UNITED STATES
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 March 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File 000-27271
BE FREE, INC.
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(Exact name of registrant as specified in its charter)
Delaware 04-3303188
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
154 Crane Meadow Road
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Marlborough, Massachusetts 01752
(Address of principal executive offices)
(508) 480-4000
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(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 March 31, 2001 the registrant had outstanding 66,846,069 shares of
voting common stock, $0.01 par value per share.
TABLE OF CONTENTS
FORM 10-Q QUARTERLY REPORT
QUARTER ENDED MARCH 31, 2001
PART I - FINANCIAL INFORMATION
Page
----
ITEM 1 FINANCIAL STATEMENTS
Consolidated Balance Sheets (unaudited) as of March 31, 2001
and December 31, 2000............................................... 3
Consolidated Statements of Operations (unaudited) for the
three months ended March 31, 2001 and 2000.......................... 4
Consolidated Statements of Cash Flows (unaudited) for the
three months ended March 31, 2001 and 2000.......................... 5
Notes to Consolidated Financial Statements (unaudited).............. 6
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS........................................... 9
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......... 18
PART II - OTHER INFORMATION
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS........................... 19
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K.................................... 19
SIGNATURE PAGE...................................................... 20
2
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
BE FREE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2001 2000
--------- --------
ASSETS
Current assets:
Cash and cash equivalents............................ $ 52,591 $ 27,527
Marketable securities................................ 95,180 122,333
Accounts receivable, net of allowance of $756 and
$658, respectively.................................. 3,302 3,903
Other current assets................................. 4,547 4,815
--------- --------
Total current assets............................... 155,620 158,578
Marketable securities................................. - 4,021
Property and equipment, net of accumulated
depreciation of $7,924 and $6,277, respectively..... 16,789 17,443
Intangible assets, net of accumulated amortization
of $59,599 and $45,843, respectively................. 4,863 119,217
Deposits.............................................. 1,057 1,023
Other assets.......................................... 20 93
--------- --------
Total assets....................................... $ 178,349 $300,375
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... $ 1,104 $ 1,937
Accrued expenses..................................... 6,782 4,857
Deferred revenue..................................... 1,956 1,250
Current portion of long-term debt.................... 2,629 2,593
--------- --------
Total current liabilities.......................... 12,471 10,637
Long-term debt, net of current portion................ 2,048 2,781
--------- --------
Total liabilities.................................. 14,519 13,418
Stockholders' equity:
Common stock, $0.01 par value; 250,000 shares
authorized; 67,028 and 66,021 shares issued,
respectively........................................ 670 660
Additional paid-in capital........................... 381,683 379,932
Unearned compensation................................ (4,711) (3,805)
Stockholders' notes receivable....................... - (78)
Accumulated other comprehensive income............... 272 177
Accumulated deficit.................................. (214,056) (89,929)
--------- --------
163,858 286,957
Treasury stock, at cost (182 shares at March 31,
2001)................................................ (28) -
--------- --------
Total stockholders' equity......................... 163,830 286,957
--------- --------
Total liabilities and stockholders' equity............ $ 178,349 $300,375
========= ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THE CONSOLIDATED FINANCIAL STATEMENTS.
3
BE FREE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUDANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
------------------
2001 2000
---- ----
Revenue................................................. $ 5,422 $ 3,629
Operating expenses:
Network costs......................................... 1,421 603
Sales and marketing (exclusive of equity related
compensation of $304 and $153, respectively)......... 5,264 3,559
Client services (exclusive of equity related
compensation of $59 and $39, respectively)........... 2,059 1,527
Development and engineering (exclusive of equity
related compensation of $134 and $40, respectively).. 3,234 1,568
General and administrative (exclusive of equity
related compensation of $276 and $40, respectively).. 2,222 1,176
Restructuring charge.................................. 312 --
Equity related compensation........................... 773 272
Intangible amortization, merger related expenses
and charge for impairment of assets.................. 116,491 5,349
--------- --------
Total operating expenses............................ 131,776 14,054
--------- --------
Operating loss...................................... (126,354) (10,425)
Interest income....................................... 2,350 1,166
Interest expense...................................... (123) (85)
--------- --------
Net loss................................................ $(124,127) $( 9,344)
========= ========
Basic and diluted net loss per share.................... $ (1.94) $ (0.17)
========= ========
Shares used in computing basic and diluted net
loss per share......................................... 64,035 53,455
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)
THREE MONTHS ENDED
MARCH 31,
------------------
2001 2000
---- ----
Cash flows for operating activities:
Net loss.............................................. $(124,127) $ (9,344)
Adjustments to reconcile net loss to net cash
used in operating activities:
Charge for impairment of assets .................... 102,736 --
Depreciation and amortization ...................... 15,656 5,050
Equity related compensation ........................ 773 272
Provisions for doubtful accounts ................... 98 84
Changes in operating assets and liabilities
net of the effects from the purchase of
TriVida Corporation:
Accounts receivable ............................. 503 (836)
Deposits ........................................ (35) 3
Accounts payable ................................ (1,003) (2,087)
Accrued expenses ................................ (217) 509
Deferred revenue ................................ 706 1,114
Other assets..................................... 343 (1,338)
--------- --------
Net cash used in operating activities .................. (4,567) (6,573)
--------- --------
Cash flows for investing activities:
Purchases of property and equipment................. (818) (780)
Cash paid for TriVida acquisition, net of
cash acquired.................................... -- (3,116)
Proceeds from the sale of marketable securities..... 76,221 --
Purchases of marketable securities.................. (45,158) (31,410)
--------- --------
Net cash provided by (used in) investing activities..... 30,245 (35,306)
--------- --------
Cash flows from financing activities:
Proceeds from issuance of Common Stock, net of
offering costs................................... 9 105,545
Acquisition of common stock and treasury shares..... (28) --
Proceeds from exercise of options and
warrants......................................... 72 251
Proceeds from repayment of notes receivable from
stockholders..................................... 78 --
Payments on long-term debt.......................... (698) (229)
--------- --------
Net cash (used in) provided by financing activities..... (567) 105,567
Effect of exchange rate changes on cash................. (47) --
--------- --------
Net increase in cash and cash equivalents............... 25,064 63,688
Cash and cash equivalents at beginning of period........ 27,527 58,976
--------- --------
Cash and cash equivalents at end of period.............. $ 52,591 $122,664
========= ========
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 a marketing
platform that allows online businesses to attract, convert and retain
customers easily and cost effectively. Our marketing platform includes
technology and services to manage, track and analyze a variety of online
marketing programs. It is offered on a hosted basis to enable businesses to
execute marketing programs without the expense of building and maintaining
their own in-house technical infrastructure and resources. We offer two
services on this platform, BFAST, or partner marketing and BSELECT onsite,
or site marketing.
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, 2000 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, including those
of a normal recurring nature. These adjustments are 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. To better define our
component costs, we renamed the cost of revenue line item on the
Consolidated Statements of Operations to Network costs. 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, 2001, 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, 2000 included in the Company's Annual Report on Form 10-K
filed with the Securities and Exchange Commission on April 2, 2001.
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. RECENT ACCOUNTING PRONOUNCEMENTS
In September 2000, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 140 (SFAS 140), "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities", which replaces Statement of Financial Accounting Standards
No. 125 (SFAS 125), "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities." SFAS 140 revises the standards
of accounting for securitizations and other transfers of financial assets
and collateral and requires certain disclosures, but it carries over most
of SFAS 125's provisions without reconsideration. SFAS 140 is effective for
transfers and servicing of assets and extinguishments of liabilities
occurring after March 31, 2001. The Company does not believe that the
adoption of SFAS 140 will have a significant impact on its financial
position, results of operations or cash flows.
C. 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 (Note D).
6
D. IMPAIRMENT CHARGE
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," the Company reviews goodwill and other long-
lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of these assets may exceed their fair
value. The Company considers several factors in determining whether an
impairment may have occurred, including the intended use of the underlying
asset, the Company's market capitalization compared to its book value per
share, the overall business climate and current estimates for expected
operating results of acquired businesses. The Company has decided that
the technology obtained through the acquisition of TriVida will no longer
be integrated into the BFAST technology as originally intended due to the
deterioration of the Internet retail market and customer feedback as well
as other business factors considered. As a result of this decision and a
review of the other factors, the Company concluded that an impairment
assessment was required for the long-lived assets of TriVida as of March
31, 2001.
The Company grouped all long-lived assets for TriVida, including goodwill
and other intangible assets, and estimated the future discounted cash flows
related to these long-lived assets. The discount rate used was based on the
risks involved. As a result of this analysis, the Company recorded an
impairment charge in the quarter ended March 31, 2001 totaling $102.7
million representing the excess of the carrying amount of the TriVida
assets over the discounted cash flows. The remaining carrying amount of the
assets will be amortized over their remaining useful lives.
E. RESTRUCTURING
In March 2001, the Company restructured certain parts of the organization.
The restructuring plan included involuntary terminations and the
consolidation of certain office space. The Company reduced its workforce by
12 employees, which represents approximately 4% of the total employee base,
and recorded a restructuring charge of $312,000 during the three months
ended March 31, 2001. This charge comprises severance costs of $274,000 and
legal and other costs of $38,000. At March 31, 2001, $258,000 of this
charge had been paid. The Company expects the balance to be paid during the
second quarter of 2001 (Note J).
F. 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, 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:
MARCH 31
---------------------
2001 2000
---- ----
Options to purchase shares of common stock...... 6,319,696 4,603,240
Unvested shares of restricted stock............. 2,577,426 3,175,978
Warrants to purchase shares of common stock..... -- 733,000
7
G. STOCKHOLDERS' EQUITY
In relation to its acquisition of TriVida (Note C), 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 28, 2000, the Company sold 4,046,608 shares of its Common Stock in
a secondary offering for approximately $104,705 in net cash proceeds, after
deducting underwriting commissions and offering expenses.
On January 1, 2001, the Company issued 875,306 shares of restricted stock
to Company employees who previously requested to participate in the Stock-
for-Options benefit program (the "Program"). Under the provisions of the
Program, participating employees exchanged two stock options for one share
of restricted stock issued under the 1998 Stock Incentive Plan with a
purchase price of $0.01 per share. In connection with the Program, the
Company recorded unearned compensation for restricted stock granted to
employees below fair market value of $1,906,000. The Company is recognizing
this compensation expense over the vesting period of the restricted stock
which is based on the remaining vesting period of the canceled options.
H. 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.
The following table reflects the components of comprehensive income (loss):
THREE MONTHS ENDED
MARCH 31
---------------------
2001 2000
---- ----
Net loss...................................... $(124,127) $(9,344)
Other comprehensive income:
Change in unrealized gain (loss) on
marketable securities during the period...... 142 (28)
Foreign currency translation adjustments...... (47) --
--------- -------
Comprehensive loss............................ $(124,032) $(9,372)
========= =======
I. SUPPLEMENTAL CASH FLOW DISCLOSURES
THREE MONTHS ENDED
MARCH 31
---------------------
2001 2000
---- ----
Supplemental schedule of noncash investing
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
========
J. SUBSEQUENT EVENTS
On April 25, 2001, the Company announced a further reduction in workforce
of 49 employees throughout the organization. This represents approximately
16% of the total workforce. The reduction was approved by management in
response to continued losses of Internet retail customers and longer than
anticipated sales cycles. The Company expects to record a restructuring
charge of approximately $1.0 million in the second quarter related to this
event.
In April 2001, the Company announced that our Board of Directors had
authorized the repurchase of up to $20 million of Be Free Common Stock.
Purchases are authorized to be made from time to time throughout the
remainder of 2001 in the open market or in privately negotiated
transactions depending on market conditions. The repurchase plan does not
obligate the Company to repurchase any specific number of shares and may be
suspended at any time. Shares acquired would be available for use under Be
Free's employee stock plans and for other corporate purposes.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements. Any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the foregoing, the
words "believes," "anticipates," "plans," "expects," and similar expressions are
intended to identify forward-looking statements. There are a number of important
factors that could cause the Company's actual results to differ materially from
those indicated by such forward-looking statements. These factors include,
without limitation, those set forth below under the caption "Certain Factors
That May Affect Future Results."
Overview
We provide a marketing platform that enables our customers to attract, convert
and retain online customers easily and cost effectively. Our marketing platform
delivers technology and services including personalizing, delivering, tracking
and analyzing online promotions, and compensating and communicating with online
marketing partners. Our hosted solution is designed to increase our customers'
online sales or traffic and to decrease their cost of customer acquisition.
To date, we have generated our revenue primarily from our BFAST partner
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 or
quarterly service fees. For our commerce customers, the service 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, subject to
minimum levels. For our content customers, the service fees are generally based
on the volume of click-throughs generated by their marketing partners, subject
to minimum levels. In addition to the BFAST service, we also offer optional,
enhanced customer services, such as outsourced program management, marketing
partner support and development, marketing partner application review and
marketing partner commission payment services for additional fees.
In the third quarter of 2000, we introduced our first site marketing service,
BSELECT Onsite. In general, we enter into a standard service agreement that
requires our BSELECT Onsite customers to pay us a one-time initialization fee
and monthly or quarterly service fees. The BSELECT Onsite service fees are
generally based on the volume of click-throughs generated by personalized
promotions served to our customers' Internet sites, subject to minimum levels.
We have incurred significant net losses and negative cash flows from operations
since the commencement of our online marketing business, and as of March 31,
2001, we had an accumulated deficit of approximately $214.1 million. This loss
has been funded primarily through the issuance of preferred stock, borrowings,
and public offerings of our common stock. We raised net proceeds of $70.6
million and $104.7 million during our public offerings in November 1999 and in
March 2000, respectively.
RESULTS OF OPERATIONS
REVENUE
Through March 31, 2001, revenue includes integration and monthly service fees
for BFAST and BSELECT. Revenue for the three months ended March 31, 2001,
increased 49%, to $5.4 million from $3.6 million for the three months ended
March 31, 2000. This increase is attributable to the addition of 77 new
customers and greater revenue from existing customers as a result of more
customers exceeding minimum service fees and new service offerings.
9
NETWORK COSTS
To better define our component costs, we renamed the cost of revenue line item
on the Consolidated Statements of Operations to Network costs. These costs
consist of expenses related to the operation of our hosting services. Network
costs include depreciation and operating lease expense for systems and storage
equipment, costs for third-party data center facilities and costs for Internet
connectivity to our customers and their marketing partners.
Network costs for the three months ended March 31, 2001, increased 136% to $1.4
million from $603,000 for the three months ended March 31, 2000. The Company
made significant investments in additional systems and data storage equipment in
order to increase capacity and redundancy and to accommodate growth in the
number and activity level of our customers. This additional investment
resulted in an increase in depreciation, equipment lease and data center
facilities expenses.
SALES AND MARKETING EXPENSES
Sales and marketing expenses consist of payroll and related costs for our sales,
marketing and business development groups. Also included are the costs for
marketing programs to promote our services to our current and prospective
customers, as well as programs to recruit marketing partners for our current
customers.
Sales and marketing expenses for the three months ended March 31, 2001,
increased 48% to $5.3 million from $3.6 million for the three months ended
March 31, 2000. Approximately $1.4 million of the increase was due to personnel
and related expenses resulting from the expansion of the sales force to target
growth opportunities.
CLIENT SERVICES EXPENSES
Client Services expenses 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' marketing
partners on an optional basis for additional fees.
Client Services expenses for the three months ended March 31, 2001, increased
35% to $2.1 million from $1.5 million for the three months ended March 31, 2000
as a result of adding 7 new employees to the client services group to support
our growing customer base and to provide additional services to our existing
customers. The customer base increased 32% to 317 customers from 240 in March
2000.
DEVELOPMENT AND ENGINEERING EXPENSES
Development and engineering expenses consist of payroll and related costs for
our product development and engineering groups and depreciation related to
equipment used for development purposes. The product development group designs
and develops the underlying technologies for our services and the engineering
group develops and manages the infrastructure necessary to support our services.
Development and engineering expenses for the three months ended March 31, 2001,
increased 106% to $3.2 million from $1.6 million. Personnel and related cost
increased $1.1 million as a result of the addition of 32 new employees,
including the employees assumed in the acquisition of TriVida. Hardware and
software maintenance costs also increased by $200,000 due to additional capital
equipment purchases for development purposes.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses consist of payroll and related costs and
professional fees related to our general management, finance and human resource
functions.
General and administrative expenses for the three months ended March 31, 2001,
increased by 89% to $2.2 million from $1.2 million for the three months ended
March 31, 2001. Approximately $500,000 of the increase was due to the addition
of 12 new employees,
10
and approximately $390,000 of the increase was due to an increase in
professional service fees relating to legal expenses associated with our
continued domestic and international growth and investor relations services.
Additionally, in connection with our regular review of outstanding receivables
we increased our allowance for doubtful accounts by $150,000.
RESTRUCTURING CHARGES
In March 2001, we restructured certain parts of the organization. The
restructuring plan included involuntary terminations and the consolidation of
certain office space. We reduced our workforce by 12 employees, which
represents approximately 4% of the total employee base, and recorded a
restructuring charge of $312,000 during the three months ended March 31, 2001.
This charge comprises severance costs of $274,000 and legal and other costs of
$38,000. At March 31, 2001, $258,000 of this charge had been paid. We expect
the balance to be paid during the second quarter of 2001.
On April 25, 2001, we announced a further reduction in workforce of 49 employees
throughout the organization. This represents approximately 16% of the total
workforce. The reduction was approved by management in response to continued
losses of customers and longer than anticipated sales cycles. We expect to
record a restructuring charge of approximately $1.0 million in the second
quarter related to this event.
EQUITY RELATED COMPENSATION EXPENSES
Equity related compensation expenses are noncash 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 are recorded over
the vesting period of the applicable option or stock award. These fair values
were determined in accordance with Accounting Principles Board Opinion 25 and
Statement of Financial Accounting Standards 123. Equity related compensation
expenses were $773,000 and $272,000 for the three months ended March 31, 2001
and 2000, respectively.
On January 1, 2001, the Company issued 875,306 shares of restricted stock to
employees who had previously requested to participate in a Stock-for-Options
benefit program (the "Program"). Under the provisions of the Program,
participating employees exchanged two stock options issued under Be Free's 1998
Stock Incentive Plan for one share of restricted stock with a purchase price of
$0.01 per share. The first 25% of the restricted stock purchased vests 15
months from the original stock option grant date. An additional 25% vests each
year after the first vest date, for the next three years. In connection with
the Program, the Company recorded unearned compensation expense for restricted
stock granted to employees below fair market value of $1.9 million. The Company
is recognizing this compensation expense over the vesting period of the
restricted stock which is based on the remaining vesting period of the canceled
options.
INTANGIBLE AMORTIZATION, MERGER RELATED EXPENSES AND CHARGE FOR IMPAIRMENT OF
ASSETS
Intangible amortization, merger related expenses and charge for impairment of
assets totaled $116.5 million and $5.3 million for the three months ended March
31, 2001 and 2000, respectively. All of these charges were incurred in
connection with TriVida which we acquired in February 2000. The amount recorded
in 2001 is composed of $13.8 million of intangible amortization and an
impairment charge of $102.7 million. The amount recorded in 2000 is composed of
$4.5 million of amortization relating to acquired intangibles and $765,000
relating to one-time acquisition related costs.
We periodically evaluate the potential impairment of long-lived assets,
including intangible assets resulting from acquisitions whenever events or
changes in circumstances indicate that the carrying amount of these assets may
exceed their fair value. We consider several factors in determining whether an
impairment may have occurred, including the intended use of the underlying
asset, our market capitalization compared to our book value per share, the
overall business climate and current estimates for expected operating results of
acquired businesses. We have determined that the technology obtained through the
acquisition of TriVida will no longer be integrated into the BFAST technology as
originally intended due to the deterioration of the Internet retail market
market and customer feedback as well as other business factors considered. As a
result of this decision and a review of the other factors, we concluded that an
impairment assessment was required for the long-lived assets of TriVida as of
March 31, 2001.
As a result of our review, we recorded a $102.7 million impairment charge in the
quarter ended March 31, 2001. The charge was determined based upon our
estimated discounted cash flows related to the long-lived assets. The
assumptions supporting
11
the cash flows including the discount rate were determined using our best
estimates as of such date. The remaining carrying amount of the assets will be
amortized over their remaining useful lives. As a result of this impairment, we
expect to recognize amortization expense relating to the acquired intangible
assets of approximately $634,000 per quarter through February 2003. We will
continue to assess the recoverability of the remaining goodwill and intangibles
periodically in accordance with our policy.
INTEREST INCOME (EXPENSE), NET
Interest income (expense), net consists of interest expense on our borrowings,
partially offset by interest income earned on our cash and marketable securities
balances.
Net interest income of $2.2 million for the three months ended March 31, 2001
resulted from interest income of $2.4 million from the investment of a portion
of the proceeds from our initial and secondary public offerings which was
partially offset by interest expense on lease obligations of $123,000. Net
interest income of $1.1 million for the three months ended March 31, 2000
resulted from interest income of $1.2 million from investments offset by
interest expense on lease obligations of $85,000.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2001, we had $147.8 million in cash and cash equivalents and
current marketable securities. For the three months ended March 31, 2001, cash
and cash equivalents increased by $25.1 million while marketable securities,
current and non current, decreased by $31.2 million. These changes reflect the
Company's decision to increase its portfolio's liquidity.
Cash used in operating activities was $4.6 million for the three months ended
March 31, 2001. This use of cash resulted from a net loss of $124.1 million,
which included $15.7 million in noncash depreciation and amortization expense,
an impairment charge of $102.7 million and $773,000 in equity related
compensation. Additionally there was a decrease in accounts payable totaling
$1.0 million and an increase in deferred revenue of $706,000 from December 31,
2000. Accounts payable decreased by $1.0 million due to the timing of vendor
payments. The cash provided as a result of the increase in deferred revenue of
$706,000 relates to the annual prepayments received from some customers per the
terms of their contracts. The decrease in accounts receivable of $503,000 from
December 31, 2000 mitigated the use of cash from operations.
Cash provided by investing activities was $30.3 million for the three months
ended March 31, 2001. Purchases and sales of marketable securities for the three
months ended March 31, 2001 totaled $45.1 million and $76.2 million,
respectively. Capital expenditures totaled $818,000 for the three months ended
March 31, 2001.
Cash used in financing activities was $567,000 for the three months ended March
31, 2001. This use of cash consisted of payments on our capital lease
arrangements of $698,000 which were partially offset by proceeds from the
issuance of shares relating to the Stock-for-Options Program of $81,000 and the
repayment of a note receivable from a stockholder totaling $78,000.
In April 2001, we announced that our Board of Directors has authorized the
repurchase of up to $20 million of Be Free Common Stock. Purchases are
authorized to be made from time to time throughout the remainder of 2001 in the
open market or in privately negotiated transactions depending on market
conditions. The repurchase plan does not obligate us to repurchase any specific
number of shares and may be suspended at any time. We expect to fund any
repurchases using a portion of our current cash and marketable securities
balances. Shares acquired would be available for use under Be Free's employee
stock plans and for other corporate purposes.
We believe that our current cash, cash equivalents and marketable securities
balances 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 shareholders.
RECENT ACCOUNTING PRONOUNCEMENTS
In September 2000, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 140 (SFAS 140), "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities", which
replaces Statement of Financial Accounting Standards No. 125 (SFAS 125),
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." SFAS 140 revises the standards of accounting for
securitizations and other transfers of financial assets and collateral and
requires certain disclosures, but it carries over most of SFAS 125's provisions
without reconsideration. SFAS 140 is effective for transfers and servicing of
assets and extinguishments of liabilities occurring after March 31, 2001. We do
not believe that the adoption of SFAS 140 will have a significant impact on its
financial position, results of operations or cash flows.
12
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 online 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 March 31, 2001 was $214.1 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. 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.
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 further 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.
13
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 service. Any system-wide failure by Exodus, or us
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 system-wide 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 centers and the opening of additional data centers may not
eliminate systems outages or prevent the loss of sales when system outages
occur. Any damage or failure that interrupts or delays our operations could
result in material harm to our business and expose us to material liabilities.
INTENSE COMPETITION IN OUR MARKETS MAY REDUCE THE NUMBER OF OUR CUSTOMERS AND
THE PRICING OF OUR SERVICES
We compete in markets that are new, intensely competitive, highly fragmented and
rapidly changing. We compete against larger public companies as well as against
similar sized, private companies. We face competition in the online marketing
services market in general, as well as in the affiliate marketing program and
site personalization segments specifically. 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 marketing software or services 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 CUSTOMERS MAY REGARD INFORMATION ABOUT THEIR ONLINE SALES AND TRAFFIC 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 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'
Internet sites. Some online customers 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 our marketing services entirely or seek to establish and manage their own
marketing services 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
14
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, 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 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. Software defects and inaccurate
data may cause us to send payments 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. Our services depend on complex software that
we have internally developed or licensed from third parties. Software often
contains defects, particularly when first introduced or when new versions are
released, which can adversely affect performance or result in inaccurate data.
We may not discover software defects that affect our new or current services or
enhancements until after they are deployed. In addition, our services depend on
our customers and their marketing partners supplying us with data regarding
contacts, performance and sales. They may provide us with erroneous or
incomplete data.
TO BE COMPETITIVE, WE MUST CONTINUE TO DEVELOP NEW AND ENHANCED SERVICES, AND
OUR FAILURE TO DO SO MAY ADVERSELY AFFECT OUR PROSPECTS
Our market is characterized by rapid technological change, frequent new service
introductions, 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. 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, among other
items. 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
Internet site and its marketing partners' Internet sites. Privacy concerns may
cause visitors to avoid Internet 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
15
heighten these concerns if businesses must notify users that the data captured
after visiting Internet sites may be used to direct product promotions and
advertising to that user. For example, the United States and the European Union
recently enacted privacy regulations that may result in limits on the collection
and use of some user information. The United States and other countries may
adopt additional 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 obtained through our
acquisition of TriVida or our ability to expand successfully our operations in
Europe and in other foreign countries.
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 Internet 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
Internet site and its marketing partners' Internet 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
Internet users could significantly undermine the commercial viability of our
BSELECT Onsite service. 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. There have been a number of patents granted
relating to online commerce, advertising and affiliate marketing programs.
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 ARE NOT ABLE TO OVERCOME THE CHALLENGES OF OUR INTERNATIONAL OPERATIONS,
OUR REVENUE AND OUR PROSPECTS FOR PROFITABILITY MAY BE MATERIALLY AND
ADVERSELY AFFECTED
16
To date, we have limited experience in developing localized versions of our
services and in marketing, selling and distributing our services
internationally. We provide online marketing services for several customers in
Europe and we may offer our services in additional European countries. 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 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, Internet server technology, database technology,
graphical user interface technology and encryption technology, primarily from
Sun Microsystems, Microsoft Corporation, 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.
17
WE MAY BE EXPOSED TO LIABILITY FOR INFORMATION DISPLAYED ON OUR CUSTOMERS'
INTERNET SITES OR WITHIN THEIR MARKETING PARTNERS' INTERNET SITES
Because the provision of our services requires us to provide a connection to the
Internet sites of our customers and their marketing partners, we may be
perceived as being associated with the content of these Internet 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 Internet 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 Internet site. As a
result, we could be involved in legal proceedings and disputes that are costly
to resolve, regardless of their lack of merit. We may also suffer a loss of
customers or reputational harm based on this information or resulting from our
involvement in these legal proceedings. Furthermore, some foreign governments
have enforced laws and regulations related to content distributed over the
Internet that are more strict than those currently in place in the United
States. Our insurance may not cover claims of these types or may not be adequate
to indemnify us for all liability that may be imposed. There is a risk that a
single claim or multiple claims, if successfully asserted against us, could
exceed the total of our coverage limits. There is also a risk that a single
claim or multiple claims asserted against us may not qualify for coverage under
our insurance policies as a result of coverage exclusions that are contained
within these policies. Any imposition of liability, particularly liability that
is not covered by insurance or is in excess of insurance coverage could have a
material adverse effect on our reputation and our business and operating
results, or could result in the imposition of criminal penalties.
WE EXPECT OUR OPERATING RESULTS TO FLUCTUATE AND THE PRICE OF OUR COMMON STOCK
COULD FALL IF QUARTERLY RESULTS ARE LOWER THAN THE EXPECTATIONS OF SECURITIES
ANALYSTS OR STOCKHOLDERS
We believe that quarter-to-quarter comparisons of our operating results are not
necessarily meaningful. You should not rely on the results of one quarter as an
indication of our future performance. If our quarterly operating results fall
below the expectations of securities analysts or stockholders, however, the
price of our common stock could fall. We have experienced significant
fluctuation in our quarterly operating results and may continue to experience
significant fluctuation.
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.
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PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(d) 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 March 31, 2001,
Be Free spent approximately $5.0 million to repay certain subordinated
debt, $9.1 million in capital expenditures, $25.1 million for sales and
marketing, $10.2 million for client services expense, $14.9 million for
development and engineering costs, $5.4 million for network costs and
$9.5 million for other working capital for general corporate purposes.
These life to date expenses have fully used the proceeds from Be Free's
initial public offering. 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
(b) Reports on Form 8-K - None
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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)
Date: May 11, 2001 /s/ Gordon B. Hoffstein
-----------------------
Gordon B. Hoffstein
Chief Executive Officer, President and
Chairman
(Principal Executive Officer)
Date: MAY 11, 2001 /s/ Stephen M. Joseph
---------------------
Stephen M. Joseph
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
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