<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 15, 1999
REGISTRATION NO. 333-86755
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
FREEMARKETS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7389 04-3265483
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
22ND FLOOR, ONE OLIVER PLAZA
210 SIXTH AVENUE
PITTSBURGH, PA 15222
(412) 434-0500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
GLEN T. MEAKEM
CHIEF EXECUTIVE OFFICER
22ND FLOOR, ONE OLIVER PLAZA
210 SIXTH AVENUE
PITTSBURGH, PA 15222
(412) 434-0500
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
MARLEE S. MYERS, ESQ.
DAVID A. GERSON, ESQ. KEITH F. HIGGINS, ESQ.
ERIC D. KLINE, ESQ. ROPES & GRAY
MORGAN, LEWIS & BOCKIUS LLP ONE INTERNATIONAL PLACE
THIRTY-SECOND FLOOR, ONE OXFORD CENTRE BOSTON, MA 02110
PITTSBURGH, PA 15219-1417 (617) 951-7000
(412) 560-3300 FAX: (617) 951-7050
FAX: (412) 560-3399
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=================================================================================================================================
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED(1) PER SHARE(2) AGGREGATE OFFERING PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Common Stock, $0.01 par value.......... 4,025,000 $16.00 $64,400,000 $17,903(3)
=================================================================================================================================
</TABLE>
(1) Includes 525,000 shares issuable pursuant to an over-allotment option
granted to the underwriters.
(2) Estimated solely for the purpose of computing the amount of the registration
fee; based on a bona fide estimate of the maximum offering price per share
of the securities being registered in accordance with Rule 457(a) under the
Securities Act.
(3) Previously paid.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
The information in this preliminary prospectus is not complete and may be
changed. These securities may not be sold until the registration statement filed
with the Securities and Exchange Commission is effective. This preliminary
prospectus is not an offer to sell these securities nor does it seek an offer to
buy these securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION. DATED OCTOBER 15, 1999.
3,500,000 Shares
FreeMarkets, Inc. Logo
Common Stock
------------------------
This is an initial public offering of shares of common stock of
FreeMarkets, Inc. All of the shares of common stock are being sold by
FreeMarkets.
Before this offering, there has been no public market for our common stock.
We estimate that the initial public offering price will be between $14.00 and
$16.00 per share. We have applied to have our common stock approved for
quotation on the Nasdaq National Market under the symbol "FMKT".
See "Risk Factors" beginning on page 9 to read about factors you should
consider before buying shares of our common stock.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to FreeMarkets................... $ $
</TABLE>
If the underwriters sell more than 3,500,000 shares of common stock, the
underwriters have the option to purchase up to an additional 525,000 shares from
FreeMarkets at the initial public offering price less the underwriting discount.
At our request, the underwriters have reserved up to 350,000 shares of the
common stock offered in this prospectus for sale at the initial public offering
price to a subsidiary of United Technologies Corporation, and an additional
175,000 shares of the common stock offered in this prospectus for sale at the
initial public offering price to our employees, officers and directors.
The underwriters expect to deliver the shares against payment in New York,
New York on , 1999.
------------------------
Joint Book-Running Managers
GOLDMAN, SACHS & CO. MORGAN STANLEY DEAN WITTER
------------------------
DONALDSON, LUFKIN & JENRETTE
WIT CAPITAL CORPORATION
------------------------
Prospectus dated , 1999.
<PAGE> 3
INSIDE FRONT COVER
The front of the gatefold includes a picture of a die cast metal piston
with the following text above it: "At 8:01 am, this piston cost $3.02. At 8:39
am, it cost $1.95."
A pull-out text box appears at the upper left-hand corner of the inside
gatefold with the following text: "In November 1998, FreeMarkets conducted an
online auction for die cast parts, including this piston."
The inside gatefold pages also include three pictures of computer screens,
each showing a graph generated by our BidWare software that illustrates prices
declining as a FreeMarkets online auction progresses.
The following text appears under the first picture of a bid graph generated
at the start of the auction: "At 8:00 am the online auction for all 17 lots, or
groups of parts, opened. The first bid for Lot 1, which included this piston and
other parts, was above the previous price our client paid. One second later, a
new bid was 6% below the previous price paid." A pull-out text box appears over
the right-hand corner of the picture and indicates the time the bid graph was
generated and the market bid for the contract at that time. The text that
appears reads as follows: "8:01 am. 2 Bids Received for Lot 1."
The following text appears under the second picture of a bid graph
generated during the middle of the auction: "Sixteen minutes later, 30 bids had
been received for Lot 1, with the low bid at 20% below previous price paid." A
pull-out text box appears over the right-hand corner of the picture and
indicates the time the bid graph was generated and the market bid for the
contract at that time. The text that appears reads as follows: "8:16 am. 30 Bids
Received for Lot 1."
The following text appears under the third picture of a bid graph generated
at the end of the auction: "By the time the bidding for Lot 1 closed, less than
40 minutes after opening, the lowest bid price was 23% below the total previous
price paid for all of the parts in this lot." A pull out text box appears over
the right-hand corner of the picture and indicates the time the bid graph was
generated and the market bid for the contract at that time. The text that
appears reads as follows: "8:39 am. 41 Bids Received for Lot 1."
A paragraph appears in the lower left-hand corner of the inside gatefold
with the following text: "Before many people had even heard of the Internet,
FreeMarkets was conducting successful online auctions. Since 1995, we've created
online auctions for more than 30 clients from among the world's largest
industrial purchasing organizations, receiving bids from over 2,000 suppliers.
Our auctions have covered more than 50 product categories, with almost $1
billion in auction volume in 1998 alone."
A table containing a bulleted list of some product categories for which we
have conducted auctions appears in the top right-hand corner of the inside
gatefold. The following text appears in this table: "Some of the product
categories for which we have conducted auctions: Chemicals, Coal, Commercial
Machinings, Corrugated Packaging, Die Castings, Fasteners, Injection Molded
Plastics, Metal Fabrications, Metal Stampings, Molded Rubber, Motor Freight,
Printed Circuit Boards, Service Center Metals, Transformers."
A pull-out text box appears at the lower right-hand corner of the inside
gatefold with the following text: "Total potential savings for this client that
day: $3.7 million."
Our logo, with the word "FreeMarkets" beside it, appears at the bottom of
the inside gatefold with the following tag-line text below it: "Redefining
purchasing power for the Global 1000."
The following text appears at the bottom left of the inside gatefold:
"FreeMarkets(R), BidWare(R) and BidServer(R) are registered trademarks and
SmartRFI(TM), SmartRFQ(TM) and CBE(TM) are trademarks of FreeMarkets, Inc. in
the United States. All other trademarks and service marks mentioned in this
prospectus are the property of their respective owners."
The following text appears at the bottom left of the inside gatefold: "Each
auction is a distinct event. The results of any auction cannot be predicted, and
may not be duplicated."
<PAGE> 4
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding FreeMarkets, Inc. and our consolidated financial
statements and the related notes appearing elsewhere in this prospectus. Unless
otherwise indicated, this prospectus assumes the automatic conversion of our
outstanding preferred stock into 16,051,438 shares of common stock, effective as
of the closing of this offering. This prospectus also assumes no exercise of the
underwriters' over-allotment option.
FREEMARKETS, INC.
FreeMarkets creates customized business-to-business online auctions for the
world's largest buyers of industrial parts, raw materials and commodities. We
created online auctions covering approximately $1.0 billion worth of purchase
orders in 1998 and $1.4 billion worth of purchase orders in the nine months
ended September 30, 1999. We estimate that the resulting savings for our clients
ranged from approximately 2% to more than 25%. Since 1995, we have created
online auctions for more than 30 clients in over 50 product categories,
including injection molded plastic parts, commercial machinings, metal
fabrications, chemicals, printed circuit boards, corrugated packaging and coal.
More than 2,000 suppliers from over 30 countries have participated in our
auctions. Our current clients include United Technologies Corporation, General
Motors Corporation, Quaker Oats, Emerson Electric, Allied Signal Corporation and
the Commonwealth of Pennsylvania. Two of our clients accounted for 58% of our
revenues during the first nine months of 1999.
Based on industry research and government statistics, we estimate that
manufacturers worldwide purchase approximately $5 trillion each year of "direct
materials" -- the industrial parts and raw materials that they incorporate into
finished products. Because these direct materials are often custom-made to
buyers' specifications, there are no catalogs or price lists to enable buyers to
make price comparisons. The process of purchasing direct materials is further
complicated by the fragmentation of supply markets and the importance of product
quality in supplier selection. Because this complexity leads to market
inefficiencies, we think that buyers of direct materials often pay prices that
are too high.
The Internet offers an opportunity to create more efficient markets for
direct materials. As the number of Internet users has grown, large companies
have increasingly adopted electronic commerce as a way to do business. Forrester
Research estimates that United States business-to-business electronic commerce
will grow from $109 billion in 1999 to $1.3 trillion in 2003, accounting for 90%
of the dollar value of all electronic commerce by 2003. However, because of the
complexity of direct materials purchasing, we believe that Internet technology
alone cannot solve the problems faced by large industrial buyers. To solve these
problems, we think that Internet technology must be combined with services that
are customized to buyers' needs.
We combine our proprietary BidWare Internet technology with our in-depth
knowledge of supply markets to help large industrial buyers obtain lower prices
and make better purchasing decisions. In a FreeMarkets online auction, suppliers
from around the world can submit bids in a real-time, interactive competition.
Our auctions are "downward price" auctions in which suppliers continue to lower
their prices until the auction is closed. Before each auction, we work with our
client to identify and screen suppliers and assemble a request for quotation
that provides detailed, clear and consistent information for suppliers to use as
a basis for their competitive bids. Our service, which we call "market making",
creates a custom market for the direct materials or other goods or services that
our client purchases in a particular auction.
We seek to be the world's leading provider of business-to-business online
auctions. Our strategy is to extend our client base in our target market of
large purchasing organizations. We also intend to expand into additional product
categories where our online auctions can generate savings for buyers and to add
new functions and features to our BidWare technology to further automate
portions of our market making process.
5
<PAGE> 5
THE OFFERING
Shares offered by FreeMarkets...... 3,500,000 shares
Shares to be outstanding after the
offering........................... 33,854,958 shares
Use of Proceeds.................... For working capital and general corporate
purposes. See "Use of Proceeds".
Proposed Nasdaq National Market
Symbol............................. "FMKT"
The number of shares to be outstanding after this offering is based on our
shares of common stock and preferred stock outstanding as of September 30, 1999.
This number excludes 11,396,830 shares issuable upon the exercise of options and
Series A and Series B warrants outstanding as of September 30, 1999.
6
<PAGE> 6
SUMMARY CONSOLIDATED FINANCIAL DATA
The following tables summarize the consolidated financial data for our
business. You should read this data along with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our consolidated
financial statements and related notes. Potentially dilutive common shares have
been excluded from the shares used to compute earnings per share in each loss
year because their inclusion would be antidilutive. Pro forma earnings per share
data reflects the conversion of all outstanding preferred stock into common
stock, even if the effect of the conversion is antidilutive. As adjusted
consolidated balance sheet data reflects the issuance of shares in this
offering, at an assumed initial public offering price of $15.00 per share and
after deducting the underwriting discount and the expenses of this offering.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues......................... $ 409 $ 1,783 $ 7,801 $ 4,802 $ 13,037
Gross (loss) profit.............. (97) 634 3,543 1,972 5,670
Operating costs:
Research and development....... 394 292 842 563 2,960
Sales and marketing............ 321 586 656 387 5,625
General and administrative..... 630 837 2,026 1,129 5,890
Stock-based expense............ -- -- -- -- 4,728
Operating (loss) income.......... (1,442) (1,081) 19 (107) (13,533)
Net (loss) income................ (1,431) (1,061) 234 89 (13,479)
Earnings per share:
Basic.......................... (.14) (.10) .02 .01 (1.00)
Diluted........................ (.14) (.10) .01 .00 (1.00)
Shares used to compute earnings
per share:
Basic.......................... 10,316,599 10,618,481 11,191,670 10,990,053 13,451,407
Diluted........................ 10,316,599 10,618,481 26,776,611 25,224,247 13,451,407
Pro forma earnings per share:
Basic.......................... $ .01 $ (.51)
Diluted........................ .01 (.51)
Shares used to compute pro forma
earnings per share:
Basic.......................... 22,575,470 26,394,512
Diluted........................ 26,776,611 26,394,512
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
--------------------------
ACTUAL AS ADJUSTED
------ -----------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $22,259 $68,759
Working capital............................................. 33,717 80,217
Total assets................................................ 45,677 92,177
Long-term debt, excluding current portion................... 1,976 1,976
Total stockholders' equity.................................. 37,761 84,261
</TABLE>
7
<PAGE> 7
AUCTION VOLUME AND CLIENT DATA
The following data represent the aggregate volume of all direct materials,
commodities and services for which we have conducted an online auction, and the
number of clients that we have served, in the periods presented.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------- ------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Auction volume (in millions)................... $124 $257 $979 $615 $1,363
Number of clients.............................. 8 13 12 11 21
</TABLE>
Please see "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Determination of Auction Volume and Achievable Savings"
for a discussion of how we calculate auction volume.
------------------------
Our executive offices are located at One Oliver Plaza, 22nd Floor, 210
Sixth Avenue, Pittsburgh, Pennsylvania 15222. Our telephone number is (412)
434-0500, our facsimile number is (412) 434-0508, and our Internet address is
www.freemarkets.com. The information on our website is not a part of this
prospectus.
8
<PAGE> 8
RISK FACTORS
You should carefully consider the risks and uncertainties described below
and the other information in this prospectus before deciding whether to invest
in shares of our common stock. The risks and uncertainties described below are
not the only ones we face. Additional risks and uncertainties not known to us or
that we now believe to be unimportant could also impair our business. If any of
the following risks actually occur, our business, financial condition or
operating results could be negatively affected. If this happens, the trading
price of our common stock could decline, and you may lose part or all of your
investment.
OUR LIMITED OPERATING HISTORY MAKES EVALUATING OUR BUSINESS AND FUTURE PROSPECTS
DIFFICULT
FreeMarkets has a very limited operating history. Our company was founded
in 1995 and did not generate a significant amount of revenues until 1998.
Because our operating history is so limited, it is very difficult to evaluate
our business and our future prospects. We will encounter risks and difficulties
frequently encountered by companies in an early stage of commercial development
in new and rapidly evolving markets. In order to overcome these risks and
difficulties, we must, among other things:
- execute our business and marketing strategy successfully;
- increase the number of industrial buyers that use our online auction
services;
- attract a sufficient number of suppliers to participate in our online
auctions to sustain competitive auctions;
- enter into long-term agreements with clients who have tried our service
under initial short-term agreements;
- upgrade our technology and information processing systems so that we can
create a wider variety and greater number of online auctions; and
- continue to attract, hire, motivate and retain qualified personnel.
If we fail to achieve these objectives, we may not realize sufficient
revenues or net income to succeed.
WE USE SIGNIFICANTLY MORE CASH THAN WE GENERATE
Since our inception, our operating and investing activities have used more
cash than they have generated. Because we will continue to need substantial
amounts of working capital to fund the growth of our business, we expect to
continue to experience significant negative operating and investing cash flows
for the foreseeable future. We may need to raise additional capital in the
future to meet our operating and investing cash requirements. We may not be able
to find additional financing, if required, on favorable terms or at all. If we
raise additional funds through the issuance of equity, equity-related or debt
securities, these securities may have rights, preferences or privileges senior
to those of the rights of our common stock, and our stockholders may experience
additional dilution to their equity ownership.
WE ANTICIPATE FUTURE LOSSES
We experienced losses for the partial year 1995 and in 1996 and 1997. We
achieved a modest profit in 1998, but are incurring losses in 1999 as a result
of our efforts to invest in the actual and anticipated growth of our business.
Our profitability will depend on whether we can increase revenues while
controlling expenses. We may not achieve profitability in the future, or sustain
any future profitability.
9
<PAGE> 9
WE DEPEND PRIMARILY ON TWO CLIENTS; THE LOSS OF EITHER WOULD SIGNIFICANTLY
REDUCE OUR REVENUES AND NET INCOME
We depend on two clients, United Technologies Corporation and General
Motors Corporation, for a substantial portion of our revenues. These two clients
represented 77% of our revenues in 1998 and 58% of our revenues in the nine
months ended September 30, 1999. Our agreement with United Technologies expires
in December 2000, and our agreement with General Motors expires in September
2001. The agreements can be terminated by the respective clients at any time
upon prior notice. Although United Technologies would be required to pay us a
substantial fee if it terminates its agreement, the fee would not make up for
the resulting loss of revenue. General Motors is not required to pay any
termination fee if it terminates its agreement.
We may not be able to keep either United Technologies or General Motors as
a client in the future. The loss or partial loss of either of these clients
would significantly diminish our revenues and operating results, forcing us to
curtail our growth plans and incur greater losses. Even if we keep one or both
of these clients, we may not be successful in growing and diversifying our
client base.
INDUSTRIAL PURCHASERS MAY NOT ADOPT OUR ONLINE AUCTION METHOD OF PURCHASING AT
LEVELS SUFFICIENT TO SUSTAIN OUR BUSINESS
Business-to-business online auction services are a novel method of
industrial purchasing, which potential clients may not adopt. If not enough
companies adopt our auction method of purchasing, then our business could be
harmed. In order to accept our method, buyers must adopt new purchasing
practices that are different from their traditional practices. Traditional
purchasing is often based on long-standing relationships between a buyer and a
few suppliers. Buyers and their suppliers often negotiate prices face-to-face,
with buyers frequently directing their business to chosen suppliers based on
factors in addition to price. Our services may be disruptive to existing,
long-standing supplier relationships because, in order to use our services, a
buyer must be willing to open the bidding process to multiple suppliers.
Moreover, buyers must be willing to rely less upon personal relationships in
making purchasing decisions. We cannot assure you that enough industrial
purchasers will choose to adopt our method or do so at sufficient levels to
sustain our business.
CLIENTS MAY NOT PURCHASE OUR SERVICES IF WE ARE UNABLE TO GENERATE SIGNIFICANT
SAVINGS
If our online auction services increase the efficiency of any particular
supply market, the future likelihood of significant savings to our clients in
that market may decrease. Factors beyond our control may limit our ability to
generate savings. If the magnitude of savings in particular product categories
decreases, we may have difficulty in the future selling our auction services to
buyers in those markets, or attracting willing suppliers in other markets,
either of which will reduce our revenues and net income.
OUR QUARTERLY OPERATING RESULTS ARE VOLATILE AND DIFFICULT TO PREDICT; IF WE
FAIL TO MEET THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS OR INVESTORS, THE MARKET
PRICE OF OUR COMMON STOCK MAY DECLINE
Our quarterly operating results have varied significantly in the past and
will likely vary significantly in the future. We believe that period-to-period
comparisons of our results of operations are not meaningful and you should not
rely upon them as indicators of future performance. Our operating results will
likely fall below the expectations of securities analysts or investors in some
future quarter or quarters. Our failure to meet these expectations may result in
a decrease in the market price of our common stock.
Our quarterly revenues often fluctuate because we depend on a small number
of relatively large clients. We recognize a portion of our revenues from service
agreements on a monthly basis as we provide services; the remainder may be
contingent on successfully achieving agreed-upon volume and savings objectives.
As a result, our quarterly operating results may continue to fluctuate
significantly based on the size and timing of monthly fees and based on any
contingent compensation we earn.
10
<PAGE> 10
OUR SPENDING ON INCREASED CAPACITY PRECEDES OUR RECEIPT OF REVENUES; THIS COULD
CAUSE OUR GROSS MARGINS TO BE VOLATILE
We must hire personnel, acquire equipment and expand our facilities in
anticipation of receiving revenues in future periods. Because many of our
expenses for these activities are components of our cost of revenues, our gross
margins are likely to be volatile.
WE MAY NOT BE ABLE TO ADJUST OUR SPENDING QUICKLY; IF WE CANNOT, THEN OUR NET
INCOME WILL BE REDUCED
We plan to increase expenditures for our sales and marketing efforts,
development of new technology, capital improvements to our facilities and
improvement of our operational and financial systems. The historical financial
data upon which we can base our planned operating costs and capital expenditures
is very limited and may not be meaningful. Our planned expense levels are
relatively fixed in the short term and are based on our anticipation of future
revenues. We may not be able to forecast revenues accurately due to our limited
operating history. If we fail to predict revenues accurately in relation to our
planned expense levels, then we may be unable to adjust our costs in a timely
manner in response to lower-than-expected revenues, and our net income will be
negatively affected.
WE MAY NOT BE ABLE TO HIRE OR RETAIN QUALIFIED STAFF
If we cannot attract and retain enough qualified and skilled staff, the
growth of our business may be limited. Our ability to provide services to
clients and grow our business depends, in part, on our ability to attract and
retain staff with college and graduate degrees, as well as professional
experiences that are relevant for market making, technology development and
other functions we perform. Competition for personnel with these skill sets is
intense. Some technical job categories are under conditions of severe shortage
in the United States. In addition, restrictive immigration quotas could prevent
us from recruiting skilled staff from outside the United States. We may not be
able to recruit or retain the caliber of staff required to carry out essential
functions at the pace necessary to sustain or grow our business.
THE CAPACITY CONSTRAINTS OF OUR PERSONNEL AND TECHNOLOGY RESOURCES MAY LIMIT OUR
GROWTH
If we are unable to undertake new business due to a shortage of staff or
technology resources, our growth will be impeded. Our clients are typically
large companies. At times, these clients ask us to pursue large projects that
put a strain on our resources, both in terms of people and technology. At the
same time, penetration of new product categories often requires that we build up
a significant database of new information. This, too, often requires a large
amount of time from our market making staff. If our staff does not have the time
to find and assimilate this new information, we may not be able to extend our
services to new product categories. Therefore, there may be times when our
opportunities for revenue growth may be limited by the capacity of our internal
resources rather than by the absence of market demand.
FAILURE TO MANAGE OUR GROWTH COULD REDUCE OUR REVENUES OR NET INCOME
Rapid expansion strains our infrastructure, management, internal controls
and financial systems. We may not be able to effectively manage our present
growth or any future expansion. We have recently experienced significant growth,
with our revenues for the nine months ended September 30, 1999 increasing over
170% compared to the same period in 1998. To support our growth, we have hired
the majority of our employees within the last year. This rapid growth has also
strained our ability to integrate and properly train our new employees.
Inadequate integration and training of our employees may result in
underutilization of our workforce and may reduce our revenues or net income.
11
<PAGE> 11
WE MAY ACQUIRE OTHER BUSINESSES OR TECHNOLOGIES; IF WE DO, WE MAY BE UNABLE TO
INTEGRATE THEM WITH OUR BUSINESS, OR WE MAY IMPAIR OUR FINANCIAL PERFORMANCE
If appropriate opportunities present themselves, we may acquire businesses,
technologies, services or products that we believe are strategic. We do not
currently have any understandings, commitments or agreements with respect to any
acquisition, nor are we currently pursuing any acquisition. We may not be able
to identify, negotiate or finance any future acquisition successfully. Even if
we do succeed in acquiring a business, technology, service or product, we have
no experience in integrating an acquisition into our business; the process of
integration may produce unforeseen operating difficulties and expenditures and
may absorb significant attention of our management that would otherwise be
available for the ongoing development of our business. Moreover, we have not
made any acquisitions, and we may never achieve any of the benefits that we
might anticipate from a future acquisition. If we make future acquisitions, we
may issue shares of stock that dilute other stockholders, incur debt, assume
contingent liabilities or create additional expenses related to amortizing
goodwill and other intangible assets, any of which might harm our financial
results and cause our stock price to decline. Any financing that we might need
for future acquisitions may only be available to us on terms that restrict our
business or that impose on us costs that reduce our net income.
OUR SALES CYCLE IS LONG AND UNCERTAIN AND MAY NOT RESULT IN REVENUES; FACTORS
OUTSIDE OF OUR CONTROL MAY AFFECT THE DECISION TO PURCHASE OUR SERVICES
Our sales cycle is long, typically taking from two to twelve months from
initial client contact until we sign a contract with the client. Not every
potential client that we solicit actually purchases our services. Because we
offer a new method of industrial purchasing, we must educate potential customers
on the use and benefits of our services. We need to spend a significant amount
of time with multiple decision makers in a prospective client's organization to
sell our services. Other factors that contribute to the length and uncertainty
of our sales cycle and that may reduce the likelihood that clients will purchase
our services include:
- budgeting constraints;
- incentive structures that do not reward decision makers for savings
achieved through cost-cutting;
- the strength of pre-existing supplier relationships; and
- an aversion to new purchasing methods.
If we are unable to enter into service agreements with clients on a
consistent basis, then our business may suffer from diminished revenues.
IF OUR SHORT-TERM SERVICE AGREEMENTS DO NOT LEAD TO LONG-TERM SERVICE
AGREEMENTS, OUR BUSINESS MAY NOT BE PROFITABLE
Frequently, we begin a relationship with a new client by entering into a
short-term service agreement that we hope will lead to a long-term service
agreement. Failure to move a sufficient number of clients from short-term to
long-term service agreements would hurt our operating results. Our initial
agreement with a client usually involves a period of trial and evaluation with
relatively small volume auctions. This initial period, in which we learn about
our client's business and its related product categories and educate our client
about the best use of our services for its organization, requires a very
significant expenditure of our time and resources. A subsequent longer-term
service agreement often involves more frequent and larger volume auctions.
Clients may decide not to enter into a long-term service agreement with us, or
may delay entering into such an agreement until a later time. Because we do not
achieve economies of scale early in a client relationship, our gross margins are
typically lower at the outset than the margins we may achieve later. Further, we
may be diverting personnel from higher-margin opportunities to develop a new
relationship, without any assurance that the new relationship will endure.
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<PAGE> 12
FACTORS OUTSIDE OUR CONTROL COULD RESULT IN DISAPPOINTING AUCTION RESULTS;
DISAPPOINTED CLIENTS MAY CANCEL OR FAIL TO RENEW THEIR AGREEMENTS WITH US
The actual savings achieved in any given auction vary widely and depend
upon many factors outside of our control. These factors include:
- the current state of supply and demand in the supply market for the
products being auctioned;
- the past performance of our client's purchasing organization in
negotiating favorable terms with suppliers;
- the willingness of a sufficient number of qualified suppliers to bid for
business using our auction services;
- reductions in the number of suppliers in particular markets due to
mergers, acquisitions or suppliers exiting from supply industries; and
- seasonal and cyclical trends that influence all industrial purchasing
decision making.
Because factors outside of our control affect a client's perception of the
value of our services, clients may cancel our service agreements or choose not
to renew them, even if we have performed well. Any non-renewal or cancellation
of service agreements may reduce our revenues and net income.
FAILURES OF HARDWARE SYSTEMS OR SOFTWARE COULD UNDERMINE OUR CLIENTS' CONFIDENCE
IN OUR RELIABILITY
A significant disruption in our online auction service could seriously
undermine our clients' confidence in our business. Our clients hold us to a high
standard of reliability and performance. From time to time, we have experienced
service interruptions during online auctions, with the most significant being a
breakdown in the computer network over which our auctions are conducted. This
computer network is provided to us by an outside vendor, and this kind of
interruption may occur in the future. During these disruptions, participants may
lose their online connection or we may not receive their bids in a timely
manner. Any interruptions in our service may undermine actual and potential
clients' confidence in the reliability of our business.
Conducting an online auction requires the successful technical operation of
an entire chain of software, hardware and telecommunications equipment. This
chain includes our BidWare software, the personal computers and network
connections of bidders, our network servers, operating systems, databases and
networking equipment such as routers. A failure of any element in this chain can
partially or completely disrupt an online auction.
Some of the elements set forth above are not within our control, such as
Internet connectivity and software, hardware and telecommunications equipment we
purchase from others. We frequently have auction participants from outside North
America who may use older or inferior technologies, which may not operate
properly. In addition, hardware and software are potentially vulnerable to
interruption from power failures, telecommunications outages, network service
outages and disruptions, natural disasters, and vandalism and other misconduct.
Our business interruption insurance would not compensate us fully for any losses
that may result from these disruptions.
THE LOSS OF OUR KEY EXECUTIVES WOULD DISRUPT OUR BUSINESS
The loss of any member of our key management team would significantly
disrupt our business. We rely on the leadership and vision of key members of our
senior management team, including:
- Glen Meakem, our President, Chairman, Chief Executive Officer and a
co-founder;
- Sam Kinney, an Executive Vice President, our Secretary and a co-founder;
and
- David Becker, an Executive Vice President and our Chief Operating
Officer.
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<PAGE> 13
Messrs. Meakem and Kinney created FreeMarkets, and they and Mr. Becker have
been instrumental in the management and growth of our business. The loss of any
of these executives could disrupt the Company's growth or result in lost
revenues or net income.
IF WE FAIL TO CONTINUALLY IMPROVE OUR TECHNOLOGY, OUR BUSINESS WILL SUFFER
Our services and the business-to-business electronic commerce market are
characterized by rapidly changing technologies and frequent new product and
service introductions. We may fail to introduce new online auction technology on
a timely basis or at all. If we fail to introduce new technology or to improve
our existing technology in response to industry developments, we could
experience frustration from our clients that could lead to a loss of revenues.
Our online auction technology is complex, and accordingly may contain
undetected errors or defects that we may not be able to fix. In the past we have
discovered software errors in new versions of our BidWare software after their
release. Reduced market acceptance of our services due to errors or defects in
our technology would harm our business by reducing our revenues.
IF WE DO NOT ADEQUATELY MAINTAIN OUR CLIENTS' CONFIDENTIAL INFORMATION, OUR
REPUTATION COULD BE HARMED AND WE COULD INCUR LEGAL LIABILITY
Any breach of security relating to our clients' confidential information
could result in legal liability for us and a reduction in use or cancellation of
our online auction services, either of which could materially harm our business.
Our personnel receive highly confidential information from buyers and suppliers
that is stored in our files and on our computer systems. For example, we often
possess blueprints and product plans that could be valuable to our clients'
competitors if misappropriated. Similarly, we receive sensitive pricing
information that has historically been maintained as a matter of utmost
confidence within buyer and supplier organizations. We enter into standard
non-disclosure and confidentiality agreements with virtually all clients with
whom we deal.
We currently have practices and procedures in place to ensure the
confidentiality of our clients' information. However, our security procedures to
protect against the risk of inadvertent disclosure or intentional breaches of
security might fail to adequately protect information that we are obligated to
keep confidential. We may not be successful in adopting more effective systems
for maintaining confidential information, so our exposure to the risk of
disclosure of the confidential information of others may grow with increases in
the amount of information we possess. If we fail to adequately maintain our
clients' confidential information, some of our clients could end their business
relationships with us and we could be subject to legal liability.
THE MARKET FOR BUSINESS-TO-BUSINESS ELECTRONIC COMMERCE PRODUCTS AND SERVICES IS
INTENSELY COMPETITIVE; IF WE CANNOT COMPETE SUCCESSFULLY, OUR BUSINESS WILL
SUFFER REDUCED REVENUES AND NET INCOME
As one of a number of companies providing services or products to the
market for business-to-business electronic commerce, we face the risk that
existing and potential clients may choose to purchase competitors' services. If
they do, then our revenues and net income will be reduced. For a more detailed
discussion of our competitive environment, please see "Business -- Competition."
OUR BUSINESS WILL SUFFER IF OUR PROSPECTIVE CLIENTS DO NOT ACCEPT ELECTRONIC
COMMERCE AND THE INTERNET AS A MEANS OF PURCHASING
Our online auction services depend on the increased acceptance and use of
the Internet as a medium of commerce. Our business will suffer if potential
clients do not accept electronic commerce and the Internet as a means of
purchasing. Business-to-business electronic commerce is a new and emerging
business practice that remains largely untested in the marketplace. Rapid growth
in the use of the Internet and electronic commerce is a recent phenomenon. As a
result, acceptance and use may
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<PAGE> 14
not continue to develop at recent rates and a sufficiently broad base of
business customers may not adopt or continue to use the Internet as a medium of
commerce. Demand for and market acceptance of services and products recently
introduced over the Internet are subject to a high level of uncertainty, and few
proven services and products yet exist.
Electronic commerce may not prove to be a viable medium for
business-to-business purchasing for the following reasons, any of which could
seriously harm our business:
- the necessary infrastructure for Internet communications may not develop
adequately;
- buyer clients and suppliers may have security and confidentiality
concerns;
- complementary products, such as high-speed modems and high-speed
communication lines, may not be developed;
- alternative purchasing solutions may be implemented;
- buyers may dislike a reduction in the human contact that traditional
purchasing methods provide;
- use of the Internet and other online services may not continue to
increase or may increase more slowly than expected;
- the development or adoption of new standards and protocols may be
delayed; and
- new and burdensome governmental regulations may be imposed.
SECURITY RISKS AND CONCERNS MAY DETER THE USE OF THE INTERNET FOR CONDUCTING
COMMERCE
Concern about the security of the transmission of confidential information
over public networks is a significant barrier to electronic commerce and
communication. Advances in computer capabilities, new discoveries in the field
of cryptography or other events or developments could result in compromises or
breaches of Internet security systems that protect proprietary information. If
any well-publicized compromises of security were to occur, they could
substantially reduce the use of the Internet for commerce and communications.
Anyone who circumvents our security measures could misappropriate
proprietary information or cause interruptions in our services or operations.
Our activities involve the storage and transmission of proprietary information,
such as confidential buyer and supplier specifications. The Internet is a public
network, and data is sent over this network from many sources. In the past,
computer viruses have been distributed and have rapidly spread over the
Internet. Computer viruses could be introduced into our systems or those of our
clients or suppliers, which could disrupt our online auction technology or make
it inaccessible to our clients or suppliers. We may be required to expend
significant capital and other resources to protect against the threat of, or to
alleviate problems caused by, security breaches and the introduction of computer
viruses. Our security measures may be inadequate to prevent security breaches or
combat the introduction of computer viruses, either of which may result in loss
of data, increased operating costs, litigation and possible liability.
IF WE ARE NOT ABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, THEN
OUR COMPETITORS MAY BE ABLE TO DUPLICATE OUR SERVICES
We rely in part upon our proprietary technology, including our BidWare
software, for the conduct of auctions. Our failure to adequately protect our
intellectual property rights could harm our business by making it easier for our
competitors to duplicate our services. We have applied for patents on aspects of
our technology and processes, but we do not know whether any patents will be
issued. In addition, even if some or all of these patents are issued, we cannot
assure you that they will not be successfully challenged by others or
invalidated, that they will adequately protect our technology and processes or
that they will result in commercial advantages for us. We have also obtained
trademark registrations for some of our brand names and our marketing materials
are copyrighted, but these
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<PAGE> 15
protections may not be adequate. Although we require each of our employees to
enter into a confidentiality agreement and some key employees are subject to
non-competition agreements, these agreements may not satisfactorily safeguard
our intellectual property.
We cannot be certain that third parties will not infringe or misappropriate
our proprietary rights or that third parties will not independently develop
similar proprietary information. Any infringement, misappropriation or
independent development could harm our future financial results. In addition,
effective patent, trademark, copyright and trade secret protection may not be
available in every country where we provide online auction services. We may, at
times, have to incur significant legal costs and spend time defending our
trademarks, copyrights and, if issued, our patents. Any defense efforts, whether
successful or not, would divert both time and resources from the operation and
growth of our business.
There is also significant uncertainty regarding the applicability to the
Internet of existing laws regarding matters such as property ownership,
copyrights and other intellectual property rights. Legislatures adopted the vast
majority of these laws prior to the advent of the Internet and, as a result,
these laws do not contemplate or address the unique issues of the Internet and
related technologies. We cannot be sure what laws and regulations may ultimately
affect our business or intellectual property rights.
OTHERS MAY ASSERT THAT OUR TECHNOLOGY INFRINGES THEIR INTELLECTUAL PROPERTY
RIGHTS
We do not believe that we infringe the proprietary rights of others, and,
to date, no third parties have notified us of infringement, but we may be
subject to infringement claims in the future. The defense of any claims of
infringement made against us by third parties could involve significant legal
costs and require our management to divert time from our business operations.
Either of these consequences of an infringement claim could have a material
adverse effect on our operating results. If we are unsuccessful in defending any
claims of infringement, we may be forced to obtain licenses or to pay royalties
to continue to use our technology. We may not be able to obtain any necessary
licenses on commercially reasonable terms or at all. If we fail to obtain
necessary licenses or other rights or if these licenses are costly, our
operating results may suffer either from reductions in revenues through our
inability to serve clients or from increases in costs to license third party
technology.
OTHERS MAY REFUSE TO LICENSE IMPORTANT TECHNOLOGY TO US OR MAY INCREASE THE FEES
THEY CHARGE US FOR THIS TECHNOLOGY
We rely on third parties to provide us with some software and hardware, for
which we pay fees. This software has been readily available, and to date we have
not paid significant fees for its use. These third parties may increase their
fees significantly or refuse to license their software or provide their hardware
to us. While other vendors may provide the same or similar technology, we cannot
be certain that we can obtain the required technology on favorable terms, if at
all. If we are unable to obtain required technology at a reasonable cost, our
growth prospects and operating results may be harmed through impairment of our
ability to conduct business or through increased cost.
FUTURE GOVERNMENT REGULATION OF THE INTERNET AND ONLINE AUCTIONS MAY ADD TO OUR
OPERATING COSTS
Like many Internet-based businesses, we operate in an environment of
tremendous uncertainty as to potential government regulation. We believe that we
are not currently subject to direct regulation of online commerce, other than
regulations applicable to businesses generally. However, the Internet has
rapidly emerged as a commerce medium, and governmental agencies have not yet
been able to adapt all existing regulations to the Internet environment. Laws
and regulations may be introduced and court decisions reached that affect the
Internet or other online services, covering issues such as user pricing, user
privacy, freedom of expression, access charges, content and quality of products
and services, advertising, intellectual property rights and information
security. Some new laws intended to address Internet issues have yet to be
interpreted in any meaningful way by the courts, and the applicability
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<PAGE> 16
and reach of these laws are therefore uncertain. In addition, because we offer
our services worldwide and facilitate sales of goods to clients globally,
foreign jurisdictions may claim that we are required to comply with their laws.
Any future regulation may have a negative impact on our business by restricting
our method of operation or imposing additional costs.
As an Internet company, it is unclear in which jurisdictions we are
actually conducting business. Our failure to qualify to do business in a
jurisdiction that requires us to do so could subject us to fines or penalties
and could result in our inability to enforce contracts in that jurisdiction.
Numerous jurisdictions have laws and regulations regarding the conduct of
auctions and the liability of auctioneers. We do not believe that these laws and
regulations, which were enacted for consumer protection many years ago, apply to
our online auction services. However, one or more jurisdictions may attempt to
impose these laws and regulations on our operations in the future.
WE MAY BECOME SUBJECT TO CERTAIN SALES AND OTHER TAXES THAT COULD ADVERSELY
AFFECT OUR BUSINESS
The imposition of sales, value-added or similar taxes could diminish our
competitiveness and harm our business. We do not collect sales or other similar
taxes for goods purchased through our online auctions. Our clients are large
purchasing organizations that typically manage and pay their own sales and use
taxes. However, we may be subject to sales tax collection obligations in the
future.
WE MAY SUFFER SERVICE INTERRUPTIONS OR TECHNICAL FAILURES DUE TO THE YEAR 2000
COMPUTER PROBLEM ON OUR OWN SYSTEMS OR SYSTEMS OF THIRD PARTIES
Our business is dependent upon computers and networks, both voice and data.
As a result, interruptions and breakdowns in computer and network services can
completely disrupt our business. Many computer systems and the networks over
which they operate are coded to accept only two-digit entries in date code
fields. These systems may be unable to distinguish whether "00" means 1900 or
2000, which may result in failures or the creation of erroneous results by, at
or beyond the year 2000. Many companies' computer and/or software systems may
need to be upgraded or replaced in order to process dates correctly beginning on
January 1, 2000 and to comply with the so-called "Year 2000" requirements.
We rely on our internally developed software as well as software, hardware
and other computer technology developed by third parties. The failure of any of
this software, hardware or computer technology could result in the interruption
of our auction services, delay or loss of revenues, diversion of development
resources, damage to our reputation and/or liability to our clients.
OUR INTERNATIONAL OPERATIONS SUBJECT US TO RISKS AND UNCERTAINTIES
We face risks in doing business internationally. We provide our services to
international buyers and often have international suppliers participate in our
auctions. We have a subsidiary in Brussels, Belgium that serves our clients
based in Europe and the European operations of our multinational clients based
in the United States. We plan to establish similar branches or subsidiaries in
other parts of the world. We have experienced, and expect to continue to
experience, significant costs for our international operations as we add staff
in foreign countries. These costs, together with the costs of the overhead
needed to comply with legal, regulatory and accounting requirements that differ
from those in the United States, may reduce our net income. Finally, our
international operations are subject to disruption from political and economic
instability in the countries in which they are located, which may interrupt our
ability to conduct business and impose additional costs upon us.
OUR MANAGEMENT HAS BROAD DISCRETION OVER HOW TO USE THE PROCEEDS OF THIS
OFFERING; WE MAY NOT USE THE PROCEEDS IN WAYS THAT HELP OUR BUSINESS SUCCEED
We estimate that our net proceeds from this offering will be $46.5 million,
at an assumed initial public offering price of $15.00 per share and after
deducting the underwriting discount and our
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<PAGE> 17
estimated offering expenses. Our primary purposes in making this offering are to
increase our working capital, create a public market for our common stock,
facilitate our future access to the public capital markets and increase our
visibility in the marketplace. We have no specific plans for the net proceeds of
this offering other than working capital and general corporate purposes.
Accordingly, our management will have broad discretion as to how to apply the
net proceeds of this offering. If we fail to use these proceeds effectively, our
business may not grow and our revenues and net income may decline.
ANOTHER COMPANY MAY HAVE DIFFICULTY ACQUIRING US, EVEN IF DOING SO WOULD BENEFIT
OUR STOCKHOLDERS, DUE TO PROVISIONS OF OUR CORPORATE CHARTER AND BY-LAWS AND
DELAWARE LAW
Provisions in our Certificate of Incorporation, in our Bylaws and under
Delaware law could make it more difficult for another company to acquire us,
even if doing so would benefit our stockholders. Our Certificate of
Incorporation and Bylaws contain the following provisions, among others, which
may inhibit an acquisition of our company by a third party:
- a staggered Board of Directors, where stockholders elect only a minority
of the Board each year;
- advance notification procedures for matters to be brought before
stockholder meetings;
- a limitation on who may call stockholder meetings; and
- a prohibition on stockholder action by written consent.
We are also subject to provisions of Delaware law that prohibit us from
engaging in any business combination with any "interested stockholder", meaning
generally a stockholder that beneficially owns more than 15% of our stock, for a
period of three years from the date this person became an interested
stockholder, unless various conditions are met, such as approval of the
transaction by our board. This could have the effect of delaying or preventing a
change in control. For a more complete discussion of these provisions of
Delaware law, please see "Description of Capital Stock -- Anti-Takeover
Provisions -- Delaware Law."
OUR STOCK PRICE MAY BE VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES FOR
STOCKHOLDERS
Before this offering, there has never been a public market for our common
stock. The market price for our common stock is likely to be highly volatile and
subject to wide fluctuations in response to the risks described above and many
other factors, some of which are beyond our control.
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<PAGE> 18
SUBSTANTIAL SALES OF OUR COMMON STOCK AFTER THE OFFERING COULD CAUSE OUR STOCK
PRICE TO FALL
Most of our outstanding shares are currently restricted from resale, but
some may be sold into the market in the near future. Sales of these shares into
the market could cause the market price of our common stock to drop
significantly, even if our business is doing well.
Immediately following this offering, we will have outstanding 33,854,958
shares of common stock. This includes the 3,500,000 shares we are selling in
this offering, of which investors may resell 3,325,000 in the public market
immediately. The remaining 90.2%, or 30,529,958 shares, of our total outstanding
shares will become available for resale in the public market as shown in the
chart below:
<TABLE>
<CAPTION>
NUMBER OF SHARES/
% OF TOTAL OUTSTANDING DATE OF AVAILABILITY FOR RESALE INTO PUBLIC MARKET
- ---------------------- -----------------------------------------------------------
<S> <C>
2,637,132/7.8% Immediately
302,991/0.9% 90 days after the date of this prospectus
25,227,631/74.5% 180 days after the date of this prospectus due to an
agreement many of our stockholders have with the
underwriters. However, the underwriters can waive this
restriction and allow these stockholders to sell their
shares at any time.
2,362,204/7.0% After September 2, 2000.
</TABLE>
As restrictions on resale end, the market price of our stock could drop
significantly if the holders of these restricted shares sell them or the market
perceives that they intend to sell them. For a more detailed description, please
see "Shares Eligible for Future Sale."
YOU WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION IN THE BOOK VALUE OF YOUR
INVESTMENT
The initial public offering price per share will significantly exceed our
net tangible book value per share. If we were to liquidate immediately after the
offering, investors purchasing shares in this offering would receive a per share
amount of tangible assets net of liabilities that would be less than the initial
public offering price per share. Investors purchasing shares in this offering
will suffer dilution of $12.52 per share from their investment. For more
information, please see "Dilution."
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FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary", "Risk Factors",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", "Business", and elsewhere in this prospectus constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties, and other factors that may cause our or our industry's actual
results, levels of activity, performance or achievements to be materially
different than any expressed or implied by these forward-looking statements. In
some cases, you can identify forward-looking statements by terminology such as
"may", "will", "should", "expects", "plans", "anticipates", "believes",
"estimates", "predicts", "potential", "continue" or the negative of these terms
or other comparable terminology.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We are under no duty to update any of the
forward-looking statements after the date of this prospectus to conform these
statements to actual results.
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USE OF PROCEEDS
We estimate that the net proceeds to us from the sale of the shares being
offered will be $46.5 million, at an assumed initial public offering price of
$15.00 per share after deducting the underwriting discount and estimated
offering expenses payable by us. If the underwriters exercise their
over-allotment option in full, then we estimate that the net proceeds to us from
the sale of the shares being offered will be $53.8 million.
The principal purposes of this offering are to increase our working
capital, create a public market for our common stock, facilitate our future
access to the public capital markets and increase our visibility in the
marketplace. We have no specific plans for the net proceeds of this offering
other than general corporate purposes and working capital, and our use of these
proceeds will be in the discretion of our management. We may, for example, use a
portion of the net proceeds to acquire complementary technologies or businesses;
however, we currently have no commitments or agreements and are not involved in
any negotiations involving any of these transactions. Pending deployment of the
net proceeds of this offering, we intend to invest the net proceeds in
interest-bearing, investment grade securities.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock. We do
not anticipate paying any cash dividends in the foreseeable future. We currently
intend to retain any future earnings to finance the expansion of our business.
Moreover, our bank credit facility restricts our ability to pay cash dividends.
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<PAGE> 21
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 1999
on an actual and as adjusted basis. The as adjusted column reflects our actual
capitalization plus:
- the filing of an amendment to our Certificate of Incorporation concurrent
with the closing of this offering to eliminate all existing classes of
preferred stock and to create 5,000,000 shares of undesignated preferred
stock;
- the automatic conversion of all shares of outstanding preferred stock
into 16,051,438 shares of common stock immediately prior to the closing
of this offering; and
- our sale of 3,500,000 shares of common stock at an assumed initial public
offering price of $15.00 per share, after deducting the underwriting
discount and estimated offering expenses.
Neither of the columns reflects 15,450,000 shares of common stock reserved
for issuance under our Stock Incentive Plan as of September 30, 1999, of which
11,201,230 shares were subject to outstanding options, or 195,600 shares of
common stock issuable upon the exercise of our Series A and Series B warrants.
You should read the table below along with our consolidated balance sheet
as of September 30, 1999 and the related notes.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
---------------------------
ACTUAL AS ADJUSTED
--------- ------------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
<S> <C> <C>
Cash and cash equivalents................................... $ 22,259 $ 68,759
======== =========
Long-term debt, excluding current portion................... 1,976 1,976
-------- ---------
Stockholders' equity:
Convertible preferred stock, 50,000,000 shares authorized,
actual; no shares authorized, issued or outstanding, as
adjusted:
Series A; $.01 par value; 9,036,600 shares issued and
outstanding, actual.................................... 90 --
Series B; $.01 par value; 2,347,200 shares issued and
outstanding, actual.................................... 24 --
Series C; $.01 par value; 2,305,434 shares issued and
outstanding, actual.................................... 23 --
Series D; $.01 par value; 2,362,204 shares issued and
outstanding, actual.................................... 24 --
Preferred stock; $.01 par value, no shares authorized,
issued or outstanding, actual; 5,000,000 shares
authorized, no shares issued or outstanding, as
adjusted................................................ -- --
Common stock; $.01 par value, 200,000,000 shares
authorized; 14,303,520 shares issued and outstanding,
actual; 33,854,958 shares issued and outstanding, as
adjusted................................................ 143 339
Additional capital.......................................... 55,838 102,303
Unearned stock-based compensation........................... (1,751) (1,751)
Stock purchase warrants..................................... 30 30
Accumulated deficit......................................... (16,660) (16,660)
-------- ---------
Total stockholders' equity.............................. 37,761 84,261
-------- ---------
Total capitalization............................... $ 39,737 $ 86,237
======== =========
</TABLE>
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DILUTION
Our net tangible book value as of September 30, 1999 was $37.5 million, or
$1.23 per share. Net tangible book value per share represents the amount of our
total tangible assets, reduced by the amount of our total liabilities, and then
divided by the total number of shares of common stock outstanding after giving
effect to the automatic conversion of all shares of outstanding preferred stock.
Dilution in net tangible book value per share represents the difference between
the amount paid per share by purchasers of shares of common stock in this
offering and the net tangible book value per share of common stock immediately
after the completion of this offering. After giving effect to the sale of the
3,500,000 shares of common stock offered by us at an initial public offering
price of $15.00 per share, and after deducting the underwriting discount and
estimated offering expenses payable by us, our net tangible book value at
September 30, 1999 would have been approximately $84.0 million or $2.48 per
share of common stock. This represents an immediate increase in net tangible
book value of $1.25 per share to existing stockholders and an immediate dilution
of $12.52 per share to new investors purchasing shares at the initial offering
price. The following table illustrates this dilution on a per share basis:
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $15.00
Net tangible book value per share before the offering..... $ 1.23
Increase per share attributable to new investors.......... 1.25
------
Net tangible book value per share after the offering........ 2.48
------
Dilution per share to new investors......................... $12.52
======
</TABLE>
The following table summarizes, as of September 30, 1999, the differences
between the existing stockholders and new investors with respect to the number
of shares of common stock purchased from us, the total consideration paid to us
and the average price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- ---------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders................. 30,354,958 89.7% $ 51,268,303 49.4% $ 1.69
New investors......................... 3,500,000 10.3 52,500,000 50.6 15.00
---------- ----- ------------ -----
Totals........................... 33,854,958 100.0% $103,768,303 100.0%
========== ===== ============ =====
</TABLE>
The preceding tables assume no issuance of shares of common stock under our
stock plans after September 30, 1999. As of September 30, 1999, 11,201,230
shares were subject to outstanding options at a weighted average exercise price
of $4.29 per share. This table also assumes no exercise of the 195,600 Series A
or Series B warrants outstanding as of September 30, 1999. If all of these
options and warrants were exercised, then the total dilution per share to new
investors would be $12.08.
23
<PAGE> 23
SELECTED CONSOLIDATED FINANCIAL DATA
You should read the selected consolidated financial data set forth below
along with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our consolidated financial statements and the related
notes. We have derived the consolidated statement of operations data for 1996,
1997 and 1998 and the nine months ended September 30, 1999, and the consolidated
balance sheet data as of December 31, 1997 and 1998 and September 30, 1999 from
our consolidated financial statements that have been audited by
PricewaterhouseCoopers LLP. We have derived all other data in this table from
financial statements not included in this prospectus. We believe the unaudited
results shown in the table below include all adjustments, consisting only of
normal recurring adjustments, that we consider necessary for a fair presentation
of such information. Operating results for the nine months ended September 30,
1999 are not necessarily indicative of the results that may be expected for all
of 1999. Potentially dilutive common shares have been excluded from the shares
used to compute earnings per share in each loss year because their inclusion
would be antidilutive. Pro forma earnings per share data reflects the conversion
of all outstanding preferred stock into common stock, even if the effect of the
conversion is antidilutive.
<TABLE>
<CAPTION>
MARCH 13, 1995
(INCEPTION) NINE MONTHS ENDED
THROUGH YEAR ENDED DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, --------------------------------------- -------------------------
1995 1996 1997 1998 1998 1999
-------------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues........................ $ 17 $ 409 $ 1,783 $ 7,801 $ 4,802 $ 13,037
Cost of revenues................ 25 506 1,149 4,258 2,830 7,367
---------- ----------- ----------- ----------- ----------- -----------
Gross (loss) profit............. (8) (97) 634 3,543 1,972 5,670
Operating costs:
Research and development.... 333 394 292 842 563 2,960
Sales and marketing......... 59 321 586 656 387 5,625
General and
administrative............ 526 630 837 2,026 1,129 5,890
Stock-based expense......... -- -- -- -- -- 4,728
---------- ----------- ----------- ----------- ----------- -----------
Total operating costs........... 918 1,345 1,715 3,524 2,079 19,203
Operating (loss) income......... (926) (1,442) (1,081) 19 (107) (13,533)
Other income, net............... 4 11 20 215 196 54
---------- ----------- ----------- ----------- ----------- -----------
Net (loss) income............... $ (922) $ (1,431) $ (1,061) $ 234 $ 89 $ (13,479)
========== =========== =========== =========== =========== ===========
Earnings per share:
Basic....................... $ (.13) $ (.14) $ (.10) $ .02 $ .01 $ (1.00)
Diluted..................... (.13) (.14) (.10) .01 .00 (1.00)
Shares used to compute earnings
per share:
Basic....................... 7,262,352 10,316,599 10,618,481 11,191,670 10,990,053 13,451,407
Diluted..................... 7,262,352 10,316,599 10,618,481 26,776,611 25,224,247 13,451,407
Pro forma earnings per share:
Basic....................... $ .01 $ (.51)
Diluted..................... .01 (.51)
Shares used to compute pro forma
earnings per share:
Basic....................... 22,575,470 26,394,512
Diluted..................... 26,776,611 26,394,512
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
------------------------------------ SEPTEMBER 30,
1995 1996 1997 1998 1999
----------- ---- ------ ------ -------------
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $106 $523 $1,999 $1,656 $22,259
Working capital............................................. (81) 505 2,783 3,814 33,717
Total assets................................................ 306 985 3,336 6,870 45,677
Long-term debt, excluding current portion................... -- 21 -- 413 1,976
Total stockholders' equity.................................. 104 792 3,052 4,592 37,761
</TABLE>
24
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with "Selected Consolidated
Financial Data" and our consolidated financial statements and related notes.
OVERVIEW
FreeMarkets creates customized business-to-business online auctions for the
world's largest buyers of industrial parts, raw materials and commodities. We
were founded in March 1995 and began offering our auction services in that year.
We currently offer our auction services primarily in the United States, and to a
lesser extent in Europe. We created online auctions covering approximately $1.0
billion worth of purchase orders in 1998 and $1.4 billion worth of purchase
orders in the nine months ended September 30, 1999. We estimate that the
achievable savings for our clients resulting from completed auctions ranged from
approximately 2% to more than 25%.
DETERMINATION OF AUCTION VOLUME AND ACHIEVABLE SAVINGS
We believe that one indicator of our market acceptance is the estimated
dollar volume of direct materials, commodities and services that we auction for
our clients. We measure this auction volume by multiplying the lowest bid price
per unit in each auction by the estimated number of units that our client
expects to purchase. When our clients specify multi-year purchases in a request
for quotation, we calculate auction volume for the entire term. For example,
where our client specifies in its request for quotation that it expects to
purchase 10,000 units each year for a three-year term, we would calculate volume
for the related auction based on 30,000 units multiplied by the lowest bid price
submitted in the auction.
The actual dollar volume of direct materials, commodities or services that
our clients purchase may differ from our estimated auction volume. Because
non-price factors such as quality and service may be important to our client's
purchasing decision, our client may not select the lowest bid price that we use
in our calculation, or the parties may adjust prices in the future. In addition,
the actual number of units purchased by our client often varies from the
original estimate on which we base our calculation.
Auction volume does not necessarily correlate with either our revenues or
our operating results in any particular period or over time. Further, auction
volume has varied in the past and we expect it to vary in the future. The
following table sets forth our auction volume for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------------- --------------
1995 1996 1997 1998 1998 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Auction volume (in millions)..................... $9 $124 $257 $979 $615 $1,363
</TABLE>
We believe that the percentage savings achievable by clients through our
auctions is an indicator of the effectiveness of our auction services. To
estimate these savings, we compare the last price paid by our client for the
auctioned items against the lowest bid price for those items in our auction.
Actual savings that our clients achieve may not equal these estimates because
our client may not select the lowest bid price, the parties may agree to change
price terms after our auction or our client may not actually buy all or any of
the auctioned items.
Each auction we conduct is a distinct event, with a different mix of
participants and different products being bid upon. Savings vary from auction to
auction, and many factors affecting savings are outside of our control. We
report savings in a range, reflecting our experience. The savings achieved in
any particular auction cannot be predicted, and may not be duplicated. Factors
affecting savings include supply and demand conditions in the product category
from which our client is purchasing and past performance of our client's
purchasing organization. In addition, the percentage savings that can
25
<PAGE> 25
be achieved on commodities, such as chemicals and coal, is typically far less
than the savings that can be achieved on custom-made direct materials.
Some of our agreements with clients provide for incentive compensation
based on auction volumes and/or savings. These agreements may define auction
volumes or savings differently than the methods we use to calculate auction
volume and savings.
REVENUES
We generate revenues under service agreements with our clients. Our service
agreements typically provide us with revenues from fixed monthly fees, and may
also include performance incentive payments, based on volume or savings, and
sales commissions. The revenue structure in a particular service agreement may
vary, depending upon the needs of our client and the conventional practices in
the supply market where our client obtains its direct materials or commodities.
The monthly fees that we receive are for the use of our technology, information,
market operations staff, market making staff and facilities. Negotiated monthly
fees vary by client, and reflect both the anticipated auction volume and the
staffing, expertise and technology we anticipate committing to complete the
services requested by our clients. For the nine months ended September 30, 1999,
fixed monthly fees constituted a majority of our revenues, and we expect that
these monthly fees will continue to constitute a majority of our revenues for at
least the next 12 months. Our agreements typically allow us to limit the
personnel resources that we must make available in performing these services. We
recognize revenues from our fixed monthly fees ratably as we provide services.
Our agreements range in length from a few months to as many as four years. At
any given time, we have agreements of varying lengths with staggered
expirations. Our service agreements generally permit early termination by our
client without penalty.
Some of our agreements include performance incentive payments that are
contingent upon our client achieving specific auction volume or savings
thresholds, as set forth in the respective agreements. We recognize these
revenues as these thresholds are achieved. Most agreements entered into since
January 1999 include incentive payment provisions. We expect that as our auction
volume grows, a greater percentage of revenues will be attributable to these
incentive payments.
Our agreements may also provide for sales commissions to be paid to us upon
shipment of the auctioned items from the winning supplier to our client. We
recognize these commission revenues when the supplier ships to our client, which
in many cases occurs several months after our auction. Either the winning
supplier or our client pays these commissions, depending upon the terms of the
agreement. The service agreements that we have signed since January 1999 do not
include significant supplier-paid commissions, although we continue to receive
supplier-paid commissions under some agreements.
COST OF REVENUES
Cost of revenues consists primarily of the expenses related to staffing our
market making service organization and our Market Operations Center. These costs
also include an allocation of general overhead items such as building rent,
equipment leasing costs, telecommunications charges and depreciation expense.
Our gross margins vary from quarter to quarter. We must often add personnel to
our market making and market operations organizations based on our forecast of
anticipated clients' needs. If we over-estimate our clients' needs, our gross
margins may decrease because we cannot reduce our staffing levels in the short
term. Conversely, our gross margins may increase in periods when we earn
performance incentive payments resulting from our efforts in prior periods. As a
result, we have experienced volatility in our gross margins in the past and
expect this to continue.
OPERATING COSTS
We classify our operating costs into three general categories, research and
development, sales and marketing and general and administrative, based on the
nature of the expenditures.
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<PAGE> 26
We also allocate the total costs for overhead and facilities, based on
headcount, to each of the functional areas that use these services. These
allocated charges include general overhead items such as building rent,
equipment leasing costs, telecommunications charges and depreciation expense.
RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of expenses related to
the development and upgrade of our proprietary BidWare software and other market
making technologies. These expenses include employee compensation for software
developers and quality assurance personnel and third-party contract development
costs. We expect to increase our research and development expenses in absolute
dollars in future periods to invest in new technology for future product and
service offerings and to adapt and add features to our existing technology.
SALES AND MARKETING
Sales and marketing expenses consist primarily of employee compensation for
direct sales and marketing personnel, travel, public relations, sales and other
promotional materials, trade shows, advertising and other sales and marketing
programs. We expect to continue to increase our sales and marketing expenses in
absolute dollars in future periods to promote our brand, to pursue our business
development strategy and to increase the size of our sales force.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of compensation for
personnel and fees for outside professional advisors. We expect that general and
administrative expenses will continue to increase in absolute dollars in future
periods as we continue to add staff and infrastructure to support our expected
domestic and international business growth and bear the increased expense
associated with being a public company.
STOCK-BASED EXPENSE
Stock-based expense consists of expenses related to employee stock option
grants and stock purchase warrants issued with exercise prices lower than the
deemed fair value of the underlying shares at the time of grant. Stock-based
compensation for employee stock options granted is amortized on an accelerated
method over the vesting period of each individual award.
OTHER INCOME, NET
Other income consists primarily of interest income received from the
investment of proceeds from our financing activities, offset by interest expense
and other fees related to our bank borrowings. Other income also includes other
items not related to our operations. In the past, these items have included an
economic development grant and gains or losses on the disposal of fixed assets.
We expect interest income to increase in the short term as a result of our
investing the proceeds from our sale of Series D preferred stock and this
offering. We also expect interest expense to grow in future periods as we intend
to borrow additional funds under our bank credit facility.
INCOME TAXES
We incurred a net taxable loss in each of 1996, 1997 and the nine months
ended September 30, 1998 and 1999, and therefore did not record a provision for
income taxes in those periods. In 1998, we offset our net taxable income through
the use of net operating loss carryforwards.
As of September 30, 1999, we had $11.8 million of federal and $10.2 million
of state net operating loss carryforwards for tax reporting purposes available
to offset future taxable income. We may use these operating loss carryforwards
to offset future federal and state income taxes through 2019 and 2009,
respectively. However, in 1996 we sold a sufficient amount of our preferred
stock to
27
<PAGE> 27
constitute an "ownership change" under the Internal Revenue Code; as a result
our future utilization of these net operating loss carryforwards that we
accumulated prior to that change in ownership, amounting to $1.3 million, will
be subject to a limitation of $247,000 per year. We may generate additional net
operating loss carryforwards in the future.
LIMITED OPERATING HISTORY
Our limited operating history makes predicting future operating results
very difficult. We believe that you should not rely on the period-to-period
comparison of our operating results to predict our future performance. You must
consider our prospects in light of the risks, expenses and difficulties
encountered by companies in new and rapidly evolving markets. We may not be
successful in addressing these risks and difficulties. Although we have
experienced significant percentage growth in revenues in recent periods, we may
not be able to sustain our prior growth rates. Our prior growth may not be
indicative of future operating results.
CUSTOMER CONCENTRATION
We depend on two clients, United Technologies and General Motors, for a
substantial portion of our revenues. These two clients represented 77% of our
revenues in 1998 and 58% of our revenues in the nine months ended September 30,
1999. We anticipate that we will continue to diversify our base of clients by
adding new clients and increasing sales to other existing clients and that the
percentage of total revenues we derive from United Technologies and General
Motors will decrease. We cannot be certain, however, that this will occur.
RESULTS OF OPERATIONS
The following table sets forth consolidated statement of operations data as
a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------ ---------------
1996 1997 1998 1998 1999
------ ----- ----- ----- ------
<S> <C> <C> <C> <C> <C>
Revenues............................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues....................................... 123.7 64.4 54.6 58.9 56.5
------ ----- ----- ----- ------
Gross (loss) profit.................................... (23.7) 35.6 45.4 41.1 43.5
Operating costs:
Research and development............................. 96.4 16.4 10.8 11.7 22.7
Sales and marketing.................................. 78.5 32.9 8.4 8.1 43.1
General and administrative........................... 154.0 46.9 26.0 23.5 45.2
Stock-based expense.................................. -- -- -- -- 36.3
------ ----- ----- ----- ------
Operating (loss) income................................ (352.6) (60.6) 0.2 (2.2) (103.8)
Other income (expense), net............................ 2.7 1.1 2.8 4.1 0.4
------ ----- ----- ----- ------
Net (loss) income...................................... (349.9)% (59.5)% 3.0% 1.9% (103.4)%
====== ===== ===== ===== ======
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
REVENUES
Revenues increased 171% from $4.8 million for the nine months ended
September 30, 1998 to $13.0 million for the same period in 1999. The increase in
revenues is primarily attributable to an increased number of new clients for
which we conducted auctions, as well as increased use of our services by
existing clients. Revenues for both periods were substantially concentrated in
two clients, United Technologies and General Motors. For the nine months ended
September 30, 1998, these two clients together contributed revenues of $3.5
million, or 73% of our total revenues. Revenues for the nine months ended
September 30, 1998 included a $500,000 performance incentive from United
28
<PAGE> 28
Technologies. For the same period in 1999, total revenues from these two clients
increased over 115% to $7.5 million, or 58% of our total revenues.
COST OF REVENUES
Cost of revenues increased from $2.8 million for the nine months ended
September 30, 1998 to $7.4 million for the same period in 1999. As a percentage
of revenues, however, cost of revenues declined from 59% to 57%. The increase in
absolute dollar amounts from the nine months ended September 30, 1998 to the
same period in 1999 reflects an increase in the number of market making staff
and the increased cost of our operations due to a relocation of our headquarters
to a larger facility.
The decrease in cost of revenues as a percentage of revenues is primarily
the result of spreading some relatively fixed costs over a higher base of
revenues. In addition, this improvement in our gross margin percentage was
favorably impacted by an increase in the proportion of revenues derived from
long-term agreements, including the $500,000 performance incentive we earned
from United Technologies. We have also increased staff productivity by becoming
more specialized in various market making activities. In the nine months ended
September 30, 1999, we had a lower incidence of deep price discounts which we
had used in earlier periods to attract clients. Finally, we attained some
operating efficiencies from our investments in information tools to automate
portions of our market making process, which positively impacted our gross
margins.
OPERATING COSTS
RESEARCH AND DEVELOPMENT. Research and development costs increased from
$563,000, or 12% of revenues, for the nine months ended September 30, 1998, to
$3.0 million, or 23% of revenues, for the same period in 1999. The increase in
both absolute dollars and as a percentage of revenues relates primarily to an
increase in the number of research and development staff and associated costs
for the continued development of our BidWare software and other market making
technology.
SALES AND MARKETING. Sales and marketing expenses increased from $387,000,
or 8% of revenues, for the nine months ended September 30, 1998, to $5.6
million, or 43% of revenues, for the same period in 1999. The increase in both
absolute dollars and as a percentage of revenues reflects a significant ramp up
in sales and marketing staff, public relations costs, trade shows and
advertising as we pursued our brand and business development strategy and
accelerated our spending on potential future growth. As a result, sales and
marketing expenses for the nine months ended September 30, 1999 included certain
costs not incurred in the same period for 1998, such as those for advertising in
professional trade magazines, airport advertising and other promotions.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
from $1.1 million, or 24% of revenues, for the nine months ended September 30,
1998, to $5.9 million, or 45% of revenues, for the same period in 1999. The
increase in both absolute dollars and as a percentage of revenues is primarily
attributable to the addition of personnel to our general and administrative
staff in the areas of technical operations, human resources, legal, finance and
facilities management. The increase in general and administrative expenses is
also attributable to start-up and other costs associated with our European
subsidiary, which we established in late 1998.
STOCK-BASED EXPENSE
In September 1999, we issued warrants to a subsidiary of United
Technologies to purchase 304,431 shares of Series D preferred stock at an
exercise price of $.01 per share, in exchange for United Technologies' agreement
to delete from its contract with us provisions that limited our ability to
render services to its competitors. As a result, we recorded an expense of $4.5
million in September 1999.
29
<PAGE> 29
Additionally, we recorded $2.0 million of unearned stock-based compensation
related to employee stock options granted in June and July 1999. In the nine
months ended September 30, 1999, $225,700 has been amortized related to these
grants.
OTHER INCOME, NET
Other income was $196,000 for the nine months ended September 30, 1998 as
compared to $54,000 for the same period in 1999. The change was primarily
attributable to an economic development grant from the Commonwealth of
Pennsylvania for $150,000 during the nine months ended September 30, 1998. The
change was also the net result of a write-off of property and equipment of
$119,000 related to our move to our new headquarters, offset by increased net
interest income.
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
REVENUES
Total revenues increased 336% from $409,000 in 1996 to $1.8 million in 1997
and 338% to $7.8 million in 1998. The increase in revenues from 1996 to 1998 is
primarily attributable to an increased number of new clients for which we
conducted auctions, as well as revenues from the increased use of our services
by existing clients. During 1998, $1.6 million of our revenues was attributable
to a performance incentive bonus we earned from a client.
COST OF REVENUES
Cost of revenues increased in absolute dollars from $506,000 in 1996 to
$1.1 million in 1997 and to $4.3 million in 1998. The increase in absolute
dollar amounts from 1996 to 1998 was primarily attributable to the overall
growth in the size of our market making staff. Cost of revenues as a percentage
of revenues decreased from 124% in 1996 to 64% in 1997 and to 55% in 1998. The
decrease as a percentage of revenues over this period reflected operating
efficiencies as we spread certain relatively fixed costs over a larger base of
revenues and improved staff and operational productivity. The decrease in 1998
was affected specifically by the receipt of a $1.6 million performance incentive
bonus, which favorably impacted our gross margins. In addition, longer-term
agreements entered into with United Technologies, General Motors and other
clients in 1997 and 1998 allowed us to forecast our workforce needs better and
thereby hire and deploy market making personnel more efficiently.
OPERATING COSTS
RESEARCH AND DEVELOPMENT. Research and development expenses decreased from
$394,000, or 96% of revenues, in 1996, to $292,000, or 16% of revenues, in 1997,
and increased to $842,000, or 11% of revenues, in 1998. The decrease in research
and development expenses in absolute dollars from 1996 to 1997 was primarily
attributable to the costs associated with the introduction of the first
generation of our BidWare software in 1996 and subsequent decrease in our use of
outside software development staff for this project in 1997. The increase in
absolute dollars from 1997 to 1998 was primarily attributable to an increase in
the number of software developers and quality assurance personnel hired by us to
further develop our BidWare software, as well as other market making technology.
The decrease in research and development expenses as a percentage of revenues
from 1996 to 1998 was due to the significant increase in revenues during this
period.
SALES AND MARKETING. Sales and marketing expenses increased from $321,000
in 1996 to $586,000 in 1997 and to $656,000 in 1998. Sales and marketing expense
as a percentage of revenues decreased from 79% in 1996 to 33% in 1997 and to 8%
in 1998. The increase in absolute dollar amounts from 1996 to 1998 resulted
primarily from continued investment in sales and marketing activities as our
business developed. The decrease in sales and marketing expenses as a percentage
of revenues from 1996 to 1998 was due to the significant increase in revenues
over this period. Further, a
30
<PAGE> 30
substantial portion of our overall revenue growth in 1998 came from increased
services provided to existing clients, which required relatively less sales and
marketing expense per dollar of revenue than from new clients.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
from $630,000 in 1996 to $837,000 in 1997 and to $2.0 million in 1998. As a
percentage of revenues, however, general and administrative expenses decreased
from 154% in 1996 to 47% in 1997 and to 26% in 1998. The increase in absolute
dollars from 1996 to 1998 resulted primarily from the addition of finance, human
resources and executive and administrative personnel to support the growth of
our business during this period. In 1998, we also incurred significant legal and
administrative costs related to establishing our Belgian subsidiary. The
decrease in general and administrative expenses as a percentage of revenues from
1996 to 1998 was due to the significant increase in revenues over this period.
OTHER INCOME, NET
Other income increased from $11,000 in 1996 to $20,000 in 1997 and to
$215,000 in 1998. The increases in all periods were a result of interest earned
on increased cash balances. The increase in 1998 was also a result of the
receipt of a $150,000 economic development grant from the Commonwealth of
Pennsylvania.
LIQUIDITY AND CAPITAL RESOURCES
We have historically satisfied our cash requirements primarily through a
combination of revenues from operations and private equity financing
transactions. Through September 30, 1999, we raised cumulative net proceeds of
$49.7 million through private equity offerings. As of September 30, 1999, we had
cash and cash equivalents of $22.3 million, short-term investments of $10.3
million and working capital of $33.7 million.
Net cash used in operating activities totaled $1.6 million in 1996, $1.8
million in 1997, $1.2 million in 1998 and $8.6 million in the nine months ended
September 30, 1999. Our use of cash in 1996 and 1997 was primarily attributable
to operating losses, and in 1998 to an increase in working capital. The use of
cash for the nine months ended September 30, 1999 related primarily to the
operating loss generated by our investment in the growth of our business,
including an increase in personnel from 105 at the end of 1998 to 278 at
September 30, 1999. In addition, in March 1999, we began leasing a significantly
larger facility. The lease, which runs through May 2004, currently requires an
annual lease payment of $1.1 million, and will increase to $1.4 million in
November 1999 upon our occupying an additional floor of space in the same
building. Our lease payments will grow further as we take additional office
space.
Net cash used in investing activities totaled $165,000 in 1996, $50,000 in
1997, $859,000 in 1998 and $14.9 million in the nine months ended September 30,
1999. Our use of cash in investing activities in 1996, 1997 and 1998 resulted
primarily from our continued additions to and upgrade of computing and
telecommunications equipment. At the end of 1998, we began purchasing equipment
using available funds under a previous credit facility and reduced our use of
leased equipment. During the nine months ended September 30, 1999, we spent
approximately $4.4 million to furnish our new facility and purchase computing
and telecommunications equipment to accommodate our increase in personnel. We
also used $10.3 million to purchase short-term investments.
Net cash provided by financing activities totaled $2.2 million in 1996,
$3.3 million in 1997, $1.7 million in 1998 and $44.1 million for the nine months
ended September 30, 1999. These positive financing cash flows reflect primarily
the net proceeds from private equity offerings and bank borrowings. During the
nine months ended September 30, 1999, we raised $40.6 million from the sale of
convertible preferred stock, received proceeds of $1.3 million from the exercise
of warrants, and had net borrowings of $2.2 million under our bank credit
facilities.
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<PAGE> 31
As of September 30, 1999, we had a $10.0 million bank credit facility,
consisting of a $5.0 million revolving line of credit, all of which was
available as of September 30, 1999, and two equipment loans totaling $5.0
million, of which $2.6 million was outstanding as of September 30, 1999. The
line of credit bears interest at a rate of prime plus 0.75% and expires in
September 2000. The equipment loans bear interest at a rate of prime plus 1.0%
and are payable over 36-month terms expiring in August 2002 and September 2003.
Our bank credit facility contains restrictive covenants, including a
limitation on incurring additional indebtedness and paying dividends. We are
also required to satisfy minimum tangible net worth and current and debt service
ratios each month. We have pledged substantially all of our tangible assets as
collateral for the bank credit facility.
Capital expenditures were $776,000 in 1998 and $4.4 million in the nine
months ended September 30, 1999. Capital expenditures over these periods were
primarily made to purchase computing and telecommunications equipment and for
furnishings in our new headquarters. We also expanded our network and server
capacity. We funded these capital expenditures through a combination of cash
from operations, sales of our equity securities and bank borrowings. We intend
to fund future capital expenditures, which we estimate at $4.5 million for the
remainder of 1999, through a combination of proceeds from our recent sale of
Series D preferred stock and bank borrowings. We anticipate an increase in our
capital expenditures over future periods consistent with growth in our
operations, infrastructure and personnel.
We expect to experience significant growth in our operating costs for the
foreseeable future in order to execute our business plan, particularly in the
areas of research and development and sales and marketing. We also expect to
open new domestic and international offices in order to support the needs of our
existing and anticipated clients. As a result, we estimate that these operating
costs, as well as other planned expenditures, will constitute a significant use
of our cash resources. In addition, we may use cash resources to fund
acquisitions of complementary businesses and technologies; however, we currently
have no commitments or agreements and are not involved in any negotiations
regarding any of these transactions. We believe that the net proceeds from this
offering, combined with current cash resources, will be sufficient to meet our
working capital and capital expenditures for at least the next eighteen months.
Thereafter, we may find it necessary to obtain additional equity or debt
financing. In the event that additional financing is required, we may not be
able to raise it on terms acceptable to us, if at all.
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QUARTERLY OPERATING RESULTS
The following table sets forth our unaudited quarterly results of
operations data for our 11 most recent quarters, as well as the percentage of
revenues represented by each item. You should read this table along with our
consolidated financial statements and related notes. We have prepared this
unaudited information on the same basis as our audited financial statements, and
it includes all adjustments, consisting only of normal recurring adjustments,
that we consider necessary for a fair presentation of our financial position and
operating results for the quarters presented.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------
MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31, JUNE 30, SEP. 30,
1997 1997 1997 1997 1998 1998 1998
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................... $ 124 $ 248 $ 531 $ 880 $ 1,109 $ 1,287 $ 2,406
Cost of revenues........... 186 232 264 467 608 971 1,251
------- ------- ------- ------- ------- ------- -------
Gross (loss) profit........ (62) 16 267 413 501 316 1,155
Operating costs:
Research and development.. 95 53 69 75 144 180 239
Sales and marketing....... 114 115 121 236 114 117 156
General and
administrative.......... 177 183 207 270 353 351 425
Stock-based expense....... -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Total operating costs...... 386 351 397 581 611 648 820
------- ------- ------- ------- ------- ------- -------
Operating (loss) income.... (448) (335) (130) (168) (110) (332) 335
Other income (expense),
net....................... 5 5 5 5 23 163 10
------- ------- ------- ------- ------- ------- -------
Net (loss) income.......... $ (443) $ (330) $ (125) $ (163) $ (87) $ (169) $ 345
======= ======= ======= ======= ======= ======= =======
AS A PERCENTAGE OF
REVENUES:
Revenues................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues........... 150.0 93.5 49.7 53.1 54.8 75.4 52.0
------- ------- ------- ------- ------- ------- -------
Gross (loss) profit........ (50.0) 6.5 50.3 46.9 45.2 24.6 48.0
Operating costs:
Research and development.. 76.6 21.4 13.0 8.5 13.0 14.0 9.9
Sales and marketing....... 91.9 46.4 22.8 26.8 10.3 9.1 6.5
General and
administrative.......... 142.8 73.8 39.0 30.7 31.8 27.3 17.7
Stock-based expense....... -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Total operating costs...... 311.3 141.6 74.8 66.0 55.1 50.4 34.1
------- ------- ------- ------- ------- ------- -------
Operating (loss) income.... (361.3) (135.1) (24.5) (19.1) (9.9) (25.8) 13.9
Other income (expense),
net....................... 4.0 2.0 1.0 0.6 2.1 12.7 0.4
------- ------- ------- ------- ------- ------- -------
Net (loss) income.......... (357.3)% (133.1)% (23.5)% (18.5)% (7.8)% (13.1)% 14.3%
======= ======= ======= ======= ======= ======= =======
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------
DEC. 31, MAR. 31, JUNE 30, SEP. 30,
1998 1999 1999 1999
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C>
Revenues................... $ 2,999 $ 3,499 $ 4,183 $ 5,355
Cost of revenues........... 1,428 1,566 2,583 3,218
------- ------- ------- -------
Gross (loss) profit........ 1,571 1,933 1,600 2,137
Operating costs:
Research and development.. 279 555 806 1,599
Sales and marketing....... 269 593 1,869 3,163
General and
administrative.......... 897 1,243 2,158 2,489
Stock-based expense....... -- -- -- 4,728
------- ------- ------- -------
Total operating costs...... 1,445 2,391 4,833 11,979
------- ------- ------- -------
Operating (loss) income.... 126 (458) (3,233) (9,842)
Other income (expense),
net....................... 19 (34) (32) 120
------- ------- ------- -------
Net (loss) income.......... $ 145 $ (492) $(3,265) $(9,722)
======= ======= ======= =======
AS A PERCENTAGE OF
REVENUES:
Revenues................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues........... 47.6 44.8 61.7 60.1
------- ------- ------- -------
Gross (loss) profit........ 52.4 55.2 38.3 39.9
Operating costs:
Research and development.. 9.3 15.9 19.3 29.8
Sales and marketing....... 8.9 16.9 44.7 59.1
General and
administrative.......... 30.0 35.5 51.6 46.5
Stock-based expense....... -- -- -- 88.2
------- ------- ------- -------
Total operating costs...... 48.2 68.3 115.6 223.6
------- ------- ------- -------
Operating (loss) income.... 4.2 (13.1) (77.3) (183.7)
Other income (expense),
net....................... 0.6 (1.0) (0.8) 2.2
------- ------- ------- -------
Net (loss) income.......... 4.8% (14.1)% (78.1)% (181.5)%
======= ======= ======= =======
</TABLE>
YEAR 2000 ISSUES
Many computer systems are coded to accept only two-digit entries in date
code fields. These systems may be unable to distinguish whether "00" means 1900
or 2000, which may result in failures or the creation of erroneous results by,
at or beyond the year 2000. Many companies' computer and/or software systems may
need to be upgraded or replaced in order to process dates correctly beginning on
January 1, 2000 and to comply with the so-called "Year 2000" requirements.
We rely on our internally developed software as well as software, hardware
and other computer technology developed by third parties. The failure of any of
this software, hardware or computer technology could result in the interruption
of our auction services, result in delay or loss of revenues, diversion of
development resources, damage to our reputation and/or liability to our clients,
any of which could seriously harm our business.
We believe, based on internal assessments to date, that our internally
developed proprietary software, including our BidWare software, is Year 2000
compliant. We are not certain that this is the case, however, and it is possible
that our BidWare software will not function properly when used by auction
participants on systems that are not Year 2000 compliant. We generally do not
represent to our clients that our software and systems are Year 2000 compliant,
although we have been compelled to make this representation to some significant
clients. For these clients, our liability is limited to the actual damages
sustained by the client, subject to specific dollar limitations in each
agreement. We are
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<PAGE> 33
not liable, however, for Year 2000 noncompliance resulting from the
incompatibility of our clients' technology with ours, or from problems with
public or private networks over which we run our auctions.
We also believe, based on internal assessments to date and representations
made to us by third-party vendors, that the third-party software and hardware
that we operate in our business, including our basic operating systems, office
software, servers and databases, is either Year 2000 compliant or can be made
Year 2000 compliant without significant cost or effort. Our servers and some of
our personal computers are not currently Year 2000 compliant. However, we are in
the process of performing vendor-recommended upgrades necessary to make these
servers and personal computers Year 2000 compliant. We intend to complete these
upgrades prior to December 31, 1999 at a cost that we estimate to be no greater
than $170,000.
It is difficult for us to assess the Year 2000 compliance of the general
communications infrastructure on which we rely to conduct our online auctions.
Our online auctions depend on the successful technical operation of an entire
chain of software, hardware and telecommunications equipment. The failure of any
element in this chain to be Year 2000 compliant could result in a disruption of
our auction services. Many of the elements in this chain, such as
telecommunications equipment and Internet connectivity, are not within our
control. For example, most suppliers who participate in our online auctions use
our BidWare software by dialing into a network provided by a third party, from
whom we lease private network services. While we have contacted this vendor and
requested confirmation of Year 2000 compliance, the vendor has not provided the
confirmation we requested.
We have limited information concerning the Year 2000 compliance of our
clients and of suppliers who participate in our online auctions. In addition,
many suppliers are located in foreign countries with inferior telecommunications
infrastructure. We expect that many auction participants will have to perform
vendor-recommended upgrades to their systems to become Year 2000 compliant. We
believe that we have the ability to bypass isolated failures of our clients'
systems through other means. However, a generalized failure of any of our
clients' systems or the failure of the systems of a significant number of
suppliers could prevent us from successfully conducting online auctions for
those clients or with those suppliers and could adversely affect our business.
We may incur extra costs from time to time in supporting clients and suppliers
who are not Year 2000 compliant.
We think that the most reasonably likely worst case Year 2000 scenario for
our business would be if there were a generalized failure of the
telecommunications equipment and Internet connectivity on which we rely to
conduct our online auctions. Such a failure would prevent us from conducting
online auctions until the providers of this equipment and connectivity restored
service. We do not have a formal contingency plan to address such a failure or
any other generalized failure of computer systems due to the Year 2000 issue.
MARKET RISK
All of our revenues recognized to date have been denominated in United
States dollars and are primarily from clients in the United States. We have a
European subsidiary located in Belgium and intend to establish other foreign
subsidiaries in the future. Revenues from international clients to date have not
been substantial, and nearly all of these revenues have been denominated in
United States dollars. In the future, a portion of the revenues we derive from
international operations may be denominated in foreign currencies. We incur
costs for our overseas offices in the local currency of those offices, for
staffing, rent, telecommunications and other services. As a result, our
operating results could become subject to significant fluctuations based upon
changes in the exchange rates of those currencies in relation to the United
States dollar. Furthermore, to the extent that we engage in international sales
denominated in U.S. dollars, an increase in the value of the United States
dollar relative to foreign currencies could make our services less competitive
in international markets. Although currency fluctuations are currently not a
material risk to our operating results, we will
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<PAGE> 34
continue to monitor our exposure to currency fluctuations and when appropriate,
use financial hedging techniques to minimize the effect of these fluctuations in
the future. We cannot assure you that exchange rate fluctuations will not harm
our business in the future. We do not currently utilize any derivative financial
instruments or derivative commodity instruments.
Our interest income is sensitive to changes in the general level of United
States interest rates, particularly since the majority of our investments are in
short-term instruments. Borrowings under our existing credit lines are also
interest rate sensitive, since the interest rate charged by our bank varies with
changes in the prime rate of lending. We believe, however, that we are currently
not subject to material interest rate risk.
RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133,
which is effective, as amended, for all quarters in fiscal years beginning after
June 15, 2000, establishes accounting and reporting standards for derivative
financial instruments and hedging activities related to those instruments, as
well as other hedging activities. As we do not currently engage in derivative or
hedging activities, we do not expect the adoption of this standard to have a
significant impact on our consolidated financial statements.
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<PAGE> 35
BUSINESS
THE COMPANY
FreeMarkets creates customized business-to-business online auctions for the
world's largest buyers of industrial parts, raw materials and commodities. We
combine our proprietary BidWare Internet technology with our in-depth knowledge
of supply markets to help our clients obtain lower prices, make better
purchasing decisions and achieve significant savings. We created online auctions
covering approximately $1.0 billion worth of purchase orders in 1998 and $1.4
billion worth of purchase orders in the nine months ended September 30, 1999. We
estimate that the resulting savings for our clients ranged from approximately 2%
to more than 25%. Since 1995, we have created online auctions for more than 30
clients in over 50 product categories, including injection molded plastic parts,
commercial machinings, metal fabrications, chemicals, printed circuit boards,
corrugated packaging and coal. More than 2,000 suppliers from over 30 countries
have participated in our auctions. Our clients are large purchasing
organizations, including United Technologies Corporation, General Motors
Corporation, Quaker Oats, Emerson Electric, Allied Signal Corporation and the
Commonwealth of Pennsylvania.
INDUSTRY BACKGROUND
GROWTH OF BUSINESS-TO-BUSINESS ELECTRONIC COMMERCE
The Internet is one of the fastest-growing means of communication, reaching
consumers and businesses globally. As the number of Internet users has grown,
businesses have increasingly recognized the power of the Internet to streamline
complex processes, lower costs and improve efficiency. Forrester Research
expects business-to-business electronic commerce to grow more rapidly than
business-to-consumer electronic commerce over the next several years. Forrester
Research estimates that business-to-business electronic commerce will grow from
$109 billion in 1999 to $1.3 trillion in 2003, accounting for 90% of the dollar
value of electronic commerce in the United States by 2003, and that total
electronic commerce worldwide may reach as high as $3.2 trillion by 2003.
Auctions targeted at consumers are a popular application of Internet
technology. Forrester Research projects that the value of goods sold through
Internet auctions will increase from $8.7 billion in 1998 to $52.6 billion in
2002. The popularity of consumer-oriented auction sites and the opportunity
presented by business-to-business electronic commerce have spurred the creation
of business-to-business Internet auction sites. However, we believe that these
auction sites have not adequately addressed the problems faced by manufacturers
who purchase "direct materials" -- the industrial parts and raw materials that
are incorporated into finished products.
INEFFICIENCIES OF SUPPLY MARKETS FOR DIRECT MATERIALS
Based on industry research and government statistics, we estimate that
manufacturers worldwide purchase approximately $5 trillion of direct materials
each year. Due to inefficiencies in the markets that supply these materials, we
think that buyers at times pay prices that are too high. We believe that these
inefficiencies result in part from the following factors:
- CUSTOM-MADE PRODUCTS HAVE NO STANDARD PRICES. Direct materials are often
custom-made or adapted to the buyer's specifications. Unlike maintenance,
repair and operating supplies, direct materials are often not
standardized and therefore cannot be ordered from catalogs at list
prices. Without catalogs or list prices, buyers cannot easily obtain
comparative price information.
- QUALITY CAN BE AS IMPORTANT AS PRICE. Because manufacturers use direct
materials as components in finished products, quality is critical. There
is often little standardized information on direct material quality. As a
result, when selecting suppliers, buyers often must spend significant
effort compiling their own information to compare quality as well as
price.
- SUPPLY MARKETS ARE FRAGMENTED. Supply markets for direct materials often
contain hundreds of potential suppliers. This fragmentation makes it
difficult for buyers to understand the entire
36
<PAGE> 36
supply market for the products they are buying and to evaluate and select
potential new suppliers.
The need for customization, the importance of quality and the fragmentation
of supply markets complicate the process by which buyers purchase direct
materials. This complexity often leads buyers to rely on suppliers with whom
they have dealt in the past, making it difficult for new suppliers to compete
for business. Because competition among suppliers is limited by these factors,
buyers may pay higher prices or obtain lower quality than they would in a more
efficient market with better information and more readily available alternative
sources of supply.
LIMITATIONS OF CURRENT BUSINESS-TO-BUSINESS ELECTRONIC COMMERCE APPLICATIONS
The Internet offers an opportunity to make business-to-business commerce
more efficient by facilitating the communication and use of information.
Although several electronic commerce applications for business purchasing have
emerged, we believe that none has adequately addressed the problems presented by
direct materials purchasing. Several of these applications, and the primary
reasons why we believe that they fail to meet the needs of direct materials
buyers, are summarized below:
- SOFTWARE THAT FACILITATES THE PROCUREMENT OF STANDARDIZED PRODUCTS. These
software applications can reduce the paperwork needed to requisition
office supplies and other standardized products, but are not suitable for
the purchase of direct materials for which no catalogs or price lists
exist.
- WEBSITES DEDICATED TO PARTICULAR PRODUCT CATEGORIES. These so-called
"vertical market" sites are generally supported by supplier-paid
advertisements, and as a result may contain biased information. Moreover,
buyers of custom-made or tailored products often need to exchange
detailed, confidential information with suppliers and to follow specific
procedures when making purchases. These vertical market sites generally
do not support buyer-specific purchasing processes. Thus, they are of
limited benefit to many large industrial buyers.
- SELLER-ORIENTED BUSINESS-TO-BUSINESS AUCTION SITES. These sites enable
sellers to offer goods to multiple potential buyers. They are designed to
sell standard or excess items, such as used machinery, to the highest
bidder. As with websites dedicated to particular product categories,
these auction sites are not suitable for the purchase of items such as
direct materials that are custom-made to the buyer's specifications.
We believe that neither software nor Internet technology alone can provide
an adequate solution for buyers of direct materials. Rather, we think that the
creation of an efficient market for these materials requires a solution that
combines buyer-oriented Internet technology with services that are customized to
buyers' needs.
THE FREEMARKETS SOLUTION
We combine our proprietary BidWare Internet technology with our in-depth
knowledge of supply markets to help large industrial buyers obtain lower prices
and make better purchasing decisions. In a FreeMarkets online auction, multiple
suppliers from around the world can submit bids for a buyer's purchase order in
a real-time, interactive competition. Our auctions, in contrast to those
designed for sellers, are "downward price" auctions in which suppliers continue
to lower their prices until the auction is closed. For each auction, we work
with our client to identify and screen suppliers and to assemble a request for
quotation that provides detailed, clear and consistent information for suppliers
to use as a basis for their competitive bids. Our service, which we call "market
making", creates a custom market for the goods or services being purchased by
our client in a particular auction. Our solution provides:
- SUBSTANTIAL SAVINGS. Our online auctions can deliver substantial savings
to our clients. Depending upon the nature of the direct materials or
services being bid, savings typically range from a few percentage points
on purchases of commodities to more than 25% on purchases of
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custom industrial components, with even greater savings at times. Clients
often begin to save with the first auction we conduct.
- ROBUST INTERACTIVE TECHNOLOGY. Our BidWare Internet technology
facilitates dynamic competitive bidding by enabling suppliers to submit
bids in real time and to view competing bids within seconds after their
submission. Our technology is also flexible. We can easily configure our
BidWare software in many different formats to address the characteristics
of a particular supply market and to achieve the particular objectives of
each of our clients. In addition, we engage in a continuous process of
improving our technology by adding new functions and features that we
develop through our auction experience.
- TAILORED APPROACH TO CLIENTS' NEEDS. We tailor our services to meet the
needs of each client. Our clients are typically large corporations that
purchase a wide variety of industrial parts, raw materials and
commodities. Each client has its own unique organizational structure,
approach to purchasing and specific purchasing objectives. We work with
each client to identify the portions of their purchases that are best
suited for our market making approach and we design a program of services
that meets their needs.
- IN-DEPTH KNOWLEDGE OF SUPPLY MARKETS. We develop and manage specialized
information about many different product categories. Each time we conduct
an auction for a client, we add to the knowledge we can apply to our
business. We maintain a database of thousands of potential suppliers,
with information about their manufacturing processes, quality assurance
practices, market focus and facilities. This in-depth knowledge enables
us to provide our clients with market information that they cannot easily
generate themselves or obtain from other sources.
- MARKET INTEGRITY. We have designed our market making service to enable
our clients to evaluate competing suppliers on the basis of price,
quality and performance in a process that is intended to be fair to all
participating suppliers. The request for quotation that is sent to
potential suppliers provides detailed and clear specifications, so that
all suppliers who participate in a FreeMarkets online auction have
consistent information to use as a basis for their bids. Buyers and
suppliers who participate in our auctions agree in advance to a set of
auction rules which are designed to ensure the integrity of the markets
that we create. These rules give participating suppliers the confidence
to submit their best bids.
THE FREEMARKETS STRATEGY
We seek to be the world's leading provider of business-to-business online
auctions. The key elements of our strategy are:
- EXTEND OUR CLIENT BASE. We intend to extend our client base in our target
market of Global 1000 corporations and other large enterprises,
particularly those whose purchasing needs include custom-engineered
industrial parts or other customized goods or services obtained from
fragmented supply markets. We also successfully serve the Commonwealth of
Pennsylvania, and believe that our service can attract other governmental
entities. In order to become better known in our target markets, we plan
to hire additional sales and marketing personnel and increase our
marketing and advertising expenditures on brand development.
- EXPAND INTO ADDITIONAL PRODUCT CATEGORIES. We intend to expand into
additional product categories where our online auctions can continue to
generate savings for buyers. We plan to identify these markets by working
with our existing and prospective clients to determine additional direct
materials, services and commodities that would be appropriate for our
solution and by hiring personnel with expertise in a variety of product
categories. We believe that knowledge of additional product categories
will enable us to expand our relationships with our existing clients, as
well as to serve new clients.
- GROW INTERNATIONAL PRESENCE. We intend to expand our presence in Europe
and to create a presence in both Asia and Latin America to better serve
multinational enterprises. We have
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served buyers in the United States and Europe, with over 2,000 suppliers
from more than 30 countries participating in our online auctions. We
believe that we can assist buyers in identifying potential suppliers
worldwide and that our service will be attractive to buyers based outside
the United States.
- FOSTER A CULTURE OF EXCELLENCE AND CLIENT SERVICE. We intend to continue
to employ rigorous recruiting, training and evaluation practices to help
us attract and retain employees who dedicate themselves to delivering
outstanding results to our clients. Since our inception, we have
emphasized the creation of an environment of excellence and client
service. We believe that our commitment to excellent service has led and
will continue to lead to new client referrals from satisfied buyers who
have used our auctions.
- ADD BIDDING FEATURES AND AUTOMATION TOOLS. We intend to continue to add
functions and features to our BidWare technology. These functions and
features will facilitate our ability to provide to new and existing
clients additional services, such as upward-price auctions and trading
exchanges for used equipment and excess inventory. We also intend to
develop new tools that will automate portions of our market making
process, enhancing the value we can provide to clients and improving the
scalability of our business.
- INTRODUCE BUYER HUB WEBSITES. We intend to introduce websites, which we
call "buyer hubs", that will incorporate buyers' proprietary information
and tools that they may use to manage their direct materials purchasing.
We believe that these buyer hubs will position us to provide additional
services to our current clients, allowing us to participate in a greater
proportion of their purchasing decisions, and help us to attract new
clients. We currently operate prototype buyer hubs on behalf of two
clients. We intend to build additional buyer hubs that our clients can
use more widely throughout their own organizations to purchase from a
broader range of product categories.
THE FREEMARKETS MARKET MAKING PROCESS
We help our clients obtain lower prices and make better purchasing
decisions. Our process combines auction services and our proprietary BidWare
Internet technology. We call this process "market making" because we create a
custom market for the direct materials, commodities or services being purchased
in each FreeMarkets online auction. To make a custom market, we work with a
client, typically over a period that ranges from four to eight weeks, to
accomplish the following:
[Graphic depiction of five arrows, with the following text in each arrow:
in the first arrow, "Identify Potential Savings", in the second arrow, "Prepare
Request for Quotation"; in the third arrow, "Select Suppliers and Distribute
Request for Quotation"; in the fourth arrow, "Conduct Online Auction", and in
the fifth arrow, "Implement Results".]
IDENTIFY POTENTIAL SAVINGS. We work with our client to identify which of
its purchases seem best suited to our market making process. Although our online
auctions generate savings on many types of products, the potential savings are
particularly dramatic for direct materials that are custom-made to a buyer's
specifications and available from many different suppliers. Examples include
injection molded plastic components, metal fabrications, commercial machinings,
printed circuit boards, fasteners and corrugated packaging. Other types of
products, including commodities such as chemicals and coal, can also be
appropriate for our process because market conditions are volatile and purchase
prices may change with each transaction.
PREPARE REQUEST FOR QUOTATION. Once a suitable purchase has been
identified, we work with our client to prepare a request for quotation. The
request for quotation is our client's specification of the materials to be
auctioned. This specification is sent to selected suppliers to help them prepare
their bids. Because many direct materials must be custom-made to a buyer's
specifications, it is essential for
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<PAGE> 39
the request for quotation to specify precisely all of our client's requirements,
including the applicable technical characteristics, quality and logistics
requirements and commercial terms. An auction typically includes components with
different characteristics or delivery locations, so we group components into
auction lots with the goal of creating meaningful competition in each lot.
SELECT POTENTIAL SUPPLIERS AND DISTRIBUTE REQUEST FOR QUOTATION. While the
request for quotation is being prepared, the supplier selection process begins.
We start with a target list of suppliers that includes those known to our client
and others we identify from our supplier database or additional market research.
After a detailed screening process, our client selects a list of potential
suppliers. Because most industrial purchases are made from a select group of
potential suppliers, our online auctions are private, and only those suppliers
whom our client ultimately invites may participate. Privacy is important because
the information contained in the request for quotation is highly confidential
and our client will award a purchase order only to a qualified supplier. Once
our client has selected potential suppliers, we provide these suppliers with the
request for quotation to enable them to prepare for the auction. Before auction
day, we train suppliers in the use of our BidWare software.
CONDUCT ONLINE AUCTION. After potential suppliers have been selected and
trained, we conduct an online auction. During the auction, suppliers remain
anonymous to one another but can see competing price bids in real time, while
our client can see both the identity and current bid of each supplier. An
auction typically lasts from one to three hours. The activity is fast-paced,
with suppliers generally submitting bids every few minutes, and often more
frequently as the closing time for each lot nears. Our Market Operations Center
in Pittsburgh provides continuous support to our clients and the suppliers
involved in our auctions throughout the process. We monitor auction performance,
send real-time messages to participants, and strive to ensure that all bidders
can participate effectively. We believe that our active involvement during
auctions makes our process more reliable. We can support auction participants in
more than 20 different languages. We consider this to be a critical skill in
helping clients to buy from suppliers around the world.
IMPLEMENT RESULTS. After the online auction has been completed, we assist
our client in analyzing and implementing auction results so that our client can
award a purchase order to the supplier or suppliers providing the best overall
value. In some situations, our client can make an award decision and issue a
purchase order soon after an auction. In other situations, our client may
perform additional analysis and due diligence before making an award. Since
awards may be based not only on price, but also on non-price factors such as
quality and delivery capabilities, the low bidder does not always win a
FreeMarkets online auction. Our client ultimately makes the final award
decision.
CASE STUDIES
The examples that follow illustrate how the FreeMarkets market making
process helps clients achieve savings on their direct materials purchases. Each
auction we conduct is a distinct event, with a different mix of participants and
products. The results of any auction cannot be predicted, and may not be
duplicated.
UNITED TECHNOLOGIES CORPORATION
We have conducted over 50 auctions for United Technologies since 1996. The
case study presented below describes a single auction we conducted in 1997 for a
three-year contract to purchase injection molded plastic parts used in heating,
ventilating and air conditioning equipment. The auction resulted in projected
savings, estimated after final supplier selection, of $1.2 million per year, or
$3.6 million over the life of the contract. This represented a 12% savings when
compared to the previous prices paid by United Technologies for these parts.
IDENTIFY POTENTIAL SAVINGS. We worked with United Technologies to identify
injection molded plastic parts purchased by four different plants as suitable
for an online auction. The package to be auctioned included 159 different parts,
all to be produced to United Technologies' specifications. These
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parts represented a total of $29.1 million of purchases over the three-year life
of the contract to be bid, or $9.7 million annually, based on the previous
prices paid by United Technologies.
PREPARE REQUEST FOR QUOTATION. We worked with our client to write a request
for quotation describing the parts to be auctioned. The request for quotation
included blueprints and material specifications, as well as other technical
details needed by suppliers to prepare their bids. We grouped the 159 parts into
10 different lots, reflecting differences in part size, materials and special
treatments required for the finished parts.
SELECT POTENTIAL SUPPLIERS AND DISTRIBUTE REQUEST FOR QUOTATION. We helped
our client to select appropriate suppliers for each of the 10 lots. We
identified potential suppliers from among those used by United Technologies in
the past, from our database and from research that we performed during this
project. All suppliers completed surveys designed to profile their capabilities
as plastic molders and assess their quality assurance practices. Because the
parts varied from small, decorative items to large, functional items, it was
necessary to select and to distribute the request for quotation to a diverse
group of suppliers to ensure that we had a sufficiently competitive market for
each of the 10 lots. Ultimately, United Technologies selected 36 different
suppliers to participate in the auction and shipped a request for quotation to
each supplier.
CONDUCT ONLINE AUCTION. The auction began at 11:00 a.m. Eastern Time and
open bidding ensued on all 10 lots. Within eight minutes of the auction's
opening, 40 bids had been received, and the aggregate low bid for all 10 lots
stood at an amount that represented $27.5 million over the three-year life of
the contract. At this point, the projected savings equaled $1.6 million, or 5%,
below the amount that United Technologies would have paid over three years based
on the previous prices they had paid for these parts. The first lot closed at
12:07 p.m., with a total of 132 bids having been placed, 12 of which had been
received in the final 10 minutes of bidding. The remaining lots closed
sequentially over the next three hours, allowing bidders to concentrate on each
lot individually in the intense final minutes of bidding.
IMPLEMENT RESULTS. We worked with United Technologies to assess bidding
results. Because non-price factors were also important, we had informed
suppliers in advance that low bidders would not automatically win, just as low
bidders would not automatically win in more traditional bidding processes.
Ultimately, United Technologies received 382 bids on the 10 lots from 28
suppliers, and selected six suppliers. If United Technologies purchases the full
auctioned volume over the contract life, then it will pay an aggregate purchase
price of $25.5 million over the three-year period, saving $3.6 million, or 12%,
over the life of the contract.
OTHER EXAMPLES
Since 1995, we have created similar online auctions for more than 30
clients. The examples below illustrate the savings that we have helped our
clients to achieve on purchases in a variety of product categories.
PRINTED CIRCUIT BOARDS. In January 1998, we conducted an online auction for
multi-layered printed circuit boards on behalf of a Fortune 100 corporation,
which resulted in savings of $10.6 million per year, or $31.7 million over the
life of the three-year contract bid. This represented savings of 43% below the
prices previously paid for these components by our client. The package, on which
29 suppliers from Europe, Asia and North America bid, included 383 different
printed circuit board designs. Based on the low bid price achieved in our
auction, these components would represent $41.8 million of purchases over a
three-year period, or $13.9 million annually.
COMMERCIAL MACHININGS. In April 1999, we conducted an online auction for
commercial machinings on behalf of an electrical products company, which
resulted in savings of $2.1 million per year, or $6.3 million over the life of
the three-year contract bid. This represented savings of 24% below the prices
previously paid for these components by our client. The package included 813
different precision machined metal components, which previously were produced by
as many as 56 different
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suppliers. One of our client's objectives for this auction was to reduce the
number of suppliers. We expect that, as a result of our auction, our client will
ultimately purchase the components in this package from approximately 15
suppliers. The bidders during this auction participated simultaneously from
Taiwan, India, Hong Kong, Malaysia, Mexico and the United States. Based on the
low bid price achieved in our auction, these components would represent $19.8
million of purchases over a three-year period, or $6.6 million annually.
LABELS. In June 1999, we conducted an online auction for packaging labels
on behalf of a major consumer packaged goods company, which resulted in annual
savings of $1.5 million. This represented savings of 41% below the prices
previously paid for these labels by our client. The package, on which three
suppliers bid, included 76 different labels. Based on the low bid price achieved
in our auction, these labels would represent $2.1 million of purchases over the
one-year term of the contract bid.
ROCK SALT. In July 1999, we conducted an online auction for rock salt on
behalf of a government purchasing organization, which resulted in annual savings
of $2.5 million. This represented savings of 7% below the prices previously paid
for this material by our client. The package, on which nine suppliers bid,
included solar and mined rock salt used to melt ice on winter roads. Based on
the low bid price achieved in our auction, this material would represent a total
of $31.1 million of purchases over the one-year term of the contract bid.
PRODUCT CATEGORIES
We create online auctions for our clients in a wide variety of product
categories, ranging from commodities to custom-engineered components. The number
of product categories in which we have experience had grown to more than 50 as
of September 30, 1999. The following list includes some of the product
categories in which we have had the most experience:
<TABLE>
<S> <C> <C>
Chemicals Fasteners Motor freight
Coal Injection molded plastics Printed circuit boards
Commercial machinings Metal fabrications Service center metals
Corrugated packaging Metal stampings Transformers
Die castings Molded rubber
</TABLE>
Most industrial buyers purchase a range of product categories, so we
believe it is important that we address a comparable range. We typically conduct
auctions in a product category for multiple clients, so we gain knowledge and
improve productivity over time through repeated auctions.
CLIENTS
Our clients are among the world's largest buyers of industrial parts, raw
materials and commodities. To date, we have created online auctions for more
than 30 clients. We have served the following clients in the nine months ended
September 30, 1999:
<TABLE>
<S> <C> <C>
Allegheny Ludlum Corporation Eaton Corporation Owens Corning
Allied Signal Corporation Emerson Electric Company Pepsico, Inc.
BP Amoco Corporation FirstEnergy Corp. The Quaker Oats Company
Commonwealth of Pennsylvania General Electric Company Reliant Energy, Incorporated
Conopco, Inc. (acting through its (formerly known as Houston
(which does business as GE Industrial Systems Lighting & Power)
Unilever Home & Personal business component) SmithKline Beecham plc
Care USA) General Motors Corp. United Technologies Corporation
Delphi Automotive Systems Hillenbrand Industries, Welch Foods Inc.
Corporation Inc.
Navistar International
</TABLE>
We provide services to our clients under service agreements that range from
a few months to four years. These agreements are typically cancelable by our
clients on minimal notice and without substantial penalties. Our agreements
typically provide us with revenues from monthly fees. Some of
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our agreements also include performance incentive payments that are contingent
upon our client achieving specific auction volume or savings thresholds. Our
agreements may also provide for sales commissions to be paid to us upon shipment
of the auctioned items from the winning supplier to our client. We never take
title to or possession of any of the products purchased through our auctions. We
also do not oversee delivery of or payment for these products.
SALES AND MARKETING
We sell our services through our direct sales organization. As of September
30, 1999, our direct sales force consisted of 14 sales professionals, organized
along buyer industry lines. We plan to expand our direct sales force and the
number of buyer industry sectors for which we have specialists on our staff.
We typically target our sales efforts at senior purchasing executives and
other senior executives within a buying organization. When a prospective client
is interested in working with us, we will analyze which portions of its direct
material purchases are best suited to our market making process. Throughout this
analysis, we work with the prospective client to negotiate terms of a service
agreement.
New clients often enter into short-term agreements with us in order to try
our service before making a longer-term commitment. Because our technology need
not be integrated with the client's existing information technology
infrastructure, short-term agreements can quickly result in savings for our
client. Our short-term agreements typically last four to six months, during
which time we prepare and conduct a range of auctions. Our goal through this
process is to demonstrate our capability to provide savings, and to obtain a
longer-term service agreement with the client.
Our marketing efforts focus on general communications and on obtaining
referrals from our existing clients. We participate in trade conferences and
purchasing industry forums, and advertise in major airports and business
publications. We intend to increase our advertising and marketing expenditures
in an effort to become better known in our target markets. These expenditures
will cover the addition of sales, marketing and business development personnel,
increased advertising in professional journals and general business and trade
media, increased media relations, increased presence at purchasing and
technology trade conferences, and continuing improvements to our website.
TECHNOLOGY AND OPERATIONS
We have built our proprietary auction technology called BidWare to create
highly-interactive auctions tailored to the needs of industrial purchasers. Our
Internet-based BidWare software provides an easy-to-use graphical interface that
our clients use to watch their auctions progress and that suppliers use to
submit bids. Suppliers participate from their own offices, where key decision
makers submit bids. Our BidWare software provides nearly instantaneous response,
displaying these bids to all users within seconds of submission. A truly dynamic
auction results, as buyers watch prices decrease before their eyes.
We operate a Market Operations Center in our Pittsburgh headquarters to
ensure that each auction is actively managed and runs smoothly. We strive to
make our auctions extremely reliable, both through our operations methodology
and the quality of our BidWare software. The BidWare architecture contains many
features to monitor and control auctions so that our Market Operations Center
can quickly respond in the event of technical or other difficulties. In
addition, our Market Operations Center staff actively supports bidders before
and during auctions, helping to further ensure the reliability of our service.
Although we have taken extensive measures to ensure the reliability of our
actions, we cannot guarantee that we will not have technical interruptions or
failures in the future.
Our BidWare software incorporates a wide range of bidding features and
auction formats that we have developed to address specific needs of industrial
purchasers. Examples of the types of auctions we can run with our BidWare
software include:
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- multi-parameter auctions, where submitted bids incorporate quality and
technical factors as well as prices;
- differential index auctions, where suppliers compete on price
differentials from a pre-specified index or reference price that may
fluctuate during the life of the contract;
- multi-currency auctions, where our client and suppliers can choose to
monitor the auction in the currency of their choice; and
- multi-period auctions, where suppliers can submit a series of price
quotes covering multiple future periods.
Because we can operate our BidWare software in many different formats and
set many different control parameters, we can create tailored auctions that
address particular industrial purchasing situations.
Our BidWare software is designed so that users can connect to our BidServer
technology, the server-side application that manages our auctions, through
either their own Internet connections or an Internet service provider from which
we lease private network services. We encourage bidders to use our leased
network service provider so that we can obtain a more reliable and uniform level
of performance that we believe is important for real-time interactive bidding.
We operate our BidServer technology from our Market Operations Center in
Pittsburgh, where we have redundant links to our Internet service provider and a
redundant router configuration that automatically reroutes traffic if a
connection fails.
We expended $842,000 on research and development in 1998 and $3.0 million
in the nine months ended September 30, 1999. We plan to increase our research
and development expenditures to continue adding features to our technology and
to develop new Internet-based purchasing automation tools. We plan to continue
to develop tools to manage purchasing information customized for specific
clients. We believe that these tools may enable us to increase our employees'
productivity and allow us to serve more clients as we further automate our
services. We may also be able to derive additional revenues from operating these
tools for clients.
COMPETITION
A number of companies provide services or products to the market for
business-to-business electronic commerce, and existing and potential clients can
choose from a variety of current and potential competitors' services.
Competition in this market is rapidly evolving and intense, and we expect
competition to further intensify in the future. We currently or potentially will
compete with a number of other companies, including:
- well-financed entrepreneurial start-ups that offer similar services or
services perceived by a client to be similar;
- providers of electronic commerce technology extending their offerings to
include services or technology similar to ours;
- professional service and consulting firms and others offering services
similar to ours; and
- providers of stand-alone software products that make available to buyers
technology for conducting online auctions.
Our online auction service is one of many alternative approaches to
purchasing that buyers are considering. Many of our current and potential
competitors are larger, more established and have significantly greater
resources than we do. As a result, some of our current or potential competitors
may be able to commit more resources to marketing and promotional campaigns,
adopt more aggressive pricing policies and devote more resources to technology
development. In order to respond to changes within this competitive environment,
we may from time to time make pricing, service, marketing or other strategic
decisions that could adversely affect our operating results. In addition,
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competitors may introduce products or services that appear to be the same as
ours despite actual differences. In such an environment, we face the risk that
buyers will confuse our services with those of our competitors or choose the
services of a competitor with greater resources. We also face the risk that
buyers may attain poor results with other products or services and lose interest
in trying our services. We may not be able to keep our current clients or secure
new ones in light of these issues.
INTELLECTUAL PROPERTY
We regard the protection of our intellectual property rights to be critical
to our success. We rely or expect to rely on a combination of patent, copyright,
trademark, service mark and trade secret restrictions and contractual provisions
to protect our intellectual property rights. We require employees and
independent contractors to enter into confidentiality and invention assignment
agreements and require some of our employees to enter into non-competition
agreements. We also have non-disclosure agreements with our clients and with
suppliers who participate in our online auctions. We do not sell our BidWare
software to our clients or to suppliers, but rather license it for the limited
purpose of enabling buyers to view our online auctions and suppliers to submit
bids. The contractual provisions and the other steps we have taken to protect
our intellectual property may not prevent misappropriation of our technology or
deter third parties from developing similar or competing technologies.
BidWare, BidServer and FreeMarkets are registered trademarks of FreeMarkets
in the United States, and BidWare is a registered trademark of FreeMarkets in
the European Community. We have also applied for United States trademark
registration on SmartRFI, SmartRFQ and CBE. We have cleared the opposition
period in the European Community for our trademark application for FreeMarkets
and we have applied for trademarks in other jurisdictions.
We have filed patent applications in the United States with respect to some
proprietary features of our technology. We cannot assure that these patents will
be issued, or that, even if issued, these patents will adequately protect our
technology or processes or otherwise result in commercial advantages to us.
We cannot be certain that the steps we have taken to protect our
intellectual property will be adequate, that third parties will not infringe or
misappropriate our proprietary rights or that third parties will not
independently develop similar proprietary information. Any such infringement,
misappropriation or independent development could harm our future financial
results. Additionally, effective patent, trademark, copyright and trade secret
protection may not be available in every country where we provide online auction
services. We may, at times, have to incur significant legal costs and spend time
defending our trademarks, copyrights and, if issued, our patents. Any such
defense efforts, whether successful or not, would divert both time and resources
from the operation and growth of our business.
There is also significant uncertainty regarding the applicability to the
Internet of existing laws regarding matters such as property ownership,
copyrights and other intellectual property rights. The vast majority of these
laws were adopted prior to the advent of the Internet and, as a result, do not
contemplate or address the unique issues of the Internet and related
technologies.
GOVERNMENT REGULATION
As with many Internet-based businesses, we operate in an environment of
tremendous uncertainty as to potential government regulation. We believe that we
are not currently subject to direct regulation applicable to online commerce,
other than regulations applicable to businesses generally. However, the Internet
has rapidly emerged as a commerce medium, and governmental agencies have not yet
been able to adapt existing regulations to its use. Future laws, regulations and
court decisions may affect the Internet or other online services, covering
issues such as user pricing, user privacy, freedom of expression, access
charges, taxation, content and quality of products and services, advertising,
intellectual property rights and information security. Some new laws intended to
address Internet issues have yet to be interpreted in any meaningful way by the
courts, and their applicability and reach are therefore uncertain. In addition,
because our services are offered worldwide, and we facilitate sales of
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goods to clients worldwide, foreign jurisdictions may claim that we are required
to comply with their laws. Any future regulation may have a negative impact on
our business.
Because we are an Internet company, it is unclear in which jurisdictions we
are actually conducting business. Our failure to qualify to do business in a
jurisdiction that requires us to do so could subject us to fines and penalties
and could result in our inability to enforce agreements in that jurisdiction.
Numerous states have laws and regulations regarding the conduct of auctions
and the liability of auctioneers. We do not believe that these laws and
regulations, which were enacted for consumer protection many years ago, apply to
our online auction services. However, one or more jurisdictions may attempt to
impose these laws and regulations on our operations in the future.
EMPLOYEES
As of September 30, 1999, we had 278 employees, 249 of whom were located at
our Pittsburgh headquarters and 29 at our office in Brussels, Belgium. Of our
employees, 141 are engaged in market making, 27 in sales and marketing, 37 in
research and development, 25 in technical operations and 48 in administration,
human resources, legal, finance and facilities management. None of our employees
is represented by a collective bargaining agreement, and we believe that we have
good relations with our employees.
FACILITIES
Our headquarters in Pittsburgh, Pennsylvania currently occupies 54,000
square feet of office space under a lease that expires in May 2004. We will
lease additional space in the same building in November 1999, which will bring
our total occupied space to 72,000 square feet. We believe that our existing
facilities in Pittsburgh, coupled with options we have to lease additional
space, are adequate for our growth needs for the next two years. We also lease
an office of 2,400 square feet in Brussels, Belgium. We are expanding to a total
of 11,000 square feet of space in Brussels, Belgium to accommodate the
anticipated growth of our operations there, and we have agreed to lease an
office with a total of 4,700 square feet in San Jose, California. We may add
additional offices in the United States and in other countries.
LEGAL PROCEEDINGS
We are not currently involved in any material legal proceedings.
CORPORATE HISTORY
We were originally incorporated in 1995 as "Online Markets Corporation." We
changed our name to "FreeMarkets OnLine, Inc." shortly after our formation, and
then changed our name again in September 1999 to "FreeMarkets, Inc."
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth specific information regarding our executive
officers and directors as of September 30, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- --------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Glen T. Meakem..................................... 35 President, Chief Executive Officer, Chairman of the
Board and Director
Sam E. Kinney, Jr.................................. 35 Executive Vice President, Secretary and Director
David J. Becker.................................... 35 Executive Vice President and Chief Operating Officer
Thomas L. Dammer................................... 35 Vice President of Sales
Joan S. Hooper..................................... 42 Vice President, Chief Financial Officer and Treasurer
Jane M. Kirkland................................... 40 Vice President and Chief Information Officer
John P. Levis, III................................. 38 Vice President of People Development
Thomas L. McLeod................................... 41 Vice President of Market Making
Dr. Eric C. Cooper................................. 40 Director
David A. Noble..................................... 40 Director
</TABLE>
GLEN T. MEAKEM co-founded FreeMarkets in 1995 and has served as our
President, Chief Executive Officer, Chairman of the Board and a director since
our inception. Prior to co-founding FreeMarkets, from May 1994 to February 1995,
Mr. Meakem was employed as a manager in the Corporate Business Development Group
of General Electric Co. From January 1992 to April 1994, Mr. Meakem was an
associate with McKinsey & Company, Inc., a management consulting firm, where he
focused on industrial sourcing and commodities trading for clients in the United
States and Mexico. From June 1986 to December 1991, Mr. Meakem was an officer in
the United States Army Reserve. During this period, Mr. Meakem served two
separate active duty tours in the Army; the first from July 1986 to December
1986, and the second from December 1990 to June 1991. During his second active
duty tour, Mr. Meakem volunteered for and served as a combat engineer platoon
leader in Operation Desert Storm. From January 1987 to July 1989, Mr. Meakem
held product marketing positions of increasing responsibility with Kraft-General
Foods Corporation. Mr. Meakem earned an A.B. in government from Harvard
University and an M.B.A. from Harvard Business School.
SAM E. KINNEY, JR. co-founded FreeMarkets in 1995 and has served as our
Secretary and a director since our inception. From April 1995 to May 1998, he
was a Vice President of FreeMarkets, and since May 1998 he has been an Executive
Vice President. He also served as Acting Chief Financial Officer from June 1998
to September 1999, and as our Treasurer from our inception until September 1999.
Prior to co-founding FreeMarkets, from March 1992 to April 1995, Mr. Kinney was
employed as a consultant and engagement manager at McKinsey & Company, Inc. From
July 1990 to March 1992, Mr. Kinney worked as a special projects and budget
manager for Lucas Aerospace Power Equipment Corporation. From July 1986 to June
1988, Mr. Kinney was employed as a consultant with Booz-Allen & Hamilton, Inc.,
a management consulting firm. During his tenure as a consultant with McKinsey &
Company and Booz-Allen & Hamilton, Mr. Kinney worked on issues of sourcing,
industrial distribution and operations effectiveness for industrial, healthcare
and financial institution clients. Mr. Kinney earned an A.B. in economics from
Dartmouth College and an M.B.A. from the Amos Tuck School of Business
Administration at Dartmouth College.
DAVID J. BECKER has served as an Executive Vice President and our Chief
Operating Officer since March 1998. From October 1996 to February 1998, Mr.
Becker served as our Vice President of Market Making. Prior to joining
FreeMarkets, from March 1992 to September 1996, Mr. Becker was employed
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with Dole Fresh Fruit International, Ltd., where he worked in key financial and
management positions at Dole's Latin and South American headquarters and
subsidiaries. Mr. Becker's most recent position with Dole was as Manager,
Worldwide Logistics Information Network. Mr. Becker earned a B.S. in chemical
and petroleum refining engineering from Colorado School of Mines, an M.S. in
chemical engineering from the West Virginia College of Graduate Studies and an
M.B.A. from Harvard Business School.
THOMAS L. DAMMER has served as our Vice President of Sales since September
1998. Prior to joining FreeMarkets, from January 1994 to September 1998, Mr.
Dammer was employed by SmithKline Beecham Consumer Healthcare, where he served
in several positions, including Associate Director, Worldwide Business
Development and National Account Manager, Managed Care. From September 1987 to
January 1994, Mr. Dammer held several sales, sales management and marketing
product management positions with The Upjohn Company. Mr. Dammer earned a B.S.
in chemistry from Hope College (Michigan) and an M.B.A. from Duquesne
University.
JOAN S. HOOPER has served as a Vice President and our Chief Financial
Officer and Treasurer since September 1999. Prior to joining FreeMarkets, Ms.
Hooper was employed by AT&T Corp. from March 1979 to September 1999, serving in
several key financial and senior management positions within various divisions,
including divisions that are now independent companies -- Lucent Technologies,
Inc., US West, Inc. and NCR Corp. Ms. Hooper's most recent position was as
Financial Vice President of AT&T Business Services. Ms. Hooper holds a B.S.B.A.
in finance from Creighton University and an M.B.A. from Northwestern University,
and is a Certified Public Accountant and Certified Management Accountant.
JANE M. KIRKLAND has served as a Vice President and our Chief Information
Officer since July 1999. Prior to joining FreeMarkets, from June 1988 to July
1999, Ms. Kirkland was employed with McKinsey & Company, Inc., where she worked
in several positions, including Associate, Principal and Director of Knowledge
Management. During her tenure at McKinsey & Company, Ms. Kirkland focused on
serving clients in the financial services and electronics industries. Ms.
Kirkland holds a B.A. in English from Smith College, an M.A.T. in English from
Brown University, an M.S. in computer science from the University of
Massachusetts, Lowell and an M.B.A. from the Amos Tuck School of Business
Administration at Dartmouth College.
JOHN P. LEVIS, III has served as our Vice President of People Development
since September 1998. From January 1997 to September 1998, Mr. Levis served as
our Vice President of Client Development. Prior to joining FreeMarkets, from
August 1990 to December 1996, Mr. Levis was a consultant with McKinsey &
Company, Inc., where he served healthcare, financial services, energy, food
service and media clients on issues of marketing, channel strategy and cost
management. Mr. Levis earned a B.A. in history from Yale College and an M.B.A.
from the Amos Tuck School of Business Administration at Dartmouth College.
THOMAS L. MCLEOD has served as our Vice President of Market Making since
May 1998. Prior to joining FreeMarkets, from June 1996 to May 1998, Mr. McLeod
was a Principal with A.T. Kearney, a management consulting firm. From 1988 to
1996, Mr. McLeod was employed by Gemini Consulting, most recently in the
position of Vice President in the Federal Republic of Germany, where he led the
Analysis and Design practice. Mr. McLeod earned a B.A. in economics from the
University of Virginia and an M.B.A. from the College of William and Mary.
DR. ERIC C. COOPER has served as a director of FreeMarkets since June 1999.
Dr. Cooper was a co-founder of FORE Systems, Inc., a pioneer in the development
of ATM high speed networking equipment, which was acquired by GEC, p.l.c. in
June 1999. From FORE System's inception in April 1990 to June 1999, Dr. Cooper
served as Chairman of the Board, and he also served as Chief Executive Officer
from inception through January 1998. Prior to co-founding FORE Systems in 1990,
Dr. Cooper was on the faculty of Carnegie Mellon University. Dr. Cooper earned a
Ph.D. in computer science from the University of California at Berkeley, and an
A.B. in mathematics from Harvard University.
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DAVID A. NOBLE has served as a director of FreeMarkets since April 1999.
Mr. Noble is currently a general partner of Stolberg, Meehan & Scano, a private
equity investment fund focusing on business-to-business services in the
communications, utilities, information technology and electronic commerce
industries. From July 1985 to September 1997, Mr. Noble was employed with
McKinsey & Company, Inc., most recently as a Principal and head of the firm's
commodity risk management practice. Mr. Noble earned a B.S. in electrical
engineering from the Massachusetts Institute of Technology and an M.B.A. from
Harvard Business School.
BOARD COMPOSITION
Our Board of Directors currently consists of four members. Currently, each
director is elected for a period of one year at our annual meeting of
stockholders and serves until the next annual meeting or until his successor is
duly elected and qualified. Effective upon this offering, the Board will be
divided into three classes, with each class serving a staggered three-year term.
Messrs. Kinney and Meakem will serve as directors in the class having a term
first ending in 2002, Mr. Noble will serve as a director in the class having a
term first ending in 2000 and Dr. Cooper will serve as a director in the class
having a term first ending in 2001. See "Description of Capital
Stock -- Anti-Takeover Provisions".
BOARD COMMITTEES
Our Board of Directors established a compensation committee and an audit
committee in 1998. The compensation committee currently consists of Mr. Noble as
Chairman and Dr. Cooper. The compensation committee reviews and recommends to
the Board of Directors the compensation and benefits of our executive officers,
administers our stock option plans and establishes and reviews general policies
relating to compensation and benefits of our employees. The audit committee
currently consists of Dr. Cooper as Chairman and Mr. Noble. The audit committee
reviews our internal accounting procedures and consults with, and reviews the
services provided by, our independent accountants.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Neither of the members of our compensation committee has ever been an
officer or employee of FreeMarkets. None of our executive officers serves as a
member of the board of directors or compensation committee of any entity that
has one or more executive officers serving on our Board of Directors or
Compensation Committee.
DIRECTOR COMPENSATION
We do not currently compensate our directors for their services as members
of the Board of Directors, although we do reimburse them for travel and lodging
expenses in connection with attendance at Board and committee meetings. Our
directors are eligible to receive options under our Amended and Restated Stock
Incentive Plan. To date, we have not granted any options to our non-employee
directors under this plan.
EMPLOYMENT AND CHANGE IN CONTROL ARRANGEMENTS
All of our executive officers serve at the discretion of the Board of
Directors.
If we experience a change in control, some of the outstanding options held
by some of our executive officers, including Messrs. Meakem, Kinney, Becker,
Levis and McLeod, that were not previously vested will immediately vest either
50% or 100%. As of September 30, 1999, the minimum number of options held by
Messrs. Meakem, Kinney, Becker, Levis and McLeod that could vest under this
provision is as follows: Mr. Meakem -- 1,120,000; Mr. Kinney -- 680,000; Mr.
Becker -- 457,000; Mr. Levis -- 52,500; and Mr. McLeod -- 240,000. In addition,
if the acquiror in any change of control
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fails to provide substitute options to replace outstanding options held by these
executive officers, then all outstanding options not previously vested would
vest on the change of control.
Generally, a change in control would include:
- an acquisition of more than 50% of the combined voting power of all our
outstanding securities; or
- a merger where, following the transaction, our stockholders own 50% or
less of the voting securities of the surviving or resulting entity; or
- our liquidation or the sale of substantially all of our assets; or
- individuals who currently form a majority of our Board of Directors
ceasing to be a majority, unless the new directors are nominated for
election by our current Board of Directors or their nominated successors.
EXECUTIVE COMPENSATION
The following table sets forth the compensation received for services
rendered to FreeMarkets by our Chief Executive Officer and our four other most
highly compensated executive officers who earned more than $100,000 during 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
(OPTION AWARDS)
ANNUAL COMPENSATION --------------------
---------------------------------- NUMBER OF SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION OPTIONS(#)
- --------------------------- -------- ------- ------------- --------------------
<S> <C> <C> <C> <C>
Glen T. Meakem.......................... $177,083 $50,000 -- 1,440,000
President, Chief Executive Officer and
Chairman of the Board
Sam E. Kinney, Jr....................... 140,000 30,000 -- 960,000
Executive Vice President and Acting
Chief Financial Officer
David J. Becker......................... 140,000 30,000 -- 480,000
Executive Vice President and Chief
Operating Officer
Thomas L. McLeod (1).................... 123,590 60,250 $50,000 480,000
Vice President of Market Making
John P. Levis, III...................... 115,000 15,000 -- 30,000
Vice President of People Development
</TABLE>
- ---------------
(1) Mr. McLeod became Vice President of Market Making in May 1998. His other
annual compensation for 1998 reflects a relocation allowance.
50
<PAGE> 50
OPTION GRANTS
The following table provides summary information regarding stock options
granted to our Chief Executive Officer and our four other most highly
compensated executive officers during 1998. We granted these options at an
exercise price equal to the fair value of the common stock on the date of grant
as determined by the Board of Directors. Thirty percent of the options shown for
each executive officer will become exercisable immediately upon the closing of
this offering. The remaining options will become exercisable at the rate of 25%
per year beginning May 2001, unless we experience a change in control. In that
event, 50% of the options set forth in the table below which are not yet vested
would immediately vest, and the remaining options would vest over the periods
set forth above.
We calculated the potential realizable value of options in the table
assuming the exercise price on the date of grant appreciates at the indicated
rate for the entire term of the option and that the option holder exercises his
option on the last day of its term at the appreciated price. All options listed
have a term of 10 years. We assumed stock price appreciation of 5% and 10%
pursuant to the rules of the Securities and Exchange Commission. We cannot
assure you that the actual stock price will appreciate over the 10-year option
term at the assumed 5% and 10% levels or at any other rate.
OPTION GRANTS DURING 1998
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------- POTENTIAL REALIZABLE
PERCENTAGE VALUE AT ASSUMED
NUMBER OF OF TOTAL ANNUAL RATES OF
SECURITIES OPTIONS STOCK PRICE APPRECIATION
UNDERLYING GRANTED IN EXERCISE FOR OPTION TERM
OPTIONS 1998 TO PRICE PER EXPIRATION -------------------------
NAME GRANTED EMPLOYEES SHARE DATE 5% 10%
- ---- ---------- ------------- --------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Glen T. Meakem............. 1,440,000 23.4% $1.08 5/28/08 $981,076 $2,486,238
Sam E. Kinney, Jr.......... 960,000 15.6 1.08 5/28/08 654,050 1,657,492
David J. Becker............ 480,000 7.8 1.08 5/28/08 327,025 828,746
Thomas L. McLeod........... 480,000 7.8 1.08 5/28/08 327,025 828,746
John P. Levis, III......... 30,000 0.5 1.08 5/28/08 20,439 51,797
</TABLE>
RECENT OPTION GRANTS
In July 1999, we granted options to purchase 225,000 shares of common stock
to Jane M. Kirkland when she joined our company. These options are exercisable
at a price of $4.77 per share and vest over a five-year term.
We made the following option grants to purchase shares of our common stock
to our executive officers in August and September 1999:
<TABLE>
<S> <C>
Glen T. Meakem............................................ 800,000
Sam E. Kinney, Jr......................................... 400,000
David J. Becker........................................... 200,000
Thomas L. Dammer.......................................... 20,000
John P. Levis, III........................................ 75,000
</TABLE>
These options are exercisable at a price of $14.80 per share and vest over a
five-year term.
In September 1999, we granted options to purchase 225,000 shares of common
stock to Joan S. Hooper when she joined our company. These options are
exercisable at a price of $14.80 per share and vest over a five-year term.
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<PAGE> 51
FISCAL YEAR END OPTION VALUES
The following table provides summary information concerning the shares of
common stock represented by outstanding stock options held by our Chief
Executive Officer and our four other most highly compensated executive officers
as of December 31, 1998. None of these executive officers exercised options
during 1998. We have calculated the value of in-the-money options based on the
estimated fair market value for our common stock of $1.67 per share on December
31, 1998.
FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT DECEMBER 31, 1998 DECEMBER 31, 1998
----------------------------------- ---------------------------
NAME EXERCISABLE (#) UNEXERCISABLE (#) EXERCISABLE UNEXERCISABLE
- ---- --------------- ----------------- ----------- -------------
<S> <C> <C> <C> <C>
Glen T. Meakem............................ -- 1,440,000 -- $840,000
Sam E. Kinney, Jr......................... -- 960,000 -- 560,000
David J. Becker........................... 78,000 597,000 $96,850 425,275
Thomas L. McLeod.......................... -- 480,000 -- 280,000
John P. Levis, III........................ 39,000 186,000 43,875 193,000
</TABLE>
STOCK PLANS
STOCK INCENTIVE PLAN
The Board of Directors adopted and our stockholders approved our Amended
and Restated Stock Incentive Plan in June 1999. The Amended and Restated Stock
Incentive Plan amended and restated our 1998 Stock Option Plan. The Amended and
Restated Stock Incentive Plan became effective on June 30, 1999, and it will
terminate on March 1, 2008, unless the Board of Directors terminates it earlier.
We may grant the following types of awards under the Amended and Restated Stock
Incentive Plan:
- incentive stock options;
- nonqualified stock options; and
- restricted stock.
As of September 30, 1999, we had granted options to purchase 10,482,500
shares of common stock under the Amended and Restated Stock Incentive Plan, of
which 59,520 had been exercised and 156,550 had been forfeited. We had not
granted any shares of restricted stock under the Amended and Restated Stock
Incentive Plan.
We may currently award a maximum of 15,450,000 shares of common stock under
the Amended and Restated Stock Incentive Plan, plus any shares of stock covered
by the unexercised portion of any terminated options granted under the 1996
Stock Incentive Plan, discussed below. In addition, the number of awardable
shares automatically increases on the first day of each year beginning in 2001
by an amount equal to the lesser of 1,500,000 shares or 3% of our total shares
outstanding on the last day of the immediately preceding year, unless the Board
of Directors determines to increase the amount by a lesser number of shares. Our
compensation committee administers the Amended and Restated Stock Incentive
Plan.
If control of our company changes through, for example, an acquisition of
more than 50% of our stock by another person or company, or through a merger
with another company, and the acquiror fails to assume or replace all
outstanding awards under the Amended and Restated Stock Incentive Plan with
equivalent awards of the acquiror, then all outstanding options that have not
vested prior to the change of control will immediately vest and the restrictions
on any restricted stock that have not lapsed before the change of control will
immediately lapse. If, upon a change of control, an acquiror agrees to assume or
substitute for the outstanding awards, then 50% of any unvested options that we
have
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<PAGE> 52
granted since June 30, 1999, will immediately vest and the restrictions on 50%
of any restricted stock will immediately lapse.
1996 STOCK INCENTIVE PLAN
The Board of Directors adopted and our stockholders approved our 1996 Stock
Incentive Plan in January 1996. The 1996 Stock Incentive Plan will terminate in
January 2006, unless the Board of Directors terminates it earlier. In the event
of a change of control, as defined in the 1996 Stock Incentive Plan, all
unvested options held by grantees whom we have employed for at least three years
will immediately vest. We may not grant any further options under the 1996 Stock
Incentive Plan. Our compensation committee administers the 1996 Stock Incentive
Plan.
EMPLOYEE STOCK PURCHASE PLAN
The Board of Directors adopted and our stockholders approved our Employee
Stock Purchase Plan in 1999. The Employee Stock Purchase Plan permits eligible
employees to purchase common stock, through payroll deductions, at a discount
from its fair market value. We have reserved a total of 500,000 shares of common
stock for issuance under the Employee Stock Purchase Plan, plus an automatic
annual increase on the first day of each year beginning in 2000 equal to the
total number of shares purchased under the Employee Stock Purchase Plan during
the immediately preceding fiscal year, up to a maximum of 2,000,000 shares that
can be reserved for issuance under the plan. The Employee Stock Purchase Plan
becomes effective upon the effective date of the registration statement filed in
connection with this offering and, unless the Board of Directors terminates it
earlier, will continue in effect for a term of 20 years.
The Employee Stock Purchase Plan is intended to qualify under Section 423
of the Internal Revenue Code. The Employee Stock Purchase Plan consists of a
series of overlapping 24-month offering periods. Each offering period consists
of four six-month purchase periods. Participating employees will automatically
make stock purchases at the end of each purchase period. The initial offering
period and the initial purchase period will begin on the date of this
prospectus. The Board of Directors has the authority under the plan to set new
offering or purchase periods.
The Board of Directors or a committee appointed by the Board of Directors
will administer the Employee Stock Purchase Plan. The Employee Stock Purchase
Plan permits eligible employees to purchase common stock through payroll
deductions, which may not exceed 20% of an employee's compensation, unless the
Board decides to increase such amount. The purchase price is equal to the lower
of 85% of the fair market value of the common stock at the beginning of the
applicable offering period or 85% of the fair market value of the common stock
at the end of each corresponding purchase period. In circumstances specified in
the Employee Stock Purchase Plan, we may adjust the purchase price during an
offering period to avoid our incurring adverse accounting charges. Our
employees, including officers and employee directors, are eligible to
participate in the Employee Stock Purchase Plan if they are employed by us for
at least 20 hours per week and more than five months in the year. Employees may
withdraw from participation in the Employee Stock Purchase Plan at any time and
receive a refund of their payroll deductions made since the last purchase date,
in which case, they cannot resume participation until the beginning of the next
offering period. Participation ends automatically upon termination of
employment.
Each employee's purchase of common stock during any one purchase period is
subject to limitations. In the event that another company acquires us, the
Employee Stock Purchase Plan generally provides that the acquiror shall assume
each right to purchase stock or shall substitute equivalent rights; otherwise,
each right to purchase common stock will accelerate and become exercisable
immediately before the acquisition. The Board of Directors has the power to
amend or terminate the Employee Stock Purchase Plan.
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<PAGE> 53
LIMITATION OF LIABILITY OF DIRECTORS AND INDEMNIFICATION MATTERS
Our Certificate of Incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for:
- any breach of their duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
- any transaction from which a director derives an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under
the federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our Certificate of Incorporation and Bylaws provide that we shall indemnify
our directors and executive officers, and may indemnify our other officers and
employees and other agents, to the fullest extent permitted by law. We believe
that indemnification under our Bylaws covers at least negligence and gross
negligence on the part of indemnified parties. Our Bylaws also permit us to
secure insurance on behalf of any officer, director, employee or other agent for
any liability arising out of his or her actions in such capacity and certain
other capacities, such as serving as a director of another corporation at the
request of the Board, regardless of whether the Bylaws would permit
indemnification.
At present, we are not aware of any pending or threatened litigation or
proceeding involving a director, officer, employee or agent in which
indemnification would be required or permitted.
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<PAGE> 54
CERTAIN TRANSACTIONS
In May 1996, we sold 4,019,400 shares of Series A-1 preferred stock at a
price of $.43 per share. In this private placement, we sold 1,176,000 shares to
CSM Partners, 18,000 shares to Saturn Capital and 58,800 shares to Jane M.
Kirkland. As consideration for acting as placement agent, we also issued to
Saturn Capital warrants to purchase 810,000 shares of Series A-1 preferred stock
with an exercise price of $.54 per share.
In September 1996, we sold 219,600 shares of common stock at a price of
$.43 per share. In this private placement, we sold 58,800 shares to David J.
Becker.
In July 1997, we sold 2,347,200 shares of Series B preferred stock at a
price of $.54 per share. In this private placement, we sold 22,200 shares to
Jane M. Kirkland, 21,000 shares to John P. Levis, III and 46,200 shares to David
A. Noble. As consideration for acting as placement agent, we issued to Saturn
Capital warrants to purchase 571,800 shares of Series B preferred stock with an
exercise price of $.54 per share.
In October 1997, we sold 5,017,200 shares of Series A-2 preferred stock at
a price of $.54 per share. In this private placement, we sold 922,800 shares to
CSM Partners, 66,000 shares to David J. Becker, 76,200 shares to Jane M.
Kirkland, 115,800 shares to John P. Levis, III and 138,000 shares to David A.
Noble. As consideration for acting as placement agent, we issued to Saturn
Capital warrants to purchase 1,222,800 shares of Series A-2 stock with an
exercise price of $.54 per share.
In October 1997, we sold 531,000 shares of common stock at a price of $.54
per share. In this private placement, we sold 39,000 shares to John P. Levis,
III.
In October 1998, we sold 780,000 shares of common stock at a price of $1.67
per share. In this private placement, we sold 873 shares to Glen T. Meakem,
15,000 shares to Thomas L. Dammer, 18,000 shares to David J. Becker, 8,502
shares to John P. Levis, III and 60,000 shares to Thomas L. McLeod.
In February 1999, Goldman, Sachs & Co. committed to invest at least
$6,596,700 in an offering of FreeMarkets' equity securities. That private
placement was completed in April 1999, when we sold 1,382,955 shares of Series C
preferred stock to Goldman Sachs & Co. and two of its affiliated entities at a
price of $4.77 per share. Goldman Sachs & Co. is an underwriter in this
offering. In this private placement, we also sold 156,705 shares to CSM
Partners, 1,269 shares to Saturn Capital, 4,152 shares to David J. Becker,
11,700 shares to Jane M. Kirkland and 1,383 shares to John P. Levis, III.
We also paid $600,000 to Saturn Capital in April 1999 in order to complete
the Series C offering.
In September 1999, we sold 2,057,773 shares of Series D preferred stock at
a price of $14.80 per share. In this private placement, we sold 3,292 shares to
David J. Becker, 8,643 shares to Jane M. Kirkland and 1,414,552 shares to a
subsidiary of United Technologies. We also issued to a subsidiary of United
Technologies warrants to purchase 304,431 shares of Series D preferred stock in
exchange for United Technologies' agreement to delete from its contract with us
provisions that limited our ability to render services to its competitors. These
warrants were exercised at a price of $.01 per share in September 1999. United
Technologies is our largest customer. In 1997, we earned $585,000 in revenues
from United Technologies, in 1998, we earned $4.5 million in revenues from
United Technologies and in the nine months ended September 30, 1999 we earned
$5.3 million in revenues from United Technologies.
In each transaction set forth above where executive officers, directors,
five percent or greater stockholders or family members of any of these persons
purchased shares, these shares were purchased at the same price, and on the same
terms, as shares purchased by other investors at those times. Each share of our
preferred stock is convertible into one share of common stock. To date, warrants
to purchase 2,409,000 shares of our common stock have been exercised, at an
exercise price of $.54 per share.
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<PAGE> 55
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us with respect to the
beneficial ownership by the following persons of our common stock as of
September 30, 1999, as adjusted to reflect the sale of common stock by us:
- our Chief Executive Officer and each of our four other most highly
compensated executive officers;
- each director;
- each stockholder known by us to own beneficially more than 5% of our
common stock; and
- all executive officers and directors as a group.
Percentage ownership in the following table is based on 30,354,958 shares
of common stock outstanding as of September 30, 1999. Percentage ownership
assumes conversion of all shares of preferred stock outstanding as of September
30, 1999 into shares of common stock, which will occur upon the closing of this
offering.
We have determined beneficial ownership in the table in accordance with the
rules of the Securities and Exchange Commission. In computing the number of
shares beneficially owned by a person and the percentage ownership of that
person, we have deemed shares of common stock subject to options or warrants
held by that person that are currently exercisable or will become exercisable
within 60 days of September 30, 1999, assuming that this offering occurs in that
60-day period, to be outstanding, but we have not deemed these shares to be
outstanding for computing the percentage ownership of any other person. To our
knowledge, except as set forth in the footnotes below, each stockholder
identified in the table possesses sole voting and investment power with respect
to all shares of common stock shown as beneficially owned by such stockholder.
The address of CSM Partners is Two Gateway Center, Suite 1800, Pittsburgh,
Pennsylvania 15222. The address of Saturn Capital, Inc. is c/o Saturn Asset
Management, 75 Federal Street, Boston, Massachusetts. The address of United
Technologies Corporation is One Financial Plaza, Hartford, Connecticut 06101.
The address of each other 5% stockholder listed in the following table is c/o
FreeMarkets, Inc., 22nd Floor, One Oliver Plaza, 210 Sixth Avenue, Pittsburgh,
Pennsylvania 15222.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
--------------------------------------------------------------------------------
NUMBER OF OPTIONS
AND WARRANTS PERCENT
NUMBER OF EXERCISABLE BY --------------------------------
SHARES NOVEMBER 29, 1999 TOTAL BEFORE OFFERING AFTER OFFERING
--------- ----------------- ------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Glen T. Meakem (1).......... 3,152,000 432,000 3,584,000 11.6% 10.5%
Sam E. Kinney, Jr. (2)...... 1,857,600 288,000 2,145,600 7.0 6.3
David J. Becker (3)......... 283,444 261,000 544,444 1.8 1.6
Thomas L. McLeod (4)........ 60,000 144,000 204,000 * *
John P. Levis, III (5)...... 710,685 57,000 767,685 2.5 2.3
Dr. Eric Cooper............. 31,892 -- 31,892 * *
David A. Noble.............. 184,200 -- 184,200 * *
CSM Partners................ 2,319,912 -- 2,319,912 7.6 6.9
Saturn Capital, Inc......... 2,428,269 -- 2,428,269 8.0 7.2
United Technologies
Corporation (6)........... 1,718,983 -- 1,718,983 5.7 5.1
All executive officers and
directors as a group (10
persons) (7).............. 6,625,964 1,200,000 7,825,964 24.8 22.3
</TABLE>
- ---------------
* Less than 1% of the outstanding shares of common stock.
(1) Includes 2,542,200 shares and options to purchase 432,000 shares held by a
limited partnership controlled by Mr. Meakem.
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<PAGE> 56
(2) Includes 1,577,400 shares held by various trusts for the benefit of Mr.
Kinney's family and by a limited partnership controlled by Mr. Kinney.
(3) Includes 270,000 shares held by a limited partnership controlled by Mr.
Becker.
(4) Includes 30,000 shares owned by Mr. McLeod's wife. Mr. McLeod disclaims
beneficial ownership of these shares.
(5) Includes 120,000 shares held by various trusts. Mr. Levis disclaims
beneficial ownership of these shares.
(6) These shares are held of record by Nevada Bond Investment Corp. II, which is
a subsidiary of United Technologies Corporation.
(7) Includes 15,000 shares held by a limited partnership controlled by an
executive officer of the Company. See also Notes (1) through (5).
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<PAGE> 57
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, we will be authorized to issue
200,000,000 shares of common stock, $0.01 par value, and 5,000,000 shares of
undesignated preferred stock, $0.01 par value. The following description of our
capital stock does not purport to be complete and is subject to, and qualified
in its entirety by, our Certificate of Incorporation and Bylaws, which we have
included as exhibits to the registration statement of which this prospectus
forms a part.
COMMON STOCK
As of September 30, 1999, there were 30,354,958 shares of common stock and
preferred stock outstanding, held of record by approximately 329 stockholders.
These amounts assume the conversion of all outstanding shares of preferred stock
into common stock, which is to occur upon completion of this offering. In
addition, as of September 30, 1999, there were 11,201,230 shares of common stock
subject to outstanding options. Upon completion of this offering, there will be
33,854,958 shares of common stock outstanding, assuming no additional exercise
of outstanding stock options.
Each share of common stock entitles its holder to one vote on all matters
to be voted upon by stockholders. Subject to preferences that may apply to any
outstanding preferred stock, holders of common stock may receive ratably any
dividends that the Board of Directors may declare out of funds legally available
for that purpose. In the event of our liquidation, dissolution or winding up,
the holders of common stock are entitled to share ratably in all assets
remaining after payment of liabilities and any liquidation preference of
preferred stock that may be outstanding. The common stock has no preemptive
rights, conversion rights or other subscription rights or redemption or sinking
fund provisions. All outstanding shares of common stock are fully paid and
non-assessable, and the shares of common stock that we will issue upon
completion of this offering will be fully paid and non-assessable.
PREFERRED STOCK
As of September 30, 1999, we had four series of convertible preferred
stock: Series A, Series B, Series C and Series D. As of September 30, 1999, the
number of outstanding shares for each series of our preferred stock was:
- 9,036,600 shares of Series A;
- 2,347,200 shares of Series B;
- 2,305,434 shares of Series C; and
- 2,362,204 shares of Series D.
Upon the closing of this offering, all outstanding shares of our preferred
stock will be converted on a one-for-one basis into 16,051,438 shares of common
stock. Thereafter, the Board of Directors will have the authority, without
further action by the stockholders, to issue up to 5,000,000 shares of preferred
stock in one or more series and to designate the rights, preferences, privileges
and restrictions of each such series. The issuance of preferred stock could have
the effect of restricting dividends on the common stock, diluting the voting
power of the common stock, impairing the liquidation rights of the common stock
or delaying or preventing a change in control without further action by the
stockholders. We have no present plans to issue any shares of preferred stock
after the completion of this offering.
WARRANTS
As of September 30, 1999, there were warrants outstanding to purchase
134,400 shares of Series A preferred stock, and 61,200 shares of Series B
preferred stock. After completion of this offering, these warrants will be
exercisable for an equal number of shares of common stock. The Series A warrants
may be exercised until May 2003, and the Series B warrants may be exercised
until July 2004.
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<PAGE> 58
REGISTRATION RIGHTS
The holders of 20,754,607 shares of the common stock that will be
outstanding after this offering are entitled to require us to register the sales
of their shares under the Securities Act, under the terms of an agreement
between us and the holders of these securities. Subject to limitations specified
in this agreement, these registration rights include the following:
- an unlimited number of piggyback registration rights that require us to
register sales of a holder's shares when we undertake a public offering,
subject to the discretion of the managing underwriter of the offering to
decrease the amount that holders may register;
- two demand registration rights that holders may exercise no sooner than
180 days after our initial public offering, which require us to register
sales of a holder's shares, subject to the discretion of our Board of
Directors to delay the registration; and
- an unlimited number of rights to require us to register sales of shares
on Form S-3, a short form of registration statement permitted to be used
by some companies, which holders may exercise if they request
registration of the sale of more than $5.0 million of common stock
following the time we first qualify for the use of this form of
registration with the Securities and Exchange Commission.
We will bear all registration expenses if these registration rights are
exercised, other than underwriting discounts and commissions. These registration
rights terminate as to a holder's shares when that holder may sell those shares
under Rule 144(k) of the Securities Act, which for most parties means two years
after the acquisition of the shares from us.
ANTI-TAKEOVER PROVISIONS
DELAWARE LAW
We are subject to Section 203 of the Delaware General Corporation Law,
which regulates acquisitions of some Delaware corporations. In general, Section
203 prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years
following the date the person becomes an interested stockholder, unless:
- our Board of Directors approved the business combination or the
transaction in which the person became an interested stockholder prior to
the date the person attained this status;
- upon consummation of the transaction that resulted in the person becoming
an interested stockholder, the person owned at least 85% of the voting
stock of the corporation outstanding at the time the transaction
commenced, excluding shares owned by persons who are directors and also
officers; or
- at or subsequent to the date the person became an interested stockholder,
our Board of Directors approved the business combination and the
stockholders other than the interested stockholder authorized the
transaction at an annual or special meeting of stockholders.
A "business combination" generally includes a merger, asset or stock sale
or other transaction resulting in a financial benefit to the interested
stockholder. In general, an "interested stockholder" is a person who, together
with the person's affiliates and associates, owns, or within three years prior
to the determination of interested stockholder status did own, 15% or more of a
corporation's voting stock.
CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS
Our Certificate of Incorporation and Bylaws, to be effective upon the
closing of this offering, divide the Board into three classes as nearly equal in
size as possible, with each class serving a three-year term. The terms are
staggered, so that one-third of the Board is to be elected each year. The
classification of the Board could have the effect of making it more difficult
than otherwise for a third
59
<PAGE> 59
party to acquire control of us, because it would typically take more than a year
for a majority of the stockholders to elect a majority of our Board. In
addition, our Certificate of Incorporation and Bylaws will provide that any
action required or permitted to be taken by our stockholders at an annual or
special meeting may be taken only if it is properly brought before the meeting,
and may not be taken by written action in lieu of a meeting. The Bylaws will
also provide that special meetings of the stockholders may be called only by the
Board of Directors, the Chairman of the Board or the Chief Executive Officer.
Under our Bylaws, stockholders wishing to propose business to be brought before
a meeting of stockholders will be required to comply with various advance notice
requirements. Finally, our Certificate of Incorporation and Bylaws, will not
permit stockholders to take any action without a meeting.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Co. The transfer agent's address is 40 Wall Street, New York,
New York 10005.
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<PAGE> 60
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock.
Future sales of substantial amounts of our common stock in the public market
could adversely affect prevailing market prices. Sales of substantial amounts of
our common stock in the public market after any restrictions on sale lapse could
adversely affect the prevailing market price of the common stock and impair our
ability to raise equity capital in the future.
Upon completion of the offering, we will have 33,854,958 outstanding shares
of common stock, outstanding options to purchase 11,201,230 shares of common
stock and outstanding warrants to purchase 195,600 shares of common stock,
assuming no additional option or warrant grants or exercises after September 30,
1999. Of the 3,500,000 shares sold in the offering, 175,000 shares will be
subject to the lock-up agreements described below, and 3,325,000 shares, plus
any shares issued upon exercise of the underwriters' over-allotment option, will
be freely tradable without restriction under the Securities Act, unless
purchased by our "affiliates" as that term is defined in Rule 144 under the
Securities Act. In general, affiliates include officers, directors and 10% or
greater stockholders.
The remaining 30,529,958 shares outstanding and 11,396,830 shares subject
to outstanding options and warrants are "restricted securities" within the
meaning of Rule 144. Restricted securities may be sold in the public market only
if the sale is registered or if it qualifies for an exemption from registration,
or if the securities can be sold under Rules 144, 144(k) or 701 promulgated
under the Securities Act, which are summarized below. Sales of restricted
securities in the public market, or the availability of such shares for sale,
could adversely affect the market price of the common stock.
LOCK-UP AGREEMENTS
Our directors, officers, employees and various other stockholders, who
together hold substantially all of our securities, have entered into lock-up
agreements in connection with this offering. These lock-up agreements generally
provide that these holders will not offer, sell, contract to sell, grant any
option to purchase or otherwise dispose of our common stock or any securities
exercisable for or convertible into our common stock owned by them for a period
of 180 days after the date of this prospectus without the prior written consent
of the representatives of the underwriters of this offering. Notwithstanding
possible earlier eligibility for sale under the provisions of Rules 144, 144(k)
and 701, shares subject to lock-up agreements may not be sold until these
agreements expire or are waived by the representatives of the underwriters of
this offering. Assuming that the representatives of the underwriters of this
offering do not release any security holders from the lock-up agreements, the
following shares will be eligible for sale in the public market at the following
times:
- Beginning on the effective date of the registration statement of which
this prospectus forms a part, 3,325,000 of the 3,500,000 shares sold in
this offering, and 2,637,132 additional shares not subject to lock-up
agreements and eligible for sale under Rule 144(k), will be immediately
available for sale in the public market.
- Beginning 90 days after the effective date, an additional 302,991 shares
not subject to lock-up agreements will be eligible for sale pursuant to
Rule 144 and Rule 701.
- Beginning 180 days after the effective date, an additional 25,227,631
shares will be eligible for sale pursuant to Rule 144, Rule 144(k) and
Rule 701.
61
<PAGE> 61
RULE 144
In general, under Rule 144 as currently in effect, after the expiration of
the lock-up agreements, a person who has beneficially owned restricted
securities for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
- one percent of the number of shares of common stock then outstanding,
which will equal approximately 339,000 shares immediately after this
offering; and
- the average weekly trading volume of our common stock during the four
calendar weeks preceding the sale.
Sales under Rule 144 are also subject to requirements with respect to
manner of sale, notice and the availability of current public information about
us.
RULE 144(k)
Under Rule 144(k), a person who is not deemed to have been our affiliate at
any time during the three months preceding a sale, and who has beneficially
owned the shares proposed to be sold for at least two years, may sell these
shares without complying with the manner of sale, public information, volume
limitation or notice requirements of Rule 144.
RULE 701
Rule 701, as currently in effect, permits our employees, officers,
directors or consultants who purchased shares pursuant to a written compensatory
plan or contract to resell such shares in reliance upon Rule 144, but without
compliance with certain restrictions. Rule 701 provides that affiliates may sell
their Rule 701 shares under Rule 144 ninety days after effectiveness without
complying with the holding period requirement and that non-affiliates may sell
such shares in reliance on Rule 144 ninety days after effectiveness without
complying with the holding period, public information, volume limitation or
notice requirements of Rule 144.
EMPLOYEE PLANS
In addition, we intend to file a registration statement under the
Securities Act after the effective date of this offering to register shares to
be issued pursuant to our employee benefit plans. As a result, any options or
rights exercised under the 1996 Stock Incentive Plan, the Amended and Restated
Stock Incentive Plan and the Employee Stock Purchase Plan will also be freely
tradable in the public market. However, shares held by affiliates will still be
subject to the volume limitation, manner of sale, notice and public information
requirements of Rule 144, unless otherwise resalable under Rule 701. As of
September 30, 1999, we had granted options to purchase 11,201,230 shares of
common stock that had not been exercised, of which options to purchase 821,677
shares were exercisable. In addition, as of that date we had reserved 500,000
shares for possible future issuance under our Employee Stock Purchase Plan. See
"Risk Factors -- Substantial Sales of Our Common Stock After the Offering Could
Cause our Stock Price to Fall", "Management -- Stock Plans" and "Description of
Capital Stock -- Registration Rights".
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
FreeMarkets by Morgan, Lewis & Bockius LLP, Pittsburgh, Pennsylvania. Legal
matters will be passed on for the underwriters by Ropes & Gray, Boston,
Massachusetts. Attorneys of Morgan, Lewis & Bockius own 40,275 shares of common
stock of FreeMarkets.
62
<PAGE> 62
EXPERTS
The consolidated financial statements as of December 31, 1997 and 1998 and
September 30, 1999 and for each of the three years in the period ended December
31, 1998 and for the nine-month period ended September 30, 1999 included in this
prospectus have been so included in reliance upon the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act concerning the common stock
offered in this offering. This prospectus does not contain all of the
information set forth in the registration statement or its exhibits and
schedules. For further information about FreeMarkets and our common stock, we
refer you to the registration statement and to its attached exhibits and
schedules. Statements made in this prospectus concerning the contents of any
document are not necessarily complete. With respect to each document filed as an
exhibit to the registration statement, we refer you to the exhibit for a more
complete description of the matter involved.
You may inspect our registration statement and the attached exhibits and
schedules without charge at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
regional offices of the Commission located at Seven World Trade Center, 13th
Floor, New York, NY 10048, and at 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. You may obtain copies of all or any part of our registration
statement from the Commission upon payment of prescribed fees. You may also
inspect reports, proxy and information statements and other information that we
file electronically with the Commission without charge at the Commission's
Internet site, http://www.sec.gov.
We intend to furnish our stockholders with annual reports containing
financial statements audited by our independent auditors and to make available
to our stockholders quarterly reports containing unaudited financial data for
each of the first three quarters of each fiscal year.
63
<PAGE> 63
FREEMARKETS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998
and September 30, 1999.................................... F-3
Consolidated Statements of Operations for each of the three
years in the period ended December 31, 1998 and for the
nine-month periods ended September 30, 1998 (unaudited)
and 1999.................................................. F-4
Consolidated Statements of Stockholders' Equity for each of
the three years in the period ended December 31, 1998 and
for the nine-month period ended September 30, 1999........ F-5
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 1998 and for the
nine-month periods ended September 30, 1998 (unaudited)
and 1999.................................................. F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 64
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of FreeMarkets, Inc. and Subsidiaries:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of FreeMarkets,
Inc. and Subsidiaries (the Company) as of December 31, 1997 and 1998 and
September 30, 1999, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998 and for the
nine-month period ended September 30, 1999, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits in accordance with generally accepted auditing standards, which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
October 15, 1999
F-2
<PAGE> 65
FREEMARKETS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- SEPTEMBER 30,
1997 1998 1999
----------- ----------- -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,998,884 $ 1,655,932 $ 22,258,728
Short-term investments.................................... -- -- 10,289,831
Accounts receivable, net of allowance for doubtful
accounts of $20,000, $25,000 and $114,316 as of December
31, 1997, 1998 and September 30, 1999, respectively..... 1,060,654 3,939,305 5,955,801
Other current assets...................................... 7,532 83,463 1,152,465
----------- ----------- ------------
Total current assets................................ 3,067,070 5,678,700 39,656,825
Property and equipment, net................................. 177,784 1,062,392 5,610,009
Other assets, net........................................... 91,149 128,456 410,365
----------- ----------- ------------
Total assets........................................ $ 3,336,003 $ 6,869,548 $ 45,677,199
=========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 170,808 $ 738,976 $ 3,059,027
Accrued incentive compensation............................ -- 489,995 894,000
Other current liabilities................................. 55,038 623,026 1,319,865
Current portion of long-term debt......................... 58,332 12,368 666,629
----------- ----------- ------------
Total current liabilities........................... 284,178 1,864,365 5,939,521
Long-term debt.............................................. -- 413,018 1,976,427
----------- ----------- ------------
Total liabilities................................... 284,178 2,277,383 7,915,948
----------- ----------- ------------
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, $.01 par value, 50,000,000
shares authorized; 11,383,800 shares issued and
outstanding as of December 31, 1997 and 1998 and
16,051,438 shares issued and outstanding as of September
30, 1999................................................ 37,946 37,946 160,514
Common stock, $.01 par value, 200,000,000 shares
authorized; 10,970,400 and 11,805,000 shares issued and
outstanding as of December 31, 1997 and 1998,
respectively, and 14,303,520 shares issued and
outstanding as of September 30, 1999.................... 36,568 39,350 143,035
Additional capital........................................ 5,993,000 7,296,811 55,837,965
Unearned stock-based compensation......................... -- -- (1,750,845)
Stock purchase warrants................................... 398,000 398,000 30,000
Accumulated deficit....................................... (3,413,689) (3,179,942) (16,659,418)
----------- ----------- ------------
Total stockholders' equity.......................... 3,051,825 4,592,165 37,761,251
----------- ----------- ------------
Total liabilities and stockholders' equity.......... $ 3,336,003 $ 6,869,548 $ 45,677,199
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 66
FREEMARKETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------------------------- --------------------------
1996 1997 1998 1998 1999
----------- ----------- ---------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues................................ $ 408,820 $ 1,783,180 $7,801,250 $4,801,649 $ 13,037,297
Cost of revenues........................ 505,691 1,148,994 4,258,403 2,829,644 7,367,079
----------- ----------- ---------- ---------- ------------
Gross (loss) profit..................... (96,871) 634,186 3,542,847 1,972,005 5,670,218
----------- ----------- ---------- ---------- ------------
Operating costs:
Research and development............ 394,266 291,826 841,874 562,951 2,959,635
Sales and marketing................. 320,935 585,511 656,183 386,937 5,625,287
General and administrative.......... 629,620 837,357 2,025,899 1,129,322 5,890,462
Stock-based expense................. -- -- -- -- 4,728,184
----------- ----------- ---------- ---------- ------------
Total operating costs................... 1,344,821 1,714,694 3,523,956 2,079,210 19,203,568
----------- ----------- ---------- ---------- ------------
Operating (loss) income................. (1,441,692) (1,080,508) 18,891 (107,205) (13,533,350)
Other income, net....................... 10,504 19,808 214,856 196,165 53,874
----------- ----------- ---------- ---------- ------------
Net (loss) income....................... $(1,431,188) $(1,060,700) $ 233,747 $ 88,960 $(13,479,476)
=========== =========== ========== ========== ============
Earnings per share:
Basic............................... $ (.14) $ (.10) $ .02 $ .01 $ (1.00)
=========== =========== ========== ========== ============
Diluted............................. $ (.14) $ (.10) $ .01 $ .00 $ (1.00)
=========== =========== ========== ========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 67
FREEMARKETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNEARNED STOCK
PREFERRED COMMON ADDITIONAL STOCK-BASED PURCHASE ACCUMULATED
STOCK STOCK CAPITAL COMPENSATION WARRANTS DEFICIT TOTAL
--------- -------- ----------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995...... -- $ 171 $ 1,025,255 -- -- $ (921,801) $ 103,625
Employee common stock purchases,
net of offering costs of
$625........................... -- 4 92,701 -- -- -- 92,705
Issuance of Series A-1
convertible preferred stock,
net of offering costs of
$188,544....................... $ 67 -- 1,511,389 -- -- -- 1,511,456
Issuance of Series A-1 stock
purchase warrants.............. -- -- (614,000) -- $ 614,000 -- --
Issuance of Series B convertible
preferred stock, net of
offering costs of $57,300...... 18 -- 515,235 -- -- -- 515,253
Issuance of Series B stock
purchase warrants.............. -- -- (18,000) -- 18,000 -- --
Net loss......................... -- -- -- -- -- (1,431,188) (1,431,188)
-------- -------- ----------- ----------- ----------- ------------ ------------
Balance at December 31, 1996...... 85 175 2,512,580 -- 632,000 (2,352,989) 791,851
Employee common stock purchases,
net of offering costs of
$600........................... -- 9 265,482 -- -- -- 265,491
Options exercised................ -- -- 5,934 -- -- -- 5,934
Issuance of Series B convertible
preferred stock, net of
offering costs of $95,303...... 21 -- 602,190 -- -- -- 602,211
Issuance of Series B stock
purchase warrants.............. -- -- (69,000) -- 69,000 -- --
Series A-1 stock purchase
warrants exercised, net of
offering costs of $170,289..... 53 -- 2,029,808 -- (490,000) -- 1,539,861
Issuance of Series A-2
convertible preferred stock,
net of offering costs of
$100,323....................... 31 -- 907,146 -- -- -- 907,177
Issuance of Series A-2 stock
purchase warrants.............. -- -- (187,000) -- 187,000 -- --
200-for-1 stock split............ 37,756 36,384 (74,140) -- -- -- --
Net loss......................... -- -- -- -- -- (1,060,700) (1,060,700)
-------- -------- ----------- ----------- ----------- ------------ ------------
Balance at December 31, 1997...... 37,946 36,568 5,993,000 -- 398,000 (3,413,689) 3,051,825
Employee common stock purchases,
net of offering costs of
$14,173........................ -- 2,600 1,283,227 -- -- -- 1,285,827
Options exercised................ -- 182 20,584 -- -- -- 20,766
Net income....................... -- -- -- -- -- 233,747 233,747
-------- -------- ----------- ----------- ----------- ------------ ------------
Balance at December 31, 1998...... 37,946 39,350 7,296,811 -- 398,000 (3,179,942) 4,592,165
Stock purchase warrants
exercised...................... -- 8,030 1,664,845 -- (368,000) -- 1,304,875
Issuance of Series C preferred
stock, net of offering cost of
$737,044....................... 7,684 -- 10,252,192 -- -- -- 10,259,876
Options exercised................ -- 100 16,150 -- -- -- 16,250
3-for-1 stock split.............. 91,262 94,960 (186,222) -- -- -- --
Issuance of Series D preferred
stock, net of offering costs of
$165,920....................... 20,578 -- 30,268,542 -- -- -- 30,289,120
Issuance of Series D stock
purchase warrants.............. -- -- -- -- 4,502,534 -- 4,502,534
Stock purchase warrants
exercised...................... 3,044 -- 4,502,534 -- (4,502,534) -- 3,044
Options exercised................ -- 595 46,618 -- -- -- 47,213
Unearned stock-based
compensation................... -- -- 1,976,495 $(1,976,495) -- -- --
Amortization of stock-based
compensation................... -- -- -- 225,650 -- -- 225,650
Net loss......................... -- -- -- -- -- (13,479,476) (13,479,476)
-------- -------- ----------- ----------- ----------- ------------ ------------
Balance at September 30, 1999..... $160,514 $143,035 $55,837,965 $(1,750,845) $ 30,000 $(16,659,418) $ 37,761,251
======== ======== =========== =========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 68
FREEMARKETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------------------------- --------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income........................... $(1,431,188) $(1,060,700) $ 233,747 $ 88,960 $(13,479,476)
Adjustments to reconcile net (loss) income
to net cash used in operating activities:
Depreciation and amortization............. 49,185 90,408 191,052 136,715 620,368
Provision for bad debts................... -- 20,000 5,000 -- 89,316
Stock-based expense....................... -- -- -- -- 4,728,184
(Gain) loss on disposal of property and
equipment............................... -- -- (3,443) -- 118,797
Cash (used in) provided by changes in:
Accounts receivable....................... (141,209) (931,866) (2,883,651) (1,230,973) (2,105,812)
Other assets.............................. 535 (3,259) (78,516) (55,538) (1,168,972)
Accounts payable.......................... (44,899) 30,595 320,437 69,500 1,496,291
Other liabilities......................... (5,591) 37,252 1,057,983 411,720 1,100,844
----------- ----------- ----------- ----------- ------------
Net cash used in operating activities... (1,573,167) (1,817,570) (1,157,391) (579,616) (8,600,460)
----------- ----------- ----------- ----------- ------------
Cash flows from investing activities:
Purchases of short-term investments......... -- -- -- -- (10,289,831)
Acquisitions of property and equipment,
net....................................... (71,381) (85,200) (775,598) (524,615) (4,431,366)
Software development costs.................. (58,714) -- -- -- --
Patent and trademark costs.................. -- -- (83,610) (22,279) (213,595)
(Purchase) redemption of restricted cash
equivalent................................ (35,000) 35,000 -- -- --
----------- ----------- ----------- ----------- ------------
Net cash used in investing activities... (165,095) (50,200) (859,208) (546,894) (14,934,792)
----------- ----------- ----------- ----------- ------------
Cash flows from financing activities:
Proceeds from debt.......................... 42,000 58,332 444,000 444,000 4,226,630
Repayment of debt........................... (7,000) (35,000) (76,946) (312,304) (2,008,960)
Proceeds from issuance of preferred stock
and exercise of stock purchase warrants,
net....................................... 2,026,709 3,049,249 -- -- 41,856,915
Proceeds from issuance of common stock,
net....................................... 92,705 271,425 1,285,827 320,060 --
Options exercised........................... -- -- 20,766 9,441 63,463
----------- ----------- ----------- ----------- ------------
Net cash provided by financing
activities............................ 2,154,414 3,344,006 1,673,647 461,197 44,138,048
----------- ----------- ----------- ----------- ------------
Net change in cash and cash equivalents..... 416,152 1,476,236 (342,952) (665,313) 20,602,796
Cash and cash equivalents at beginning of
period...................................... 106,496 522,648 1,998,884 1,998,884 1,655,932
----------- ----------- ----------- ----------- ------------
Cash and cash equivalents at end of period.... $ 522,648 $ 1,998,884 $ 1,655,932 $ 1,333,571 $ 22,258,728
=========== =========== =========== =========== ============
Supplemental disclosure:
Cash paid for interest...................... $ 11,164 $ 2,190 $ 27,783 $ 23,852 $ 94,337
=========== =========== =========== =========== ============
Supplemental non-cash disclosure:
Fixed asset additions included in accounts
payable................................... $ 5,840 $ -- $ 247,731 $ 18,437 $ 823,760
=========== =========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 69
FREEMARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS
FreeMarkets, Inc. (the "Company"), formerly FreeMarkets OnLine, Inc., was
formed in March 1995. The Company creates customized business-to-business online
auctions for the world's largest buyers of industrial parts, raw materials and
commodities.
INITIAL PUBLIC OFFERING
In September 1999, the Company filed a registration statement with the
Securities and Exchange Commission that would permit the Company to sell shares
of common stock in connection with a proposed initial public offering.
Immediately prior to the consummation of an underwritten initial public
offering, all of the outstanding shares of convertible preferred stock will
automatically convert into an equal number of shares of common stock. The result
of the conversion will be a reclassification of preferred stock to common stock.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries: FreeMarkets SA/NV, which is based in
Brussels, Belgium, and FreeMarkets Investment Company, Inc., which is based in
Wilmington, Delaware. All material intercompany transactions have been
eliminated in consolidation.
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The unaudited consolidated statements of operations and cash flows for the
nine-month period ended September 30, 1998, in the opinion of management, have
been prepared on the same basis as the audited consolidated financial
statements, and include all adjustments necessary for the fair presentation of
the results of the interim period. All adjustments reflected in the consolidated
financial statements are of a normal recurring nature. The data disclosed in the
notes to the consolidated financial statements for this period is also
unaudited.
CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all unrestricted, highly liquid investments with a
maturity of three months or less at the time of purchase to be cash equivalents.
The Company classifies its short-term investments as available for sale.
Such investments are recorded at fair value based on quoted market prices, with
unrealized gains and losses, which are considered to be temporary, recorded as
other comprehensive income or loss until realized. The cost of short-term
investments sold is based on the specific identification method. Accumulated
other comprehensive income related to these investments is immaterial as of
September 30, 1999.
As of September 30, 1999, short-term investments consisted of commercial
paper and corporate bonds with maturities of less than one year.
Income included in other income earned on these investments was $16,200 in
1996, $22,800 in 1997, $93,400 in 1998 and $70,300 and $302,000 in the
nine-month periods ended September 30, 1998 and 1999, respectively.
F-7
<PAGE> 70
FREEMARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated on the
straight-line method over their estimated useful lives. Repairs and maintenance
expenditures, which are not considered improvements and do not extend the useful
life of the property and equipment, are expensed as incurred. The cost and
related accumulated depreciation applicable to property and equipment no longer
in service are eliminated from the accounts and any gain or loss is included in
operations.
OTHER ASSETS
Other assets consist principally of capitalized patent and trademark costs
and capitalized software development costs, both of which are being amortized
using the straight-line method over seventeen and three years, respectively.
Qualified internally developed software costs are capitalized subsequent to the
determination of technological feasibility; such capitalization continues until
the product becomes available for general release. The carrying value of patent
and trademark costs was $4,500, $86,600 and $292,300 at December 31, 1997 and
1998 and September 30, 1999, respectively. The carrying value of software
development costs was $71,100, $23,700 and $0 at December 31, 1997 and 1998 and
September 30, 1999, respectively. Amortization expense on patent and trademark
costs and software development costs was $24,000 in 1996, $47,700 in 1997,
$48,900 in 1998 and $36,700 and $31,700 in the nine-month periods ended
September 30, 1998 and 1999, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
The carrying values of long-lived assets, which include property and
equipment and patent and trademark costs, are evaluated periodically in relation
to the operating performance and future undiscounted cash flows of the
underlying assets. Adjustments are made if the sum of expected future net cash
flows is less than carrying value.
REVENUE RECOGNITION
The Company recognizes revenue from fixed monthly fees for providing
services to clients ratably as those services are provided over the related
contract periods. In the case of contracts with performance incentive payments
based on auction volume and/or savings generated, as defined in the respective
contracts, revenue is recognized as those thresholds are achieved. Commission
revenue is recognized as the direct materials and commodities that are the
subject of the Company's auctions are shipped from the winning suppliers to the
buyers in accordance with the terms of the contracts.
REVENUE CONCENTRATION AND RELATED PARTY
In 1998, 77% of revenues were concentrated with two clients. For the
nine-month period ended September 30, 1999, 58% of revenues were concentrated
with the same two clients. The Company has long-term contracts with both
clients, which extend through December 2000 and September 2001, and contain
additional renewal options available at the clients' discretion. Both contracts
can be canceled by the client upon notice prior to the expiration dates.
As further discussed in Note 7, a subsidiary of United Technologies
Corporation ("UTC") invested $20,938,400 in the Company in September 1999.
Revenues from UTC were $5,294,400 in the nine-month period ended September 30,
1999, and amounts due from UTC were $1,522,700 as of September 30, 1999.
F-8
<PAGE> 71
FREEMARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COST OF REVENUES
Cost of revenues consists primarily of the expenses related to staffing and
operation of the Company's market making service organization and Market
Operations Center. Staffing costs include a proportional allocation of overhead
costs.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred, and include costs
to develop, enhance and manage the Company's proprietary technology.
ADVERTISING COSTS
Advertising costs are expensed at the time the ad is first aired or the
promotion is held. Advertising expenses were $43,300 in 1996, $109,500 in 1997,
$162,100 in 1998 and $91,200 and $2,300,600 in the nine-month periods ended
September 30, 1998 and 1999, respectively.
START-UP COSTS
Start-up costs are expensed as incurred, and include costs to establish new
locations, operations or subsidiaries.
STOCK-BASED EXPENSE
The Company accounts for the grant of stock options to employees in
accordance with Statement of Financial Accounting Standard ("SFAS") No. 123,
"Accounting for Stock-Based Compensation". SFAS 123 gives companies the option
to adopt the fair value method for expense recognition of employee stock options
or to continue to account for stock options and stock-based awards using the
intrinsic value method, as outlined under Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees". The Company has
elected to continue to apply the intrinsic value method to account for employee
stock options and discloses the pro forma effect as if the fair value method had
been applied in Note 8. With respect to stock options granted at exercise prices
less than fair value, the Company recorded unearned stock-based compensation.
Such unearned stock-based compensation is amortized on an accelerated basis over
the vesting period of each individual award in accordance with Financial
Accounting Standards Board Interpretation No. 28.
PENNSYLVANIA OPPORTUNITY GRANT
During 1998, the Company received a $150,000 Opportunity Grant (the "PA
Grant") from the Department of Community and Economic Development of the
Commonwealth of Pennsylvania. The PA Grant provided for working capital funds to
assist the Company during a period of accelerated growth, and was earned based
upon the achievement of job creation requirements. The PA Grant is included in
other income in the consolidated statements of operations.
INCOME TAXES
Deferred income taxes are recorded using the liability method. Under this
method, deferred tax assets and liabilities are determined based on the
differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
F-9
<PAGE> 72
FREEMARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INTERNATIONAL OPERATIONS
The Company began operating a service center in Brussels, Belgium in late
1998. The service center's operating loss was $1,711,100 and its revenues were
immaterial in the nine-month period ended September 30, 1999.
The local currency is the functional currency for the Company's operations
outside of the United States. Assets and liabilities are translated using the
exchange rate at the balance sheet date. Revenues, expenses, gains and losses
are translated at the exchange rate on the date those elements are recognized.
Foreign currency gains and losses and the cumulative translation adjustment were
immaterial.
EARNINGS PER SHARE
The Company computes earnings per share in accordance with SFAS No. 128,
"Earnings per Share". Under the provisions of SFAS No. 128, basic earnings per
share is computed by dividing the net (loss) income for the period by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share is computed by dividing the net (loss) income for the period
by the weighted average number of common and potentially dilutive common shares
outstanding during the period. Potentially dilutive common shares consist of the
common shares issuable upon the exercise of stock options and warrants (using
the treasury stock method) and upon the conversion of convertible preferred
stock (using the if-converted method). Potentially dilutive common shares are
excluded from the calculation if their effect is antidilutive.
The following table sets forth the computation of earnings per share:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------------------------- --------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Numerator:
Net (loss) income......... $(1,431,188) $(1,060,700) $ 233,747 $ 88,960 $(13,479,476)
=========== =========== =========== =========== ============
Denominator:
Weighted average common
shares.................. 10,316,599 10,618,481 11,191,670 10,990,053 13,451,407
(Denominator for basic
calculation)
Weighted average effect of
dilutive securities:
Convertible preferred
stock................ -- -- 11,383,800 11,383,800 --
Stock options and
warrants............. -- -- 4,201,141 2,850,394 --
----------- ----------- ----------- ----------- ------------
Denominator for diluted
calculation.......... 10,316,599 10,618,481 26,776,611 25,224,247 13,451,407
=========== =========== =========== =========== ============
Earnings per share:
Basic..................... $ (.14) $ (.10) $ .02 $ .01 $ (1.00)
=========== =========== =========== =========== ============
Diluted................... $ (.14) $ (.10) $ .01 $ .00 $ (1.00)
=========== =========== =========== =========== ============
</TABLE>
For 1996 and 1997, 2,878,952 and 6,321,439 potentially dilutive common
shares, respectively, were excluded because their effect was antidilutive. For
the nine-month period ended September 30, 1999, 20,856,078 potentially dilutive
common shares were excluded because their effect was antidilutive.
F-10
<PAGE> 73
FREEMARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pro forma earnings per share is computed using the weighted average number
of shares of common stock outstanding, including potentially dilutive common
shares from the convertible preferred stock (using the if-converted method),
which will automatically convert into common stock upon an initial public
offering as if converted at the original date of issuance, for both basic and
diluted earnings per share, even if inclusion is antidilutive.
The following table sets forth the computation of pro forma earnings per
share:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -----------------
<S> <C> <C>
Numerator:
Net (loss) income......................................... $ 233,747 $(13,479,476)
=========== ============
Denominator:
Weighted average common shares............................ 22,575,470 26,394,512
(Denominator for basic calculation)
Weighted average effect of dilutive securities:
Stock options and warrants............................. 4,201,141 --
----------- ------------
Denominator for diluted calculation.................... 26,776,611 26,394,512
=========== ============
Pro forma earnings per share:
Basic..................................................... $ .01 $ (.51)
=========== ============
Diluted................................................... $ .01 $ (.51)
=========== ============
</TABLE>
For the nine-month period ended September 30, 1999, 7,905,087 potentially
dilutive common shares were excluded because their effect was antidilutive.
COMPREHENSIVE INCOME OR LOSS
The Company adopted SFAS No. 130, "Reporting Comprehensive Income"
effective January 1, 1998. No material differences exist between net income
(loss) and comprehensive income (loss).
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133,
which is effective, as amended, for all quarters in fiscal years beginning after
June 15, 2000, establishes accounting and reporting standards for derivative
financial instruments and hedging activities related to those instruments, as
well as other hedging activities. As the Company does not currently engage in
derivative or hedging activities, the adoption of this standard is not expected
to have a significant impact on the Company's consolidated financial statements.
F-11
<PAGE> 74
FREEMARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment (and their related useful lives) consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- SEPTEMBER 30,
1997 1998 1999
-------- ---------- -------------
<S> <C> <C> <C>
Computer and office equipment (3 to 5 years)........... $192,440 $ 884,920 $4,163,194
Furniture and fixtures (5 years)....................... 48,621 293,335 1,181,400
Leasehold improvements (5 years)....................... 16,290 95,982 927,418
-------- ---------- ----------
257,351 1,274,237 6,272,012
Less accumulated depreciation.......................... 79,567 211,845 662,003
-------- ---------- ----------
$177,784 $1,062,392 $5,610,009
======== ========== ==========
</TABLE>
Depreciation expense was $25,200 in 1996, $42,700 in 1997, $142,200 in 1998
and $100,000 and $588,700 in the nine-month periods ended September 30, 1998 and
1999, respectively. In connection with the Company's relocation to new office
space in 1999, property and equipment with net book value of approximately
$118,800 was disposed of related to the old office facility.
NOTE 4. LONG-TERM DEBT
In February 1998, the Company entered into a Line of Credit Agreement (the
"Line of Credit"), which provided for borrowings of up to $750,000. The Line of
Credit accrued interest at the lender's prime rate plus 1.0%. A non-refundable
commitment fee equal to 1.0% per annum of the average daily unused portion of
the Line of Credit was payable quarterly. As of December 31, 1998, there was
$300,000 outstanding under the Line of Credit, which has been classified as
long-term debt due to the February 1999 refinancing under the new facility
discussed below.
The Line of Credit contained restrictive covenants, including a limitation
on incurring additional indebtedness and a requirement that the Company maintain
a tangible net worth, as defined, of $500,000. The Company pledged substantially
all of its assets as collateral for the Line of Credit.
In February 1999, the Company settled all outstanding amounts under the
Line of Credit and terminated this agreement. At this time, the Company entered
into a Revolving Promissory Note (the "Revolver") and an Equipment Term Note
(the "Equipment Term Note"), both under the terms of a Loan and Security
Agreement (the "Loan and Security Agreement"). The Revolver provided for
borrowings of up to $2,000,000, with interest accruing at the lender's prime
rate plus 0.75% (9.0% at September 30, 1999). As of September 30, 1999, no
amounts were outstanding under the Revolver.
The Equipment Term Note provided for total borrowings of up to $2,000,000
that were drawn from February through August 1999. Monthly interest-only
payments were due and payable on any outstanding advances during that time
period. In September 1999, the advances under the Equipment Term Note converted
to a note payable with 36 equal monthly principal and interest installments,
which are due and payable through August 2002. The Equipment Term Note bears
interest at the lender's prime rate plus 1.0%. As of September 30, 1999, there
was $1,944,300 outstanding under the Equipment Term Note.
In September 1999, the Company's Loan and Security Agreement (the "Amended
Loan and Security Agreement") was amended to increase the available borrowings
under the Revolver from $2,000,000 to $5,000,000 and extend the expiration date
to September 2000. Interest will remain at the lenders prime rate plus 0.75%.
The amendment also provides for two additional equipment term notes (Equipment
Term Note #2) in addition to the $2,000,000 original Equipment Term Note. These
notes provide for total borrowings of up to $3,000,000 that may be drawn from
September 1999
F-12
<PAGE> 75
FREEMARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
through October 2000. Monthly interest-only payments are due and payable on any
outstanding advances during that time period. In April and October 2000, these
notes automatically convert to notes payable with 36 equal monthly principal and
interest installments. These notes bear interest at the lender's prime rate plus
1.0%. As of September 30, 1999, there was $698,700 outstanding under Equipment
Term Note #2.
The Amended Loan and Security Agreement contains restrictive covenants,
including a limitation on incurring additional indebtedness and paying
dividends. The Company is also required to satisfy minimum tangible net worth
and current and debt service ratios each month, as defined. The Company has
pledged substantially all of its tangible assets as collateral for the Amended
Loan and Security Agreement.
In March 1998, the Company entered into a $144,000 loan with the City of
Pittsburgh Urban Redevelopment Authority (the "URA Loan"), with interest
accruing at 6.8%. Proceeds from the URA Loan were required to be used for local
office space expansion. The URA Loan was repaid in February 1999 with proceeds
from the Equipment Term Note.
Interest expense was $11,200 in 1996, $2,200 in 1997, $27,800 in 1998 and
$24,300 and $131,700 in the nine-month periods ended September 30, 1998 and
1999, respectively. The weighted average interest rate was 10.8% in 1996, 3.7%
in 1997, 6.9% in 1998 and 8.0% and 7.6% in the nine-month periods ended
September 30, 1998 and 1999, respectively. Based on market rates currently
available, the carrying value of the Company's long-term debt as of September
30, 1999 approximates fair value.
NOTE 5. COMMITMENTS AND CONTINGENCIES
The Company leases office space and computer and office equipment under
operating leases expiring through 2004. In October 1998, the Company entered
into a new Office Lease Agreement (the "Lease"), as amended in March and June
1999, that significantly expands the Company's office space within the city of
Pittsburgh, Pennsylvania. The Lease, which provides for additional expansion
within the same building, expires in May 2004.
Operating lease rental expense amounted to $105,000 in 1996, $141,000 in
1997, $279,500 in 1998 and $607,800 in the nine-month period ended September 30,
1999. The following is a schedule of future minimum lease payments under all
operating leases through December 31 of each of the following years:
<TABLE>
<S> <C>
1999........................................................ $ 366,100
2000........................................................ 1,783,100
2001........................................................ 1,818,700
2002........................................................ 1,864,800
2003........................................................ 1,911,700
Thereafter.................................................. 1,513,700
----------
$9,258,100
==========
</TABLE>
NOTE 6. INCOME TAXES
The Company had no income tax provision in 1996, 1997 and the nine-month
periods ended September 30, 1998 and 1999 since the Company had a net taxable
loss in each of those periods. For 1998, the Company's net taxable income was
eliminated through the use of net operating loss carryforwards of approximately
$414,000. The tax benefit resulting from the use of these net operating losses
was approximately $166,000.
F-13
<PAGE> 76
FREEMARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets and liabilities consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- SEPTEMBER 30,
1997 1998 1999
----------- ----------- -------------
<S> <C> <C> <C>
Net operating losses.............................. $ 1,348,000 $ 1,182,000 $ 4,726,000
Research and experimentation credits.............. 42,000 111,000 185,000
Lease termination fee............................. -- 90,000 --
Deferred stock-based expense and other............ (54,000) (46,000) 1,820,000
----------- ----------- -----------
Net deferred tax assets........................... 1,336,000 1,337,000 6,731,000
Less valuation allowance.......................... (1,336,000) (1,337,000) (6,731,000)
----------- ----------- -----------
$ -- $ -- $ --
=========== =========== ===========
</TABLE>
In assessing the realizability of net deferred tax assets, management
considers whether it is more likely than not that some portion of the net
deferred tax assets will not be realized. The ultimate realization of net
deferred tax assets is dependent upon the generation of future taxable income
during the periods in which temporary differences representing net future
deductible amounts become deductible. Management has established a full
valuation allowance against the net deferred tax assets at December 31, 1997 and
1998 and September 30, 1999, since the realization of these assets in future
periods is uncertain.
As of September 30, 1999, the Company had available federal net operating
loss carryforwards of approximately $11,815,000 and state net operating loss
carryforwards of approximately $10,194,000. These net operating loss
carryforwards may be used to offset future federal and state income taxes
through 2019 and 2009, respectively. As a result of the Series A-1 offering
discussed in Note 7 and concurrent ownership change, Section 382 of the Internal
Revenue Code limits the federal net operating losses incurred prior to May 1996,
which amounted to $1,298,000, available to the Company to $247,000 per year. Any
unused annual limitation may be carried forward to future years for the balance
of the federal net operating loss carryforward period. In addition, the Company
has research and experimentation credit carryforwards available to offset future
federal tax liabilities through 2019.
NOTE 7. STOCKHOLDERS' EQUITY
In June 1999, the Company amended its Certificate of Incorporation to
increase the preferred shares authorized for issuance from 20,000,000 to
50,000,000 and the common shares authorized for issuance from 20,000,000 to
200,000,000.
STOCK SPLITS
In January 1998, the Company's Board of Directors declared a 200-for-1
stock split in the form of a stock dividend for the then-outstanding shares of
preferred stock and common stock. The stock split was reflected in 1997 and
resulted in a $37,756 reclassification from additional capital to preferred
stock and a $36,384 reclassification from additional capital to common stock
representing the aggregate par value of the shares issued under the stock split.
In June 1999, the Company's Board of Directors declared a 3-for-1 stock
split in the form of a stock dividend for the then-outstanding shares of
preferred stock and common stock. The stock split resulted in a $91,262
reclassification from additional capital to preferred stock and a $94,960
reclassification from additional capital to common stock representing the
aggregate par value of the shares issued under the stock split.
F-14
<PAGE> 77
FREEMARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
All references to the number of shares and per share amounts have been
restated to reflect both stock splits.
CONVERTIBLE PREFERRED STOCK
In May 1996, the Company completed an offering of 4,019,400 shares of
Series A-1 convertible preferred stock ("Series A-1") at $.43 per share, with
3,157,200 callable warrants to purchase shares of the Company's preferred stock
at an exercise price of $.54 per share. The warrants were callable by the
Company, subject to the achievement of certain operational thresholds. The
proceeds from the offering totaled $1,511,456, net of offering costs of
$188,544.
In December 1996, the Company commenced an offering of 2,347,200 shares of
Series B convertible preferred stock ("Series B") at $.54 per share. Total
proceeds from the offering, which was completed in July 1997, were $1,117,464,
net of offering costs of $152,603.
In October 1997, the Company exercised its right to call the 3,157,200
warrants issued pursuant to the Series A-1 offering. In addition, the Company
commenced an offering to sell an additional 1,860,000 shares of Series A-2
convertible preferred stock ("Series A-2") at $.54 per share. The warrant call
and the offering were completed in December 1997, resulting in total proceeds of
$2,447,038, net of offering costs of $270,612.
In April 1999, the Company completed an offering of 2,305,434 shares of
Series C convertible preferred stock ("Series C") at $4.77 per share. Total
proceeds from the offering were $10,259,876, net of offering costs of $737,044.
In September 1999, the Company completed an offering of 2,057,773 shares of
Series D convertible preferred stock ("Series D") at $14.80 per share, of which
1,414,552 shares were purchased by UTC. Proceeds from the offering were
$30,289,120, net of offering costs of $165,920. In addition, the Company granted
304,431 stock purchase warrants (the "Series D warrants") at an exercise price
of $.01 per share to UTC in exchange for release of restrictions that limited
the Company from serving certain clients. In connection with this warrant grant,
the Company recognized expense of $4,502,534 in September 1999, as determined
using the Black-Scholes pricing model. UTC exercised the Series D warrants in
September 1999, resulting in total proceeds of $3,044 and a $4,502,534 transfer
from stock purchase warrants to additional capital.
The Company's Series A-1, A-2, B, C and D preferred stock are convertible
into common stock based upon an initial conversion ratio of one-to-one, which is
subject to adjustment as defined in the Company's Certificate of Incorporation
and the respective certificates of designations that created the preferred
stock. All series of preferred stock will be converted automatically into an
equal number of shares of common stock immediately preceding the closing of an
underwritten initial public offering pursuant to an effective registration
statement under the Securities Act of 1933, as amended. The holders of Series
A-1 and A-2 preferred stock, collectively as a group, have the right to elect
one director, while the holders of Series B, C and D preferred stock and all
holders of common stock, voting as a class, have the right to elect the
remaining directors. The holders of preferred stock also have a liquidation
preference equal to the purchase price of the preferred stock, the right to
receive dividends prior to any junior preferred stock or common stock, and
certain antidilution protections, all as defined in the Company's Certificate of
Incorporation and the respective certificates of designations that created the
preferred stock.
The Company has granted preemptive rights to the holders of Series A-1, A-2
and B preferred stock, as well as to two holders of common stock. In the event
that the Company seeks to raise additional capital, these rights allow holders,
under certain circumstances, to maintain their percentage
F-15
<PAGE> 78
FREEMARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ownership of the Company. All preemptive rights terminate upon an initial public
offering of the Company's common stock.
STOCK PURCHASE WARRANTS
In addition to the warrants issued in connection with the Series A-1
offering that were subsequently exercised in the Series A-2 offering, the
Company granted a total of 2,604,600 warrants at an exercise price of $.54 per
share to the placement agent as compensation for services rendered in connection
with the Series A-1, A-2 and B offerings. Those warrants issued to the placement
agent, which do not have a call feature, expire seven years from the date of
issuance.
The Series A-1 warrants and placement agent warrants were valued using a
Black-Scholes pricing model. The portion of the proceeds received from the
Series A-1, A-2 and B preferred stock offerings representing the value assigned
to the warrants, as well as the Series D warrants discussed above, are reflected
as stock purchase warrants in the stockholders' equity section of the
accompanying balance sheets. At the time of exercise or expiration, the Company
will transfer the value assigned to the warrants to additional capital.
In March 1999, the placement agent exercised 2,409,000 warrants, resulting
in total proceeds of $1,304,875 and a $368,000 transfer of stock purchase
warrants to additional capital.
COMMON STOCK
In 1996, the Board of Directors reserved 240,000 shares of common stock to
be issued pursuant to a qualified stock purchase plan (the "1996 Purchase Plan")
under which employees could purchase shares of common stock of the Company.
During 1996, employees purchased 219,600 shares of common stock at $.43 per
share resulting in total proceeds of $92,705, net of offering costs of $625.
In 1997, the Board of Directors reserved an additional 600,000 shares of
common stock to be issued pursuant to the 1996 Purchase Plan. During 1997,
employees purchased 531,000 shares of common stock at $.54 per share resulting
in total proceeds of $287,025, net of offering costs of $600. No further shares
may be purchased under the 1996 Purchase Plan.
In 1998, the Board of Directors reserved 780,000 shares of common stock,
which included the remaining unissued shares under the 1996 Purchase Plan, to be
issued pursuant to a qualified stock purchase plan (the "1998 Purchase Plan")
under which employees could purchase shares of common stock of the Company.
During 1998, employees purchased 780,000 shares of common stock at $1.67 per
share resulting in total proceeds of $1,285,827, net of offering costs of
$14,173. No further shares may be purchased under the 1998 Purchase Plan.
F-16
<PAGE> 79
FREEMARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of share activity for all classes of stock:
<TABLE>
<CAPTION>
STOCK
PREFERRED COMMON PURCHASE
STOCK STOCK WARRANTS
---------- ---------- ----------
<S> <C> <C> <C>
Outstanding at December 31, 1995.................... -- 10,243,800 --
Shares issued..................................... 5,077,200 219,600 --
Stock purchase warrants issued.................... -- -- 4,224,600
---------- ---------- ----------
Outstanding at December 31, 1996.................... 5,077,200 10,463,400 4,224,600
Shares issued, net................................ 3,149,400 493,200 --
Stock purchase warrants issued.................... -- -- 1,537,200
Stock purchase warrants exercised................. 3,157,200 -- (3,157,200)
Options exercised................................. -- 13,800 --
---------- ---------- ----------
Outstanding at December 31, 1997.................... 11,383,800 10,970,400 2,604,600
Shares issued..................................... -- 780,000 --
Options exercised................................. -- 54,600 --
---------- ---------- ----------
Outstanding at December 31, 1998.................... 11,383,800 11,805,000 2,604,600
Shares issued..................................... 4,363,207 -- --
Stock purchase warrants issued.................... -- -- 304,431
Stock purchase warrants exercised................. 304,431 2,409,000 (2,713,431)
Options exercised................................. -- 89,520 --
---------- ---------- ----------
Outstanding at September 30, 1999................... 16,051,438 14,303,520 195,600
========== ========== ==========
</TABLE>
NOTE 8. EMPLOYEE BENEFIT PLANS
401(K) SAVINGS PLAN
In January 1999, the Company adopted a savings plan (the "Savings Plan")
that qualifies as a deferred salary arrangement under Section 401(k) of the
Internal Revenue Code. Under the Savings Plan, eligible employees may contribute
a certain percentage of their pre-tax earnings up to the annual limit set by the
Internal Revenue Service. The Company is not required to contribute to the
Savings Plan, and has made no contributions since its inception.
EMPLOYEE STOCK PURCHASE PLAN
In 1999, the Board of Directors adopted, and the stockholders of the
Company approved, the Company's Employee Stock Purchase Plan (the "1999 Purchase
Plan"), under which 500,000 shares have been reserved for issuance, subject to
increases as provided in the 1999 Purchase Plan. Under the 1999 Purchase Plan,
eligible employees may purchase common stock each year in an amount not to
exceed 20% of the employee's annual cash compensation. The purchase price per
share will be 85% of the lowest fair value at certain dates defined in the 1999
Purchase Plan. The 1999 Purchase Plan will become effective upon the completion
of an underwritten initial public offering.
STOCK OPTION PLANS
Prior to March 1998, the Company maintained a stock incentive plan (the
"1996 Option Plan"), which provided for the issuance of stock options and stock
appreciation rights to employees. Under the 1996 Option Plan, options were
granted at prices determined by the Board of Directors. The options granted are
exercisable in accordance with a vesting schedule, not to exceed 10 years. No
further stock options may be granted under the 1996 Option Plan.
F-17
<PAGE> 80
FREEMARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In March 1998, the Company adopted the 1998 Stock Option Plan (the "1998
Option Plan"). All available options in the 1996 Option Plan were transferred
into the 1998 Option Plan. All options outstanding under the 1996 Option Plan as
of the termination date continue in effect under their original terms. The 1998
Option Plan provides for the issuance of stock options to employees, directors,
consultants and advisors, which are granted at prices determined by the Board of
Directors. The options granted are exercisable in accordance with a vesting
schedule, not to exceed 10 years. Certain executives hold options that contain
limited accelerated vesting, as defined, in the event of an initial public
offering or sale of the Company.
In June 1999, the Company adopted an Amended and Restated Stock Incentive
Plan (the "Stock Incentive Plan"). The Stock Incentive Plan amended the 1998
Option Plan to increase the amount of unissued shares reserved for the future
issuance of stock options, as well as add certain change-of-control provisions.
As of September 30, 1999, 15,450,000 stock options were authorized for issuance.
The following is a summary of stock option activity:
<TABLE>
<CAPTION>
NUMBER EXERCISE
OF OPTIONS PRICE
---------- --------------
<S> <C> <C>
Outstanding at December 31, 1995.............. -- --
Granted..................................... 867,000 $ .33 - $ .43
----------
Outstanding at December 31, 1996.............. 867,000 .33 - .43
Granted..................................... 564,000 .54
Forfeited................................... (354,600) .33 - .54
Exercised................................... (13,800) .43
----------
Outstanding at December 31, 1997.............. 1,062,600 .33 - .54
Granted..................................... 6,150,900 .54 - 1.67
Forfeited................................... (44,700) .33 - 1.67
Exercised................................... (54,600) .33 - .54
----------
Outstanding at December 31, 1998.............. 7,114,200 .33 - 1.67
Granted..................................... 4,331,600 1.67 - 14.80
Forfeited................................... (155,050) .54 - 14.80
Exercised................................... (89,520) .54 - 1.67
----------
Outstanding at September 30, 1999............. 11,201,230 .33 - 14.80
==========
Shares reserved for future options as of
September 30, 1999.......................... 4,090,850 N/A
</TABLE>
The following is a summary of the options outstanding as of September 30,
1999:
<TABLE>
<CAPTION>
NUMBER EXERCISE
OF OPTIONS PRICE
---------- --------------
<S> <C> <C>
532,800 $.33 - $ .43
1,449,900 .54
4,050,000 1.08
1,114,680 1.67
42,000 2.50
1,861,000 4.77
4,800 12.50
2,146,050 14.80
----------
11,201,230
==========
</TABLE>
F-18
<PAGE> 81
FREEMARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of the exercisable options as of each date:
<TABLE>
<CAPTION>
NUMBER EXERCISE
OF OPTIONS PRICE
---------- ------------
<S> <C> <C>
December 31, 1996................................ 27,600 $ .33
December 31, 1997................................ 236,610 .33 - .43
December 31, 1998................................ 580,392 .33 - .54
September 30, 1999............................... 821,677 .33 - 1.67
</TABLE>
All options were granted at exercise prices determined by the Board of
Directors. The weighted average exercise price and the weighted average
remaining contractual life for options outstanding at September 30, 1999 was
$4.29 and 8.9 years, respectively. In 1999, the Company recorded $1,976,500 of
unearned stock-based expense, of which $225,700 was amortized in the nine-month
period ended September 30, 1999.
If compensation costs had been recognized pursuant to SFAS No. 123, the
Company's net (loss) income and earnings per share would have been changed to
the pro forma amounts shown below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------- NINE MONTHS ENDED
1996 1997 1998 SEPTEMBER 30, 1999
----------- ----------- --------- ------------------
<S> <C> <C> <C> <C>
Net (loss) income:
As reported................. $(1,431,188) $(1,060,700) $233,747 $(13,479,476)
Pro forma................... (1,466,066) (1,113,771) (208,581) (16,051,271)
Earnings per share:
Basic:
As reported................. $(.14) $(.10) $.02 $(1.00)
Pro forma................... (.14) (.10) (.02) (1.19)
Diluted:
As reported................. (.14) (.10) .01 (1.00)
Pro forma................... (.14) (.10) (.02) (1.19)
</TABLE>
The weighted average fair value per option granted was $.10 in 1996, $.14
in 1997, $.23 in 1998 and $2.11 in the nine-month period ended September 30,
1999. The fair value of each option grant according to SFAS No. 123 is estimated
on the date of grant using the Black-Scholes pricing model with the following
assumptions:
<TABLE>
<S> <C>
Weighted average risk-free interest rate.................... 5-6%
Expected life (number of years)............................. 5
</TABLE>
------------------------
F-19
<PAGE> 82
UNDERWRITING
FreeMarkets and the underwriters named below have entered into an
underwriting agreement with respect to the shares being offered. Subject to the
terms of the underwriting agreement, each underwriter has severally agreed to
purchase the number of shares indicated in the following table. Goldman, Sachs &
Co., Morgan Stanley & Co. Incorporated, Donaldson, Lufkin & Jenrette Securities
Corporation and Wit Capital Corporation are the representatives of the
underwriters.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
Goldman, Sachs & Co. .......................................
Morgan Stanley & Co. Incorporated...........................
Donaldson, Lufkin & Jenrette Securities Corporation.........
Wit Capital Corporation.....................................
---------
Total....................................................... 3,500,000
=========
</TABLE>
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional 525,000
shares from FreeMarkets to cover these sales. They may exercise that option for
30 days. If any shares are purchased pursuant to this option, the underwriters
will severally purchase shares in approximately the same proportion as set forth
in the table above.
The following tables show the per share and total underwriting discounts
and commissions to be paid to the underwriters by FreeMarkets. Such amounts are
shown assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares.
Paid by FreeMarkets
---------------------
<TABLE>
<CAPTION>
No Full
Exercise Exercise
-------- --------
<S> <C> <C>
Per Share.................................... $ $
Total........................................ $ $
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial public offering price. Any of those
securities dealers may resell any shares purchased from the underwriters to
other brokers or dealers at a discount of up to $ per share from the initial
public offering price. If all the shares are not sold at the initial public
offering price, the representatives may change the offering price and the other
selling terms.
FreeMarkets and its directors, officers, employees and other holders of
substantially all its securities have agreed, with the underwriters, subject to
limited exceptions, not to dispose of or hedge any of their common stock or
securities convertible into or exchangeable for shares of common stock during
the period from the date of this prospectus through the date 180 days after the
date of this prospectus, except with the prior written consent of the
representatives. See "Shares Eligible for Future Sale" for a discussion of
certain transfer restrictions.
Prior to this offering, there has been no public market for the common
stock. The initial public offering price for the common stock will be negotiated
among FreeMarkets and the representatives of the underwriters. Among the factors
to be considered in determining the initial public offering price of the shares,
in addition to prevailing market conditions, are FreeMarkets' historical
performance, estimates of FreeMarkets' business potential and earnings
prospects, an assessment of FreeMarkets' management and the consideration of the
above factors in relation to the market valuation of companies in related
businesses.
U-1
<PAGE> 83
FreeMarkets has applied to have its common stock approved for quotation on
the Nasdaq National Market under the symbol "FMKT".
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. Stabilizing
transactions consist of certain bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the common stock while
the offering is in progress.
The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to other underwriters a portion of the
underwriting discount received by it because the representatives have
repurchased shares sold by or for the account of such underwriter in stabilizing
or short-sale covering transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.
At the request of FreeMarkets, the underwriters have reserved, at the
initial public offering price, up to 350,000 shares of common stock for sale to
a subsidiary of United Technologies Corporation and up to 175,000 shares of
common stock for sale to directors, officers and employees of FreeMarkets.
The number of shares available for sale to the general public will be
reduced by the number of reserved shares sold. Any reserved shares not so
purchased will be offered by the underwriters to the general public on the same
basis as other shares offered hereby.
FreeMarkets estimates that the total expenses of the offering, excluding
underwriting discounts and commissions, will be approximately $2.3 million.
FreeMarkets has agreed to indemnify the underwriters against various
liabilities, including liabilities under the Securities Act of 1933.
On February 5, 1999, Goldman, Sachs & Co. committed to invest at least
$6,596,700 in an offering of FreeMarkets' equity securities. That private
placement was completed with the sale of 1,382,955 shares of Series C preferred
stock to Goldman, Sachs & Co. and two affiliates on April 9, 1999, at a price of
$4.77 per share. These shares automatically convert into the same number of
shares of common stock immediately prior to the closing of this offering.
Wit Capital, a member of the National Association of Securities Dealers,
Inc., will participate in the offering as one of the representatives of the
underwriters. The National Association of Securities Dealers, Inc. approved the
membership of Wit Capital on September 4, 1997. Since that time, Wit Capital has
acted as an underwriter, e-Manager or selected dealer in over 125 public
offerings. Except for its participation as a representative in this offering,
Wit Capital has no relationship with FreeMarkets, or any of its founders or
significant stockholders.
U-2
<PAGE> 84
INSIDE BACK COVER
The inside of the back cover includes a picture of a printed circuit board
with the following text above it: "At 8:30 am, printed circuit boards for a
Global 1000 manufacturer cost $24 million. 1 day later, they cost $14 million."
A pull-out text box appears at the lower right-hand corner of the inside
back cover with the following text: "FreeMarkets recruited a global base of
suppliers whose bids fell 43% below previous prices. That's $10 million." Our
logo, with the word "FreeMarkets" beside it, appears at the bottom of the inside
back cover with the following tag-line text below it: "Redefining purchasing
power for the Global 1000."
The following text appears at the bottom left of the inside back cover:
"Each auction is a distinct event. The results of any auction cannot be
predicted, and may not be duplicated."
<PAGE> 85
- -------------------------------------------------------
- -------------------------------------------------------
No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely on
any unauthorized information or representations. This prospectus is an offer to
sell only the shares offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary..................... 5
Risk Factors........................... 9
Use of Proceeds........................ 21
Dividend Policy........................ 21
Capitalization......................... 22
Dilution............................... 23
Selected Consolidated Financial Data... 24
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 25
Business............................... 36
Management............................. 47
Certain Transactions................... 55
Principal Stockholders................. 56
Description of Capital Stock........... 58
Shares Eligible for Future Sale........ 61
Legal Matters.......................... 62
Experts................................ 63
Additional Information................. 63
Index to Financial Statements.......... F-1
Underwriting........................... U-1
</TABLE>
------------------
Through and including , 1999 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to a dealer's obligation to deliver a prospectus when acting
as an underwriter and with respect to an unsold allotment or subscription.
- -------------------------------------------------------
- -------------------------------------------------------
- -------------------------------------------------------
- -------------------------------------------------------
3,500,000 Shares
FREEMARKETS, INC.
Common Stock
------------------
FreeMarkets, Inc. Logo
------------------
Joint Book-Running Managers
GOLDMAN, SACHS & CO.
MORGAN STANLEY DEAN WITTER
------------------
DONALDSON, LUFKIN & JENRETTE
WIT CAPITAL CORPORATION
Representatives of the Underwriters
-------------------------------------------------------
-------------------------------------------------------
<PAGE> 86
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the registrant in connection
with the sale of the securities being registered. All amounts are estimates
except the SEC registration fee, the NASD fee and the Nasdaq National Market
listing fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE PAID
----------
<S> <C>
SEC registration fee........................................ $ 17,903
NASD fee.................................................... 7,500
Nasdaq National Market listing fee.......................... *
Printing expenses........................................... *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Transfer agent and registrar fees........................... *
Miscellaneous............................................... *
----------
Total............................................. $2,325,000
==========
</TABLE>
- ---------------
* To be filed by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 102(b)(7) of the Delaware General Corporation Law (the "DGCL")
permits a corporation, in its certificate of incorporation, to limit or
eliminate, subject to certain statutory limitations, the liability of directors
to the corporation or its stockholders for monetary damages for breaches of
fiduciary duty, except for liability (a) for any breach of the director's duty
of loyalty to the corporation or its stockholders, (b) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (c) under Section 174 of the DGCL, or (d) for any transaction from which
the director derived an improper personal benefit. Article VII of the
registrant's Amended and Restated Certificate of Incorporation, to be in effect
upon consummation of the offering of the securities to which this registration
statement relates, provides that the personal liability of directors of the
registrant is eliminated to the fullest extent permitted by Section 102(b)(7) of
the DGCL.
Under Section 145 of the DGCL, a corporation has the power to indemnify
directors and officers under certain prescribed circumstances and subject to
certain limitations against certain costs and expenses, including attorneys'
fees actually and reasonably incurred in connection with any action, suit or
proceeding, whether civil, criminal, administrative or investigative, to which
any of them is a party by reason of being a director or officer of the
corporation if it is determined that the director or officer acted in accordance
with the applicable standard of conduct set forth in such statutory provision.
Article VII of the registrant's Amended and Restated Bylaws, to be in effect
upon consummation of the offering of the securities to which this registration
statement relates, provides that the registrant will indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding by reason of the fact that he is or was
(or to the extent permitted under Delaware law, has agreed to be) a director,
officer, employee or agent of the registrant, or is or was serving (or, to the
extent permitted under Delaware law, has agreed to serve) at the request of the
registrant as a director, officer, employee or agent of another entity, against
certain liabilities, costs and expenses. Article VII further permits the
registrant to maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the registrant, or is or was serving at
the request of the registrant as a director, officer, employee or agent of
another entity, against any liability
II-1
<PAGE> 87
asserted against such person and incurred by such person in any such capacity or
arising out of his status as such, whether or not the registrant would have the
power to indemnify such person against such liability under the DGCL. The
registrant expects to maintain directors' and officers' liability insurance.
Under Section 8(b) of the Underwriting Agreement, the Underwriters will be
obligated, under certain circumstances, to indemnify directors and officers of
the registrant against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). Reference is made to
the form of Underwriting Agreement filed as Exhibit 1.1 hereto.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since September 1996, the registrant has sold and issued the following
securities:
1. In September 1996, the registrant issued 219,600 shares of common stock
to 10 employees for an aggregate consideration of $93,330.
2. In July 1997, the registrant issued 2,347,200 shares of Series B
preferred stock and warrants to purchase 571,800 shares of Series B preferred
stock to 33 investors for an aggregate consideration of $1,270,067.
3. In October 1997, the registrant issued 531,000 shares of common stock to
24 employees for an aggregate consideration of $287,625.
4. In December 1997, the registrant issued 5,017,200 shares of Series A-2
preferred stock and warrants to purchase 1,222,800 shares of Series A-2
preferred stock to 60 investors for an aggregate consideration of $2,717,650.
5. In October 1998, the registrant issued 780,000 shares of common stock to
78 employees for an aggregate consideration of $1,300,000.
6. In March 1999, the Company issued 2,409,000 shares of common stock upon
the exercise of warrants previously issued to an investor and placement agent,
for an aggregate consideration of $1,304,875.
7. In April 1999, the registrant issued 2,305,434 shares of Series C
preferred stock to 78 investors for an aggregate consideration of $10,996,926.
8. In September 1999, the registrant issued 2,057,773 shares of Series D
preferred stock and warrants to purchase 304,431 shares of Series D preferred
stock to 44 investors for an aggregate consideration of $30,445,040.
9. In September 1999, the Company issued 304,431 shares of Series D
preferred stock upon the exercise of warrants previously issued to an investor,
for an aggregate consideration of $3,044.
10. Since inception, the registrant has granted options to purchase an
aggregate of 11,913,500 shares of common stock to a number of its employees,
directors and consultants. No consideration was received by the registrant upon
grant of any such options.
The issuances of the above securities were intended to be exempt from
registration under the Securities Act in reliance on Section 4(2) thereof as
transactions by an issuer not involving any public offering. In addition,
certain issuances to employees described in Items 1, 3, 5 and 10 were intended
to be exempt from registration under the Securities Act in reliance upon Rule
701 promulgated under the Securities Act. The recipients of securities in each
such transaction represented their intentions to acquire the securities for
investment only and not with a view to, or for sale in connection with, any
distribution thereof and appropriate legends were affixed to the share
certificates, warrants and options issued in such transactions. The registrant
believes that all recipients had adequate access, through their relationships
with the registrant, to information about the registrant.
II-2
<PAGE> 88
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS. The following exhibits are filed as part of this registration
statement:
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- -------- ------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement.
3.1(a)* Registrant's Amended and Restated Certificate of
Incorporation (to be replaced by Exhibit 3.1(b) upon the
closing of this offering).
3.1(b)* Form of registrant's Amended and Restated Certificate of
Incorporation (to be effective upon the closing of this
offering).
3.2(a)* Registrant's Amended and Restated Bylaws (to be replaced by
Exhibit 3.2(b) upon the closing of this offering).
3.2(b)* Form of registrant's Amended and Restated Bylaws (to be
effective upon the closing of this offering).
4.1* Amended and Restated Registration Rights Agreement dated
August 3, 1999.
5.1 Opinion of Morgan, Lewis & Bockius LLP as to the legality of
the securities being registered.
10.1(a)+ Transaction Agreement between General Motors Corporation and
the registrant dated July 17, 1998 and effective as of June
8, 1998.
10.1(b)+ Amendment to Transaction Agreement between General Motors
Corporation and the registrant dated and effective as of
October 1, 1999.
10.2(a)+ Systems and Services Agreement between United Technologies
Corporation and the registrant dated January 14, 1999 and
effective as of January 1, 1999.
10.2(b)*+ Side Letter Agreement between United Technologies
Corporation and the registrant dated July 30, 1999.
10.3(a)* Lease Agreement between the registrant and One Oliver
Associates Limited Partnership dated October 21, 1998.
10.3(b)* First Amendment to Lease between the registrant and One
Oliver Associates dated March 30, 1999.
10.4(a)* Loan and Security Agreement between the registrant and
Silicon Valley Bank dated February 5, 1999.
10.4(b)* First Amendment to Loan and Security Agreement between the
registrant and Silicon Valley Bank dated September 3, 1999.
10.5* Registrant's 1996 Stock Incentive Plan.
10.6 Registrant's Amended and Restated Stock Incentive Plan.
10.7 Registrant's Employee Stock Purchase Plan.
10.8(a)+ 1998 Stock Option Plan Grant Certificate (Glen T. Meakem).
10.8(b)+ 1998 Stock Option Plan Grant Certificate (Sam E. Kinney,
Jr.).
10.8(c)+ 1998 Stock Option Plan Grant Certificate (Sam E. Kinney,
Jr.).
10.8(d)+ 1998 Stock Option Plan Grant Certificate (David J. Becker).
10.8(e)+ 1998 Stock Option Plan Grant Certificate (David J. Becker).
10.8(f)+ 1998 Stock Option Plan Grant Certificate (John P. Levis,
III).
10.8(g)+ 1998 Stock Option Plan Grant Certificate (Thomas L. McLeod).
10.8(h)+ 1998 Stock Option Plan Grant Certificate (Thomas L. McLeod).
21.1* Subsidiaries of the registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
</TABLE>
II-3
<PAGE> 89
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- -------- ------------------------------------------------------------
<S> <C>
23.2 Consent of Morgan, Lewis & Bockius LLP (included in opinion
filed as Exhibit 5.1).
24.1 Power of Attorney (included on signature page of this
registration statement and Amendment No. 1 hereto).
27.1* Financial Data Schedule for the year ended December 31,
1996.
27.2* Financial Data Schedule for the year ended December 31,
1997.
27.3* Financial Data Schedule for the year ended December 31,
1998.
27.4 Financial Data Schedule for the nine months ended September
30, 1998.
27.5 Financial Data Schedule for the nine months ended September
30, 1999.
</TABLE>
- ---------------
* Previously filed.
+ Confidential treatment requested as to certain portions of this Exhibit.
+ Management or compensatory contract.
II-4
<PAGE> 90
(b) FINANCIAL STATEMENT SCHEDULES. The following financial statement schedule
is included as part of this registration statement:
Schedule II -- Valuation and Qualifying Accounts.
Other financial statement schedules have been omitted because they are
inapplicable or are not required under applicable provisions of Regulation S-X,
or because the information that would otherwise be included in such schedules is
contained in the registrant's financial statements or notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For the purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rules 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-5
<PAGE> 91
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to the registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Pittsburgh,
Commonwealth of Pennsylvania, on October 15, 1999.
FREEMARKETS, INC.
By: /s/ GLEN T. MEAKEM
------------------------------------
Glen T. Meakem
President, Chief Executive Officer
and Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
* Director October 15, 1999
- ------------------------------
Eric C. Cooper
* Director October 15, 1999
- ------------------------------
David A. Noble
</TABLE>
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints, Glen T. Meakem and Sam E. Kinney,
Jr., and each of them, as such person's true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for such person and
in such person's name, place and stead, in any and all capacities, to sign any
and all amendments to this registration statement (including post-effective
amendments) and any and all additional registration statements pursuant to Rule
462(b) under the Securities Act of 1933, as amended, in connection with or
related to the offering contemplated by this registration statement and its
amendments, if any, and to file the same, with all exhibits thereto and all
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto each said attorney-in-fact and agent full power and
authority to do and perform each and every act in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or either of them, or
their or his substitutes or substitute, may lawfully do or cause to be done by
virtue hereof.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
/s/ GLEN T. MEAKEM President, Chief Executive October 15, 1999
- ------------------------------------ Officer and Chairman of the
Glen T. Meakem Board
(Principal Executive Officer)
and a Director
/s/ JOAN S. HOOPER Vice President and Chief October 15, 1999
- ------------------------------------ Financial Officer (Principal
Joan S. Hooper Financial and Accounting
Officer)
/s/ SAM E. KINNEY, JR. Director October 15, 1999
- ------------------------------------
Sam E. Kinney, Jr.
*By /s/ GLEN T. MEAKEM
----------------------------
Glen T. Meakem,
attorney-in-fact, pursuant
to powers of attorney
previously filed as part of
this registration statement
</TABLE>
II-6
<PAGE> 92
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders
of FreeMarkets, Inc. and Subsidiaries:
Our audits of the consolidated financial statements referred to in our report
dated October 15, 1999, appearing in this Registration Statement also included
an audit of the financial statement schedule listed in Item 16 of this Form S-1.
In our opinion, this financial statement schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
October 15, 1999
<PAGE> 93
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- ------------------------------------------ ---------- ---------- ---------- ---------- ----------
ADDITIONS
-----------------------
BALANCE AT CHARGED TO BALANCE AT
BEGINNING CHARGED TO OTHER END OF
OF PERIOD EXPENSE ACCOUNTS DEDUCTIONS PERIOD
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1996............ -- -- -- -- --
Year ended December 31, 1997............ -- 20,000 -- -- 20,000
Year ended December 31, 1998............ 20,000 5,000 -- -- 25,000
Nine months ended September 30, 1999.... 25,000 93,750 -- (4,434) 114,316
Allowance for deferred tax assets:
Year ended December 31, 1996............ 393,000 -- 767,000 -- 1,160,000
Year ended December 31, 1997............ 1,160,000 -- 176,000 -- 1,336,000
Year ended December 31, 1998............ 1,336,000 -- 1,000 -- 1,337,000
Nine months ended September 30, 1999.... 1,337,000 -- 5,394,000 -- 6,731,000
</TABLE>
<PAGE> 94
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- -------- ------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement.
3.1(a)* Registrant's Amended and Restated Certificate of
Incorporation (to be replaced by Exhibit 3.1(b) upon the
closing of this offering).
3.1(b)* Form of registrant's Amended and Restated Certificate of
Incorporation (to be effective upon the closing of this
offering).
3.2(a)* Registrant's Amended and Restated Bylaws (to be replaced by
Exhibit 3.2(b) upon the closing of this offering).
3.2(b)* Form of registrant's Amended and Restated Bylaws (to be
effective upon the closing of this offering).
4.1* Amended and Restated Registration Rights Agreement dated
August 3, 1999.
5.1 Opinion of Morgan, Lewis & Bockius LLP as to the legality of
the securities being registered.
10.1(a)+ Transaction Agreement between General Motors Corporation and
the registrant dated July 17, 1998 and effective as of June
8, 1998.
10.1(b)+ Amendment to Transaction Agreement between General Motors
Corporation and the registrant dated, and effective as of
October 1, 1999.
10.2(a)+ Systems and Services Agreement between United Technologies
Corporation and the registrant dated January 14, 1999 and
effective as of January 1, 1999.
10.2(b)*+ Side Letter Agreement between United Technologies
Corporation and the registrant dated July 30, 1999.
10.3(a)* Lease Agreement between the registrant and One Oliver
Associates Limited Partnership dated October 21, 1998.
10.3(b)* First Amendment to Lease between the registrant and One
Oliver Associates dated March 30, 1999.
10.4(a)* Loan and Security Agreement between the registrant and
Silicon Valley Bank dated February 5, 1999.
10.4(b)* First Amendment to Loan and Security Agreement between the
registrant and Silicon Valley Bank dated September 3, 1999.
10.5* Registrant's 1996 Stock Incentive Plan.
10.6 Registrant's Amended and Restated Stock Incentive Plan.
10.7 Registrant's Employee Stock Purchase Plan.
10.8(a)+ 1998 Stock Option Plan Grant Certificate (Glen T. Meakem).
10.8(b)+ 1998 Stock Option Plan Grant Certificate (Sam E. Kinney,
Jr.).
10.8(c)+ 1998 Stock Option Plan Grant Certificate (Sam E. Kinney,
Jr.).
10.8(d)+ 1998 Stock Option Plan Grant Certificate (David J. Becker).
10.8(e)+ 1998 Stock Option Plan Grant Certificate (David J. Becker).
10.8(f)+ 1998 Stock Option Plan Grant Certificate (John P. Levis,
III).
10.8(g)+ 1998 Stock Option Plan Grant Certificate (Thomas L. McLeod).
10.8(h)+ 1998 Stock Option Plan Grant Certificate (Thomas L. McLeod).
21.1* Subsidiaries of the registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
</TABLE>
<PAGE> 95
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- -------- ------------------------------------------------------------
<S> <C>
23.2 Consent of Morgan, Lewis & Bockius LLP (included in opinion
filed as Exhibit 5.1).
24.1 Power of Attorney (included on signature page of this
registration statement and Amendment No. 1 hereto).
27.1* Financial Data Schedule for the year ended December 31,
1996.
27.2* Financial Data Schedule for the year ended December 31,
1997.
27.3* Financial Data Schedule for the year ended December 31,
1998.
27.4 Financial Data Schedule for the nine months ended September
30, 1998.
27.5 Financial Data Schedule for the nine months ended September
30, 1999.
</TABLE>
- ---------------
* Previously filed.
+ Confidential treatment requested as to certain portions of this Exhibit.
+ Management or compensatory contract.
<PAGE> 1
Exhibit 1.1
FREEMARKETS, INC.
COMMON STOCK ($.01 PAR VALUE)
----------
UNDERWRITING AGREEMENT
October __, 1999
Goldman, Sachs & Co.,
Morgan Stanley & Co. Incorporated
Donaldson, Lufkin & Jenrette Securities Corporation
Wit Capital Corporation
As representatives of the several Underwriters
named in Schedule I hereto,
c/o Goldman, Sachs & Co.
85 Broad Street
New York, New York 10004
Ladies and Gentlemen:
FreeMarkets, Inc., a Delaware corporation (the "Company"), proposes,
subject to the terms and conditions stated herein, to issue and sell to the
Underwriters named in Schedule I hereto (the "Underwriters") an aggregate of
shares (the "Firm Shares") and, at the election of the Underwriters, up
to additional shares (the "Optional Shares") of Common Stock ($.01 par
value) ("Stock") of the Company (the Firm Shares and the Optional Shares that
the Underwriters elect to purchase pursuant to Section 2 hereof being
collectively called the "Shares"). Morgan Stanley & Co. Incorporated ("Morgan
Stanley") has agreed to reserve a portion of the Shares to be purchased by it
under this Agreement for sale to the Company's directors, officers, employees
and business associates and other parties related to the Company (collectively,
"Participants"), as set forth in the Prospectus under the heading "Underwriters"
(the "Directed Share Program"). The Shares to be sold by Morgan Stanley and its
affiliates pursuant to the Directed Share Program are referred to hereinafter as
the "Directed Shares." Any Directed Shares not orally confirmed for purchase by
any Participants by the end of the business day on which this Agreement is
executed will be offered to the public by the Underwriters as set forth in the
Prospectus.
1. The Company represents and warrants to, and agrees with, each of the
Underwriters that:
(a) A registration statement on Form S-1 (File No. 333- ) (the
"Initial Registration Statement") in respect of the Shares has been filed with
the Securities and Exchange Commission (the "Commission"); the Initial
Registration Statement and any post-effective amendment thereto, each in the
form heretofore delivered to you, and, excluding exhibits thereto, to you for
each of the other Underwriters, have been declared effective by the Commission
in such form; other than a registration statement, if any, increasing the size
of the offering (a "Rule 462(b) Registration Statement"), filed pursuant to Rule
462(b) under the Securities Act of 1933, as amended (the "Act"), which became
effective upon filing, no other document with respect to the Initial
Registration Statement has heretofore been filed with the Commission; and no
stop order suspending the effectiveness of the Initial Registration Statement,
any post-effective amendment thereto or the Rule 462(b) Registration Statement,
if any, has been issued and no proceeding for that purpose has been initiated or
threatened by the Commission (any preliminary prospectus included in the Initial
Registration Statement or filed with the Commission pursuant to Rule 424(a) of
the rules and regulations of the Commission under the Act is hereinafter called
a "Preliminary Prospectus"; the various parts of the Initial Registration
Statement and the Rule 462(b) Registration Statement, if any, including all
exhibits thereto and including the information contained in the form of final
prospectus filed with the
<PAGE> 2
Commission pursuant to Rule 424(b) under the Act in accordance with Section 5(a)
hereof and deemed by virtue of Rule 430A under the Act to be part of the Initial
Registration Statement at the time it was declared effective, each as amended at
the time such part of the Initial Registration Statement became effective or
such part of the Rule 462(b) Registration Statement, if any, became or hereafter
becomes effective, are hereinafter collectively called the "Registration
Statement"; such final prospectus, in the form first filed pursuant to Rule
424(b) under the Act, is hereinafter called the "Prospectus;"
(b) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and each Preliminary Prospectus,
at the time of filing thereof, conformed in all material respects to the
requirements of the Act and the rules and regulations of the Commission
thereunder, and did not contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that this representation and warranty
shall not apply to any statements or omissions made in reliance upon and in
conformity with information furnished in writing to the Company by an
Underwriter through Goldman, Sachs & Co. expressly for use therein;
(c) The Registration Statement conforms, and the Prospectus and any
further amendments or supplements to the Registration Statement or the
Prospectus will conform, in all material respects to the requirements of the Act
and the rules and regulations of the Commission thereunder and do not and will
not, as of the applicable effective date as to the Registration Statement and
any amendment thereto, and as of the applicable filing date as to the Prospectus
and any amendment or supplement thereto, contain an untrue statement of a
material fact or omit to state a material fact (i) in the case of the
Registration Statement and any further amendments thereto, that is required to
be stated therein or necessary to make the statements therein not misleading and
(ii) in the case of the Prospectus and any supplements thereto, that is
necessary to make the statements therein, in light of the circumstances they
were made, not misleading; provided, however, that this representation and
warranty shall not apply to any statements or omissions made in reliance upon
and in conformity with information furnished in writing to the Company by an
Underwriter through Goldman, Sachs & Co. expressly for use therein;
(d) Neither the Company nor any of its subsidiaries has sustained since
the date of the latest audited financial statements included in the Prospectus
any loss or interference with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any labor dispute or
court or governmental action, order or decree, that would have a material
adverse effect on the general affairs, management, the current or future
consolidated financial position, business prospects, stockholders' equity or
results of operations of the Company and its subsidiaries, taken as a whole (a
"Material Adverse Effect"), otherwise than as set forth or contemplated in the
Prospectus; and, since the respective dates as of which information is given in
the Registration Statement and the Prospectus, there has not been any change in
the capital stock or long-term debt of the Company or any of its subsidiaries or
any change, or development resulting in a Material Adverse Effect, otherwise
than as set forth or contemplated in the Prospectus;
(e) The Company and its subsidiaries do not own any real property and,
except for the real property held under the lease between the Company and One
Oliver Associates Limited Partnership dated October 21, 1998 (the "Lease"),
holds no real property or building under lease that are material to the general
affairs, management, financial position, stockholders' equity or results of
operations of the Company and its subsidiaries, taken as a whole, and the
Company and its subsidiaries have good and marketable title to all personal
property owned by them, in each case free and clear of all liens, encumbrances
and defects except such as are described in the Prospectus or such as do not
materially affect the value of such property and do not interfere with the use
made and proposed to be made of such property by the Company and its
subsidiaries; and the Lease is valid, subsisting and enforceable with such
exceptions as are not material and do not interfere with the use made and
proposed to be made of such property and buildings by the Company and its
subsidiaries;
(f) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the state of Delaware, with power
and authority (corporate and other) to own its properties and conduct its
business as described in the Prospectus, and has been duly qualified as a
foreign corporation for the transaction of business and is in good standing
under the laws of each other jurisdiction in which it owns or leases properties
or conducts any business so as to require such qualification, or is subject to
no material liability or disability by reason of the failure to be so qualified
in any such jurisdiction; and each subsidiary of the Company has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation; and each subsidiary of the Company
has been duly incorporated and is validly existing as a corporation in good
standing under the laws of its jurisdiction of incorporation.
(g) The Company will have an authorized capitalization as of the "First
Time of Delivery" (as defined in Section 4 herein) as set forth in the
Prospectus for "Pro Forma As Adjusted" under the caption "Capitalization", and
all of the issued shares of capital stock of the Company as of the First Time of
Delivery will have been duly and validly authorized and issued, will be fully
paid and non-assessable and conform to the description of the Stock contained in
the Prospectus; and all of the issued shares of capital stock of each subsidiary
of the Company have been duly and validly authorized and
-2-
<PAGE> 3
issued, are fully paid and non-assessable and (except for directors' qualifying
shares and except as set forth in the Prospectus) are owned directly or
indirectly by the Company, free and clear of all liens, encumbrances, equities
or other adverse claims;
(h) The unissued Shares to be issued and sold by the Company to the
Underwriters hereunder have been duly and validly authorized and, when issued
and delivered against payment therefor as provided herein, will be duly and
validly issued and fully paid and non-assessable and will conform to the
description of the Stock contained in the Prospectus;
(i) The issue and sale of the Shares by the Company and the compliance
by the Company with all of the provisions of this Agreement and the consummation
of the transactions herein contemplated will not conflict with or result in a
breach or violation of any of the terms or provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, loan agreement or other
material agreement or instrument (the "Specified Documents") to which the
Company or any of its subsidiaries is a party or by which the Company or any of
its subsidiaries is bound or to which any of the property or assets of the
Company or any of its subsidiaries is subject, nor will such action result in
any violation of the provisions of the Certificate of Incorporation or By-laws
of the Company or any statute or any order, rule or regulation of any court or
governmental agency or body having jurisdiction over the Company or any of its
subsidiaries or any of their properties; and no consent, approval,
authorization, order, registration or qualification of or with any such court or
governmental agency or body is required for the issue and sale of the Shares or
the consummation by the Company of the transactions contemplated by this
Agreement, except the registration under the Act of the offer and sale of the
Shares and such consents, approvals, authorizations, registrations or
qualifications as may be required under state securities or Blue Sky laws or the
bylaws, rules and regulations of the National Association of Securities Dealers,
Inc. (the "NASD") in connection with the purchase and distribution of the Shares
by the Underwriters;
(j) Neither the Company nor any of its subsidiaries is in violation of
its Certificate of Incorporation or By-laws or in default in the performance or
observance of any material obligation, agreement, covenant or condition
contained in any Specified Documents to which it is a party or by which it or
any of its properties may be bound;
(k) The statements set forth in the Prospectus under the caption
"Description of Capital Stock", insofar as they purport to constitute a summary
of the terms of the Stock and under the caption "Underwriting", insofar as they
purport to describe the provisions of the documents referred to therein, are
accurate and complete;
(l) Other than as set forth in the Prospectus, there are no legal or
governmental proceedings pending to which the Company or any of its subsidiaries
is a party or of which any property of the Company or any of its subsidiaries is
the subject which, if determined adversely to the Company or any of its
subsidiaries, would individually or in the aggregate have a Material Adverse
Effect; and, to the best of the Company's knowledge, no such proceedings are
threatened or contemplated by governmental authorities or threatened by others;
(m) The Company is not and, after giving effect to the offering and
sale of the Shares, will not be an "investment company", as such term is defined
in the Investment Company Act of 1940, as amended (the "Investment Company
Act");
(n) PricewaterhouseCoopers LLP, who have certified certain financial
statements of the Company and its subsidiaries, are independent public
accountants as required by the Act and the rules and regulations of the
Commission thereunder; and
(o) The Company has reviewed its operations and that of its
subsidiaries and any third parties with which the Company or any of its
subsidiaries has a material relationship to evaluate the extent to which the
business or operations of the Company or any of its subsidiaries will be
affected by the Year 2000 Problem. As a result of such review, the Company has
no reason to believe, and does not believe, that the Year 2000 Problem will have
a Material Adverse Effect or result in any material loss or interference with
the Company's business or operations. The "Year 2000 Problem" as used herein
means any significant risk that computer hardware or software used in the
receipt, transmission, processing, manipulation, storage, retrieval,
retransmission or other utilization of data or in the operation of mechanical or
electrical systems of any kind will not, in the case of dates or time periods
occurring after December 31, 1999, function at least as effectively as in the
case of dates or time periods occurring prior to January 1, 2000.
(p) Other than as set forth in the Prospectus, the Company and its
subsidiaries own or have (or can acquire on reasonable terms) the right to use
pursuant to license, sublicense, agreement, or permission all patents, patent
applications, trademarks, service marks, trade names, copyrights, trade secrets,
confidential information, proprietary rights and processes ("Intellectual
Property") necessary for the operation of the business of the Company and its
subsidiaries as described in the Prospectus have taken all steps reasonably
necessary to secure assignments of such Intellectual Property from its employees
and contractors; to the knowledge of the Company none of the technology employed
by the Company or its subsidiaries has been obtained or is being used by the
Company or its subsidiaries in violation of any contractual or
-3-
<PAGE> 4
fiduciary obligation binding on the Company, its subsidiaries or any of their
respective directors or executive officers or, to the Company's knowledge, any
of their respective employees or consultants; and the Company and its
subsidiaries have taken and will maintain reasonable measures to prevent the
unauthorized dissemination or publication of its confidential information.
Except as described in the Prospectus, neither the Company nor any of its
subsidiaries have received, or know of any basis for the reasonable assertion
of, any charge, complaint, claim, demand, or notice alleging any interference,
infringement, misappropriation, or violation (including any claim that the
Company or any of its subsidiaries must license or refrain from using any
intellectual property rights of any third party) with the asserted rights of
others which, if the subject of any unfavorable decision, ruling or finding
would, individually or in the aggregate, be reasonably likely to have a Material
Adverse Effect;
To the Company's knowledge, there are no legal or governmental
proceedings pending relating to trademarks, trade names, patent rights, mask
works, copyrights, licenses, trade secrets or other intellectual property rights
of the Company or any of its subsidiaries other than the prosecution by the
Company and its subsidiaries of their patent applications before the United
States Patent Office and appropriate foreign government agencies, and no
proceedings are threatened or contemplated by governmental authorities or others
relating to trademarks, trade names, patent rights, mask works, copyrights,
licenses or other intellectual property rights of the Company or its
subsidiaries.
(q) The Registration Statement, the Prospectus and any Preliminary
Prospectus comply, and any amendments or supplements thereto will comply, with
any applicable laws or regulations of foreign jurisdictions in which the
Prospectus or any Preliminary Prospectus, as amended or supplemented, if
applicable, are distributed in connection with the Directed Share Program.
(r) No consent, approval, authorization or order of, or qualification
with, any governmental body or agency, other than those obtained, is required in
connection with the offering of the Directed Shares in any jurisdiction where
the Directed Shares are being offered.
(s) The Company has not offered, or caused Morgan Stanley or its
affiliates to offer, Shares to any person pursuant to the Directed Share Program
with the specific intent to unlawfully influence (i) a customer or supplier of
the Company to alter the customer's or supplier's level or type of business with
the Company, or (ii) a trade journalist or publication to write or publish
favorable information about the Company or its products.
2. Subject to the terms and conditions herein set forth, (a) the
Company agrees to issue and sell to each of the Underwriters, and each of the
Underwriters agrees, severally and not jointly, to purchase from the Company, at
a purchase price per share of $ , the number of Firm Shares set
forth opposite the name of such Underwriter in Schedule I hereto and (b) in the
event and to the extent that the Underwriters shall exercise the election to
purchase Optional Shares as provided below, the Company agrees to issue and sell
to each of the Underwriters, and each of the Underwriters agrees, severally and
not jointly, to purchase from the Company, at the purchase price per share set
forth in clause (a) of this Section 2, that portion of the number of Optional
Shares as to which such election shall have been exercised (to be adjusted by
you so as to eliminate fractional shares) determined by multiplying such number
of Optional Shares by a fraction, the numerator of which is the maximum number
of Optional Shares which such Underwriter is entitled to purchase as set forth
opposite the name of such Underwriter in Schedule I hereto and the denominator
of which is the maximum number of Optional Shares that all of the Underwriters
are entitled to purchase hereunder.
The Company hereby grants to the Underwriters the right to purchase at
their election up to Optional Shares, at the purchase price
per share set forth in the paragraph above, for the sole purpose of covering
sales of shares in excess of the number of Firm Shares. Any such election to
purchase Optional Shares may be exercised only by written notice from you to the
Company, given within a period of 30 calendar days after the date of this
Agreement, setting forth the aggregate number of Optional Shares to be purchased
and the date on which such Optional Shares are to be delivered, as determined by
you but in no event earlier than the First Time of Delivery (as defined in
Section 4 hereof) or, unless you and the Company otherwise agree in writing,
earlier than two or later than ten business days after the date of such notice.
3. Upon the authorization by you of the release of the Firm Shares, the
several Underwriters propose to offer the Firm Shares for sale upon the terms
and conditions set forth in the Prospectus.
4. (a) The Shares to be purchased by each Underwriter hereunder, in
definitive form, and in such authorized denominations and registered in such
names as Goldman, Sachs & Co. may request upon at least forty-eight hours' prior
notice to the Company, shall be delivered by or on behalf of the Company to
Goldman, Sachs & Co., through the facilities
-4-
<PAGE> 5
of the Depository Trust Company ("DTC"), for the account of such Underwriter,
against payment by or on behalf of such Underwriter of the purchase price
therefor by wire transfer of Federal (same-day) funds to the account specified
by the Company to Goldman, Sachs & Co. at least forty-eight hours in advance.
The Company will cause the certificates representing the Shares to be made
available for checking and packaging at least twenty-four hours prior to the
Time of Delivery (as defined below) with respect thereto at the office of DTC or
its designated custodian (the "Designated Office"). The time and date of such
delivery and payment shall be, with respect to the Firm Shares, 9:30 a.m., New
York City time, on November __, 1999 or such other time and date as Goldman,
Sachs & Co. and the Company may agree upon in writing, and, with respect to the
Optional Shares, 9:30 a.m., New York time, on the date specified by Goldman,
Sachs & Co. in the written notice given by Goldman, Sachs & Co. of the
Underwriters' election to purchase such Optional Shares, or such other time and
date as Goldman, Sachs & Co. and the Company may agree upon in writing. Such
time and date for delivery of the Firm Shares is herein called the "First Time
of Delivery", such time and date for delivery of the Optional Shares, if not the
First Time of Delivery, is herein called the "Second Time of Delivery", and each
such time and date for delivery is herein called a "Time of Delivery".
(b) The documents to be delivered at each Time of Delivery by
or on behalf of the parties hereto pursuant to Section 7 hereof, including the
cross receipt for the Shares and any additional documents requested by the
Underwriters pursuant to Section 7(l) hereof, will be delivered at the offices
of ______________________________ (the "Closing Location"), and the Shares will
be delivered at the Designated Office, all at such Time of Delivery. A meeting
will be held at the Closing Location at p.m., New York City time, on the
New York Business Day next preceding such Time of Delivery, at which meeting the
final drafts of the documents to be delivered pursuant to the preceding sentence
will be available for review by the parties hereto. For the purposes of this
Section 4, "New York Business Day" shall mean each Monday, Tuesday, Wednesday,
Thursday and Friday which is not a day on which banking institutions in New York
are generally authorized or obligated by law or executive order to close.
5. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by you and to file
such Prospectus pursuant to Rule 424(b) under the Act not later than the
Commission's close of business on the second business day following the
execution and delivery of this Agreement, or, if applicable, such earlier time
as may be required by Rule 430A(a)(3) under the Act; to make no further
amendment or any supplement to the Registration Statement or Prospectus which
shall be disapproved by you promptly after reasonable notice thereof; to advise
you, promptly after it receives notice thereof, of the time when any amendment
to the Registration Statement has been filed or becomes effective or any
supplement to the Prospectus or any amended Prospectus has been filed and to
furnish you with copies thereof; to advise you, promptly after it receives
notice thereof, of the issuance by the Commission of any stop order or of any
order preventing or suspending the use of any Preliminary Prospectus or
prospectus, of the suspension of the qualification of the Shares for offering or
sale in any jurisdiction, of the initiation or threatening of any proceeding for
any such purpose, or of any request by the Commission for the amending or
supplementing of the Registration Statement or Prospectus or for additional
information; and, in the event of the issuance of any stop order or of any order
preventing or suspending the use of any Preliminary Prospectus or prospectus or
suspending any such qualification, promptly to use its best efforts to obtain
the withdrawal of such order;
(b) Promptly from time to time to take such action as you may
reasonably request to qualify the Shares for offering and sale under the
securities laws of such jurisdictions as you may request and to comply with such
laws so as to permit the continuance of sales and dealings therein in such
jurisdictions for as long as may be necessary to complete the distribution of
the Shares, provided that in connection therewith the Company shall not be
required to qualify as a foreign corporation or to file a general consent to
service of process in any jurisdiction;
(c) Prior to 12:00 (Noon), New York City time, on the New York Business
Day next succeeding the date of this Agreement and from time to time, to furnish
the Underwriters with copies of the Prospectus in New York City in such
quantities as you may reasonably request, and, if the delivery of a prospectus
is required at any time and if at such time any event shall have occurred as a
result of which the Prospectus as then amended or supplemented would include an
untrue statement of a material fact or omit to state any material fact necessary
in order to make the statements therein, in the light of the circumstances under
which they were made when such Prospectus is delivered, not misleading, or, if
for any other reason it shall be necessary during such period to amend or
supplement the Prospectus in order to comply with the Act, to notify you and
upon your request to prepare and furnish without charge to each Underwriter and
to any dealer in securities as many copies as you may from time to time
reasonably request of an amended Prospectus or a supplement to the Prospectus
which will correct such statement or omission or effect such compliance, and in
case any Underwriter is required to deliver a prospectus in connection with
sales of any of the Shares at any time nine months or more after the time of
issue of the Prospectus, upon your request but at the expense of such
Underwriter, to prepare and deliver to such Underwriter as many copies as you
may request of an amended or supplemented Prospectus complying with Section
10(a)(3) of the Act;
-5-
<PAGE> 6
(d) To make generally available to its securityholders as soon as
practicable, but in any event not later than eighteen months after the effective
date of the Registration Statement (as defined in Rule 158(c) under the Act), an
earnings statement of the Company and its subsidiaries (which need not be
audited) complying with Section 11(a) of the Act and the rules and regulations
thereunder (including, at the option of the Company, Rule 158);
(e) During the period beginning from the date hereof and continuing to
and including the date 180 days after the date of the Prospectus, not to offer,
sell, contract to sell or otherwise dispose of, except as provided hereunder any
securities of the Company that are substantially similar to the Shares,
including but not limited to any securities that are convertible into or
exchangeable for, or that represent the right to receive, Stock or any such
substantially similar securities without your prior written consent (other than
(i) pursuant to options or purchase rights now outstanding or hereafter granted
under employee stock option plans or employee stock purchase plans existing on,
or upon the conversion or exchange of convertible or exchangeable securities
outstanding as of, the date of this Agreement) or (ii) in exchange for all of
the equity or substantially all of the equity or assets of a company in
connection with a merger or acquisition, provided that prior to any such
issuance the recipients of such securities shall have agreed with Goldman, Sachs
& Co. in writing to be bound by this provision for the remainder of the 180-day
period;
(f) To furnish to its stockholders as soon as practicable after the end
of each fiscal year an annual report (including a balance sheet and statements
of income, stockholders' equity and cash flows of the Company and its
consolidated subsidiaries certified by independent public accountants) and, as
soon as practicable after the end of each of the first three quarters of each
fiscal year (beginning with the fiscal quarter ending after the effective date
of the Registration Statement), to make available to its stockholders
consolidated summary financial information of the Company and its subsidiaries
for such quarter in reasonable detail;
(g) During a period of five years from the effective date of the
Registration Statement, to furnish to you copies of all reports or other
communications (financial or other) furnished to stockholders, and to deliver to
you (i) as soon as they are available, copies of any reports and financial
statements furnished to or filed with the Commission or any national securities
exchange on which any class of securities of the Company is listed; and (ii)
such additional information concerning the business and financial condition of
the Company as you may from time to time reasonably request (such financial
statements to be on a consolidated basis to the extent the accounts of the
Company and its subsidiaries are consolidated in reports furnished to its
stockholders generally or to the Commission);
(h) To use the net proceeds received by it from the sale of the Shares
pursuant to this Agreement in the manner specified in the Prospectus under the
caption "Use of Proceeds";
(i) To use its best efforts to list for quotation the Shares on the
National Association of Securities Dealers Automated Quotation National Market
System ("NASDAQ");
(j) To file with the Commission such information on Form 10-Q or Form
10-K as may be required by Rule 463 under the Act; and
(k) If the Company elects to rely upon Rule 462(b) to file a Rule
462(b) Registration Statement with the Commission in compliance with Rule 462(b)
by 10:00 P.M., Washington, D.C. time, on the date of this Agreement, and at the
time of filing either to pay to the Commission the filing fee for the Rule
462(b) Registration Statement or give irrevocable instructions for the payment
of such fee pursuant to Rule 111(b) under the Act.
(l) To place stop transfer orders on any Directed Shares that have
been sold to Participants subject to the three month restriction on sale,
transfer, assignment, pledge or hypothecation imposed by NASD Regulation, Inc.
under its Interpretative Material 2110-1 on free-riding and withholding to the
extent necessary to ensure compliance with the three month restrictions.
(m) To comply with all applicable securities and other applicable
laws, rules and regulations in each jurisdiction in which the Directed Shares
are offered in connection with the Directed Share Program.
6. The Company covenants and agrees with the several Underwriters that
the Company will pay or cause to be paid the following: (i) the fees,
disbursements and expenses of the Company's counsel and accountants in
connection with the registration of the Shares under the Act and all other
expenses in connection with the preparation, printing and filing of the
Registration Statement, any Preliminary Prospectus and the Prospectus and
amendments and supplements thereto and the mailing and delivering of copies
thereof to the Underwriters and dealers; (ii) the cost of printing or producing
any Agreement Among Underwriters, this Agreement, the Blue Sky Memorandum,
closing documents (including any compilations thereof) and any other documents
in connection with the offering, purchase, sale and delivery of the Shares;
(iii) all expenses in connection with the qualification of the Shares for
offering and sale under state securities laws as provided in Section 5(b)
hereof, including the fees and disbursements of counsel for the Underwriters in
connection with such qualification and in connection with the Blue Sky survey
(iv) all fees and expenses in connection with listing the
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Shares on NASDAQ; (v) the filing fees incident to, and the fees and
disbursements of counsel for the Underwriters in connection with, securing any
required review by the NASD of the terms of the sale of the Shares; (vi) the
cost of preparing stock certificates; (vii) the cost and charges of any transfer
agent or registrar; (viii) all fees and disbursements of counsel incurred by the
Underwriters in connection with the Directed Share Program and stamp duties,
similar taxes or duties or other taxes, if any, incurred by the Underwriters in
connection with the Directed Share Program; and (ix) all other costs and
expenses incident to the Company's performance of its obligations hereunder
which are not otherwise specifically provided for in this Section. It is
understood, however, that, except as provided in this Section, and Sections 8
and 11 hereof, the Underwriters will pay all of their own costs and expenses,
including the fees of their counsel, stock transfer taxes on resale of any of
the Shares by them, and any advertising expenses connected with any offers they
may make.
7. The obligations of the Underwriters hereunder, as to the Shares to
be delivered at each Time of Delivery, shall be subject, in their discretion, to
the condition that all representations and warranties and other statements of
the Company herein are, at and as of such Time of Delivery, true and correct,
the condition that the Company shall have performed all of its obligations
hereunder theretofore to be performed, and the following additional conditions:
(a) The Prospectus shall have been filed with the Commission pursuant
to Rule 424(b) within the applicable time period prescribed for such filing by
the rules and regulations under the Act and in accordance with Section 5(a)
hereof; if the Company has elected to rely upon Rule 462(b), the Rule 462(b)
Registration Statement shall have become effective by 10:00 P.M., Washington,
D.C. time, on the date of this Agreement; no stop order suspending the
effectiveness of the Registration Statement or any part thereof shall have been
issued and no proceeding for that purpose shall have been initiated or
threatened by the Commission; and all requests for additional information on the
part of the Commission shall have been complied with to your reasonable
satisfaction;
(b) Ropes & Gray, counsel for the Underwriters, shall have furnished to
you such written opinion or opinions (a draft of each such opinion is attached
as Annex II(a) hereto), dated such Time of Delivery, with respect to the matters
covered in paragraphs (i), (ii), (vii), (xi) and (xiii) of subsection (c) below
as well as such other related matters as you may reasonably request, and such
counsel shall have received such papers and information as they may reasonably
request to enable them to pass upon such matters;
(c) Morgan, Lewis & Bockius LLP, counsel for the Company, shall have
furnished to you their written opinion (a draft of such opinion is attached as
Annex II(b) hereto), dated such Time of Delivery, in form and substance
satisfactory to you, to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of
the state of Delaware, with the corporate power and authority
to own its properties and conduct its business as described in
the Prospectus;
(ii) The Company has an authorized capitalization as set forth
in the Prospectus under the caption "Description of Capital
Stock" and for "pro forma as adjusted" under the caption
"Capitalization," and all of the issued shares of capital
stock of the Company (including the Shares being delivered at
such Time of Delivery, but with respect to such Shares only
when issued and delivered by the Company pursuant to this
Agreement against payment therefor) have been duly and validly
authorized and issued and are fully paid and non-assessable;
and the Shares conform in all material respects to the
description of the Stock contained in the Prospectus under the
caption "Description of Capital Stock";
(iii) The Company has been duly qualified as a foreign
corporation for the transaction of business and is in good
standing under the laws of each other jurisdiction in which it
owns or leases properties or conducts any business so as to
require such qualification or is subject to no material
liability or disability by reason of failure to be so
qualified in any such jurisdiction (such counsel being
entitled to rely in respect of matters of fact upon
certificates of officers of the Company, provided that such
counsel shall state that they believe that both you and they
are justified in relying upon such certificates); and
provided, further, that such counsel shall provide copies of
such certificates to the Representatives;
(iv) Each subsidiary of the Company has been duly incorporated
and is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation; and all
of the issued shares of capital stock of each such subsidiary
have been duly and validly authorized and issued, are fully
paid and non-assessable, and (except for directors' qualifying
shares and except as otherwise set forth in the Prospectus)
are owned directly or indirectly by the Company, free and
clear of all adverse claims (such counsel being entitled to
rely in respect of matters of fact upon certificates of
officers of the Company or its subsidiaries, provided that
such counsel shall state that they believe that both you and
they are justified in relying upon such opinions and
certificates); and provided, further, that such counsel shall
provide copies of such certificates to the Representatives;
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<PAGE> 8
(v) Any real property and buildings held by the Company and
its subsidiaries under leases filed as exhibits to the
Registration Statement are held by them under valid,
subsisting and enforceable leases with such exceptions as are
not material and do not interfere to a material extent with
the use made and proposed to be made of such property and
buildings by the Company and its subsidiaries (in giving the
opinion in this clause, such counsel may state that no
examination of record titles for the purpose of such opinion
has been made, and that they are relying upon a general review
of the titles of the Company and its subsidiaries, upon
abstracts, reports and policies of title companies rendered or
issued at or subsequent to the time of acquisition of such
property by the Company or its subsidiaries, and, in respect
to matters of fact, upon certificates of officers of the
Company or its subsidiaries, provided that such counsel shall
state that they believe that both you and they are justified
in relying upon such opinions, abstracts, reports, policies
and certificates); and provided, further, that such counsel
shall provide copies of such abstracts, reports, policies and
certificates to the Representatives;
(vi) To such counsel's knowledge and other than as set forth
in the Prospectus, there are no legal or governmental
proceedings pending to which the Company or any of its
subsidiaries is a party or of which any property of the
Company or any of its subsidiaries is the subject which, if
determined adversely to the Company or any of its
subsidiaries, would individually or in the aggregate have a
material adverse effect on the current or future consolidated
financial position, stockholders' equity or results of
operations of the Company and its subsidiaries, taken as a
whole; and, to such counsel's knowledge, no such proceedings
are threatened or contemplated by governmental authorities or
threatened by others;
(vii) This Agreement has been duly authorized, executed and
delivered by the Company;
(viii) The issue and sale of the Shares being delivered at
such Time of Delivery by the Company and the compliance by the
Company with all of the provisions of this Agreement and the
consummation of the transactions herein contemplated will not
result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any Specified
Document known to such counsel to which the Company or any of
its subsidiaries is a party or by which the Company or any of
its subsidiaries is bound or to which any of the property or
assets of the Company or any of its subsidiaries is subject,
nor will such action result in any violation of the provisions
of the Certificate of Incorporation or By-laws of the Company
or any statute or any order, rule or regulation known to such
counsel of any court or governmental agency or body having
jurisdiction over the Company or any of its subsidiaries or
any of their properties;
(ix) To such counsel's knowledge, no consent, approval,
authorization, order, registration or qualification of or with
any such court or governmental agency or body is required for
the issue and sale of the Shares or the consummation by the
Company of the transactions contemplated by this Agreement,
except the registration under the Act of the Shares, and such
consents, approvals, authorizations, registrations or
qualifications as may be required under state securities or
Blue Sky laws (as to which such counsel need express no
opinion) and under the bylaws, rules and regulations of the
NASD (as to which such counsel need express no opinion) in
connection with the purchase and distribution of the Shares by
the Underwriters;
(x) Neither the Company nor any of its subsidiaries is in
violation of its Certificate of Incorporation or By-laws or to
such counsel's knowledge, in default in the performance or
observance of any obligation, agreement, covenant or condition
contained in any Specified Document to which it is a party or
by which it or any of its properties may be bound;
(xi) The statements set forth in the Prospectus under the
caption "Description of Capital Stock", insofar as they
purport to constitute a summary of the terms of the Stock and
under the caption "Underwriting", insofar as they purport to
describe the provisions of the laws and documents referred to
therein, are accurate, complete and fair;
(xii) The Company is not an "investment company", as such term
is defined in the Investment Company Act;
(xiii) The Registration Statement and the Prospectus and any
further amendments and supplements thereto made by the Company
prior to such Time of Delivery (other than the financial
statements, the notes thereto and related schedules and other
financial data therein, as to which such counsel need express
no opinion) comply as to form in all material respects with
the requirements of the Act and the rules and regulations
thereunder. In addition, such counsel shall state that, during
the course of preparation of the Registration Statement and
the Prospectus, such counsel has participated in conferences
with you, officers
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<PAGE> 9
and representatives of the Company and representatives of the
independent certified public accountants of the Company, at
which conferences the contents of the Registration Statement
and the Prospectus and related matters were discussed, and,
although such counsel does not pass upon and does not assume
any responsibility for the accuracy, completeness or fairness
of the statements contained in the Registration Statement or
the Prospectus (except as set forth in numbered paragraph (xi)
of this Section 7(c)), on the basis of the foregoing, no facts
shall have come to such counsel's attention which cause such
counsel to believe that the Registration Statement at the
effective date of the Registration Statement and at such Time
of Delivery contained or contains an untrue statement of a
material fact or omitted or omits to state a material fact
required to be stated therein or necessary to make the
statements therein not misleading or that the Prospectus on
the date of the Underwriting Agreement and at such Time of
Delivery included or includes any untrue statement of a
material fact or omitted or omits to state a material fact
necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading;
provided, however, that such counsel need express no comment
with respect to the financial statements, the notes thereto,
related schedules or any other financial information contained
in the Registration Statement; and they do not know of any
contracts or other documents of a character required to be
filed as an exhibit to the Registration Statement or required
to be described in the Registration Statement or the
Prospectus which are not filed or described as required.
(d) Morgan, Lewis & Bockius LLP, Brussels, Belgium shall have furnished
to you their written opinion, dated such Time of Delivery, in form and substance
satisfactory to you, with respect to the matters set forth in clauses (iv), (vi)
and (x) of the foregoing paragraph (c), relating to FreeMarkets Online, SA/NV, a
Belgian corporation;
(e) On the date of the Prospectus at a time prior to the execution of
this Agreement, at 9:30 a.m., New York City time, on the effective date of any
post-effective amendment to the Registration Statement filed subsequent to the
date of this Agreement and also at each Time of Delivery, PricewaterhouseCoopers
LLP shall have furnished to you a letter or letters, dated the respective dates
of delivery thereof, in form and substance satisfactory to you, to the effect
set forth in Annex I hereto (the executed copy of the letter delivered prior to
the execution of this Agreement is attached as Annex I(a) hereto and a draft of
the form of letter to be delivered on the effective date of any post-effective
amendment to the Registration Statement and as of each Time of Delivery is
attached as Annex I(b) hereto);
(f) (i) Neither the Company nor any of its subsidiaries shall have
sustained since the date of the latest audited financial statements included in
the Prospectus any loss or interference with its business from fire, explosion,
flood or other calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, otherwise than as set
forth or contemplated in the Prospectus, and (ii) since the respective dates as
of which information is given in the Prospectus there shall not have been any
change in the capital stock (other than issuance of stock upon the exercise of
options outstanding as of the date of the Prospectus) or long-term debt of the
Company or any of its subsidiaries or any change, or any development involving a
prospective change, in or affecting the general affairs, management, financial
position, stockholders' equity or results of operations of the Company and its
subsidiaries, otherwise than as set forth or contemplated in the Prospectus, the
effect of which, in any such case described in clause (i) or (ii), is in the
judgment of the Representatives so material and adverse as to make it
impracticable or inadvisable to proceed with the public offering or the delivery
of the Shares being delivered at such Time of Delivery on the terms and in the
manner contemplated in the Prospectus;
(g) On or after the date hereof (i) no downgrading shall have occurred
in the rating accorded the Company's debt securities or preferred stock by any
"nationally recognized statistical rating organization", as that term is defined
by the Commission for purposes of Rule 436(g)(2) under the Act, and (ii) no such
organization shall have publicly announced that it has under surveillance or
review, with possible negative implications, its rating of any of the Company's
debt securities or preferred stock;
(h) On or after the date hereof there shall not have occurred any of
the following: (i) a suspension or material limitation in trading in securities
generally on NASDAQ; (ii) a suspension or material limitation in trading in the
Company's securities on NASDAQ; (iii) a general moratorium on commercial banking
activities declared by either federal or New York State or Commonwealth of
Pennsylvania authorities; or (iv) the outbreak or escalation of hostilities
involving the United States or the declaration by the United States of a
national emergency or war, if the effect of any such event specified in this
clause (iv) in the judgment of the Representatives makes it impracticable or
inadvisable to proceed with the public offering or the delivery of the Shares
being delivered at such Time of Delivery on the terms and in the manner
contemplated in the Prospectus;
(i) The Shares to be sold at such Time of Delivery shall have been duly
listed for quotation on NASDAQ;
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(j) The Company has obtained and delivered to the Underwriters
executed copies of an agreement substantially to the effect set forth in
Subsection 5(e) hereof in form and substance satisfactory to you from (i) each
stockholder of the Company holding at least 0.25% of the common stock of the
Company as of the date hereof on an as converted and fully diluted basis, and
(ii) in aggregate, stockholders of the Company holding at least 90% of the
common stock of the Company as of the date hereof on an as converted and fully
diluted basis;
(k) The Company shall have complied with the provisions of Section
5(c) hereof with respect to the furnishing of prospectuses on the New York
Business Day next succeeding the date of this Agreement; and
(l) The Company shall have furnished or caused to be furnished to you
at such Time of Delivery certificates of officers of the Company satisfactory to
you as to the accuracy of the representations and warranties of the Company
herein at and as of such Time of Delivery, as to the performance by the Company
of all of its obligations hereunder to be performed at or prior to such Time of
Delivery, as to the matters set forth in subsections (a) and (e) of this Section
and as to such other matters as you may reasonably request.
8. (a) The Company will indemnify and hold harmless each Underwriter
against any losses, claims, damages or liabilities, joint or several, to which
such Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact (x) in the case of the Registration Statement, that is required to
be stated therein or necessary to make the statements therein not misleading,
and (y) in the case of the Preliminary Prospectus and Prospectus, that is
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading and will reimburse each Underwriter for any
legal or other expenses reasonably incurred by such Underwriter in connection
with investigating or defending any such action or claim as such expenses are
incurred; provided, however, that the Company shall not be liable in any such
case to the extent that any such loss, claim, damage or liability arises out of
or is based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in any Preliminary Prospectus, the Registration Statement
or the Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by any Underwriter
through Goldman, Sachs & Co. expressly for use therein.
(b) Each Underwriter will indemnify and hold harmless the Company
against any losses, claims, damages or liabilities to which the Company may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon an untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus, the Registration Statement or the
Prospectus, or any amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
in each case to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was made in any
Preliminary Prospectus, the Registration Statement or the Prospectus or any such
amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by such Underwriter through Goldman, Sachs
& Co. expressly for use therein; and will reimburse the Company for any legal or
other expenses reasonably incurred by the Company in connection with
investigating or defending any such action or claim as such expenses are
incurred.
(c) Promptly after receipt by an indemnified party under subsection (a)
or (b) above of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party under such subsection, notify the indemnifying party in writing of the
commencement thereof; but the omission so to notify the indemnifying party shall
not relieve it from any liability which it may have to any indemnified party
otherwise than under such subsection. In case any such action shall be brought
against any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
therein and, to the extent that it shall wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party (who shall not, except with the
consent of the indemnified party, be counsel to the indemnifying party), and,
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party shall not be
liable to such indemnified party under such subsection for any legal expenses of
other counsel or any other expenses, in each case subsequently incurred by such
indemnified party, in connection with the defense thereof other than reasonable
costs of investigation. No indemnifying party shall, without the written consent
of the indemnified party, effect the settlement or compromise of, or consent to
the entry of any judgment with respect to, any pending or threatened action or
claim in respect of which indemnification or contribution may be sought
hereunder (whether or not the indemnified party is an actual or potential party
to such action or claim) unless such settlement, compromise or judgment (i)
includes an unconditional release of the
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<PAGE> 11
indemnified party from all liability arising out of such action or claim and
(ii) does not include a statement as to or an admission of fault, culpability or
a failure to act, by or on behalf of any indemnified party.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities (or
actions in respect thereof) in such proportion as is appropriate to reflect the
relative benefits received by the Company on the one hand and the Underwriters
on the other from the offering of the Shares. If, however, the allocation
provided by the immediately preceding sentence is not permitted by applicable
law or if the indemnified party failed to give the notice required under
subsection (c) above, then each indemnifying party shall contribute to such
amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company on the one hand and the Underwriters on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities (or actions in respect thereof), as well as any
other relevant equitable considerations. The relative benefits received by the
Company on the one hand and the Underwriters on the other shall be deemed to be
in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company bear to the total underwriting
discounts and commissions received by the Underwriters, in each case as set
forth in the table on the cover page of the Prospectus. The relative fault shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company on the one hand
or the Underwriters on the other and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission. The Company and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this subsection (d) were determined by
pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take account
of the equitable considerations referred to above in this subsection (d). The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages or liabilities (or actions in respect thereof) referred to above
in this subsection (d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
subsection (d), no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Shares underwritten
by it and distributed to the public were offered to the public exceeds the
amount of any damages which such Underwriter has otherwise been required to pay
by reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations in this subsection (d) to contribute are several in proportion to
their respective underwriting obligations and not joint.
(e) (i) The Company agrees to indemnify and hold harmless Morgan
Stanley and its affiliates and each person, if any, who controls Morgan Stanley
or its affiliates within the meaning of either Section 15 of the Securities Act
or Section 20 of the Exchange Act ("Morgan Stanley Entities"), from and against
any and all losses, claims, damages and liabilities (including, without
limitation, any legal or other expenses reasonably incurred in connection with
defending or investigating any such action or claim) (x) caused by any untrue
statement or alleged untrue statement of a material fact contained in any
material prepared by or with the consent of the Company for distribution to
Participants in connection with the Directed Share Program, or caused by any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading; (y)
caused by the failure of any Participant to pay for and accept delivery of
Directed Shares that the Participant has agreed to purchase; or (z) related to,
arising out of, or in connection with the Directed Share Program other than
losses, claims, damages or liabilities (or expenses relating thereto) that are
finally judicially determined to have resulted from the bad faith or gross
negligence of Morgan Stanley Entities.
(ii) In case any proceeding (including any governmental
investigation) shall be instituted involving any Morgan Stanley Entity in
respect of which indemnity may be sought pursuant to Section 8(e)(i), the Morgan
Stanley Entity seeking indemnity shall promptly notify the Company in writing
and the Company, upon request of the Morgan Stanley Entity, shall retain counsel
reasonably satisfactory to the Morgan Stanley Entity to represent the Morgan
Stanley Entity and any other the Company may designate in such proceeding and
shall pay the fees and disbursements of such counsel related to such proceeding.
In any such proceeding, any Morgan Stanley Entity shall have the right to retain
its own counsel, but the fees and expenses of such counsel shall be at the
expense of such Morgan Stanley Entity unless (x) the Company shall have agreed
to the retention of such counsel or (y) the named parties to any such proceeding
(including any impleaded parties) include both the Company and the Morgan
Stanley Entity and representation of both parties by the same counsel would be
inappropriate due to actual or potential differing interests between them. The
Company shall not, in
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respect of the legal expenses of the Morgan Stanley Entities in connection with
any proceeding or related proceedings the same jurisdiction, be liable for the
fees and expenses of more than one separate firm (in addition to any local
counsel) for all Morgan Stanley Entities. Any such firm for the Morgan Stanley
Entities shall be designated in writing by Morgan Stanley. The Company shall not
be liable for any settlement of any proceeding effected without its written
consent, but if settled with such consent or if there be a final judgment for
the plaintiff, the Company agrees to indemnify the Morgan Stanley Entities from
and against any loss or liability by reason of such settlement or judgment.
Notwithstanding the foregoing sentence, if at any time a Morgan Stanley Entity
shall have requested the Company to reimburse it for fees and expenses of
counsel as contemplated by the second and third sentences of this paragraph, the
Company agrees that it shall be liable for any settlement of any proceeding
effected without its written consent if (x) such settlement is entered into more
than 30 days after receipt by the Company of the aforesaid request and (y) the
Company shall not have reimbursed the Morgan Stanley Entity in accordance with
such request prior to the date of such settlement. The Company shall not,
without the prior written consent of Morgan Stanley, effect any settlement of
any pending or threatened proceeding in respect of which any Morgan Stanley
Entity is or could have been a party and indemnity could have been sought
hereunder by such Morgan Stanley Entity, unless such settlement includes an
unconditional release of the Morgan Stanley Entities from all liability on
claims that are the subject matter of such proceeding.
(iii) To the extent the indemnification provided for in
Section 8(e)(i) is unavailable to a Morgan Stanley Entity or insufficient in
respect of any losses, claims, damages or liabilities referred to therein, then
the Company, in lieu of indemnifying the Morgan Stanley Entity thereunder, shall
contribute to the amount paid or payable by the Morgan Stanley Entity as a
result of such losses, claims, damages or liabilities (x) in such proportion as
is appropriate to reflect the relative benefits received by the Company on the
one hand and the Morgan Stanley Entities on the other hand from the offering of
the Directed Shares or (y) if the allocation provided by clause 8(e)(iii)(x)
above is not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause 8(e)(iii)(x)
above but also the relative fault of the Company on the one hand and of the
Morgan Stanley Entities on the other hand in connection with the statements or
omissions that resulted in such losses, claims, damages or liabilities, as well
as any other relevant equitable considerations. The relative benefits received
by the Company on the one hand and of the Morgan Stanley Entities on the other
hand in connection with the offering of the Directed Shares shall be deemed to
be in the same respective proportions as the net proceeds from the offering of
the Directed Shares (before deducting expenses) and the total underwriting
discounts and commissions received by the Morgan Stanley Entities for the
Directed Shares, bear to the aggregate purchase price of the Shares. If the
loss, claim, damage or liability is caused by an untrue or alleged untrue
statement of a material fact, the relative fault of the Company on the one hand
and the Morgan Stanley Entities on the other hand shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
or the omission or alleged omission relates to information supplied by the
Company or by the Morgan Stanley Entities and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
(iv) The Company and the Morgan Stanley Entities agree that it
would not be just or equitable if contribution pursuant to this Section 8(e)
were determined by pro rata allocation (even if the Morgan Stanley Entities were
treated as one entity for such purpose) or by any other method of allocation
that does not take account of the equitable considerations referred to in
Section 8(e)(iii). The amount paid or payable by the Morgan Stanley Entities as
a result of the losses, claims, damages and liabilities referred to in the
immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably incurred by
the Morgan Stanley Entities in connection with investigating or defending any
such action or claim. Notwithstanding the provisions of this Section 8(e), no
Morgan Stanley Entity shall be required to contribute any amount in excess of
the amount by which the total price at which the Directed Shares distributed to
the public were offered to the public exceeds the amount of any damages that
such Morgan Stanley Entity has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission. The remedies
provided for in this Section 8(e) are not exclusive and shall not limit any
rights or remedies which may otherwise be available to any Morgan Stanley Entity
at law or in equity.
(v) The indemnity and contribution provisions contained in
this Section 8(e) shall remain operative and in full force and effect regardless
of (x) any termination of this Agreement, (y) any investigation made by or on
behalf of any Morgan Stanley Entity or the Company, its officers or directors or
any person controlling the Company and (z) acceptance of and payment for any of
the Directed Shares.
(f) The obligations of the Company under this Section 8 shall be in
addition to any liability which the Company may otherwise have and shall extend,
upon the same terms and conditions, to each person, if any, who controls any
Underwriter within the meaning of the Act; and the obligations of the
Underwriters under this Section 8 shall be in addition to any liability which
the respective Underwriters may otherwise have and shall extend, upon the same
terms and conditions, to each officer and director of the Company and to each
person, if any, who controls the Company within the meaning of the Act.
-12-
<PAGE> 13
9. (a) If any Underwriter shall default in its obligation to purchase
the Shares which it has agreed to purchase hereunder at a Time of Delivery, you
may in your discretion arrange for you or another party or other parties to
purchase such Shares on the terms contained herein. If within thirty-six hours
after such default by any Underwriter you do not arrange for the purchase of
such Shares, then the Company shall be entitled to a further period of
thirty-six hours within which to procure another party or other parties
satisfactory to you to purchase such Shares on such terms. In the event that,
within the respective prescribed periods, you notify the Company that you have
so arranged for the purchase of such Shares, or the Company notifies you that it
has so arranged for the purchase of such Shares, you or the Company shall have
the right to postpone such Time of Delivery for a period of not more than seven
days, in order to effect whatever changes may thereby be made necessary in the
Registration Statement or the Prospectus, or in any other documents or
arrangements, and the Company agrees to file promptly any amendments to the
Registration Statement or the Prospectus which in your opinion may thereby be
made necessary. The term "Underwriter" as used in this Agreement shall include
any person substituted under this Section with like effect as if such person had
originally been a party to this Agreement with respect to such Shares.
(b) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company as
provided in subsection (a) above, the aggregate number of such Shares which
remains unpurchased does not exceed one-eleventh of the aggregate number of all
the Shares to be purchased at such Time of Delivery, then the Company shall have
the right to require each non-defaulting Underwriter to purchase the number of
shares which such Underwriter agreed to purchase hereunder at such Time of
Delivery and, in addition, to require each non-defaulting Underwriter to
purchase its pro rata share (based on the number of Shares which such
Underwriter agreed to purchase hereunder) of the Shares of such defaulting
Underwriter or Underwriters for which such arrangements have not been made; but
nothing herein shall relieve a defaulting Underwriter from liability for its
default.
(c) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company as
provided in subsection (a) above, the aggregate number of such Shares which
remains unpurchased exceeds one-eleventh of the aggregate number of all the
Shares to be purchased at such Time of Delivery, or if the Company shall not
exercise the right described in subsection (b) above to require non-defaulting
Underwriters to purchase Shares of a defaulting Underwriter or Underwriters,
then this Agreement (or, with respect to the Second Time of Delivery, the
obligations of the Underwriters to purchase and of the Company to sell the
Optional Shares)) shall thereupon terminate, without liability on the part of
any non-defaulting Underwriter or the Company, except for the expenses to be
borne by the Company and the Underwriters as provided in Section 6 hereof and
the indemnity and contribution agreements in Section 8 hereof; but nothing
herein shall relieve a defaulting Underwriter from liability for its default.
10. The respective indemnities, agreements, representations, warranties
and other statements of the Company and the several Underwriters, as set forth
in this Agreement or made by or on behalf of them, respectively, pursuant to
this Agreement, shall remain in full force and effect, regardless of any
investigation (or any statement as to the results thereof) made by or on behalf
of any Underwriter or any controlling person of any Underwriter, or the Company,
or any officer or director or controlling person of the Company, and shall
survive delivery of and payment for the Shares.
11. If this Agreement shall be terminated pursuant to Section 9 hereof,
the Company shall not then be under any liability to any Underwriter except as
provided in Sections 6 and 8 hereof; but, if for any other reason, any Shares
are not delivered by or on behalf of the Company as provided herein, the Company
will reimburse the Underwriters through you for all out-of-pocket expenses
approved in writing by you, including fees and disbursements of counsel,
reasonably incurred by the Underwriters in making preparations for the purchase,
sale and delivery of the Shares not so delivered, but the Company shall then be
under no further liability to any Underwriter except as provided in Sections 6
and 8 hereof.
12. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you jointly or by Goldman, Sachs & Co. on behalf of you as the
representatives.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or
facsimile transmission to you as the representatives in care of Goldman, Sachs &
Co., 32 Old Slip, 21st Floor, New York, New York 10005, Attention: Registration
Department; and if to the Company shall be delivered or sent by mail to the
address of the Company set forth in the Registration Statement, Attention:
Secretary; provided, however, that any notice to an Underwriter pursuant to
Section 8(c) hereof shall be delivered or sent by mail, telex or facsimile
transmission to such Underwriter at its address set forth in its Underwriters'
Questionnaire, or telex constituting such Questionnaire, which address will be
supplied to the Company by you upon request. Any such statements, requests,
notices or agreements shall take effect upon receipt thereof.
-13-
<PAGE> 14
13. This Agreement shall be binding upon, and inure solely to the
benefit of, the Underwriters, the Company and, to the extent provided in
Sections 8 and 10 hereof, the officers and directors of the Company and each
person who controls the Company or any Underwriter, and their respective heirs,
executors, administrators, successors and assigns, and no other person shall
acquire or have any right under or by virtue of this Agreement. No purchaser of
any of the Shares from any Underwriter shall be deemed a successor or assign by
reason merely of such purchase.
14. Time shall be of the essence of this Agreement. As used herein, the
term "business day" (other than a New York Business Day, which is separately
defined herein) shall mean any day when the Commission's office in Washington,
D.C. is open for business.
15. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK.
16. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the same
instrument.
-14-
<PAGE> 15
If the foregoing is in accordance with your understanding, please sign
and return to us seven counterparts hereof, and upon the acceptance hereof by
you, on behalf of each of the Underwriters, this letter and such acceptance
hereof shall constitute a binding agreement between each of the Underwriters and
the Company. It is understood that your acceptance of this letter on behalf of
each of the Underwriters is pursuant to the authority set forth in a form of
Agreement among Underwriters, the form of which shall be submitted to the
Company for examination upon request, but without warranty on your part as to
the authority of the signers thereof.
Very truly yours,
FreeMarkets, Inc.
By: ___________________________
Name:
Title:
Accepted as of the date hereof:
Goldman, Sachs & Co.
Morgan Stanley & Co. Incorporated
Donaldson, Lufkin & Jenrette Securities Corporation
Wit Capital Corporation
By:_______________________________________________
(Goldman, Sachs & Co.)
On behalf of each of the Underwriters
<PAGE> 16
SCHEDULE I
<TABLE>
<CAPTION>
NUMBER OF OPTIONAL
SHARES TO BE
TOTAL NUMBER OF PURCHASED IF
FIRM SHARES MAXIMUM OPTION
UNDERWRITER TO BE PURCHASED EXERCISED
----------- --------------- ---------
<S> <C> <C>
Goldman, Sachs & Co.
Morgan Stanley & Co. Incorporated
Donaldson Lufkin & Jenrette Securities Corporation
Wit Capital Corporation
[NAMES OF OTHER UNDERWRITERS].....................................
Total
</TABLE>
<PAGE> 17
ANNEX I
Pursuant to Section 7(d) of the Underwriting Agreement, the accountants
shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants with respect to
the Company and its subsidiaries within the meaning of the Act and the
applicable published rules and regulations thereunder;
(ii) In their opinion, the financial statements and any supplementary
financial information and schedules (and, if applicable, financial
forecasts and/or pro forma financial information) examined by them and
included in the Prospectus or the Registration Statement comply as to
form in all material respects with the applicable accounting
requirements of the Act and the related published rules and regulations
thereunder; and, if applicable, they have made a review in accordance
with standards established by the American Institute of Certified
Public Accountants of the unaudited consolidated interim financial
statements, selected financial data, pro forma financial information,
financial forecasts and/or condensed financial statements derived from
audited financial statements of the Company for the periods specified
in such letter, as indicated in their reports thereon, copies of which
have been separately furnished to the representatives of the
Underwriters (the "Representatives") and are attached hereto;
(iii) They have made a review in accordance with standards established
by the American Institute of Certified Public Accountants of the
unaudited condensed consolidated statements of income, consolidated
balance sheets and consolidated statements of cash flows included in
the Prospectus as indicated in their reports thereon copies of which
have been separately furnished to the Representatives and are attached
hereto and on the basis of specified procedures including inquiries of
officials of the Company who have responsibility for financial and
accounting matters regarding whether the unaudited condensed
consolidated financial statements referred to in paragraph (vi)(A)(i)
below comply as to form in all material respects with the applicable
accounting requirements of the Act and the related published rules and
regulations, nothing came to their attention that cause them to believe
that the unaudited condensed consolidated financial statements do not
comply as to form in all material respects with the applicable
accounting requirements of the Act and the related published rules and
regulations;
(iv) The unaudited selected financial information with respect to the
consolidated results of operations and financial position of the
Company for the five most recent fiscal years included in the
Prospectus agrees with the corresponding amounts (after restatements
where applicable) in the audited consolidated financial statements for
such five fiscal years which were included or incorporated by reference
in the Company's Annual Reports on Form 10-K for such fiscal years;
(v) They have compared the information in the Prospectus under selected
captions with the disclosure requirements of Regulation S-K and on the
basis of limited procedures specified in such letter nothing came to
their attention as a result of the foregoing procedures that caused
them to believe that this information does not conform in all material
respects with the disclosure requirements of Items 301, 302, 402 and
503(d), respectively, of Regulation S-K;
(vi) On the basis of limited procedures, not constituting an
examination in accordance with generally accepted auditing standards,
consisting of a reading of the unaudited financial statements and other
information referred to below, a reading of the latest available
interim financial statements of the Company and its subsidiaries,
inspection of the minute books of the Company and its subsidiaries
since the date of the latest audited financial statements included in
the Prospectus, inquiries of officials of the Company and its
subsidiaries responsible for
-1-
<PAGE> 18
financial and accounting matters and such other inquiries and
procedures as may be specified in such letter, nothing came to their
attention that caused them to believe that:
(A) (i) the unaudited consolidated statements of income,
consolidated balance sheets and consolidated statements of cash flows
included in the Prospectus do not comply as to form in all material
respects with the applicable accounting requirements of the Act and the
related published rules and regulations, or (ii) any material
modifications should be made to the unaudited condensed consolidated
statements of income, consolidated balance sheets and consolidated
statements of cash flows included in the Prospectus for them to be in
conformity with generally accepted accounting principles;
(B) any other unaudited income statement data and balance
sheet items included in the Prospectus do not agree with the
corresponding items in the unaudited consolidated financial statements
from which such data and items were derived, and any such unaudited
data and items were not determined on a basis substantially consistent
with the basis for the corresponding amounts in the audited
consolidated financial statements included in the Prospectus;
(C) the unaudited financial statements which were not included
in the Prospectus but from which were derived any unaudited condensed
financial statements referred to in clause (A) and any unaudited income
statement data and balance sheet items included in the Prospectus and
referred to in clause (B) were not determined on a basis substantially
consistent with the basis for the audited consolidated financial
statements included in the Prospectus;
(D) any unaudited pro forma consolidated condensed financial
statements included in the Prospectus do not comply as to form in all
material respects with the applicable accounting requirements of the
Act and the published rules and regulations thereunder or the pro forma
adjustments have not been properly applied to the historical amounts in
the compilation of those statements;
(E) as of a specified date not more than five days prior to
the date of such letter, there have been any changes in the
consolidated capital stock (other than issuances of capital stock upon
exercise of options and stock appreciation rights, upon earn-outs of
performance shares and upon conversions of convertible securities, in
each case which were outstanding on the date of the latest financial
statements included in the Prospectus) or any increase in the
consolidated long-term debt of the Company and its subsidiaries, or any
decreases in consolidated net current assets or stockholders' equity or
other items specified by the Representatives, or any increases in any
items specified by the Representatives, in each case as compared with
amounts shown in the latest balance sheet included in the Prospectus,
except in each case for changes, increases or decreases which the
Prospectus discloses have occurred or may occur or which are described
in such letter; and
(F) for the period from the date of the latest financial
statements included in the Prospectus to the specified date referred to
in clause (E) there were any decreases in consolidated net revenues or
operating profit or the total or per share amounts of consolidated net
income or other items specified by the Representatives, or any
increases in any items specified by the Representatives, in each case
as compared with the comparable period of the preceding year and with
any other period of corresponding length specified by the
Representatives, except in each case for decreases or increases which
the Prospectus discloses have occurred or may occur or which are
described in such letter; and
(vii) In addition to the examination referred to in their report(s)
included in the Prospectus and the limited procedures, inspection of
minute books, inquiries and other procedures referred to in paragraphs
(iii) and (vi) above, they have carried out certain specified
procedures, not constituting an examination in accordance with
generally accepted auditing standards, with respect to certain amounts,
percentages and financial information specified by the Representatives,
which are derived from the general accounting records of the
-2-
<PAGE> 19
Company and its subsidiaries, which appear in the Prospectus, or in
Part II of, or in exhibits and schedules to, the Registration Statement
specified by the Representatives, and have compared certain of such
amounts, percentages and financial information with the accounting
records of the Company and its subsidiaries and have found them to be
in agreement.
-3-
<PAGE> 1
Exhibit 5.1
October 15, 1999
FreeMarkets, Inc.
210 Sixth Avenue, 22nd floor
One Oliver Plaza
Pittsburgh, PA 15222
Re: Registration Statement on Form S-1
File No. 333-86755
Ladies and Gentlemen:
We have acted as counsel to FreeMarkets, Inc., a Delaware corporation (the
"Company"), in connection with the Registration Statement on Form S-1, File No.
333-86755 (the "Registration Statement"), filed by the Company with the
Securities and Exchange Commission pursuant to the Securities Act of 1933, as
amended, relating to the public offering of an aggregate of 4,025,000 shares
(the "Company Shares") of the Company's Common Stock, par value $.01 per share
("Common Stock"), to be sold by the Company to the underwriters for whom
Goldman, Sachs & Company, Morgan Stanley Dean Witter, Donaldson, Lufkin &
Jenrette Securities Corporation, and Wit Capital Corporation are acting as
representatives (the "Underwriters"), of which up to 525,000 shares are shares
of Common Stock which the underwriters will have an option to purchase from the
Company solely for the purpose of covering over-allotments.
We are familiar with the Registration Statement. We have reviewed the Company's
Certificate of Incorporation and Bylaws, each as amended to date. We have also
examined such other public and corporate documents, certificates, instruments
and corporate records, and such questions of law, as we have deemed necessary
for purposes of expressing an opinion on the matters hereinafter set forth. In
all examinations of documents, instruments and other papers, we have assumed the
genuineness of all signatures on original and certified documents and the
conformity to original and certified documents of all copies submitted to us as
conformed, photostatic or other copies.
<PAGE> 2
FreeMarkets, Inc.
October 15, 1999
Page Two
On the basis of the foregoing, we are of the opinion that the Company Shares,
when issued and sold in accordance with the plan of distribution set forth in
the Registration Statement, will be validly issued, fully paid and
non-assessable.
We consent to the filing of this opinion as Exhibit 5.1 to the Registration
Statement and to the use of our name in the Prospectus forming a part thereof
under the caption "Legal Matters."
Yours truly,
/s/ Morgan, Lewis & Bockius LLP
<PAGE> 1
Exhibit 10.1(a)
INFORMATION DENOTED BY [*] HEREIN HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT. THIS INFORMATION HAS BEEN FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.
GENERAL MOTORS CORPORATION
TRANSACTION AGREEMENT
THIS TRANSACTION AGREEMENT (Transaction Agreement) is made to be
effective as of the 8th day of June, 1998 (Effective Date) by and between
General Motors Corporation, with offices at 100 Renaissance Center, Detroit,
Michigan 48243 and FreeMarkets OnLine, Inc., with offices at 130 Seventh Street,
Suite 500, Pittsburgh, Pennsylvania 15222. General Motors Corporation and
FreeMarkets OnLine, Inc. are referred herein individually as a "Party" and
collectively as the "Parties."
Terms used in this Transaction Agreement with initial capital letters
are defined in Exhibit A of this Transaction Agreement or herein or in the other
Agreements, as more fully set forth in Section 17.3 herein.
BACKGROUND
The Parties have entered into the Framework Agreement governing their
overall relationship regarding the provision to Customer by Supplier of Products
and Services. The Parties have also entered into a Software Licensing Agreement
and a Consulting Services Agreement, the terms of which are incorporated into
and made a part of the Framework Agreement. Customer wishes to be provided with,
and Supplier wishes to provide, access to a global online bidding system to be
used by Customer and associated consulting services including training, CBE
management services, technical operations services, call center services and
OnLine Market Making(TM) consulting services. This Transaction Agreement is
intended to address the specific understanding of the parties related to the
Project. The Parties intend that upon full execution of this Transaction
Agreement, the terms hereof shall be incorporated into and made a part of the
Agreements. The terms of this Transaction Agreement are intended to supplement
the Framework Agreement, the Software Licensing Agreement and the Consulting
Services Agreement by defining and clarifying the Parties' rights and
obligations with respect to the licensing by Supplier of Licensed Software to
Customer and the provision by Supplier to Customer of the Services described
therein.
THE AGREEMENT
1. SCOPE OF PROJECT
1.1 GENERAL. Subject to the terms and conditions of this Transaction
Agreement, Supplier agrees to supply, and Customer agrees to license, access to
Supplier's online bidding system and use of Supplier's BidWare(R) Software, and
purchase associated services to be used by Customer's purchasing department in
[*****] to enable Supplier and Certified Buyers to conduct CBEs
<PAGE> 2
among selected Qualified Bidders for procurement of goods and services for
Customer. The services to be provided by Supplier shall include training of
Certified Buyers and Qualified Bidders, CBE Management services, Technical
Operations services, Call Center services and OnLine Market Making(TM)
consulting services. All CBEs will be conducted at a time mutually agreeable to
Customer and Supplier.
2. SERVICES
2.1 SERVICES. Beginning on the Effective Date, Supplier will provide
the integrated set of services set forth in this Article 2 to assist Customer in
effectively utilizing the System. These services will provide Buyers with tools
to work with Supplier to conduct CBEs among Qualified Bidders for specific
pieces of business. Fees for the services described in this Article 2 are set
forth in Exhibit D.
2.2 TRAINING OF BUYERS. At times mutually agreed to by Supplier and
Customer, Supplier will provide training to Buyers designated by Customer
relating to Supplier's proprietary procedures for structuring online bids and
operating the BidWare(R) Software. All Buyer training will be held at Customer's
Sites and will be conducted by [*****] Supplier personnel assigned by Supplier.
Each class will last for [*****] hours during normal business hours and shall
have the agenda set forth in Exhibit B. Each class will run up to [*****] a day
during specific periods as mutually agreed to by Customer and Supplier. A
maximum total of [*****] Buyers may attend each training class. Buyers who, as
determined by Supplier, are successfully trained will be certified by Supplier
as being a Certified Buyer. Each Certified Buyer will be given a unique user
identification number and password for the use of the BidWare(R) Software and
access to the System. The Parties agree that only Certified Buyers will be
permitted to use the BidWare(R) Software and access the System. The
certification by Supplier of a Buyer in no way shall be interpreted as a
guarantee that the Certified Buyer is able to operate and understand the CBE
process without error. Supplier shall have no liability for any act or omission
of a Buyer.
2.3 SUPPORT IN VIEWING CBES. Subject to the terms of the license grant
set forth herein, Supplier will provide copies of BidWare(R) Software for
installation on Customer's personal computers for Certified Buyers in North
America, as requested in writing by Customer, at the price set forth in Exhibit
D. Neither Supplier nor Customer will integrate the BidWare(R) Software with
existing Customer computer systems or any other computer system, nor will the
BidWare(R) Software be used on any Customer networks or any other networks under
this Transaction Agreement, except for the network designated by Supplier.
Certified Buyers will be invited to use this software to view the market
activity of the CBEs as well as print out market results and audit reports. Each
Site which is provided with the BidWare(R) Software shall be outfitted by
Customer as set forth in Section 3.2. Customer shall have the option to purchase
a BidWare(R) PC (including CPU, monitor, modem and printer) through Supplier for
each copy of BidWare(R) Software supplied to Customer as set forth on Exhibit D
of this Transaction Agreement, or to purchase its own personal computers to run
the BidWare(R) Software.
2
<PAGE> 3
2.4 SERVICES FOR CBES. Upon the request of a Certified Buyer to use the
System to set up a CBE and Supplier's consent to the same, Supplier will provide
the following services related to such CBE:
(A) ASSISTANCE IN STRUCTURING EVENTS. Supplier will provide
CBE Management Services to Certified Buyers to assist the Certified Buyer in
structuring the CBE. "Structuring" shall include lot setting, establishing
bidding parameters and other factors relevant to the CBE. Additionally, if
requested by Customer, Supplier will provide OnLine Market Making(TM) Consulting
to Certified Buyers at a time which is mutually agreeable to the Parties. The
CBE Management Services and the OnLine Market Making(TM) consulting services
outlined in this Section 2.4 will be billed on a variable basis and are not
included in the fixed cost of this Transaction Agreement. A description of the
OnLine Market Making(TM) consulting services and associated costs is attached
hereto as Exhibit D.
(B) INTERACTION WITH BIDDERS. Supplier will contact each
Bidder properly identified by Customer which Customer desires to participate in
a particular CBE. Supplier shall attempt to identify the appropriate Bidder
contact, and explain the bidding process to such person. Supplier will provide
the relevant Certified Buyer with reasonable feedback on the status of each
Bidder.
(C) DISTRIBUTION OF SOFTWARE TO QUALIFIED BIDDERS. Upon
written notification of the CBE, the names of the Bidders and agreement on the
time line for the CBE, as set forth in Section 3.1, Supplier will attempt to
have Bidder execute the Bidder Agreement and to license Supplier's BidWare(R)
Software to the Bidders. All licenses for the BidWare(R) Software to Bidders
shall be pursuant to the terms and conditions of Supplier's then standard
license provided with each copy of the BidWare(R) Software supplied to Bidders.
A copy of Supplier's current license is attached hereto as Exhibit G. A Bidder
shall be considered a Qualified Bidder upon execution of the Bidder Agreement
and acceptance of the terms of the license agreement. In the event that a Bidder
does not agree to the terms of the Bidder Agreement and/or the terms of the
license agreement, the Bidder shall not be permitted to participate in the CBE.
Upon Bidder's execution of the Bidder Agreement, Supplier shall ship the
BidWare(R) Software and the BidWare Manual to the Bidder, and issue the Bidder a
unique user identification number and password to be used for the CBE, subject
to Bidder's acceptance of the license agreement. Customer shall pay the license
fee for each copy of the BidWare(R) Software licensed to Bidders. Bidders shall
be responsible for providing their own personal computers to run the BidWare(R)
Software and for the installation of such software onto such personal computers.
Bidders shall also be responsible for the connection of such personal computers
to the telecommunication service used for the CBE.
(D) TRAINING OF QUALIFIED BIDDERS. Supplier shall use
commercially reasonable efforts to identify the correct contact for each
Qualified Bidder to be trained in the use of the BidWare(R) Software. Customer
agrees to provide reasonable assistance in identifying such person if requested
by Supplier. Supplier will train that contact over the phone using real time
"mock" bidding sessions to ensure that the Qualified Bidder is reasonably
comfortable with the BidWare(R) Software and the System. Supplier does not
guarantee that the Qualified Bidder personnel will be
3
<PAGE> 4
properly trained and reserves the right to request that a different person be
provided by the Qualified Bidder.
(E) CONDUCT OF THE CBE. The Supplier will load all relevant
CBE and technical parameters provided by Customer into the System. During the
term of this Transaction Agreement, Supplier will staff an operations center
located at Supplier's facility in Pittsburgh to handle all CBE related
activities as follows:
(a) Maintain a call center for Qualified Bidders to call with
questions before the CBE or with technical problems during the CBE;
(b) Conduct procedures for ensuring that Qualified Bidders are
prepared and present on bid-day;
(c) Respond in a timely fashion to Qualified Bidder issues
with software or connectivity;
(d) Respond to Qualified Bidder problems that might prevent
bidding with a secure "surrogate bidding" system;
(e) Close bidding only after a reasonable determination that
no Qualified Bidders experienced difficulties material to the bidding process;
(f) Communicate any changes or adjustments to all Qualified
Bidders;
(g) Provide reasonable assistance to facilitate resolution of
any issues between Certified Buyers and Qualified Bidders;
(h) Establish and maintain a secure virtual private network;
(i) Authenticate the identities of all Qualified Bidders and
Certified Buyers involved in each CBE; and
(j) Ensure that only authorized Qualified Bidders and
Certified Buyers have access to appropriate CBE information.
3. CUSTOMER RESPONSIBILITY
3.1 GENERAL. At least [*****] days prior to a CBE, a Certified Buyer
shall inform Supplier of its desire to hold a CBE. Supplier and the Certified
Buyers shall agree on mutually acceptable time and date for the CBE and a time
line for conducting the CBE. The Certified Buyer shall provide Supplier, in
writing, all of the necessary information regarding the parts, materials or
services to be bid on in the CBE and identify the Bidders who will be invited to
participate in the CBE. The Certified Buyer shall also provide the applicable
completed RFQ to each Bidder and Supplier. The Certified Buyer will coordinate
with the Supplier CBE Management Staff to structure
4
<PAGE> 5
the online bid. Customer and all Certified Buyers who use Supplier must agree to
abide by the Rules and Procedures set forth in the Bidder Agreement. Supplier
and/or Supplier senior staff have the right to de-certify any Certified Buyer
who fails to abide by these rules.
3.2 SITE RESOURCES. Customer will designate a room at each major
location (i.e., [*****]) as the Supplier Room. This room will contain an
external analog phone line and a separate external phone line for normal
telephone usage. In addition, Customer will be responsible for providing all
audiovisual equipment for projecting electronic bids for a larger audience if
Customer desires (i.e., computer projector). During a CBE and in preparation
thereof, Customer shall ensure that appropriate facilities and personnel are
available to facilitate Certified Buyers' use of the System.
3.3 PERSONNEL. Customer will designate a prime contact responsible for
all Supplier matters. This contact will have the authority to ensure that all
Customer commitments are met and will commit significant time to understanding
the Supplier process and system. Customer will also designate a "Buyer Feedback"
sponsor who will periodically attend Buyer training sessions, gather feedback on
these sessions, and assist the Supplier team in improving the training.
4. LICENSES
4.1 LICENSE. In consideration of the fees paid pursuant to this
Transaction Agreement, Supplier hereby grants, and Customer hereby accepts, a
non-exclusive, non-transferable: (i) limited license to have Certified Buyers in
[*****] access the System solely to conduct CBEs as set forth in this
Transaction Agreement, and (ii) limited license to have Certified Buyers in
[*****] use the BidWare(R) Software to work with Supplier to conduct CBEs as set
forth in this Transaction Agreement. Customer is not granted any right or access
to the Source Code and shall not, attempt to decompile, disassemble, reverse
engineer or use any other process to gain access to the Source Code.
4.2 SYSTEM. The functionality provided to Customer by the System is
described in the Documentation provided by Supplier to Customer for the System
and the BidWare(R) Software. In addition, [*****] of the [*****] will [*****] as
set forth in Exhibit E.
4.3 AUTHORIZED USERS. Except for Certified Buyers, no other employees,
consultants, agents or other individuals of Customer or any other individuals or
entities are permitted to use the BidWare(R) Software or access the System.
4.4 NUMBER OF USERS. Customer may only use and/or install the
BidWare(R) Software on one personal computer per copy of BidWare(R) Software
distributed by Supplier under this Transaction Agreement. Customer may, however,
make one copy of the BidWare(R) Software for back-up purposes. As the System
will be resident at Supplier's facility in Pittsburgh, Pennsylvania and
maintained and operated by Supplier, Customer may not make any copies of the
System, in whole or in part, for any purpose. During the term of this
Transaction Agreement, Customer agrees that it shall only use the BidWare(R)
Software in accordance with Supplier's specifications and instructions.
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<PAGE> 6
5. DELIVERY AND INSTALLATION
5.1 BIDWARE(R) PCS. If Customer purchases BidWare(R) PCs from Supplier,
Supplier shall pre-load each BidWare(R) PC ordered from Supplier with one copy
of the BidWare(R) Software. Supplier will pre-test and ship each pre-loaded
BidWare(R) PC to Customer complete with modem, monitor and printer. If requested
by Customer in writing, Supplier will install the BidWare(R) PCs at Customer's
Site. Installation will be provided by Supplier's CBE Management personnel. In
the event that Customer installs the BidWare(R) PCs itself, Supplier will
provide telephone support by Technical Operations personnel. Customer shall be
deemed to have accepted a BidWare(R) PC if Customer does not report a failure of
such BidWare(R) PC during any thirty day period after its delivery. For purposes
of this Section 5.1, a "failure" means a failure caused solely by the BidWare(R)
PC which results in System unavailability.
5.2 BIDWARE(R) SOFTWARE TO QUALIFIED BUYERs. In the event that Customer
supplies its own personal computers to run the BidWare(R) Software, Customer
shall be responsible for the installation of such software onto such personal
computers. Supplier shall provide telephone support to assist Customer with the
installation of the BidWare(R) Software. All personal computers provided by
Customer to run the BidWare(R) Software must, at a minimum, conform to the
specifications set forth on Exhibit H of this Transaction Agreement. All
personal computers used during a CBE shall be located in a Supplier Room.
Customer shall also be responsible for the connection of such personal computers
to the telecommunication service used for the CBE.
5.3 BIDWARE(R) SOFTWARE TO BIDDERs. Supplier shall ship one copy of the
BidWare(R) Software to each Qualified Bidder for which Customer purchases a
BidWare(R) Software license pursuant to this Transaction Agreement. Each
Qualified Bidder shall be responsible for supplying their own personal computer
on which to load the BidWare(R) Software. Qualified Bidders shall be responsible
for loading the BidWare(R) Software on such personal computers. Supplier will
provide telephone support by Technical Operations personnel to assist Qualified
Bidders with the installation of the BidWare(R) Software.
6. FEES AND COSTS
6.1 FEES. In consideration of the Services and the licenses provided
pursuant to this Transaction Agreement, Customer agrees to pay [*****] as well
as certain [*****], depending on need, as set forth in Exhibit D. Invoices for
the fees of whatever nature, including without limitation, [*****] and/or
out-of-pocket expenses incurred during a month will be invoiced at the end of
such month. The first invoice will be sent by Supplier to Customer by the last
day of the first month after the Effective Date of this Transaction Agreement.
Monthly charges that have been in effect for less than a full calendar month
shall be prorated on the basis of a thirty (30) day month.
6.2 CURRENCY. All fees and costs set forth in this Transaction
Agreement are stated in, and shall be paid in, the currency of the United
States.
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<PAGE> 7
7. MODIFICATIONS
7.1 GENERAL. During the term of this Transaction Agreement, from time
to time, Supplier will modify the BidWare(R) Software and System, including
without limitation, correcting errors in the BidWare(R) Software or System. Such
error corrections or modifications may result in the creation of a new
version(s) of the BidWare(R) Software or System, under the same or one or more
different names (collectively, the Supplier Modifications). Supplier
Modifications shall in all cases be considered new versions of existing
BidWare(R) Software and/or System and not new Products. All rights to the
Supplier Modifications shall belong to Supplier. Exhibit E to this Transaction
Agreement contains a list of modifications currently scheduled by Supplier.
7.2 AVAILABILITY. During the term of this Transaction Agreement,
Supplier shall [*****] supply Customer, and Customer shall accept, Supplier's
then current [*****] over [*****] not later than [*****].
7.3 WARRANTY. Supplier Modifications to the BidWare(R) Software shall
be considered BidWare(R) Software for purposes of this Transaction Agreement;
provided, however, that all warranty provisions herein shall apply to each
Supplier Modification from the time such modifications are first delivered to
Customer. Supplier shall promptly deliver any Documentation, if any, relating to
the Supplier Modifications.
8. TERM AND TERMINATION
8.1 TERM. This Transaction Agreement and the Agreements shall continue
in force for an initial term of twelve (12) months from the Effective Date, and
shall be automatically renewed for one twelve (12) month term thereafter, and,
if still in effect, shall again automatically renew thereafter for a term that
begins on June 8, 2000 and ends on December 31, 2000. The foregoing automatic
renewals shall occur unless Customer provides written notice of its intent not
to renew this Transaction Agreement at least [*****] days prior to the renewal
date. In the event that the term automatically renews from June 8, 2000 until
December 31, 2000, as set forth above, the [****] fee set forth on Exhibit D
shall be prorated accordingly. This Transaction Agreement and the Agreements may
be extended for additional terms past December 31, 2000 if agreed to in writing
by both Parties, upon terms and conditions mutually agreed to in writing by the
Parties. [*****].
8.2 TERMINATION. This Transaction Agreement and the Agreements may only
be terminated or canceled prior to the expiration of the term upon the terms and
conditions set forth in Sections 19.1(E), 19.3, 19.4 (except for a change in
stock ownership of less than fifty percent (50%) or pursuant to an initial
public offering under the Securities Act of 1933, as amended), 19.5 or 19.6 of
the Framework Agreement.
8.3 EFFECT OF TERMINATION. Upon the termination or expiration of this
Transaction Agreement, whether under this Article 8 or otherwise, Customer will
discontinue use of the BidWare(R) Software and access to the System, and both
parties shall return or destroy the other Party's Confidential Information as
set forth in Sections 12.9 and 12.10 of the Framework Agreement, as modified by
Sections 11.1, 11.2 and 17.3 of this Transaction Agreement.
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<PAGE> 8
9. OWNERSHIP
9.1 SUPPLIER INTELLECTUAL PROPERTY. Customer shall have no rights or
interests in Supplier Intellectual Property except as described in this
Transaction Agreement. All right, title and interest in and to Supplier
Intellectual Property shall be and shall remain the sole property of the
Supplier or its third party subcontractors/licensors. Supplier hereby grants to
Customer a non-exclusive, non-transferable, royalty-free license to use the
Supplier Intellectual Property as required to effectuate the purposes of this
Transaction Agreement. Customer is not granted any other right to Supplier
Intellectual Property and shall not copy, modify, create derivative works,
sublicense, transfer, sell or otherwise use or dispose of the Supplier
Intellectual Property. Notwithstanding the above, Customer may make copies of
training materials provided by Supplier solely for the internal use of Customer.
9.2 DERIVATIVE WORKS. With respect to any Derivative Works developed
under the Agreements or in the provision of the Products or Services, the
allocation of rights in such works will be as follows:
(A) All Intellectual Property rights in a Derivative Work
developed by Customer for which the preexisting work is Customer Intellectual
Property, shall be owned by Customer and shall be deemed to be Customer
Intellectual Property.
(B) All Intellectual Property rights in a Derivative Work
developed by Supplier, by Supplier in conjunction with Customer when the
preexisting work is Supplier Intellectual Property shall be owned by Supplier
and shall be deemed to be Supplier Intellectual Property.
9.3 WORK PRODUCT. All Work Product shall be owned by Supplier. Customer
shall retain no rights in any Work Product.
10. SUPPLIERS WARRANTIES
10.1 WARRANTIES. Set forth below are certain exceptions to the
covenants, representations and warranties (collectively "Warranties") set forth
in the Framework Agreement and applicable Category Agreements.
A. All Warranties shall terminate upon the termination of the
Transaction Agreement.
B. No Warranties are made with respect to Third Party
Equipment, Software and Services.
C. Section 10.11 of the Framework Agreement is modified by
deleting "necessary conversions."
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<PAGE> 9
D. Section 12.15 of the Software Licensing Agreement is
modified by deleting: "within the same time periods and under the terms
set forth in Article 11 of this Software Licensing Agreement."
E. Section 10.5 of the Framework Agreement and Section 12.16
of the Software Licensing Agreement are modified by making the illicit
code/virus warranties only apply to the presence of illicit
code/viruses on the BidWare(R) Software at the time of delivery by
Supplier.
10.2 DISCLAIMER OF WARRANTIES. EXCEPT FOR THE EXPRESS WARRANTIES MADE
IN THE AGREEMENTS, AS MODIFIED BY THIS TRANSACTION AGREEMENT, NEITHER PARTY
MAKES ANY OTHER WARRANTIES, EXPRESS OR IMPLIED, CONCERNING THE SUBJECT MATTER OF
THIS TRANSACTION AGREEMENT, INCLUDING WITHOUT LIMITATION ANY IMPLIED WARRANTIES
OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
10.3 REMEDY. If during the term of this Transaction Agreement, the
BidWare(R) Software fails to meet the Warranties, Supplier shall promptly repair
or replace the non-conforming BidWare(R) Software at no cost to Customer.
Supplier will not provide the foregoing warranty service if the nonconformity is
caused by malfunctions of hardware, non-Supplier software, modification of the
BidWare(R) Software not made by Supplier, by operator error, or by use of the
BidWare(R) Software that is not in accordance with the operating instructions
for the BidWare(R) Software.
11. CONFIDENTIALITY
11.1 CONFIDENTIAL INFORMATION OF SUPPLIER. Section 12.2 of the
Framework Agreement shall apply to this Transaction Agreement. However, Customer
agrees that: (i) the BidWare(R) Software, (ii) all training materials and
Documentation which are marked as "Confidential" and provided by Supplier to
Customer, and (iii) all pricing, cost information, business affairs information
and other information related to Supplier's business learned during [*****];
shall be considered Supplier Confidential Information without the approval of
the Customer Project Manager and that Supplier will not generate a written
report describing such material.
11.2 USE AND RETURN OF SUPPLIER CONFIDENTIAL INFORMATION. Section 12.10
of the Framework Agreement shall apply to this Transaction Agreement. However,
Section 12.10 is modified by deleting: ", to the extent Customer no longer needs
the Supplier Confidential Information to exercise its rights under the
Agreements" from Section 12.10(i), and deleting all of Section 12.10(iii) and
the sentence which follows 12.10(iii).
11.3 AGREEMENT. Both parties shall have the right to disclose the
existence of this Transaction Agreement but not the terms of this Agreement
unless such disclosure is approved in writing by both parties prior to such
disclosure or such terms are required to be disclosed by governmental
authorities.
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<PAGE> 10
12. LIMITATION OF LIABILITY.
IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR CONSEQUENTIAL, INCIDENTAL OR
PUNITIVE LOSSES, DAMAGES OR EXPENSES (INCLUDING LOSS OF PROFITS, SAVINGS,
PENALTIES, FINES, LATE-PAYMENT CHARGES, INTEREST, COMPETITIVE ADVANTAGE,
GOODWILL, BUSINESS ADVANTAGE, GOODWILL, BUSINESS INTERRUPTION OR INDEMNITY
HEREUNDER), EVEN IF IT HAS BEEN ADVISED OF THE POSSIBLE EXISTENCE THEREOF.
EITHER PARTY'S LIABILITY FOR DAMAGES OF ANY KIND ARISING OUT OF THIS TRANSACTION
AGREEMENT AND THE AGREEMENTS, INCLUDING WITHOUT LIMITATION ANY AMOUNTS DUE
PURSUANT TO ARTICLE 15 OF THE FRAMEWORK AGREEMENT, SHALL BE LIMITED TO $[*].
NOTWITHSTANDING THE LIMITATION OF LIABILITY SET FORTH IN THE PRECEDING SENTENCE,
SUPPLIER'S LIABILITY FOR DAMAGES OF ANY KIND ARISING OUT OF SECTIONS 15.2(A),
AND 15.2(B) OF THE FRAMEWORK AGREEMENT (INFRINGEMENT), AND CUSTOMER'S LIABILITY
FOR DAMAGES OF ANY KIND ARISING OUT OF SECTIONS 15.1(A) AND 15.1(B) OF THE
FRAMEWORK AGREEMENT (INFRINGEMENT), SHALL BE LIMITED TO $[*]. THE FOREGOING
LIMITATIONS ON LIABILITY SHALL NOT APPLY TO FEES WHICH ARE OUTSTANDING UNDER
THIS TRANSACTION AGREEMENT.
13. CONTRACT ADMINISTRATION
13.1 DESIGNATION OF CONTRACT AND PROJECT MANAGERS. For purposes of
Article 3 of the Framework Agreement, a Party may assign the same individual to
be the Corporate Contract Manager and Project Manager. The Corporate Contract
Manager/Project Manager for the Parties shall be as follows:
Corporate Contract Manager:
Customer: James Scotti
Supplier: Glen Meakem
Project Manager:
Customer: Duane Bolinger
Supplier: Robert Stevens
A Party may change its Corporate Contract Manager and/or Project
Manager at any time in their sole discretion and shall provide notice of such
change to the other Party within ten (10) business days of such change.
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<PAGE> 11
14. PERSONNEL
14.1 GENERAL. Each party shall choose personnel in their sole
discretion to perform their respective services and obligations under this
Transaction Agreement. In the event that a Party is not satisfied with the
performance, actions or inactions of an employee of the other Party, the Party
shall inform the other Party of such dissatisfaction. The other Party shall then
take commercially reasonable action to investigate the performance, inaction or
action of such employee and shall take appropriate measures, if any, as
determined by such other Party.
14.2 [*****]. Supplier agrees that in the event that Customer [*****]
that includes [*****] required for Customer's performance under this Transaction
Agreement, such [*****] may [*****] provided that: (i) all [*****] by the
[*****] shall be provided by [*****], (ii) the [*****] has [*****], and (iii)
the [*****] is not a competitor of Supplier in [*****].
15. SUPPLIER SERVICES
Supplier agrees that for a period lasting from the Effective Date to
the earlier of: (i) June 30, 2000, or (ii) the date this Transaction Agreement
terminates; as long as Customer is not in default under the terms of this
Transaction Agreement, Supplier shall not provide the services provided to
Customer hereunder to the automobile operations of the following
manufacturers:[*****].
16. INSURANCE
16.1 LIMITS. The minimum limits of liability of insurance which
Supplier must maintain, as set forth in Section 17.1 of the Framework Agreement,
are modified as follows:
(i) The limits of liability for the insurance set forth in
Section 17.1(B) (General Commercial) shall be [*****] per
occurrence.
(ii) The limits of liability for the insurance set forth in
Section 17.1(C) (Automobile) shall be [*****] per occurrence.
(iii) The limit for the insurance set forth in Section 17.1(D)
(Errors and Omissions) shall be [*****] per occurrence.
16.2 LOSS PAYEES. Supplier is not required to name any other entity,
including without limitation, Customer, as a loss payee under any of Supplier's
insurance policies.
17. GENERAL
17.1 [*****] USE. As set forth in Exhibit F, Supplier and Customer may
agree to begin a pilot [*****] program upon the execution by both Parties of a
separate mutually agreeable Transaction Agreement relating to such project.
17.2 FORCE MAJEURE. The Force Majeure provision set forth in Section
25.3 of the Framework Agreement shall apply to this Transaction Agreement,
provided that the second and third sentences of such section shall not apply to
this Transaction Agreement.
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17.3 ORDER OF PRECEDENCE. This Transaction Agreement incorporates the
terms of the Framework Agreement, the Software Licensing Agreement and the
Consulting Agreement. The Parties agree that any inconsistency, ambiguity or
conflict between or among the terms and conditions of this Transaction Agreement
and the Agreements be resolved according to the order of precedence set forth in
Section 1.3 of the Framework Agreement. In furtherance of, and not in limitation
to the generality of the preceding, the following provisions shall not apply to
this Transaction Agreement:
(A) Framework Agreement: Sections 1.2, 1.4, 1.5, 1.6, 1.7, 2.6, 4.1,
4.2, 4.3, 5.2, 5.6(C), 5.8(A)(3), 8.1(A), 8.3, 9.4, 9.8, 10.7 and 10.13, Article
11, Sections 12.13, 12.17, 13.2, 13.3(B) (iii), 13.3(C), 13.4, 13.5, 13.6, 13.7
and 13.9, Article 14, Sections 15.7, 19.1(A) - (D), 19.7, 19.9, 20.3, and
22.6(A) (source code), Article 23, and Section 25.17.
(B) Software Licensing Agreement: Sections 3.3, 3.4, 3.5, 4.1, 4.3,
5.1, that portion of Section 6.1(A) which states ", from which Customer may make
copies for its use consistent with all limitations of this Software Licensing
Agreement and the applicable Transaction Agreement," Sections 6.2, 7.3, Articles
8 and 9, Sections 10.1(B) (CD-ROMs), 12.4, 12.9, 12.10 and 12.14, and Articles
11, 13 and 14.
(C) Consulting Services Agreement: Section 3.4.
In addition, the Parties agree that any inconsistency, ambiguity or
conflict between the definitions attached to this Transaction Agreement in
Exhibit A and any other definitions contained in the Agreements or elsewhere
will be resolved in favor of the definitions attached to this Transaction
Agreement in Exhibit A.
17.4 ASSIGNMENT. Neither party may assign any of its rights or
obligations hereunder or the Agreements without the prior written consent of the
other party, which consent shall be in the other Party's sole discretion.
17.5 [*****]. Subsections 5.6(A) and (B) of the Framework Agreement
shall apply to this Transaction Agreement. Notwithstanding anything to the
contrary in the foregoing: (i) Customer shall conduct, or have conducted on its
behalf, no more than [*****] per year period after the initial one-year period,
(ii) Supplier shall only be required to provide such information in such [*****]
which is reasonably required by Customer, and (iii) the [*****] shall execute a
non-disclosure agreement substantially in the form set forth in Exhibit I prior
to its conduct of such assessment. Changes to the non-disclosure agreement may
only be made with the written consent of Supplier.
17.6 ENTIRE AGREEMENT. Section 25.14 of the Framework Agreement shall
apply to this Transaction Agreement. Additionally, the Parties agree that
Section 14(c) of the purchase order TCS26983, dated October 31, 1997, and
Section 4 of Attachment 1 thereto, shall be superseded in their entirety by
Sections 4 and 9 of this Transaction Agreement, and that Section 12 of this
Transaction Agreement shall apply to such purchase order, except that the
references therein to Sections 15.2 (A) and (B) of the Framework Agreement shall
be deemed to refer to Sections 14(a) and (b) of such purchase order. The Parties
also agree that such purchase order shall not apply to
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<PAGE> 13
any goods or services provided under this Transaction Agreement or any future
Transaction Agreement between the Parties.
17.7 PUBLICITY. Section 25.15 of the Framework Agreement shall apply to
this Transaction Agreement. Notwithstanding anything to the contrary in the
foregoing, Supplier may use Customer's name as part of a general customer list
used by Supplier in promotional material and business presentations.
17.8 GOVERNING LAW; VENUE; SERVICE OF PROCESS. This Transaction
Agreement and the Agreements are to be construed according to the laws of
Michigan, without giving effect to the principals of conflicts of laws. Any
action or proceedings by Customer against Supplier shall be brought in the
federal or state courts located in Pittsburgh, Pennsylvania, and any action
brought by Supplier against Customer shall be brought in federal or state courts
in Detroit, Michigan.
IN WITNESS WHEREOF, this Transaction Agreement has been executed by the
Parties as of the Effective Date.
SUPPLIER CUSTOMER
By: /s/ Glen T. Meakem By: /s/ James Scotti
Title: Chief Executive Officer Title: Commodity Manager
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<PAGE> 1
EXHIBIT 10.1(b)
GENERAL MOTORS CORPORATION
AMENDMENT TO THE TRANSACTION AGREEMENT
THIS AMENDMENT TO THE TRANSACTION AGREEMENT ("Amendment") is made effective as
of October 1, 1999 ("Amendment Effective Date") between General Motors
Corporation and FreeMarkets, Inc., f/k/a FreeMarkets OnLine, Inc. General Motors
Corporation and FreeMarkets, Inc. have entered into a Transaction Agreement
effective as of June 8, 1998 ("Transaction Agreement") under which FreeMarkets,
Inc. (the "Supplier") has provided General Motors Corporation and certain of its
subsidiaries ("Customer" as defined in the Transaction Agreement) with access to
a global online bidding system and associated business services. Customer and
Supplier have agreed to amend the Transaction Agreement as follows:
1. EXTENSION OF TERM. The term under Section 8.1 of the Transaction Agreement
shall continue until September 30, 2001 without giving effect to automatic
renewals contained therein.
2. NO THIRTY (30) DAY TERMINATION. As of the Amendment Effective Date, Section
8.2 of the Transaction Agreement is amended by adding after the term "Section
19.1(E)" the following parenthetical: "(upon ninety (90) days prior written
notice to Supplier)."
3. NO SUPPLIER SERVICE LIMITATIONS. As of the Amendment Effective Date, Section
15 of the Transaction Agreement is deleted in its entirety and Supplier shall
have the right to perform services for any other entity.
4. FEE REDUCTIONS. As of the Amendment Effective Date, the System Access License
Fee set forth in Exhibit D of the Transaction Agreement is reduced from
[*******] per year to [*******] per year. As of October 1, 2000, such System
Access Fee shall be reduced from [*******] per year to $1,037,000 per year. As
of April 1, 2000, Supplier shall waive the following [*******].
5. DELPHI. As of January 1, 2000, [*******] shall not be included within the
definition of "Customer" under the Transaction Agreement. Nothing in this
Amendment shall prevent Supplier from providing services to [*******] under an
agreement entered into between Supplier AND[*******].
6. WEB ACTIVITIES. Supplier agrees that no later than March 31, 2000 [*******].
7. GENERAL. Except as modified by this Amendment, the definitions, terms and
conditions of the Transaction Agreement, including the terms specifically
incorporated therein of the Framework Agreement, Software License Agreement and
Consulting Agreement, shall continue in full force and effect. The parties agree
that any inconsistency, ambiguity or conflict between this Amendment and the
Transaction Agreement shall be resolved in favor of this Amendment and that,
except as set forth in this Amendment and the Transaction Agreement, no other
purchase order, understanding or other agreement shall apply to any goods or
services provided hereunder.
<PAGE> 2
IN WITNESS WHEREOF, this Amendment to the Transaction Agreement has been
executed by the parties as of the Amendment Effective Date first written above.
SUPPLIER CUSTOMER
By: /s/ GLEN T. MEAKEM By: /s/ JAMES B. SCOTTI
--------------------------- ----------------------------
(Print) Glen T. Meakem (Print) James B. Scotti
------------------------ -------------------------
Title: Chairman and CEO Title: Commodity Manager --
------------------------- Worldwide Purchasing
-------------------------
2
<PAGE> 1
Exhibit 10.2(a)
INFORMATION DENOTED BY [*] HEREIN HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT. THIS INFORMATION HAS BEEN FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.
SERVICE AND SYSTEM ACCESS AGREEMENT BETWEEN UNITED TECHNOLOGIES CORPORATION
AND FREEMARKETS ONLINE, INC.
This Service and System Access Agreement ("Agreement") is made this
14th day of January, 1999, effective as of January 1, 1999 ("Effective Date"),
by and between United Technologies Corporation, a corporation organized and
existing under the laws of the state of Delaware with an office and place of
business at Hartford, Connecticut (hereinafter referred to as "United") and
FreeMarkets OnLine, Inc., a corporation organized and existing under the laws of
the state of Delaware with an office and place of business at 130 Seventh
Street, Suite 500, Pittsburgh, PA 15222 (hereinafter referred to as
"FreeMarkets" or "Seller"). For purposes of this Agreement, the rights granted
to United under this Agreement shall also be deemed granted to any United
"Affiliate," which shall mean any entity in which United owns more than 50% of
the outstanding voting ownership interests, and shall also mean International
Aero Engines, Inc.
United wishes to be provided with, and FreeMarkets wishes to provide,
the following: (i) a series of online and offline industrial market making
project(s), including overall project management for these projects, and (ii)
access to FreeMarkets' proprietary global online bidding system for the conduct
of Competitive Bidding Events ("CBEs"), consisting of proprietary
Bidware(R)/BidServer(R) software, computer and networking hardware and operating
software used to conduct CBEs (the "System"). A CBE, the result of substantial
preparation work with buyers and suppliers, is an online session where suppliers
submit bids in an interactive fashion to establish market prices for the various
materials or components desired to be purchased by United. The parties intend
that FreeMarkets will assist United to achieve savings and supplier
consolidation for purchased components and materials used in United's products.
This Agreement is intended to address the specific understanding of the parties
related to such projects and the provision of access to the System, including
without limitation, provisions regarding confidentiality and exclusivity.
In consideration of the premises and of the mutual promises of each
party to the other herein contained, it is hereby mutually agreed as follows:
ARTICLE I - STATEMENT OF BUSINESS
SERVICES, SYSTEM ACCESS, SCOPE OF
WORK AND RESOURCE
COMMITMENTS
A) TERM OF SERVICES. FreeMarkets agrees that during the period commencing on
the 1st day of January, 1999 and ending on December 31, 2000 (the "Initial
Term"), and during all renewal term(s) of this Agreement (if any) (any such
renewal term(s) together with the Initial Term shall be collectively
referred to herein as the "Term"), FreeMarkets will make available to
United, to the extent, and in the manner hereinafter provided, its business
services with respect to industrial market making and purchasing and access
to the System.
B) PROJECT MANAGEMENT SERVICES. FreeMarkets will conduct a series of online
and offline industrial market making project(s) (also known as sourcing
project(s)) for the purposes of assisting United to achieve savings and
supplier consolidation for purchased components and materials used in
United's products, as identified by United from time to time. FreeMarkets
will provide overall project management for these projects utilizing either
the following FreeMarkets' market making process, organized into five
phases, or the United sourcing process set forth in
-1-
<PAGE> 2
Exhibit J attached hereto which is similar to the FreeMarkets process
except that the United process does not include CBEs and related online
industrial sourcing services:
1. Phase 1: Identify Savings Opportunities - FreeMarkets will conduct
detailed reviews of information on current and historic spending, as
well as interviews of United staff to identify savings opportunities
appropriate for utilizing the System or other sourcing processes.
2. Phase 2: Prepare Total Cost Request For Quotation ("RFQ") -
FreeMarkets will gather detailed information at the part level on
quality, logistics, engineering, manufacturing, tooling, and commercial
requirements. It will create bidding strategies designed to achieve
United's desired results, including lot setting and reserve prices,
then write and obtain buyer approval of RFQ(s), which RFQs shall
include terms and conditions satisfactory to United, including, without
limitation, government contract provisions when appropriate, insurance
specifications, and confidentiality requirements.
3. Phase 3: Identify, Screen, and Prepare Suppliers - FreeMarkets will
obtain supplier selection criteria from United buyers for manufacturing
capability, quality, delivery requirements, location, financial
strength, etc. FreeMarkets will research and identify potential new
suppliers, then screen all suppliers, including those that may be
identified by United, against the selection criteria. FreeMarkets will
gain buyer approval for final lists of suppliers, answer supplier
questions on RFQs and, if applicable, train suppliers in the use of the
System.
4. Phase 4: Online Competitive Bidding Event(s) - FreeMarkets will
provide access to the System for the conduct of CBEs. FreeMarkets will
provide all necessary infrastructure (except local buyer and supplier
site personal computers and other equipment) so that United can employ
the System. FreeMarkets will also provide all technical support and
necessary operations personnel, including training of United buyers in
the use of the System (where United does not use the System,
FreeMarkets will assist United with any offline supplier negotiations).
5. Phase 5: Provide Savings Implementation Support - FreeMarkets will
provide post-bid supplier cost breakdowns, analysis of award options,
support for supplier qualification trips and other general
implementation support as reasonably requested by United.
C) FREEMARKETS SOURCING PROJECTS. For purposes of this Agreement, a
"FreeMarkets Sourcing Project" shall include any United sourcing project
commenced before or during the Term where FreeMarkets provides one or more
of the following services described above:
(I) Prepare the RFQ for the project;
(II) Identify, screen and prepare suppliers
for the project; and/or
(III) Provide access to the System for the conduct of CBEs.
Unless otherwise agreed by the parties, FreeMarkets Sourcing Projects shall
not include sourcing projects related to products and services not
purchased for use in United's products such as office supplies, travel and
outside services. Within thirty (30) days of the Effective Date,
FreeMarkets will provide to United
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a schedule identifying each FreeMarkets Sourcing Project commenced prior to
the Effective Date. Thereafter, FreeMarkets will provide to United a
monthly schedule identifying each FreeMarkets Sourcing Project that was
commenced during the prior month. Within thirty (30) days of receipt of any
such schedule, United will notify FreeMarkets of any objection to such
schedule and the parties will work to mutually resolve any such objections.
No project will be designated as a FreeMarkets Sourcing Project unless the
parties mutually agree to such designation, provided that if United fails
to object to a designation within thirty (30) day of receipt of the
schedule containing such designation, United will be deemed to have
accepted such designation.
D) OVERALL PROJECT MANAGEMENT SERVICES. In addition to providing services
related to FreeMarkets Sourcing Projects as described above, during the
Term, FreeMarkets will provide the following services ("Overall Project
Management Services") to United in connection with the United Sourcing
Initiative as defined from time to time by the United personnel leading
such initiative (the "Sourcing Initiative"): overall Sourcing Initiative
planning and scheduling; assistance with tracking and reporting of savings
achieved pursuant to the Sourcing Initiative [*] as defined in Article I k)
below; assistance in high level purchasing problem solving; and, consulting
with senior United managers engaged in the Sourcing Initiative. The Overall
Project Management Services will be provided as reasonably requested by
United, subject to the resource limitations in [*] FTE's set forth in
Exhibit B attached hereto.
E) TRAINING. It is the intention of FreeMarkets to assist United in developing
internal world class sourcing capability across its many businesses. In
addition to Overall Project Management Services described above,
FreeMarkets will provide training in online and offline sourcing processes
to the United personnel working on FreeMarkets Sourcing Projects with
FreeMarkets. FreeMarkets will also provide training classes to United
personnel to assist United in the development of internal sourcing
capabilities, including the ability to effectively utilize the System.
FreeMarkets will provide up to [*] full day classes (maximum of [*]
students in each class) during each calendar year of the Term. FreeMarkets
will be prepared to provide such training classes beginning on January 31,
1999. Such training will include instruction regarding identification of
savings opportunities (Phase 1), preparation of RFQs (Phase 2),
identification, screening and preparation of suppliers (Phase 3),
conducting CBEs using the System (Phase 4), and implementing savings
(Phase 5).
F) SOURCING STRATEGY DEVELOPMENT SERVICES. To further assist United in
developing internal world class sourcing capability across its many
businesses, as specifically requested by United, FreeMarkets will analyze
and create sourcing strategies for the categories of spend which
FreeMarkets helps United to source. Sourcing strategy development services
set forth in this Article I f) will be provided as reasonably requested by
United, subject to the resource limitations [*] set forth in Exhibit B
attached hereto.
G) PRODUCT SPEND SAVINGS GOAL. Throughout the Term, FreeMarkets will provide a
complete market making team (the "FreeMarkets Market Making Team") which
will provide services with respect to FreeMarkets Sourcing Projects,
Overall Project Management Services and other services as described above.
The FreeMarkets Market Making Team shall consist on average of the number
of full time equivalent staff members set forth on Exhibit B attached
hereto. The goal of
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FreeMarkets and United is to meet or exceed the savings goals set forth in
Exhibit A. Specifically, FreeMarkets' goal will be to help United generate
[*] (the "Product Spend Savings Goal") in Implementable Savings (as defined
below) for United in each calendar year of the Term. FreeMarkets does not
guarantee that United can reach the Product Spend Savings Goal [*]. The
results of the FreeMarkets Sourcing Projects and Overall Project Management
Services for United will be highly dependent upon the support the
FreeMarkets Market Making Team receives from United staff. FreeMarkets and
United staff will cooperate to identify and execute Sourcing Projects,
Training, Sourcing Strategy Development and Overall Project Management
Services sufficient to deliver savings to United.
H) REPORTING. Throughout the Term, the FreeMarkets Market Making Team will
schedule periodic review sessions with the United day-to-day teams and
senior project sponsors as necessary to conduct the projects and maintain
communication. On a monthly basis, FreeMarkets will provide the Vice
President of Purchasing for United with a summary of FreeMarkets activities
in support of the various United divisions and cross division purchasing
product teams. The FreeMarkets Market Making Team will split its time
between work at United site(s) and FreeMarkets' offices.
I) BIDWARE(R)/BIDSERVER(R)SOFTWAre. Subject to the terms of Article III e),
throughout the Term, in consideration of the business service and System
access fees set forth in Article II a), FreeMarkets will provide United and
its Affiliates with any necessary license to use its proprietary
BidWare(R)/BidServer(R)software pursuant to the terms of this Agreement and
the Software License Agreement effective as of January 1, 1998 between
United and FreeMarkets attached hereto as Exhibit E ("Software License
Agreement") and will provide suppliers with any necessary license to use
its proprietary BidWare(R)/BidServer(R) software pursuant to the terms of
the standard FreeMarkets' supplier license agreement. These licenses are
for any usage necessary to conduct CBEs under this Agreement, but do not
extend beyond these projects or the Term.
J) SERVICE STANDARDS. FreeMarkets represents and warrants that during the
Term, the System will perform in a manner necessary to carry out its
obligations under this Agreement, including without limitation accurately
processing date/time data from, into, and between the twentieth and twenty-
first centuries (1999-2000), provided that all hardware and software with
which the System exchanges data is year 2000 compliant. FreeMarkets' sole
obligation under this performance warranty for the System shall be to
remedy any nonconformance of the System. EXCEPT AS EXPRESSLY SET FORTH
HEREIN OR THE SOFTWARE LICENSE AGREEMENT, FREEMARKETS MAKES NO OTHER
WARRANTIES REGARDING THE SYSTEM, ANY COMPETITIVE BIDDING EVENT, ANY
SUPPLIER, OR UNITED'S PARTICIPATION IN ANY COMPETITIVE BIDDING EVENT,
EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO, ANY IMPLIED WARRANTY OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
K) [*]. Subject to the terms of the Software License Agreement and the terms
of the Service Agreement effective as of January 1, 1998 between United and
FreeMarkets, FreeMarkets hereby continues to grant to United and its
Affiliates [*******] for any internal purpose, including any right
possessed by FreeMarkets to use [******] for any internal purpose.
L) RENEWAL. At the request of United, FreeMarkets will extend this Agreement
beyond the Initial Term for a period of one year subject to the same terms
and conditions for services, System access and
compensation.
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M) SUPPLIER SELECTION. In no event shall United be obligated hereunder to
accept the lowest bid in a CBE or any other project hereunder.
ARTICLE II - COMPENSATION
In consideration for the business services and System access provided by
FreeMarkets hereunder, United agrees to pay FreeMarkets as follows:
A) BUSINESS SERVICE AND SYSTEM ACCESS FEES. An annual total of [*] million
(including [*] in business service fees) and [*] in System access fees
during each of 1999 and 2000, payable in equal monthly installments, as set
forth in Article II f) and Exhibit B. Exhibit B is a complete schedule of
business service and System access fees payable by United under this
Agreement.
B) EXPENSE REIMBURSEMENT. Reimbursement for the cost of all reasonable and
necessary traveling expenses, clerical expenses, telecommunications
expenses, mailing, courier, blueprinting, printing, copying or stenographic
services, in connection with the performance of the services hereunder. The
estimated monthly expenses set forth on Exhibit B will be payable as set
forth in Article II f).
C) ADDITIONAL COMPENSATION. In addition to the business service and System
access fees and the expense reimbursement set forth above, FreeMarkets will
earn additional bonus compensation provided the conditions set forth in
this Agreement are met. Subject to the terms of Article II e) (Bonus
Determinations), United will pay to FreeMarkets, the following additional
bonus compensation earned by FreeMarkets:
(I) United will pay to FreeMarkets an "Implementable Savings Bonus" equal
to [*] of Implementable Savings (as defined below) for FreeMarkets
Sourcing Projects; and
(II) United will pay to FreeMarkets an "Implemented Savings Bonus" equal
to [*] of Implemented Savings (as defined below) for FreeMarkets
Sourcing Projects; and
(III) Provided that the Implementable Savings for FreeMarkets Sourcing
Projects for any calendar year during the Term equals or exceeds the
Product Spend Savings Goal as defined in Article I g) for
FreeMarkets Sourcing Projects, United will pay to FreeMarkets a
Major Business Objective or "MBO Bonus" equal to [*] with respect to
such year.
D) DEFINITIONS. For the purposes hereof:
(I) "Implementable Savings" means a good faith estimate of the gross
annualized savings stated in U.S. dollars expected to be implemented
as a result of FreeMarkets Sourcing Projects as reported [*] or an
alternative tracking and reporting system agreed upon by the parties.
Implementable Savings shall include savings from all FreeMarkets
Sourcing Projects commenced during or before the Term. Implementable
Savings shall be determined [*] upon finalization of agreement(s)
with selected supplier(s) based on volume estimates, non-price
savings and elimination of any potential savings which are [*] at a
site level to be too costly or too difficult to implement.
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Savings shall not be classified as "Implementable Savings" until [*]
that any potential savings are implementable. Implementable Savings
(as reported [*] or an alternative tracking and reporting system
agreed upon by the parties) shall not include any deduction for costs
of implementation.
(II) "Implemented Savings" means a good faith estimate of [*] stated in
U.S. dollars implemented as a result of FreeMarkets Sourcing Projects
as reported using [*] or an alternative tracking and reporting system
agreed upon by the parties. Implemented Savings shall be determined
[*] upon acceptance of purchase orders by selected supplier(s) as a
result of FreeMarkets Sourcing Projects and shall be based on [*] and
[*]. Implemented Savings shall include savings from all FreeMarkets
Sourcing Projects commenced [*]. Implemented Savings (as reported [*]
or an alternative tracking and reporting system agreed upon by the
parties) shall not include any deduction for non-incremental costs of
implementation.
E) BONUS DETERMINATIONS.
(I) BILLING FOR IMPLEMENTABLE SAVINGS BONUS. No later than 15 days
following the end of each calendar quarter (including the calendar
quarter ending on December 31, 1998), FreeMarkets will submit to
United a schedule and invoice (the "Implementable Savings Schedule")
identifying the Implementable Savings with respect to all FreeMarkets
Sourcing Projects conducted during or before such calendar quarter
([*] or an alternative tracking and reporting system agreed upon by
the parties). The Implementable Savings Bonus with respect to
FreeMarkets Sourcing Projects shall be determined based on excess of
the cumulative Implementable Savings as of the end of such calendar
quarter over the cumulative Implementable Savings as of the end of the
immediately prior quarter. In the event that the [*] Implementable
Savings as of the end of such calendar quarter [*] the cumulative
Implementable Savings as of the end of the immediately prior quarter,
[*] in the following calendar quarters.
(II) BILLING FOR IMPLEMENTED SAVINGS BONUS. No later than 15 days following
the end of each calendar quarter (including the calendar quarter
ending on December 31, 1998), FreeMarkets will submit to United a
schedule and invoice (the "Implemented Savings Schedule") identifying
Implemented Savings with respect to all FreeMarkets Sourcing Projects
conducted during or before such calendar quarter [*] or an alternative
tracking and reporting system agreed upon by the parties). The
Implemented Savings Bonus with respect to FreeMarkets Sourcing
Projects shall be determined based on excess of the cumulative
Implemented Savings as of the end of such calendar quarter over the
cumulative Implemented Savings as of the end of the immediately prior
calendar quarter. In the event that the [*] Implemented Savings as of
the end of the immediately [*] than the Implemented Savings as of [*]
in the following calendar quarters.
(III) BILLING FOR MBO BONUS. No later than 15 days following the end of each
calendar year (including the calendar year ending on December 31,
1998), FreeMarkets will submit to United a schedule and invoice (the
"MBO
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Bonus Schedule") identifying cumulative Implementable Savings with
respect to all FreeMarkets Sourcing Projects as of the end of such
calendar year ([*] or an alternative tracking and reporting system
agreed upon by the parties). Payment of the MBO Bonus with respect to
FreeMarkets Sourcing Projects for each calendar year during the Term
shall be determined based on the [*]of such calendar year over the
cumulative Implementable Savings as of December 31 of the prior year.
In the event that [*] of such calendar year [*] as of December 31 of
the prior year, [*].
Based on such determinations, if the excess cumulative Implementable
Savings for a calendar year during the Term meets or exceeds the
Product Spend Savings Goal, then United will pay the applicable MBO
Bonus to FreeMarkets in accordance with Article II c) (iii).
(IV) SETTLEMENT PROCESS. Upon receipt of the Implementable Savings
Schedule, Implemented Savings Schedule or MBO Bonus Schedule, United
shall have [*] to confirm the amounts billed and due under this
Agreement using [*] or an alternative tracking and reporting system
agreed upon by the parties. All undisputed amounts shall be paid
within thirty days of United's receipt of the Implementable Savings
Schedule, Implemented Savings Schedule or MBO Bonus Schedule. United
shall notify FreeMarkets of any disputed Implementable Savings or
Implemented Savings amounts within the initial [*] period. The parties
will use their best efforts to resolve any such disputes, and United
will pay the mutually agreed settlement of all disputed amounts within
thirty (30) days of such settlement.
F) PAYMENT. Amounts that are due under Article II a) and b) will be invoiced
to United by FreeMarkets at the end of each calendar month; provided that
the estimated amounts due under Article II b) will be invoiced to United
for each month during the Term and within thirty (30) days after each
calendar year, FreeMarkets will provide a schedule that reconciles actual
expenses under Article II b) for such calendar year with the estimated
payments and will provide United with an invoice for any amount by which
actual expenses exceeded estimated expenses. If actual expenses were less
than estimated expenses, FreeMarkets will either credit United with the
difference or, if no further invoices are to be sent to United hereunder,
will pay such difference to United. United acknowledges that it shall be
responsible for all amounts invoiced and due under this Agreement.
FreeMarkets will submit invoices for the services and related expenses as
described herein directly to Shelley Stewart or another designated member
of the Vice President of Purchasing's staff. Upon presentation of such
invoices in form and detail satisfactory to United, United will use its
best efforts to make payments within 10 days, and in all events shall make
payment within 30 days. Each invoice shall fairly and accurately describe
in sufficient detail the actual services performed, the period of
performance and the fees and expenses that are payable to FreeMarkets under
the provisions of this Agreement.
ARTICLE III - TERMS AND CONDITIONS
OF SOURCING PROJECTS
United acknowledges and agrees as follows:
A) CBE RULES. With respect to any CBE conducted hereunder, to abide by the
attached Rules and Procedures Governing Competitive Bidding Events
(Exhibit C), which contain marketplace ground rules for United,
suppliers, and FreeMarkets. These Rules and Procedures are designed to
ensure ethical participation. In the event that FreeMarkets postpones,
cancels or
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otherwise modifies any CBE in accordance with Exhibit C, to the extent
possible, FreeMarkets agrees to provide advance notice to United of such
modification.
B) NDA. United and FreeMarkets have entered into the attached Non-Disclosure
Agreement as of October 1, 1997 (Exhibit D), under which each party
mutually agrees to keep confidential information which either party shall
designate to the other as confidential, including but not limited to
engineering data and prints. The parties hereby agree that the terms of
such Non- Disclosure Agreement apply to this Agreement and that the terms
and conditions of this Agreement shall be designated confidential
information under such Non-Disclosure Agreement; provided, however, that
notwithstanding Section 2 thereof, Confidential Information shall be
maintained in confidence perpetually, except as otherwise agreed by the
parties and unless such information is information described in Sections
1(a)-(f) thereof.
C) RFQ COPIES. United acknowledges that FreeMarkets has the right to include
in RFQs all information it receives from United for purposes of inclusion
in the RFQs and to copy RFQs for distribution to suppliers selected by
United for procurement by United only. United or its Affiliates also has
the right to copy RFQs. United will provide FreeMarkets for inclusion in
such RFQs any non-disclosure agreement forms required by United or its
Affiliates to be executed by such suppliers.
D) USE OF DATA. FreeMarkets shall have the right to use all data generated in
connection with FreeMarkets Sourcing Projects, including data that United
provides to FreeMarkets, to do the following: (i) perform such general
analyses to track the performance of the BidWare(R)/BidServer(R)aND [*] (or
any alternative) software; (ii) determine general price trends in various
supply industries; and (iii) create predictive analyses useful for
estimating the price for a Component before such Component has been the
subject of a FreeMarkets Sourcing Project. For purposes of this subsection,
"Component" shall mean a distinct part or material described by a United
technical drawing or part number. FreeMarkets will use such data and
perform such analyses and publish the same in such a way [*]. FreeMarkets
shall have the right to publish general results of FreeMarkets Sourcing
Projects to suppliers through FreeMarkets provided [*]. These results may
include: specific results for supplier participants in each FreeMarkets
Sourcing Project; and general results for all supplier members of the
service.
E) SOFTWARE OWNERSHIP AND LICENSE. United acknowledges that FreeMarkets
retains full ownership rights to the BidWare(R)/BidServer(R)suite of
software applications and [*], and that United is not acquiring any
ownership interest in such technology. The terms under which FreeMarkets
will supply the BidWare(R)/BidServer(R)aND [*] technology (collectively
"Software") under this Agreement are further described in the Software
License Agreement. Unless otherwise agreed in writing by the parties,
United also acknowledges that FreeMarkets will retain full ownership rights
to any software, including [*], developed by FreeMarkets during the Term.
F) [*]. In the event that [*] during the term of this Agreement in addition to
[*], if any, [*] to United no later than the time [*] its other industrial
customers. In addition, subject to any applicable confidentiality
requirements and other restrictions, FreeMarkets shall provide United with
[*].
ARTICLE IV - INDEMNITIES
A) FREEMARKETS. FreeMarkets agrees to protect, defend, indemnify, and hold
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<PAGE> 9
harmless United from and against all claims, demands, causes of action of
every type or character, arising out of or related to negligent or willful
acts or omissions of FreeMarkets or its subcontractors, officers,
directors, assigns or employees in connection with the performance of the
work under this Agreement.
B) UNITED. United agrees to protect, defend, indemnify and hold harmless
FreeMarkets from and against all claims, demands, causes of every type and
character arising out of or related to any negligent or willful act or
omission of United or its subcontractors, officers, directors, assigns, or
employees in connection with the performance of its obligations under this
Agreement.
C) COSTS. In the event that a claim is made hereunder, at law or otherwise,
alleging damage as a result of any error, omission or other act arising out
of or relating to this Agreement, the prevailing party shall be entitled to
reimbursement for all costs, including reasonable attorney's fees, incurred
in defending itself against such claim.
ARTICLE V - INTELLECTUAL
PROPERTY INDEMNIFICATION
A) GENERAL. FreeMarkets shall protect, defend, indemnify and hold harmless
United from any suit or proceeding brought against United based on a claim
that (1) the Software furnished by FreeMarkets hereunder, (2) the use of
the Software by United consistent with FreeMarkets' specifications and
instructions or (3) the copying by United of any Software or documentation
as permitted herein constitutes an infringement of any United States
patent, United States copyright or other intellectual property rights
asserted under the laws of the United States.
B) LIMITATIONS. FreeMarkets shall have no liability for any claim based upon:
(i) the combination, operation or use of the Software with equipment,
devices or software not supplied or specified by FreeMarkets; (ii) the
alteration or modification of the Software which alteration or modification
was not made by FreeMarkets; or (iii) the failure by United to use the most
current version of the Software [*].
ARTICLE VI -COMPETITIVE
ACTIVITIES
During the term of this Agreement, FreeMarkets shall not provide technology
or services similar to those defined in this Agreement for the competitive
companies listed in Exhibit F.
ARTICLE VII - NOTICES
Whenever any notice is required or authorized to be given hereunder, such
notice shall be given in writing and sent by certified mail, return receipt
requested, or overnight delivery by a national reputable service. Any such
notice, if sent by United to the Seller, shall be addressed as follows:
Glen T. Meakem
Chief Executive Officer
FreeMarkets OnLine, Inc.
130 Seventh Street
Century Building, Suite 500
Pittsburgh, PA 15222
and if sent by FreeMarkets to United, shall be
addressed as follows:
United Technologies Corporation
One Financial Plaza
Hartford, CT 06101
Attention: Vice President - Purchasing
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ARTICLE VIII - ADDITIONAL
PROVISIONS
A) UNITED GENERAL TERMS. This Agreement is subject to and governed by the
following additional provisions: (i) "United Technologies Corporation
Service Agreement Provisions, dated February 1998" (attached hereto as
Exhibit G) except provisions 3, 4, 9(a), 13 and 14 which shall not apply;
(ii) United's "Code of Ethics"; and (iii) United's Policy Statement on
Business Ethics and Contracting With the United States Government, as they
may be amended from time to time.
B) REGULATORY COMPLIANCE. FreeMarkets represents and warrants to United that
FreeMarkets shall comply strictly with all of the covenants, agreements,
and undertakings made by FreeMarkets in, or furnished under or as part of
this Agreement, including without limitation, compliance with all
applicable laws or regulations, whether or not specifically referenced in
this Agreement.
C) INSURANCE COVERAGE. The coverage amounts set forth in Provision 18 (2)-(6)
of United's Service Agreement Provisions set forth in Exhibit G attached
hereto shall be increased [*] to [*], and in addition to such coverages,
FreeMarkets shall obtain [*]. Notwithstanding anything to the contrary in
Provision 18, such insurance shall contain a provision prohibiting
cancellation or reduction in coverage except upon at least 30 days' prior
notice to United. FreeMarkets represents that, as of the date of execution
of this Agreement, it has obtained all such insurance coverage. D) [*] WILL
BE LIABLE [*] FOR ANY DIRECT DAMAGES, ARISING FROM THIS AGREEMENT OR THE
SOFTWARE LICENSING AGREEMENT, UNDER ANY THEORY OF LIABILITY IN EXCESS
OF)[*]. IN NO EVENT WILL [*] BE LIABLE TO THE OTHER FOR CONSEQUENTIAL,
INCIDENTAL OR SPECIAL DAMAGES OR LOST PROFITS OF ANY NATURE WHATSOEVER
UNDER ANY THEORY OF LIABILITY, ARISING FROM THIS AGREEMENT OR THE SOFTWARE
LICENSING AGREEMENT, [*].
E) TERMINATION. This Agreement will remain in full force and effect during the
Term, and may be terminated prior to the end of the Term only as follows:
(I) By either party if the other party has materially breached this
Agreement and has failed to correct such breach within 90 days after
receiving written notice from the other party specifying the nature of
such breach;
(II) By either party if the other party (i) becomes the subject of a
voluntary or involuntary petition in bankruptcy or any proceeding
relating to insolvency, receivership, liquidation, or composition for
the benefit of creditors, if that petition or proceeding is not
dismissed within thirty (30) days after filing, (ii) suspends the
operation of its present business or liquidates its business assets,
or (iii) generally fails to pay its debts as such debts become due or
admits in writing its inability to pay its debts.
(III) By United, provided it gives FreeMarkets 30 days prior written notice
of termination, and pays to FreeMarkets the following:
(A) all business service and System access fees and reimbursement
that have accrued under Article II a) and b) through the date of
termination;
(B) any Implementable Savings Bonus and Implemented Savings Bonus with
respect to all FreeMarkets Sourcing Projects based on the cumulative
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Implementable Savings and Implemented Savings from such FreeMarkets
Sourcing Projects, which Savings Bonuses shall be paid in accordance
with Article II (e) (the final payment of such Savings Bonuses shall
be based on the cumulative Implementable Savings and Implemented
Savings, respectively, as of the last day of the calendar month which
includes the one-year anniversary of the date of termination, taking
into account any existing credits under Article II e));
(C) provided that the excess cumulative Implementable Savings from
January 1 through the date of termination is equal to or greater than
the amount obtained by multiplying the Product Spend Savings Goal by a
fraction, the numerator of which is the number of days that have
elapsed in such calendar year through the date of termination and the
denominator of which is 365 ("Proration Fraction"), a portion of the
MBO Bonus will be paid for the calendar year in which termination
occurs equal to [*] multiplied by the Proration Fraction (examples of
the determination of the MBO Bonus upon termination are set forth in
Exhibit I); and
(D) a fee (the "Termination Fee") equal to [*]. The parties agree that
the Termination Fee will compensate FreeMarkets for the resources it
is committing to United hereunder, and is not in the nature of
liquidated damages or a penalty.
(IV) In the event that this Agreement expires under Article I (a) in
accordance with the terms thereof or is terminated by United under
Article VIII (e) (i) or (ii), United shall not be obligated to pay
FreeMarkets the Termination Fee; provided that such expiration or
termination shall not affect United's obligations to pay compensation
that has accrued under the terms of this Agreement prior to the date
of expiration or termination (as determined under Article VIII e)
(iii).
(V) In the event that this Agreement is terminated for any reason,
FreeMarkets will provide United with a schedule of all FreeMarkets
Sourcing Projects commenced prior to the date of termination and the
parties will reasonably cooperate to transition the FreeMarkets
Sourcing Projects to United provided that termination of this
Agreement shall not relieve either party of any obligation incurred
prior to the termination.
ARTICLE IX - MISCELLANEOUS
MODIFICATION. This Agreement can only be modified by a written agreement duly
signed by the persons authorized to sign agreements on behalf of the parties and
any other variance from the terms and conditions of this Agreement will be of no
effect.
SEVERABILITY OF PROVISIONS. If any provision or provisions of this Agreement
shall be held to be invalid, illegal or unenforceable, the validity, legality
and enforceability of the remaining provisions shall not in any way be affected
or be impaired thereby.
GOVERNING LAW. This Agreement shall be governed by and construed in accordance
with the laws of the State of Connecticut (other than the laws on the conflict
of laws). Unless the parties otherwise agree, any action or
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proceedings by United against FreeMarkets shall be brought in the federal or
state courts located in Pittsburgh, Pennsylvania, and any action brought by
FreeMarkets against United shall be brought in federal or state courts in
Hartford, Connecticut.
ENTIRE AGREEMENT. This Agreement, including all exhibits and schedules hereto,
the Non-Disclosure Agreement and the Software License Agreement referenced
herein and attached hereto, are the complete and exclusive statement of the
agreement between the parties as to the subject matter herein, and they
supersede all prior and contemporaneous proposals or agreements, oral or
written, and all other communications between the parties related to the subject
matter of this Agreement.
WAIVERS. A waiver of a breach or default under this Agreement shall not be a
waiver of any other or subsequent breach or default. The failure or delay by
either party in enforcing compliance with any term or condition of this
Agreement shall not constitute a waiver of such term or condition unless such
term or condition is expressly waived in writing.
AGREEMENT BINDING. This Agreement shall be
binding upon and inure to the benefit of the
parties hereto, their successors and permitted
assigns.
ASSIGNMENT. Neither party may assign this Agreement without the prior written
consent of the other party, which consent shall not be unreasonably withheld or
delayed.
AUTHORITY. Each party represents that it has full power and authority to enter
into and perform this Agreement, and the person signing this Agreement on behalf
of it has been properly authorized and empowered to enter into this Agreement.
COUNTERPARTS. This Agreement may be executed in several counterparts, all of
which taken together shall constitute one agreement between the parties.
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IN WITNESS WHEREOF, the parties hereto have executed or caused these
presents to be executed in duplicate (each of which shall be deemed to be an
original) effective as of the date first written above.
- --------------------------------------------------------------------------------
UNITED TECHNOLOGIES FREEMARKETS ONLINE, INC.
CORPORATION
By: By:
-------------------------------- ----------------------------
Name: Kent Brittan Name: Glen T. Meakem
Title: Vice President - Purchasing Title: Chief Executive Officer
Federal ID # 043265483
-13-
<PAGE> 14
Exhibit A
SAVINGS GOALS
<TABLE>
<CAPTION>
TOTAL PRODUCT IMPLEMENTABLE IMPLEMENTED
SPEND* SAVINGS SAVINGS
YEAR ($000,000S) ($000,000S) ($000,000S)
---- ----------- ----------- -----------
<S> <C> <C> <C>
1999 [*] [*] [*]
2000 [*] [*] [*]
</TABLE>
* Dollar amount of total potential annual spending under FreeMarkets
Sourcing Projects
<PAGE> 15
Exhibit B
United Technologies Corporation Schedule of Payments
To FreeMarkets OnLine for Business Services and System Access
<TABLE>
<CAPTION>
Business System
Service Access Estimated Total Estimated
Calendar Fees Fees Expenses** Cost**
Month Year [*] ($000s) ($000s) ($000s) ($000s)
- -------- -------- ---------- -------- ------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Jan 1999 [*] [*] [*] [*] [*]
Feb [*] [*] [*] [*] [*]
Mar [*] [*] [*] [*] [*]
Apr [*] [*] [*] [*] [*]
May [*] [*] [*] [*] [*]
Jun [*] [*] [*] [*] [*]
Jul [*] [*] [*] [*] [*]
Aug [*] [*] [*] [*] [*]
Sep [*] [*] [*] [*] [*]
Oct [*] [*] [*] [*] [*]
Nov [*] [*] [*] [*] [*]
Dec [*] [*] [*] [*] [*]
- -------- -------- ---------- -------- ------- ---------- ---------------
Subtotal 1999 [*] [*] [*] [*]
- -------- -------- ---------- -------- ------- ---------- ---------------
Jan 2000 [*] [*] [*] [*] [*]
Feb [*] [*] [*] [*] [*]
Mar [*] [*] [*] [*] [*]
Apr [*] [*] [*] [*] [*]
May [*] [*] [*] [*] [*]
Jun [*] [*] [*] [*] [*]
Jul [*] [*] [*] [*] [*]
Aug [*] [*] [*] [*] [*]
Sep [*] [*] [*] [*] [*]
Oct [*] [*] [*] [*] [*]
Nov [*] [*] [*] [*] [*]
Dec [*] [*] [*] [*] [*]
Subtotal 2000 [*] [*] [*] [*]
- -------- -------- ---------- -------- ------- ---------- ---------------
Overall Contract [*] [*] [*] [*]
Total
- -------- -------- ---------- -------- ------- ---------- ---------------
</TABLE>
* [*] United by FreeMarkets.
** Estimated payments only. Exact amounts will depend upon actual expenses
incurred and year-end reconciliation.
<PAGE> 16
Exhibit C
RULES AND PROCEDURES
GOVERNING COMPETITIVE BIDDING EVENTS
<PAGE> 17
Exhibit D
NON-DISCLOSURE AGREEMENT
This NON-DISCLOSURE AGREEMENT (this "Agreement") dated this 1st day of
October, 1997 is by and between United Technologies Corporation ("United"), and
FreeMarkets OnLine, Inc. ( "FreeMarkets"), a Delaware corporation.
- --------------------------------------------------------------------------------
Preamble:
In the course of the online industrial market making projects described in
the accompanying "Service Agreement" (Service Agreement Between United
Technologies Corporation and FreeMarkets OnLine, Inc. dated October 1, 1997),
United and FreeMarkets may acquire and communicate information between one
another which either party may consider to be proprietary or confidential in
nature. Such "Confidential Information" shall mean any information owned by the
owning party or any of its subsidiaries or affiliates, or entrusted to the
owning party that provides economic value, actual or potential, to the owning
party by reason of it not being generally known to other persons or entities who
can obtain economic value from its disclosure or use. Such information may
include, by way of example: computer programs and documentation; technical
design, manufacturing and application information; customer information;
training information; financial information; personnel information; new product
developments; advertising, business, and marketing plans. Therefore, based on
our mutual desire to protect our respective Confidential Information, we each
have agreed to execute this Agreement. Therefore, with the intent to be legally
bound, the parties agree as follows:
(1) All Confidential Information acquired by or disclosed to either party or its
employees or agents (a "Party") during the course of our engagement, or
disclosed in any manner incidental to the engagement by any party in whatever
form, whether written, graphic or machine-readable form, orally disclosed or
visually observed by the discovering Party, shall not be published or disclosed
internally (except to those who have a need to know in connection with the
Parties' performance of the engagement), or to any other person, firm, or
corporation or used by the discovering Party, except for any such information:
(a) which is already known to the discovering
Party at the time it acquires such information;
or
(b) which is or becomes publicly known through no wrongful act of the
discovering Party; or
(c) which is rightfully received from a third person without restriction; or
(d) which is furnished to a third person by the owning Party without a similar
restriction on the third person's right; or
(e) which is approved for release by written authorization of the owning Party
including without limitation pursuant to tem-is of the Service Agreement;
or
(f) which is required by law or the judicial process to be disclosed.
In addition and notwithstanding the foregoing, and consistent with Article
III d) of the Service Agreement between United and FreeMarkets, FreeMarkets
shall have the right to publish general results of CBEs to Suppliers.
The parties will make their best effort to mark or verbally identify as
"CONFIDENTIAL" all Confidential Information. The failure to so mark or identify
any Confidential Information shall not constitute a waiver of confidentiality
with respect to the Confidential Information. Each Party shall be responsible
for violations of this Agreement by its employees, representatives, and agents.
<PAGE> 18
(2) Each Party agrees that the obligations hereunder shall continue for a period
of five (5) years from the date on which the Confidential Information was first
acquired.
(3) The discovering Party shall use the same reasonable degree of care to
protect Confidential Information from disclosure as it exercises in protecting
like information of its own.
(4) Nothing in this Agreement shall be deemed, either expressly or by
implication, to convey any right or license to the discovering Party.
(5) Confidential Information is and shall remain the property of the owning
Party. All such information which is in writing shall be returned to the
appropriate owning Party upon written request to the discovering Party.
(6) Each Party agrees to notify the owning Party immediately upon becoming aware
of or reasonably suspecting the possession, use or knowledge of all or part of
any Confidential Information of such Party by any person or entity not
authorized to have such possession, use or knowledge. Each Party will promptly
furnish the owning Party with details of such possession, use or knowledge, will
assist in preventing a recurrence thereof and will cooperate with the owning
Party in protecting their rights in the Confidential Information. Compliance
with the terms of this section will not be construed in any way as a waiver of
the owning Party's right to recover damages or obtain other relief for the
breach of this Agreement.
(7) The Parties agree that in the event of a breach or threatened breach of the
terms of this Agreement, the non-breaching party may be entitled to an
injunction prohibiting any such breach. Any such relief shall be in addition to
and not in lieu of any other relief. The Parties acknowledge that the
Confidential Information is unique and that disclosure in breach of this
Agreement may result in irreparable injury to the Party owning such information.
(8) This Agreement shall continue in effect for the Initial Term of the Service
Agreement, and during any renewal terms. Notwithstanding any termination of this
Agreement or of the Service Agreement, all obligations of each Party with
respect to Confidential Information obtained during the term of this Agreement
shall survive such termination.
(9) This Agreement:
(a) may not be amended or modified in any
manner except in writing signed by all Parties,
and
(b) shall be governed and construed in accordance with the laws of the
Commonwealth of Pennsylvania without regard to choice of law provisions.
(10) Nothing in this Agreement shall limit or otherwise restrict either party's
obligations under terms of the Service Agreement.
(11) If any provision of this Agreement is found to be unenforceable, the
remainder shall be enforced as fully as possible and the unenforceable provision
shall be deemed modified to the limited extent required to permit its
enforcement in a manner most closely representing the intention of the Parties
expressed herein.
2
<PAGE> 19
Exhibit E
SOFTWARE LICENSE AGREEMENT
This Software License Agreement ("License Agreement") is made this ____ day
of January, 1999, effective as of January 1, 1998 ("Effective Date"), by and
between United Technologies Corporation, a corporation organized and existing
under the laws of the state of Delaware with an office and place of business at
Hartford, Connecticut (hereinafter referred to as "United") and FreeMarkets
OnLine, Inc., a corporation organized and existing under the laws of the state
of Delaware with an office and place of business at 130 Seventh Street, Suite
500, Pittsburgh, PA 15222 (hereinafter referred to as "FreeMarkets").
In consideration of the premises and of the mutual promises of each party
to the other herein contained, it is hereby mutually agreed as follows:
1. CAPITALIZED TERMS. Unless otherwise defined herein, all capitalized terms
shall have the meanings set forth in the Service and System Access Agreement
(the "Service Agreement") entered into between United and FreeMarkets effective
as of January 1, 1998. For purposes of this License Agreement, the rights
granted to United under this License Agreement shall also be deemed granted to
any United "Affiliate," which shall mean any entity in which United owns more
than 50% of the outstanding voting ownership interests, and shall also mean
International Aero Engines, Inc; provided, however that any such rights are
subject to the terms and conditions of this License Agreement.
2. GRANT OF LICENSE.
2.1 BIDWARE(R). Subject to the terms and conditions set forth in this License
Agreement, in consideration of the business services and System access fees set
forth in the Service Agreement, FreeMarkets hereby grants to United a
non-transferable and non-exclusive license to use BidWare(R), and any of its
respective components and any other software, exclusive of [*****], provided
under the Service Agreement. The license granted herein authorizes use of
BidWare(R) only by United authorized users and only in connection with the
services to be provided to United by FreeMarkets. For purposes of this License,
United's "use" of the BidWare(R), means to load BidWare(R) into RAM or to store
BidWare(R) in a memory storage device such as a hard drive, CD-ROM or other
storage device. Under no circumstances shall United make BidWare(R) or its
components ("BidWare(R)") available, or allow BidWare(R) to be made available,
on a network or file server other than the FreeMarkets BidServer(R) and the
FreeMarkets Network. Under no circumstances shall United copy BidWare(R), or
allow BidWare(R) to be copied, for any purpose other than to produce the single
archival (backup) copy permitted under this license.
[*]. Subject to the terms and conditions set forth in this License Agreement,
FreeMarkets hereby grants United and its Affiliates a perpetual, non-exclusive,
world-wide, non-transferrable, royalty-free license tot use, copy, modify and
make derivative works of the [*] delivered to United defined in Article I of the
Service Agreement [*] for any internal purpose, including the right to use the
name [*] for any internal purpose. No license is granted for United to sell,
license, sub-license or otherwise distribute [*]. [*]. FreeMarkets disclaims any
warranties and any liability of any kind in relation to such enhancements,
modifications, improvements or derivative works and nothing herein shall provide
[*]. Nothing in this Agreement provides United with any license rights to any
enhancement, improvement, modification, derivative work and/or commercial
version of [*].
For purposes of this License Agreement, BidWare(R) anD [*] shall collectively be
referred to as the "Software".
<PAGE> 20
3. USE AND LOCATION
3.1 BidWare(R) shall not be used to connect with any server, on-line service, or
any other system except as specifically provided or specified by FreeMarkets.
3.2 BidWare(R) users who have complied with the terms of this License Agreement
will be assigned a user ID and password to govern access to the FreeMarkets
Network and BidWare(R) databases. FreeMarkets reserves the right to change or
cancel or render inoperable any user ID and/or password at any time without
prior notification. United is required at all times to maintain security for its
assigned user ID(s) and password(s). Disclosure of user IDs and passwords to
anyone else is strictly prohibited, and will be grounds for termination of
FreeMarkets' services under this license.
3.3 United understands that FreeMarkets may from time-to-time make available
upgrades to modify the performance of BidWare(R). United understands that in
order to utilize BidWare(R) in conjunction with the BidServer(R) and the
FreeMarkets Network, FreeMarkets may require United to perform the necessary
tasks, and supply the necessary computer equipment, to install software
upgrades. United's failure to install upgrades or provide appropriate computer
equipment may render the BidWare(R) inoperable for its intended purpose.
4. LIMITED WARRANTY/WARRANTY
DISCLAIMER/LIMITATION OF
LIABILITY
4.1 FreeMarkets represents and warrants that:
a) during the term of this Agreement and any renewal term, BidWare(R) will
conform to, and perform in the manner described in, the user documentation;
b) FreeMarkets owns or otherwise has the right to grant a license for the use of
the Software;
c) any diskettes, tapes or other media provided to United by FreeMarkets
pursuant to this Agreement shall be free from physical defects under normal use,
and, at the time of delivery, shall be free from viruses;
d) any enhancements of BidWare(R) generally made available to the public or
other customers will be made available for United's use pursuant to the terms
and conditions of this Agreement.
e) BidWare(R) is designed to and will be year 2000 compliant, which means that
the product, by itself or in exchanging data with other software and/or
hardware, accurately processes date/time data (including, but not limited to,
calculating, comparing and sequencing) from, into, and between the twentieth and
twenty-first centuries (1999-2000), and the years 1999 and 2000 and leap year
calculations, provided that all hardware and software with which the Software
exchanges data (excluding hardware and software in the System used by
FreeMarkets to conduct FreeMarkets Sourcing Projects ) is year 2000 compliant.
4.2 FreeMarkets shall deliver [*] 1.1 to United with any [*] and [*] shall
perform at United in substantially the same manner it operates at FreeMarkets as
of September 18, 1998 as long as the operating environment at United for [*]
meets the requirements set forth in Exhibit H of the Services Agreement. United
acknowledges that [*], that it has not been developed or tested for commercial
use, that it may contain bugs and errors that effect its performance, that
United takes [*] an AS-IS condition and that FreeMarkets has no obligation to
repair, replace or otherwise maintain [*].
4.3 EXCEPT AS EXPRESSLY SET FORTH HEREIN OR IN THE SERVICES AGREEMENT,
FREEMARKETS MAKES NO OTHER WARRANTIES TO UNITED, EXPRESS OR IMPLIED, INCLUDING
BUT NOT LIMITED TO, ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE,
2
<PAGE> 21
RESPECTING THE SOFTWARE, NETWORK, ANY COMPETITIVE BIDDING EVENT, ANY SUPPLIER,
OR UNITED'S PARTICIPATION IN ANY COMPETITIVE BIDDING EVENT. SUBJECT TO
FREEMARKETS OBLIGATIONS REGARDING REPAIR OR REPLACEMENT, UNITED HEREBY
ACKNOWLEDGES AND AGREES THAT THE SOFTWARE AND THE NETWORK ARE NEW CREATIONS, AND
THAT THERE MAY SURFACE FROM TIME-TO-TIME "BUGS" OR "GLITCHES" THAT MAY AFFECT
FREEMARKETS' PERFORMANCE OF ITS OBLIGATIONS, AND/OR THE RIGHTS AND BENEFITS OF
UNITED, UNDER THIS AGREEMENT. SUBJECT TO FREEMARKETS OBLIGATIONS REGARDING
REPAIR OR REPLACEMENT, UNITED AGREES THAT IT ASSUMES THE RISKS OF SUCH "BUGS" OR
"GLITCHES".
FREEMARKETS' SOLE OBLIGATION UNDER THE PERFORMANCE WARRANTY FOR THE BIDWARE(R)
SOFTWARE SHALL BE TO USE REASONABLE EFFORTS TO REMEDY ANY NONCONFORMANCE OF THE
BIDWARE(R) SOFTWARE OR REPLACE THE BIDWARE(R) SOFTWARE.
5. PROPRIETARY RIGHTS. This License does not convey to United any patent,
copyright, trademark, service mark, trade secret, trade name or other
intellectual property rights, except that United will have the limited rights
for BidWare(R) and [*****] expressly set forth in this License. Accordingly,
United acknowledges that, except as expressly provided for in this License,
United possesses no title or ownership of any Software or any portion thereof.
6. NON-ASSIGNMENT OF USE OR LICENSE. United may not assign or otherwise
transfer, voluntarily, by operation of law or otherwise, any of its rights under
this License, without, in each instance, FreeMarkets' prior written consent,
which consent may be withheld, delayed or conditioned in FreeMarkets' sole
discretion. Any attempted assignment or transfer in violation of the terms of
this Section 6 shall, at FreeMarkets' option, be null and void. Any assignment
consented to by FreeMarkets will not act to relieve United of any of its
obligations under this License.
7. TERMINATION OF LICENSE. The License is effective as set forth in the Services
Agreement. The license for BidWare(R) shall terminate immediately upon
completion of or termination of services to be provided by FreeMarkets to
United. United may terminate this Agreement by notifying FreeMarkets and
returning to FreeMarkets any BidWare(R) software and copies thereof and extracts
therefrom held by United.
FreeMarkets may terminate this License Agreement if United has materially
breached this License Agreement and has failed to correct such breach within [*]
after receiving written notice from FreeMarkets specifying the nature of such
breach [*].
Upon any termination of the License, for whatever reason, United shall, within
ten (10) days after such termination, return to FreeMarkets the BidWare(R)
software, any and all copies thereof, materials related thereto and derivations
therefrom then in United's possession or under its control.
8. U.S. GOVERNMENT RESTRICTED RIGHTS. The Software is provided with RESTRICTED
RIGHTS. Use, duplication, or disclosure by the U.S. Government is subject to
restrictions as set forth in subparagraph (c)(1)(ii) of the Rights in Technical
Data and Computer Software clause at DFARS 242.227-7013 or subparagraphs (c)(1)
and (2) of the Commercial Computer Software - Restrict Rights clause at 48 CFR
52.227-19, as applicable. Contractor/Manufacturer is FreeMarkets OnLine, Inc.,
130 Seventh Street, Century Building, Suite 500, Pittsburgh, PA 15222, USA.
3
<PAGE> 22
9. GENERAL PROVISIONS.
9.1 General. This License will be governed by and construed in accordance with
the laws of the [*], without giving effect to its conflicts of laws provisions.
In the event that any provision of this Agreement is held to be illegal, invalid
or unenforceable under present or future laws by any court of competent
jurisdiction, then such provision will be fully severable and this Agreement
will be construed and enforced as if such illegal, invalid or unenforceable
provision were not a part hereof. BidWare(R) and BidServer(R) are registered
trademarks of FreeMarkets. No right, license or interest to such trademarks are
granted hereunder and United agrees that no such right, license or interest
shall be asserted by United with respect to such trademarks.
9.2 Modification. This Agreement can only be modified by a written agreement
duly signed by the persons authorized to sign agreements on behalf of the
parties and any other variance from the terms and conditions of this Agreement
will be of no effect.
9.3 Entire Agreement. This Agreement, including all exhibits and schedules
hereto, the Service Agreement referenced herein and the Non-Disclosure Agreement
referenced in the Service Agreement, are the complete and exclusive statement of
the agreement between the parties as to the subject matter herein, and they
supersede all proposals or agreements, oral or written, and all other
communications between the parties related to the subject matter of this
Agreement.
9.4 Waivers. A waiver of a breach or default under this Agreement shall not be a
waiver of any other or subsequent breach or default. The failure or delay by
either party in enforcing compliance with any term or condition of this
Agreement shall not constitute a waiver of such term or condition unless such
term or condition is expressly waived in writing.
9.5 Agreement Binding. This Agreement shall be binding upon and inure to the
benefit of the parties hereto, their successors and permitted assigns.
9.6 Assignment. Neither party may assign this Agreement without the prior
written consent of the other party.
9.7 Authority. Each party represents that it has full power and authority to
enter into and perform this Agreement, and the person signing this Agreement on
behalf of it has been properly authorized and empowered to enter into this
Agreement.
9.8 Counterparts. This Agreement may be executed in several counterparts, all of
which taken together shall constitute one agreement between the parties.
4
<PAGE> 23
IN WITNESS WHEREOF, the parties hereto have executed or caused these
presents to be executed in duplicate (each of which shall be deemed to be an
original) effective as of the date first written above.
- --------------------------------------------------------------------------------
UNITED TECHNOLOGIES FREEMARKETS ONLINE, INC.
CORPORATION
By: /s/ By: /s/ Glen T. Meakem
-------------------------- ------------------------------
Name: [*] Name: Glen T. Meakem
Title: [*] Title: Chief Executive Officer
Federal ID # 043265483
5
<PAGE> 24
Exhibit F
[*****]
United is providing FreeMarkets with competitively sensitive information and
spending significant resources to use FreeMarkets' cost-saving processes and
services. United's competitors have access to entities other than FreeMarkets
for alternative cost-saving services and therefore the parties have agreed that
during the term (including all renewals) of this Agreement, FreeMarkets shall
abide by the terms of Article VI with regard to the following United
Competitors:
UNITED DIVISION/SUBSIDIARY [******]
CARRIER [******]
HAMILTON STANDARD [******]
OTIS [******]
PRATT & WHITNEY [******]
SIKORSKY [******]
UNITED TECHNOLOGIES [******]
AUTOMOTIVE(1)
* Directly competitive divisions/categories only.
(1) In addition to the companies listed as competitors of United Technologies
Automotive ("UTA"), UTA competes with [*]. FreeMarkets has an existing
business relationship with [*] and may continue to perform services for
them. FreeMarkets agrees (i) FreeMarkets will not disclose to [*] or any
other third party any Confidential Information received from United under
this Agreement except as provided in Exhibit D, and (ii) if [*] requests
that FreeMarkets perform specialized market-making services (i.e. RFQ
preparation and supplier qualification) for a project where FreeMarkets
possesses Confidential Information received from United known to
FreeMarkets to be applicable to the project, FreeMarkets will decline the
engagement for such specialized services. Nothing herein shall prevent
FreeMarkets from conducting any Online Competitive Bidding Event for [*].
<PAGE> 25
Exhibit G
UNITED TECHNOLOGIES CORPORATION
SERVICE AGREEMENT PROVISIONS
(Government related)
February, 1998
PROVISION 1 - INTERPRETATION AND CONSTRUCTION
a. This Agreement shall be interpreted as a unified contractual document with
these Provisions and the Articles set forth in the Service Agreement attached
hereto having equal effect, except that in the event of any inconsistency
between an Article and a Provision, the Article shall control. The construction
of this Agreement shall be governed by the laws of the State of Connecticut,
excluding its conflict of law rules. The title designations of the Articles or
Provisions in this Agreement are for convenience only and shall not affect the
interpretation or construction hereof.
b. The terms and provisions set forth in this Agreement constitute the entire
agreement between the parties and shall supersede all previous communications,
representations, and agreements, either oral or written, between the parties
hereto with respect to the subject matter hereof and no agreement or
understanding varying or extending this Agreement shall be binding upon either
party hereto unless made in a writing referencing this Agreement and signed by a
duly authorized officer or representative of the party to be bound.
c. Ambiguities, inconsistencies, or conflicts arising out of or related to this
Agreement will not be strictly construed against United; rather, they shall be
resolved by applying the most reasonable interpretation under the circumstances,
giving full consideration to the intentions of the parties at the time of
contracting.
d. If in any instance any provision of this Agreement shall be determined to be
invalid or unenforceable under any law or regulation, such provision shall not
apply in such instance, but the remaining provisions hereof shall be given
effect in accordance with their terms.
e. United's failure to insist on performance of any of the terms or conditions
herein, or to exercise any right or privilege, or United's waiver of any breach
hereunder, shall not thereafter waive any such terms, conditions, or privileges
or any other terms, conditions, or privileges, whether of the same or similar
type.
PROVISION 2 - INDEPENDENT SELLER RELATIONSHIP
a. The relationship of the Seller to United is that of an independent contractor
and nothing herein shall be construed as creating any other relationship. The
Seller may adopt such arrangements as the Seller may desire with regard to the
details of the services performed hereunder, the hours during which said
services are to be provided, and the place or places where said services are to
be furnished, provided that such details, hours and services shall be consistent
with the proper accomplishment of said services and provided further that said
services shall be performed in a manner calculated to attain the most
satisfactory results for United.
b. Seller accepts, in connection with the work called for hereby, exclusive
liability for the payment of any taxes or contributions measured by Seller's
income or levied on Sellers property (real or personal). Seller also assumes all
liability for Social Security, unemployment insurance, old age payments,
annuities or retirement benefits which are measured by wages, salaries or other
remuneration's paid by Seller to any and all persons employed by it in
connection with the performance of the work, and to comply with all valid
Federal and State administrative regulations respecting the assumption of
liability for any of the aforesaid
<PAGE> 26
taxes or contributions. Seller represents that the Agreement prices incorporated
herein include all such taxes or contributions and agrees to indemnify and hold
United and United's directors, officers and employees harmless from and against
any and all liability for the delay or failure of Seller and its subcontractors
to pay any such taxes or contributions.
PROVISION 3 - CONFIDENTIAL INFORMATION AND COMPETITIVE ACTIVITIES
a. "Confidential Information" shall mean any information owned by United or any
of its subsidiaries or affiliates (in Provisions 3 and 4 all referred to as
"United"), or acquired herein by United, or entrusted to United, that provides
economic value, actual or potential, to United by reason of it not being
generally known to other persons or entities who can obtain economic value from
its disclosure or use. Such information may include, by way of example: computer
programs and documentation; technical design, manufacturing and application
information; customer information; training information; financial information;
personnel information; new product developments; advertising and business and
marketing plans.
b. Seller shall have no obligation of confidentiality with respect to any
Confidential Information which:
i) was not developed by Seller hereunder and was already known to
Seller prior to acquisition from, or disclosure by United; or
ii) is received without restriction as to disclosure by Seller
from a third party having the right to disclose it; or
iii) is approved for release by written authorization of United; or
iv) is or becomes publicly known without fault of Seller.
c. During the term (including all renewals) of this Agreement, and for five (5)
years thereafter, Seller shall safeguard and shall neither disclose to any third
person nor use for Seller's own benefit nor for the benefit of others,
Confidential Information however or whenever acquired by Seller.
d. Seller hereby represents and warrants that Seller is under no obligation to
any other person or company whereby conflicts of interest are or may be created
by Seller entering into or performing this Agreement with United.
e. During the term (including all renewals) of this Agreement and for a period
of two (2) years thereafter, Seller shall not knowingly engage, directly or
indirectly, in any development or consulting activity which is competitive to
United.
f. The Seller shall contractually bind its employees and such other persons or
parties as may be used by the Seller in the performance of services hereunder to
the obligations established under this Provision, and, in the event of a breach
of these obligations by such employees, other persons or parties, Seller shall
enforce such contractual provisions and, upon the written request of United,
permit United to enforce such contractual provisions in Seller's name
2
<PAGE> 27
PROVISION 4 - INTELLECTUAL PROPERTY
a. "Intellectual Property" shall mean all patents, copyrights, mask works,
trademarks, Confidential Information and other rights and information of a
similar nature worldwide to the extent that such rights or information are
created or made possible by Seller alone (or acting with United or others) and
result from any service(s) herein provided to United.
b. Seller will promptly disclose in writing to United all Intellectual Property.
To the extent permissible by law, all deliverables shall be deemed works made
for hire for United. In addition, Seller, on behalf of itself, its employees and
any others used by Seller, hereby irrevocably assigns to United all right, title
and interest to all Intellectual Property, and agrees to do all things
reasonably necessary to enable United to secure United States and non-United
States patents, copyrights and any other rights relating to Intellectual
Property, including the execution of a specific assignment of title of any
Intellectual Property to United. Seller, on behalf of itself, its employees and
any others used by Seller, hereby irrevocably waives all "moral rights", all
rights under the Visual Artists Rights Act, all rights of privacy and publicity,
and the like, in all materials provided to United.
c. To any extent United does not otherwise have the right(s) to do so, Seller,
on behalf of itself, its employees and any others used by Seller, hereby grants
to United worldwide, non-exclusive, perpetual, fully-paid, irrevocable,
transferable licenses (with rights to grant sublicenses) to make, copy,
distribute, display, perform, adapt and use, in any and all media, now known or
later developed, all materials and other information which Seller provides or
has provided to United either during the term of or prior to the effective date
of this Agreement.
d. Seller hereby represents and warrants to United that all materials, devices,
services and other information that Seller uses, copies or adapts hereunder are
created originally by Seller and/or are licensed lawfully to Seller.
e. Seller shall hold United harmless from and against all damages, liabilities
and costs in connection with any claim that the exercise of any right(s)
assigned/granted hereunder, infringes or violates any patent, copyright, trade
secret or other intellectual property right or other right worldwide, provided
that United: (i) gives Seller notice of such claim, (ii) permits Seller to
defend or reasonably settle same, and (iii) gives Seller all reasonable
assistance to enable Seller to do so.
f. The Seller shall contractually bind its employees and such other persons or
parties as may be used by the Seller in the performance of services hereunder to
the obligations established under this Provision, and, in the event of A breach
of these obligations by Such employees, other persons or parties, Seller shall
enforce such contractual provisions and, upon the written request of United,
permit United to enforce such contractual provisions in Seller's name.
PROVISION 5 - TITLE TO MATERIALS AND EQUIPMENT
a. All materials and equipment furnished by United and all materials and
equipment the cost of which shall be reimbursed to the Seller by United
hereunder are to be and remain the sole property of United and are to be
returned to United within ninety (90) days after the expiration or earlier
termination of this Agreement
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<PAGE> 28
PROVISION 6 - REPRESENTATIONS, WARRANTIES, AGREEMENTS AND COVENANTS
Seller represents, warrants, covenants and agrees that:
a. The Seller and any others used by the Seller in the performance of services
hereunder will comply with United's "Code of Ethics" and shall not, directly or
indirectly, wrongfully solicit, obtain or use on behalf of the United, or
wrongfully disclose to United, any information of any other person, association,
firm, corporation, government or other entity, including information which is a
trade secret, confidential, proprietary, government security classified, or
government procurement sensitive (including documents identified prior to the
award of a government contract as source selection information and any other
information which offers or may offer United an illegal or unfair competitive
advantage); and, unless otherwise specifically identified in writing at the time
of disclosure, all information disclosed to United by the Seller and any others
used by the Seller in the performance of services hereunder may be used or
disclosed by United without restriction;
b. None of the provisions of this Agreement, nor the services performed
hereunder by the Seller and any others used by the Seller, contravenes or is in
conflict with any law, judgment, decree, order or regulation of any governmental
authority, or with any contract or agreement with, or any obligations owed to,
any other person, association, firm, corporation, government or other entity to
which the Seller or any such others used by the Seller are subject, including
without limiting the generality of the foregoing, employment agreements,
consulting agreements, disclosure agreements or agreements for the assignment of
inventions;
c. No entertainment, gift, gratuity, money, or anything of value shall be paid,
offered, given or promised by the Seller or by any others used by the Seller in
the performance of services hereunder to, or be obtained or solicited by the
Seller or by any such others from, directly or indirectly, any person,
association, firm, corporation, government or other entity that is prohibited by
United's Code of Ethics, by applicable law or regulation, by the policies of
that association, firm, corporation, government or other entity, or by the
"Policy Statement";
d. Prior to the effective date hereof and throughout the term of this Agreement,
the Seller shall promptly notify United in writing of any action, change or
development which would make any representation, warranty, covenant or agreement
in or furnished under or as a part of this Agreement untrue, inaccurate or
incomplete in any respect;
e. If the Seller (or any others used by the Seller in the performance of
services hereunder) is expected to or may engage in services considered to be
within the definitions of a "Government Marketing Consultant", "Lobbyist", or
"current or former employee of, or consultant to, the U.S. Government," as such
terms are defined in pertinent laws and regulations, the Seller agrees to notify
United immediately in writing.
In addition to the representation, warranties, covenants, and agreements
provided above, the Seller additionally warrants, represents, agrees and
covenants, that:
(1) The Seller (and all others used by the Seller in performing services
hereunder) will comply with all applicable laws and regulations, including, but
not limited to:
(A) the "Byrd Amendment", 31 U.S.C. 1352, as implemented by
Federal Acquisition Regulation ("FAR") 3.8; and
(B) the Office of Federal Procurement Policy Act,
41 U.S.C. 423, as implemented by FAR 3.104; and
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<PAGE> 29
(C) section 8141 of the 1989 Department of Defense
Appropriation Act and section 6 of the OFPP Act, 41 U.S.C. 404, as implemented
by FAR 9.5 and OFPP Policy Letter 89-1.
(2) The Seller shall avoid and refrain from all activities on behalf of
United which could be interpreted as creating conflicts of interest or the
appearance of a conflict for United or the Seller, including, but not limited
to:
(A) any activities that are contrary to the responsibilities
and standards of conduct set forth in the regulations of the Office of
Personnel Management, 5 CFR Parts 2635-2637, or would create conflicts
of interest as such conflicts are described in 18 U.S.C. 201-218;
(B) any activities that are prohibited by the Office of
Federal Procurement Policy Act Amendments of 1988 (herein the "OFPP
Amendments") or implementing regulations thereunder, including the
prohibitions applicable to Sellers and their Sellers during the conduct
of any federal agency procurement from knowingly:
(i) making, directly or indirectly, any offer or promise of
future employment or business opportunity to, or engage,
directly or indirectly, in any discussion of future employment
or business opportunity with, any procurement official of such
agency;
(ii) offering, giving, or promising to offer or give, directly
or indirectly, any money, gratuity, or other thing of value to
any procurement official of such agency; or
(iii) soliciting or obtaining, directly or indirectly, from
any officer or employee of such agency, prior to award of a
contract, any proprietary or source selection information
regarding such procurement or disclosing such information,
directly or indirectly, to a person other than a person
authorized by the government to receive such information;
(3) The Seller is familiar with and shall continue to be familiar with
all such conflicts of interest laws and regulations and shall provide such
written certifications under such laws and regulations as United may reasonably
request. Written certifications may be required as provided for under the OFPP
Amendments and other regulations governing the conduct of Government Marketing
Consultants and/or Lobbyists. United shall make available to the Seller, upon
written request, copies or synopses of such laws and regulations. Failure to
promptly and accurately complete certifications shall be grounds for United's
immediate termination of this Agreement, without liability to United;
(4) The Seller agrees to promptly notify United if the Seller at any time
has information or reason to believe that the performance of services hereunder
would violate any such laws or regulation or would create such a conflict of
interest, or the appearance of such a conflict;
(5) Payment by United and acceptance of compensation by the Seller under
this Agreement does not constitute a violation of 10 U.S.C. 2397b, and Seller
shall not use or provide compensation to any other persons in connection with
the performance of services hereunder in violation of such statute;
(6) The Seller and any other persons used by the Seller in the
performance of services hereunder shall not contact, directly or indirectly, (i)
any officer, employee, principal or agent of the
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<PAGE> 30
Government (including any elected member of the legislative branch of the
Government or their staff) or, (ii) any customer, competitor, prime Seller,
subcontractor, vendor or supplier of United, if such contact relates to a
current or prospective government procurement; unless the Seller is specifically
authorized to make such a contact under the terms of this Agreement or the
Seller receives the prior written approval of United to make such a contact; in
any and all such instances the Seller and any such others used by the Seller
shall comply with all applicable laws and regulations; and
(7) Neither the Seller nor, where applicable, any others used by the
Seller in the performance of services hereunder, has been convicted of a felony
or has been debarred or suspended from doing business with the government or
declared ineligible by the government to perform services for or on behalf of
United, or is presently the subject of any such action.
PROVISION 7 -ASSIGNMENT
a. Neither this Agreement nor any interest hereunder shall be assignable by
either party unless such assignment is mutually agreed to in writing by the
parties hereto; provided, however, that United may assign this Agreement to any
corporation with which United may merge or consolidate or to which United may
assign substantially all of its assets or that portion of its business to which
this Agreement pertains without obtaining the agreement of the Seller.
PROVISION 8 - MODIFICATION
a. No modification of this Agreement shall be valid unless in writing and signed
by each of the parties hereto.
PROVISION 9 - EXPIRATION OR TERMINATION
a. Either party may terminate this Agreement or any renewal thereof by giving
the other party written notice of that party's intention to so terminate. The
termination will become effective on the thirtieth (30th) day immediately
following the date of the sending of said notice. This Agreement or any renewal
thereof shall automatically expire as of the end of the term if the parties do
not renew the Agreement
b. Notwithstanding any other provisions of this Agreement, if Seller or others
used by the Seller in the performance of services hereunder violate any of the
provisions of this Agreement, including but not limited to any applicable laws
or regulations or United's "Code of Ethics" or the "Policy Statement", United
may, in its sole discretion and in addition to any other remedies available at
law or in equity, terminate this Agreement by written notice to the Seller
effective immediately upon the sending of said notice.
c. The expiration or termination of this Agreement or of any renewal thereof
shall discharge any further obligations of either party hereto with respect to
this Agreement or any renewal thereof; provided, however, that the Seller's
obligations under Provisions 3, 4, 5, 20, 21 and 22 hereof with respect to such
of said services as may have been furnished prior to the effective date of
expiration or termination shall not be discharged by such expiration or
termination but shall remain in full force and effect; and, provided further,
that United's obligation hereunder to make payment to the Seller with respect to
the period prior to the effective date of said expiration or termination shall,
except in the event of termination for cause under b.
above, remain in full force and effect.
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<PAGE> 31
d. At any time prior to final payment for work under this Agreement and within
three (3) years thereafter, United shall have the right to audit all direct and
indirect charges, to the extent United may deem necessary, for the purpose of
verifying all charges claimed under any invoice. Seller agrees to maintain and
make available all records and books of account detailing any costs and expenses
charged against this Agreement or any invoice hereunder.
PROVISION 10 -WARRANTIES
a. Seller warrants that all work will be performed in accordance with current,
sound and generally accepted industry practices by appropriately licensed
personnel who are experienced in the appropriate fields. These services are to
be performed by Seller for United in consideration of the payments specified
herein and with the obligation that should any of the work not prove
satisfactory at any time, in United's sole judgment, Seller shall re-perform all
work originally undertaken by Seller and/or necessary to correct such defective
work, at no additional cost to United.
b. Seller agrees to provide A high standard of professional service and will
exert its best efforts to achieve satisfactory results within the time and funds
available.
c. All work submitted by Seller shall comply with federal, state, or local
guidelines and directions, as appropriate, regarding the format of documents,
protocols, testing procedures, and/or contents of designs, plans,
specifications, etc., to the extent such guidelines and directions are available
to Seller prior to performance of work.
d. Seller shall assign to United all warranties for materials and equipment
furnished by Seller during the performance of work. Seller shall notify United
prior to furnishing any materials or equipment that are not fully warranted for
at least the six month period immediately following conclusion of work
hereunder.
e. Seller further agrees to execute any certificate reasonably required by
United and within the scope of work hereunder if such certificate is required
pursuant to federal, state, or local laws or regulations.
f. Seller agrees to comply with all applicable federal, state, and local laws
pertinent to performance of work under this Agreement, and further agrees to
include the substance of this paragraph in all subcontracts entered into by
Seller.
g. Any payment(s) otherwise due Seller for any item o f work in dispute may be
withheld by United (in whole or part) upon evidence of default by Seller in the
performance of any such work. In no event shall payment be made for any work
performed by the Seller if such work is not stated in or is not otherwise within
the scope of work.
h. Seller warrants that the prices/charges/rates set forth or incorporated via
reference in this Agreement are not less favorable than those currently extended
to any other customer for the same or similar services, in similar quantities,
during the term hereof. No additional charges or rates of any type shall be
added without United's prior written consent
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<PAGE> 32
PROVISION 11 - EXCUSABLE DELAYS
a. Should the progress or completion of the work required be delayed due to
causes such as (but not limited to) strikes, accidents, or other unforeseeable
causes beyond the Seller's reasonable control and without its fault or
negligence, the time for completion of said work shall be extended for an
equivalent period of such delay as may be approved in writing by United (such
approval not to be unreasonably withheld). Delays caused by acts of
subcontractors or parties engaged by Seller shall not be excusable unless such
subcontractor's or party's delay was excusable within the meaning of this clause
and Seller was unable to secure alternate sources of supply or services within a
commercially reasonable time . Prompt notice in writing shall be given to United
whenever it appears said work shall be delayed or is likely to be delayed for
any cause, and Seller shall use its best efforts to minimize any delay and
continue its performance.
b. United shall be excused for any delays due to causes beyond its reasonable
control.
PROVISION 12 - CHANGES
a. At any time during the performance of services hereunder, United shall have
the right to make changes in, deletions from, or additions to the work,
hereinafter collectively referred to as "Changes". In the event that such
Changes require different and/or additional work by Seller, then prior to
commencement of work under such Change, Seller shall present to United, and
United shall consider, a claim for an equitable increase in its compensation for
services rendered because of such Change. Such claim shall be supported by such
data and information as United reasonably may require. Any such claim by Seller
for an equitable increase in compensation shall be mutually agreed to prior to
the commencement of work under the proposed Change.
b. The parties anticipate that Changes hereunder may be required under
circumstances not permitting sufficient time in which to meet the formalities
described in paragraph a. above. In such event, both parties agree to use their
best efforts to prosecute the work required as well as to fully define any
equitable increase in compensation within a reasonable time after the Change is
ordered by United.
c. Any Changes ordered hereunder shall be issued only by United's duly
authorized representative or other designee appointed in writing in advance of
ordering the Change.
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<PAGE> 33
PROVISION 13 - INDEMNIFICATION
a. Seller agrees to protect, defend, indemnify, and hold harmless United from
and against all claims, demands, and causes of action of every type and
character, without limitation, arising out of or related to performance of work
under this Agreement
b. The indemnification provided in a. above shall apply to any action arising
out of or related to the negligent or willful acts or omissions of Seller or its
subcontractors, officers, directors, heirs, assigns, or employees. This
indemnity shall not apply to claims - other than those described in c. below -
proximately resulting from the sole negligence or willful misconduct of United,
its directors, officers, agents or employees.
c. The obligation undertaken in b. above shall expressly include, without
limitation, indemnification against injuries, sickness, disease (including
occupational disease whenever occurring), or death of Sellers employees in any
way connected with or resulting from the sole, joint, or comparative negligence
of United, or of its directors, officers, agents, or employees, whether acting
jointly or severally.
d. In the event Seller makes a claim against United, at law or otherwise,
alleging damage to Seller as a result of any error, omission or other act
arising out of or relating to this Agreement, and Seller fails to prove such
claim or to prevail in any action at law or in equity, then Seller shall pay all
costs, including reasonable attorney's fees, incurred by United in defending
itself against such claim.
PROVISION 14 - TERMINATIONS AND SUSPENSION OF WORK
a. The performance of work under this Agreement may be terminated or suspended
by United in accordance with this Article in whole or from time to time in part
whenever United shall determine that such termination or suspension is in the
best interest of United. Any such termination or suspension shall be effected by
delivery to the Seller by United of a written notice specifying the extent to
which performance of work under this Contract is terminated and/or suspended and
the date upon which such action shall become effective. In the event of such
action, United shall pay Seller for all services rendered up to the effective
date of termination or suspension (subject to Article 11(d) of the Service
Agreement), and Seller may submit a proposal for equitable increase in the
prices hereof to account for any costs of demobilization and direct termination
expenses, to the extent such costs are solely attributable to the
termination/suspension and are actually incurred and paid by Seller.
PROVISION 15 - PERMITS AND LICENSES
a. Except for permits and/or licenses required by statute or regulation to be
obtained by United, Seller agrees to obtain and maintain - at its own expense -
all permits, licenses and other forms of documentation required by Seller in
order to comply with all existing laws, ordinances, and regulations of the
United States and of any state, county, township, or municipal subdivision
thereof, or other governmental agency, which may be applicable to Seller's
performance of work hereunder. United reserves the right to review and approve
all applications, permits, and licenses prior to the commencement of any work
hereunder.
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<PAGE> 34
PROVISION 16 - REPRESENTATIVES
a. Both United and Seller shall designate a representative or representatives
who shall be available during progress of work and who shall have authority to
act in all matters concerning such services, excepting, however, such
representative(s) shall not be empowered to amend or waive any term or condition
of this Contract.
PROVISION 17 - EQUAL OPPORTUNITY
a. Seller will not discriminate against any employee or applicant for employment
because of age, race, color, handicap, religion, sex, or national origin. Seller
will take affirmative action to ensure that applicants are employed, and that
employees are treated during employment without regard to their age, race,
color, religion, sex, handicap, or national origin. Such action shall include
but not be limited to the following: Employment, upgrading, demotion, or
transfer, recruitment or recruitment advertising, layoff or termination, rates
of pay or other forms of compensation, selection for training, including
apprenticeship. Seller agrees to post in conspicuous places, available to
employees and applicants for employment, notices setting forth the provisions of
this nondiscrimination clause.
b. Seller will, in all solicitations or advertisements for employees placed by
or on behalf of Seller, state that all qualified applicants will receive
consideration for employment without regard to age, race, color, religion, sex,
handicap, or national origin.
c. Seller will send to each labor union or representative of workers with which
he has a collective bargaining agreement or other contract or understanding, a
notice advising the labor union or workers' representative of the Seller's
commitments under this Equal Opportunity clause and shall post copies of the
notice in conspicuous places available to employees and applicants for
employment.
d. Seller will comply with all provisions of the rules, regulations, and
relevant orders of the Secretary of Labor.
e. Seller will include the substance of this Article in every subcontract or
purchase order unless exempted by rules, regulations, or orders of the Secretary
of Labor issued pursuant to section 204 of Executive Order 11246 of September
24, 1965, as amended by Executive Order 11375 of October 13, 1967, so that such
provisions will be binding upon each subcontractor or vendor.
PROVISION 18 - INSURANCE
a. Seller agrees to secure and carry as a minimum the following insurance
covering all work to be performed under this Agreement
(1) Workers' Compensation and Employer's Liability Insurance in an amount
sufficient by virtue of the laws of the U.S., foreign country, state, or other
governmental subdivision in which the work or any portion of the work is
performed;
(2) General Liability Insurance in which the limit of liability for
injuries, including accidental death, shall be [*] for any one occurrence;
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<PAGE> 35
(3) General Liability Insurance in which the limit of liability for
property damage shall be [*] for any one occurrence;
(4) Automobile Liability Insurance in which the limit of liability for
injuries, including accidental death, shall be [*] for any one occurrence;
(5) Automobile Liability Insurance in which the limit of liability for
property damage shall be [*] for any one occurrence; and
(6) Professional Liability Insurance subject to a limit of [*].
(7) Contractual Liability Insurance sufficient in scope of coverage and
amount [*] to cover the liabilities herein assumed by Seller.
b. All such insurance shall be issued by companies authorized to do business
under the laws of the State in which all or part of the services are to be
performed, shall be in form satisfactory to United, and shall contain a
provision prohibiting cancellation except upon at least ten (10) days' prior
notice to United. All such insurance policies will be primary in the event of a
loss arising out of the Seller's performance of work. Certified copies of said
policies or certificates evidencing such insurance and naming United as an
additional insured shall be filed with United within 30 days after the date of
this Agreement and within a reasonable time after any renewals or changes to
such policies are issued.
c. To the extent permitted by law, Seller and its insurer(s) agree that
subrogation rights against United are hereby waived. Seller hereby undertakes to
reflect such waiver in any policy(ies) required under this Agreement.
d. Seller agrees to insert the substance of paragraphs a. through c. above in
all subcontracts entered into by Seller to support work performed under this
Agreement.
PROVISION 19 - CONTINUATION OF WORK DURING THE PENDENCY OF A DISPUTE
a. No failure of Seller and United to settle any dispute or to reach any
agreement provided for by the terms of this Agreement shall excuse Seller from
diligently proceeding with the performance of this Agreement, except as
otherwise expressly provided in this Agreement.
PROVISION 20 - GOVERNMENT CONTRACTING PROVISIONS
a. This Agreement is subject to and governed by United's "Policy Statement on
Business Ethics and Conduct in Contracting with the United States Government,"
dated February 1, 1989, made a part hereof, as such may be amended from time to
time. The Seller covenants and agrees that the Seller and any others used by the
Seller in the performance of services hereunder will comply with the laws and
regulations applicable to contracting with the United States Government and with
the "Policy Statement."
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<PAGE> 36
PROVISION 21 - NATIONAL DEFENSE INFORMATION
a. The Seller recognizes that United is engaged in the performance of contracts
with the United States Government and that under such contracts United is
required to meet various requirements as to the safeguarding and nondisclosure
of information relating to the national defense. The Seller agrees, therefore,
that the Seller and others used by the Seller in the furnishing of services
hereunder shall comply strictly with all applicable laws, rules, regulations and
requirements of the Government and of United with regard to such matters. The
Seller further understands that failure to safeguard, or improper disclosure of,
information relating to the national defense may subject Seller or any such
others used by Seller to criminal liability under the laws of the United States,
including Title 18 U.S.C., Sections 793 through 799, and Executive Orders No.
10865 dated February 20, 1960, as amended by Executive Orders No. 10909 and No.
11382, and modified by No. 12030; and No. 12065 dated June 28, 1978.
PROVISION 22 - KICKBACKS
a. Seller represents and warrants to United that neither Seller (including any
of its officers, partners, employees or agents) nor any subcontractor or
subcontractor employee has:
(1) provided, attempted to provide, or offered to provide any kickback;
(2) solicited, accepted or attempted to accept any kickback; or
(3) included, directly or indirectly, the amount of any kickback in the
price applicable to this Agreement or in the subcontract price charged by any
subcontractor to a higher tier subcontractor.
b. In addition to any other remedies that United may have, Seller shall
indemnify and hold harmless United from and against any loss or damage,
including, without limitation, United's costs, attorney's fees, or any fines or
penalties assessed against United, resulting from a violation of (i) the
Anti-Kickback Act of 1986 or (ii) other pertinent federal, state, or local laws
regarding kickbacks or commercial bribery, by Seller (including any of its
officers, partners, employees, or agents) or by any subcontractor or
subcontractor employee.
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<PAGE> 37
Exhibit H
TECHNICAL ENVIRONMENT REQUIREMENTS FOR RUNNING [*****]
Server Requirements:
The server environment for the [*****] Server Database for use on a network must
have:
1. Network environment with shared file storage
2. 10-20 Mb Free files space on network accessible shared drive
Client Requirements
The computer to run the [*****] Client Software must have:
1. Pentium Processor (or equivalent)
2. 32 Mb or more RAM
3. At least 20 Mb free space on hard drive
4. Microsoft Windows 95 Release 4.00.950 or greater or Microsoft
Windows NT 4.0 or greater
5. Network connection and authority to access and write to
network drive where shared database file is stored
(UTCMeasures.mdb)
6. Microsoft Access 97
<PAGE> 38
Exhibit I
Determination of MBO Bonus Upon Termination
Assumptions:
Product Spend Savings Goal: [*]
Date of Termination: May 26
146 Days
Prorated Savings Goal: [*] x ------------ = [*] Million
365 Days
******************************************************************************
Scenario 1:
MBO Savings
January 1 - May 26: [*]
146 Days
MBO Bonus: [*] x ------------ = [*]
365 Days
******************************************************************************
Scenario 2:
MBO Savings
January 1 - May 26: [*] Million
MBO Bonus: No MBO Bonus
<PAGE> 39
Exhibit J
United Sourcing Process
The goal of the United Technologies Corporation Supply Management Process is to
select and manage the best possible suppliers. The detailed steps are outlined
below:
# Perform Procurement Analysis and Profile Sourcing Group (SG)
# Develop Sourcing Strategy
# Generate Supplier Portfolio
# Develop Solicitation and Visit Suppliers
# Evaluate Supplier Proposals
# Select Competitive Supplier
# Negotiate with Selected Supplier
# Manage Transition Plan for Products and Services
<PAGE> 1
Exhibit 10.6
FREEMARKETS, INC.
AMENDED AND RESTATED STOCK INCENTIVE PLAN
1. PURPOSE OF THE PLAN.
The purpose of the FreeMarkets, Inc. Amended and Restated Stock
Incentive Plan (originally named the FreeMarkets OnLine, Inc. 1998 Stock Option
Plan) (the "Plan") is to promote the interests of FreeMarkets, Inc. (the
"Company"), its subsidiaries and its stockholders by (i) attracting and
retaining employees, officers, directors, consultants and advisors of
outstanding ability, (ii) motivating such persons, by means of
performance-related incentives, to achieve long-range performance goals, and
(iii) enabling such persons to participate in the long-term growth and financial
success of the Company and its subsidiaries. The original effective date of the
Plan was March 2, 1998 ("Effective Date"); the Plan was subsequently amended and
restated as of June 30, 1999 ("Restated Effective Date") and was thereafter
amended to reflect a change in the Company's name, and to clarify certain
aspects of Plan operation, effective as of the Restated Effective Date. Except
as otherwise specifically provided herein, the Plan as amended and restated
applies generally to Options (as defined in Section 3) granted prior to, as well
as Options and Restricted Stock (as defined in Section 3) granted on and after,
the Restated Effective Date.
2. ADMINISTRATION.
(a) Subject to the following paragraphs, the Plan shall be administered
by the Company's Board of Directors (the "Board") or by a Compensation Committee
of the Board (the "Compensation Committee"). If the Board delegates to the
Compensation Committee the authority to administer the Plan, the Compensation
Committee shall be empowered to take all actions reserved to the Board under the
Plan. The Board is authorized to interpret the Plan, to prescribe, amend and
rescind rules and regulations to further the purposes of the Plan, and to make
all other determinations necessary for the administration of the Plan. All such
actions by the Board shall be conclusive, final and binding on all recipients of
grants hereunder ("participants").
(b) Following registration by the Company of its Common Stock, par
value $.01 per share ("Common Stock") under Section 12 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), any Compensation
Committee to which Plan administration is delegated shall consist solely of
Board members who qualify as (i) "Non-Employee Directors" as defined under Rule
16b-3 under the Exchange Act and (ii) "outside directors" as defined under
Section 162(m) or any successor provision of the Internal Revenue Code of 1986,
as amended (the "Code") and applicable Treasury regulations thereunder, if and
to the extent such qualification is necessary so that grants made under the Plan
or the exercise of rights thereunder will qualify for any tax or other material
benefit to participants or the Company and its subsidiaries under applicable
law.
(c) Notwithstanding the foregoing, the Board may, subject to any
limitations or restrictions the Board may impose from time to time, delegate to
the Chief Executive Officer the authority to administer the Plan, including the
authority to grant Options (as hereinafter defined) to employees, consultants or
advisors of the Company and its subsidiaries who are not subject, by reason of
their position with the Company or its subsidiaries, to the requirements of
Section 16 of the Exchange Act and who are not expected to be subject to the
limitations of Code Section 162(m).
<PAGE> 2
3. GRANTS.
Grants under the Plan may be in the form of options which qualify as
"incentive stock options" within the meaning of Code Section 422 or any
successor provision ("Incentive Stock Options"), options which do not so qualify
("Nonqualified Options" and, collectively with Incentive Stock Options,
"Options"), and stock which is subject to certain forfeiture risks and
restrictions on transferability ("Restricted Stock"). Incentive Stock Options
may be granted only to employees of the Company or its subsidiaries. Each grant
of an Option shall be designated in the applicable "Grant Instrument" (as
defined in Section 5) as an Incentive Stock Option or a Nonqualified Option, as
appropriate. If, notwithstanding its designation as an Incentive Stock Option,
all or a portion of any Option grant does not qualify under the Code as an
Incentive Stock Option, the portion which does not so qualify shall be treated
for all purposes hereunder as a Nonqualified Option.
4. SHARES SUBJECT TO THE PLAN.
Subject to adjustment as provided in Section 9, the maximum aggregate
number of shares of Common Stock that may be subject to grants made under the
Plan is 15,450,000 shares (plus any shares of Common Stock covered by any
unexercised portion of terminated stock options granted under the FreeMarkets
OnLine, Inc. 1996 Stock Incentive Plan (the "1996 Plan")), plus an automatic
annual increase on the first day of each fiscal year of the Company beginning on
or after January 1, 2001 and ending on or before December 31, 2008 equal to the
lesser of (i) 1,500,000 shares, (ii) 3% of the shares outstanding on the last
day of the immediately preceding fiscal year, or (iii) such lesser number of
shares as is determined by the Board. The Common Stock to be offered under the
Plan shall be authorized and unissued Common Stock or issued Common Stock which
shall have been reacquired by the Company and held in its treasury. The Common
Stock covered by any unexercised portion of terminated stock options granted
under the Plan or under the 1996 Plan, or by any grant of Restricted Stock which
is forfeited, may again be subject to new grants under the Plan. In the event
the purchase price of an Option is paid in whole or in part through the delivery
of Common Stock, only the net number of shares of Common Stock issuable in
connection with the exercise of the Option shall be counted against the number
of shares remaining available for grant under the Plan. At any time following
registration by the Company of its Common Stock under Section 12 of the Exchange
Act, no participant shall receive grants in respect of more than 2,000,000
shares of Common Stock in any calendar year (subject to adjustment as provided
in Section 9).
5. PARTICIPANTS.
The Board shall determine and designate from time to time those
employees, directors, consultants and advisors of the Company or its
subsidiaries who shall be granted Options or Restricted Stock under the Plan and
the number of shares of Common Stock to be covered by each such Option or
Restricted Stock grant; provided, that any such consultants or advisors who
receive grants under the Plan render bona fide services to the Company or its
subsidiaries that are not in connection with the offer or sale of securities in
a capital-raising transaction. In making its determinations, the Board shall
take into account the present and potential contributions of the respective
individuals to the success of the Company and its subsidiaries and such other
factors as the Board shall deem relevant in connection with accomplishing the
purposes of the Plan. Each grant shall be evidenced by a written Option or
Restricted Stock agreement or grant form ("Grant Instrument") as the Board shall
approve from time to time.
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<PAGE> 3
6. FAIR MARKET VALUE.
For all purposes under the Plan, the term "Fair Market Value" shall
mean, as of any applicable date, (i) if the principal securities market on which
the Common Stock is traded is a national securities exchange or The Nasdaq
National Market ("NNM"), the closing price of the Common Stock on such exchange
or NNM, as the case may be, or if no sale of the Common Stock shall have
occurred on such date, on the next preceding date on which there was a reported
sale; (ii) if the Common Stock is not traded on a national securities exchange
or NNM, the closing price on such date as reported by The Nasdaq SmallCap
Market, or if no sale of the Common Stock shall have occurred on such date, on
the next preceding date on which there was a reported sale; (iii) if the
principal securities market on which the Common Stock is traded is not a
national securities exchange, NNM or The Nasdaq SmallCap Market, the average of
the bid and asked prices reported by the National Quotation Bureau, Inc.; or
(iv) if the price of the Common Stock is not so reported, the Fair Market Value
of the Common Stock as determined in good faith by the Board.
7. GRANTS OF OPTIONS.
(a) Exercise Price of Options. Incentive Stock Options shall be granted
at an exercise price of not less than 100% of the Fair Market Value on the date
of grant; provided, however, that Incentive Stock Options granted to a
participant who at the time of such grant owns (within the meaning of Code
Section 424(d)) more than 10% of the voting power of all classes of stock of the
Company (a "10% Holder") shall be granted at an exercise price of not less than
110% of the Fair Market Value on the date of grant. Nonqualified Options shall
be granted at an exercise price as determined in each case by the Board.
(b) Term and Termination of Options.
(1) The Board shall determine the term within which each
Option may be exercised, in whole or in part, provided that (i) such term shall
not exceed 10 years from the date of grant, (ii) the term of an Incentive Stock
Option granted to a 10% Holder shall not exceed 5 years from the date of grant,
and (iii) the aggregate Fair Market Value (determined on the date of grant) of
Common Stock with respect to which Incentive Stock Options granted to a
participant under the Plan or any other plan of the Company and its subsidiaries
become exercisable for the first time in any single calendar year shall not
exceed $100,000.
(2) Unless otherwise determined by the Board, all rights to
exercise Options shall terminate on the first to occur of (i) the scheduled
expiration date as set forth in the applicable Grant Instrument, (ii) 60 days
following the date of termination of employment for any reason other than the
participant's death or permanent disability (as defined in Code Section
22(e)(3)), (iii) 1 year following the date of termination of employment or
provision of services by reason of the participant's death or permanent
disability (as defined in Code Section 22(e)(3)), or (iv) as may be otherwise
provided in the event of a Change of Control as defined in Section 11; provided,
however, that in the event that a participant ceases to be employed by or to
provide services to the Company and its subsidiaries due to a termination for
"cause" (as defined in Section 7(b)(3)), all rights to exercise Options held by
such participant shall terminate immediately as of the date such participant
ceases to be employed by or to provide services to the Company or its
subsidiaries.
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<PAGE> 4
(3) As used in this Plan, the term "cause" shall mean a
finding by the Board that the participant has engaged in conduct that is
fraudulent, disloyal, criminal or injurious to the Company or its subsidiaries,
including, without limitation, embezzlement, theft, commission of a felony or
dishonesty in the course of his or her employment or service, or the disclosure
of trade secrets or confidential information of the Company or its subsidiaries
to persons not entitled to receive such information.
(c) Payment for Shares. Full payment for shares purchased upon exercise
of Options granted under the Plan shall be made at the time the Options are
exercised in whole or in part. Payment of the purchase price shall be made in
cash or in such other form as the Board may approve, including, without
limitation, (i) by the participant's delivery to the Company of a promissory
note containing such terms as the Board may determine, (ii) by the participant's
delivery to the Company of shares of Common Stock that have been held by the
participant for at least six months prior to exercise of the Options, valued at
the Fair Market Value of such shares on the date of exercise, or (iii) if the
Common Stock is publicly traded, pursuant to a cashless exercise arrangement
with a broker on such terms as the Board may determine; provided, however, that
if payment is made pursuant to clause (i), the then par value of the purchased
shares shall be paid in cash. No shares of Common Stock shall be issued to the
participant until such payment has been made, and a participant shall have none
of the rights of a stockholder with respect to Options held by such participant.
(d) Other Terms and Conditions. The Board shall have the discretion to
determine terms and conditions, consistent with the Plan, that will be
applicable to Options, including, without limitation, performance-based criteria
for acceleration of the date on which certain Options shall become exercisable.
Options granted to the same or different participants, or at the same or
different times, need not contain similar provisions.
(e) Substitution of Options. Options may be granted under the Plan from
time to time in substitution for stock options of other entities ("Acquired
Companies") in connection with the merger or consolidation of the Acquired
Company with the Company or its subsidiaries, the acquisition by the Company or
by its subsidiaries of all or a portion of the assets of the Acquired Company,
or the acquisition of stock of the Acquired Company such that the Acquired
Company becomes a subsidiary of the Company.
8. GRANTS OF RESTRICTED STOCK.
The Board may issue or transfer shares of Common Stock to employees,
directors, consultants or advisors under a grant of Restricted Stock, upon such
terms as the Board deems applicable, including the provisions set forth below:
(a) General Requirements. Shares of Common Stock issued or transferred
pursuant to Restricted Stock grants may be issued or transferred for
consideration or for no consideration, and subject to restrictions or no
restrictions, as determined by the Board. The Board may establish conditions
under which restrictions on shares of Restricted Stock shall lapse over a period
of time or according to such other criteria (including performance-based
criteria) as the Board deems appropriate. The period of time during which the
Restricted Stock will remain subject to restrictions will be designated in the
Grant Instrument as the "Restriction Period."
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<PAGE> 5
(b) Number of Shares. The Board shall determine the number of shares of
Common Stock to be issued or transferred pursuant to a Restricted Stock grant
and the restrictions applicable to such shares.
(c) Requirement of Employment. If a participant who has received a
Restricted Stock grant ceases to be employed by the Company and its subsidiaries
during the Restriction Period, or if other specified conditions are not met, the
Restricted Stock grant shall terminate as to all shares covered by the grant as
to which the restrictions have not lapsed, and those shares of Common Stock
shall be canceled in exchange for the purchase price, if any, paid by the
participant for such shares. The Board may provide, however, for complete or
partial exceptions to this requirement as it deems appropriate.
(d) Restrictions on Transfer and Legend on Stock Certificate. During
the Restriction Period, a participant may not sell, assign, transfer, donate,
pledge or otherwise dispose of the shares of Restricted Stock. Each certificate
for a share of Restricted Stock shall contain a legend giving appropriate notice
of the applicable restrictions. The participant shall be entitled to have the
legend removed from the stock certificate covering the shares of Restricted
Stock subject to restrictions when all restrictions on such shares lapse. The
Board may determine that the Company will not issue certificates for shares of
Restricted Stock until all restrictions on such shares lapse, or that the
Company will retain possession of certificates for shares of Restricted Stock
until all restrictions on such shares lapse.
(e) Right to Vote and to Receive Dividends. During the Restriction
Period, the participant shall have the right to vote shares of Restricted Stock
and to receive any dividends or other distributions paid on such shares, subject
to any restrictions deemed appropriate by the Board.
(f) Lapse of Restrictions. All restrictions imposed on Restricted Stock
shall lapse upon the expiration of the applicable Restriction Period and the
satisfaction of all conditions imposed by the Board. The Board may determine, as
to any or all Restricted Stock grants, that the restrictions shall lapse without
regard to any Restriction Period.
9. ADJUSTMENTS TO REFLECT CAPITAL CHANGES.
The number and kind of shares subject to outstanding grants, the
exercise price applicable to Options previously granted, and the number and kind
of shares available subsequently to be granted under the Plan shall be
appropriately adjusted to reflect any stock dividend, stock split, combination
or exchange of shares or other change in capitalization with a similar
substantive effect upon the Plan or grants under the Plan. The Board shall have
the power and sole discretion to determine the nature and amount of the
adjustment to be made in each case. The adjustment so made shall be final and
binding on all participants.
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<PAGE> 6
10. RIGHT OF FIRST REFUSAL; RIGHT TO REPURCHASE.
(a) At any time prior to registration by the Company of its Common
Stock under Section 12 of the Exchange Act, the Company shall have a right of
first refusal with respect to any proposed sale or other disposition by
participants (and their successors in interest by purchase, gift or other mode
of transfer) of any shares of Common Stock issued to them under the Plan which
are transferable. This right of first refusal shall be exercisable by the
Company in accordance with the terms and conditions established by the Board.
(b) At any time prior to registration by the Company of its Common
Stock under Section 12 of the Exchange Act, in the event that a participant's
employment or service is terminated for cause (as defined in Section 7(b)(3)),
the Company shall have the right, exercisable within 90 days following such
termination, to repurchase any shares of Common Stock issued to such participant
under the Plan for the purchase price paid by such participant for such shares
of Common Stock.
11. DEFINITION OF CHANGE OF CONTROL.
For purposes of this Plan, a "Change of Control" shall mean the
occurrence of any of the following events:
(a) the acquisition, other than from the Company, by any individual,
entity or group (within the meaning of Section 13(d)(3) or Section 14(d)(2) of
the Exchange Act), other than the Company or an employee benefit plan of the
Company, of beneficial ownership (within the meaning of Rule 13d-3 promulgated
under the Exchange Act) of more than 50% of the combined voting power of the
then outstanding voting securities of the Company entitled to vote generally in
the election of directors (the "Voting Securities"); or
(b) the approval by the Company's stockholders of a reorganization,
merger, consolidation or recapitalization of the Company (a "Business
Combination"), other than a Business Combination in which more than 50% of the
combined voting power of the outstanding voting securities of the surviving or
resulting entity immediately following the Business Combination is held by the
persons who, immediately prior to the Business Combination, were the holders of
the Voting Securities; or
(c) the approval by the Company's stockholders of a complete
liquidation or dissolution of the Company, or a sale of all or substantially all
of the Company's assets; or
(d) individuals who, as of the Restated Effective Date, constitute the
Board (the "Incumbent Board") cease for any reason to constitute at least a
majority of the Board; provided, that any individual becoming a director
subsequent to such date whose election or nomination for election by the
Company's stockholders was approved by a vote of at least a majority of the
directors then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board.
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<PAGE> 7
12. CONSEQUENCES OF A CHANGE OF CONTROL.
(a) Upon a Change of Control, (i) each outstanding Option shall be
assumed by the Acquiring Corporation (as defined below) or parent thereof or
replaced with a comparable option or right to purchase shares of the capital
stock, or equity equivalent instrument, of the Acquiring Corporation or parent
thereof, or other comparable rights (such assumed and comparable options and
rights, together, the "Replacement Options") and (ii) each share of Restricted
Stock shall be converted to a comparable restricted grant of capital stock, or
equity equivalent instrument, of the Acquiring Corporation or parent thereof or
other comparable restricted property (such assumed and comparable restricted
grants, together, the "Replacement Restricted Stock"); provided, however, that
if the Acquiring Corporation or parent thereof does not agree to grant
Replacement Options and Replacement Restricted Stock, then all outstanding
Options which have been granted under the Plan and which are not exercisable as
of the effective date of the Change of Control shall automatically accelerate
and become exercisable immediately prior to the effective date of the Change of
Control, and all restrictions and conditions on any Restricted Stock shall lapse
upon the effective date of the Change of Control. The term "Acquiring
Corporation" means the surviving, continuing, successor or purchasing
corporation, as the case may be. The Board may determine in its discretion (but
shall not be obligated to do so) that in lieu of the issuance of Replacement
Options, all holders of outstanding Options which are exercisable immediately
prior to a Change of Control (including those that become exercisable under this
Section 12(a) and any that become exercisable under Section 12(b)) will be
required to surrender them in exchange for a payment by the Company, in cash or
Common Stock as determined by the Board, of an amount equal to the amount (if
any) by which the then Fair Market Value of Common Stock subject to unexercised
Options exceeds the exercise price of those Options, with such payment to take
place as of the date of the Change of Control or such other date as the Board
may prescribe.
(b) In the event that the Acquiring Corporation or parent thereof
agrees to grant Replacement Options and Replacement Restricted Stock pursuant to
Section 12(a) hereof, then 50% of the outstanding Options granted under the Plan
after the Restated Effective Date ("New Options") which are not exercisable as
of the effective date of the Change of Control shall automatically accelerate
and become exercisable immediately prior to the effective date of the Change of
Control, and all restrictions and conditions on 50% of any Restricted Stock
shall lapse upon the effective date of the Change of Control. For purposes of
this provision, the 50% acceleration and lapse provisions shall be applied pro
rata to all unvested New Options, and to all Restricted Stock, respectively,
held by each participant, regardless of when granted.
(c) Any Options that are not assumed or replaced by Replacement
Options, exercised or cashed out prior to or concurrent with a Change of Control
will terminate effective upon the Change of Control or at such other time as the
Board deems appropriate.
(d) Notwithstanding anything in the Plan to the contrary, in the event
of a Change of Control, no action described in the Plan shall be taken
(including, without limitation, actions described in subsections (a), (b) and
(c) above) if such actions would make the Change of Control ineligible for
"pooling of interests" accounting treatment or would make the Change of Control
ineligible for desired tax treatment if, in the absence of such actions, the
Change of Control would qualify for such treatment and the Company intends to
use such treatment with respect to such Change of Control.
13. TRANSFERABILITY OF OPTIONS.
Unless otherwise determined by the Board with respect to Nonqualified
Options, Options granted under the Plan shall not be transferable other than by
will or the laws of descent and distribution and are exercisable during a
participant's lifetime only by the participant.
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<PAGE> 8
14. WITHHOLDING.
The Company shall have the right to deduct any taxes required by law to
be withheld in respect of grants under the Plan from amounts paid to a
participant in cash as salary, bonus or other compensation. In the Board's
discretion, a participant may be permitted to elect to have withheld from the
shares otherwise issuable to the participant, or to tender to the Company, a
number of shares of Common Stock the aggregate Fair Market Value of which does
not exceed the applicable withholding rate for federal (including FICA), state
and local tax liabilities. Any such election must be in a form and manner
prescribed by the Board.
15. CONSTRUCTION OF THE PLAN.
The validity, construction, interpretation, administration and effect
of the Plan and of its rules and regulations, and rights relating to the Plan,
shall be determined solely by the Board. Any determination by the Board shall be
final and binding on all participants. The Plan shall be governed in accordance
with the laws of the State of Delaware, without regard to the conflict of law
provisions of such laws.
16. NO RIGHT TO GRANT; NO RIGHT TO EMPLOYMENT.
No person shall have any claim of right to be granted an Option or
Restricted Stock under the Plan. Neither the Plan nor any action taken hereunder
shall be construed as giving any employee any right to be retained in the employ
of the Company or any of its subsidiaries or as giving any consultant, advisor
or director of the Company or any of its subsidiaries any right to continue to
serve in such capacity.
17. GRANTS NOT INCLUDABLE FOR BENEFIT PURPOSES.
Income recognized by a participant pursuant to the provisions of the
Plan shall not be included in the determination of benefits under any employee
pension benefit plan (as such term is defined in Section 3(2) of the Employee
Retirement Income Security Act of 1974) or group insurance or other benefit
plans applicable to the participant which are maintained by the Company or any
of its subsidiaries, except as may be provided under the terms of such plans or
determined by resolution of the Board.
18. NO STRICT CONSTRUCTION.
No rule of strict construction shall be implied against the Company,
the Board or any other person in the interpretation of any of the terms of the
Plan, any grant made under the Plan or any rule or procedure established by the
Board.
19. CAPTIONS.
All Section headings used in the Plan are for convenience only, do not
constitute a part of the Plan, and shall not be deemed to limit, characterize or
affect in any way any provisions of the Plan, and all provisions of the Plan
shall be construed as if no captions had been used in the Plan.
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<PAGE> 9
20. SEVERABILITY.
Whenever possible, each provision in the Plan and every grant under the
Plan shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of the Plan or any grant under the Plan
shall be held to be prohibited by or invalid under applicable law, then such
provision shall be deemed amended to accomplish the objectives of the provision
as originally written to the fullest extent permitted by law, and all other
provisions of the Plan and every other grant under the Plan shall remain in full
force and effect.
21. LEGENDS.
All certificates for Common Stock delivered under the Plan shall be
subject to such transfer and other restrictions as the Board may deem advisable
under the rules, regulations and other requirements of the Securities and
Exchange Commission, any stock exchange or quotation system upon which the
Common Stock is then listed or quoted and any applicable federal or state
securities laws, and the Board may cause a legend or legends to be put on any
such certificates to make appropriate references to such restrictions.
22. AMENDMENT.
The Board may, by resolution, amend or revise the Plan, except that
such action shall not be effective without stockholder approval if such
stockholder approval is required to maintain the compliance of the Plan and/or
grants made to directors, executive officers or other persons with Rule 16b-3
promulgated under the Exchange Act or any successor rule. The Board may not
modify any Options previously granted under the Plan in a manner adverse to the
holders thereof without the consent of such holders, except in accordance with
the provisions of Sections 9, 12 or 23.
23. MODIFICATION FOR GRANTS OUTSIDE THE U.S.
The Board may, without amending the Plan, determine the terms and
conditions applicable to grants of Options or Restricted Stock to participants
who are foreign nationals or employed outside the United States in a manner
otherwise inconsistent with the Plan if the Board deems such terms and
conditions necessary in order to recognize differences in local law or
regulations, tax policies or customs.
24. EFFECTIVE DATE; TERMINATION OF PLAN.
The Plan was originally effective on March 2, 1998. The Restated
Effective Date is June 30, 1999. The Plan shall terminate on March 1, 2008,
unless it is earlier terminated by the Board. Termination of the Plan shall not
affect previous grants under the Plan.
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<PAGE> 1
Exhibit 10.7
FREEMARKETS, INC.
EMPLOYEE STOCK PURCHASE PLAN
The following constitute the provisions of the FreeMarkets, Inc.
Employee Stock Purchase Plan:
I. Purpose and History
1.1 The purpose of the Plan is to provide employees of the Company and its
Designated Subsidiaries with an opportunity to purchase Common Stock of
the Company. It is the Company's intention to have the Plan qualify as
an "Employee Stock Purchase Plan" under Code Section 423. Accordingly,
the provisions of the Plan shall be construed so as to extend and limit
participation in a manner consistent with the requirements of that Code
section.
II. Definitions
The following words and phrases, when used in this Plan, unless their
context clearly indicates otherwise, shall have the following meanings:
2.1 "Administrator" means the individual(s), committee or entity as may be
appointed by the Board, with such authority and power as the Board may
determine, to administer the terms of the Plan. The Administrator may,
in turn, delegate all or a portion of its authority to one or more
individuals to perform administrative functions under the terms of the
Plan.
2.2 "Board" means the Company's Board of Directors.
2.3 "Change in Control" means the occurrence of any of the following
events:
(a) the acquisition, other than from the Company, by any
individual, entity or group (within the meaning of Section
13(d)(3) or Section 14(d)(2) of the Exchange Act) (other than
the Company or an employee benefit plan of the Company) of
beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of more than 50% of the
combined voting power of the then outstanding voting
securities of the Company entitled to vote generally in the
election of directors (the "Voting Securities"); or
(b) the approval by the Company's stockholders of a
reorganization, merger, consolidation or recapitalization of
the Company (a "Business Combination"), other than a Business
Combination in which more than 50% of the combined voting
power of the outstanding voting securities of the surviving or
resulting entity immediately following the Business
Combination is held by the persons
<PAGE> 2
who, immediately prior to the Business Combination, were the
holders of the Voting Securities; or
(c) the approval by the Company's stockholders of a complete
liquidation or dissolution of the Company, or a sale of all or
substantially all of the Company's assets; or
(d) individuals who, as of the effective date of the Plan,
constitute the Board (the "Incumbent Board") cease for any
reason to constitute at least a majority of the Board;
provided, that any individual becoming a director subsequent
to such date whose election or nomination for election by the
Company's stockholders was approved by a vote of at least a
majority of the directors when comprising the Incumbent Board
shall be considered as though such individual were a member of
the Incumbent Board.
2.4 "Code" means the Internal Revenue Code of 1986, as amended.
2.5 "Common Stock" means the Company's Common Stock.
2.6 "Company" means FreeMarkets, Inc., a Delaware corporation.
2.7 "Compensation" means all cash compensation paid to an Employee by the
Company and includes commissions, bonuses, overtime, incentive
compensation, incentive payments and other forms of cash compensation
as determined by the Administrator.
2.8 "Continuous Status as an Employee" means the absence of any
interruption or termination of service as an Employee. Continuous
Status as an Employee shall not be considered interrupted in the case
of: (i) sick leave; (ii) military leave; (iii) any other leave of
absence approved by the Administrator; provided, that such leave is for
a period of not more than ninety (90) days, unless reemployment upon
the expiration of such leave is guaranteed by contract or statute, or
unless provided otherwise pursuant to Company policy adopted from time
to time; or (iv) in the case of transfers between locations of the
Company or between the Company and its Designated Subsidiaries.
2.9 "Contributions" means all amounts credited to the account of a
participant pursuant to the Plan.
2.10 "Designated Subsidiaries" means the Subsidiaries that have been
designated by the Board from time to time in its sole discretion as
eligible to participate in the Plan (as set forth on Appendix A);
provided, however, that the Board shall only have the discretion to
designate a Subsidiary if the issuance of options to such Subsidiary's
Employees under the Plan would not cause the Company to incur adverse
accounting charges or cause the Plan not to qualify under Code Section
423.
2.11 "Employee" means any person, including an Officer, who is customarily
employed for at least twenty (20) hours per week and more than five (5)
months in a calendar year by the Company or one of its Designated
Subsidiaries.
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<PAGE> 3
2.12 "Exchange Act" means the Securities Exchange Act of 1934, as amended.
2.13 "Offering Date" means the first business day of each Offering Period of
the Plan.
2.14 "Offering Period" means a period of twenty-four (24) months commencing
on May 1 and November 1 of each year, except for the first Offering
Period as set forth in Section 4.1.
2.15 "Officer" means a person who is an officer of the Company within the
meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
2.16 "Plan" means the FreeMarkets, Inc. Employee Stock Purchase Plan.
2.17 "Purchase Date" means the last day of each Purchase Period of the Plan.
2.18 "Purchase Period" means a period of six (6) months within an Offering
Period, except for the first Purchase Period as set forth in Section
4.2.
2.19 "Purchase Price" means with respect to a Purchase Period an amount
equal to eighty-five percent (85%) of the Fair Market Value (as defined
in Section 7.2 below) of a Share on the Offering Date or on the
Purchase Date, whichever is lower; provided, however, that in the event
(i) there is any increase in the number of Shares available for
issuance under the Plan (including without limitation an automatic
increase pursuant to Section 13.1 below or as a result of a
stockholder-approved amendment to the Plan), (ii) all or a portion of
such additional Shares are to be issued with respect to one or more
Offering Periods that are underway at the time of such increase
("Additional Shares"), and (iii) the Fair Market Value of a Share on
the date of such increase (the "Approval Date Fair Market Value") is
higher than the Fair Market Value on the Offering Date for any such
Offering Period, then in such instance the Purchase Price with respect
to Additional Shares shall be eighty-five percent (85%) of the Approval
Date Fair Market Value or the Fair Market Value of a Share on the
Purchase Date, whichever is lower.
2.20 "Share" means a share of Common Stock, as adjusted in accordance with
Article 19 of the Plan.
2.21 "Subsidiary" means a corporation, domestic or foreign, of which not
less than fifty percent (50%) of the voting shares are held by the
Company or a Subsidiary, whether or not such corporation now exists or
is hereafter organized or acquired by the Company or a Subsidiary.
III. Eligibility
3.1 Eligible Employees. Any person who is an Employee as of the Offering
Date of a given Offering Period shall be eligible to participate in
such Offering Period under the Plan, subject to the requirements of
Section 5.1 and the limitations imposed by Code Section 423(b);
provided, however, that eligible Employees may not participate in more
than one Offering Period at a time.
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<PAGE> 4
3.2 Excluded Employees. Notwithstanding any Plan provisions to the
contrary, no Employee shall be granted an option under the Plan if: (i)
immediately after the grant, such Employee (or any other person whose
stock would be attributed to such Employee pursuant to Code Section
424(d)) would own capital stock of the Company and/or hold outstanding
options to purchase stock possessing five percent (5%) or more of the
total combined voting power or value of all classes of stock of the
Company or of any subsidiary corporation (as defined in Code Section
424(f)); or (ii) such option would permit his or her rights to purchase
stock under all employee stock purchase plans (described in Code
Section 423) of the Company and its Subsidiaries to accrue at a rate
which exceeds twenty-five thousand dollars ($25,000) of the Fair Market
Value (as defined in Section 7.2 below) of such stock (determined at
the time such option is granted) for each calendar year in which such
option is outstanding at any time.
IV. Offering Periods and Purchase Periods
4.1 Offering Periods. The Plan shall be implemented by a series of Offering
Periods of twenty-four (24) months' duration, with new Offering Periods
commencing on or about November 1 and May 1 of each year (or at such
other time or times as may be determined by the Board). The first
Offering Period shall commence on the beginning of the effective date
of the Registration Statement on Form S-1 for the initial public
offering of the Company's Common Stock (the "IPO Date") and continue
until October 31, 2001. The Board shall have the power to change the
duration and/or the frequency of Offering Periods with respect to
future offerings without stockholder approval if such change is
announced at least five (5) days prior to the scheduled beginning of
the first Offering Period to be affected.
4.2 Purchase Periods. Each Offering Period (other than the first) shall
consist of four (4) consecutive Purchase Periods of six (6) months'
duration. The first Offering Period shall consist of four (4)
consecutive Purchase Periods; the first Purchase Period shall commence
on the IPO Date and shall end on April 30, 2000, and the next three (3)
Purchase Periods shall be of six (6) months' duration, with the fourth
Purchase Period ending on October 31, 2001. The last day of each
Purchase Period shall be the Purchase Date for such Purchase Period. A
Purchase Period commencing on November 1 shall end on the next April
30. A Purchase Period commencing on May 1 shall end on the next October
31. The Board shall have the power to change the duration and/or
frequency of Purchase Periods with respect to future purchases without
stockholder approval if such change is announced at least five (5) days
prior to the scheduled beginning of the first Purchase Period to be
affected.
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<PAGE> 5
V. Participation
5.1 Employee Participation. An eligible Employee may become a participant
in the Plan by completing a subscription agreement on the form provided
by the Company and filing it with the Administrator prior to the
applicable Offering Date, unless a later time for filing the
subscription agreement is set by the Administrator for all eligible
Employees with respect to a given Offering Period. The subscription
agreement shall set forth the percentage of a participant's
Compensation (subject to Section 6.1 below) to be paid as Contributions
under the Plan.
5.2 Payroll Deductions. Payroll deductions shall commence as of the first
payroll following the Offering Date and shall end on the last payroll
paid on or prior to the last Purchase Date of the Offering Period to
which the subscription agreement is applicable, unless sooner
terminated by the participant as provided in Section 10.
VI. Method of Payment of Contributions
6.1 Amount of Payroll Deductions. A participant shall elect to have payroll
deductions made on each payday during the Offering Period in an amount
not less than one percent (1%) and not more than twenty percent (20%)
(or such lesser or greater percentage as the Board may establish from
time to time before an Offering Date) of such participant's
Compensation on each payday during the Offering Period. All payroll
deductions made by a participant shall be credited to his or her
account under the Plan. A participant may not make any additional
payments into such account.
6.2 Change and Discontinuation of Payroll Deduction Election. A participant
may discontinue his or her participation in the Plan as provided in
Article 10, or, on one occasion only during an Offering Period may
increase and on one occasion only during such Offering Period may
decrease the rate of his or her Contributions with respect to the
Offering Period by completing and filing a new subscription agreement
with the Administrator. Any such change in the payroll deduction rate
shall be effective as soon as administratively practicable after the
Administrator receives the new subscription agreement from the
participant.
6.3 Limit on Payroll Deductions. Notwithstanding the foregoing, to the
extent necessary to comply with Code Section 423(b)(8) and Section 3.2
herein, a participant's payroll deductions may be decreased during any
Offering Period scheduled to end during the current calendar year to
zero percent (0%) at such time that the aggregate of all payroll
deductions accumulated with respect to such Offering Period and any
other Offering Period ending within the same calendar year equal
$21,250. Payroll deductions shall resume at the elected rate set forth
in such participant's subscription agreement at the beginning of the
first Offering Period that is scheduled to end in the following
calendar year, unless terminated by the participant as provided in
Article 10. Notwithstanding the foregoing, to the extent necessary to
comply with Section 423(b)(8) of the Code and Section 3.2 hereof, a
participant's payroll deductions may be decreased to zero percent (0%)
at any time during a Purchase Period. Payroll deductions shall
recommence at the rate provided in such participant's subscription
agreement at the beginning of the first Purchase Period which is
scheduled to end in the following calendar year, unless terminated by
the participant as provided in Article 10.
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VII. Grant of Option
7.1 Grant of Option. On each Offering Date, each eligible Employee
participating in such Offering Period shall be granted an option to
purchase a number of Shares as determined by dividing such Employee's
Contributions accumulated prior to each Purchase Date during the
Offering Period and retained in the participant's account as of the
Purchase Date by the applicable Purchase Price. There is no limit on
the number of Shares that a participant may purchase under the Plan;
provided, however, that the Board may impose a limit on the number of
Shares a participant may purchase under the Plan at any time; provided,
further, that such purchase shall be subject to the limitations set
forth in Section 3.2 and Article 13.
7.2 Fair Market Value of Options. For all purposes under the Plan, the term
"Fair Market Value" shall mean, as of any applicable date: (i) if the
principal securities market on which the Common Stock is traded is a
national securities exchange or The Nasdaq National Market ("NNM"), the
closing price of the Common Stock on such exchange or NNM, as the case
may be, or if no sale of the Common Stock shall have occurred on such
date, on the next preceding date on which there was a reported sale;
(ii) if the Common Stock is not traded on a national securities
exchange or NNM, the closing price on such date as reported by The
Nasdaq SmallCap Market, or if no sale of the Common Stock shall have
occurred on such date, on the next preceding date on which there was a
reported sale; (iii) if the principal securities market on which the
Common Stock is traded is not a national securities exchange, NNM or
The Nasdaq SmallCap Market, the average of the bid and asked prices
reported by the National Quotation Bureau, Inc.; or (iv) if the price
of the Common Stock is not so reported, the Fair Market Value of the
Common Stock as determined in good faith by the Board.
VIII. Exercise of Option
8.1 Exercise of Option. Unless a participant withdraws from the Plan as
provided in Article 10, his or her option for the purchase of Shares
will be exercised automatically on each Purchase Date of an Offering
Period, and the maximum number of full Shares subject to the option
will be purchased at the applicable Purchase Price with the accumulated
Contributions in his or her account. No fractional Shares shall be
issued under the Plan. The Shares purchased upon exercise of an option
hereunder shall be deemed to be transferred to the participant on the
Purchase Date. During his or her lifetime, a participant's option to
purchase Shares hereunder is exercisable only by him or her.
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<PAGE> 7
IX. Delivery
9.1 Delivery of Shares. As soon as administratively practicable after each
Purchase Date of each Offering Period, the Administrator shall arrange
the delivery to each participant, as appropriate, of a certificate
representing the Shares purchased upon exercise of his or her option.
As an alternative, the Administrator may make arrangements with a
brokerage firm to establish a brokerage account for each participant,
to which Shares purchased for the participant upon exercise of his or
her option shall be credited and held for the participant. Any payroll
deductions accumulated in a participant's account which are not
sufficient to purchase a full Share shall be retained in the
participant's account for the subsequent Purchase Period or Offering
Period, subject to earlier withdrawal by the participant as provided in
Article 10 below. Any other amounts left over in a participant's
account after a Purchase Date shall be returned to the participant.
X. Withdrawal and Termination of Employment
10.1 Voluntary Withdrawal of Participation. A participant may withdraw all
(partial withdrawals are not permitted) Contributions credited to his
or her account under the Plan at any time prior to each Purchase Date
by giving written notice to the Administrator. All of the participant's
Contributions credited to his or her account will be paid to him or her
as soon as administratively practicable after receipt of his or her
withdrawal notice and his or her option for the current period will be
automatically terminated. In addition, no further Contributions for the
purchase of Shares will be made during the Offering Period on the
participant's behalf.
10.2 Withdrawal Upon Termination of Employment. Upon termination of the
participant's Continuous Status as an Employee prior to the Purchase
Date of an Offering Period for any reason, including retirement or
death, the Contributions credited to his or her account will be
returned to him or her or, in the case of his or her death, to the
person or persons entitled thereto under Article 14, and his or her
option will terminate automatically.
10.3 Involuntary Withdrawal of Participation. In the event an Employee fails
to remain in Continuous Status as an Employee of the Company for at
least twenty (20) hours per week during the Offering Period in which
the Employee is a participant, he or she will be deemed to have elected
to withdraw from the Plan and the Contributions credited to his or her
account will be returned to him or her and his or her option will be
terminated.
10.4 Effect of Withdrawal. A participant's withdrawal from an offering will
not have any effect upon his or her eligibility to participate in a
succeeding offering or in any similar plan which may hereafter be
adopted by the Company.
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<PAGE> 8
XI. Automatic Withdrawal
11.1 Automatic Withdrawal. If the Fair Market Value of the Shares on any
Purchase Date of an Offering Period is less than the Fair Market Value
of the Shares on the Offering Date for such Offering Period, then every
participant shall automatically: (i) be withdrawn from such Offering
Period at the close of such Purchase Date and after the acquisition of
Shares for such Purchase Period; and (ii) be enrolled in the Offering
Period commencing on the first business day subsequent to such Purchase
Period. Participants shall automatically be withdrawn as of April 30,
2000 from the Offering Period beginning on the IPO Date and re-enrolled
in the Offering Period beginning on May 1, 2000 if the Fair Market
Value of the Shares on the Offering Date of the first Offering Period
is greater than the Fair Market Value of the Shares on April 30, 2000,
unless a participant notifies the Administrator prior to April 30, 2000
that he or she does not wish to be withdrawn and re-enrolled.
XII. Interest
12.1 Interest Accrual. No interest shall accrue on the Contributions of a
Plan participant.
XIII. Shares
13.1 Shares Available Under the Plan. Subject to adjustment as provided in
Section 19, the maximum number of Shares that initially shall be made
available for sale under the Plan shall be 500,000 Shares. In addition,
on the first day of each of the Company's fiscal years, the aggregate
number of Shares reserved for issuance under the Plan shall be
increased automatically by the number of Shares purchased under the
Plan in the preceding fiscal year; provided, that the aggregate number
of Shares reserved under the Plan shall not exceed 2,000,000 Shares. If
the Board determines that, on a given Purchase Date, the number of
Shares with respect to which options are to be exercised may exceed:
(i) the number of Shares that were available for sale under the Plan on
the Offering Date of the applicable Offering Period; or (ii) the number
of Shares available for sale under the Plan on such Purchase Date, the
Board may in its sole discretion provide: (x) that the Company shall
make a pro rata allocation of the Shares available for purchase on such
Offering Date or Purchase Date, as applicable, in as uniform a manner
as shall be practicable and as it shall determine in its sole
discretion to be equitable among all participants exercising options to
purchase Common Stock on such Purchase Date, and continue all Offering
Periods then in effect; or (y) that the Company shall make a pro rata
allocation of the Shares available for purchase on such Offering Date
or Purchase Date, as applicable, in as uniform a manner as shall be
practicable and as it shall determine in its sole discretion to be
equitable among all participants exercising options to purchase Common
Stock on such Purchase Date, and terminate any or all Offering Periods
then in effect pursuant to Section 20 below. Notwithstanding any
authorization of additional Shares for issuance under the Plan by the
Company's stockholders subsequent to such Offering Date, the Company
may make a pro rata allocation of the Shares available on the Offering
Date of any applicable Offering Period pursuant to the preceding
sentence.
13.2 Voting of Shares. The participant shall have no interest or voting
right in Shares covered by his or her option until such option has been
exercised.
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<PAGE> 9
13.3 Registration of Shares. Shares to be delivered to a participant under
the Plan will be registered in the name of the participant or in the
name of the participant and his or her spouse (or, where applicable, in
the name of a broker or other nominee or custodian for the benefit of
the participant or the participant and his or her spouse).
XIV. Administration
14.1 Plan Administration. The Board shall supervise and administer the Plan
and shall have full power to adopt, amend and rescind any rules deemed
desirable and appropriate for the administration of the Plan and not
inconsistent with the Plan, to construe and interpret the Plan, and to
make all other determinations necessary or advisable for the
administration of the Plan. In its sole discretion, the Board may
appoint an Administrator and delegate all or a portion of its authority
to such Administrator to administer the terms of the Plan.
XV. Designation of Beneficiary
15.1 Beneficiary Designation. A participant may file a written beneficiary
designation with the Administrator designating the beneficiary who is
to receive any Shares and cash, if any, from the participant's account
under the Plan in the event of such participant's death subsequent to
the end of a Purchase Period but prior to delivery to him or her of
such Shares and cash. In addition, a participant may file a beneficiary
designation with the Administrator who is to receive any cash from the
participant's account under the Plan in the event of such participant's
death prior to the Purchase Date of an Offering Period. If a
participant is married and the designated beneficiary is not the
participant's spouse, spousal consent shall be required for such
designation to be effective.
15.2 Change of Beneficiary Designation. Such beneficiary designation may be
changed by the participant (and his or her spouse, if any) at any time
by written notice. In the event of the death of a participant and in
the absence of a valid beneficiary designation who is living at the
time of such participant's death, the Administrator shall deliver such
Shares and/or cash to the executor or administrator of the estate of
the participant, or if no such executor or administrator has been
appointed (to the knowledge of the Administrator), the Administrator,
in its discretion, may deliver such Shares and/or cash to the spouse or
to any one or more dependents or relatives of the participant, or if no
spouse, dependent or relative is known to the Administrator, then to
such other person as the Administrator may designate.
XVI. Transferability
16.1 Transfer of Plan Benefits. Neither Contributions credited to a
participant's account nor any rights with regard to the exercise of an
option or to receive Shares under the Plan may be assigned,
transferred, pledged or otherwise disposed of in any way (other than by
will, the laws of descent and distribution, or as provided in Article
15) by the participant. Any such attempt at assignment, transfer,
pledge or other disposition shall be without effect, except that the
Company may treat such act as a voluntary election to withdraw funds in
accordance with Article 10.
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<PAGE> 10
XVII. Use of Contributions
17.1 Use of Contributions. All Contributions received or held by the Company
under the Plan may be used by the Company for any corporate purpose,
and the Company shall not be obligated to segregate such Contributions
from other Company assets.
XVIII. Reporting of Accounts
18.1 Reporting of Accounts. Individual accounts will be maintained for each
participant in the Plan. Statements of account will be given to
participating Employees at least annually, which statements will set
forth the amounts of Contributions, the per Share Purchase Price, the
number of Shares purchased and the remaining cash balance, if any.
XIX. Adjustments Upon Changes in Capitalization;
Change in Control
19.1 Adjustment. Subject to any required action by the Company's
stockholders, the number of Shares covered by each option under the
Plan that has not yet been exercised and the number of Shares which
have been authorized for issuance under the Plan but have not yet been
placed under option (collectively, the "Reserves"), as well as the
maximum number of Shares which may be purchased by a participant in a
Purchase Period, the number of Shares set forth in Section 13.1 above,
and the price per Share covered by each option under the Plan that has
not yet been exercised, shall be appropriately adjusted to reflect any
stock dividend, stock split, combination or exchange of shares or other
change in capitalization with a similar substantive effect upon the
Plan or the awards granted under the Plan. The Board shall have the
power and sole discretion to determine the nature and amount of the
adjustment to be made in each case. The adjustment so made shall be
final and binding on all participants.
19.2 Change in Control. Upon a Change of Control, each outstanding option
shall be assumed by the "Acquiring Corporation" (as defined below) or
parent thereof or replaced with a comparable option or right to
purchase shares of the capital stock, or equity equivalent instrument,
of the Acquiring Corporation or parent thereof, or other comparable
rights (such assumed and comparable options and rights, together, the
"Replacement Options"); provided, however, that if the Acquiring
Corporation or parent thereof does not agree to grant Replacement
Options, then all outstanding Options which have been granted under the
Plan and which are not exercisable as of the effective date of the
Change of Control shall automatically accelerate and become exercisable
immediately prior to the effective date of the Change of Control as
described below. The term "Acquiring Corporation" means the surviving,
continuing, successor or purchasing corporation, as the case may
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<PAGE> 11
be. In the event that the successor corporation refuses to grant
Replacement Options, each Purchase Period and Offering Period then in
progress shall be shortened and a new Purchase Date shall be set (the
"New Purchase Date"), as of which date any Purchase Period and Offering
Period then in progress will terminate. The New Purchase Date shall be
on or before the date of consummation of the Change in Control and the
Board shall notify each participant in writing, at least ten (10) days
prior to the New Purchase Date, that the Purchase Date for his or her
option has been changed to the New Purchase Date and that his or her
option will be exercised automatically on the New Purchase Date, unless
prior to such date he or she has withdrawn from the Offering Period as
provided in Article 10. For purposes of this Article 19, an option
granted under the Plan shall be deemed to be assumed, without
limitation, if, at the time of issuance of the stock or other
consideration upon a Change in Control, each holder of an option under
the Plan would be entitled to receive upon exercise of the option the
same number and kind of shares of stock or the same amount of property,
cash or securities as such holder would have been entitled to receive
upon the occurrence of the Change in Control if the holder had been,
immediately prior to the transaction, the holder of the number of
Shares of Common Stock covered by the option at such time (after giving
effect to any adjustments in the number of Shares covered by the option
as provided for in this Article 19); provided, however, that if the
consideration received in the transaction is not solely common stock of
the Acquiring Corporation, the Board may, with the consent of the
Acquiring Corporation, provide for the consideration to be received
upon exercise of the option to be solely common stock of the Acquiring
Corporation or its parent equal in Fair Market Value to the per Share
consideration received by holders of Common Stock in the transaction.
Notwithstanding any other provision of this Section, the Board may
determine, in its discretion, to terminate any Purchase Period and
Offering Period in progress immediately prior to the effective date of
a Change of Control and to return all unused Contributions to
Participants.
19.3 Liquidation and Dissolution. In the event of a dissolution or
liquidation of the Company, any Purchase Period and Offering Period
then in progress will terminate immediately prior to the consummation
of such action, unless otherwise provided by the Board.
XX. Amendment or Termination
20.1 Authority to Amend or Terminate Plan. The Board may at any time and for
any reason terminate or amend the Plan. Except as provided in Article
19, no such termination of the Plan may affect options previously
granted; provided, that the Plan or an Offering Period may be
terminated by the Board on a Purchase Date or by the Board's setting a
new Purchase Date with respect to an Offering Period and Purchase
Period then in progress if the Board determines that termination of the
Plan and/or the Offering Period is in the Company's best interests and
the stockholders' or if continuation of the Plan and/or the Offering
Period would cause the Company to incur adverse accounting charges as a
result of a change after the effective date of the Plan in the
generally accepted accounting rules applicable to the Plan. Except as
provided in Section 19 and in this Section 20, no amendment to the Plan
shall make any change in any option previously granted which adversely
affects the rights of any participant. In addition, to
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<PAGE> 12
the extent necessary to comply with Rule 16b-3 under the Exchange Act,
or under Code Section 423 (or any successor rule or provision or any
applicable law or regulation), the Company shall obtain stockholder
approval in such a manner and to such a degree as so required.
20.2 Amendment of Plan Provisions. Without stockholder consent and without
regard to whether any participant rights may be considered to have been
adversely affected, the Board shall be entitled to change the Offering
Periods and Purchase Periods, limit the frequency and/or number of
changes in the amount withheld during an Offering Period, establish the
exchange ratio applicable to amounts withheld in a currency other than
U.S. dollars, permit payroll withholding in excess of the amount
designated by a participant in order to adjust for delays or mistakes
in the Company's processing of properly completed withholding
elections, establish reasonable waiting and adjustment periods and/or
accounting and crediting procedures to ensure that amounts applied
toward the purchase of Common Stock for each participant properly
correspond with amounts withheld from the participant's Compensation,
and establish such other limitations or procedures as the Board, in its
sole discretion, determines to be advisable.
XXI. Notices
21.1 Notices. All notices or other communications by a participant to the
Company under or in connection with the Plan shall be deemed to have
been duly given when received in the form specified by the Company at
the location, or by the person, designated by the Company for the
receipt thereof.
XXII. Conditions Upon Share Issuance
22.1 Conditions Upon Share Issuance. Shares shall not be issued with respect
to an option unless the exercise of such option and the issuance and
delivery of such Shares pursuant thereto shall comply with all
applicable provisions of law, domestic or foreign, including, without
limitation, the Securities Act of 1933, as amended, the Exchange Act,
the rules and regulations promulgated thereunder, applicable state
securities laws and the requirements of any stock exchange upon which
the Shares may then be listed, and shall be further subject to the
approval of counsel for the Company with respect to such compliance. As
a condition to the exercise of an option, the Company may require the
person exercising such option to represent and warrant at the time of
any such exercise that the Shares are being purchased only for
investment and without any present intention to sell or distribute such
Shares if, in the opinion of counsel for the Company, such a
representation is required by any of the aforementioned applicable
provisions of law.
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XXIII. Miscellaneous
23.1 Term of Plan and Effective Date. The Plan shall become effective upon
the IPO Date. It shall continue in effect for a term of twenty (20)
years unless sooner terminated under Article 20.
23.2 Additional Restrictions. The terms and conditions of options granted
hereunder to, and the purchase of Shares by, persons subject to Section
16 of the Exchange Act shall comply with the applicable provisions of
Rule 16b-3. This Plan shall be deemed to contain, and such options
shall contain, and the Shares issued upon exercise thereof shall be
subject to, such additional conditions and restrictions as may be
required by Rule 16b-3 to qualify for the maximum exemption from
Section 16 of the Exchange Act with respect to Plan transactions.
23.3 Withholding. The Company shall have the right to deduct from all
amounts paid to a participant in cash as salary, bonus or other
compensation any taxes required by law to be withheld in respect of
awards granted under the Plan. In the Administrator's discretion, a
participant may be permitted to elect to have withheld from the Shares
otherwise issuable to the participant, or to tender to the Company, the
number of Shares whose Fair Market Value equals the amount required to
be withheld.
23.4 Construction of the Plan. The validity, construction, interpretation,
administration and effect of the Plan and of its rules and regulations,
and rights relating to the Plan, shall be determined solely by the
Board. Any determination by the Board shall be final and binding on all
participants. The Plan shall be governed in accordance with the laws of
the State of Delaware, without regard to the conflict of law provisions
of such laws.
23.5 No Right to Option; No Right to Employment. No person shall have any
claim of right to be granted an option under the Plan. Neither the Plan
nor any action taken hereunder shall be construed as giving any
employee any right to be retained in the Company's employ or any of its
subsidiaries or as giving any consultant, advisor or director any right
to continue to serve in such capacity.
23.6 Awards Not Includable for Benefit Purposes. Income recognized by a
participant pursuant to the provisions of the Plan shall not be
included in the determination of benefits under any "employee benefit
plan" (as such term is defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974) or such other benefit plan,
policy or arrangement applicable to the participant that are maintained
by the Company or any of its subsidiaries, except as may be provided
under the terms of such plans or determined by resolution of the Board.
23.7 No Strict Construction. No rule of strict construction shall be implied
against the Company, the Board, or any other person in the
interpretation of any of the terms of the Plan, any award granted under
the Plan or any rule or procedure established by the Board.
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23.8 Captions. All Section headings used in the Plan are for convenience
only, do not constitute a part of the Plan, and shall not be deemed to
limit, characterize or affect in any way any provisions of the Plan,
and all provisions of the Plan shall be construed as if no captions
have been used in the Plan.
23.9 Severability. Whenever possible, each provision in the Plan and every
option at any time granted under the Plan shall be interpreted in such
manner as to be effective and valid under applicable law, but if any
provision of the Plan or any option at any time granted under the Plan
shall be held to be prohibited by or invalid under applicable law, then
such provision shall be deemed amended to accomplish the objectives of
the provision as originally written to the fullest extent permitted by
law, and all other provisions of the Plan and every other option at any
time granted under the Plan shall remain in full force and effect.
23.10 Legends. All certificates for Common Stock delivered under the Plan
shall be subject to such transfer and other restrictions as the Board
may deem advisable under the rules, regulations and other requirements
of the Securities and Exchange Commission, any stock exchange or
quotation system upon which the Common Stock is then listed or quoted
and any applicable federal or state securities law, and the Board may
cause a legend or legends to be put on any such certificates to make
appropriate references to such restrictions.
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APPENDIX A
DESIGNATED SUBSIDIARIES PARTICIPATING UNDER THE PLAN
<PAGE> 16
FREEMARKETS, INC.
EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
New Election ______
Change of Election ______
1. I, ________________________, hereby elect to participate in the
FreeMarkets, Inc. Employee Stock Purchase Plan (the "Plan") for the Offering
Period from __________________, ____ to _______________, ____, and subscribe to
purchase shares of the Company's Common Stock in accordance with this
Subscription Agreement and the Plan.
2. I elect to have Contributions in the amount of ____% of my
Compensation, as those terms are defined in the Plan, applied to this purchase.
I understand that this amount must not be less than 1% and not more than 20% of
my Compensation during the Offering Period. (Please note that no fractional
percentages are permitted).
3. I hereby authorize payroll deductions from each paycheck during the
Offering Period at the rate stated in Item 2 of this Subscription Agreement. I
understand that all payroll deductions made by me shall be credited to my
account under the Plan and that I may not make any additional payments into such
account. I understand that all payments made by me shall be accumulated for the
purchase of Shares at the applicable purchase price determined in accordance
with the Plan. I further understand that, except as otherwise set forth in the
Plan, Shares will be purchased for me automatically on the Purchase Date of each
Offering Period unless I otherwise withdraw from the Plan by giving written
notice to the Company for such purpose.
4. I understand that I may discontinue my participation in accordance
with the Plan's terms at any time prior to a Purchase Date. I also understand
that I can increase or decrease the rate of my Contributions on one occasion
only with respect to any increase and one occasion only with respect to any
decrease during any Offering Period by completing and filing a new Subscription
Agreement, such Subscription Agreement to take effect as soon as
administratively practicable after the date it is filed with the Administrator.
Further, I may change the rate of deductions for future Offering Periods by
filing a new Subscription Agreement, and any such change will be effective as of
the beginning of the next Offering Period. In addition, I acknowledge that,
unless I discontinue my participation in the Plan, my election will continue to
be effective for each successive Offering Period.
5. I have received a copy of the complete "FreeMarkets, Inc. Employee
Stock Purchase Plan" and a prospectus describing the Plan's terms. I understand
that my participation in the Plan is in all respects subject to the terms of the
Plan.
6. Shares purchased for me under the Plan should be issued in the
name(s) of (name of employee or employee and spouse only):
_____________________________________________
<PAGE> 17
7. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due to me under the Plan:
NAME: (Please print)______________________________________________________
(First) (Middle) (Last)
(Relationship)______________________________________________________
(Address)______________________________________________________
______________________________________________________
______________________________________________________
8. I understand that if I dispose of any shares received by me pursuant
to the Plan within 2 years after the Offering Date (the first day of the
Offering Period during which I purchased such shares) or within 1 year after the
Purchase Date, I will be treated for federal income tax purposes as having
received ordinary compensation income at the time of such disposition in an
amount equal to the excess of the fair market value of the shares on the
Purchase Date over the price which I paid for the shares, regardless of whether
I disposed of the shares at a price less than their fair market value at the
Purchase Date. The remainder of the gain or loss, if any, recognized on such
disposition will be treated as capital gain or loss.
I HEREBY AGREE TO NOTIFY THE COMPANY IN WRITING WITHIN 30 DAYS AFTER
THE DATE OF ANY SUCH DISPOSITION, AND I WILL MAKE ADEQUATE PROVISION FOR
FEDERAL, STATE OR OTHER TAX WITHHOLDING OBLIGATIONS, IF ANY, WHICH ARISE UPON
THE DISPOSITION OF THE COMMON STOCK. The Company may, but will not be obligated
to, withhold from my compensation the amount
necessary to meet any applicable withholding obligation including any
withholding necessary to make available to the Company any tax deductions or
benefits attributable to the sale or early disposition of Common Stock by me.
9. If I dispose of such shares at any time after expiration of the
2-year and 1-year holding periods, I understand that I will be treated for
federal income tax purposes as having received compensation income only to the
extent of an amount equal to the lesser of (1) the excess of the fair market
value of the shares at the time of such disposition over the purchase price
which I paid for the shares under the option, or (2) 15% of the fair market
value of the shares on the Offering Date. The remainder of the gain or loss, if
any, recognized on such disposition will be treated as capital gain or loss.
I UNDERSTAND THAT THIS TAX SUMMARY IS ONLY A SUMMARY AND IS SUBJECT TO
CHANGE. I further understand that I should consult a tax advisor concerning the
tax implications of the purchase and sale of stock under the Plan.
2
<PAGE> 18
10. I hereby agree to be bound by the terms of the Plan. The
effectiveness of this Subscription Agreement is dependent upon my eligibility to
participate in the Plan.
SIGNATURE:
- ------------------------------
SOCIAL SECURITY #
- ------------------------------
DATE:
- ------------------------------
SPOUSE'S SIGNATURE
(necessary only if beneficiary
is not spouse):
- ------------------------------
(Signature)
- ------------------------------
(Print name)
3
<PAGE> 19
FREEMARKETS, INC.
EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
I, __________________________, hereby elect to withdraw my
participation in the FreeMarkets, Inc. Employee Stock Purchase Plan (the "Plan")
for the Offering Period that began on ____________, _____. This withdrawal
covers all Contributions currently credited to my account and is effective on
the date designated below.
I understand that all Contributions credited to my account will be paid
to me as soon as administratively practicable following receipt by the
Administrator of this Notice of Withdrawal and that my option for the current
period will automatically terminate, and that no further Contributions for the
purchase of shares can be made by me during the Offering Period.
The undersigned further understands and agrees that he or she shall be
eligible to participate in succeeding offering periods only by delivering to the
Company a new Subscription Agreement.
Dated:
----------------- ---------------------------------------
Signature of Employee
---------------------------------------
Social Security Number
4
<PAGE> 1
Exhibit 10.8(a)
FreeMarkets OnLine, Inc.
1998 STOCK OPTION PLAN
Grant Certificate
This Grant Certificate, dated May 28, 1998, evidences the grant of an option
pursuant to the provisions of the 1998 Stock Option Plan (the "Plan") of
FreeMarkets OnLine, Inc. (the "Company") to the individual whose name appears
below (the "Grantee"), covering the specific number of shares of Common Stock of
the Company, par value $.01 per share ("Shares") set forth below, pursuant to
the provisions of the Plan and on the following terms and conditions:
1. Name of Grantee: Glen T. Meakem
2. Number of Shares subject to this option: 480,000 Shares
3. Exercise price per Share subject to this option: $3.25
4. Date of grant of this option: May 28, 1998
5. Vesting: Date Number of Shares
---- ----------------
May 28, 2001 120,000
May 28, 2002 120,000
May 28, 2003 120,000
May 28, 2004 120,000
(1) In the event that the Company consummates an underwritten public offering
of shares registered with the Securities and Exchange Commission
(an "IPO"), 30% of any options which are not vested as of the date of the
consummation of the IPO, shall vest on such date, and any remaining
unvested options shall continue to vest ratably over the vesting period
set forth above.
(2) Upon the occurrence of a "Change of Control" of the Company, as defined
in the attached, 50% of any of the above options which are not vested
upon the occurrence of a Change of Control, shall vest on the date of
such occurrence, and any remaining unvested options shall continue to
vest ratably over the vesting period set forth above.
Vesting ceases immediately upon termination of employment for any reason, and
any portion of this option that has not vested on or prior to the date of
such termination is forfeited on such date. Once vesting has occurred, the
vested portion can be exercised at any time, subject to Section 6 below.
6. The last day on which the vested portion of this option can be exercised is
the earliest of:
a. May 28, 2008 [tenth anniversary of date of grant];
b. the date on which Grantee's employment terminates for "cause"
(as defined in the Plan);
c. 60 days following the date that Grantee's employment terminates other than
for "cause" (as defined in the Plan); or
d. one year following the Grantee's death or "permanent disability"
(as defined in the Plan).
<PAGE> 2
7. Type of option: Non-Qualified Stock Option
The Grantee hereby acknowledges receipt of a copy of the Plan as presently in
effect. All of the terms and conditions of the Plan are incorporated herein by
reference (including but not limited to capitalized terms not otherwise defined
herein), and this option is subject to such terms and conditions in all
respects. This Grant Certificate and the Plan constitute the entire agreement of
the parties with respect to the subject matter hereof, and supersede any prior
written or oral agreements. If the Grantee is entitled to exercise the vested
portion of this option, and wishes to do so, in whole or in part, the Grantee
shall submit to the Company a written notice of exercise in the form attached to
this Grant Certificate, specifying the exercise date and the number of Shares to
be purchased pursuant to such exercise, and shall remit to the Company in a form
satisfactory to the Company (in its sole discretion) the exercise price, plus an
amount sufficient to satisfy any withholding tax obligations of the Company that
arise in connection with such exercise.
Accepted and Agreed: FreeMarkets OnLine, Inc.
/s/ Glen T. Meakem By: /s/ Glen T. Meakem
- -------------------------- -----------------------------------------
Employee Signature Name: Glen T. Meakem
Title: President and Chief Executive Officer
<PAGE> 3
FURTHER RESOLVED, that for the purposes of the Senior Leadership Options, a
"Change in Control" shall mean the occurrence of any of the following events:
(i) the acquisition, other than from the Company, by any individual,
entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person")
(other than the Company or an employee benefit plan of the Company) of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of more than 50% of the combined voting power of the then
outstanding voting securities of the Company entitled to vote generally in the
election of directors (the "Voting Securities"); or
(ii) the approval by the stockholders of the Company of a
reorganization, merger, consolidation or recapitalization of the Company (a
"Business Combination"), other than a Business Combination in which more than
50% of the combined voting power of the outstanding voting securities of the
surviving or resulting entity immediately following the Business Combination is
held by the persons who, immediately prior to the Business Combination, were the
holders of the Voting Securities; or
(iii) the approval by the stockholders of the Company of a complete
liquidation or dissolution of the Company, or a sale of all or substantially all
of the assets of the Company; or
(iv) individuals who, as of May 28, 1998, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board, provided that any individual becoming a director subsequent to such date
whose election or nomination for election by the Company's stockholders was
approved by a vote of at least a majority of the directors then comprising the
Incumbent Board shall be considered as though such individual were a member of
the Incumbent Board.
<PAGE> 1
Exhibit 10.8(b)
FreeMarkets OnLine, Inc.
1998 STOCK OPTION PLAN
Grant Certificate
This Grant Certificate, dated May 28, 1998, evidences the grant of an option
pursuant to the provisions of the 1998 Stock Option Plan (the "Plan") of
FreeMarkets OnLine, Inc. (the "Company") to the individual whose name appears
below (the "Grantee"), covering the specific number of shares of Common Stock of
the Company, par value $.01 per share ("Shares") set forth below, pursuant to
the provisions of the Plan and on the following terms and conditions:
1. Name of Grantee: Sam Kinney
2. Number of Shares subject to this option: 196,924 Shares
3. Exercise price per Share subject to this option: $3.25
4. Date of grant of this option: May 28, 1998
5. Vesting: Date Number of Shares
---- ----------------
May 28, 2001 49,231
May 28, 2002 49,231
May 28, 2003 49,231
May 28, 2004 49,231
(1) In the event that the Company consummates an underwritten public offering
of shares registered with the Securities and Exchange Commission
(an "IPO"), 30% of any options which are not vested as of the date of the
consummation of the IPO, shall vest on such date, and any remaining
unvested options shall continue to vest ratably over the vesting period
set forth above.
(2) Upon the occurrence of a "Change of Control" of the Company, as defined
in the attached, 50% of any of the above options which are not vested
upon the occurrence of a Change of Control, shall vest on the date of
such occurrence, and any remaining unvested options shall continue to
vest ratably over the vesting period set forth above.
Vesting ceases immediately upon termination of employment for any reason, and
any portion of this option that has not vested on or prior to the date of
such termination is forfeited on such date. Once vesting has occurred, the
vested portion can be exercised at any time, subject to Section 6 below.
6. The last day on which the vested portion of this option can be exercised is
the earliest of:
a. May 28, 2008 [tenth anniversary of date of grant];
b. the date on which Grantee's employment terminates for "cause"
(as defined in the Plan);
c. 60 days following the date that Grantee's employment terminates other than
for "cause" (as defined in the Plan); or
d. one year following the Grantee's death or "permanent disability"
(as defined in the Plan).
<PAGE> 2
7. Type of option: Non-Qualified Stock Option
The Grantee hereby acknowledges receipt of a copy of the Plan as presently in
effect. All of the terms and conditions of the Plan are incorporated herein by
reference (including but not limited to capitalized terms not otherwise defined
herein), and this option is subject to such terms and conditions in all
respects. This Grant Certificate and the Plan constitute the entire agreement of
the parties with respect to the subject matter hereof, and supersede any prior
written or oral agreements. If the Grantee is entitled to exercise the vested
portion of this option, and wishes to do so, in whole or in part, the Grantee
shall submit to the Company a written notice of exercise in the form attached to
this Grant Certificate, specifying the exercise date and the number of Shares to
be purchased pursuant to such exercise, and shall remit to the Company in a form
satisfactory to the Company (in its sole discretion) the exercise price, plus an
amount sufficient to satisfy any withholding tax obligations of the Company that
arise in connection with such exercise.
Accepted and Agreed: FreeMarkets OnLine, Inc.
/s/ Sam Kinney By: /s/ Glen T. Meakem
- -------------------------- -----------------------------------------
Employee Signature Name: Glen T. Meakem
Title: President and Chief Executive Officer
<PAGE> 3
FURTHER RESOLVED, that for the purposes of the Senior Leadership Options, a
"Change in Control" shall mean the occurrence of any of the following events:
(i) the acquisition, other than from the Company, by any individual,
entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person")
(other than the Company or an employee benefit plan of the Company) of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of more than 50% of the combined voting power of the then
outstanding voting securities of the Company entitled to vote generally in the
election of directors (the "Voting Securities"); or
(ii) the approval by the stockholders of the Company of a
reorganization, merger, consolidation or recapitalization of the Company (a
"Business Combination"), other than a Business Combination in which more than
50% of the combined voting power of the outstanding voting securities of the
surviving or resulting entity immediately following the Business Combination is
held by the persons who, immediately prior to the Business Combination, were the
holders of the Voting Securities; or
(iii) the approval by the stockholders of the Company of a complete
liquidation or dissolution of the Company, or a sale of all or substantially all
of the assets of the Company; or
(iv) individuals who, as of May 28, 1998, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board, provided that any individual becoming a director subsequent to such date
whose election or nomination for election by the Company's stockholders was
approved by a vote of at least a majority of the directors then comprising the
Incumbent Board shall be considered as though such individual were a member of
the Incumbent Board.
<PAGE> 1
Exhibit 10.8(c)
FreeMarkets OnLine, Inc.
1998 STOCK OPTION PLAN
Grant Certificate
This Grant Certificate, dated May 28, 1998, evidences the grant of an option
pursuant to the provisions of the 1998 Stock Option Plan (the "Plan") of
FreeMarkets OnLine, Inc. (the "Company") to the individual whose name appears
below (the "Grantee"), covering the specific number of shares of Common Stock of
the Company, par value $.01 per share ("Shares") set forth below, pursuant to
the provisions of the Plan and on the following terms and conditions:
1. Name of Grantee: Sam Kinney
2. Number of Shares subject to this option: 123,076 Shares
3. Exercise price per Share subject to this option: $3.25
4. Date of grant of this option: May 28, 1998
5. Vesting: Date Number of Shares
---- ----------------
May 28, 2001 30,769
May 28, 2002 30,769
May 28, 2003 30,769
May 28, 2004 30,769
(1) In the event that the Company consummates an underwritten public offering
of shares registered with the Securities and Exchange Commission
(an "IPO"), 30% of any options which are not vested as of the date of the
consummation of the IPO, shall vest on such date, and any remaining
unvested options shall continue to vest ratably over the vesting period
set forth above.
(2) Upon the occurrence of a "Change of Control" of the Company, as defined
in the attached, 50% of any of the above options which are not vested
upon the occurrence of a Change of Control, shall vest on the date of
such occurrence, and any remaining unvested options shall continue to
vest ratably over the vesting period set forth above.
Vesting ceases immediately upon termination of employment for any reason, and
any portion of this option that has not vested on or prior to the date of
such termination is forfeited on such date. Once vesting has occurred, the
vested portion can be exercised at any time, subject to Section 6 below.
6. The last day on which the vested portion of this option can be exercised is
the earliest of:
a. May 28, 2008 [tenth anniversary of date of grant];
b. the date on which Grantee's employment terminates for "cause"
(as defined in the Plan);
c. 60 days following the date that Grantee's employment terminates other than
for "cause" (as defined in the Plan); or
d. one year following the Grantee's death or "permanent disability"
(as defined in the Plan).
<PAGE> 2
7. Type of option: Incentive Stock Option
The Grantee hereby acknowledges receipt of a copy of the Plan as presently in
effect. All of the terms and conditions of the Plan are incorporated herein by
reference (including but not limited to capitalized terms not otherwise defined
herein), and this option is subject to such terms and conditions in all
respects. This Grant Certificate and the Plan constitute the entire agreement of
the parties with respect to the subject matter hereof, and supersede any prior
written or oral agreements. If the Grantee is entitled to exercise the vested
portion of this option, and wishes to do so, in whole or in part, the Grantee
shall submit to the Company a written notice of exercise in the form attached to
this Grant Certificate, specifying the exercise date and the number of Shares to
be purchased pursuant to such exercise, and shall remit to the Company in a form
satisfactory to the Company (in its sole discretion) the exercise price, plus an
amount sufficient to satisfy any withholding tax obligations of the Company that
arise in connection with such exercise.
Accepted and Agreed: FreeMarkets OnLine, Inc.
/s/ Sam Kinney By: /s/ Glen T. Meakem
- -------------------------- -----------------------------------------
Employee Signature Name: Glen T. Meakem
Title: President and Chief Executive Officer
<PAGE> 3
FURTHER RESOLVED, that for the purposes of the Senior Leadership Options, a
"Change in Control" shall mean the occurrence of any of the following events:
(i) the acquisition, other than from the Company, by any individual,
entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person")
(other than the Company or an employee benefit plan of the Company) of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of more than 50% of the combined voting power of the then
outstanding voting securities of the Company entitled to vote generally in the
election of directors (the "Voting Securities"); or
(ii) the approval by the stockholders of the Company of a
reorganization, merger, consolidation or recapitalization of the Company (a
"Business Combination"), other than a Business Combination in which more than
50% of the combined voting power of the outstanding voting securities of the
surviving or resulting entity immediately following the Business Combination is
held by the persons who, immediately prior to the Business Combination, were the
holders of the Voting Securities; or
(iii) the approval by the stockholders of the Company of a complete
liquidation or dissolution of the Company, or a sale of all or substantially all
of the assets of the Company; or
(iv) individuals who, as of May 28, 1998, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board, provided that any individual becoming a director subsequent to such date
whose election or nomination for election by the Company's stockholders was
approved by a vote of at least a majority of the directors then comprising the
Incumbent Board shall be considered as though such individual were a member of
the Incumbent Board.
<PAGE> 1
Exhibit 10.8(d)
FreeMarkets OnLine, Inc.
1998 STOCK OPTION PLAN
Grant Certificate
This Grant Certificate, dated May 28, 1998, evidences the grant of an option
pursuant to the provisions of the 1998 Stock Option Plan (the "Plan") of
FreeMarkets OnLine, Inc. (the "Company") to the individual whose name appears
below (the "Grantee"), covering the specific number of shares of Common Stock of
the Company, par value $.01 per share ("Shares") set forth below, pursuant to
the provisions of the Plan and on the following terms and conditions:
1. Name of Grantee: David J. Becker
2. Number of Shares subject to this option: 42,024 Shares
3. Exercise price per Share subject to this option: $3.25
4. Date of grant of this option: May 28, 1998
5. Vesting: Date Number of Shares
---- ----------------
May 28, 2001 14,331
May 28, 2002 9,231
May 28, 2003 9,231
May 28, 2004 9,231
(1) In the event that the Company consummates an underwritten public offering
of shares registered with the Securities and Exchange Commission
(an "IPO"), 30% of any options which are not vested as of the date of the
consummation of the IPO, shall vest on such date, and any remaining
unvested options shall continue to vest ratably over the vesting period
set forth above.
(2) Upon the occurrence of a "Change of Control" of the Company, as defined
in the attached, 50% of any of the above options which are not vested
upon the occurrence of a Change of Control, shall vest on the date of
such occurrence, and any remaining unvested options shall continue to
vest ratably over the vesting period set forth above.
Vesting ceases immediately upon termination of employment for any reason, and
any portion of this option that has not vested on or prior to the date of
such termination is forfeited on such date. Once vesting has occurred, the
vested portion can be exercised at any time, subject to Section 6 below.
6. The last day on which the vested portion of this option can be exercised is
the earliest of:
a. May 28, 2008 [tenth anniversary of date of grant];
b. the date on which Grantee's employment terminates for "cause"
(as defined in the Plan);
c. 60 days following the date that Grantee's employment terminates other than
for "cause" (as defined in the Plan); or
d. one year following the Grantee's death or "permanent disability"
(as defined in the Plan).
<PAGE> 2
7. Type of option: Non-Qualified Stock Option
The Grantee hereby acknowledges receipt of a copy of the Plan as presently in
effect. All of the terms and conditions of the Plan are incorporated herein by
reference (including but not limited to capitalized terms not otherwise defined
herein), and this option is subject to such terms and conditions in all
respects. This Grant Certificate and the Plan constitute the entire agreement of
the parties with respect to the subject matter hereof, and supersede any prior
written or oral agreements. If the Grantee is entitled to exercise the vested
portion of this option, and wishes to do so, in whole or in part, the Grantee
shall submit to the Company a written notice of exercise in the form attached to
this Grant Certificate, specifying the exercise date and the number of Shares to
be purchased pursuant to such exercise, and shall remit to the Company in a form
satisfactory to the Company (in its sole discretion) the exercise price, plus an
amount sufficient to satisfy any withholding tax obligations of the Company that
arise in connection with such exercise.
Accepted and Agreed: FreeMarkets OnLine, Inc.
/s/ David J. Becker By: /s/ Glen T. Meakem
- -------------------------- -----------------------------------------
Employee Signature Name: Glen T. Meakem
Title: President and Chief Executive Officer
<PAGE> 3
FURTHER RESOLVED, that for the purposes of the Senior Leadership Options, a
"Change in Control" shall mean the occurrence of any of the following events:
(i) the acquisition, other than from the Company, by any individual,
entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person")
(other than the Company or an employee benefit plan of the Company) of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of more than 50% of the combined voting power of the then
outstanding voting securities of the Company entitled to vote generally in the
election of directors (the "Voting Securities"); or
(ii) the approval by the stockholders of the Company of a
reorganization, merger, consolidation or recapitalization of the Company (a
"Business Combination"), other than a Business Combination in which more than
50% of the combined voting power of the outstanding voting securities of the
surviving or resulting entity immediately following the Business Combination is
held by the persons who, immediately prior to the Business Combination, were the
holders of the Voting Securities; or
(iii) the approval by the stockholders of the Company of a complete
liquidation or dissolution of the Company, or a sale of all or substantially all
of the assets of the Company; or
(iv) individuals who, as of May 28, 1998, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board, provided that any individual becoming a director subsequent to such date
whose election or nomination for election by the Company's stockholders was
approved by a vote of at least a majority of the directors then comprising the
Incumbent Board shall be considered as though such individual were a member of
the Incumbent Board.
<PAGE> 1
Exhibit 10.8(e)
FreeMarkets OnLine, Inc.
1998 STOCK OPTION PLAN
Grant Certificate
This Grant Certificate, dated May 28, 1998, evidences the grant of an option
pursuant to the provisions of the 1998 Stock Option Plan (the "Plan") of
FreeMarkets OnLine, Inc. (the "Company") to the individual whose name appears
below (the "Grantee"), covering the specific number of shares of Common Stock of
the Company, par value $.01 per share ("Shares") set forth below, pursuant to
the provisions of the Plan and on the following terms and conditions:
1. Name of Grantee: David Becker
2. Number of Shares subject to this option: 117,976 Shares
3. Exercise price per Share subject to this option: $3.25
4. Date of grant of this option: May 28, 1998
5. Vesting: Date Number of Shares
---- ----------------
May 28, 2001 25,669
May 28, 2002 30,769
May 28, 2003 30,769
May 28, 2004 30,769
(1) In the event that the Company consummates an underwritten public offering
of shares registered with the Securities and Exchange Commission
(an "IPO"), 30% of any options which are not vested as of the date of the
consummation of the IPO, shall vest on such date, and any remaining
unvested options shall continue to vest ratably over the vesting period
set forth above.
(2) Upon the occurrence of a "Change of Control" of the Company, as defined
in the attached, 50% of any of the above options which are not vested
upon the occurrence of a Change of Control, shall vest on the date of
such occurrence, and any remaining unvested options shall continue to
vest ratably over the vesting period set forth above.
Vesting ceases immediately upon termination of employment for any reason, and
any portion of this option that has not vested on or prior to the date of
such termination is forfeited on such date. Once vesting has occurred, the
vested portion can be exercised at any time, subject to Section 6 below.
6. The last day on which the vested portion of this option can be exercised is
the earliest of:
a. May 28, 2008 [tenth anniversary of date of grant];
b. the date on which Grantee's employment terminates for "cause"
(as defined in the Plan);
c. 60 days following the date that Grantee's employment terminates other than
for "cause" (as defined in the Plan); or
d. one year following the Grantee's death or "permanent disability"
(as defined in the Plan).
<PAGE> 2
7. Type of option: Incentive Stock Option
The Grantee hereby acknowledges receipt of a copy of the Plan as presently in
effect. All of the terms and conditions of the Plan are incorporated herein by
reference (including but not limited to capitalized terms not otherwise defined
herein), and this option is subject to such terms and conditions in all
respects. This Grant Certificate and the Plan constitute the entire agreement of
the parties with respect to the subject matter hereof, and supersede any prior
written or oral agreements. If the Grantee is entitled to exercise the vested
portion of this option, and wishes to do so, in whole or in part, the Grantee
shall submit to the Company a written notice of exercise in the form attached to
this Grant Certificate, specifying the exercise date and the number of Shares to
be purchased pursuant to such exercise, and shall remit to the Company in a form
satisfactory to the Company (in its sole discretion) the exercise price, plus an
amount sufficient to satisfy any withholding tax obligations of the Company that
arise in connection with such exercise.
Accepted and Agreed: FreeMarkets OnLine, Inc.
/s/ David Becker By: /s/ Glen T. Meakem
- -------------------------- -----------------------------------------
Employee Signature Name: Glen T. Meakem
Title: President and Chief Executive Officer
<PAGE> 3
FURTHER RESOLVED, that for the purposes of the Senior Leadership Options, a
"Change in Control" shall mean the occurrence of any of the following events:
(i) the acquisition, other than from the Company, by any individual,
entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person")
(other than the Company or an employee benefit plan of the Company) of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of more than 50% of the combined voting power of the then
outstanding voting securities of the Company entitled to vote generally in the
election of directors (the "Voting Securities"); or
(ii) the approval by the stockholders of the Company of a
reorganization, merger, consolidation or recapitalization of the Company (a
"Business Combination"), other than a Business Combination in which more than
50% of the combined voting power of the outstanding voting securities of the
surviving or resulting entity immediately following the Business Combination is
held by the persons who, immediately prior to the Business Combination, were the
holders of the Voting Securities; or
(iii) the approval by the stockholders of the Company of a complete
liquidation or dissolution of the Company, or a sale of all or substantially all
of the assets of the Company; or
(iv) individuals who, as of May 28, 1998, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board, provided that any individual becoming a director subsequent to such date
whose election or nomination for election by the Company's stockholders was
approved by a vote of at least a majority of the directors then comprising the
Incumbent Board shall be considered as though such individual were a member of
the Incumbent Board.
<PAGE> 1
Exhibit 10.8(f)
FreeMarkets OnLine, Inc.
1998 STOCK OPTION PLAN
Grant Certificate
This Grant Certificate, dated May 28, 1998, evidences the grant of an option
pursuant to the provisions of the 1998 Stock Option Plan (the "Plan") of
FreeMarkets OnLine, Inc. (the "Company") to the individual whose name appears
below (the "Grantee"), covering the specific number of shares of Common Stock of
the Company, par value $.01 per share ("Shares") set forth below, pursuant to
the provisions of the Plan and on the following terms and conditions:
1. Name of Grantee: John P. Levis III
2. Number of Shares subject to this option: 10,000 Shares
3. Exercise price per Share subject to this option: $3.25
4. Date of grant of this option: May 28, 1998
5. Vesting: Subject to (1) and (2) below, the vesting schedule for the options
is as follows:
Date Number of Shares
---- ----------------
May 28, 2001 2,500
May 28, 2002 2,500
May 28, 2003 2,500
May 28, 2004 2,500
(1) In the event that the Company consummates an underwritten public offering
of shares registered with the Securities and Exchange Commission
(an "IPO"), 30% of any options which are not vested as of the date of the
consummation of the IPO, shall vest on such date, and any remaining
unvested options shall continue to vest ratably over the vesting period
set forth above.
(2) Upon the occurrence of a "Change in Control" of the Company, as defined
in the attached, 50% of any of the above options which are not vested
upon the occurrence of a Change of Control shall vest on the date of
such occurrence, and any remaining unvested options shall continue to
vest ratably over the vesting period set forth above.
Vesting ceases immediately upon termination of employment for any reason, and
any portion of this option that has not vested on or prior to the date of
such termination is forfeited on such date. Once vesting has occurred, the
vested portion can be exercised at any time, subject to Section 6 below.
6. The last day on which the vested portion of this option can be exercised is
the earliest of:
a. May 28, 2008 [tenth anniversary of date of grant];
b. the date on which Grantee's employment terminates for "cause"
(as defined in the Plan);
c. 60 days following the date that Grantee's employment terminates other than
for "cause" (as defined in the Plan); or
d. one year following the Grantee's death or "permanent disability"
(as defined in the Plan).
<PAGE> 2
7. Type of option: Incentive Stock Option
The Grantee hereby acknowledges receipt of a copy of the Plan as presently in
effect. All of the terms and conditions of the Plan are incorporated herein by
reference (including but not limited to capitalized terms not otherwise defined
herein), and this option is subject to such terms and conditions in all
respects. This Grant Certificate and the Plan constitute the entire agreement of
the parties with respect to the subject matter hereof, and supersede any prior
written or oral agreements. If the Grantee is entitled to exercise the vested
portion of this option, and wishes to do so, in whole or in part, the Grantee
shall submit to the Company a written notice of exercise in the form attached to
this Grant Certificate, specifying the exercise date and the number of Shares to
be purchased pursuant to such exercise, and shall remit to the Company in a form
satisfactory to the Company (in its sole discretion) the exercise price, plus an
amount sufficient to satisfy any withholding tax obligations of the Company that
arise in connection with such exercise.
Accepted and Agreed: FreeMarkets OnLine, Inc.
/s/ John P. Levis III By: /s/ Glen T. Meakem
- -------------------------- -----------------------------------------
Employee Signature Name: Glen T. Meakem
Title: Chief Executive Officer
<PAGE> 3
FURTHER RESOLVED, that for the purposes of the Senior Leadership Options, a
"Change in Control" shall mean the occurrence of any of the following events:
(i) the acquisition, other than from the Company, by any individual,
entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person")
(other than the Company or an employee benefit plan of the Company) of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of more than 50% of the combined voting power of the then
outstanding voting securities of the Company entitled to vote generally in the
election of directors (the "Voting Securities"); or
(ii) the approval by the stockholders of the Company of a
reorganization, merger, consolidation or recapitalization of the Company (a
"Business Combination"), other than a Business Combination in which more than
50% of the combined voting power of the outstanding voting securities of the
surviving or resulting entity immediately following the Business Combination is
held by the persons who, immediately prior to the Business Combination, were the
holders of the Voting Securities; or
(iii) the approval by the stockholders of the Company of a complete
liquidation or dissolution of the Company, or a sale of all or substantially all
of the assets of the Company; or
(iv) individuals who, as of May 28, 1998, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board, provided that any individual becoming a director subsequent to such date
whose election or nomination for election by the Company's stockholders was
approved by a vote of at least a majority of the directors then comprising the
Incumbent Board shall be considered as though such individual were a member of
the Incumbent Board.
<PAGE> 1
Exhibit 10.8(g)
FreeMarkets OnLine, Inc.
1998 STOCK OPTION PLAN
Grant Certificate
This Grant Certificate, dated May 28, 1998, evidences the grant of an option
pursuant to the provisions of the 1998 Stock Option Plan (the "Plan") of
FreeMarkets OnLine, Inc. (the "Company") to the individual whose name appears
below (the "Grantee"), covering the specific number of shares of Common Stock of
the Company, par value $.01 per share ("Shares") set forth below, pursuant to
the provisions of the Plan and on the following terms and conditions:
1. Name of Grantee: Thomas McLeod
2. Number of Shares subject to this option: 36,924 Shares
3. Exercise price per Share subject to this option: $3.25
4. Date of grant of this option: May 28, 1998
5. Vesting: Date Number of Shares
---- ----------------
May 28, 2001 9,231
May 28, 2002 9,231
May 28, 2003 9,321
May 28, 2004 9,321
(1) In the event that the Company consummates an underwritten public offering
of shares registered with the Securities and Exchange Commission
(an "IPO"), 30% of any options which are not vested as of the date of the
consummation of the IPO, shall vest on such date, and any remaining
unvested options shall continue to vest ratably over the vesting period
set forth above.
(2) Upon the occurrence of a "Change of Control" of the Company, as defined
in the attached, 50% of any of the above options which are not vested
upon the occurrence of a Change of Control, shall vest on the date of
such occurrence, and any remaining unvested options shall continue to
vest ratably over the vesting period set forth above.
Vesting ceases immediately upon termination of employment for any reason, and
any portion of this option that has not vested on or prior to the date of
such termination is forfeited on such date. Once vesting has occurred, the
vested portion can be exercised at any time, subject to Section 6 below.
6. The last day on which the vested portion of this option can be exercised is
the earliest of:
a. May 28, 2008 [tenth anniversary of date of grant];
b. the date on which Grantee's employment terminates for "cause"
(as defined in the Plan);
c. 60 days following the date that Grantee's employment terminates other than
for "cause" (as defined in the Plan); or
d. one year following the Grantee's death or "permanent disability"
(as defined in the Plan).
<PAGE> 2
7. Type of option: Non-Qualified Stock Option
The Grantee hereby acknowledges receipt of a copy of the Plan as presently in
effect. All of the terms and conditions of the Plan are incorporated herein by
reference (including but not limited to capitalized terms not otherwise defined
herein), and this option is subject to such terms and conditions in all
respects. This Grant Certificate and the Plan constitute the entire agreement of
the parties with respect to the subject matter hereof, and supersede any prior
written or oral agreements. If the Grantee is entitled to exercise the vested
portion of this option, and wishes to do so, in whole or in part, the Grantee
shall submit to the Company a written notice of exercise in the form attached to
this Grant Certificate, specifying the exercise date and the number of Shares to
be purchased pursuant to such exercise, and shall remit to the Company in a form
satisfactory to the Company (in its sole discretion) the exercise price, plus an
amount sufficient to satisfy any withholding tax obligations of the Company that
arise in connection with such exercise.
Accepted and Agreed: FreeMarkets OnLine, Inc.
/s/ Thomas McLeod By: /s/ Glen T. Meakem
- -------------------------- -----------------------------------------
Employee Signature Name: Glen T. Meakem
Title: President and Chief Executive Officer
<PAGE> 3
FURTHER RESOLVED, that for the purposes of the Senior Leadership Options, a
"Change in Control" shall mean the occurrence of any of the following events:
(i) the acquisition, other than from the Company, by any individual,
entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person")
(other than the Company or an employee benefit plan of the Company) of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of more than 50% of the combined voting power of the then
outstanding voting securities of the Company entitled to vote generally in the
election of directors (the "Voting Securities"); or
(ii) the approval by the stockholders of the Company of a
reorganization, merger, consolidation or recapitalization of the Company (a
"Business Combination"), other than a Business Combination in which more than
50% of the combined voting power of the outstanding voting securities of the
surviving or resulting entity immediately following the Business Combination is
held by the persons who, immediately prior to the Business Combination, were the
holders of the Voting Securities; or
(iii) the approval by the stockholders of the Company of a complete
liquidation or dissolution of the Company, or a sale of all or substantially all
of the assets of the Company; or
(iv) individuals who, as of May 28, 1998, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board, provided that any individual becoming a director subsequent to such date
whose election or nomination for election by the Company's stockholders was
approved by a vote of at least a majority of the directors then comprising the
Incumbent Board shall be considered as though such individual were a member of
the Incumbent Board.
<PAGE> 1
Exhibit 10.8(h)
FreeMarkets OnLine, Inc.
1998 STOCK OPTION PLAN
Grant Certificate
This Grant Certificate, dated May 28, 1998, evidences the grant of an option
pursuant to the provisions of the 1998 Stock Option Plan (the "Plan") of
FreeMarkets OnLine, Inc. (the "Company") to the individual whose name appears
below (the "Grantee"), covering the specific number of shares of Common Stock of
the Company, par value $.01 per share ("Shares") set forth below, pursuant to
the provisions of the Plan and on the following terms and conditions:
1. Name of Grantee: Thomas McLeod
2. Number of Shares subject to this option: 123,076 Shares
3. Exercise price per Share subject to this option: $3.25
4. Date of grant of this option: May 28, 1998
5. Vesting: Date Number of Shares
---- ----------------
May 28, 2001 30,769
May 28, 2002 30,769
May 28, 2003 30,769
May 28, 2004 30,769
(1) In the event that the Company consummates an underwritten public offering
of shares registered with the Securities and Exchange Commission
(an "IPO"), 30% of any options which are not vested as of the date of the
consummation of the IPO, shall vest on such date, and any remaining
unvested options shall continue to vest ratably over the vesting period
set forth above.
(2) Upon the occurrence of a "Change of Control" of the Company, as defined
in the attached, 50% of any of the above options which are not vested
upon the occurrence of a Change of Control, shall vest on the date of
such occurrence, and any remaining unvested options shall continue to
vest ratably over the vesting period set forth above.
Vesting ceases immediately upon termination of employment for any reason, and
any portion of this option that has not vested on or prior to the date of
such termination is forfeited on such date. Once vesting has occurred, the
vested portion can be exercised at any time, subject to Section 6 below.
6. The last day on which the vested portion of this option can be exercised is
the earliest of:
a. May 28, 2008 [tenth anniversary of date of grant];
b. the date on which Grantee's employment terminates for "cause"
(as defined in the Plan);
c. 60 days following the date that Grantee's employment terminates other than
for "cause" (as defined in the Plan); or
d. one year following the Grantee's death or "permanent disability"
(as defined in the Plan).
<PAGE> 2
7. Type of option: Incentive Stock Option
The Grantee hereby acknowledges receipt of a copy of the Plan as presently in
effect. All of the terms and conditions of the Plan are incorporated herein by
reference (including but not limited to capitalized terms not otherwise defined
herein), and this option is subject to such terms and conditions in all
respects. This Grant Certificate and the Plan constitute the entire agreement of
the parties with respect to the subject matter hereof, and supersede any prior
written or oral agreements. If the Grantee is entitled to exercise the vested
portion of this option, and wishes to do so, in whole or in part, the Grantee
shall submit to the Company a written notice of exercise in the form attached to
this Grant Certificate, specifying the exercise date and the number of Shares to
be purchased pursuant to such exercise, and shall remit to the Company in a form
satisfactory to the Company (in its sole discretion) the exercise price, plus an
amount sufficient to satisfy any withholding tax obligations of the Company that
arise in connection with such exercise.
Accepted and Agreed: FreeMarkets OnLine, Inc.
/s/ Thomas McLeod By: /s/ Glen T. Meakem
- -------------------------- -----------------------------------------
Employee Signature Name: Glen T. Meakem
Title: President and Chief Executive Officer
<PAGE> 3
FURTHER RESOLVED, that for the purposes of the Senior Leadership Options, a
"Change in Control" shall mean the occurrence of any of the following events:
(i) the acquisition, other than from the Company, by any individual,
entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person")
(other than the Company or an employee benefit plan of the Company) of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of more than 50% of the combined voting power of the then
outstanding voting securities of the Company entitled to vote generally in the
election of directors (the "Voting Securities"); or
(ii) the approval by the stockholders of the Company of a
reorganization, merger, consolidation or recapitalization of the Company (a
"Business Combination"), other than a Business Combination in which more than
50% of the combined voting power of the outstanding voting securities of the
surviving or resulting entity immediately following the Business Combination is
held by the persons who, immediately prior to the Business Combination, were the
holders of the Voting Securities; or
(iii) the approval by the stockholders of the Company of a complete
liquidation or dissolution of the Company, or a sale of all or substantially all
of the assets of the Company; or
(iv) individuals who, as of May 28, 1998, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board, provided that any individual becoming a director subsequent to such date
whose election or nomination for election by the Company's stockholders was
approved by a vote of at least a majority of the directors then comprising the
Incumbent Board shall be considered as though such individual were a member of
the Incumbent Board.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of
our reports dated October 15, 1999, relating to the financial statements and
financial statement schedule of FreeMarkets, Inc. and Subsidiaries, which appear
in such Registration Statement. We also consent to the references to us under
the headings "Selected Consolidated Financial Data" and "Experts" in such
Registration Statement.
/s/ PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
October 15, 1999
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
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<DEPRECIATION> 0
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0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
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<TOTAL-REVENUES> 4,801,649
<CGS> 0
<TOTAL-COSTS> 2,829,644
<OTHER-EXPENSES> 2,079,210
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (196,195)
<INCOME-PRETAX> 88,960
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<NET-INCOME> 88,960
<EPS-BASIC> .01
<EPS-DILUTED> .00
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<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 22,285,728
<SECURITIES> 10,289,831
<RECEIVABLES> 6,070,117
<ALLOWANCES> (114,316)
<INVENTORY> 0
<CURRENT-ASSETS> 39,656,825
<PP&E> 6,272,012
<DEPRECIATION> (662,003)
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0
160,514
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<OTHER-SE> 37,457,702
<TOTAL-LIABILITY-AND-EQUITY> 45,677,199
<SALES> 0
<TOTAL-REVENUES> 13,037,297
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<TOTAL-COSTS> 7,367,079
<OTHER-EXPENSES> 19,203,568
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (53,874)
<INCOME-PRETAX> (13,479,476)
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