Filed Pursuant to Rule 424(b)(3)
Registration Statement No. 333-37776
PROSPECTUS SUPPLEMENT NO. 4
(TO PROSPECTUS DATED JUNE 26, 2000)
BE FREE, INC.
This Prospectus Supplement No. 4 supplements our Prospectus dated June
26, 2000 (the "Prospectus"), Prospectus Supplement No. 1 dated July 26, 2000
(the "Supplement No. 1" ), Prospectus Supplement No. 2 dated August 14, 2000
(the "Supplement No. 2" ) and Prospectus Supplement No. 3 dated October 26, 2000
(the "Supplement No. 3" ) with respect to the filing on November 14, 2000 of a
Quarterly Report on Form 10-Q reporting our financial results for our fiscal
quarter ended September 30, 2000.
Any statement contained in the Prospectus, Supplement No. 1,
Supplement No. 2 and Supplement No. 3 shall be deemed to be modified or
superceded to the extent that information in this Prospectus Supplement No. 4
modifies or supersedes such statement. Any statement that is modified or
superseded shall not be deemed to constitute a part of the Prospectus except as
modified or superseded by this Prospectus Supplement No. 4.
This Prospectus Supplement No. 4 should be read in conjunction with,
and may not be delivered or utilized without, the Prospectus, Supplement No. 1,
Supplement No. 2 and Supplement No. 3.
_______________________
Prospectus Supplement No. 4, dated November 14, 2000
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
FOR QUARTERLY AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE 000-27271
BE FREE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-3303188
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
154 CRANE MEADOW ROAD
MARLBOROUGH, MASSACHUSETTS 01752
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(508) 480-4000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
As of September 30, 2000 the registrant had outstanding 65,822,705 shares of
voting common stock, $0.01 par value per share.
TABLE OF CONTENTS
FORM 10-Q QUARTERLY REPORT
QUARTER ENDED SEPTEMBER 30, 2000
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
Consolidated Balance Sheets (unaudited) as of September 30, 2000
and December 31, 1999........................................................... 3
Consolidated Statements of Operations (unaudited) for the three months
and nine months ended September 30, 2000 and 1999............................... 4
Consolidated Statements of Cash Flows (unaudited) for the nine months
ended September 30, 2000 and 1999............................................... 5
Notes to Consolidated Financial Statements (unaudited).......................... 6
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................... 8
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK........................................................... 20
PART II - OTHER INFORMATION
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS................................... 20
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K............................................ 20
SIGNATURE PAGE.................................................................. 20
EXHIBIT INDEX................................................................... 21
2
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
BE FREE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
SEPTEMBER 30, DECEMBER 31,
2000 1999
ASSETS
Current assets:
Cash and cash equivalents............................................... $ 34,732 $ 58,976
Marketable securities................................................... 113,987 12,762
Accounts receivable, net of allowances of $422 and $97,
respectively........................................................... 2,756 892
Prepaid expenses........................................................ 1,659 1,013
Other current assets.................................................... 3,788 705
-------- --------
Total current assets................................................. 156,922 74,348
Marketable securities..................................................... 10,960 7,954
Property and equipment, net............................................... 16,130 7,967
Intangible assets, net.................................................... 132,945 --
Deposits.................................................................. 1,076 340
Other assets.............................................................. 208 228
-------- --------
Total assets......................................................... $318,241 $ 90,837
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................ $ 2,005 $ 967
Accrued expenses........................................................ 4,561 2,916
Deferred revenue........................................................ 1,571 943
Current portion of long-term debt....................................... 2,586 943
-------- --------
Total current liabilities............................................ 10,723 5,769
Long-term debt, net of current portion.................................... 3,352 2,507
-------- --------
Total liabilities.................................................... 14,075 8,276
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value; 250,000,000 shares authorized;
65,822,705 and 56,176,498 shares issued, respectively.................. 658 562
Additional paid-in capital.............................................. 379,639 113,274
Unearned compensation................................................... (4,378) (6,002)
Stockholders' notes receivable.......................................... (78) (208)
Accumulated other comprehensive income (loss)........................... 53 (11)
Accumulated deficit..................................................... (71,709) (25,017)
-------- --------
304,185 82,598
Treasury stock, at cost (125,763 and 244,996 shares,respectively)......... (19) (37)
-------- --------
Total stockholders' equity........................................... 304,166 82,561
-------- --------
Total liabilities and stockholders' equity................................ $318,241 $ 90,837
======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
3
BE FREE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
-------- ------- -------- ---------
Revenue:
Performance marketing services............ $ 5,330 $ 1,313 $ 13,279 $ 2,709
Operating expenses:
Cost of revenue......................... 990 199 2,445 437
Sales and marketing (exclusive of
equity related compensation of
$153, $153, $458 and $375, respectively) 4,656 2,695 12,961 6,045
Client services (exclusive of equity
related compensation of $40, $40,
$118 and $196, respectively)........... 1,726 1,143 5,051 2,289
Development and engineering (exclusive
of equity related compensation of $36,
$26, $112 and $102, respectively)...... 2,997 1,653 7,294 3,135
General and administrative (exclusive
of equity related compensation of $264,
$269, $465 and $768, respectively)..... 1,624 798 4,555 1,652
Equity related compensation............. 493 488 1,153 1,441
Amortization and merger related expenses 13,754 -- 32,857 --
-------- ------- -------- ---------
Total operating expenses........... 26,240 6,976 66,316 14,999
-------- ------- -------- ---------
Operating loss..................... (20,910) (5,663) (53,037) (12,290)
Interest income......................... 2,806 244 6,660 521
Interest expense........................ (126) (269) (315) (714)
-------- ------- -------- ---------
Net loss................................... (18,230) (5,688) (46,692) (12,483)
Accretion of preferred stock to
redemption value......................... -- (596) -- (1,297)
-------- ------- -------- ---------
Net loss attributable to common
stockholders............................. $(18,230) $(6,284) $(46,692) $(13,780)
======== ======= ======== =========
Basic and diluted net loss per share
attributable to common stockholders...... $(0.29) $(0.49) $(0.78) $(1.09)
Shares used in computing basic and diluted
net loss per share attributable to common
stockholders............................. 62,862 12,695 59,794 12,661
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
4
BE FREE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
2000 1999
--------- --------
Cash flows for operating activities:
Net loss............................................................................ $ (46,692) $(12,483)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization..................................................... 35,214 941
Equity related compensation....................................................... 1,153 1,441
Provisions for doubtful accounts.................................................. 325 57
Changes in operating assets and liabilities net of the effects
from the purchase of TriVida Corporation:
Accounts receivable............................................................ (1,742) (778)
Prepaid expenses............................................................... (366) (802)
Deposits....................................................................... (1) 45
Accounts payable............................................................... (2,508) (28)
Accrued expenses............................................................... 1,093 1,537
Deferred revenue............................................................... 629 1,009
Other, net..................................................................... (3,681) (50)
--------- --------
Net cash used in operating activities............................................... (16,576) (9,111)
--------- --------
Cash flows for investing activities:
Purchases of property and equipment................................................. (5,076) (1,079)
Cash paid for TriVida acquisition, net of cash acquired............................. (3,525) --
Proceeds from the sale of marketable securities..................................... 108,163 --
Purchases of marketable securities.................................................. (212,087) (2,932)
--------- --------
Net cash used in investing activities............................................... (112,525) (4,011)
--------- --------
Cash flows from financing activities:
Proceeds from issuance of Series B Convertible Participating Preferred Stock,
net of issuance costs.............................................................. -- 24,945
Proceeds from issuance of Common Stock, net of offering costs....................... 104,715 --
Acquisition of common stock and treasury shares..................................... -- (5)
Proceeds from exercise of options and warrants...................................... 772 --
Proceeds from Employee Stock Purchase Plan.......................................... 519 --
Proceeds from notes receivable from stockholders.................................... 130 550
Proceeds from sales/leaseback....................................................... -- 241
Payment on long-term debt........................................................... (1,267) (530)
--------- --------
Net cash provided by financing activities........................................... 104,869 25,201
--------- --------
Effect of exchange rate changes on cash............................................. (12) --
--------- --------
Net increase (decrease) in cash and cash equivalents................................ (24,244) 12,079
Cash and cash equivalents at beginning of period.................................... 58,976 4,327
--------- --------
Cash and cash equivalents at end of period.......................................... $ 34,732 $ 16,406
========= ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS - Be Free, Inc. (the "Company") provides hosted online
marketing services including affiliate marketing and personalization. Affiliate
marketing enables customers to generate, place and manage hyperlink promotions
for their products and services in numerous locations on the Internet.
Personalization enables customers to target promotions designed to increase the
buying behavior based upon an analysis of the past browsing and buying behavior
of anonymous user profiles.
BASIS OF PRESENTATION - The accompanying unaudited consolidated financial
statements have been prepared by the Company in accordance with generally
accepted accounting principles for interim reporting and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Consequently, the statements do
not include all disclosures normally required by generally accepted accounting
principles for annual financial statements or those normally made in the
Company's Annual Report on Form 10-K. The December 31, 1999 consolidated balance
sheet was derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles. Certain prior
period financial statement items have been reclassified to conform to the
current period's presentation. In the opinion of management, the accompanying
unaudited consolidated financial statements contain all adjustments, consisting
only of those of a normal recurring nature, necessary for a fair presentation of
the Company's financial position, results of operations and cash flows at the
dates and for the periods indicated. The results of operations for the period
presented herein are not necessarily indicative of the results of operations to
be expected for the entire fiscal year, which ends on December 31, 2000, or for
any other future period.
These consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto, for the year ended December
31, 1999 included in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 30, 2000.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
B. ACQUISITION
On February 29, 2000, the Company acquired TriVida Corporation ("TriVida").
TriVida provides personalization services to online merchants and content sites.
These personalization services are designed to predict the buying behavior of a
unique but anonymous user based upon the past browsing and buying behavior of
that user as well as other anonymous users. In connection with the transaction,
the Company issued common stock with an approximate value of $165,000. The
acquisition has been accounted for under the purchase method of accounting. The
allocation of the purchase price for TriVida resulted in goodwill of $110,000
and other intangibles, including patents, developed technology and workforce, of
$55,000. These items have been recorded as intangible assets within the
Consolidated Balance Sheet, and are being amortized on a straight-line basis
over three years. In the period ended March 31, 2000, the Company recorded a
nonrecurring charge to operations for acquisition-related costs of $765, which
primarily related to employee severance. The Company paid $263 and $599 in
acquisition-related costs during the respective three and nine months ended
September 30, 2000. As of September 30, 2000, $166 of the total acquisition
related costs were included in accrued expenses.
The following unaudited pro forma consolidated results are presented as if the
TriVida acquisition had occurred on January 1, 2000 and 1999, respectively.
Based on an estimated useful life of three years for the intangible assets, the
unaudited proforma consolidated results include an adjustment of approximately
$9,168 and $41,259 for amortization expense for the nine months ended September
30, 2000 and 1999 respectively, and $765 in nonrecurring acquisition related
expense for the nine months ended September 30, 1999.
6
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------
2000 1999
Net sales............................. $ 13,279 $ 2,709
Net loss.............................. (59,160) (58,269)
Basic and diluted net loss per share.. $ (0.98) $ (3.76)
The unaudited consolidated pro forma information is not necessarily indicative
of the combined results that would have occurred had the purchase been made at
the beginning of the periods presented or the future results of the combined
operations.
C. NET LOSS PER SHARE
Basic loss per share is computed using the weighted average number of common
shares outstanding during the period. Diluted loss per share is computed using
the weighted average number of common shares outstanding during the period, plus
the effect of any dilutive potential common shares. Dilutive potential common
shares consist of stock options, preferred stock, unvested shares of restricted
stock and warrants. Potential common shares were excluded from the calculation
of net loss per share for the periods presented since their inclusion would be
antidilutive.
Potential common shares excluded from the calculation of diluted loss per
share were as follows:
SEPTEMBER 30,
-------------
2000 1999
---------- ----------
Options to purchase shares of common stock........................................ 6,577,545 3,234,608
Shares of Preferred Stock convertible into shares of common stock................. -- 23,796,522
Unvested shares of restricted stock............................................... 2,517,731 4,745,216
Warrants to purchase shares of common stock....................................... -- 3,498,000
Warrants to purchase shares of Preferred Stock convertible into shares of common
stock............................................................................. -- 700,000
All outstanding shares of preferred stock were converted into common stock
in the initial public offering on November 3, 1999.
D. STOCKHOLDERS' EQUITY
In connection with its acquisition of TriVida (see Note B), the Company issued
2,912,996 shares of its Common Stock for all of the outstanding shares of
TriVida (valued at approximately $165,000).
On March 8, 2000, the Company effected a 2-for-1 Common Stock split in the form
of a 100% stock dividend to stockholders of record on March 1, 2000. All
financial statements presented give effect to this stock dividend.
On March 28, 2000, the Company sold 4,046,608 shares of its Common Stock in
a public offering for approximately $104,696 in net cash proceeds, after
deducting underwriting commissions and offering expenses.
E. 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.
7
The following table reflects the components of comprehensive income (loss):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
--------- -------- --------- ---------
Net loss.............................................. $(18,230) $(6,284) $(46,692) $(13,780)
Other comprehensive income:
Change in unrealized gain (loss) on marketable
securities during the period.......................... 146 -- 75 --
Foreign currency translation adjustments.............. (11) -- (12) --
-------- ------- ------- --------
Comprehensive loss.................................... $(18,095) $(6,284) $(46,629) $(13,780)
======== ======= ======== ========
F. SUPPLEMENTAL CASH FLOW DISCLOSURES
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------
2000 1999
--------------- --------------
Supplemental schedule of noncash investing and financing activities:
Acquisition:
Stock issued.................................................................................. $165,000 --
Fair value of assets acquired................................................................. (58,648) --
Liabilities assumed........................................................................... 3,963 --
-------- ------
Purchase price in excess of fair value of assets acquired..................................... $110,315 --
======== ======
Purchase of property and equipment under capital lease
obligations and equipment financing........................................................... $ 1,526 $7,173
Notes receivable for Common Stock sold........................................................ -- $ 53
Elimination of note receivable for restricted stock........................................... -- $ 74
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements. Any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the foregoing, the
words "believes," "anticipates," "plans," "expects," and similar expressions are
intended to identify forward-looking statements. There are a number of important
factors that could cause the Company's actual results to differ materially from
those indicated by such forward-looking statements. These factors include,
without limitation, those set forth below under the caption "Certain Factors
That May Affect Future Results."
Overview
We are a leading provider of performance marketing services that enable our
customers to promote their products and services in tens of thousands of
locations on the Internet and to pay for these promotions based on performance.
Our solutions - BFAST affiliate marketing services and BSELECT personalization
services - are designed to increase our customers' online sales or traffic and
to decrease their cost of customer acquisition. We are seeking to develop
additional performance marketing services and plan to further our service
offerings in the future.
8
RESULTS OF OPERATIONS
Revenue
To date, our revenue has been generated primarily from our BFAST affiliate
marketing services. Be Free's revenue includes integration fees and monthly
service fees for BFAST and BSELECT. Revenue from performance marketing services
for the three months ended September 30, 2000 increased 306%, to $5.3 million
from $1.3 million for the three months ended September 30, 1999. For the nine
months ended September 30, 2000 total revenue increased 390% to $13.3 million
from $2.7 million for the nine months ended September 30, 1999. This increase is
attributable to (i) the addition of new customers, (ii) greater revenue from
existing customers as a result of more customers exceeding monthly minimum
service fees, (iii) increases in the minimum BFAST service fee, and (iv) new
service offerings.
Cost of Revenue
Cost of revenue consists of expenses related to the operation of our data
interchange. These expenses primarily include depreciation, operating lease
expense for systems and data storage equipment, costs for third-party data
center facilities and costs for Internet connectivity to our customers and their
marketing partners.
Cost of revenue for the three months ended September 30, 2000 increased 398%, to
$990,000 from $199,000 for the same period last year. For the nine months ended
September 30, 2000, cost of revenue increased 460% to $2.4 million from $437,000
for the nine months ended September 30, 1999. We added systems and data storage
equipment to increase our capacity and redundancy and to accommodate growth in
the number and activity level of our customers. Cost of revenue increased since
this additional investment in equipment resulted in higher depreciation,
equipment lease and data center facilities expenses.
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. We expect that cost of revenue as a percentage of total revenue will
decrease in the future.
Sales and Marketing Expenses
Sales and marketing expenses consist of payroll and related costs for our sales,
marketing and business development groups. Also included are the costs for
marketing programs to promote our services to our current and prospective
customers, as well as programs to recruit marketing partners for our current
customers.
Sales and marketing expenses for the three months ended September 30, 2000
increased 73%, to $4.7 million from $2.7 million during the same period last
year. For the nine months ended September 30, 2000, sales and marketing expenses
increased 114%, to $13.0 million from $6.0 million for the nine months ended
September 30, 1999.
The increase was primarily due to the expansion of the direct sales and internal
telesales groups and the incurrence of additional marketing costs. Approximately
$1.4 million of the increase was due to higher personnel and related expense
largely resulting from 39 new employees. An additional $329,000 was spent to
increase our recruitment program to assist customers in attracting marketing
partners. If the anticipated revenue growth is realized, we expect that sales
and marketing expenses will decrease as a percentage of revenue during the next
year while we continue to add technical resources to support our BSELECT sales
efforts, expand our European operations and continue to grow our domestic sales
force to serve our growing U.S. customer base.
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.
9
Client services expenses for the three months ended September 30, 2000 increased
51% to $1.7 million from $1.1 million for the same period last year. For the
nine months ended September 30, 2000, client services expenses increased 121%,
to $5.1 million from $2.3 million for the nine months ended September 30, 1999.
The number of client service employees increased to 75 as of September 30, 2000
from 38 as of September 30, 1999 to accommodate the growth of our customer base
and the increased number of clients utilizing our optional services. We will
continue to automate certain client services processes to continue to increase
the productivity of our client services organization. We expect that client
services expenses will decrease as a percentage of revenue in the future while
we add the resources to service the anticipated growth in the European customer
base.
Development and Engineering Expenses
Development and engineering expenses primarily include payroll and related costs
for our product development and engineering groups and depreciation related to
equipment used for development purposes. The product development group designs
and develops the underlying technologies for our services and the engineering
group develops and manages the infrastructure necessary to support our services.
Development and engineering expenses for the three months ended September 30,
2000 increased 81% to $3.0 million from $1.7 million for the same quarter last
year. For the nine months ended September 30, 2000, development and engineering
expenses increased 133%, to $7.3 million from $3.1 million for the nine months
ended September 30, 1999. The increase over the third quarter of 1999 is
primarily due to personnel and related cost increases of approximately $659,000
from the addition of 50 employees including the employees resulting from the
acquisition of TriVida. We expect development and engineering costs to decrease
as a percentage of revenue over the next several quarters while we continue to
expand existing services and develop new services.
General and Administrative Expenses
General and administrative expenses principally consist of payroll and related
costs, and professional fees related to our general management, investor
relations, finance and human resource functions. Facility and related costs are
allocated to sales and marketing, development and engineering and general and
administrative expenses based upon the relative number of employees in each
area.
General and administrative expenses for the three months ended September 30,
2000 increased 103%, to $1.6 million from $798,000 for the same period last
year. For the nine months ended September 30, 2000, general and administrative
expenses increased 176%, to $4.6 million from $1.7 million for the nine months
ended September 30, 1999. Professional services expenses for the quarter
increased $368,000 relating to legal, investor relations and general fees
associated with being a public company and expanding into Europe. Increased
personnel and related costs of approximately $243,000 for the current quarter
resulted largely from the addition of 11 employees to support the expansion of
the Company. We expect general and administrative expenses will decrease as a
percentage of revenue in future quarters.
Equity Related Compensation Expenses
Equity related compensation expenses are non-cash charges representing the
difference between the exercise price of options to purchase common stock
granted to our employees or the price paid for restricted stock sold to our
employees and the fair value of these shares as of the date of grant, as
determined for financial reporting purposes. These expenses also include the
fair value of options granted to consultants as of the date of grant, as
determined for financial reporting purposes. These fair values were determined
in accordance with Accounting Principles Board Opinion No. 25 and Statement of
Financial Accounting Standards No. 123. Equity related compensation expenses for
the three months ended September 30, 2000, were $493,000 as compared to $488,000
for the same period of 1999. For the nine months ended September 30, 2000,
equity related compensation expenses were $1.2 million as compared to $1.4
million for the same period last year due to the repayment of certain
stockholder notes for the purchase of shares that were previously expensed.
We expect to recognize equity related compensation expenses of at least $475,000
per quarter through the end of 2002 as a result of issuances of stock and stock
options to employees and others with exercise or purchase prices subsequently
determined to be below the fair market value at the dates of grant or award for
financial reporting purposes.
10
Amortization and merger related expenses
Merger related expenses of $13.8 million during the three months ended September
30, 2000 and $32.9 million during the nine months ended September 30, 2000
resulted from the acquisition of TriVida Corporation. These expenses include
$765,000 of nonrecurring acquisition related costs, primarily for employee
severance, and $32.1 million of amortization expense related to the intangible
assets acquired for the nine months ended September 30, 2000. We are amortizing
the approximate $165 million of intangible assets acquired on a straight-line
basis over three years and expect to recognize amortization expense of
approximately $13.8 million per quarter through February 2002.
Interest Income (Expense), net
Interest income (expense), net consists of interest income earned on marketable
securities and cash, partially offset by interest expense on our borrowings.
As a result of the investment of the net proceeds raised during our public
offerings, net interest income for the three months ended September 30, 2000 was
$2.7 million as compared to net interest expense of $25,000 for the same period
last year. Net interest income for the nine months ended September 30, 2000
resulted from interest income of $6.7 million net of $315,000 in interest
expense for leases, as compared to interest income of $521,000 offset by
$714,000 interest expense on borrowings for the same prior year period.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities for the nine months ended September 30, 2000,
totaled $16.6 million. Our net loss of $46.7 million included $35.2 million in
non-cash depreciation and amortization expense, including $32.1 million in
expenses relating to the amortization of intangible assets associated with the
acquisition of TriVida. Accounts receivable increased $1.7 million with the
growth in our customer base and a slight deterioration of accounts receivable
aging. Cash used through accounts payable totaled $2.5 million, primarily due
to the payment of liabilities assumed in the acquisition of TriVida. Other, net
increased $3.7 million due in part to net capitalized costs associated with
software developed for internal use of approximately $1.0 million and interest
receivable on marketable securities of approximately $1.6 million.
Cash used in investing activities for the nine months ended September 30, 2000
totaled $112.5 million. Purchases and sales of marketable securities totaled
$212.1 million and $108.2 million, respectively. Investment activity in
marketable securities is a result of the investment of the proceeds of our
secondary offering, as well as a portion of the proceeds raised in our initial
public offering. Capital expenditures for the period totaled approximately $5.1
million and were largely related to the purchase of additional system and
storage equipment. We expect that capital expenditures will increase
significantly as our customer and employee base grow and as we expand the number
and capacity of our data centers.
Cash provided by financing activities for the nine months ended September 30,
2000 totaled $104.9 million, of which $104.7 million was from the proceeds
received from our sale of 4,046,608 shares of our common stock through a public
offering in March 2000, after deducting underwriting commissions and offering
expenses. Prior to the March 2000 public offering, we financed our operations
through net cash proceeds from our initial public offering in November 1999, the
private sale of securities and borrowings. In May 2000, we entered into a
capital lease agreement for software licenses and support of approximately $2.0
million. In September 2000, we entered into a capital lease agreement for
systems equipment of approximately $428,000.
As of September 30, 2000, our primary financial commitments consisted of
obligations outstanding under capital and operating leases for computer
equipment and office space of approximately $12.0 million.
As of September 30, 2000, we had $34.7 million in cash and cash equivalents,
$124.9 million in marketable securities and $146.2 million in working capital.
Since our inception, we have significantly increased our operating expenses and
anticipate that we will continue to experience significant growth in operating
expenses for the foreseeable future. We intend to fund a portion of our
operating expenses and capital expenditures through the use of cash resources.
We may use a portion of our cash to acquire additional businesses, products and
technologies that are complementary to our business.
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We believe that our current cash balances, marketable securities and borrowings
will be sufficient to meet our debt service, operating and capital requirements
for at least the next 12 months. While we do not anticipate that this would be
necessary, if cash were insufficient to satisfy our liquidity requirements, 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. The issuance of additional equity securities could result in
additional dilution to our stockholders.
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 fourth fiscal
quarter of the fiscal year beginning after December 15, 1999. The Company
believes that it complies with the requirements of SAB 101.
FACTORS THAT MAY AFFECT FUTURE RESULTS
We operate in a rapidly changing environment that involves a number of risks,
some of which are beyond our control. The following discussion highlights some
of the risks that may affect future operating results.
OUR LIMITED OPERATING HISTORY MAKES THE EVALUATION OF OUR BUSINESS AND PROSPECTS
DIFFICULT
We introduced our first performance marketing services and recorded our first
revenue from these services in the third quarter of 1997. Accordingly, you have
limited information about our company with which to evaluate our business,
strategies and performance and an investment in our common stock. Before buying
our common stock, you should consider the risks and difficulties frequently
encountered by early stage companies in new and rapidly evolving markets,
particularly those companies whose business depends on the Internet.
WE HAVE A HISTORY OF LOSSES AND EXPECT FUTURE LOSSES
Our accumulated deficit as of September 30, 2000 was $71.7 million. Our current
business has never achieved profitability and we expect to continue to incur
losses for the foreseeable future in light of the level of our amortization of
intangible assets and planned operating and capital expenditures. As a result of
our acquisition of TriVida, we currently expect to record amortization expenses
of approximately $55.0 million per year during the next three years and
additional expenses related to the integration of TriVida. We also expect to
experience negative operating cash flow for the foreseeable future as we fund
our operating losses and capital expenditures. If our revenue grows more slowly
than we anticipate, or if our operating expenses exceed our expectations and
cannot be adjusted in a timely manner, our business, results of operations,
financial condition and prospects would be materially and adversely affected. To
support our current and future lines of business, we plan to invest in our
technology and infrastructure, including expansion of our existing data centers
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
12
equipment, which will result in additional depreciation expense. Our losses will
increase in the future, in part because of the amortization of intangible
assets, and we may not be able to achieve or sustain profitability. We will need
to generate significant additional revenue to achieve profitability. Even if we
do achieve profitability, we may not be able to sustain or increase
profitability on a quarterly or annual basis in the future.
IF THE INTERNET FAILS TO GROW AS AN ADVERTISING, MARKETING AND SALES MEDIUM, OUR
FUTURE REVENUE AND BUSINESS PROSPECTS WOULD BE MATERIALLY AND ADVERSELY AFFECTED
Our future revenue and business prospects depend in part on a significant
increase in the use of the Internet as an advertising, marketing and sales
medium. Internet advertising and marketing is new and rapidly evolving, and it
cannot yet be compared with traditional advertising media or marketing programs
to gauge its effectiveness. As a result, demand for and market acceptance of
Internet advertising and marketing solutions are uncertain. Further, the
Internet is still emerging as a significant channel for selling goods and
services to consumers. Our business and prospects will be materially and
adversely affected if the Internet does not become accepted as an advertising
and marketing medium or if consumers do not increasingly purchase goods and
services online. The adoption of Internet advertising and marketing services,
particularly by entities that have historically relied upon more traditional
methods, requires the acceptance of a new way of advertising and marketing.
These customers may find Internet advertising and marketing to be less effective
for meeting their business needs than other methods of advertising and
marketing.
BECAUSE OUR BUSINESS MODEL IS NEW AND UNPROVEN, WE DO NOT KNOW IF WE WILL
GENERATE SIGNIFICANT REVENUE ON A SUSTAINED BASIS OR ACHIEVE PROFITABILITY
Substantially all of our revenue is derived from a new business model. Our
revenue depends on whether the online marketing that we facilitate generates
sales or traffic for our customers. In contrast, others earn fees based merely
on placing online advertisements for customers. Our customers' marketing
partners may not generate substantial volumes of sales or traffic for our
customers. Similarly, our customers' product and service offerings may not be
sufficient to attract or retain their marketing partners. In these situations,
we may lose revenue and, ultimately, customers. If the assumptions underlying
our business model are not valid or we are unable to implement our business
plan, achieve the predicted level of market penetration or obtain the desired
level of pricing of our services for sustained periods, our business, prospects,
results of operations and financial condition will be materially and adversely
affected.
SYSTEM DISRUPTIONS AND FAILURES MAY RESULT IN CUSTOMER DISSATISFACTION,
CUSTOMER LOSS OR BOTH, WHICH COULD MATERIALLY AND ADVERSELY AFFECT OUR
REPUTATION AND BUSINESS
The continued and uninterrupted performance of the computer systems used by us,
our customers and their marketing partners is critical to our success. Customers
may become dissatisfied by any system failure that interrupts our ability to
provide our services to them. These failures could affect our ability to deliver
and track promotions quickly and accurately to the targeted audience and deliver
reports to our customers and their marketing partners. Sustained or repeated
system failures would reduce the attractiveness of our services significantly.
Our operations depend on our ability to protect our computer systems against
damage from fire, power loss, water damage, telecommunications failures,
vandalism and similar unexpected adverse events. In addition, interruptions in
our services could result from the failure of telecommunications providers to
provide the necessary data communications capacity in the time required. Our
critical computer hardware and software is housed at Exodus Communications,
Inc., a third party provider of Internet hosting and communication services
located in the Harborside, New Jersey area. Any system failure by us or Exodus,
or any of the above factors affecting the Harborside, New Jersey area
specifically, would have a material adverse effect on our business. Further,
despite our efforts to implement network security measures, our systems are
vulnerable to computer viruses, break-ins and similar disruptions from
unauthorized tampering. We do not carry enough business interruption insurance
to compensate for any significant losses that may occur as a result of any of
these events.
We have experienced systems outages in the past, during which we were unable to
route transactions to our customers from their marketing partners or provide
reports. We expect to experience additional outages in the future. To date,
these outages have not had a material adverse effect on us. However, in the
future, a prolonged outage or frequent outages could cause harm to our
reputation and could cause our customers or their marketing partners to make
claims against us for damages allegedly resulting from an outage. The expansion
of our existing data center and the opening of additional data centers may not
eliminate systems outages or prevent the loss of sales when system outages
occur. Any damage or
13
failure that interrupts or delays our operations could result in material harm
to our business and expose us to material liabilities.
INTENSE COMPETITION IN OUR MARKETS MAY REDUCE THE NUMBER OF OUR CUSTOMERS AND
THE PRICING OF OUR SERVICES
We compete in markets that are new, intensely competitive, highly fragmented and
rapidly changing. We compete against larger companies with respect to our BFIT
services, the banner ad serving portion of our business. We compete more broadly
against similar sized, private companies. We face competition in the overall
performance marketing solutions market, as well as in the affiliate sales
channel and banner advertising delivery segments of the Internet advertising and
marketing markets. In addition, we have recently entered the online e-mail
referral services market and expect to face competition in this market. We have
experienced and expect to continue to experience increased competition from
current and potential competitors. Our competitors may be able to respond more
quickly to new or emerging technologies and changes in customer requirements
than we can. In addition, our current and potential competitors may bundle their
products with other software or services, including operating systems and
Internet browsers, in a manner that may discourage users from purchasing
services offered by us. Also, many current and potential competitors have
greater name recognition and significantly greater financial, technical,
marketing and other resources than we do. Increased competition could result in
price reductions, fewer customer orders, reduced gross margins and loss of
market share.
SOME ONLINE MERCHANTS AND PORTALS MAY REGARD INFORMATION ABOUT THEIR ONLINE
SALES AND TRAFFIC THAT RESULT FROM THEIR MARKETING PARTNERS TO BE TOO SENSITIVE
TO SHARE WITH ANYONE OUTSIDE THEIR COMPANY, INCLUDING BE FREE. IF THIS VIEW
BECAME WIDESPREAD, OUR BUSINESS AND PROSPECTS WOULD BE MATERIALLY AND ADVERSELY
AFFECTED
Our performance marketing services require our customers to permit us access to
their catalog, transactional and fulfillment systems, so we can track, store and
analyze the sales and traffic that result 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
14
services depend on complex software that we have internally developed or
licensed from third parties. Software often contains defects, particularly when
first introduced or when new versions are released, which can adversely affect
performance or result in inaccurate data. We may not discover software defects
that affect our new or current services or enhancements until after they are
deployed. In addition, our services depend on our customers and their marketing
partners supplying us with data regarding contacts, performance and sales. They
may provide us with erroneous or incomplete data.
TO BE COMPETITIVE, WE MUST CONTINUE TO DEVELOP NEW AND ENHANCED SERVICES, AND
OUR FAILURE TO DO SO MAY ADVERSELY AFFECT OUR PROSPECTS
Our market is characterized by rapid technological change, frequent new service
introductions, change 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 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, 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
15
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 A SIGNIFICANT NUMBER OF INTERNET USERS OPT-OUT OF ONLINE PROFILING OR USE
SOFTWARE TO PREVENT ONLINE PROFILING, OUR BUSINESS PROSPECTS COULD DECLINE
MATERIALLY
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. We host an Internet site which
allows consumers to opt not to have their anonymous profile gathered and
maintained by us. Also, software programs exist that limit or prevent the use of
"cookies" which are required for us to gather the anonymous data. Widespread use
of the opt-out capability or adoption of this software by Web users could
significantly undermine the commercial viability of our BSELECT service, the
personalization capabilities we have developed through our acquisition of
TriVida. This development could cause our business prospects to decline
materially.
IF WE FAIL TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, OUR BUSINESS AND
PROSPECTS COULD BE MATERIALLY AND ADVERSELY AFFECTED
We seek to protect our proprietary rights through a combination of patent,
copyright, trade secret and trademark law and assignment of invention and
confidentiality agreements. The unauthorized reproduction or other
misappropriation of our proprietary rights could enable third parties to benefit
from our technology without paying us for it. If this occurs, our business could
be materially and adversely affected. We have also filed applications to
register various servicemarks. We cannot assure you that any of our servicemark
registrations will be approved.
IF WE INFRINGE UPON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, WE COULD BE
EXPOSED TO SIGNIFICANT LIABILITY
We cannot assure you that our patent or any future patents or servicemark
registrations we receive will not be successfully challenged by others or
invalidated. In addition, we cannot assure you that we do not infringe any
intellectual property rights of third parties or that we will be able to prevent
misappropriation of our technologies, particularly in foreign countries where
laws or law enforcement practices may not protect our proprietary rights as
fully as in the United States. Recently, there have been a number of patents
granted relating to online commerce, advertising and affiliate sales channels.
Further, we believe that an increased number of such patents may be filed in the
future. To date, we have not been notified that our technologies infringe the
intellectual property rights of third parties, but in the future third parties
may claim that we infringe on their past, current or future intellectual
property rights. Any such claim brought against us or our customers, whether
meritorious or not, could result in loss of revenue, be time-consuming to
defend, result in costly litigation, or require us to enter into royalty or
licensing agreements. If we were unable to enter into such royalty or licensing
agreements, it could result in the significant modification or cessation of our
business operations.
IF WE FAIL TO MANAGE EFFECTIVELY THE RAPID GROWTH IN OUR OPERATIONS, OUR
BUSINESS AND PROSPECTS WILL BE MATERIALLY AND ADVERSELY AFFECTED
We have experienced rapid growth and expansion in our operations that have
placed a significant strain on our managerial, operational and financial
resources. We have grown from 12 employees as of June 30, 1998 to 298 employees
as of September 30, 2000, and we expect the number of employees to increase in
the future. To compete successfully, we must:
16
. 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.
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 several customers 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;
. 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 MAY NOT ACHIEVE THE EXPECTED BENEFITS OF OUR ACQUISITION OF TRIVIDA
In February 2000, we acquired TriVida, a provider of personalization services to
online merchants and content sites. Until June 2000, TriVida had not released
commercial products. In June 2000, we introduced our first service utilizing
TriVida's personalization technology. 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;
. successfully integrating and managing TriVida's operations with ours;
. retaining the software developers and other key employees of TriVida;
17
. 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 due to several
factors including the fluctuation of our stock price.
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 change 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.
18
WE EXPECT OUR OPERATING RESULTS TO FLUCTUATE AND THE PRICE OF OUR COMMON STOCK
COULD FALL IF QUARTERLY RESULTS ARE LOWER THAN THE EXPECTATIONS OF SECURITIES
ANALYSTS OR STOCKHOLDERS
We believe that quarter-to-quarter comparisons of our operating results are not
necessarily meaningful. You should not rely on the results of one quarter as an
indication of our future performance. If our quarterly operating results fall
below the expectations of securities analysts or stockholders, however, the
price of our common stock could fall. We have experienced significant
fluctuation in our quarterly operating results and may continue to experience
significant fluctuation.
WE 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.
IF WE ISSUE MORE EQUITY SECURITIES IN THE FUTURE, YOUR INFLUENCE OVER
CORPORATE MATTERS THAT REQUIRE STOCKHOLDER APPROVAL MAY BE DILUTED
If we raise additional capital by selling more equity securities, your
percentage ownership may decrease and any additional equity securities may have
rights, preferences or privileges senior to those of existing holders of common
stock. As a result, your ability to influence corporate matters that require
stockholder approval may be reduced.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD PREVENT
OR DELAY A CHANGE IN CONTROL OF OUR COMPANY
Some provisions of our amended and restated certificate of incorporation and by-
laws may discourage, delay or prevent a merger or acquisition that a stockholder
may consider favorable, which could reduce the market price of our common stock.
These provisions include:
. authorizing the issuance of blank check preferred stock or additional shares
of common stock;
. providing for a classified board of directors with staggered, three-year
terms;
. providing that directors may only be removed for cause by a two-thirds vote
of stockholders;
. limiting the persons who may call special meetings of stockholders;
. prohibiting stockholder action by written consent; and
. establishing advance notice requirements for nominations for election to the
board of directors or for proposing matters that can be acted on by
stockholders at stockholder meetings.
. Delaware law may also discourage, delay or prevent a third party from
acquiring or merging with us.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not currently use derivative financial instruments. We generally
invest our excess cash in marketable, high-credit quality securities, 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.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On November 2, 1999, the Securities and Exchange Commission declared effective
Be Free's Registration Statement on Form S-1 (File No. 333-84535) relating to
the initial public offering of Be Free's Common Stock, $0.01 par value per
share. The offering commenced on November 3, 1999 and a total of 12,880,000
shares (retroactively adjusted for Be Free's 2-for-1 stock split paid on March
8, 2000) covered by the Registration Statement were sold, including the exercise
in full of the underwriters' over-allotment option. The proceeds to Be Free, net
of underwriting commissions and offering expenses, was approximately $70.5
million. As of September 30, 2000, Be Free spent approximately $5.0 million to
repay certain subordinated debt, $4.9 million in capital expenditures, $14.9
million for sales and marketing, $6.2 million for client services expense, $8.4
million for development and engineering costs and $5.4 million for other working
capital for general corporate purposes. Pending their use, the proceeds from Be
Free's initial public offering are invested in investment grade, interest-
bearing securities. None of the net proceeds from the initial public offering
were used to pay, directly or indirectly, directors, officers, persons owning
ten percent or more of Be Free's equity securities, or affiliates of Be Free.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K - During the quarter ended September 30, 2000,
the Registrant filed with the Commission a Form 8-K, dated July 26, 2000,
reflecting its financial results for the second quarter of 2000.
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934, THIS REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
BE FREE, INC.
(Registrant)
Date: November 14, 2000 /s/ Gordon B. Hoffstein
-----------------------
Gordon B. Hoffstein
Chief Executive Officer, President and
Chairman
(Principal Executive Officer)
Date: November 14, 2000 /s/ Stephen M. Joseph
---------------------
Stephen M. Joseph
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
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EXHIBIT INDEX
27. Financial Data Schedule
21