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 June 30, 2001
[ ] 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
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
154 Crane Meadow Road
Marlborough, Massachusetts 01752
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(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 June 30, 2001, the registrant had outstanding 65,552,542 shares of voting
common stock, $0.01 par value per share.
TABLE OF CONTENTS
FORM 10-Q QUARTERLY REPORT
QUARTER ENDED JUNE 30, 2001
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS Page
Consolidated Balance Sheets (unaudited) as of June 30, 2001
and December 31, 2000......................................... 3
Consolidated Statements of Operations (unaudited) for the
three months and six months ended June 30, 2001 and 2000...... 4
Consolidated Statements of Cash Flows (unaudited) for the
six months ended June 30, 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..................................... 10
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.... 21
PART II - OTHER INFORMATION
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 21
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K.............................. 21
SIGNATURE PAGE................................................ 22
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)
JUNE 30, DECEMBER 31,
2001 2000
---------- -----------
ASSETS
Current assets:
Cash and cash equivalents...................... $ 40,766 $ 27,527
Marketable securities.......................... 93,548 122,333
Accounts receivable, net of allowances
of $897 and $658, respectively............... 2,182 3,903
Other current assets........................... 4,654 4,815
--------- --------
Total current assets......................... 141,150 158,578
Marketable securities.......................... 4,072 4,021
Property and equipment, net of accumulated
depreciation of $9,335 and $6,277,
respectively................................. 16,011 17,443
Intangible assets, net of accumulated
amortization of $60,237 and $45,843,
respectively................................. 4,251 119,217
Deposits....................................... 872 1,023
Other assets................................... 121 93
--------- --------
Total assets................................... $ 166,477 $300,375
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................... $ 1,698 $ 1,937
Accrued expenses............................... 3,819 4,857
Deferred revenue............................... 1,929 1,250
Current portion of long-term debt.............. 2,695 2,593
--------- --------
Total current liabilities.................... 10,141 10,637
Long-term debt, net of current portion......... 1,351 2,781
--------- --------
Total liabilities............................ 11,492 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..................... 381,557 379,932
Unearned compensation.......................... (3,861) (3,805)
Stockholders' notes receivable................. - (78)
Accumulated other comprehensive income......... 172 177
Accumulated deficit............................ (221,763) (89,929)
--------- ---------
156,775 286,957
Treasury stock, at cost (1,475 shares at
June 30, 2001)............................... (1,790) -
--------- ---------
Total stockholders' equity................... 154,985 286,957
--------- ---------
Total liabilities and stockholders' equity....... $ 166,477 $ 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 THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2001 2000 2001 2000
---- ---- ---- ----
Revenue............................$ 5,525 $ 4,320 $ 10,948 $ 7,949
Operating expenses:
Network costs.................... 1,673 852 3,094 1,455
Sales and marketing (exclusive
of equity related compensation
of $184, $153, $488 and $305,
respectively).................. 4,435 4,746 9,699 8,305
Client services (exclusive of
equity related compensation of
$34, $39, $93 and $79,
respectively).................. 1,727 1,798 3,786 3,325
Development and engineering
(exclusive of equity related
compensation of $82, $36, $216,
and $76, respectively)......... 2,832 2,729 6,066 4,297
General and administrative
(exclusive of equity related
compensation of $274, $160,
$550 and $200, respectively)... 2,193 1,755 4,416 2,931
Restructuring charges............ 1,093 - 1,406 -
Equity related compensation...... 574 388 1,347 660
Intangible amortization,
merger related expenses and
charge for impairment of
assets......................... 634 13,754 117,125 19,103
------- -------- --------- --------
Total operating expenses......... 15,161 26,022 146,939 40,076
------- -------- --------- --------
Operating loss................... (9,636) (21,702) (135,991) (32,127)
Interest income.................... 2,022 2,688 4,372 3,854
Interest expense................... (92) (104) (215) (189)
------- -------- --------- --------
Net loss........................... (7,706) $(19,118) $(131,834) $(28,462)
======= ======== ========= ========
Basic and diluted net loss
per share...................... $(0.12) $(0.31) $(2.06) $(0.49)
======= ======== ========= ========
Shares used in computing basic
and diluted net loss
per share...................... 64,187 61,963 64,111 58,243
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)
SIX MONTHS ENDED
JUNE 30, JUNE 30,
2001 2000
-------- --------
Cash flows for operating activities:
Net loss........................................... $(131,834) $ (28,462)
Adjustments to reconcile net loss to net cash
used in operating activities:
Charge for impairment of assets.................... 102,736 -
Depreciation and amortization...................... 17,772 19,812
Loss on disposal of assets......................... 40 -
Equity related compensation........................ 1,347 660
Provisions for doubtful accounts................... 239 283
Changes in operating assets and liabilities
net of the effects from the purchase
of Trivida Corporation:
Accounts receivable.............................. 1,482 (2,195)
Deposits......................................... 151 (199)
Accounts payable................................. (239) (852)
Accrued expenses................................. (1,220) 413
Deferred revenue................................. 679 1,008
Other assets..................................... 115 (2,166)
--------- ---------
Net cash used in operating activities................ (8,732) (11,698)
Cash flows from (for) investing activities:
Purchases of property and equipment................ (3,727) (2,018)
Cash paid for Trivida acquisition,
net of cash acquired............................. - (3,446)
Proceeds from the sale of
marketable securities............................ 126,325 30,411
Purchases of marketable securities................. (97,896) (139,503)
--------- ----------
Net cash provided by (used in) investing
activities ...................................... 24,702 (114,556)
Cash flows from (for) financing activities:
Proceeds from issuance of Common Stock,
net of offering costs............................ 9 105,122
Acquisition of treasury shares..................... (1,719) -
Proceeds from exercise of options and warrants..... 73 668
Proceeds from Employee Stock Purchase Plan......... 177 519
Proceeds from repayment of notes receivable
from stockholders................................ 78 92
Payments on long-term debt......................... (1,329) (693)
--------- ----------
Net cash (used in) provided by financing
activities....................................... (2,711) 105,708
Effect of exchange rate changes on cash.............. (20) (2)
--------- ----------
Net increase (decrease) in cash and cash
equivalents...................................... 13,239 (20,548)
Cash and cash equivalents at beginning
of period........................................ 27,527 58,976
--------- ----------
Cash and cash equivalents at end of
period........................................... $ 40,766 $ 38,428
========= ==========
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. The 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. Two services are offered 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 component costs, the cost of revenue line item on the
Consolidated Statements of Operations was renamed 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 July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all
business combinations be accounted for under the purchase method only and that
certain acquired intangible assets in a business combination be recognized as
assets apart from goodwill. SFAS No. 142 requires that ratable amortization of
goodwill be replaced with periodic tests of the impairment of goodwill and that
intangible assets other than goodwill be amortized over their useful lives.
SFAS No.141 is effective for all business combinations initiated after June 30,
2001 and for all business combinations accounted for by the purchase method for
which the date of acquisition is after June 30, 2001. The provisions of SFAS
No. 142 will be effective for fiscal years beginning after December 15, 2001,
and will thus be adopted by the Company, as required, in the year ending
December 31, 2002. The impact of SFAS No. 141 and SFAS No. 142 on the Company's
financial statements has not yet been determined.
6
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).
D. IMPAIRMENT CHARGE
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of 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 $102,700 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 during the three months ended March 31, 2001. This
charge comprises severance costs of $274 and legal and other costs of $38. At
June 30, 2001, the full charge had been paid.
In April 2001, the Company announced a further reduction in workforce. The
restructuring plan included involuntary terminations and the consolidation of
certain office space. The Company reduced its workforce by 43 employees, which
represents approximately 16% of the total employee base, and recorded a
restructuring charge of $1,093 during the three months ended June 30, 2001. This
charge comprises severance costs of $600, termination payments related to rental
property and equipment of $303, a loss on the disposal of fixed assets of $40
and moving and other miscellaneous costs of $150. At June 30, 2001, $722 of this
charge had been paid. The Company expects the balance to be paid during the next
twelve months.
7
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:
JUNE 30
2001 2000
---- ----
Options to purchase shares of Common Stock.......... 6,611,454 6,155,581
Unvested shares of restricted stock................. 2,094,481 3,082,053
Warrants to purchase shares of Common Stock......... - 733,000
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. 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 LOSS
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 loss:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2001 2000 2001 2000
-------- -------- --------- --------
Net loss......................... $(7,706) $(19,118) $(131,834) $(28,462)
Other comprehensive income:
Change in unrealized gain (loss)
on marketable securities
during period................ (145) (42) (3) (70)
Foreign currency translation
adjustment................... 45 (2) (2) (2)
------- -------- --------- ---------
Comprehensive loss............... $(7,806) $(19,162) $(131,839) $(28,534)
======= ======== ========= ========
8
I. SUPPLEMENTAL CASH FLOW DISCLOSURES
SIX MONTHS ENDED
JUNE 30
2001 2000
---- ----
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
==== ========
J. SUBSEQUENT EVENTS
On July 25, 2001, the Company announced that its Board of Directors had adopted
a Shareholder Rights Plan (the "Plan"). All Company shareholders of record as of
August 8, 2001, received one right to purchase shares of a new series of
Preferred Stock ("Rights") for each share of Common Stock owned.
The Rights are not being distributed in response to any current effort to
acquire control of the Company. The plan includes safeguards against tender
offers, squeeze-out mergers and other takeover tactics that limit the ability of
all shareholders to realize the long-term value of their investment in the
Company. The Rights do not prevent a takeover, but are an attempt to encourage
anyone seeking to acquire the Company to negotiate with the Board of Directors
prior to attempting one.
Initially, each Right will automatically trade with the underlying common stock
and will not be exercisable. Subject to limited exceptions, the Rights will
become exercisable if a person or entity commences a tender offer for 15 percent
or more of outstanding Be Free Common Stock. Each Right may then be exercised
for $12 in exchange for one one-thousandth of a share of the newly created
Series A Junior Participating Preferred Stock of the Company.
The Rights may also become exercisable if a person or entity acquires 15 percent
or more of outstanding Be Free Common Stock. Each Right, other than those owned
by the acquiring entity, would permit the holder to purchase shares of Be Free's
common stock having a market value of two times the $12 exercise price of the
Right. Similarly, if Be Free is involved in a merger or other transaction with
another company in which Be Free is not the surviving corporation, or transfers
more than 50 percent of its assets to another company, each Right, other than
those owned by the acquiring entity, would permit the holder to purchase shares
of the acquiring company's common stock having a market value of two times the
$12 exercise price of the Right. Be Free's Board of Directors may redeem the
9
for $0.001 per Right at any time up to ten business days after a person or
entity has acquired 15 percent or more of the outstanding common stock. Unless
the Rights are exercised or redeemed earlier, they will expire on July 24, 2011.
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
"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
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 June 30,
2001, we had an accumulated deficit of approximately $221.8 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.
10
RESULTS OF OPERATIONS
REVENUE
Through June 30, 2001, revenue includes integration and monthly service fees for
BFAST and BSELECT. Revenue for the three months ended June 30, 2001 increased
28%, to $5.5 million, from $4.3 million for the three months ended June 30,
2000. For the six months ended June 30, 2001, revenue increased 38%, to $10.9
million, from $7.9 million for the six months ended June 30, 2000. Although our
customer base decreased by 7% in the quarter ended June 30, 2001 in comparison
to June 30, 2000, our average monthly revenue per customer increased by 38%.
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 June 30, 2001 increased 96%, to $1.7
million, from $852,000 for the three months ended June 30, 2000. For the six
months ended June 30, 2001, network costs increased 113%, to $3.1 million, from
$1.5 million for the six months ended June 30, 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 the current quarter of $210,000 in depreciation, equipment
lease and data center facilities expenses. Network costs also increased by
approximately $600,000 due to data testing charges relating to the migration of
our primary data center from New Jersey to Virginia.
SALES AND MARKETING EXPENSES
Sales and marketing expenses consist of payroll and related costs for our sales,
marketing and business development groups. Also included are the costs for
marketing programs to promote our services to our current and prospective
customers, as well as programs to recruit marketing partners for our current
customers.
Sales and marketing expenses for the three months ended June 30, 2001 decreased
7%, to $4.4 million, from $4.7 million for the three months ended June 30, 2000.
For the six months ended June 30, 2001, sales and marketing expenses increased
17%, to $9.7 million, from $8.3 million for the six months ended June 30, 2000.
The net reduction in the current quarter of $311,000 is attributable to the
reduction in headcount of 24 marketing employees resulting in a decrease of
$463,000 and a reduction in marketing programs resulting in a decrease of
$247,000, which was partially offset by increased payroll costs of $580,000
related to a change in sales compensation plans.
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 customer's marketing
partners on an optional basis for additional fees.
11
Client services expenses for the three months ended June 30, 2001 decreased 4%,
to $1.7 million, from $1.8 million for the three months ended June 30, 2000.
For the six months ended June 30, 2001, client services expenses increased by
14%, to $3.8 million, from $3.3 million for the six months ended June 30, 2000.
The 4% decrease in expenses for the current quarter was primarily due to a
reduction in client services headcount of 21 employees, generating a cost
reduction of $180,000. This reduction of $180,000 was partially offset by an
increase of $75,000 relating to outsourced client service costs.
DEVELOPMENT AND ENGINEERING
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 June 30, 2001
increased 4%, to $2.8 million, from $2.7 million for the three months ended June
30, 2000. For the six months ended June 30, 2001, development and engineering
expenses increased 41% to $6.1 million from $4.3 million for the six months
ended June 30, 2000. For the current quarter, development and engineering costs
increased by $390,000 relating to development costs that were not eligible for
capitalization which were partially offset by decreased personnel and related
costs of $250,000 associated with the reduction in headcount of 24 employees.
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 June 30, 2001
increased by 25%, to $2.2 million, from $1.8 million for the three months ended
June 30, 2000. For the six months ended June 30, 2001, general and
administrative expenses increased 51% to $4.4 million from $2.9 million for the
six months ended June 30, 2000. For the current quarter, approximately $320,000
of the increase was due to professional service fees for strategic consulting
services and an $82,000 increase in franchise taxes.
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. The Company reduced its workforce by 12 employees, which
represented 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 June 30, 2001, the full amount of this charge had been paid.
On April 25, 2001, we announced a further reduction in workforce of 43 employees
throughout the organization. This represented approximately 16% of the total
workforce. The reduction was approved by management in response to continued
loss of customers and longer than anticipated sales cycles. We recorded a
restructuring charge of $1,093,000 in the second quarter related to this event.
At June 30, 2001, $722,000 of this charge had been paid. The Company expects the
balance to be paid during the next twelve months.
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
12
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 No. 25 and Statement of Financial Accounting
Standards No. 123. Equity related compensation expenses were $574,000 and
$388,000 for the three months ended June 30, 2001 and 2000, respectively. For
the six months ended June 30, 2001, equity related compensation expenses were
$1.3 million as compared to $660,000 for the same period last year.
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 $634,000 and $13.8 million for the three months ended June 30,
2001 and 2000, respectively, and $117.1 million and $19.1 million for the six
months ended June 30, 2001 and 2000, respectively. All of these charges were
incurred in connection with TriVida, which we acquired in February 2000. The
amount recorded during the six months ended June 30, 2001 is composed of $14.4
million of intangible amortization and an impairment charge of $102.7 million.
The amount recorded during the six months ended June 30, 2000 is composed of
$18.1 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 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 and recorded an impairment charge in the quarter ended March 31, 2001 of
$102.7 million.
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 income earned on our cash
and marketable securities balances partially offset by interest expense on our
borrowings.
Net interest income of $1.9 million for the three months ended June 30, 2001,
resulted from interest income of $2.0 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 $92,000. Net
interest income of $4.2
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million for the six months ended June 30, 2001, resulted from interest income of
$4.4 million from investments which was partially offset by interest expense
on lease obligations of $215,000.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2001, we had $138.4 million in cash and cash equivalents and
marketable securities. For the six months ended June 30, 2001, cash and cash
equivalents increased by $13.2 million while marketable securities, current and
non-current, decreased by $28.8 million. These changes reflect the Company's
decision to increase the liquidity of its portfolio.
Cash used in operating activities for the six months ended June 30, 2001 was
$8.7 million. This use of cash resulted from a net loss of $131.8 million,
which included non-cash expenses of $17.8 million in depreciation and
amortization expense, an impairment charge of $102.7 million and $1.3 million in
equity related compensation. Additionally, there was a decrease in accounts
receivable of $1.5 million, an increase in deferred revenue of $680,000 and a
decrease in accrued liabilities of $1.2 million from December 31, 2000. The
decrease in accounts receivable was due to an increase in cash collections.
Accrued liabilities decreased by $1.2 million due to the timing of paying
vendor invoices.
Cash provided by investing activities was $24.7 million for the six months ended
June 30, 2001. Purchases and sales of marketable securities for the six months
ended June 30, 2001 totaled $97.9 million and $126.3 million, respectively.
Capital expenditures totaled $3.7 million for the six months ended June 30,
2001.
Cash used in financing activities was $2.7 million for the six months ended June
30, 2001. This use of cash consisted of $1.7 million to repurchase 1.3 million
shares of Be Free Common Stock and payments on our capital lease arrangements of
$1.3 million. These payments were partially offset by proceeds from the issuance
of shares relating to the Employee Stock Purchase Plan of $177,000, and the
Stock-for-Options Program of $82,000, and the repayment of a note receivable
from a stockholder totaling $78,000.
In April 2001, we 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 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. As of June 30, 2001, we have
repurchased 1,328,500 shares of Be Free Common Stock.
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 stockholders.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all
business combinations be accounted for under the purchase method only and that
certain acquired intangible assets in a business combination be recognized as
assets apart from goodwill. SFAS No. 142 requires that ratable amortization of
goodwill be replaced with periodic tests of the impairment of goodwill and that
intangible assets other than goodwill be amortized over their useful lives.
SFAS No.141 is effective for
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all business combinations initiated after June 30, 2001 and for all business
combinations accounted for by the purchase method for which the date of
acquisition is after June 30, 2001. The provisions of SFAS No. 142 will be
effective for fiscal years beginning after December 15, 2001, and we will thus
adopt these provisions as required, in the year ending December 31, 2002. The
impact of SFAS No. 141 and SFAS No. 142 on our financial statements has not yet
been determined.
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 June 30, 2001 was $221.8 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.
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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 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.
16
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, 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, 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,
17
these delays have not had a material effect on our business. If we experience
material delays in introducing new services and enhancements, customers may
forego 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 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.
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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 leasing
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
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.
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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 in 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.
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
20
polices. 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 anaylsts 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
a material loss from our marketable security investments and, therefore, believe
that our potential interest rate exposure is not material.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the 2001 Annual Meeting of Stockholders of the Company (the "Annual Meeting")
on May 24, 2001, the following matters were acted upon by the stockholders of
the Company:
1. the election of two Class II Directors;
2. the ratification of the appointment of PricewaterhouseCoopers LLP as
the Company's independent auditors for the current fiscal year.
The number of shares of Common Stock issued, outstanding and eligible to vote as
of the record date of March 26, 2001 was 66,789,548. The other directors of the
Company, whose terms of office as directors continued after the Annual Meeting
are Gordon B. Hoffstein, Samuel P. Gerace, Jr., W. Michael Humphreys and
Kathleen L. Biro. The results of the voting on each of the matters presented to
stockholders at the Annual Meeting are set forth below:
1. Election of two Class II Directors:
Votes For Votes Withheld
------------- ----------------
Ted R. Dintersmith 56,193,826 987,103
Jeffrey F. Rayport 53,763,688 3,417,241
2. Ratification of the appointment of Auditors:
Votes Cast For Votes Against Abstentions
-------------- ------------- -----------
57,083,175 48,752 49,002
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: August 13, 2001 /s/ Gordon B. Hoffstein
------------------------------
Gordon B. Hoffstein
Chief Executive Officer,
President and Chairman
(Principal Executive Officer)
Date: August 13, 2001 /s/ Stephen M. Joseph
------------------------------
Stephen M. Joseph
Chief Financial Officer and
Treasurer (Principal Financial
and Accounting Officer)
22