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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For Fiscal Year Ended December 31, 1999
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File 000-27271
Be Free, Inc.
(Exact name of registrant as specified in its charter)
Delaware 04-3303188
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
154 Crane Meadow Road
Malborough, Massachusetts 01752
(Address of principal executive offices)
(508) 357-8888
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
(Title of Class)
----------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [_]
The approximate aggregate market value of Common Stock held by non-
affiliates of the Registrant was $1,249,501,975 as of February 29, 2000.
On February 29, 2000, the Registrant had outstanding 60,679,124 shares of
voting Common Stock, $.01 par value as adjusted for a 2-for-1 stock split
effected as a 100% stock dividend on March 8, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement (the "Definitive Proxy
Statement") to be filed with the Securities and Exchange Commission relative to
the Company's 2000 Annual Meeting of Stockholders are incorporated by reference
into Part III of this Report.
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TABLE OF CONTENTS
FORM 10-K ANNUAL REPORT
FISCAL YEAR ENDED DECEMBER 31, 1999
PART I
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Item Page
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1. Business............................................................ 1
2. Properties.......................................................... 9
3. Legal Proceedings................................................... 9
4. Submission of Matters to Vote of Security Holders................... 9
PART II
5. Market for Registrant's Common Equity and Related Stockholder
Matters............................................................. 10
6. Selected Consolidated Financial Data................................ 11
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 13
7A. Quantitative and Qualitative Disclosures About Market Risk.......... 32
8. Financial Statements and Supplementary Data......................... 33
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................ 33
PART III
10. Directors and Executive Officers of the Registrant.................. 33
11. Executive Compensation.............................................. 34
12. Security Ownership of Certain Beneficial Owners and Management...... 34
13. Certain Relationships and Related Transactions...................... 34
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..... 35
</TABLE>
This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended,
and Section 27A of the Securities Act of 1933, as amended. For this purpose,
any statements contained herein that are not statements of historical fact may
be deemed to be forward-looking statements. Without limiting the foregoing, the
words "believes," "anticipates," "plans," "expects" and similar expressions are
intended to identify forward-looking statements. The important factors
discussed under the caption "Factors That May Affect Future Results" in Part II
below, among others, could cause actual results to differ materially from those
indicated by forward-looking statements made herein and presented elsewhere by
management. Such forward-looking statements represent management's current
expectations and are inherently uncertain. Investors are warned that actual
results may differ from management's expectations.
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PART I.
All information in this report has been adjusted to reflect a 2-for-1 common
stock split effected as a 100% stock dividend on March 8, 2000.
ITEM 1. BUSINESS
We are a leading provider of services that enable our customers to market
their products and services online through tens of thousands of marketing
partners and to pay for these promotions based on performance. Our customers
use our services to establish and manage their own independent performance
marketing relationships directly with their marketing partners. Our online
merchant customers typically pay fees to their marketing partners based on the
sales they generate, as tracked through our services. Our portal customers
typically pay fees to their marketing partners based on the traffic sent to the
portal, as tracked through our services. We are typically paid fees by our
customers based upon the level of sales or traffic generated by these marketing
partners. We provide our customers a cost-effective solution for establishing,
managing and rewarding these performance marketing sales channels.
Through our acquisition of TriVida Corporation consummated on February 29,
2000, we intend to offer services that will enable our customers to deliver
personalized promotions to unique but anonymous users visiting their marketing
partners' Web sites based upon the past browsing and buying behavior of such
users. We also intend to offer services that will enable our customers to
deliver personalized promotions for selected goods or services to users
visiting their own Web sites, whether or not those users were directed to their
Web sites by their marketing partners.
The Be Free Solution
We provide a comprehensive solution specifically designed to enable our
customers to increase sales and decrease the cost of customer acquisition by
establishing and managing their own performance marketing sales channels. We
have developed, and continue to enhance, a broad set of technologies and
services that provide a data interchange between disparate databases utilized
by our customers and their thousands of marketing partners. Through this data
interchange, we track, store and analyze the effectiveness of individual
promotions and provide online data and analysis to both our customers and their
marketing partners. As a result of our acquisition of TriVida, we have
obtained, and continue to enhance, a new type of personalization technology
that creates product recommendations based on our observations.
Merchant Connection
We integrate our systems with each customer's often disparate catalog,
transactional and fulfillment systems by establishing standard data formats and
file transfer protocols. Through this connection, we receive and store
information about our customer's available products and services and its Web
site. We also receive order, order cancellation, sales and return data from our
customer.
Our data interchange also tracks each time a user views and clicks on a
specific hyperlink placed by any of our customers' marketing partners. We track
these individual viewings and clicks to unique transactions with our customers.
Promotions we tracked for our customers were shown more than 896 million times
in February 2000 through our customers' 3.5 million performance marketing
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relationships. This combination of customer and marketing partner data is
stored at our central processing facilities and allows us to measure the sales
or traffic performance of each specific promotion.
Management Solutions
We have significant resources and expertise dedicated to the successful
implementation, development, management and control of online performance
marketing programs. These solutions include:
. Establishment of marketing relationships. We provide online, automated
application and approval processes for Web site publishers to become a
customer's marketing partner. We also help customers identify and
recruit potential marketing partners.
. 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.
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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.
Services
Our data interchange provides the communications link, technologies and
services for performance marketing generally and Web-based affiliate sales
channels in particular. Our customers select core transactional services--
BFAST, B2BFAST, B-INTOUCH and BFIT--and may then select additional related
services. Our core services enable the collection and tracking of data that
resides on our servers in Oracle databases. Reports analyzing the data are
accessible to our customers and their marketing partners from desktop
computers using standard Internet protocols and standard Web browser
protocols. Specifically, our core transactional services include:
Serving and Tracking Promotions and Routing Users
. Tracking of selected links each time a link is displayed or delivery of
dynamic, rotating promotions and tracking of display of these promotions
each time a dynamic link is displayed;
. Directing users clicking on any promotions to the correct location on
our customer's site; and
. Collection of order, order cancellation, sales and return information
from our customer's systems and matching that information with marketing
partner data collected by our systems.
Reporting and Decision Support
. Online generation of daily customer-specific reports, including detail
on orders and order cancellations, sales and returns, traffic,
promotional success and payments due to marketing partners. A complete
decision support system allows our customers to filter and sort these
reports and to export this data for use in a spreadsheet or word
processing program;
. Modification of the available promotions and addition of new promotions
instantly; and
. Online generation of daily marketing partner reports including detail on
orders and order cancellations, sales and returns, traffic, promotions
used and success of each promotion, products purchased by the site's
audience and commissions due to the marketing partner. Marketing
partners may download these reports for use in a spreadsheet or word
processing program.
We provide these services through our BFAST, B2BFAST, B-INTOUCH and BFIT
services:
BFAST Affiliate Marketing Services
BFAST allows our customers to build and maintain their own, branded
performance marketing channels with third-party Web site publishers. Our
customers use BFAST to create and build these sales channels and to evaluate
their marketing partners using more than 80 online analyses. BFAST
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enables customers to create and offer promotions, including individual product
hyperlinks, search links, product category links, coupons and other incentives
appearing in a variety of formats including text, graphics, search boxes,
regularly updated "top 10" lists and streaming video. Each marketing partner
can select the promotions that are most likely to appeal to its audience and
use BFAST to generate the code it needs to add those hyperlinks to its site.
These marketing partners can check the performance of each hyperlink they
implement with daily reporting.
We also provide optional services to help recruit marketing partners for our
customers and provide merchandising advice directly to marketing partners. Our
outreach services include recruitment by marketing partner recruiters, direct
mail to Web site managers who have requested this information, sponsorship of
newsletters, and banner advertising. We also offer marketing partner
application review and approval services, where we accept marketing partner
applications on behalf of our customers based upon their established criteria.
We can provide customer-branded support by telephone and e-mail to marketing
partners to assist with applications, hyperlink generation, merchandising and
analysis. We can also provide performance analysis and promotional and
merchandising recommendations for the largest 250 sites in our customers'
performance marketing sales channels. We have a best practices group that has
developed expertise by monitoring industry and customer specific trends and
provides strategic advice designed to improve the performance of these sales
channels.
In general, we enter into a standard service agreement that requires our
BFAST customer to pay us a one-time integration fee and monthly performance
fees, subject to minimum monthly or annual fees, for use of our data
interchange. For our online merchant customers, the performance fees are
generally based on either a percentage of the sales generated or a fee based on
the number of transactions or orders. For our portal customers, the performance
fees are generally based on the volume of click-throughs generated by their
marketing partners. We currently derive most of our revenue from BFAST
services.
B2BFAST Business-to-Business Affiliate Marketing Services
Our B2BFAST services are targeted to businesses that sell their products or
services to other businesses. These customers use our B2BFAST services to
create performance marketing sales channels that target their business
customers. These services include specific analysis, merchandising and
recruiting technologies and techniques designed to address the special needs of
business-to-business commerce. We charge our B2BFAST customers based on the
sales or volume of traffic generated from their performance marketing channels.
B-INTOUCH E-mail Referral Services
Our recently introduced B-INTOUCH services allow our customers to create
performance marketing sales channels composed of individuals and corporations
that send e-mail messages. B-INTOUCH lets an approved sender of e-mail messages
include our customers' promotions in e-mail messages and receive fees for the
sales or traffic that result from these promotions. B-INTOUCH offers a simple
user interface for hyperlink placement and reporting, designed for the less
technologically sophisticated e-mail user. We charge our customers for B-
INTOUCH services based on the volume of sales or traffic that results from a
customer's e-mail referral program.
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BFIT Advertising Services
BFIT is an enhanced banner ad delivery service that tracks our customers'
banner advertising through to point of sale and determines the performance for
a specific banner placed in a specific location. This may include ad placement
based on specifications provided by our customers on their ad agencies. By
integrating our BFIT and BFAST services, our customers' marketing partners can
dedicate space on their Web sites within which our customer may determine the
promotional initiative displayed and modify it at any time or upon the
occurrence of specified criteria. We charge for our BFIT services based on the
number of impressions served.
Related Services
We offer related services to complement BFAST, B2BFAST, B-INTOUCH and BFIT.
These services are designed to automate aspects of the process of establishing
and managing performance marketing relationships. They include the following:
. automated sign-up of potential marketing partners through an online
application;
. definition and selection of marketing partners, compensation rules and
methods;
. rapid review and approval of marketing partner applications by
customers;
. generation of individualized messages from our customers to selected
marketing partners; and
. payment of fees due to marketing partners. For a fixed fee per check, Be
Free will prepare and distribute checks to a customer's marketing
partners in payment of their commissions. These checks are drawn against
a Be Free checking account, which is funded by the customer prior to
release of the checks.
Personalization Services
We plan to launch two services that will enable our customers to deliver
real-time, personalized promotions to potential buyers based upon historical
browsing and buying behavior. These services will include:
. delivery by our customers of personalized product or product category
recommendations to visitors to their Web sites, whether or not that
visitor was directed to their Web site through a promotion hosted by
their marketing partners; and
. delivery by our customers of personalized product or product category
recommendations on the Web sites of their marketing partners.
These recommendations will be created at a centralized service bureau and
will be served directly to the user or to a customer's server for delivery to
the user.
Sales and Marketing
We have a direct sales force that targets large online merchants and portals
as customers. The direct sales force is assigned to different geographical
regions and is supported by sales engineers. We maintain direct sales personnel
in nine major metropolitan areas throughout the United States, as
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well as in London. We also have a telesales group, located in our Marlborough,
Massachusetts headquarters, that targets mid-sized online merchants as
customers.
In order to achieve broader distribution of our services, we have contracted
with third parties to resell our services. These resellers typically receive a
percentage of our revenue derived from the online merchant accounts they
generate during specified periods.
We target potential customers through our public relations program, our Web
sites, conferences, trade shows and customer referrals. While we have primarily
focused on marketing efforts in the United States, we intend to extend these
efforts into Europe and may extend these efforts into Japan.
Customer Service
We provide comprehensive integration, training, consulting and support
services. We provide our customers with individualized customer services
designed to increase the performance of their performance marketing sales
channels and their overall satisfaction with our services. We assign dedicated,
knowledgeable customer development managers to each customer.
Our best practices consulting team gathers and analyzes data from industry
sources, our database and customer initiatives to provide our customers with
industry-wide performance results against which they can measure their own
success. This team formulates strategies for how our customers might more
effectively promote their products or services. We present our best practices
solutions through seminars, customer bulletins, case studies and one-on-one
dialogues with customers.
We provide integration services, both by telephone and in person, to new
customers. We work with new customers to create a reliable, automated data
transfer between their databases and our databases.
We teach our customers to use our technology effectively and efficiently. We
provide business training to customers, which helps them better understand the
business decisions that they face in launching their performance marketing
programs. We also offer regular refresher and update training.
Our customer development managers assist our individual customers in
managing their performance marketing programs, developing and interpreting
their analyses, and testing new promotional methods. These customer development
managers also convey emerging customer strategies, communicate customer feature
requests, manage data requests and provide ongoing project management services
for special customer initiatives.
Technology Infrastructure
Our technologies are designed to provide the following advantages:
Performance, Scalability, Availability and Reliability
Our system infrastructure has been designed as a layered architecture to
yield significant benefits to our customers in performance, scalability,
availability and reliability. Our software and databases run on multiple high-
speed servers that are connected by high-capacity connections and are organized
into multiple tiers. Each tier functions to address specific data storage and
data traffic considerations
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to enhance reporting and real-time transactional performance. We have recently
upgraded this system by adding additional servers or storage devices to each
tier.
Scalability is a term used to describe the ability of an application to
handle greater traffic when additional servers are added to a system.
Scalability is particularly important for growth-stage Internet applications
where demand can grow rapidly and unpredictably. Our servers are connected not
only within a given tier but also between tiers. This multi-tiered server
design enables us to add, extend, duplicate or exchange the specific servers
requiring the enhancement within the system as needed, without recompiling the
rest of the system or interrupting services.
The multi-tiered server design better enables us to provide our customers
with highly-available and reliable uninterrupted service. Each tier is
comprised of multiple connected servers performing similar tasks, each of which
has its own power supply. If a server fails, that server's tasks are
automatically reassigned to another running computer. In addition, identical
data is also stored in various locations. This redundant design enhances the
ability of the system to tolerate the failure of an individual server or
failures in system storage without the loss of data or the ability of the
computers to give our customers' real-time operating capability.
The connections from the network data center into the multi-tiered servers
are also designed to provide customers with reliable, uninterrupted service. We
regularly test and maintain the multiple connections between our servers, and
regularly test the connections between the network data center and the
Internet. Our engineering and hosting center personnel monitor traffic patterns
and congestion points and reroute traffic flows in an effort to reduce end-user
response times. We provide monitoring and support services required to maintain
transaction availability 24 hours a day, 365 days a year.
Although our systems are designed to enhance reliability, system and
communication failures have caused both delays and cessation of services. We
recently experienced an 11-hour systems outage during which we were unable to
re-direct Internet users to our customers from their marketing partners or
provide reports.
We have taken and are taking additional steps to decrease the likelihood of
future outages. These steps include installing additional server and storage
hardware, and adding an additional level of redundancy to all tiers of our
system architecture. Our development team is modifying our software to make it
more functional upon hardware failure. Even with these improvements, there can
be no assurance that our services will not be interrupted in the future.
Flexibility
Our systems infrastructure uses platform systems with UNIX, a non-
proprietary open operating system, and is also compatible with Microsoft's
proprietary operating system, Windows NT. We currently use servers manufactured
by Sun Microsystems and storage equipment manufactured by EMC. While we are not
dependent on any single server hardware system or vendor, any change could be
costly and time consuming.
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
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computers and their standard Internet connection. Our reporting systems use
standard Internet and Web protocols.
Central Operations Facility
Our network data centers are designed to optimize performance and maintain
reliability. Our primary network data center is housed at Exodus Communications
in Harborside, New Jersey. This center has multiple, physically distinct, high-
capacity connections to the Internet designed to reduce the likelihood that
outages within the network will materially impact customer use. We expect to
establish additional data centers in the western United States and in Europe.
These data centers all have duplicate systems for power, climate-control,
fire protection, seismic reinforcement and continuous security surveillance.
These facilities utilize manual and automated intrusion detection techniques to
monitor the security of the center and its hardware. We regularly use outside
security professionals to evaluate our physical and electronic security
measures.
Development
Development of new services begins with our product marketing group. Based
upon customer, competitive and market analyses, our product marketing group
determines functions and specifications for future services and enhancements to
current services. Our development group develops new services and enhances
existing services based on specifications provided by the product marketing
group. Our development group is divided into strategic and tactical teams. Our
strategic team develops new performance marketing services and new generations
of current services. Our tactical development team focuses on extending
existing functions or developing additional functions within any given release.
We have developed a managed release process to assist customers in the
adoption of new releases. This process includes testing and evaluating
revisions, updating online and paper documentation to include new features,
training customer support personnel and notifying and training customers.
For the years ended December 31, 1998 and 1999, we spent $304,100 and $2.4
million, respectively, on research and development activities.
Competition
The markets for online performance marketing solutions are new, rapidly
evolving and highly competitive. We do not currently compete against
established companies across the range of services we provide. We do, however,
compete against larger companies with respect to a portion of the services we
provide and compete more broadly against similar sized, private companies. We
expect to face future competition across a broad range of our services from
larger companies currently providing products or services that compete only
with respect to a portion of the services we provide.
For the provision of online merchant branded affiliate sales channel
solutions, we compete against internally-developed performance marketing
solutions and against enterprise software solution providers. Customers of
enterprise software solutions must develop and maintain databases and
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servers to track their performance marketing channels. We also compete against
multi-merchant, shared affiliate program providers, including Commission
Junction and Linkshare. A customer of a shared affiliate program shares its
marketing partners with potentially all of the other customers of that
program, even customers that may be competitors. Finally, we compete with ad
server companies that provide banner ad services that might be considered an
alternative marketing solution.
We believe that the principal competitive factors in our market are:
. the provision of comprehensive, reliable services;
. the ability to offer a customer ownership of and control over a
significant sales channel;
. the provision of extensive online reports and analyses; and
. price.
We seek to compete against internally developed efforts and enterprise
software solutions by providing more comprehensive, cost-effective services
that are more easily managed. We seek to compete against multi-merchant,
shared affiliate program providers on the basis of our technology, by
permitting our customers greater control over their affiliate sales channel
and providing individualized customer service. We seek to compete against ad
serving companies by offering broader services and the ability to track
promotional efforts through to resulting sales rather than merely to the
number of times viewed.
Employees
As of February 29, 2000, we had a total of 236 employees, 72 of whom were
in sales and marketing, 56 in client services, 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.
ITEM 2. PROPERTIES
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.
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 6, 1999, holders of our then outstanding capital stock, owning
of record shares representing in excess of 50% of the voting power of all the
outstanding shares of capital stock on October 6, 1999, consented in writing
to the following matters: (i) a 1-for-2 reverse common stock split, (ii) an
increase in the shares of common stock issuable under the 1998 Stock Incentive
Plan by 575,000 shares, (iii) the adoption of the 1999 Employee Stock Purchase
Plan, and (iv) the adoption of the Amended and Restated Certificate of
Incorporation and the Amended and Restated By-Laws.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Be Free effected its initial public offering of its common stock on November
3, 1999 at a price of $12.00 per share. As of March 24, 1999, there were
approximately 303 holders of record of Be Free common stock. Be Free common
stock is listed for quotation on the Nasdaq Natonal Market under the symbol
"BFRE". The following table sets forth, the high and low sales prices for our
common stock as reported by the Nasdaq National Market, as retroactively
adjusted for our 2-for-1 common stock split effectuated as a 100% stock
dividend on March 8, 2000:
<TABLE>
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Price Range of
Common Stock
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High Low
<S> <C> <C>
Year Ended December 31, 1999:
Fourth Quarter (since November 3, 1999)....................... $ 43.53 $10.75
Year Ending December 31, 2000:
First Quarter (through March 28, 2000)........................ $ 60.88 $27.00
</TABLE>
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.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data for the
five years in the period ended December 31, 1999. This 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. The historical results presented herein are not necessarily
indicative of future results.
<TABLE>
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Year Ended December 31,
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1999 1998 1997 1996 1995
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(In thousands, except share and per
State of Operations Data: share data)
Revenue:
Performance marketing services... $ 5,329 $ 1,319 $ 216 $ -- $ --
Other............................ -- 8 60 196 481
-------- ------- ------- ------- ------
Total revenue................... 5,329 1,327 276 196 481
-------- ------- ------- ------- ------
Operating expenses:
Cost of revenue.................. 845 424 273 -- --
Sales and marketing (exclusive of
equity related compensation of
$0, $0, $0, $56 and $525 in
1995, 1996, 1997, 1998 and 1999,
respectively) .................. 9,329 1,154 180 398 49
Client services (exclusive of
equity related compensation of
$0, $0, $0, $15 and $238 for
1995, 1996, 1997, 1998 and 1999,
respectively.................... 3,474 300 -- -- --
Development and engineering
(exclusive of equity related
compensation of $0, $0, $0,
$1,865 and $146 in 1995, 1996,
1997, 1998 and 1999,
respectively)................... 4,767 728 426 505 274
General and administrative
(exclusive of equity related
compensation of $0, $0, $0, $450
and $1,033 in 1995, 1996, 1997,
1998 and 1999, respectively).... 2,825 875 332 558 115
Equity related compensation...... 1,941 2,385 -- -- --
Amortization of goodwill and
intangible assets............... -- -- -- -- --
-------- ------- ------- ------- ------
Total operating expenses........ 23,181 5,866 1,211 1,461 438
-------- ------- ------- ------- ------
Operating income (loss)........... (17,852) (4,539) (935) (1,265) 43
Interest income (expense), net.... 348 (224) (99) (26) (4)
Provision for income taxes........ -- -- -- -- --
-------- ------- ------- ------- ------
Net income (loss) before
extraordinary item............... (17,504) (4,763) (1,034) (1,291) 39
Extraordinary item--loss on early
extinguishment of debt........... (330) -- -- -- --
-------- ------- ------- ------- ------
Net loss.......................... (17,834) (4,763) (1,034) (1,291) 39
Accretion of preferred stock to
redemption value................. (1,517) (130) -- -- --
-------- ------- ------- ------- ------
Net income (loss) attributable to
common stockholders.............. $(19,351) $(4,893) $(1,034) $(1,291) $ 39
======== ======= ======= ======= ======
Basic and diluted net income
(loss) per share................. $ (1.02) $ (0.31) $ (0.04) $ (0.07) $ 0.01
Shares used in computing basic and
diluted net income (loss) per
share............................ 18,951 16,018 27,139 19,544 3,522
Unaudited supplemental basic and
diluted net loss per share....... $ (0.50) $ (0.24)
Shares used in computing
supplemental basic and diluted
net loss per share............... 35,713 19,640
Pro forma loss per share from
continuing operations............
Shares used in computing unaudited
pro forma loss per share.........
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
As of December 31,
---------------------------------------
1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and marketable
securities............................ $ 90 $ 25 $ 76 $ 4,327 $79,692
Working capital (deficit).............. 169 (443) (502) 3,422 68,580
Total assets........................... 294 140 254 5,971 90,837
Long-term debt, net of current portion. 62 751 333 4,949 2,507
Convertible preferred.................. -- -- -- 8,786 --
Total stockholders' equity (deficit)... 168 (1,104) (1,897) (9,496) 82,561
</TABLE>
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 $25.0
million. We had net losses of approximately $19.4 and $4.8 million for the
years ended December 31, 1999 and 1998, respectively. These losses have been
funded primarily through the issuance of preferred stock, borrowings and more
recently, our initial 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
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<PAGE>
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 2,933,276 shares
of our common stock. In addition, we assumed options to purchase 566,592 shares
of our common stock. We have estimated the purchase price to be approximately
$165.0 million which will be allocated to approximately $1.4 million of
tangible assets and approximately $163.4 million to intangible assets. We
expect to amortize intangible assets over three years which will result in
amortization expense of approximately $54.5 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,
---------------------------
1999 1998 1997
<S> <C> <C> <C>
Revenue:
Performance marketing services.................. 100 % 99 % 78 %
Other........................................... -- 1 22
------- ------- -------
Total revenue................................. 100 100 100
Operating expenses:
Cost of revenue................................. 16 32 99
Sales and marketing............................. 175 87 65
Client services ................................ 65 22 --
Development and engineering..................... 89 55 154
General and administrative...................... 54 66 120
Equity related compensation..................... 36 180 --
------- ------- -------
Total operating expenses...................... 435 442 438
Operating loss.................................... (335) (342) (338)
Interest income (expense), net.................... 7 (17) (36)
------- ------- -------
Net loss before extraordinary item................ (328)% (359)% (374)%
======= ======= =======
</TABLE>
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<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.
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<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.
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<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.
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
. approximately $70.6 million in proceeds from our initial public offering,
net of issuance costs.
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<PAGE>
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.
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
18
<PAGE>
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 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.
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<PAGE>
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 second 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.
Factors That May Affect Future Results
Be Free operates in a rapidly changing environment that involves a number of
risks, some of which are beyond its control. The following discussion
highlights some of the risks which may affect future operating results.
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<PAGE>
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 $25.0 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."
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
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<PAGE>
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.
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
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<PAGE>
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."
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.
23
<PAGE>
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 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
24
<PAGE>
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.
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
25
<PAGE>
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 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
26
<PAGE>
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 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;
27
<PAGE>
. 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."
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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.
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30We 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 our public offerings, our current cash, cash
equivalents and marketable securities and borrowings to meet our operating and
capital requirements and service our debt for at least the next 12 months.
After that, we may need to raise additional funds. We cannot be certain that we
will be able to obtain additional financing on favorable terms, if at all. If
we cannot raise funds when needed, on acceptable terms, we may not be able to
develop or enhance our services, take advantage of future opportunities or
respond to competitive pressures or unanticipated requirements. This could
seriously harm our business, results of operations and financial condition.
We plan to devote substantial resources to expanding our existing data
center and establishing additional data centers in 2000. In addition, we expect
to make significant investments in sales and marketing and the development of
new services as part of our business strategy. The failure to generate
sufficient cash from operations or to raise sufficient funds to finance this
growth could require us to delay or abandon some or all of our plans or
otherwise forgo market opportunities. This could make it difficult for us to
respond to competitive pressures.
If we are not able to overcome the challenges of our planned international
expansion, our revenue and our prospects for profitability may be materially
and adversely affected
We are expanding, and plan to continue to expand, our international
operations and international sales and marketing efforts. To date, we have
limited experience in developing localized versions of our services and in
marketing, selling and distributing our services internationally. We provide
performance marketing services for an existing customer in Europe and we intend
to offer our services in additional European countries. We may also offer our
services in Japan. Our success in these markets will depend on the success of
our customers in these countries.
International operations are subject to other inherent risks, including:
. the impact of recessions in economies outside the United States;
. changes in regulatory requirements;
. potentially adverse tax consequences;
. difficulties and costs of staffing and managing foreign operations;
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. political and economic instability;
. compliance with foreign regulations regarding Internet privacy concerns;
. fluctuations in currency exchange rates; and
. seasonal reductions in business activity during the summer months in
Europe and some other parts of the world.
We depend on the continued viability of the Internet infrastructure
Our business depends upon the development and maintenance of a viable
Internet infrastructure. The current Internet infrastructure may be unable to
support an increased number of users. The timely development of products such
as high-speed modems and communications equipment will be necessary to continue
reliable Internet access. Furthermore, the Internet has experienced outages and
delays as a result of damage to portions of its infrastructure. Outages and
delays, including those resulting from attempts to disable Web sites, such as
through targeted queries for data designed to overwhelm the servers for a Web
site, could adversely affect Web sites and our services, e-mail and the level
of traffic on the Web sites of our customers and their marketing partners. We
also depend upon Internet access providers that provide consumers with access
to our services. In the past, users have occasionally experienced difficulties
due to system failures unrelated to our systems. Any disruption in the Internet
access provided by third-party providers or any failure of third-party
providers to handle higher volumes of user traffic could have a material
adverse effect on our business, results of operations and financial condition.
Finally, the effectiveness of the Internet may decline due to delays in the
development or adoption of new standards and protocols designed to support
increased levels of activity. If new standards or protocols are developed, we
may be required to incur substantial expenditures to adapt our products.
Our existing stockholders will be able to control all matters requiring
stockholder approval and could delay or prevent someone from acquiring or
merging with us on terms favored by a majority of our independent stockholders
Our executive officers and directors and their affiliates beneficially own a
majority of our outstanding common stock. As a result, these stockholders will
be able to exercise control over the company's operations and all matters
requiring stockholder approval, including the election of directors and
approval of significant corporate transactions. This could delay or prevent a
third party from acquiring or merging with us.
If we issue more equity securities in the future, your influence over corporate
matters that require stockholder approval may be diluted
If we raise additional capital by selling more equity securities, your
percentage ownership may decrease and any additional equity securities may have
rights, preferences or privileges senior to those of existing holders of common
stock. As a result, your ability to influence corporate matters that require
stockholder approval may be reduced.
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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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
We do not currently use derivative financial instruments. We generally place
our marketable security investments in high credit quality instruments,
primarily U.S. government obligations, tax-exempt municipal obligations and
corporate obligations with contractual maturities of two years or less. We do
not expect any material loss from our marketable security investments and
therefore believe that our potential interest rate exposure is not material.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements which appear on page F-1 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers, 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
</TABLE>
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.
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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.
Ellen M. Brezniak has been our Vice President, Product Marketing since
November 1998. From October 1996 until joining us, she was Vice President,
Business-To-Business Operating Unit at Open Market, Inc. From March 1994 until
September 1996, she was Director, Product Marketing and Planning with Progress
Software Corporation, a supplier of application development and management
technology. Prior to that time, she held various marketing positions at Cognos,
Inc., which offers application development software and EIS tools, and software
database companies such as Sybase, Inc. and Oracle Corporation. Ms. Brezniak
holds a B.S. from Rensselaer Polytechnic Institute.
W. Blair Heavey has been our Vice President, Sales since October 1998. From
April 1995 until joining us, he held sales positions at Open Market, Inc., an
Internet software developer, including Director of Sales and Director,
Strategic Channel Sales. From March 1989 until March 1995, he held several
sales and marketing positions at Hewlett-Packard Corporation, a manufacturer of
measurement, computation and communications systems and equipment. Mr. Heavey
received a B.A. from Boston College and an M.B.A. from Babson College.
Steven D. Pike has been our Vice President, Client Services since April
1999. From July 1998 until joining us, he served as Vice President, Customer
Services at Internet Commerce Services, Inc., a commerce service provider. From
September 1995 to June 1998, he held the position of Director of Technical
Services at Open Market, Inc. From January 1995 to September 1995, he held the
position of Manager, Product & Program Management at Progress Software
Corporation and from September 1992 to January 1995 he was Manager, Product
Support and Business Management at Bay Networks, a manufacturer of data
networking products. Mr. Pike holds a B.S. from Franklin Pierce College.
Patricia L. Travaline has been our Vice President, Marketing Communications
since October 1998. From January 1992 to February 1998, she served in positions
at PCs Compleat, Inc. including Director of Marketing Communications and
Director, Extended Services Development. From December 1985 to September 1991,
she held positions at the public relations firm of Sharon Merrill Associates,
including Vice President, Investor Relations. Ms. Travaline earned a B.A. from
the University of Denver and an M.B.A. from Simmons College.
The information under "Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance" from the Definitive Proxy Statement is hereby
incorporated by reference herein.
ITEM 11. EXECUTIVE COMPENSATION
The information under "Compensation and Other Information Concerning
Directors and Officers" from Definitive Proxy Statement, is hereby incorporated
by reference.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under "Securities Ownership of Certain Beneficial Owners
and Management" from Definitive Proxy Statement is hereby incorporated by
reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under Definitive Proxy Statement is hereby incorporated by
reference herein.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8- K
Financial Statements and Schedules. See index to Financial Statements and
Schedules, which appear on page F-1 hereof.
Reports on Form 8-K. No reports on Form 8-K were filed during the fourth
quarter of 1999.
Exhibits. The exhibits listed on the Exhibit Index following the signature
page hereof are filed herewith in response to this Item.
35
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BE FREE, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
No.
----
<S> <C>
Financial Statements:
Report of Independent Accountants....................................... F-2
Consolidated Balance Sheets at December 31, 1999 and 1998............... F-3
Consolidated Statements of Operations for the years ended December 31,
1999, 1998 and 1997.................................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1997, 1998 and 1999................................. F-5
Notes to Consolidated Financial Statements.............................. F-6
</TABLE>
SCHEDULES OMITTED
Schedules not filed herewith are omitted because of the absence of
conditions under which they are required or because the information called for
is shown in the financial statements or notes thereto.
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Be Free, Inc. and Subsidiaries:
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Be Free, Inc. and its subsidiaries at December 31, 1999 and 1998,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1999 in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 8, 2000, except for Footnote N
which is dated March 8, 2000
F-2
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------------
1999 1998
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................... $ 58,975,906 $ 4,327,090
Marketable securities.............................. 12,761,659 --
Accounts receivable, net of allowances of $96,607
and $14,000 at December 31, 1999 and 1998,
respectively...................................... 1,328,406 118,955
Prepaid expenses................................... 1,012,791 144,517
Other current assets............................... 269,526 23,222
------------ -----------
Total current assets.............................. 74,348,288 4,613,784
Marketable securities............................... 7,954,400 --
Property and equipment, net (Note E)................ 7,966,868 961,702
Deposits............................................ 340,012 384,991
Other assets........................................ 227,276 10,359
------------ -----------
Total assets...................................... $ 90,836,844 $ 5,970,836
============ ===========
<CAPTION>
LIABILITIES, CONVERTIBLE PARTICIPATING
PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(DEFICIT)
<S> <C> <C>
Current liabilities:
Accounts payable................................... 966,592 533,524
Accrued expenses................................... 2,916,569 349,725
Deferred revenue................................... 942,537 121,667
Current portion of long-term debt.................. 942,770 187,139
------------ -----------
Total current liabilities......................... 5,768,468 1,192,055
Long-term debt, net of current portion.............. 2,507,357 4,949,198
------------ -----------
Total liabilities................................. 8,275,825 6,141,253
Commitments and contingencies (Note H)
Series A Convertible Participating Preferred Stock;
$0.01 par value; 0 and 11,300,000 shares authorized
at December 31, 1999 and 1998, respectively; 0 and
10,600,000 shares issued and outstanding at
December 31, 1999 and 1998, respectively .......... -- 8,785,981
Series A Convertible Participating Preferred Stock
Warrants .......................................... -- 540,000
Stockholders' equity (deficit) (Note I):
Common stock, $0.01 par value; 75,000,000 and
27,500,000 shares authorized at December 31, 1999
and 1998 respectively; 56,176,498 and 19,500,000
shares issued at December 31, 1999 and 1998,
respectively...................................... 561,765 195,000
Additional paid-in capital......................... 113,273,840 5,505,050
Unearned compensation.............................. (6,001,938) (5,549,096)
Stockholders' notes receivable..................... (208,072) (779,558)
Accumulated other comprehensive loss............... (10,818) --
Accumulated deficit................................ (25,017,011) (7,182,599)
------------ -----------
82,597,766 (7,811,203)
Treasury stock, at cost (244,996 and 1,685,195
shares at December 31, 1999 and 1998,
respectively)..................................... (36,747) (1,685,195)
------------ -----------
Total stockholders' equity (deficit)............... 82,561,019 (9,496,398)
------------ -----------
Total liabilities, convertible participating
preferred stock and stockholders' equity
(deficit)........................................ $ 90,836,844 $ 5,970,836
============ ===========
</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,
--------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Revenue:
Performance marketing services........ $ 5,328,675 $ 1,319,183 $ 216,286
Other ................................ -- 7,580 60,424
------------ ----------- -----------
Total revenue........................ 5,328,675 1,326,763 276,710
------------ ----------- -----------
Operating expenses:
Cost of revenue...................... 844,838 423,811 272,585
Sales and marketing (exclusive of
equity related compensation of
$524,646, $56,428 and $0 in 1999,
1998 and 1997, respectively)........ 9,329,446 1,153,306 180,108
Client services (exclusive of equity
related compensation of $238,351,
$14,509 and $0 in 1999, 1998 and
1997, respectively)................. 3,473,583 300,400 --
Development and engineering
(exclusive of equity related
compensation of $146,146, $1,864,667
and $0 in 1999, 1998 and 1997,
respectively)....................... 4,767,382 728,538 426,329
General and administrative (exclusive
of equity related compensation of
$1,033,005, $449,606 and $0 in 1999,
1998 and 1997, respectively)........ 2,823,412 875,153 332,376
Equity related compensation.......... 1,942,147 2,385,211 --
------------ ----------- -----------
Total operating expenses........... 23,180,808 5,866,419 1,211,398
------------ ----------- -----------
Operating loss..................... (17,852,133) (4,539,656) (934,688)
Interest income...................... 1,292,381 34,577 6,293
Interest expense..................... (944,660) (258,420) (105,215)
------------ ----------- -----------
Net loss before extraordinary item..... (17,504,412) (4,763,499) (1,033,610)
Extraordinary item--loss on early
extinguishment of debt................ (330,000) -- --
------------ ----------- -----------
Net loss............................... (17,834,412) (4,763,499) (1,033,610)
Accretion of preferred stock to
redemption value...................... (1,517,038) (129,573) --
------------ ----------- -----------
Net loss attributable to common
stockholders.......................... $(19,351,450) $(4,893,072) $(1,033,610)
============ =========== ===========
Basic and diluted net loss per share:
Net loss attributable to common
stockholders without extraordinary
item.................................. $ (1.00) $ (0.31) $ (0.04)
Extraordinary item..................... (0.02) -- --
------------ ----------- -----------
Net loss attributable to common
stockholders.......................... $ (1.02) $ (0.31) $ (0.04)
============ =========== ===========
Shares used in computing basic and
diluted net loss per share............ 18,951,340 16,018,258 27,138,512
</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........... 28,180,816 $281,808 $ -- $ -- $ -- $ -- $ (1,385,490)
Contribution of
capital by
stockholders...... -- -- 250,000 -- -- -- --
Acquisition and
retirement of
treasury stock.... (10,567,804) (105,678) 95,678 -- -- -- --
Net loss.......... -- -- -- -- -- -- (1,033,610)
----------- -------- ------------ ----------- --------- -------- ------------
Balance at December
31, 1997........... 17,613,012 176,130 345,678 -- -- -- (2,419,100)
Stock issuance in
connection with
warrant exercise.. 1,886,988 18,870 356,130 -- -- -- --
Acquisition of
treasury stock.... -- -- -- -- -- -- --
Issuance of
restricted stock
to employees by
controlling
stockholders...... -- -- 2,145,000 (318,554) -- -- --
Issuance of
warrants to
purchase Common
Stock in
connection with
Series A
Preferred Stock
financing......... -- -- 1,791,000 -- -- -- --
Exercise of call
option on Common
Stock............. -- -- -- -- -- -- --
Forfeiture of
unvested shares
of restricted
stock............. -- -- (180,314) 180,314 -- -- --
Issuance of
restricted stock.. -- -- -- (4,417,492) (779,558) -- --
Unearned
compensation
related to option
grants............ -- -- 1,177,129 (1,177,129) -- -- --
Amortization of
unearned
compensation...... -- -- -- 183,765 -- -- --
Net loss.......... -- -- -- -- -- -- (4,763,499)
Accretion to
redemption value
of Series A
Preferred Stock... -- -- (129,573) -- -- -- --
----------- -------- ------------ ----------- --------- -------- ------------
Balance at December
31, 1998........... 19,500,000 195,000 5,505,050 (5,549,096) (779,558) -- (7,182,599)
Acquisition of
treasury stock.... -- -- (453,995) 436,957 73,510 -- --
Acceleration of
vesting of
restricted stock.. -- -- 77,103 -- -- -- --
Issuance of
restricted stock.. -- -- -- (97,500) (52,500) -- --
Repayment of
receivable from
stockholder....... -- -- -- -- 550,476 -- --
Unearned
compensation
related to option
grants............ -- -- 2,674,382 (2,674,382) -- -- --
Amortization of
unearned
compensation...... -- -- -- 1,882,083 -- -- --
Series B
Preferred Stock
dividend.......... -- -- (1,183,328) -- -- -- --
Accretion to
redemption value
of Series A and B
Preferred Stock... -- -- (333,710) -- -- -- --
Issuance of
Common Stock in
initial public
offering, net of
offering costs.... 12,880,000 128,800 70,444,818 -- -- -- --
Conversion of
Series A and
Series B
Preferred Stock
and warrants...... 23,796,498 237,965 35,549,689 -- -- -- --
Stock issuance in
connection with
option and
warrant
exercises......... -- -- 993,831 -- -- -- --
Comprehensive
loss:
Net loss........ -- -- -- -- -- -- (17,834,412)
Other
comprehensive
loss............ -- -- -- -- -- (10,818) --
----------- -------- ------------ ----------- --------- -------- ------------
Comprehensive
loss.............. -- -- -- -- -- (10,818) (17,834,412)
----------- -------- ------------ ----------- --------- -------- ------------
Balance at December
31, 1999........... 56,176,498 $561,765 $113,273,840 $(6,001,938) $(208,072) $(10,818) $(25,017,011)
=========== ======== ============ =========== ========= ======== ============
<CAPTION>
Treasury Stock
------------------------ Total
Stockholders'
Equity
Shares Value (Deficit)
<S> <C> <C> <C>
Balance at December
31, 1996........... -- $ -- $ (1,103,682)
Contribution of
capital by
stockholders...... -- -- 250,000
Acquisition and
retirement of
treasury stock.... -- -- (10,000)
Net loss.......... -- -- (1,033,610)
----------- ------------ --------------
Balance at December
31, 1997........... -- -- (1,897,292)
Stock issuance in
connection with
warrant exercise.. -- -- 375,000
Acquisition of
treasury stock.... (6,176,881) (6,176,881) (6,176,881)
Issuance of
restricted stock
to employees by
controlling
stockholders...... -- -- 1,826,446
Issuance of
warrants to
purchase Common
Stock in
connection with
Series A
Preferred Stock
financing......... -- -- 1,791,000
Exercise of call
option on Common
Stock............. (705,364) (705,364) (705,364)
Forfeiture of
unvested shares
of restricted
stock............. -- -- --
Issuance of
restricted stock.. 5,197,050 5,197,050 --
Unearned
compensation
related to option
grants............ -- -- --
Amortization of
unearned
compensation...... -- -- 183,765
Net loss.......... -- -- (4,763,499)
Accretion to
redemption value
of Series A
Preferred Stock... -- -- (129,573)
----------- ------------ --------------
Balance at December
31, 1998........... (1,685,195) (1,685,195) (9,496,398)
Acquisition of
treasury stock.... (524,437) (78,665) (22,193)
Acceleration of
vesting of
restricted stock.. -- -- 77,103
Issuance of
restricted stock.. 150,000 150,000 --
Repayment of
receivable from
stockholder....... -- -- 550,476
Unearned
compensation
related to option
grants............ -- -- --
Amortization of
unearned
compensation...... -- -- 1,882,083
Series B
Preferred Stock
dividend.......... -- -- (1,183,328)
Accretion to
redemption value
of Series A and B
Preferred Stock... -- -- (333,710)
Issuance of
Common Stock in
initial public
offering, net of
offering costs.... -- -- 70,573,618
Conversion of
Series A and
Series B
Preferred Stock
and warrants...... -- -- 35,787,654
Stock issuance in
connection with
option and
warrant
exercises......... 1,814,636 1,577,113 2,570,944
Comprehensive
loss:
Net loss........ -- -- (17,834,412)
Other
comprehensive
loss............ -- -- (10,818)
----------- ------------ --------------
Comprehensive
loss.............. -- -- (17,845,230)
----------- ------------ --------------
Balance at December
31, 1999........... (244,996) $ (36,747) $ 82,561,019
=========== ============ ==============
</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,
--------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Cash flows for operating activities:
Net loss.............................. $(17,834,412) $(4,763,499) $(1,033,610)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization......... 1,484,855 285,794 56,999
Extraordinary loss on early
extinguishment of debt............... 330,000 -- --
Equity related compensation........... 1,942,147 2,385,211 --
Loss on disposal on fixed assets...... -- -- 3,304
Acquisition of fixed assets in
exchange for services................ -- (202,688) --
Provisions for doubtful accounts...... 82,607 14,000 --
Changes in operating assets and
liabilities:
Accounts receivable.................. (1,292,058) (52,565) (54,717)
Prepaid expenses..................... (879,876) (75,991) --
Deposits............................. 44,979 (384,441) --
Accounts payable..................... 433,068 101,768 94,570
Accrued expenses..................... 2,352,902 243,365 46,085
Deferred revenue..................... 820,870 121,667 (24,508)
Other, net........................... (463,221) (33,238) (343)
------------ ----------- -----------
Net cash used in operating activities.. (12,978,139) (2,360,617) (912,220)
------------ ----------- -----------
Cash flows for investing activities:
Purchases of property and equipment... (4,850,420) (610,064) (67,726)
Purchases of marketable securities.... (20,697,729) -- --
------------ ----------- -----------
Net cash used in investing activities.. (25,548,149) (610,064) (67,726)
------------ ----------- -----------
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......... 70,573,618 -- 250,000
Proceeds from exercise of options and
warrants............................. 2,570,944 -- --
Acquisition of common stock and
treasury shares...................... (5,155) (6,882,245) (10,000)
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.......... -- 5,000,000 791,080
Payments on long-term debt............ (5,700,232) (183,297) --
------------ ----------- -----------
Net cash provided by financing
activities............................ 93,175,104 7,221,928 1,031,080
------------ ----------- -----------
Net increase in cash and cash
equivalents........................... 54,648,816 4,251,247 51,134
Cash and cash equivalents at beginning
of year............................... 4,327,090 75,843 24,709
------------ ----------- -----------
Cash and cash equivalents at end of
year.................................. $ 58,975,906 $ 4,327,090 $ 75,843
============ =========== ===========
Supplemental disclosure of cash flow
information:
Cash paid during the period for
interest............................. $ 814,660 $ 284,561 $ 53,819
Supplemental disclosures of noncash
transactions:
Notes receivable for Common Stock
sold................................. $ 52,500 $ 779,558 --
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.............. $ 3,068,804 $ 285,000 --
</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, 1999 and 1998,
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, 1999 and 1998,
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 1999 totaling
20% and 13% of revenue, respectively, one customer in 1998 totaling 73% of
revenue, and two customers in 1997 totaling 78% and 12% of revenue,
respectively. The Company had one customer that accounted for 11% of accounts
receivable at December 31, 1999. The Company had two customers that accounted
for 40% and 11%, respectively, of accounts receivable at December 31, 1998.
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 $210,000, $34,900 and $3,100 were charged to sales and marketing
expense for the years ended December 31, 1999, 1998 and 1997, 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
F-9
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the financial statements and the tax bases of assets and liabilities using
current statutory tax rates. A valuation allowance is established against net
deferred tax assets, if based on the weighted available evidence, it is more
likely than not that some or all of the deferred tax assets will not be
realized.
Accounting for Stock-Based Compensation
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," encourages but does not require companies to record
compensation cost for stock-based employee compensation at fair value. The
Company has chosen to account for stock-based compensation granted to employees
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Accordingly, compensation cost for stock options granted to
employees is measured as the excess, if any, of the fair value of the Company's
stock at the date of the grant over the amount that must be paid to acquire the
stock. The Company calculates the fair value of options granted to employees in
accordance with SFAS No. 123 for disclosure purposes only. Stock-based
compensation issued to nonemployees is measured and recorded using the fair
value method prescribed in SFAS No. 123.
Accumulated Other Comprehensive Income (Loss)
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," establishes a standard for reporting and displaying
comprehensive income and its components within the financial statements. As of
December 31, 1999, accumulated other comprehensive loss, as reflected in the
Consolidated Statements of Stockholders' Equity (Deficit), consisted of net
unrealized losses on marketable securities.
Treasury Stock
The Company accounts for the purchase of treasury stock using the cost
method. The Company has reissued treasury shares upon issuance of shares
related to grants of restricted stock and exercises 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.
F-10
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Reclassifications
Certain prior year financial statement items have been reclassified to
conform to the current year's presentation.
Recent Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
which establishes accounting and reporting standards for derivative instruments
and hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. The Company, to date, has not engaged in derivative and hedging
activities, and accordingly does not believe that the adoption of SFAS No. 133
will have a material impact on the financial reporting and related disclosures
of the Company. The Company will adopt SFAS No. 133 as required by SFAS No.
137, "Deferral of the effective date of FASB Statement No. 133," in fiscal year
2001.
On December 3, 1999, the staff of the Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition
in Financial Statements." SAB 101 summarizes some of the staff's
interpretations of the application of generally accepted accounting principles
to revenue recognition. All registrants are expected to apply the accounting
and disclosure requirements that are described in SAB 101. Any changes in
accounting and disclosures relating to SAB 101 must be reported no later than
the second fiscal quarter of the fiscal year beginning after December 15, 1999.
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,
------------------------------
1999 1998 1997
<S> <C> <C> <C>
Options to purchase shares of common stock...... 3,485,852 1,384,858 --
Shares of Preferred Stock convertible into
shares of common stock......................... -- 10,600,000 --
Unvested shares of restricted stock............. 3,500,678 5,197,050 --
Warrants to purchase shares of common stock..... 2,548,000 3,498,000 1,886,988
Warrants to purchase shares of Preferred Stock
convertible into shares of common stock........ -- 700,000 --
</TABLE>
F-11
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
All outstanding shares of preferred stock were converted into common stock
in the initial public offering on November 3, 1999.
Supplemental basic and diluted loss per share have been calculated assuming
the conversion of all outstanding shares of preferred stock into common stock,
as if the shares had converted immediately upon their issuance. Accordingly,
net loss has not been adjusted for the accrued dividends for preferred stock in
the calculation of supplemental loss per share.
The following is a calculation of supplemental net loss per share
(unaudited):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1999 1998
<S> <C> <C>
Supplemental net loss:
Net loss attributable to common stockholders...... $(19,351,450) $(4,893,072)
Accretion of preferred stock to redemption value.. 1,517,038 129,573
------------ -----------
Supplemental net loss............................. $(17,834,412) $(4,763,499)
============ ===========
Shares used in computing supplemental basic and
diluted net loss per share:
Weighted average number of common shares
outstanding...................................... 18,951,340 16,018,258
Weighted average impact of assumed conversion of
preferred stock on issuance...................... 16,761,220 3,621,370
------------ -----------
Shares used in computing supplemental basic and
diluted net loss per share....................... 35,712,560 19,639,628
------------ -----------
Basic and diluted supplemental net loss per common
share............................................ $ (0.50) $ (0.24)
============ ===========
</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.
F-12
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
E. Property and Equipment:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
Amounts under capital
lease arrangements
-----------------------
December 31, December 31,
----------------------- -----------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Furniture and office
equipment.................... $ 804,421 $ 27,778 $ 506,064 $ --
Computer equipment and
software..................... 8,282,331 1,285,683 2,980,259 285,000
Leasehold improvements........ 359,875 -- 108,299 --
----------- ---------- ----------- ---------
9,446,627 1,313,461 3,594,622 285,000
Accumulated depreciation...... (1,479,759) (351,759) (699,911) (47,500)
----------- ---------- ----------- ---------
Property and equipment, net... $ 7,966,868 $ 961,702 $ 2,894,711 $ 237,500
=========== ========== =========== =========
</TABLE>
Depreciation expense totaled $1,128,000, $232,952 and $56,999 for the years
ended December 31, 1999, 1998 and 1997, respectively.
F. Accrued Expenses:
Accrued expenses include the following:
<TABLE>
<CAPTION>
December 31,
-------------------
1999 1998
<S> <C> <C>
Professional fees..................................... $ 918,686 $135,395
Salaries and benefits................................. 755,227 27,876
Commissions........................................... 195,120 --
Accrued taxes......................................... 222,671 --
Capital purchases..................................... 213,942 --
Rent.................................................. 204,375 67,644
Accrued interest...................................... -- 50,000
Other................................................. 406,548 68,810
---------- --------
Accrued expenses.................................... $2,916,569 $349,725
========== ========
</TABLE>
F-13
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
G. Long-Term Debt:
The following table summarizes the Company's long-term borrowings:
<TABLE>
<CAPTION>
December 31,
----------------------
1999 1998
<S> <C> <C>
Subordinated debt, net........................... $ -- $4,490,000
Obligations under capital leases and equipment
financing....................................... 3,450,127 332,510
Term loans ...................................... -- 313,827
---------- ----------
3,450,127 5,136,337
Less current portion............................. (942,770) (187,139)
---------- ----------
Long-term debt................................. $2,507,357 $4,949,198
========== ==========
</TABLE>
The Company entered into term loans during 1996 and 1997 that accrued
interest based on the lender's published prime rate, which was 8.5% at December
31, 1998. These loans were paid in full in March 1999.
On August 25, 1998, the Company entered a software and support financing
arrangement with a lender totaling $376,368. Borrowings under this arrangement
have an implied interest rate of 13%. The repayment period for borrowings
outstanding under this arrangement concludes in September 2001.
On September 29, 1998, the Company entered into a subordinated debt
agreement totaling $5,000,000 which incurred interest at 12% per annum. The
Company borrowed the full amount available under this agreement on October 23,
1998. This debt was paid in full in December 1999. In connection with the
subordinated debt financing, the Company also granted warrants to purchase
700,000 shares of the Company's Series A Preferred Stock at $1.00 per share.
Upon the closing of the Company's initial public offering, the warrants
converted into common stock warrants to purchase 700,000 shares of common stock
at $1.00 per share. The fair value of the warrants, estimated to be
approximately $540,000 at issuance, was recorded as a discount on the carrying
value of the debt and amortized to interest expense over the term of the debt.
The value of the warrants was estimated assuming a weighted average risk free
interest rate of 4.51%, an expected life from date of grant of four years, a
volatility of 100% and no expected dividends. The amount of interest expense
recognized for the years ended December 31, 1999 and 1998 totaled $180,000 and
$30,000, respectively. The remaining deferred financing costs of $330,000 was
expensed as an extraordinary loss upon the early retirement of the debt.
On September 29, 1998, the Company established a capital equipment line of
credit totaling $2,000,000 on which the Company could borrow through November
30, 1999. This line is collateralized by the asset purchases made under the
line. At December 31, 1998, no amounts had been borrowed under this line. At
December 31, 1999, the Company had $1,986,205 outstanding under this line which
bears interest at 6.8%. Purchases under this line are financed as capital
leases with terms of four years.
F-14
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 1999 and 1998 was 9.2% and 11.9%, respectively.
Payments on long-term debt are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
<S> <C>
2000.......................................................... $1,216,089
2001.......................................................... 1,375,663
2002.......................................................... 1,041,158
2003.......................................................... 321,410
----------
Total payments................................................ 3,954,320
Less amounts representing interest............................ (504,193)
----------
Present value of net payments................................. 3,450,127
Less current portion.......................................... (942,770)
----------
Long-term debt, net of current portion........................ $2,507,357
==========
</TABLE>
H. Commitments and Contingencies:
The Company leases facilities and computer equipment under operating lease
agreements that expire on various dates through December 31, 2004. The Company
pays all insurance and pro-rated portions of certain operating expenses for
certain leases. Rent expense was $1,142,556, $307,575 and $113,025 for the
years ended December 31, 1999, 1998 and 1997, 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
F-15
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Preferred Stock") and 13,196,522 shares designated as Series B Convertible
Participating Preferred Stock ("Series B Preferred Stock"). Upon the closing of
the Company's initial public offering, all outstanding shares of Series A and B
Preferred Stock converted into 23,796,522 shares of Common Stock.
Effective November 3, 1999 the authorized capital stock of the Company
consists of (i) 75,000,000 shares of Common Stock authorized for issuance with
a par value of $0.01 and (ii) 10,000,000 shares of preferred stock with a par
value of $0.01.
Common Stock
Prior to August 28, 1998, the Company and its affiliated companies, FOI,
Inc. and PCX were under common control and management by immediate members of
one family. On August 28, 1998, stockholders of the affiliated companies
exchanged their shares of capital stock of the affiliated companies for shares
of the Company's Common Stock which resulted in the affiliated companies
becoming wholly owned subsidiaries of the Company. The financial statements for
the Company, FOI and PCX are presented on a combined basis for the years ended
December 31, 1997 and 1998.
On August 28, 1998, the holders of warrants to purchase shares of Common
Stock exercised their warrants for 1,886,988 shares of Common Stock. Of these
shares, 705,364 shares were subject to a call option at the discretion of the
Company for $1.00 per share. On October 27, 1998, the Company exercised its
call option in full for $705,364.
On August 28, 1998, the Company repurchased 6,176,881 shares of Common Stock
from founders and employees of the Company in exchange for notes payable issued
by the Company for $6,176,881. These notes were paid in full on August 31,
1998.
On August 28, 1998, certain controlling stockholders of the Company
transferred 2,145,000 shares of Common Stock to employees in consideration of
past performance and as an incentive for continuing employment with the
Company. The stock was transferred subject to certain vesting restrictions and
for no cash consideration. The fair value of these restricted stock awards at
the date of transfer totaled $2,145,000, which the Company is recognizing as
compensation expense over the defined vesting period. The vesting for the
transferred shares occurs over four years commencing with the recipient's date
of hire. The remaining unearned compensation will vest at various dates through
2002. Upon the transfer of these shares, the Company recorded a charge of
$1,826,446 representing fully vested shares. In addition, the Company recorded
unearned compensation related to unvested shares totaling $318,554. The Company
recorded amortization of the unearned compensation totaling $34,295 and $59,609
for the year ended December 31, 1998 and 1999, respectively.
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
F-16
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
from additional paid-in capital to Common Stock the par value of the additional
shares arising from the split. In addition, all references in the consolidated
financial statements to the number of Common Stock shares and per share amounts
have been adjusted to reflect this split.
On October 13, 1999, the Company's Board of Directors and stockholders
authorized a 1-for-2 Common Stock split. Stockholder's equity (deficit) has
been restated for all periods presented to give retroactive recognition to the
reverse split in prior periods by reclassifying from common stock to additional
paid-in capital the par value of the shares removed by the split. In addition,
all references in the consolidated financial statements to the number of Common
Stock shares and per share amounts have been adjusted to reflect this reverse
split.
On November 3, 1999, the Company sold 12,880,000 shares of Common Stock in
its initial public offering for cash proceeds of $70,573,618, net of offering
costs of $6,706,384.
Preferred Stock
On August 28, 1998, the Company issued 10,500,000 shares of Series A
Preferred Stock for cash proceeds of $10,355,408, net of issuance costs of
$144,592. On September 29, 1998, the Company issued 100,000 shares of Series A
Preferred Stock for cash proceeds of $92,000, net of issuance costs of $8,000.
The outstanding shares of Series A Preferred Stock with a value of
$9,113,151 converted into 10,600,000 shares of Common Stock upon the closing of
the Company's initial public offering.
In connection with the issuance of Series A Preferred Stock, the Company
issued warrants to the holders of the Series A Preferred Stock, for the
purchase of up to 3,498,000 shares of Common Stock at $1.50 per share. Of these
warrants, 3,465,000 are exercisable from the date of issuance through August
28, 2008 and 33,000 are exercisable from the date of issuance through September
29, 2008. The fair value of these warrants at the date of issue was $1,791,000.
This amount was recorded as a reduction of Series A Preferred Stock and an
increase to paid-in-capital. The value of the warrants was estimated assuming a
weighted average risk free interest rate of 4.51%, an expected life from date
of grant of four years, a volatility of 100% and no expected dividends. On
November 11, 1999, warrants to purchase 1,649,998 of Common Stock were
exercised.
On March 31, 1999, the Company issued 13,196,522 shares of Series B
Preferred Stock for cash proceeds of $24,944,635, net of issuance costs of
$55,253. The holders of the Series B Preferred Stock were entitled to receive
cumulative dividends at a rate of 8% per annum. One of the holders of Series B
Preferred Stock had the right to elect one member to the Board of Directors.
The outstanding shares of Series B Preferred Stock with a value of
$26,134,500 including dividends totaling $1,183,328, were converted into
13,196,522 shares of Common Stock upon the closing of the Company's initial
public offering.
F-17
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
J. Stock Options and Restricted Stock Awards:
On November 19, 1998, the Company adopted its 1998 Stock Incentive Plan (the
"Option Plan"). The Option Plan is administered by the Company's Board of
Directors, and allows for the granting of awards in the form of incentive stock
options to employees and nonqualified options and restricted stock to officers,
employees, consultants, directors and advisors. The exercise prices for awards
and options granted were determined by the Board of Directors of the Company to
be equal to the fair value of the Common Stock on the date of grant. In
reaching this determination at the time of each grant, prior to the Company's
initial public offering, the Company's Board of Directors considered a broad
range of factors including the illiquid nature of an investment in the Common
Stock, the Company's historical financial performance and financial position
and the Company's future prospects and opportunity for liquidity events. On
October 13, 1999, Company's Board of Directors and shareholders voted to
increase the number of shares available for issuance under the Option Plan by
575,000 shares. Upon this vote, the option plan allows for the Company to grant
up to 10,109,506 options for common shares and restricted stock. Stock options
may not be exercised after ten years from the date of grant. Options and
restricted stock awards normally vest over 48 months as follows: 25% after 12
months from the date of grant, thereafter, an additional 2.0833% of shares vest
at the end of each month until all shares are fully vested. In the event of a
change of control of the Company (as defined by the Option Plan), the vesting
for each option and restricted stock award will automatically be accelerated
with respect to 25% of the shares subject to such options or restricted stock
awards.
During the year ended December 31, 1998, the Company sold 5,197,050 shares
of restricted stock to certain employees for $0.15 per share. The weighted-
average grant-date fair value of these shares of restricted stock was $1.00 per
share.
During the year ended December 31, 1999, the Company granted incentive stock
options for the purchase of 2,160,442 shares and nonqualified stock options for
the purchase of 150,000 shares at a weighted-average exercise price of $2.71.
During the year ended December 31, 1999, the Company issued 150,000 shares of
restricted stock for $0.35 per share in exchange for a note receivable totaling
$52,500. The weighted-average grant-date fair value of these shares of
restricted stock was $1.00 per share.
F-18
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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................. -- -- 1,402,408 0.15 1,402,408 0.15
Cancelled............... -- -- 17,550 0.15 17,550 0.15
------- --------- ---------
Outstanding at December
31, 1998............... -- -- 1,384,858 0.15 1,384,858 0.15
Granted................. 695,124 7.02 1,615,318 0.85 2,310,442 2.71
Exercised............... -- -- 164,638 0.59 164,638 0.59
Cancelled............... 14,000 4.41 30,810 0.52 44,810 1.74
------- --------- ---------
Outstanding at December
31, 1999............... 681,124 $7.08 2,804,728 $0.52 3,485,852 $1.80
======= ========= =========
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
Weighted
Average
Remaining
Exercise Contractual Shares
Price Shares Life (Years) Exercisable
<S> <C> <C> <C>
$ 0.15 1,288,102 8.8 224,506
$ 0.35 423,406 9.0 --
$ 0.60 217,914 9.2 --
$ 0.95 530,914 9.4 --
$ 1.40 344,392 9.5 --
$ 4.41 350,624 9.7 --
$ 4.50 258,500 9.8 --
$14.06 4,000 9.9 --
$22.00 17,000 9.9 --
$30.02 26,000 10.0 --
$35.94 25,000 10.0 --
--------- -------
3,485,852 9.2 224,506
========= =======
</TABLE>
No options were exercisable at December 31, 1998.
During the years ended December 31, 1999 and 1998 the Company recorded
unearned compensation for restricted stock and options granted to employees
below fair value of $2,771,882 and $5,594,621, 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 $1,822,474 and $149,470 for the years ended December
31, 1999 and 1998, respectively.
F-19
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On April 30, 1999, the Company also accelerated the vesting with respect to
77,103 shares of restricted stock held by a former employee. The Company has
recorded a charge of $77,103 in connection with this acceleration.
Had compensation cost for the Company's 1999 and 1998 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,
-------------------------
1999 1998
<S> <C> <C>
Net loss as reported .......................... $(19,351,450) $(4,893,072)
Net loss per share as reported ................ $ (1.02) $ (0.31)
Pro forma net loss under SFAS 123.............. $(19,429,219) $(4,897,325)
Pro forma net loss per share under SFAS 123.... $ (1.03) $ (0.31)
</TABLE>
The following table presents the significant assumptions used to estimate
the fair values of the options:
<TABLE>
<CAPTION>
December 31,
-------------------
1999 1998
<S> <C> <C> <C>
Weighted-average risk free interest rate.............. 5.53% 4.85%
Expected life from the date of grant.................. 5 years 7 years
Weighted-average volatility........................... 29% None
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 1999 and 1998 with an exercise price less than
grant date stock fair value was $1.54 and $0.89, respectively. The weighted-
average fair value of options granted in 1999 with an exercise price equal to
grant date stock fair value was $5.27.
The pro forma effects of applying SFAS 123 are not indicative of future
impacts. Additional grants in future years are anticipated.
F-20
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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,
------------------------
1999 1998
<S> <C> <C>
Startup costs................................... $ 171,880 $ 240,633
Other temporary differences..................... 288,533 277,788
Net operating losses............................ 8,026,263 1,563,194
----------- -----------
Total net deferred tax asset.................... 8,486,676 2,081,615
Valuation allowance............................. (8,486,676) (2,081,615)
----------- -----------
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,
---------------------------
1999 1998 1997
<S> <C> <C> <C>
Statutory federal corporate rate.................. 34% 34% 34%
Other............................................. 4 1 1
Increase in valuation allowance................... (38) (35) (35)
------- ------- -------
Effective tax rate................................ -- % -- % -- %
======= ======= =======
</TABLE>
A valuation allowance is established if it is more likely than not that all
or a portion of the deferred tax asset will not be realized. Accordingly, a
valuation allowance has been established for the full amount of the deferred
tax asset due to the uncertainty of realization.
The Company had net operating loss carryforwards of approximately
$19,931,000 and $3,882,000 at December 31, 1999 and 1998, 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.
F-21
<PAGE>
BE FREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 425,000
shares for this plan. As of December 31, 1999, no Company shares have been
issued under this plan.
M. Related Party Transactions:
The Company had amounts due from related parties totaling $286,477 and
$813,139 at December 31, 1999 and 1998, respectively. Amounts due from related
parties at December 31, 1998 was composed of $779,558 related to notes
receivable from stockholders for restricted stock and $33,581 related to
employee advances. The notes receivable from stockholders for restricted stock
are due in June 2003 and accrue interest monthly at 7% per annum. The terms of
the notes provided that interest accrued beginning January 1, 1999 and payments
of interest commenced July 15, 1999. Amounts due from related parties at
December 31, 1999 was composed of $208,072 related to notes receivable from
stockholders executed in connection with the issuance of restricted stock and
$78,405 related to employee advances.
N. Subsequent Events:
On February 15, 2000, the Company's Board of Directors approved a two-for-
one split of Common Stock in the form of a stock dividend. The stock dividend
was paid on March 8, 2000. Stockholders' equity (deficit) has been restated for
all periods presented to give retroactive recognition to the split in prior
periods by reclassifying from additional paid-in capital to Common Stock the
par value of the additional shares arising from the split. In addition, all
references in the consolidated financial statements to the number of Common
Stock shares and per share amounts have been adjusted to reflect this split.
On February 29, 2000, the Company acquired TriVida Corporation, a privately
held developer of online personalization technology. Be Free exchanged
2,933,276 shares of its Common Stock for all of the outstanding shares of
TriVida, and assumed outstanding options to acquire TriVida capital stock for
an additional 566,592 shares of Be Free Common Stock. This acquisition will be
recorded under the purchase method of accounting.
F-22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Be Free, Inc.
(Registrant)
/s/ Gordon B. Hoffstein
By: _________________________________
Gordon B. Hoffstein,
Chief Executive Officer and
Chairman of the Board of
Directors
Date: March 30, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been duly signed below by the following persons on behalf of the
Registrant and in the capacities and on the date set forth above.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Gordon B. Hoffstein Chairman of the Board, March 30, 2000
______________________________________ President, Chief
Gordon B. Hoffstein Executive Officer and
Director (Principal
Executive Officer)
/s/ Stephen M. Joseph Chief Financial Officer March 30, 2000
______________________________________ and Treasurer (Principal
Stephen M. Joseph Financial and Accounting
Officer)
/s/ Samuel P. Gerace, Jr. Executive Vice President, March 30, 2000
______________________________________ Research & Technology and
Samuel P. Gerace, Jr. Director
/s/ Ted. R. Dintersmith Director March 30, 2000
______________________________________
Ted R. Dintersmith
/s/ W. Michael Humphrey Director March 30, 2000
______________________________________
W. Michael Humphrey
/s/ Jeffrey Rayport Director March 30, 2000
______________________________________
Jeffrey Rayport
/s/ Daniel Nova Director March 30, 2000
______________________________________
Daniel Nova
/s/ Kathleen L. Biro Director March 30, 2000
______________________________________
Kathleen L. Biro
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
2 Agreement and Plan of Merger, dated February 15, 2000 by and among the
Company, Cyrano Acquisition Corp., a Delaware corporation and wholly
owned subsidiary of the Company and TriVida Corporation, a California
corporation (Incorporated by reference to Exhibit 2 to the original
filing of this Registration Statement).
3.1 Amended and Restated Certificate of Incorporation of the Registrant
(Incorporated by reference to Exhibit 3.2 of the Company's
Registration Statement on Form S-1 (File No. 333-84535) as declared
effective by the SEC on November 2, 1999 (the "IPO Registration
Statement")).
3.2 Amended and Restated By-Laws of the Registrant (Incorporated by
reference to Exhibit 3.4 of the IPO Registration Statement).
4 Specimen certificate for shares of Common Stock, $.01 par value per
share, of the Registrant (Incorporated by reference to Exhibit 4 of
the IPO Registration Statement).
10.1 1998 Stock Incentive Plan (Incorporated by reference to Exhibit 10.1
of the IPO 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 IPO
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 IPO Registration
Statement).
10.5 Warrant Certificate for the purchase of shares of common stock issued
to Comdisco, Inc. (Incoprorated by reference to Exhibit 10.5 of the
IPO Registration Statement).
10.6 Warrant Certificate A-1 for the purchase of shares of Series A
Preferred Stock issued to Comdisco, Inc. (Incorporated by reference to
Exhibit 10.6 of the IPO Registration Statement).
10.7 Warrant Certificate A-2 for the purchase of shares of Series A
Preferred Stock issued to Comdisco, Inc. (Incorporated by reference to
Exhibit 10.7 of the IPO Registration Statement).
10.8 Subordinated Loan and Security Agreement dated as of September 29,
1998 (Incorporated by reference to Exhibit 10.8 of the IPO
Registration Statement).
10.9 Registration Rights Agreement dated as of March 31, 1999 (Incorporated
by reference to Exhibit 10.9 of the IPO Registration Statement).
10.10 Employment Agreement with Samuel P. Gerace Jr., dated August 28, 1998
(Incorporated by reference to Exhibit 10.10 of the IPO Registration
Statement).
10.11 Employment Agreement with Thomas A. Gerace dated August 28, 1998
(Incorporated by reference to Exhibit 10.11 of the IPO Registration
Statement).
10.12 Lease dated as of November 9, 1998 with Southwestern Pennsylvania
Corporation (Incorporated by reference to Exhibit 10.12 of the IPO
Registration Statement).
10.13 Lease dated October 20, 1998 with LSOF Pooled Equity L.P.
(Incorporated by reference to Exhibit 10.13 of the IPO Registration
Statement).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
+10.14 License and Services Agreement, effective January 13, 1999, with
GeoCities (Incorporated by reference to Exhibit 10.14 of the IPO
Registration Statement).
+10.15 BFAST Service Order Form, as amended, with barnesandnoble.com, Inc.
dated January 31, 1998 (Incorporated by reference to Exhibit 10.15 of
the IPO Registration Statement).
10.16 Director Indemnification Agreement dated as of March 31, 1999 with Dan
Nova (Incorporated by reference to Exhibit 10.16 of the IPO
Registration Statement).
10.17 Form of Indemnification Agreement dated August 28, 1998 (Incorporated
by reference to Exhibit 10.17 of the IPO Registration Statement).
21 List of Subsidiaries (Incorporated by reference to Exhibit 21 of the
Registration Statement).
23.1 Consent of PricewaterhouseCoopers LLP.
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 IPO Registration Statement.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-84535) of Be Free, Inc. and subsidiaries of our
report dated February 8, 2000, except for Footnote N which is dated March 8,
2000 relating to the financial statements which appear in this Form 10-K.
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 29, 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> 561,764
<OTHER-SE> 82,561,019
<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> (1.02)
<EPS-DILUTED> (1.02)
</TABLE>
