on the word "material" or similar phrases contained
in such representations and warranties shall be disregarded);
(d) each of the Buyer and the Transitory Subsidiary shall have
performed or complied with its agreements and covenants required to be performed
or complied with under this Agreement as of or prior to the Effective Time;
(e) no Legal Proceeding shall be pending or threatened wherein an
unfavorable judgment, order, decree, stipulation or injunction would have a
Buyer Material Adverse Effect, and no such judgment, order, decree, stipulation
or injunction shall be in effect;
(f) the Buyer shall have delivered to the Company a certificate (the
"Buyer Certificate") to the effect that each of the conditions specified in
clauses (a) through (e) of this Section 5.3 is satisfied in all respects;
(g) the Company shall have received from counsel to the Buyer and the
Transitory Subsidiary an opinion with respect to the matters set forth in
Exhibit E attached hereto, addressed to the Company and dated as of the Closing
Date; and
(h) the Company shall have received such certificates of good standing
of the Buyer and the Transitory Subsidiary in their jurisdiction of
organization, certified charter documents and certificates as to the incumbency
of officers and the adoption of authorizing resolutions, as it shall reasonably
request in connection with the Closing.
ARTICLE VI.
INDEMNIFICATION
6.1 Indemnification by the Company Shareholders. Subject to the limitations
in Sections 6.4 and 6.5, the Company Shareholders receiving the Merger Shares
pursuant to Section 1.5 (the "Indemnifying Shareholders") shall jointly and
severally as to claims against the Escrow Shares, and severally and not jointly
as to any other claims, indemnify the Buyer in respect of, and hold it harmless
against, any and all debts, obligations and other liabilities (whether absolute,
accrued, contingent, fixed or otherwise, or whether known or unknown, or
-32-
<PAGE>
due or to become due or otherwise), monetary damages, fines, fees, penalties,
interest obligations, deficiencies, losses and expenses (including without
limitation amounts paid in settlement, interest, court costs, reasonable costs
of investigators, reasonable fees and expenses of attorneys, accountants,
financial advisors and other experts, and other reasonable expenses of
litigation) ("Damages") incurred or suffered by the Surviving Corporation or the
Buyer or any Affiliate thereof resulting from or constituting:
(a) any misrepresentation, breach of warranty or failure to perform any
covenant or agreement of the Company contained in this Agreement or the Company
Certificate; or
(b) any Third Party Expenses incurred by the Company in excess of
$2,000,000.
6.2 Indemnification by the Buyer. The Buyer shall indemnify the
Indemnifying Shareholders in respect of, and hold them harmless against, any and
all Damages incurred or suffered by the Indemnifying Shareholders resulting
from, relating to or constituting any misrepresentation, breach of warranty or
failure to perform any covenant or agreement of the Buyer or the Transitory
Subsidiary contained in this Agreement or the Buyer Certificate.
6.3 Indemnification Claims.
(a) A party entitled, or seeking to assert rights, to indemnification
under this Article VI (an "Indemnified Party") shall give written notification
to the party from whom indemnification is sought (an "Indemnifying Party") of
the commencement of any suit or proceeding relating to a third party claim for
which indemnification pursuant to this Article VI may be sought. Such
notification shall be given within 20 business days after receipt by the
Indemnified Party of notice of such suit or proceeding, and shall describe in
reasonable detail (to the extent known by the Indemnified Party) the facts
constituting the basis for such suit or proceeding and the amount of the claimed
damages; provided, however, that no delay on the part of the Indemnified Party
in notifying the Indemnifying Party shall relieve the Indemnifying Party of any
liability or obligation hereunder except to the extent of any damage or
liability caused by or arising out of such failure. Within 20 days after
delivery of such notification, the Indemnifying Party may, upon written notice
thereof to the Indemnified Party, assume control of the defense of such suit or
proceeding with counsel reasonably satisfactory to the Indemnified Party;
provided that the Indemnifying Party may not assume control of the defense of a
suit or proceeding involving criminal liability or in which equitable relief is
sought against the Indemnified Party. If the Indemnifying Party does not so
assume control of such defense, the Indemnified Party shall control such
defense. The party not controlling such defense (the "Non-controlling Party")
may participate therein at its own expense; provided that if the Indemnifying
Party assumes control of such defense and the Indemnified Party reasonably
concludes that the Indemnifying Party and the Indemnified Party have conflicting
interests or different defenses available with respect to such suit or
proceeding, the reasonable fees and expenses of counsel to the Indemnified Party
shall be considered "Damages" for purposes of this Agreement. The party
controlling such defense (the "Controlling Party") shall keep the Non-
controlling Party advised of the status of such suit or proceeding and the
defense thereof and shall consider in good faith
-33-
<PAGE>
recommendations made by the Non-controlling Party with respect thereto. The
Non-controlling Party shall furnish the Controlling Party with such information
as it may have with respect to such suit or proceeding (including copies of any
summons, complaint or other pleading which may have been served on such party
and any written claim, demand, invoice, billing or other document evidencing or
asserting the same) and shall otherwise cooperate with and assist the
Controlling Party in the defense of such suit or proceeding. The Indemnifying
Party shall not agree to any settlement of, or the entry of any judgment arising
from, any such suit or proceeding without the prior written consent of the
Indemnified Party, which shall not be unreasonably withheld or delayed. The
Indemnified Party shall not agree to any settlement of, or the entry of any
judgment arising from, any such suit or proceeding without the prior written
consent of the Indemnifying Party, which shall not be unreasonably withheld or
delayed.
(b) In order to seek indemnification under this Article VI, an
Indemnified Party shall give written notification (a "Claim Notice") to the
Indemnifying Party which contains (i) a description and the amount (the "Claimed
Amount") of any Damages incurred or reasonably expected to be incurred by the
Indemnified Party, (ii) a statement that the Indemnified Party is entitled to
indemnification under this Article VI for such Damages and a reasonable
explanation of the basis therefor, and (iii) a demand for payment (in the manner
provided in paragraph (c) below) in the amount of such Damages. If the
Indemnified Party is the Buyer, the Indemnifying Party shall deliver a copy of
the Claim Notice to the Escrow Agent. The Claim Notice shall be delivered by the
Indemnified Party as soon as practicable after the Indemnified Party has
knowledge of the related Damages, provided however, that no delay on the part of
the Indemnified Party in delivering such Claim Notice shall relieve the
Indemnifying Party of any liability or obligation hereunder except to the extent
of any damage or liability caused by or arising out of such failure.
(c) Within 20 days after delivery of a Claim Notice in the form
required by Section 6.3(b), the Indemnifying Party shall deliver to the
Indemnified Party a written response (the "Response") in which the Indemnifying
Party shall: (i) agree that the Indemnified Party is entitled to receive all of
the Claimed Amount (in which case the Response shall be accompanied by a payment
by the Indemnifying Party to the Indemnified Party of the Claimed Amount, by
check or by wire transfer; provided that if the Indemnified Party is the Buyer,
then such payment shall not be made by check or wire transfer, and instead the
Indemnifying Party and the Indemnified Party shall deliver to the Escrow Agent,
within three days following the delivery of the Response, a written notice
executed by both parties instructing the Escrow Agent to distribute to the Buyer
such number of Escrow Shares as have an aggregate Value (as defined below) equal
to the Claimed Amount), (ii) agree that the Indemnified Party is entitled to
receive part, but not all, of the Claimed Amount (the "Agreed Amount") (in which
case the Response shall be accompanied by a payment by the Indemnifying Party to
the Indemnified Party of the Agreed Amount, by check or by wire transfer;
provided that if the Indemnified Party is the Buyer, then such payment shall not
be made by check or wire transfer, and instead the Indemnifying Party and the
Indemnified Party shall deliver to the Escrow Agent, within three days following
the delivery of the Response, a written notice executed by both parties
instructing the Escrow Agent to distribute to the Buyer such number of Escrow
Shares as have an aggregate Value equal to the Agreed Amount) or (iii) dispute
that the Indemnified Party is entitled to receive any of the Claimed Amount. If
the Indemnifying Party in the Response disputes its
-34-
<PAGE>
liability for all or part of the Claimed Amount, the Indemnifying Party and the
Indemnified Party shall follow the procedures set forth in Section 6.3(d) for
the resolution of such dispute (a "Dispute"). For purposes of this Article VI,
the "Value" of any Escrow Shares delivered in satisfaction of an indemnity claim
shall be the average closing price for 5 trading days preceding the date of this
Agreement (subject to equitable adjustment in the event of any stock split,
stock dividend, reverse stock split or similar event affecting the Buyer Common
Stock since the date hereof), multiplied by the number of such Escrow Shares.
(d) During the 60-day period following the delivery of a Response that
reflects a Dispute, the Indemnifying Party and the Indemnified Party shall use
good faith efforts to resolve the Dispute. If the Dispute is not resolved within
such 60-day period, the Indemnifying Party and the Indemnified Party shall
discuss in good faith the submission of the Dispute to a mutually acceptable
alternative dispute resolution procedure (which may be non-binding or binding
upon the parties, as they agree in advance) (the "ADR Procedure"). In the event
the Indemnifying Party and the Indemnified Party agree upon an ADR Procedure,
such parties shall, in consultation with the chosen dispute resolution service
(the "ADR Service"), promptly agree upon a format and timetable for the ADR
Procedure, agree upon the rules applicable to the ADR Procedure, and promptly
undertake the ADR Procedure. The provisions of this Section 6.3(d) shall not
obligate the Indemnifying Party and the Indemnified Party to pursue an ADR
Procedure or prevent either such party from pursuing the Dispute in a court of
competent jurisdiction; provided that, if the Indemnifying Party and the
Indemnified Party agree to pursue an ADR Procedure, neither the Indemnifying
Party nor the Indemnified Party may commence litigation or seek other remedies
with respect to the Dispute prior to the completion of such ADR Procedure. Any
ADR Procedure undertaken by the Indemnifying Party and the Indemnified Party
shall be considered a compromise negotiation for purposes of federal and state
rules of evidence, and all statements, offers, opinions and disclosures (whether
written or oral) made in the course of the ADR Procedure by or on behalf of the
Indemnifying Party, the Indemnified Party or the ADR Service shall be treated as
confidential and, where appropriate, as privileged work product. Such
statements, offers, opinions and disclosures shall not be discoverable or
admissible for any purposes in any litigation or other proceeding relating to
the Dispute (provided that this sentence shall not be construed to exclude from
discovery or admission any matter that is otherwise discoverable or admissible).
The fees and expenses of any ADR Service used by the Indemnifying Party and the
Indemnified Party shall be shared equally by the Indemnifying Party and the
Indemnified Party. If the Indemnified Party is the Buyer, the Indemnifying Party
and the Indemnified Party shall deliver to the Escrow Agent, promptly following
the resolution of the Dispute (whether by mutual agreement, pursuant to an ADR
Procedure, as a result of a judicial decision or otherwise), a written notice
executed by both parties instructing the Escrow Agent as to what (if any)
portion of the Escrow Shares shall be distributed to the Buyer and/or the
Indemnifying Shareholders (which notice shall be consistent with the terms of
the resolution of the Dispute).
(e) Notwithstanding the other provisions of this Section 6.3, if a
third party asserts (other than by means of a lawsuit) that an Indemnified Party
is liable to such third party for a monetary or other obligation which may
constitute or result in Damages for which such Indemnified Party may be entitled
to indemnification pursuant to this Article VI, and such Indemnified Party
reasonably determines that it has a valid business reason to fulfill such
-35-
<PAGE>
obligation, then (i) such Indemnified Party shall be entitled to satisfy such
obligation, without prior notice to or consent from the Indemnifying Party, (ii)
such Indemnified Party may subsequently make a claim for indemnification in
accordance with the provisions of this Article VI, and (iii) such Indemnified
Party shall be reimbursed, in accordance with the provisions of this Article VI,
for any such Damages for which it is entitled to indemnification pursuant to
this Article VI (subject to the right of the Indemnifying Party to dispute the
Indemnified Party's entitlement to indemnification, or the amount for which it
is entitled to indemnification (including without limitation to the extent
prejudiced by the actions taken by the Indemnified Party hereunder), under the
terms of this Article VI).
(f) For purposes of this Section 6.3 and the last two sentences of
Section 6.4, (i) if the Indemnifying Shareholders comprise the Indemnifying
Party, any references to the Indemnifying Party (except provisions relating to
an obligation to make or a right to receive any payments provided for in Section
6.3 or Section 6.4) shall be deemed to refer to the Indemnification
Representatives, and (ii) if the Indemnifying Shareholders comprise the
Indemnified Party, any references to the Indemnified Party (except provisions
relating to an obligation to make or a right to receive any payments provided
for in Section 6.3 or Section 6.4) shall be deemed to refer to the
Indemnification Representatives. The Indemnification Representatives shall have
full power and authority on behalf of each Indemnifying Shareholder to take any
and all actions on behalf of, execute any and all instruments on behalf of, and
execute or waive any and all rights of, the Indemnifying Shareholders under this
Article VI. The Indemnification Representatives shall have no liability to any
Indemnifying Shareholder for any action taken or omitted on behalf of the
Indemnifying Shareholders pursuant to this Article VI.
6.4 Survival of Representations and Warranties. All representations and
warranties contained in this Agreement, the Company Certificate or the Buyer
Certificate shall (a) survive the Closing and any investigation at any time made
by or on behalf of an Indemnified Party and (b) shall expire on the date one
year following the Closing Date. If an Indemnified Party delivers to an
Indemnifying Party, before expiration of a representation or warranty, either a
Claim Notice based upon a breach of such representation or warranty, or a notice
that, as a result a legal proceeding instituted by or written claim made by a
third party, the Indemnified Party reasonably expects to incur Damages as a
result of a breach of such representation or warranty (an "Expected Claim
Notice"), then such representation or warranty shall survive until, but only for
purposes of, the resolution of the matter covered by such notice. If the legal
proceeding or written claim with respect to which an Expected Claim Notice has
been given is definitively withdrawn or resolved in favor of the Indemnified
Party, the Indemnified Party shall promptly so notify the Indemnifying Party;
and if the Indemnified Party has delivered a copy of the Expected Claim Notice
to the Escrow Agent and Escrow Shares have been retained in escrow after the
Termination Date (as defined in the Escrow Agreement) with respect to such
Expected Claim Notice, the Indemnifying Party and the Indemnified Party shall
promptly deliver to the Escrow Agent a written notice executed by both parties
instructing the Escrow Agent to distribute such retained Escrow Shares to the
Indemnifying Shareholders in accordance with the terms of the Escrow Agreement.
-36-
<PAGE>
6.5 Limitations.
(a) Notwithstanding anything to the contrary herein, the aggregate
liability of the Indemnifying Shareholders, on the one hand, and the Buyer, on
the other hand, for Damages under this Article VI shall not exceed the value of
the Escrow Shares, except that such limitation shall not apply to limit the
liability of any Indemnifying Shareholder or the Buyer for fraud by such
Indemnifying Shareholder or the Buyer, as the case may be. For purposes solely
of this Article VI, all representations and warranties of the Company in Article
II (other than Sections 2.6, 2.7, 2.13(a), 2.14(a), 2.20(a), 2.29 and 2.30) and
all representations and warranties of the Buyer and the Transitory Subsidiary
(other than Sections 3.5 (as to the penultimate sentence only), 3.8, 3.9 and
3.10) shall be construed as if the term "material" and any reference to "Company
Material Adverse Effect" and "Buyer Material Adverse Effect" (and variations
thereof) were omitted from such representations and warranties, except to the
extent such references qualify the requirements of the Buyer to list specified
agreements, documents or permits on the Disclosure Schedule.
(b) Neither the Indemnifying Shareholders on the one hand, nor the
Buyer on the other, shall be liable for Damages incurred by the other under this
Article VI unless and until such Damages, together with all other Damages
incurred by such other party, exceed $250,000, in which case such Indemnifying
Party shall only be liable for such Damages in excess of $250,000; provided,
that the foregoing limitation shall not apply with respect to claims made by the
Buyer pursuant to Section 6.1(b).
(c) After the Closing, the rights of the Indemnified Parties under this
Article VI and the Escrow Agreement shall be the exclusive remedy of the
Indemnified Parties with respect to claims resulting from or relating to any
misrepresentation, breach of warranty or failure to perform any covenant or
agreement contained in this Agreement, except that such limitation shall not
apply to limit the liability of any Indemnifying Shareholder or the Buyer for
fraud by such Indemnifying Shareholder or the Buyer, as the case may be.
(d) No Indemnifying Shareholder shall have any right of contribution
against the Company or the Surviving Corporation with respect to any breach by
the Company of any of its representations, warranties, covenants or agreements.
ARTICLE VII.
TERMINATION
7.1 Termination of Agreement. The Parties may terminate this Agreement
prior to the Effective Time (whether before or after Requisite Shareholder
Approval), as provided below:
(a) the Parties may terminate this Agreement by mutual written consent;
(b) the Buyer may terminate this Agreement by giving written notice to
the Company in the event the Company is in breach of any representation,
warranty or covenant contained in this Agreement, and such breach, individually
or in combination with any other such breach, (i) would cause the conditions set
forth in clauses (c) or (d) of Section 5.2 not to be
-37-
<PAGE>
satisfied and (ii) is not cured within 20 days following delivery by the Buyer
to the Company of written notice of such breach;
(c) the Company may terminate this Agreement by giving written notice
to the Buyer in the event the Buyer or the Transitory Subsidiary is in breach of
any representation, warranty or covenant contained in this Agreement, and such
breach, individually or in combination with any other such breach, (i) would
cause the conditions set forth in clauses (c) or (d) of Section 5.3 not to be
satisfied and (ii) is not cured within 20 days following delivery by the Company
to the Buyer of written notice of such breach;
(d) any Party may terminate this Agreement by giving written notice to
the other Parties at any time after the Company Shareholders have voted on
whether to approve this Agreement and the Merger in the event this Agreement and
the Merger failed to receive the Requisite Shareholder Approval;
(e) the Buyer may terminate this Agreement by giving written notice to
the Company if the Closing shall not have occurred on or before April 30, 2000
by reason of the failure of any condition precedent under Section 5.1 or 5.2
hereof (unless the failure results primarily from a breach by the Buyer or the
Transitory Subsidiary of any representation, warranty or covenant contained in
this Agreement); or
(f) the Company may terminate this Agreement by giving written notice
to the Buyer and the Transitory Subsidiary if the Closing shall not have
occurred on or before April 30, 2000 by reason of the failure of any condition
precedent under Section 5.1 or 5.3 hereof (unless the failure results primarily
from a breach by the Company of any representation, warranty or covenant
contained in this Agreement).
7.2 Effect of Termination. If any Party terminates this Agreement pursuant
to Section 7.1, all obligations of the Parties hereunder shall terminate without
any liability of any Party to any other Party (except for any liability of any
Party for willful breaches of this Agreement).
ARTICLE VIII.
REGISTRATION RIGHTS
8.1 Certain Definitions. As used in this Article VIII, the following terms
shall have the following respective meanings:
(a) "Resale Holder" means: (i) a Company Shareholder to whom shares of
Buyer Common Stock are issued pursuant to this Agreement and the Merger, or (ii)
the Escrow Agent (as defined in the Escrow Agreement), or (iii) a transferee to
whom registration rights granted under this Article VIII are assigned pursuant
to Section 8.7 hereof.
(b) "Registrable Securities" means for any Resale Holder the number of
shares of Buyer Common Stock issued to such Resale Holder pursuant to this
Agreement and the Merger, and for all Resale Holders the sum of the Registrable
Securities held by them; provided, however, that such shares of Buyer Common
Stock held by a particular Resale Holder shall
-38-
<PAGE>
cease to be Registrable Securities on the earlier of (i) first anniversary of
the Effective Time or (ii) such time as such Resale Holder is able to sell such
shares (including all Registrable Securities held by Affiliates of such Resale
Holder) in their entirety within a single 90 day period under Rule 144 of the
Securities Act.
8.2 Resale Holder Registration.
(a) The Buyer shall use its best efforts to cause the Registrable
Securities then held by each Resale Holder to be registered under the Securities
Act so as to permit the sale thereof as set forth in this Section 8.2. The Buyer
shall prepare and file with the SEC (i) if a registration statement for an
Underwritten Sale (as defined in Section 8.3(a) below) has been filed on or
before March 15, 2000, on or before April 15, 2000 or (ii) otherwise, on or
before March 31, 2000, a registration statement in such form as is then
available under the Securities Act covering the Registrable Securities of all
Resale Holders not previously sold pursuant to Section 8.3 hereof (the "Shelf
Registration Statement"); provided, however, that the obligation of Buyer to use
its reasonable best efforts to cause the registration of the Registrable
Securities to be sold pursuant to the Shelf Registration Statement shall not
include any obligation of the Buyer to request acceleration of such Shelf
Registration Statement prior to May 15, 2000; and provided, further that each
Resale Holder shall provide all such information and materials and take all such
action as may be required in order to permit the Buyer to comply with all
applicable requirements of the Securities Act and the Exchange Act and to obtain
any desired acceleration of the effective date of such Shelf Registration
Statement, such provision of information and materials to be a condition
precedent to the obligations of the Buyer pursuant to this Article VIII to
register the Registrable Securities held by such Resale Holder. The offerings
made pursuant to the Shelf Registration Statement shall not be underwritten and
the Company and each Resale Holder acknowledges that other holders of Buyer
Common Stock may exercise rights to have the Shelf Registration Statement cover
their resale of shares of Buyer Common Stock.
(b) The Buyer shall (i) prepare and file with the Commission the Shelf
Registration Statement in accordance with Section 8.2 hereof with respect to the
Registrable Securities and shall use its best efforts to cause such registration
statements to become effective by May 15, 2000 and to keep such registration
statement effective until the sooner to occur of (A) the date on which all
Registrable Securities included within such registration statements have been
sold or (B) the first date following the Effective Time as to which no
Registrable Securities exist as a result of the proviso to Section 8.1(b); (ii)
prepare and file with the Commission such amendments to such registration
statements and amendments or supplements to the prospectuses used in connection
therewith as may be necessary to comply with the provisions of the Securities
Act with respect to the sale or other disposition of all securities registered
by such registration statement (including such amendments as may be necessary to
reflect different or additional selling stockholders as a result of any
distribution of Registrable Securities by the Resale Holders to the beneficial
owners of such Registrable Securities); (iii) furnish to each Resale Holder such
number of copies of any prospectus (including any preliminary prospectus and any
amended, combined or supplemented prospectus) in conformity with the
requirements of the Securities Act, and such other documents, as each Resale
Holder may reasonably request in order to effect the offering and sale of the
Registrable Securities to be offered and sold, but only while the Buyer shall be
required under the provisions hereof to cause the
-39-
<PAGE>
registration statements to remain effective; (iv) use its reasonable best
efforts to register or qualify the Registrable Securities covered by such
registration statements under the securities or blue sky laws of such
jurisdictions as each Resale Holder shall reasonably request (provided that the
Buyer shall not be required in connection therewith or as a condition thereto to
qualify to do business or to file a general consent to service of process in any
such jurisdiction where it has not been qualified), and do any and all other
acts or things which may be necessary or advisable to enable each Resale Holder
to consummate the public sale or other disposition of such Registrable
Securities in such jurisdictions; (v) notify each Resale Holder, promptly after
it shall receive notice thereof, of the date and time the registration
statements and each post-effective amendment to such registration statements
become effective or a supplement to any prospectus forming a part of such
registration statements has been filed; and (vi) promptly reissue, or promptly
authorize and instruct its transfer agent to reissue, unlegended certificates at
the request of any Resale Holder thereof upon such Resale Holder's delivery of
original certificates representing Registrable Securities tendered for sale
pursuant to such effective registration statements, and to promptly respond to
broker's inquiries made of the Buyer in connection with such sales, in each case
with a view to reasonably assisting the Resale Holder to complete such sale
during such period of effectiveness.
(c) If the Shelf Registration Statement shall not have been declared
effective on or before May 15, 2000 as a result of the Buyer's failure to use
best efforts consistent with the provisions of Section 8.2 (b) (but a good faith
dispute by the Buyer of disclosure requested by the SEC for a period not
exceeding 45 days from the date such SEC request has been received from the SEC
shall not be deemed a failure to use best efforts by the Buyer), then the Buyer
shall make a Make up Payment (as defined below) to the former Company
Shareholders. If the Shelf Registration Statement shall not have been declared
effective on or before June 30, 2000 for any reason other than the Buyer's
failure to use best efforts consistent with the provisions of Section 8.2(b)
(but a good faith dispute by the Buyer of disclosure requested by the SEC for a
period not exceeding 45 days from the date such SEC request has been received
from the SEC shall not be deemed a failure to use best efforts by the Buyer),
then the Buyer shall make a Make Up Payment to the former Company Shareholders.
For purposes of this Section 8.2(c), a "Make Up Payment" shall equal the lesser
of (i) the product of (x) 366,250 (732,500 following the effect of the Buyer
Stock Split) and (y) the Buyer Common Stock Differential (as defined below), and
(ii) $10,000,000. For purposes of the first sentence of this Section 8.2(c), the
"Buyer Common Stock Differential" shall equal the difference, if any, between
(x) the average closing sale price of the Buyer Common Stock as reported on the
Nasdaq National Market for the ten consecutive trading days prior to May 15,
2000 and (y) the average closing sale price of the Buyer Common Stock as
reported on the Nasdaq National Market for the ten consecutive trading days
prior to the effective date of the Shelf Registration Statement (or June 1, 2000
if the Shelf Registration Statement shall not be declared effective on or before
June 1, 2000). For purposes of the second sentence of this Section 8.2(c), the
"Buyer Common Stock Differential" shall equal the difference, if any between (x)
the average closing sale price of the Buyer Common Stock as reported on the
Nasdaq National Market for all trading days from May 15, 2000 to June 30, 2000
(inclusive) and (y) the average closing sale price of the Buyer Common Stock as
reported on the Nasdaq National Market for all trading days from July 1, 2000 to
the effective date of the Shelf Registration Statement (inclusive) (or July 31,
2000 if the Shelf Registration Statement shall not be declared effective on or
before July 31, 2000). The Buyer shall pay the Make Up Payment
-40-
<PAGE>
within 10 days of it becoming due and calculable, pro rata to the former Company
Shareholders based upon the ownership of Buyer Common Stock received in the
Merger pursuant to Section 1.5 and may elect to pay any Make Up Payment in cash
or in shares of Buyer Common Stock (valued for these purposes at the average
price determined pursuant to clause (y) of the applicable definition of Buyer
Common Stock Differential above).
(d) Notwithstanding the foregoing obligations of the Buyer under this
Section 8.2, if (i) the Resale Holders are given the opportunity to include in
the aggregate at least 366,250 (732,500 following the effect of the Buyer Stock
Split) Registrable Securities and (ii) any Resale Holder that exercises its
rights under Section 8.3 below is permitted to include at least 33% of its
Registrable Securities, in an Underwritten Sale pursuant to a registration
statement that is declared effective on or before April 30, 2000, then the Buyer
may determine the date to file the Shelf Registration Statement pursuant to
Section 8.1(a) in its sole discretion and the Buyer shall not be required to use
its best efforts to have the Shelf Registration Statement Effective by May 15,
2000, but instead the Buyer shall be obligated to have the Shelf Registration
Statement declared effective on or before the date on which the contractual
prohibitions on the sale of Buyer Common Stock imposed by the underwriters of
the Underwritten Sale on holders of Buyer Common Stock selling shares in such
Underwritten Sale, officers and directors of the Buyer or certain holders of 5%
or more of the outstanding shares of Buyer Common Stock terminate.
8.3 Company Registration.
(a) The Buyer may determine to provide for the firmly underwritten sale
of Buyer Common Stock for its own account and/or the account of other
stockholders, and in connection with such determination, file with the SEC a
registration statement to register such Buyer Common Stock (an "Underwritten
Sale"). The Buyer shall give prompt written notice to the Resale Holders of the
filing of a registration statement relating to any Underwritten Sale where such
filing is made on or before April 15, 2000 and any Resale Holder may participate
in such Underwritten Sale (and any related qualification under blue sky laws or
other related compliance) by providing written notice to the Buyer within 10
calendar days of the delivery of the foregoing notice from the Buyer. If in the
good faith judgment of the managing underwriter of the Underwritten Sale, the
inclusion of all or any portion of the Registrable Shares requested to be
included in the Underwritten Sale would reduce the number of shares to be
offered by the Buyer or interfere with the successful marketing of the
securities offered by the Buyer, the number of Registrable Shares otherwise to
be included by Resale Holders in the Underwritten Sale may be reduced pro rata
or excluded altogether; provided, that the Registrable Shares must be treated in
the same manner as shares of Buyer Common Stock held all other selling security
holders. To facilitate the allocation of shares in accordance with the above
provision, the Buyer or the underwriters may round the number of shares
allocated to any Resale Holder to the nearest 100 shares.
(b) All Resale Holders distributing Registrable Securities through the
Underwritten Sale shall (together with the Buyer and the other holders
distributing their securities through the Underwritten Sale) enter into an
underwriting agreement in customary form with the managing underwriter. The
underwriter(s) for an Underwritten Sale shall be
-41-
<PAGE>
selected by the Buyer in its sole discretion. If any Resale Holder disapproves
of the terms of the Underwritten Sale, he or she may elect to withdraw therefrom
by written notice to the Buyer and the managing underwriter.
8.4 Suspension of Prospectus. The Buyer may restrict disposition of
Registrable Securities pursuant to the Shelf Registration Statement, and a
Resale Holder will not be able to dispose of such Registrable Securities
pursuant to the Shelf Registration Statement, if the Buyer shall have delivered
a notice in writing to such Resale Holder stating that a delay in the
disposition of such Registrable Securities is necessary because the Buyer, in
its reasonable judgment, has determined in good faith that such sales would
require public disclosure by the Buyer of material nonpublic information that is
not included in such registration statement and that immediate disclosure of
such information would be seriously detrimental to the Buyer. In the event of
the delivery of the notice described above by the Buyer, the Buyer shall use its
reasonable best efforts to amend such registration statement and/or amend or
supplement the related prospectus if necessary and to take all other actions
necessary to allow the proposed sale to take place as promptly as possible,
subject, however, to the right of the Buyer to delay further sales of
Registrable Securities until the conditions or circumstances referred to in the
notice have ceased to exist or have been disclosed. Such right to delay sales of
Registrable Securities shall not exceed 90 days in the aggregate and no longer
than 30 days as to any single delay (any such period of delay herein referred to
as a "blackout period"); after the Shelf Registration Statement is declared
effective, no blackout period may be imposed during the 15-day period following
the date of effectiveness or the termination date of the last blackout period.
In addition, each Resale Holder who becomes an employee of the Buyer shall be
subject to the trading restrictions related to the release of quarterly results
of operations in the same manner as other similar employees of the Buyer.
8.5 Expenses. All of the out-of-pocket expenses incurred in connection with
any registration of Registrable Securities pursuant to this Article VIII,
including, without limitation, all SEC, Nasdaq National Market and blue sky
registration and filing fees, printing expenses, transfer agents' and
registrars' fees, and the reasonable fees and disbursements of the Buyer's
outside counsel and independent accountants shall be paid by the Buyer. The
Buyer shall not be responsible to pay any legal fees for any Resale Holder or
any selling expenses of any Resale Holder (including, without limitation, any
broker's fees or commissions, including underwriter commissions).
8.6 Indemnification. In the event of any offering registered pursuant to
this Article VIII:
(a) The Buyer will indemnify each Resale Holder, each of its officers,
directors and partners and such Resale Holder's legal counsel and independent
accountants, and each person controlling such Resale Holder within the meaning
of Section 15 of the Securities Act, with respect to which registration,
qualification or compliance has been effected pursuant to this Article VIII, and
each underwriter, if any, and each person who controls any underwriter within
the meaning of Section 15 of the Securities Act, against all expenses, claims,
losses, damages and liabilities (or actions in respect thereof), including any
of the foregoing incurred in settlement of any litigation, commenced or
threatened, arising out of or based on any untrue
-42-
<PAGE>
statement (or alleged untrue statement) of a material fact contained in any
registration statement, prospectus, offering circular or other document, or any
amendment or supplement thereto, incident to any such registration,
qualification or compliance, or based on any omission (or alleged omission) to
state therein a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances in which they are made,
not misleading, or any violation by the Buyer of any rule or regulation
promulgated under the Securities Act, or state securities laws, or common law,
applicable to the Buyer in connection with any such registration, qualification
or compliance, and will reimburse (and advance the same to) each such Resale
Holder, each of its officers, directors and partners and such Resale Holder's
legal counsel and independent accountants, and each person controlling such
Resale Holder, each such underwriter and each person who controls any such
underwriter, for any legal and any other expenses reasonably incurred in
connection with investigating, preparing or defending any such claim, loss,
damage, liability or action, provided that the Buyer will not be liable in any
such case to the extent that any such claim, loss, damage, liability or expense
arises out of or is based in any untrue statement or omission or alleged untrue
statement or omission, made in reliance upon and in conformity with written
information furnished to the Buyer in an instrument duly executed by such Resale
Holder or underwriter and stated to be specifically for use therein; provided,
however, that in the case of the Shelf Registration Statement the foregoing is
subject to the condition that, insofar as it relates to any such untrue
statement, alleged untrue statement, omission or alleged omission made in a
preliminary prospectus on file with the Commission at the time the registration
statement becomes effective or the amended prospectus is filed with the
Commission pursuant to Rule 424(b) (the "Final Prospectus"), the provisions
hereof shall not inure to the benefit of any Resale Holder, if the Buyer had
complied with its obligations under Section 8.2(b)(iii) with respect to such
Final Prospectus and a copy of the Final Prospectus was not furnished to the
person asserting the loss, liability, claim or damage at or prior to the time
such action is required by the Securities Act, and if the Final Prospectus would
have cured the defect giving rise to the loss, liability, claim or damage.
(b) Each Resale Holder will, if Registrable Securities held by such
Resale Holder are included in the securities as to which such registration,
qualification or compliance is being effected, indemnify the Buyer, each of its
directors and officers and its legal counsel and independent accountants, each
underwriter, if any, of the Buyer's securities covered by such a registration
statement, each person who controls the Buyer or such underwriter within the
meaning of Section 15 of the Securities Act, and each other such Resale Holder,
each of its officers and directors and each person controlling such Resale
Holder within the meaning of Section 15 of the Securities Act, against all
claims, losses, damages and liabilities (or actions in respect thereof) arising
out of or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any such registration statement, prospectus, offering
circular or other document, or any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, and will reimburse the Buyer, such Resale
Holders, such directors, officers, legal counsel, independent accountants,
underwriters or control persons for any legal or any other expenses reasonably
incurred in connection with investigating or defending any such claim, loss,
damage, liability or action, in each case to the extent, but only to the extent,
that such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering circular
or other document in reliance upon and in conformity with written information
-43-
<PAGE>
furnished to the Buyer by an instrument duly executed by such Resale Holder and
stated to be specifically for use therein; provided, however, that the
obligations of such Resale Holders hereunder shall be limited to an amount equal
to the net proceeds received by each such Resale Holder of Registrable
Securities actually sold as contemplated herein.
(c) Each party entitled to indemnification under this Section 8.6 (the
"Securities Indemnified Party") shall give notice to the party required to
provide indemnification (the "Securities Indemnifying Party") promptly after
such Securities Indemnified Party has written notice of any claim as to which
indemnity may be sought, and shall permit the Securities Indemnifying Party to
assume the defense of any such claim or any litigation resulting therefrom,
provided that counsel for the Securities Indemnifying Party, who shall conduct
the defense of such claim or litigation, shall be approved by the Securities
Indemnified Party (whose approval shall not be unreasonably withheld), and the
Securities Indemnified Party may participate in such defense at such party's
expense, and provided further that the failure of any Securities Indemnified
Party to give notice as provided herein shall not relieve the Securities
Indemnifying Party of its obligations under this Article VIII; provided that if
the Securities Indemnified Party has claims against the Securities Indemnifying
Party or otherwise has claims or defenses different from or in addition to those
of the Securities Indemnifying Party, the Securities Indemnified Party may
retain counsel of its own choice for all Resale Holders, and the reasonable fees
and expenses of such counsel shall be paid by the Securities Indemnifying Party.
No Securities Indemnifying Party, in the defense of any such claim or
litigation, shall, except with the consent of each Securities Indemnified Party,
consent to entry of any judgment or enter any settlement which does not include
as an unconditional term thereof the giving by the claimant or plaintiff to the
Securities Indemnified Party of a release from all liability in respect to such
claim or litigation.
(d) The obligations of the Buyer and each Resale Holder under this
Section 8.6 shall survive the completion of any offering of Registrable
Securities in a registration statement under this Article VIII and otherwise.
(e) To the extent the provisions of this Section 8.6 are inconsistent
with or conflict with the terms of any underwriting, indemnification, selling or
similar agreement entered into by a Resale Holder in connection with the offer
and sale of Registrable Securities pursuant to a registration effected pursuant
to this Article VIII, the terms of such agreement shall govern and shall
supersede the provisions of this Article VIII.
8.7 Limitation on Assignment of Registration Rights. The rights to cause
the Buyer to register Registrable Securities pursuant to this Article VIII may
not be assigned by a Resale Holder unless such a transfer is to stockholders,
partners or retired partners, or members or retired members of a Resale Holder
(including spouses and ancestors, lineal descendants, and siblings of such
stockholders, partners, members or spouses who acquire Registrable Securities by
right, will, or intestate succession). Prior to a permitted transfer of
registration rights under this Article VIII, a Resale Holder must furnish the
Buyer with written notice of the name and address of such transferee and the
Registrable Securities with respect to which such registration rights are being
assigned and a copy of a duly executed written instrument in form reasonably
satisfactory to the Buyer by which such transferee assumes all of the
obligations and liabilities of
-44-
<PAGE>
its transferor hereunder and agrees itself to be bound hereby. No transfer of
registration rights under this Article VIII shall be permitted if immediately
following such transfer the disposition of such Registrable Securities by the
transferee is not restricted under the Securities Act; provided that the Buyer
shall have provided such transferee with certificates representing such
Registrable Securities free of any transfer restrictions and the Buyer shall
have instructed the transfer agent for such Registrable Securities to remove any
stop transfer or other instructions.
ARTICLE IX.
DEFINITIONS
For purposes of this Agreement, each of the following defined terms is
defined in the Section of this Agreement indicated below.
Defined Term Section
------------ -------
ADR Procedure 6.3(d)
ADR Service 6.3(d)
Affiliate 2.15(a)(viii)
Affiliate Agreement 4.9
Agreed Amount 6.3(c)
Buyer Introduction
Buyer Certificate 5.3(f)
Buyer Common Stock 1.5(a)
Buyer Common Stock Differential 8.2(c)
Buyer Material Adverse Effect 3.1
Buyer Reports 3.5
Buyer Stock Split 1.5(b)
CERCLA 2.22(a)
Certificates 1.7
Certificate of Merger 1.1
Claim Notice 6.3(b)
Claimed Amount 6.3(b)
Closing 1.2
Closing Date 1.2
Code 1.8(a)
Common Shares 1.5(a)
Company Introduction
Company Certificate 5.2(f)
Company Intellectual Property 2.13(a)
Company Material Adverse Effect 2.1
Company Meeting 2.29
Company Shares 1.5(a)
Company Shareholders 1.5(b)
Controlling Party 6.3(a)
Conversion Ratio 1.5(b)
Customer Deliverables 2.13(a)
-45-
<PAGE>
Damages 6.1
Disclosure Schedule Article II
Dispute 6.3(c)
Dissenting Shares 1.6(a)
Effective Time 1.1
Employee Benefit Plan 2.21(a)
Environmental Law 2.22(a)
ERISA 2.21(a)
Escrow Agreement 1.3(f)
Escrow Agent 1.3(f)
Escrow Shares 1.5(b)
Expected Claim Notice 6.4
Exchange Act 2.15(a)(viii)
Exchange Agent 1.13(a)
Final Prospectus 8.6(a)
Financial Statements 2.6
GAAP 2.6
Governmental Entity 2.4
Indemnification Representatives 1.3(f)
Indemnified Party 6.3(a)
Indemnifying Party 6.3(a)
Indemnifying Shareholders 6.1
Initial Shares 1.5(b)
Intellectual Property 2.13(a)
Internal Systems 2.13(a)
Legal Proceeding 2.18
Make Up Payment 8.2(c)
Material Adverse Effect 5.2(c)
Materials of Environmental Concern 2.22(b)
Merger 1.1
Merger Shares 1.5(b)
Most Recent Balance Sheet 2.8
Most Recent Balance Sheet Date 2.6
Non-controlling Party 6.3(a)
Option Plan 1.8(a)
Options 1.8(a)
Ordinary Course of Business 2.4
Parties Introduction
Permits 2.25
Preferred Shares 1.5(a)
Proxy Statement 2.29
Reasonable Best Efforts 4.1
Resale Holder 8.1(a)
Registrable Securities 8.1(b)
Response 6.3(c)
-46-
<PAGE>
Retention Options 4.12
Requisite Shareholder Approval 2.3
SEC 3.5
Securities Act 2.2
Securities Indemnified Party 8.6(c)
Securities Indemnifying Party 8.6(c)
Security Interest 2.4
Series A Shares 1.5(a)
Series B Shares 1.5(a)
Shelf Registration Statement 8.2(a)
Software 2.13(e)
SVB Warrant 1.8(d)
Surviving Corporation 1.1
Taxes 2.9(a)(i)
Tax Returns 2.9(a)(ii)
Third Party Expenses 4.8
Transitory Subsidiary Introduction
Underwritten Sale 8.3(a)
Value 6.3(c)
Warrants 1.8(d)
Year 2000 Compliant 2.14(c)
ARTICLE X.
MISCELLANEOUS
10.1 Press Releases and Announcements. No Party shall issue any press
release or public disclosure relating to the subject matter of this Agreement
without the prior written approval of the other Parties; provided, however, that
the Buyer may make any public disclosure required by applicable law, regulation
or stock market regulation (in which case the Buyer shall use reasonable efforts
to advise the Company prior to making the disclosure).
10.2 No Third Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any person other than the Parties and their respective
successors and permitted assigns; provided, however, that the provisions in
Article I concerning issuance of the Merger Shares are intended for the benefit
of the Company Shareholders.
10.3 Entire Agreement. This Agreement (including the documents referred to
herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements or representations by or among the Parties,
written or oral, with respect to the subject matter hereof; provided that the
letter agreement dated February 2, 2000 between the Buyer and the Company shall
remain in effect in accordance with its terms.
10.4 Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective successors
and permitted assigns. No Party may assign either this Agreement or any of its
rights, interests or obligations hereunder
-47-
<PAGE>
without the prior written approval of the other Parties; provided that the
Transitory Subsidiary may assign its rights, interests and obligations hereunder
to an Affiliate of the Buyer.
10.5 Counterparts; Facsimile Signature. This Agreement may be executed in
two or more counterparts, each of which shall be deemed an original but all of
which together shall constitute one and the same instrument. This Agreement may
be executed by facsimile signature.
10.6 Headings. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
10.7 Notices. All notices, requests, demands, claims, and other
communications hereunder shall be in writing. Any notice, request, demand, claim
or other communication hereunder shall be deemed duly delivered four business
days after it is sent by registered or certified mail, return receipt requested,
postage prepaid, or one business day after it is sent for next-day delivery via
a reputable nationwide overnight courier service, in each case to the intended
recipient as set forth below:
If to the Company: Copy to:
------------------ --------
TriVida Corporation Fenwick & West LLP
3524 Hayden Avenue Two Palo Alto Square
Culver City, CA 90232 Palo Alto, CA 94306
Attn: Mr. Alex D. Jacobson Attn.: William R. Schreiber, Esq.
President and CEO (650) 494-1417
(310) 736-3701
If to the Buyer or
------------------
the Transitory Subsidiary: Copy to:
-------------------------- --------
Be Free, Inc. Hale and Dorr LLP
154 Crane Meadow Road, Suite 100 60 State Street
Marlborough, MA 01752 Boston, MA 02109
Attn.: Mr. Gordon B. Hoffstein Attn: Jay E. Bothwick, Esq.
President and CEO (617) 526-5000
(508) 357-8880
Any Party may give any notice, request, demand, claim or other communication
hereunder using any other means (including personal delivery, expedited courier,
messenger service, telecopy, telex, ordinary mail or electronic mail), but no
such notice, request, demand, claim or other communication shall be deemed to
have been duly given unless and until it actually is received by the party for
whom it is intended. Any Party may change the address to which notices,
requests, demands, claims, and other communications hereunder are to be
delivered by giving the other Parties notice in the manner herein set forth.
-48-
<PAGE>
10.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the internal laws of the Commonwealth of Massachusetts without
giving effect to any choice or conflict of law provision or rule (whether of the
Commonwealth of Massachusetts or any other jurisdiction) that would cause the
application of laws of any jurisdictions other than those of the Commonwealth of
Massachusetts.
10.9 Amendments and Waivers. The Parties may mutually amend any provision
of this Agreement at any time prior to the Effective Time. No amendment of any
provision of this Agreement shall be valid unless the same shall be in writing
and signed by all of the Parties. No waiver of any right or remedy hereunder
shall be valid unless the same shall be in writing and signed by the Party
giving such waiver. No waiver by any Party with respect to any default,
misrepresentation or breach of warranty or covenant hereunder shall be deemed to
extend to any prior or subsequent default, misrepresentation or breach of
warranty or covenant hereunder or affect in any way any rights arising by virtue
of any prior or subsequent such occurrence.
10.10 Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction. If the final judgment of a court of
competent jurisdiction declares that any term or provision hereof is invalid or
unenforceable, the Parties agree that the court making the determination of
invalidity or unenforceability shall have the power to limit the term or
provision, to delete specific words or phrases, or to replace any invalid or
unenforceable term or provision with a term or provision that is valid and
enforceable and that comes closest to expressing the intention of the invalid or
unenforceable term or provision, and this Agreement shall be enforceable as so
modified.
10.11 Construction.
(a) The language used in this Agreement shall be deemed to be the
language chosen by the Parties to express their mutual intent, and no rule of
strict construction shall be applied against any Party.
(b) Any reference to any federal, state, local or foreign statute or
law shall be deemed also to refer to all rules and regulations promulgated
thereunder, unless the context requires otherwise.
[THE NEXT PAGE IS THE SIGNATURE PAGE]
-49-
<PAGE>
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the date
first above written.
BE FREE, INC.
By: /s/ Gordon B. Hoffstein
--------------------------------
CYRANO ACQUISITION CORP.
By: /s/ Gordon B. Hoffstein
--------------------------------
TRIVIDA CORPORATION
By: /s/ Alex D. Jacobson
--------------------------------
-50-
<PAGE>
EXHIBIT 5
[date]
Be Free, Inc.
154 Crane Meadow Road
Suite 100
Marlborough, MA 01752
Re: Registration Statement on Form S-1 for Be Free Common Stock
-----------------------------------------------------------
Ladies and Gentlemen:
This opinion is furnished to you in connection with a Registration
Statement on Form S-1 (File No. _________________) (the "Registration
Statement") filed with the Securities and Exchange Commission (the "Commission")
under the Securities Act of 1933, as amended (the "Securities Act"), for the
registration of an aggregate of ________________ shares of Common Stock, $0.01
par value per share (the "Shares"), of Be Free, Inc., a Delaware corporation
(the "Company"), of which up to __________ Shares (including _________ Shares
issuable upon exercise of an over-allotment option granted by the Company (the
"Over-Allotment")) will be issued and sold by the Company.
The Shares are to be sold by the Company pursuant to an underwriting
agreement (the "Underwriting Agreement") to be entered into by and among the
Company and ____________________, as representatives of the several underwriters
named in the Underwriting Agreement, the form of which has been filed as Exhibit
1 to the Registration Statement.
We are acting as counsel for the Company in connection with the sale by the
Company of the Shares. We have examined signed copies of the Registration
Statement as filed with the Commission. We have also examined and relied upon
the Underwriting Agreement, minutes of meetings of the stockholders and the
Board of Directors of the Company as provided to us by the Company, stock record
books of the Company as provided to us by the Company, the Certificate of
Incorporation and By-Laws of the Company, each as restated and/or amended to
date, and such other documents as we have deemed necessary for purposes of
rendering the opinions hereinafter set forth.
In our examination of the foregoing documents, we have assumed the
genuineness of all signatures, the authenticity of all documents submitted to us
as originals, the conformity to original documents of all documents submitted to
us as copies, the authenticity of the originals of such latter documents and the
legal competence of all signatories to such documents.
We assume that the appropriate action will be taken, prior to the offer and
sale of the Shares in accordance with the Underwriting Agreement, to register
and qualify the Shares for sale under all applicable state securities or "blue
sky" laws.
We express no opinion herein as to the laws of any state or jurisdiction
other than the state laws of the Commonwealth of Massachusetts, the Delaware
General Corporation Law statute and the federal laws of the United States of
America. To the extent that any other laws govern the matters as to which we are
opining herein, we have assumed that such laws are identical to the state laws
of the Commonwealth of Massachusetts, and we are expressing no opinion herein as
to whether such assumption is reasonable or correct.
<PAGE>
Based upon and subject to the foregoing, we are of the opinion that the
Shares to be issued and sold by the Company have been duly authorized for
issuance and, when such Shares are issued and paid for in accordance with the
terms and conditions of the Underwriting Agreement, such Shares will be validly
issued, fully paid and nonassessable.
It is understood that this opinion is to be used only in connection with
the offer and sale of the Shares while the Registration Statement is in effect.
Please note that we are opining only as to the matters expressly set forth
herein, and no opinion should be inferred as to any other matters. This opinion
is based upon currently existing statutes, rules, regulations and judicial
decisions, and we disclaim any obligation to advise you of any change in any of
these sources of law or subsequent legal or factual developments which might
affect any matters or opinions set forth herein.
We hereby consent to the filing of this opinion with the Commission as an
exhibit to the Registration Statement in accordance with the requirements of
Item 601(b)(5) of Regulation S-K under the Securities Act and to the use of our
name therein and in the related Prospectus under the caption "Legal Matters." In
giving such consent, we do not hereby admit that we are in the category of
persons whose consent is required under Section 7 of the Securities Act or the
rules and regulations of the Commission.
Very truly yours,
HALE AND DORR LLP
- 2 -
<PAGE>
Exhibit 21
Subsidiaries of the Registrant
FOI, Inc., a Delaware corporation.
PCX Information Systems, Inc., a Pennsylvania corporation.
TriVida Corporation, a California corporation.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of
our report dated February 8, 2000, except for Footnote N which is dated
February 29, 2000 relating to the consolidated financial statements of Be Free,
Inc. and its subsidiaries, which appears in such Registration Statement. We
also consent to the references to us under the headings "Experts" and "Selected
Financial Data" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 7, 2000
<PAGE>
Exhibit 23.2
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated October 15, 1999, with respect to the financial
statements of TriVida Corporation (a Development Stage Company) included in the
Registration Statement on Form S-1 and related Prospectus of Be Free, Inc. for
the registration of 5,175,000 shares of its common stock.
/s/ Ernst & Young LLP
Los Angeles, California
March 6, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM REGISTRATION
STATEMENT FORM S-1 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 58,975,906
<SECURITIES> 12,761,659
<RECEIVABLES> 1,425,013
<ALLOWANCES> 96,607
<INVENTORY> 0
<CURRENT-ASSETS> 74,348,288
<PP&E> 9,446,627
<DEPRECIATION> 1,479,759
<TOTAL-ASSETS> 90,836,844
<CURRENT-LIABILITIES> 5,768,468
<BONDS> 0
0
0
<COMMON> 280,882
<OTHER-SE> 82,280,137
<TOTAL-LIABILITY-AND-EQUITY> 90,836,844
<SALES> 5,328,675
<TOTAL-REVENUES> 5,328,675
<CGS> 844,838
<TOTAL-COSTS> 23,180,808
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 944,660
<INCOME-PRETAX> (17,504,412)
<INCOME-TAX> 0
<INCOME-CONTINUING> (17,504,412)
<DISCONTINUED> 0
<EXTRAORDINARY> 330,000
<CHANGES> 0
<NET-INCOME> (19,351,450)
<EPS-BASIC> (2.04)
<EPS-DILUTED> (2.04)
</TABLE>
