-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WCM/mrz9me9kE8ePt3dw05trNYJEnBBtmL9UtYAl2/eDhmwfUt41Y64bGp1rhs4f XVtJdDmK+K6w/bRYkyOMkA== 0000927016-01-501017.txt : 20010516 0000927016-01-501017.hdr.sgml : 20010516 ACCESSION NUMBER: 0000927016-01-501017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BE FREE INC CENTRAL INDEX KEY: 0001084866 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 043303188 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-27271 FILM NUMBER: 1634692 BUSINESS ADDRESS: STREET 1: 154 CRANE MEADOW RD SUITE 100 CITY: MARLBOROUGH STATE: MA ZIP: 01752 BUSINESS PHONE: 5083578888 MAIL ADDRESS: STREET 1: BE FREE INC STREET 2: 154 CRANE MEADOW ROAD CITY: MARLBOROUGH STATE: MA ZIP: 01752 10-Q 1 d10q.txt FORM 10-Q 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. ------------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 04-3303188 ------------------------------------------------------------ (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification No.) 154 Crane Meadow Road ------------------------------------------------------------ Marlborough, Massachusetts 01752 (Address of principal executive offices) (508) 480-4000 ------------------------------------------------------------ (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of 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. 18 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 19 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) 20 -----END PRIVACY-ENHANCED MESSAGE-----