<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 9, 1999
REGISTRATION NO. 333-86755
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
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.......... 4,600,000 $16.00 $73,600,000 $19,431(3)
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Includes 600,000 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 NOVEMBER 9, 1999.
4,000,000 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 4,000,000 shares of common stock, the
underwriters have the option to purchase up to an additional 600,000 shares from
FreeMarkets at the initial public offering price less the underwriting discount.
At our request, the underwriters have reserved for sale at the initial
public offering price an aggregate of 1,275,000 shares in this offering as
follows:
- up to 400,000 shares for a subsidiary of United Technologies Corporation,
which is one of our largest stockholders and our largest customer
- up to 350,000 shares for Kleiner Perkins Caufield & Byers IX L.P., an
entity affiliated with one of our directors
- up to 350,000 shares for a subsidiary of Dell Computer Corporation
- up to 175,000 shares for our employees and directors
The underwriters expect to deliver the shares against payment in New York,
New York on , 1999.
------------------------
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 creating successful business-to-business online auctions, such
as the one illustrated here."
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 in the lower
left-hand corner 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 replicated."
<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
buyers of industrial parts, raw materials and commodities. We created online
auctions covering $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 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, The Quaker Oats Company, Emerson
Electric Company, AlliedSignal Inc. 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 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...... 4,000,000 shares
Shares to be outstanding after the
offering........................... 34,354,958 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 reflect 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 reflect the issuance of shares in this offering
at an assumed initial public offering price of $15.00 per share and after
deducting the estimated 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>
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 $75,759
Working capital............................................. 33,717 87,217
Total assets................................................ 45,677 99,177
Long-term debt, excluding current portion................... 1,976 1,976
Total stockholders' equity.................................. 37,761 91,261
</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, PA 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 occurs, 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
substantial 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. 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, to conduct 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 protections may not
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<PAGE> 15
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. In addition, because we offer our services worldwide and facilitate
sales of goods to clients globally, foreign jurisdictions may claim that
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<PAGE> 16
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
and facilities 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 $53.5 million,
at an assumed initial public offering price of $15.00 per share and after
deducting the estimated underwriting discount and our 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
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<PAGE> 17
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.
OTHER COMPANIES MAY HAVE DIFFICULTY ACQUIRING US, EVEN IF DOING SO WOULD BENEFIT
OUR STOCKHOLDERS, DUE TO PROVISIONS OF OUR CORPORATE CHARTER AND BYLAWS AND
DELAWARE LAW
Provisions in our Certificate of Incorporation, in our Bylaws and under
Delaware law could make it more difficult for other companies 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 who 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. The market prices for
stocks of Internet companies and other companies whose businesses are heavily
dependent on the Internet have generally proven to be highly volatile, and
particularly so in recent periods.
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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 34,354,958
shares of common stock. This includes the 4,000,000 shares we are selling in
this offering. Assuming that we sell all shares reserved under our directed
share program to the entities or persons for whom these shares have been
reserved, we expect that investors may resell 3,125,000 in the public market
immediately. The remaining 90.9%, or 31,229,958 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>
2,629,386/7.7% Immediately.
302,991/0.9% 90 days after the date of this prospectus.
25,935,377/75.4% 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.
2,362,204/6.9% 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 $12.35 per share from their investment. For more
information, please see "Dilution".
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<PAGE> 19
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 $53.5 million, at an assumed initial public offering price of
$15.00 per share after deducting the estimated 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 $61.9 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 4,000,000 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 $ 75,759
======== =========
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; 34,354,958 shares issued and outstanding, as
adjusted................................................ 143 344
Additional capital.......................................... 55,838 109,298
Unearned stock-based compensation........................... (1,751) (1,751)
Stock purchase warrants..................................... 30 30
Accumulated deficit......................................... (16,660) (16,660)
-------- ---------
Total stockholders' equity.............................. 37,761 91,261
-------- ---------
Total capitalization............................... $ 39,737 $ 93,237
======== =========
</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
4,000,000 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 $91.0 million or $2.65 per share of common
stock. This represents an immediate increase in net tangible book value of $1.42
per share to existing stockholders and an immediate dilution of $12.35 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.......... 1.42
------
Net tangible book value per share after the offering........ 2.65
------
Dilution per share to new investors......................... $12.35
======
</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 and preferred 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 88.4% $ 51,268,303 46.1% $ 1.69
New investors......................... 4,000,000 11.6 60,000,000 53.9 15.00
---------- ----- ------------ -----
Totals........................... 34,354,958 100.0% $111,268,303 100.0%
========== ===== ============ =====
</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 $11.96.
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
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 $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 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 replicated. 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 be
25
<PAGE> 25
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, savings, or both,
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, or both, 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.
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<PAGE> 26
OPERATING COSTS
We classify our operating costs into four general categories: research and
development, sales and marketing, general and administrative and stock-based
expense, based on the nature of the expenditures.
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 costs
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.
Additionally, in October 1999, we issued to our Assistant Secretary, who is
neither an employee nor a director, options to purchase 30,000 shares of common
stock at an exercise price of $14.80 per share. As a result, and in accordance
with SFAS No. 123, we recorded stock-based expense of $246,000 in October 1999,
as determined using the Black-Scholes pricing method.
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.
27
<PAGE> 27
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 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>
28
<PAGE> 28
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
REVENUES
Revenues increased 171% from $4.8 million in the nine months ended
September 30, 1998 to $13.0 million in 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 in both periods were substantially concentrated in
two clients, United Technologies and General Motors. In the nine months ended
September 30, 1998, these two clients together contributed revenues of $3.5
million, or 73% of our total revenues. Revenues in the nine months ended
September 30, 1998 included a $500,000 performance incentive from United
Technologies. In the same period in 1999, total revenues from these two clients
increased over 115% to $7.5 million, or 58% of our total revenues. Additionally,
a substantial portion of our revenue growth in the nine months ended September
30, 1999 occurred in the period from June 1999 through September 1999, as we
added 11 of the 21 clients we served in that nine-month period since mid-June.
Four of these new clients have entered into long-term agreements with us.
COST OF REVENUES
Cost of revenues increased from $2.8 million in the nine months ended
September 30, 1998 to $7.4 million in 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, in the nine months ended September 30, 1998, to
$3.0 million, or 23% of revenues, in 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, in the nine months ended September 30, 1998, to $5.6 million,
or 43% of revenues, in 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 in the
nine months ended September 30, 1999 included certain costs not incurred in the
same period in 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, in the nine months ended September 30,
1998, to $5.9 million, or 45% of revenues, in the same period in 1999. The
increase in both absolute dollars and as a percentage of revenues is
29
<PAGE> 29
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 is also attributable to
start-up costs of $200,000 and other recurring costs of $776,000 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.
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, $226,000 has been amortized related to these
grants.
OTHER INCOME, NET
Other income was $196,000 in the nine months ended September 30, 1998 as
compared to $54,000 in 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 in 1999 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. Revenues in 1997 and 1998 were substantially concentrated
in United Technologies and General Motors. In 1997, these two clients together
contributed revenues of $735,000, or 41% of our total revenues. In 1998, total
revenues from these two clients increased over 700% to $6.0 million, or 77% of
our total revenues. During 1998, $1.6 million of our revenues was attributable
to a performance incentive bonus we earned from United Technologies.
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 and General Motors in 1997 and
1998 allowed us to forecast our workforce needs better and thereby hire and
deploy market making personnel more efficiently.
30
<PAGE> 30
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 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 European 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 in 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 as of
September 30, 1999. It appeared in mid-May that if we were to continue with our
projected spending levels, we would have insufficient cash, unless we completed
another private placement. Accordingly, in September 1999, we completed our
Series D preferred stock private placement, which raised net proceeds of $30.3
million. In addition, in
31
<PAGE> 31
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 in the nine months
ended September 30, 1999. These positive financing cash flows primarily reflect
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.
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.
In June 1999, we initiated discussions with our lender to amend our
original bank credit facility to provide for additional liquidity to finance
future capital expenditures. The amendment, which became effective in September
1999, increased the total availability under our bank credit facility from $4.0
million to $10.0 million. The amendment also revised the minimum tangible net
worth covenant, under which we were in technical default from June through
August 1999, as a result of losses that we incurred through that date. We are
currently in compliance with all covenants under our amended bank credit
facility.
Our amended 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 computer and telecommunications equipment and for
furnishings in our new headquarters, as well as for expansion of 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
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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 18 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.
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, delay or loss of revenues, diversion
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<PAGE> 33
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 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, either is 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 concerning 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
Nearly 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
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<PAGE> 34
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 United States 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 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
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
$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 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 purchasing organizations, including United
Technologies Corporation, General Motors Corporation, The Quaker Oats Company,
Emerson Electric Company, AlliedSignal Inc. 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
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<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 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 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
replicated.
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.
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 achieve on purchases in a variety of product categories.
PRINTED CIRCUIT BOARDS. In January 1998, we conducted two online auctions
for multi-layered printed circuit boards on behalf of a Fortune 100 corporation,
which resulted in aggregate 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 these auctions, 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 make purchases in 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
AlliedSignal Inc. 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 Corporation 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 fixed monthly fees. Some
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of our agreements also include performance incentive payments that are
contingent upon our client achieving specific auction volume or savings
thresholds, or both. 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 and 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
proprietary features of our technology, which include features relating to how
we conduct auctions and the business processes for making markets, which we
currently use or intend to use in the future. 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. In addition, because our
services are offered worldwide, and we facilitate sales of goods to clients
worldwide, foreign jurisdictions may claim that
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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, 37 in research and development, 27
in sales and marketing, 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 November 1, 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
L. John Doerr...................................... 48 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
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Making. Prior to joining FreeMarkets, from March 1992 to September 1996, Mr.
Becker was employed 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
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science from the University of California at Berkeley, and an A.B. in
mathematics from Harvard University.
L. JOHN DOERR has served as a director of FreeMarkets since October 1999.
Mr. Doerr has been a general partner of Kleiner Perkins Caufield & Byers, a
private venture capital firm, since September 1980. In 1974, he joined Intel
Corporation and held various engineering, marketing and management assignments.
Mr. Doerr is also a director of Martha Stewart Living Omnimedia, Inc.,
Amazon.com, Inc., At Home Corporation, drugstore.com, inc., Healtheon
Corporation, Intuit Inc., Epicor Software Corporation and Sun Microsystems,
Inc., as well as several private companies. Mr. Doerr earned a B.S. and a
Masters degree in electrical engineering from Rice University and an M.B.A. from
Harvard Business School.
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 five 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 and Mr. Doerr will serve as directors
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 reimburse our directors for travel and lodging expenses in connection
with attendance at Board and committee meetings. All of our directors, including
non-employee directors, are eligible to receive options under our Amended and
Restated Stock Incentive Plan. We recently granted options to all of our
non-employee directors. See "-- Option Grants -- Recent Option Grants".
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<PAGE> 49
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. 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 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.
In October 1999, we granted options to purchase 30,000 shares of common
stock to each of Dr. Eric C. Cooper and David A. Noble, two of our non-employee
directors, in connection with their service on our Board. These options are
exercisable at a price of $14.80 per share and vested immediately upon grant. By
letter agreement, each of Dr. Cooper and Mr. Noble, subject to limited
51
<PAGE> 51
exceptions, may not sell or otherwise transfer any of the shares acquired upon
exercise of these options until October 27, 2000, after which each may only sell
10,000 of such shares. After October 27, 2001, each may sell an additional
10,000 shares, and after October 27, 2002, each may sell the remaining 10,000
shares.
Also in October 1999, we granted options to purchase 350,000 shares of
common stock to L. John Doerr, also a non-employee director, in connection with
his service on our Board. These options are exercisable at a price of $14.80 per
share and vested immediately upon grant. By letter agreement, Mr. Doerr, subject
to limited exceptions, may not sell or otherwise transfer any of the shares
acquired upon exercise of these options until October 27, 2000, after which he
may only sell 116,667 of such shares. After October 27, 2001, he may sell an
additional 116,666 shares, and after October 27, 2002, he may sell the remaining
116,667 shares.
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, including 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
52
<PAGE> 52
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 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. If control of
our company changes, 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
53
<PAGE> 53
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.
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.
54
<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.
From December 1996 through 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 paid $600,000 to Saturn Capital in April 1999 to act as placement agent
in order to complete the Series C offering. Saturn Capital also agreed at that
time to relinquish its contractual rights to receive any warrants to purchase
shares of Series C preferred stock or any other compensation, and to act as
placement agent in any future financings by the Company.
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.
55
<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.
The table does not include the beneficial ownership of our common stock by
L. John Doerr, who became a director on October 28, 1999. On that date, Mr.
Doerr was granted immediately exercisable options to purchase 350,000 shares of
our common stock, which he exercised in November 1999. Subject to limited
exceptions, Mr. Doerr is restricted from transferring the shares he acquired
upon exercise of these options; this restriction lapses over a three-year
period. If Mr. Doerr's beneficial ownership were included in the table, his
percentage ownership before the offering would be 1.1% and after the offering
would be 1.0%.
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,
PA 15222. The address of Saturn Capital, Inc. is c/o Saturn Asset Management, 75
Federal Street, Boston, MA 02110. The address of United Technologies Corporation
is One Financial Plaza, Hartford, CT 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, PA 15222.
56
<PAGE> 56
<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% 10.3%
Sam E. Kinney, Jr. (2)...... 1,857,600 288,000 2,145,600 7.0 6.2
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 2.2
Dr. Eric Cooper (6)......... 31,892 -- 31,892 * *
David A. Noble (6).......... 184,200 -- 184,200 * *
CSM Partners (7)............ 2,319,912 -- 2,319,912 7.6 6.8
Jeffrey S. McCormick,
c/o Saturn Capital, Inc.
(8)....................... 2,428,269 -- 2,428,269 8.0 7.1
United Technologies
Corporation (9)........... 1,718,983 -- 1,718,983 5.7 5.0
All executive officers and
directors as a group (10
persons) (10)(11)......... 6,625,964 1,200,000 7,825,964 24.8 22.0
</TABLE>
- ---------------
* Less than 1% of the outstanding shares of common stock.
(1) Includes 2,542,200 shares held by a limited partnership controlled by Mr.
Meakem.
(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) Does not include immediately exercisable options to purchase 30,000 shares
granted to each of these individuals on October 28, 1999. If Dr. Cooper and
Mr. Noble's options were included in the table, the percentage ownership of
all executive officers and directors as a group before the offering would be
24.9% and after the offering would be 22.1%.
(7) CSM Partners is a general partnership with three general partners and is
governed by majority rule of these partners. Accordingly, the voting
majority of the general partners has voting and investment power over these
shares.
(8) Mr. McCormick is the majority stockholder of Saturn Capital, Inc. and
exercises voting and investment power over these shares.
(9) These shares are held of record by Nevada Bond Investment Corp. II, which is
a wholly-owned subsidiary of United Technologies Corporation. United
Technologies Corporation has the power to control Nevada Bond Investment
Corp. II, and thus shares with that entity voting and investment power over
these shares.
(10) Includes 15,000 shares held by a limited partnership controlled by an
executive officer of the Company. See also Notes (1) through (5).
(11) If Mr. Doerr's beneficial ownership were included in the table, the
percentage ownership of all executive officers and directors as a group
before the offering would be 25.6% and after the offering would be 22.8%.
57
<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 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 34,354,958
shares of common stock outstanding, assuming no 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.
58
<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,
NY 10005.
60
<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 34,354,958 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 4,000,000 shares sold in the offering, 875,000 shares will be
subject to the lock-up agreements described below assuming that we sell all
shares reserved under our directed share program to the entities or persons for
whom these shares have been reserved. We expect that the remaining 3,125,000
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 31,229,958 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, 3,125,000 of the 4,000,000 shares sold in
this offering, and 2,629,386 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 25,935,377
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 344,000 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 LLP own 40,275 shares of
common stock of FreeMarkets and also hold options to purchase 30,000 shares of
such stock.
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,
IL 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; 3,794,600 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; 3,656,800 and 3,935,000 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 costs 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 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. Commission revenue was
$138,300 in 1996, $358,200 in 1997, $799,700 in 1998 and $550,100 and $1,167,800
in the nine-month periods ended September 30, 1998 and 1999, respectively.
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 ("FASB") 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. If the Company were
to leave the City of Pittsburgh, Pennsylvania prior to November 2002, the
Commonwealth of Pennsylvania may require the Company to refund a portion of the
PA Grant; however, the Company considers the likelihood of its relocation to be
remote.
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
F-9
<PAGE> 72
FREEMARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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,
F-10
<PAGE> 73
FREEMARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1999, 20,856,078 potentially dilutive common shares were excluded because their
effect was antidilutive.
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, 7,912,973 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 FASB 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 lender's 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 8.2% 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)
The Company has presented each split as a separate issuance of shares
occurring at the time of the split. Accordingly, share amounts presented in the
consolidated balance sheets and statements of stockholders' equity reflect the
actual shares outstanding for each period presented prior to the stock splits.
All references to the number of shares and per share amounts elsewhere in the
consolidated financial statements and related notes 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, of which
1,057,800 shares were issued in 1996 and 1,289,400 shares were issued in 1997.
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.
F-15
<PAGE> 78
FREEMARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 the
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 --
Callable stock purchase warrants issued........... -- -- 3,157,200
Stock purchase warrants issued.................... -- -- 1,067,400
---------- ---------- ----------
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.
F-17
<PAGE> 80
FREEMARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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>
F-18
<PAGE> 81
FREEMARKETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
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 compensation, 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....................................................... 4,000,000
=========
</TABLE>
Goldman, Sachs & Co. and Morgan Stanley & Co. Incorporated will jointly
manage the order books for the offering.
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 600,000
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'
U-1
<PAGE> 83
management and the consideration of the above factors in relation to the market
valuation of companies in related businesses.
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 400,000 shares of common stock for sale to
a subsidiary of United Technologies Corporation; up to 350,000 shares of common
stock for sale to Kleiner Perkins Caulfield & Byers IX L.P., an entity
affiliated with one of FreeMarkets' directors; up to 350,000 shares of common
stock for sale to a subsidiary of Dell Computer Corporation; and up to 175,000
shares of common stock for sale to directors and employees of FreeMarkets.
United Technologies Corporation is one of FreeMarkets' largest stockholders and
its largest customer. Dell Computer Corporation recently executed a commercial
agreement with 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 replicated."
<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.
- -------------------------------------------------------
- -------------------------------------------------------
- -------------------------------------------------------
- -------------------------------------------------------
4,000,000 Shares
FREEMARKETS, INC.
Common Stock
------------------
FreeMarkets, Inc. Logo
------------------
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........................................ $ 19,430
NASD fee.................................................... 7,860
Nasdaq National Market listing fee.......................... 94,000
Printing expenses........................................... 500,000
Legal fees and expenses..................................... 750,000
Accounting fees and expenses................................ 500,000
Transfer agent and registrar fees........................... 3,500
Miscellaneous............................................... 425,210
----------
Total............................................. $2,300,000
==========
</TABLE>
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 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
II-1
<PAGE> 87
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 December 1996, the registrant issued 1,057,800 shares of Series B
preferred stock to 13 investors for an aggregate consideration of $572,553.
3. From January through July 1997, the registrant issued 1,289,400 shares
of Series B preferred stock and warrants to purchase 571,800 shares of Series B
preferred stock to 18 investors for an aggregate consideration of $697,514.
4. In October 1997, the registrant issued 531,000 shares of common stock to
24 employees for an aggregate consideration of $287,625.
5. 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.
6. In October 1998, the registrant issued 780,000 shares of common stock to
78 employees for an aggregate consideration of $1,300,000.
7. In March 1999, the registrant 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.
8. 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.
9. 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.
10. In September 1999, the registrant 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.
11. Since inception, the registrant has granted options to purchase an
aggregate of 12,770,250 shares of common stock to a number of its employees,
directors, officers and individuals who served as consultants. No consideration
was received by the registrant upon grant of any such options. As of this date,
568,290 options have been exercised for an aggregate consideration of
$5,310,255.
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 described in Items 1, 4, 6 and 11 were intended to be exempt
from registration under the Securities Act in reliance upon Rule 701 and/or Rule
4(2) promulgated under the
II-2
<PAGE> 88
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.
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 Limited Partnership dated March 30, 1999.
10.3(c)* Second Amendment to Lease between the registrant and One
Oliver Associates Limited Partnership dated June 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).
</TABLE>
II-3
<PAGE> 89
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- -------- ------------------------------------------------------------
<S> <C>
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).
10.9+* Letter Agreement between the registrant and Eric C. Cooper
dated October 28, 1999.
10.10+* Letter Agreement between the registrant and L. John Doerr
dated October 28, 1999.
10.11+* Letter Agreement between the registrant and David A. Noble
dated October 28, 1999.
21.1* Subsidiaries of the registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Morgan, Lewis & Bockius LLP (included in opinion
filed as Exhibit 5.1).
24.1* Power of Attorney granted by Glen T. Meakem, Joan S. Hooper,
Sam E. Kinney, Jr., Eric C. Cooper and David A. Noble
(included on signature page of this registration statement
and Amendment No. 1 hereto).
24.2* Power of Attorney granted by L. John Doerr.
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.
++ Portions of this Exhibit have been omitted pursuant to a request for
confidential treatment.
+ 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 November 9, 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>
* President, Chief Executive Officer November 9, 1999
- --------------------------------------- and Chairman of the Board
Glen T. Meakem (Principal Executive Officer) and
Director
* Vice President and Chief Financial November 9, 1999
- --------------------------------------- Officer (Principal Financial and
Joan S. Hooper Accounting Officer)
* Director November 9, 1999
- ---------------------------------------
Sam E. Kinney, Jr.
* Director November 9, 1999
- ---------------------------------------
Eric C. Cooper
* Director November 9, 1999
- ---------------------------------------
David A. Noble
* Director November 9, 1999
- ---------------------------------------
L. John Doerr
*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 Limited Partnership dated March 30, 1999.
10.3(c)* Second Amendment to Lease between the registrant and One
Oliver Associates Limited Partnership dated June 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).
10.9+* Letter Agreement between the registrant and Eric C. Cooper
dated October 28, 1999.
10.10+* Letter Agreement between the registrant and L. John Doerr
dated October 28, 1999.
10.11+* Letter Agreement between the registrant and David A. Noble
dated October 28, 1999.
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 granted by Glen T. Meakem, Joan S. Hooper,
Sam E. Kinney, Jr., Eric C. Cooper and David A. Noble
(included on signature page of this registration statement
and Amendment No. 1 hereto).
24.2* Power of Attorney granted by L. John Doerr.
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.
++ Portions of this Exhibit have been omitted pursuant to a request for
confidential treatment.
+ Management or compensatory contract.
<PAGE> 1
Exhibit 5.1
November 9, 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 4,600,000 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 600,000 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.
November 9, 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
<PAGE> 2
system and use of Supplier's BidWare(R) Software, and purchase associated
services to be used by Customer's purchasing department in North America to
enable Supplier and Certified Buyers to conduct CBEs 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 twice 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
2
<PAGE> 3
Exhibit D of this Transaction Agreement, or to purchase its own personal
computers to run the BidWare(R) Software.
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
3
<PAGE> 4
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 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.
4
<PAGE> 5
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 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., North American Operations Headquarters) 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
North America access the System solely to conduct CBEs as set forth in this
Transaction Agreement, and (ii) limited license to have Certified Buyers in
North America 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, future versions of the System will
include the functionality 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.
5
<PAGE> 6
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.
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
6
<PAGE> 7
need, as set forth in Exhibit D. Invoices for the fees of whatever nature,
including without limitation, license fees, BidWare(R) PC fees, training fees,
CBE management fees, Online Market Making consulting fees, Technical Operations
fees, Call Center fees 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.
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. [*****].
7
<PAGE> 8
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.
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.
8
<PAGE> 9
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."
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.
9
<PAGE> 10
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.
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.
10
<PAGE> 11
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.
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:[*****].
11
<PAGE> 12
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 INTERNATIONAL USE. As set forth in Exhibit F, Supplier and
Customer may agree to begin a pilot international 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.
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.
12
<PAGE> 13
(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 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.
13
<PAGE> 14
SUPPLIER CUSTOMER
By: /s/ Glen T. Meakem By: /s/ James Scotti
--------------------- ----------------------
Title: Chief Executive Officer Title: Commodity Manager
14
<PAGE> 15
EXHIBIT A
DEFINITIONS
1. "Bidder" shall mean a supplier of goods and/or services who will
participate in a CBE to supply such goods and/or services to Customer.
2. "Bidder Agreement" shall mean the OnLine Bidder Agreement for General
Motors/FreeMarkets CBE attached hereto as Exhibit C. Such agreement may be
revised from time-to-time in Supplier's discretion.
3. "BidServer(R) Software" shall mean the server software used in conjunction
with online bidding auctions which is proprietary to Supplier.
4. "BidWare(R) Software" shall mean the software used in conjunction with
online bidding auctions which is proprietary to Supplier. The version of
BidWare(R), v 2.2 in general use as of the Effective Date supports multiple
Qualified Bidders bidding in real time, allowing each Qualified Bidder to
view the anonymous bids of all other Qualified Bidders.
5. "BidWare Manual" shall mean the user manual for the BidWare(R) Software.
6. "BidWare(R) PCs" shall mean the personal computers configured to operate
the BidWare(R) Software which may be purchased by Customer to be placed at
various Customer Sites in North America to allow viewing of CBEs, printing
of results, reports, and printing of audit reports.
7. "Buyer" shall mean an employee of Customer located in North America whose
primary function entails the procurement of materials from suppliers.
8. "CBE" shall mean a Competitive Bidding Event using the System as set forth
in this Transaction Agreement.
9. "Certified Buyer" shall mean a Buyer who, as determined by Supplier, has
successfully completed the Buyer training as set forth in Section 2.2 of
this Transaction Agreement.
10. [*]
11. "Customer" shall mean General Motors Corporation, Delphi Automotive Systems
and all 100% owned subsidiaries of General Motors Corporation.
12. "Documentation" shall mean the published documentation for the System and
BidWare(R) Software provided by Supplier to Customer.
<PAGE> 16
13. "Project" shall mean the implementation of the global online bidding System
provided by Supplier to be used by Buyers in North America.
14. "Qualified Bidder" shall mean a Bidder chosen by Customer to participate in
a CBE which has executed Supplier's then standard Bidder Agreement.
15. "RFQ" shall mean a written request for quote which shall contain all
relevant information required for the CBE including, without limitation,
detailed specifications of the parts, material(s) or services, the quantity
requirements and the term of the commitment.
16. "Site" shall mean, when referring to Customer's facilities, a Customer
facility located in North America, and when referring to Supplier's
facilities, shall mean Supplier's facility located in Pittsburgh,
Pennsylvania.
17. "Source Code" shall mean the BidWare(R) Software and System (and components
thereof), expressed in a form suitable for modification by humans.
18. "Supplier" shall mean FreeMarkets OnLine, Inc.
19. [*]
20. "Supplier Room" shall mean a room designated by Customer which will contain
an external analog telephone line and a separate external telephone line
for normal telephone usage. The Supplier Rooms shall be used by Customer
for the viewing of CBEs using the BidWare(R) Software.
21. "Supplier Technical Operations Staff" shall mean personnel who run and
maintain the System, as well as provide technical support to BidWare(R)
licensees, Customer and Bidders.
22. "System" shall mean the Supplier global online bidding system provided by
Supplier. The System includes BidServer(R) Software installed on Supplier's
secure hardware in its Pittsburgh offices, and hardware located at
Supplier's Pittsburgh offices, including T1 lines, routers and servers.
<PAGE> 17
EXHIBIT B
TRAINING AGENDA
ACTIVITY TIME
-------- ----
1. Principles of OnLine Market Making(TM) [*]
[*]
2. Communicating with Suppliers [*]
[*]
3. Structuring OnLine Competitive [*]
Bidding Events (CBEs)
[*]
4. Using BidWare(R) for Buyers and the [*]
FreeMarkets(TM) System
5. Structuring and executing a mock CBE [*]
TOTAL TIME [*]
<PAGE> 18
EXHIBIT C
[*]
<PAGE> 19
EXHIBIT D
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
FEE ELEMENT DESCRIPTION RATE NOTES
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
System Access License Unlimited North American use of [*] o To be used by any Certified Buyers in
the then current System. North America using Qualified Bidders
from anywhere in the world
o Will be billed at [*]
- -------------------------------------------------------------------------------------------------------------------------------
BidWare PCs PC, modem, monitor, printer at [*] [*]
select Customer buying sites,
fully configured to run BidWare(R)
Software, exclusive of license fee
for BidWare(R) Software.
- -------------------------------------------------------------------------------------------------------------------------------
BidWare(R) Software License for each copy of BidWare(R) [*] for each BidWare(R) Cost covers the following:
License Software for Buyers or Suppliers. Software license shall
begin when shipped, o Software license
and shall last for the
earlier of [*] from o Packaging
date of shipment or
the termination of o Shipping
this Transaction
Agreement, regardless o Documentation
of whether such
software is being used o Establishment and maintenance
by a Buyer or of secure user I.D.s
Qualified Bidder. [*]
for BidWare(R)Software,
Customer shall notify
Supplier in writing
whether or not
Customer wishes such
BidWare(R)Software
license to be renewed
[*]. All license fees
for BidWare(R)Software
are invoiced to
Customer upon initial
shipment or renewal.
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 20
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
FEE ELEMENT DESCRIPTION RATE NOTES
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Network & Telecom Global network connection fees Network access fee - o Network fees [*]
charges and telecommunications fees [*]
charged by providers o Telecom will be [*] and may
Network connect time - adjust over time
[*]
o Providers to be chosen by
Telecom - estimated [*] Supplier
- -------------------------------------------------------------------------------------------------------------------------------
Direct Labor OnLine Market Making Consulting [*] o In-depth consulting to
formulate [*]
CONSULTING TOPICS:
o Structuring RFQs for [*]
o [*] competition and ease of
award
o Application of online markets
to [*]
- -------------------------------------------------------------------------------------------------------------------------------
EXAMPLES OF CONSULTING:
o Presentation to Creativity Teams:
Supplier/Supplier personnel present
the goals and process of online
market making, answer questions and
help team identify projects that
would benefit from OnLine Market
Making(TM).
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 21
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
FEE ELEMENT DESCRIPTION RATE NOTES
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
o Assist Certified Buyers in structuring
events: Help Certified Buyers answer
strategic questions regarding specific
events: elements of total cost, bidding
scenarios, etc.
o Communications: Assist Certified Buyers
in communicating with Qualified Bidders
in difficult or unusual situations.
- -------------------------------------------------------------------------------------------------------------------------------
o Structuring complex or innovative CBEs:
Help Certified buyers determine [*].
- -------------------------------------------------------------------------------------------------------------------------------
Training [*] o Structured training programs for groups
of Buyers
o Time spent preparing training materials
- -------------------------------------------------------------------------------------------------------------------------------
CBE Management [*] o Work with buyers [*]
o Manage the CBE scheduling with Qualified
Buyers
- -------------------------------------------------------------------------------------------------------------------------------
Technical Operations [*] o Manage and maintain the System
o Troubleshoot Qualified Bidder connection
problems
o On-site and telephone installation
services and support for Customer and
Qualified Bidders
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 22
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
FEE ELEMENT DESCRIPTION RATE NOTES
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
Call Center [*] o Train Qualified Bidders and explain CBE and
bidding process
o Provide first line support to Certified
buyers for basic BidWare(R) Software and
CBE questions
- -------------------------------------------------------------------------------------------------------------------------------
All costs set forth above for As incurred o Direct billing for travel to and from
Direct Labor are exclusive of Customer locations
out-of-pocket expenses, which will
be billed separately as incurred
pursuant to the terms of this
Transaction Agreement.
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
All fees incurred related to Products, licenses or Services provided by Supplier
under this Transaction Agreement shall be billed to, and paid by, Customer
pursuant to the standard payment terms set forth in the Agreements as modified
by this Transaction Agreement.
All costs set forth above for Direct Labor, whether to Customer or any other
party will be billed in full day increments for, in each case, an eight hour or
greater day of service dedicated to Customer. During the term of this
Transaction Agreement, Customer agrees [*] for each of the following: (i) a CBE
Management person, (ii) a Technical Operations person, and (iii) a Call Center
person. CBE Management, Technical Operations and Call Center personnel shall be
provided on a 1:1:1 ratio for any given CBE.
<PAGE> 23
EXHIBIT E
FUTURE VERSIONS OF SYSTEM
Supplier's plan for future versions of the System includes the following
additional functionality:
ENHANCEMENT RELEASE DATE DESCRIPTION
[*] July 1998 [*]
[*] July 1998 [*]
[*] August 1998 [*]
[*] August 1998 [*]
[*] November 1998 [*]
Customer understands and agrees that such enhancements are not being
specifically developed for Customer, but will be released as general
enhancements to Supplier's System and may be implemented by Supplier in the
services offered to the general public or any other customer. Customer is not
paying for the enhancements set forth above and will have no ownership interest
in them or their Intellectual Property. Access to such enhancements shall be
licensed to Customer as part of the System pursuant to the license set forth in
Article 4 of this Transaction Agreement at no additional charge.
<PAGE> 24
EXHIBIT F
INTERNATIONAL IMPLEMENTATION
What follows are preliminary terms for possible expansion of the relationship of
the Parties for conducting international CBEs. The terms set forth herein are
preliminary and are subject to change. If the Parties agree to expand the scope
of their relationship to include international CBEs, the actual terms and
conditions for such relationship shall be set forth in mutually agreeable
additional Transaction Agreement(s).
<TABLE>
<CAPTION>
POSSIBLE POSSIBLE POSSIBLE
TIMING: EXPANSION: ACTIVITIES:
- ------- ---------- -----------
<S> <C> <C> <C>
1998 Begin pilot program in Europe [*]
[*]
1999 Begin roll-out for European o Agree on a European program
implementation
[*]
Begin pilot program in o Identify further opportunities
other region(s)
2000 Roll out into o Complete agreements for other regions
other regions
[*]
</TABLE>
DESCRIPTION OF PILOT PROGRAMS IN THE REGIONS
Supplier pilot programs in other regions will be structured similarly to North
American Operations pilot program:
o [*]
o [*]
o [*]
<PAGE> 25
ESTIMATED INCREMENTAL COSTS FOR INTERNATIONAL IMPLEMENTATION:
Item Fee Structure
- ---- -------------
System Access [*]. For example, if the potential bid volume in Europe
License Fees is U.S. $2 BB, the Access Fee will be [*]
Direct Labor Because the cost of labor [*], Customer and
Supplier agree that the direct labor costs [*]. The
percentage overhead that Supplier allocates to each
position will [*].
Supplier travel During the pilot program, Customer will [*]. Once a longer-term
agreement to other regions is reached, Supplier and Customer will [*]. Customer
will [*].
<PAGE> 26
EXHIBIT G
BIDWARE(R) SOFTWARE LICENSE AGREEMENT
READ THE TERMS AND CONDITIONS OF THIS LICENSE AGREEMENT CAREFULLY BEFORE
SELECTING THE "YES" BUTTON BELOW TO ACCEPT THE TERMS OF THE AGREEMENT. THIS
SOFTWARE IS COPYRIGHTED AND LICENSED (NOT SOLD). BY SELECTING THE "YES" BUTTON,
YOU ARE ACCEPTING AND AGREEING TO THE TERMS OF THIS AGREEMENT. IF YOU ARE NOT
WILLING TO BE BOUND BY THE TERMS OF THIS AGREEMENT, YOU SHOULD SELECT THE "NO"
BUTTON DECLINING THE TERMS, UNINSTALL THE SOFTWARE FROM YOUR PC, PROMPTLY RETURN
THE PACKAGE AND YOU WILL RECEIVE A REFUND OF ANY MONEY IF YOU PAID FOR THE
SOFTWARE. THIS AGREEMENT REPRESENTS THE ENTIRE AGREEMENT CONCERNING THE SOFTWARE
BETWEEN YOU AND FREEMARKETS ONLINE, INC. ("LICENSOR" OR "THE COMPANY"), AND IT
SUPERSEDES ANY PRIOR PROPOSAL, REPRESENTATION, OR UNDERSTANDING BETWEEN THE
PARTIES.
1. GRANT OF LICENSE. Subject to the terms and conditions set forth in this
BidWare(R) Software License Agreement ("License Agreement"), we hereby grant to
you a non-transferrable and non-exclusive license (the "License") to use this
BidWare(R) Software or any of its components (collectively "the Software"). The
License granted herein authorizes use of the Software only by your authorized
users and only in connection with the services to be provided to you by
Licensor, for purposes of this License, your "use" of the Software, means to
load the Software into RAM or to store the Software in a memory storage device
such as a hard drive, CD-ROM other storage device. Under no circumstances shall
you make the Software available, or allow the Software to be made available, on
a network or file server other than the Licensor's BidWare(R) and the Licensor's
Network. Under no circumstances shall you copy the Software, or allow the
Software to be copied, for any purpose other than to produce the single archival
(backup) copy permitted under this License, nor shall you decompile or reverse
engineer the Software, or allow others to decompile, disassemble, or reverse
engineer the Software.
2. USE AND LOCATION.
2.1 The Software shall not be used to connect with any server, on-line
service, or any other system except as specifically provided by Licensor.
2.2 BidWare(R) users who have complied with the terms of this License
will be assigned a user ID and password to govern access to the Licensor's
Network and BidWare(R) databases. We reserve the right to change or cancel or
render inoperable any user ID and/or password at any time without prior
notification. You are required at all times to maintain security for your
assigned user IDs and password(s). Discloser of user IDs and passwords to anyone
else is strictly prohibited, and will be grounds for termination of our services
under this License.
2.3 You understand that we may, from time-to-time, make available
upgrades to modify the performance of the Software. You understand that in order
to utilize the Software in conjunction with the BidWare(R) and the Licensor's
Network, we may require you to perform the necessary tasks, and supply the
necessary computer equipment, to install software upgrades. Your failure to
install upgrades or provide appropriate computer equipment may render the
Software inoperable for its intended purpose.
3. WARRANTY DISCLAIMER/LIMITATION OF LIABILITY
THE COMPANY MAKES NO WARRANTIES TO THE LICENSEE, EXPRESS OR IMPLIED,
INCLUDING BUT NOT LIMITED TO, ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS
FOR A PARTICULAR PURPOSE, RESPECTING THE SOFTWARE, NETWORK, ANY COMPETITIVE
BIDDING EVENT, ANY SUPPLIER, OR THE LICENSEE'S PARTICIPATION IN ANY COMPETITIVE
BIDDING EVENT. THE LICENSEE 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"
<PAGE> 27
THAT MAY AFFECT THE COMPANY'S PERFORMANCE OF ITS OBLIGATIONS, AND/OR THE RIGHTS
AND BENEFITS OF THE LICENSEE, UNDER THIS AGREEMENT. THE LICENSEE AGREES THAT IT
ASSUMES THE RISKS OF SUCH "BUGS" OR "GLITCHES".
THE COMPANY'S SOLE OBLIGATION AND LIABILITY UNDER THIS LICENSE SHALL BE
TO REMEDY ANY NON-CONFORMANCE TO THE SOFTWARE OR REPLACE THE SOFTWARE. THE
REMEDY OF THE LICENSEE SET FORTH ABOVE IS EXCLUSIVE AND IN LIEU OF ALL OTHERS.
THE COMPANY'S PARTICIPATION IN THE PREPARATION, EXECUTION, AND FOLLOW-UP OF A
COMPETITIVE BIDDING EVENT NOTWITHSTANDING, THE COMPANY SHALL NOT BE LIABLE FOR
DAMAGES THAT MAY ARISE OUT OF THE LICENSEES'S USE OF OR INABILITY TO USE
SOFTWARE, PARTICIPATION OR INABILITY TO PARTICIPATE IN A COMPETITIVE BIDDING
EVENT OR DAMAGES THAT ARISE FROM BREACH OF PERFORMANCE ON THE PART OF A SUPPLIER
OR THE LICENSEE IN FULFILLING TERMS OF A CONTRACT. THE COMPANY SHALL NOT BE
LIABLE FOR LOSS OF USE, INCOME OR PROFIT, INCIDENTAL, SPECIAL, CONSEQUENTIAL OR
OTHER SIMILAR DAMAGES ARISING, DIRECTLY OR INDIRECTLY, OUT OF OR OCCASIONED BY
THE OPERATION, USE, INSTALLATION, REPAIR OR REPLACEMENT OF THE SOFTWARE, ANY
DELAY IN OR NON-OCCURRENCE OF ANY COMPETITIVE BIDDING EVENT AS PLANNED, OR THE
LICENSEE'S OR ANY SUPPLIER'S INABILITY TO PARTICIPATE IN A COMPETITIVE BIDDING
EVENT, WHETHER SUCH DAMAGES ARE BASED ON A CLAIM OF BREACH OF CONTRACT OR
TORTIOUS CONDUCT (INCLUDING NEGLIGENCE AND STRICT LIABILITY) OR ANY OTHER CAUSE
OF ACTION.
4. PROPRIETARY RIGHTS. This License does not convey to you any exclusive
proprietary or other rights in any Software, including, but not limited to, any
patent, copyright, trademark, service mark, trade secret, trade name or other
intellectual property rights, except that you will have the limited rights
expressly set forth in this License. Accordingly, you acknowledge that, except
as expressly provided for in this License, you possess no title or ownership of
any Software or any portion thereof.
5. NON-ASSIGNMENT OF USE OR LICENSE. You may not assign or otherwise transfer,
voluntarily, by operation of law or otherwise, any of your rights under this
License, without, in each instance, our prior written consent, which consent may
be withheld, delayed or conditioned in our sole discretion. Any attempted
assignment or transfer in violation of the terms of this Section 5 shall be null
and void. Any assignment will not relieve you of any of your obligations under
this License.
6. TERMINATION OF LICENSE. The License is effective upon selecting the "YES"
button, which indicates your acceptance of the terms of this License Agreement,
and shall continue until terminated. The License shall terminate immediately
upon completion of or termination of services to be provided by Licensor.
Licensor may terminate this License upon the breach by you of any of the terms
hereof and you may terminate this License by returning the Software and all
copies thereof and extracts therefrom to Licensor. Upon any termination of the
License, for whatever reason, you shall, within ten (10) days after such
termination, return to us the Software, any and all copies thereof, materials
related thereto and derivations therefrom then in your possession or under your
control.
7. 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, Pennsylvania 15222, USA.
8. GENERAL PROVISIONS. This License will be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania, without giving
effect to its conflicts of laws provisions. In the event that any provision of
this License 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 License 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 Licensor.
No right, license or interest to such trademarks are granted hereunder and you
agree that no right, license or interest shall be asserted by you with respect
to such trademarks.
<PAGE> 28
EXHIBIT H
PERSONAL COMPUTER SPECIFICATIONS
The personal computers on which the BidWare(R) Software and associated equipment
will be installed shall meet the following minimum specifications:
1. Pentium 100 personal computer.
2. Microsoft Windows 95 or Windows NT version 4.0
3. 16 MB RAM
4. 28.8 kbs modem
5. 10 Megabytes of unused hard drive space
6. HP LaserJet compatible printer.
Personal computers used during a CBE must be connected to the Supplier provided
network outside of Customer's firewall and not connected to any other network.
<PAGE> 29
EXHIBIT I
This Non-Disclosure Agreement ("Agreement") is entered into between
FREEMARKETS ONLINE, INC. ("Discloser") and
---------------------------------------------
---------------------------------------------
---------------------------------------------
("Recipient")
WITNESSETH:
In consideration of the covenants and agreements herein contained, and
intending to be legally bound hereby, Discloser and Recipient agree as follows:
1. DEFINITION
"CONFIDENTIAL INFORMATION" shall mean confidential or other proprietary
information that is disclosed by Discloser to Recipient regarding
Discloser' products and other information, including without
limitation, consulting or handbook materials, product specifications
and documentation, pricing and other financial information and other
confidential business information. Confidential Information shall not
include information which: (i) is or becomes public knowledge without
any action by, or involvement of, Recipient; (ii) is disclosed by
Recipient with the prior written approval of Discloser. Recipient may
is disclose Confidential Information pursuant to any judicial or
governmental order to the extent required by such order, provided that
Recipient gives Discloser sufficient prior notice to contest such
order.
2. RESTRICTIONS ON USE
Recipient agrees that, as a condition to the receipt of Confidential
Information from Discloser, Recipient shall: (i) not disclose, directly
or indirectly, to any third party any portion of the Confidential
Information without the prior written consent of Discloser; (ii) not
use or exploit the Confidential Information in any way except for
purpose of conducting benchmarking and/or competitive assessments for
General Motors Corporation ("GM") pursuant to the agreements entered
into by Discloser and GM (the "Purpose"); (iii) promptly return or
destroy, at Discloser's option, all materials and documentation
regarding the Confidential Information received from Discloser upon
completion of Recipient's internal review or upon request of Discloser;
(iv) take all necessary precautions to protect the confidentiality of
the Confidential Information received hereunder and exercise at least
the same degree of care in safeguarding the Confidential Information as
Recipient would with its own confidential information; and, (v)
promptly advise Discloser in writing upon learning of any unauthorized
use or disclosure of the Confidential Information.
<PAGE> 30
3. OWNERSHIP
3.1 OWNERSHIP. All Confidential Information furnished to Recipient
by Discloser shall, unless otherwise specified in writing by
Discloser, remain the property of Discloser.
3.2 NO LICENSE. Except for the Purpose, Discloser does not grant
Recipient any license, by implication or otherwise, to use the
Confidential Information or any license rights in any
copyright or other intellectual property rights owned by
Discloser regarding the Confidential Information.
4. DISCLAIMER
The Confidential Information is disclosed by Discloser to Recipient
"AS-IS." Nothing contained in this Agreement or in any Confidential
Information shall constitute any express or implied warranty of any
kind, including without limitation any warranty of merchantability,
fitness for a particular purpose or noninfringement of any patent,
copyright or other third party intellectual property right.
5. MISCELLANEOUS
This Agreement shall survive for the longer of (i) five (5) years from
the Effective Date of this Agreement, or (ii) five (5) years following
the termination of all agreements between Discloser and GM. Recipient
recognizes that breach of this Agreement will cause irrevocable harm to
Discloser that is inadequately compensable in damages and that
Discloser is entitled to injunctive relief for such breach. The
invalidity or unenforceability of any provision of this Agreement shall
not affect the validity or enforceability of any other provision
hereof. No provision of this Agreement may be amended or waived without
a written agreement signed by Discloser and Recipient.
IN WITNESS WHEREOF Discloser and Recipient have entered into this
Confidentiality Agreement as of the Effective Date set forth below.
- ------------------------------- -----------------------------
(Discloser) (Recipient)
By:
--------------------------- -----------------------------
Name:
-------------------------
Title:
------------------------
Effective Date:
---------------
<PAGE> 31
EXHIBIT J
[*]
<PAGE> 1
Exhibit 10.1(b)
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
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, Delphi Automotive Systems ("Delphi") shall not
be included within the definition of "Customer" under the Transaction Agreement.
Nothing in this Amendment shall prevent Supplier from providing services to
Delphi under an agreement entered into between Supplier and Delphi.
6. WEB ACTIVITIES. Supplier agrees that no later than March 31, 2000 (i) the
global online bidding system provided by Supplier to Customer shall be an
Internet-based platform; and [*].
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
<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.
<PAGE> 2
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 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:
-2-
<PAGE> 3
(I) Prepare the RFQ for the project;
(II) Identify, screen and prepare suppliers for the project; and/or
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 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.
(III) Provide access to the System for the conduct of CBEs.
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
-3-
<PAGE> 4
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 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
-4-
<PAGE> 5
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.
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
-5-
<PAGE> 6
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. 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.
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<PAGE> 7
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 cumulative
Implementable Savings as of the end of such calendar quarter are less
than the cumulative Implementable Savings as of the end of the
immediately prior quarter, such shortfall shall be credited against
any excess cumulative Implementable Savings 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 cumulative
Implemented Savings as of the end of the immediately subsequent
quarter is less than the Implemented Savings as of the end of the
immediately prior quarter, such shortfall shall be credited against
any excess cumulative Implemented Savings 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 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 excess of the
cumulative Implementable Savings as of December 31 of such calendar
year over the cumulative Implementable Savings as
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<PAGE> 8
of December 31 of the prior year. In the event that the cumulative
Implementable Savings of such calendar year are less than the
cumulative Implementable Savings as of December 31 of the prior year,
such shortfall shall be credited against any excess cumulative
Implementable Savings in the following calendar years.
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
otherwise modifies any CBE in accordance with Exhibit C, to the extent
possible, FreeMarkets agrees to provide advance notice to United of such
modification.
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<PAGE> 9
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
[*].
-9-
<PAGE> 10
ARTICLE IV - INDEMNITIES
A) FREEMARKETS. FreeMarkets agrees to protect, defend, indemnify, and hold
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
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<PAGE> 11
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
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
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<PAGE> 12
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 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.
-12-
<PAGE> 13
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 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.
-13-
<PAGE> 14
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/ Kent Brittan BY: /s/ Glen T. Meakem
------------------------------- ---------------------------
Name: Kent Brittan Name: Glen T. Meakem
Title: Vice President - Purchasing Title: Chief Executive Officer
Federal ID # 043265483
-14-
<PAGE> 15
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> 16
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> 17
Exhibit C
RULES AND PROCEDURES
GOVERNING COMPETITIVE BIDDING EVENTS
[*]
<PAGE> 18
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
<PAGE> 19
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.
(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> 20
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
<PAGE> 21
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".
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 [*].
2
<PAGE> 22
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, 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
3
<PAGE> 23
CFR 52.227-19, as applicable. Contractor/Manufacturer is FreeMarkets OnLine,
Inc., 130 Seventh Street, Century Building, Suite 500, Pittsburgh, PA 15222,
USA.
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> 24
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/ Kent Brittan By: /s/ Glen T. Meakem
------------------------------- -------------------------------
Name: Kent Brittan Name: Glen T. Meakem
Title: Vice President - Purchasing Title: Chief Executive Officer
Federal ID # 043265483
5
<PAGE> 25
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:
<TABLE>
<CAPTION>
<S> <C>
UNITED DIVISION/SUBSIDIARY [******]
CARRIER [******]
HAMILTON STANDARD [******]
OTIS [******]
PRATT & WHITNEY [******]
SIKORSKY [******]
UNITED TECHNOLOGIES [******]
AUTOMOTIVE(1)
</TABLE>
* 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> 26
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
<PAGE> 27
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 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> 28
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.
3
<PAGE> 29
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
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.
4
<PAGE> 30
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
(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
5
<PAGE> 31
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 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
6
<PAGE> 32
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.
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.
7
<PAGE> 33
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
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.
8
<PAGE> 34
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.
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
9
<PAGE> 35
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.
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.
10
<PAGE> 36
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;
(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.
11
<PAGE> 37
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."
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.
12
<PAGE> 38
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> 39
Exhibit I
Determination of MBO Bonus Upon Termination
<TABLE>
<CAPTION>
<S> <C> <C>
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
</TABLE>
<PAGE> 40
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 10.2(b)
July 30, 1999
United Technologies Corporation
One Financial Plaza
Hartford, CT 06101
Attention: Vice President -- Purchasing
Re: Letter Agreement to Amend Service and System Access Agreement
Ladies and Gentlemen:
The purpose of this letter is to set forth the legally binding agreement between
FreeMarkets OnLine, Inc. ("FreeMarkets") and United Technologies Corporation
("UTC") to amend the Service and System Access Agreement dated as of January 14,
1999 between UTC and FreeMarkets (the "Service Agreement") in consideration for
the issuance by FreeMarkets of a certain warrant, in the form attached hereto as
Exhibit A (the "Warrant"), to purchase 304,431 shares of Series D Convertible
Preferred Stock, par value $.01 per share of FreeMarkets.
FreeMarkets and UTC hereby agree that, effective immediately upon the issuance
of the Warrant, and without any further action or notice by the parties hereto,
the Service Agreement shall be amended by deleting Article VI and Exhibit F
thereto in their entirety.
FreeMarkets and UTC further agree that, in consideration for the amendment set
forth above to the Service Agreement, subject to and concurrent with the
Closing, as such term is defined in the Series D Preferred Stock Purchase
Agreement of even date herewith among FreeMarkets, UTC, Nevada Bond Investment
Corp. II, Pivotal Partners, L.P. and ATGF II, FreeMarkets shall issue the
Warrant to Nevada Bond Investment Corp. II.
Except as specifically and expressly amended in accordance with this Letter
Agreement, the Service Agreement shall remain in full force and effect.
Very truly yours,
FREEMARKETS ONLINE, INC.
By: /s/ Glen T. Meakem
----------------------------
Glen T. Meakem
Chief Executive Officer
Acknowledged and agreed to
this 30 day of July, 1999:
UNITED TECHNOLOGIES CORPORATION
By: /s/ Kent Brittan
Name: Kent Brittan
Title: Vice President - Purchasing
<PAGE> 2
Exhibit A
THIS WARRANT AND THE SECURITIES ISSUABLE UPON ITS EXERCISE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY
STATE SECURITIES STATUTES OR REGULATIONS. NEITHER THIS WARRANT NOR THE
SECURITIES ISSUABLE UPON ITS EXERCISE MAY BE TRANSFERRED EXCEPT IN
COMPLIANCE WITH APPLICABLE STATE SECURITIES STATUTES AND REGULATIONS,
AND PURSUANT TO AN EFFECTIVE REGISTRATION UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR IN A TRANSACTION WHICH QUALIFIES AS AN EXEMPT
TRANSACTION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND THE RULES
AND REGULATIONS PROMULGATED THEREUNDER.
SERIES D CONVERTIBLE PREFERRED STOCK PURCHASE WARRANT
-----------------------------------------------------
Warrant to Purchase 304,431 Shares Exercise Price: $.01 per share
of Series D Convertible Preferred (subject to adjustment)
Stock (subject to adjustment)
September ____, 1999
FREEMARKETS, INC., a Delaware corporation (the "Company"), hereby certifies
that, for value received, NEVADA BOND INVESTMENT CORP. II (the "Holder") is
entitled, subject to the terms set forth below, to purchase from the Company, at
any time and from time to time during the Exercise Period (as defined below), in
whole or in part, the number of fully paid and non-assessable shares of the
Company's Series D Convertible Preferred Stock, par value $.01 per share
("Series D Stock"), first set forth above at the per share exercise price (the
"Exercise Price") first set forth above (subject to adjustment as set forth in
Article II).
ARTICLE I -- EXERCISE OF WARRANT
1.1 Exercise Period and Procedure.
(a) The Warrant shall be exercisable, in whole or in part, by the
Holder at any time and from time to time during the period (the "Exercise
Period") beginning on the date hereof (the "Warrant Issue Date") and ending on
the earlier of (i) 5:00 p.m. (prevailing local time at the principal executive
office of the Company) on the fifth anniversary date of the Warrant Issue Date,
or (ii) the date on which all outstanding shares of the Company's Series D Stock
are converted pursuant to an automatic conversion event (a "Conversion Event")
as set forth in Section 3(b) of the Company's Certificate of Designation, Rights
and Preferences for the Series D Convertible Preferred Stock, or as set forth in
any successor thereto. The Company shall provide to the Holder, at the Holder's
address set forth in the warrant register referenced in Section 6.3 hereof,
written notice of a Conversion Event at least two business days prior to the
occurence thereof. Any portion of the Warrant that has not been exercised at the
time of a Conversion Event shall automatically be deemed to have been exercised
immediately prior to such event in accordance with Section 1.1(c) hereof.
<PAGE> 3
(b) The purchase rights represented by this Warrant are exercisable by
the Holder, in whole or in part, during the Exercise Period by the surrender of
this Warrant, with the form of Notice of Exercise attached hereto as Annex A
duly completed and executed by such Holder, to the Company at its principal
executive office, upon payment in cash (subject to Section 1.1(c)), by certified
or official bank check or by wire transfer, of an amount equal to the Exercise
Price multiplied by the number of shares of Series D Stock being purchased
pursuant to such exercise of the Warrant.
(c) If the fair market value of one share of Series D Stock is greater
than the Exercise Price (at the date of calculation as set forth below), in lieu
of exercising this Warrant for cash, the Holder may elect to receive shares of
Series D Stock equal to the value (as determined below) of this Warrant (or the
portion thereof being canceled) by surrender of this Warrant at the principal
office of the Company together with the properly endorsed Notice of Exercise and
notice of such election in which event the Company shall issue to the Holder a
number of shares of Series D Stock computed using the following formula:
X = Y (A-B)
-----
A
Where:
X = the number of shares of Series D Stock to be issued to
the Holder
Y = the number of shares of Series D Stock purchasable under
the Warrant or, if only a portion of the Warrant is being
exercised, the portion of the Warrant being canceled (at
the date of such calculation)
A = The fair market value of one share of the Company's
Series D Stock (at the date of such calculation)
B = Exercise Price (as of the date of such calculation)
For purposes of the above calculation, the fair market value of one share of
Series D Stock shall be (i) as determined in good faith by the Company's Board
of Directors prior to a Qualified Public Offering (as such term is defined in
the Company's Certificate of Designation, Rights and Preferences for the Series
D Convertible Preferred Stock); or (ii) in the event that the Warrant is
automatically exercised pursuant to Section 1.1(a) hereof as a result of a
Conversion Event that constitutes a Qualified Public Offering, the product of
(a) the per share offering price of such Qualified Public Offering, and (b) the
number of shares of Common Stock into which each share of Series D Stock is
convertible at the time of such exercise.
1.2 Partial Exercise. This Warrant may be exercised for less than the full
number of shares of Series D Stock first shown above, provided that this Warrant
may not be exercised in part for less than a whole number of shares of Series D
Stock. Upon any such partial exercise, the Company at its expense will forthwith
issue to the Holder a new Warrant or Warrants of like tenor exercisable for the
number of shares of Series D Stock as to which rights have not been exercised
(subject to adjustment as herein provided), such Warrant or Warrants to be
issued in the name of the Holder or its nominee (upon payment by such Holder of
any applicable transfer taxes).
1.3 Delivery of Stock Certificates on Exercise. As soon as practicable after the
exercise of this Warrant and payment of the Exercise Price (or, in the event of
an automatic exercise pursuant to Section 1.1(a), after the surrender of the
Warrant, along with the form of Notice of Exercise attached hereto as Annex A
duly completed and executed by the Holder) and in any event within 10 days
thereafter, the Company, at its expense, will cause to be issued in the name of
and delivered to the Holder a certificate or certificates for the number of duly
authorized, validly issued, fully paid and non-assessable shares or other
securities or property to which such Holder shall be
2
<PAGE> 4
entitled upon such exercise, plus, in lieu of any fractional share to which such
Holder would otherwise be entitled, cash in an amount determined in accordance
with Section 2.5 hereof. The Company agrees that the shares so purchased shall
be deemed to be issued to the Holder as the record owner of such shares as of
the close of business on the date on which this Warrant shall have been
surrendered and payment made for such shares as aforesaid.
ARTICLE II -- ADJUSTMENTS
2.1 Adjustments Generally. In order to prevent dilution of the rights granted
hereunder in the specific circumstances contemplated by this Article II, the
Exercise Price shall be subject to adjustment from time to time in accordance
with this Article II. Upon each adjustment of the Exercise Price pursuant to
this Article II, the registered Holder of this Warrant shall thereafter be
entitled to acquire upon exercise, at the Exercise Price resulting from such
adjustment, the number of shares of the Company's Series D Stock determined by
(a) multiplying (i) the Exercise Price in effect immediately prior to such
adjustment by (ii) the number of shares of the Company's Series D Stock issuable
upon exercise hereof immediately prior to such adjustment, and (b) dividing the
product thereof by the Exercise Price resulting from such adjustment.
2.2 Subdivisions and Combinations. In case the Company shall at any time
subdivide its outstanding shares of Series D Stock into a greater number of
shares (including, without limitation, through any stock split effected by means
of a dividend on the Series D Stock which is payable in Series D Stock), the
Exercise Price in effect immediately prior to such subdivision shall be
proportionately reduced, and, conversely, in case the outstanding shares of
Series D Stock of the Company shall be combined into a smaller number of shares,
the Exercise Price in effect immediately prior to such combination shall be
proportionately increased.
2.3 Reorganization, Reclassification, Consolidation, Merger or Sale of Assets.
If any capital reorganization or reclassification of the capital stock of the
Company, or consolidation or merger of the Company with another corporation, or
the sale of all or substantially all of its assets to another corporation shall
be effected in such a way that holders of Series D Stock shall be entitled to
receive stock, securities, cash or other property with respect to or in exchange
for Series D Stock, then, as a condition of such reorganization,
reclassification, consolidation, merger or sale, lawful and adequate provision
shall be made whereby the Holder of this Warrant shall have the right to acquire
and receive upon exercise of this Warrant such shares of stock, securities, cash
or other property of the successor corporation that a holder of the shares
deliverable upon exercise of this Warrant would have been entitled to receive in
such reorganization, reclassification, consolidation, merger or sale if this
Warrant had been exercised immediately before such reorganization,
reclassification, consolidation, merger or sale. The foregoing provisions shall
similarly apply to successive reorganizations, reclassifications,
consolidations, mergers or sales and to the stock or securities of any other
corporation that are at the time receivable upon the exercise of this Warrant.
In all events, appropriate adjustments (as determined by the Board of Directors
of the Company) shall be made in the application of the provisions of this
Warrant with respect to the rights and interests of the Holder after the
transaction, to the end that the provisions of this Warrant shall be applicable
after that event, as near as reasonably may be, in relation to any shares or
other property deliverable after that event upon exercise of this Warrant.
2.4 Adjustment by Board of Directors. If any event occurs as to which, in the
opinion of the Board of Directors of the Company, the provisions of this Article
II are not strictly applicable or if strictly applicable would not fairly
protect the rights of the Holder of this Warrant in accordance with the
essential intent and principles of such provisions, then the Board of Directors
may make such adjustment in the application of such provisions, in accordance
with such essential intent and principles, as it deems appropriate so as to
protect such rights as aforesaid, but in no event shall any adjustment have the
effect of increasing the Exercise Price as otherwise determined pursuant to any
of the provisions of this Article II except in the case of a combination of
shares of a type contemplated in Section 2.2 and then in no event to an amount
larger than the Exercise Price as adjusted pursuant to Section 2.2.
3
<PAGE> 5
2.5 Fractional Shares. The Company shall not issue fractions of shares of Series
D Stock upon exercise of this Warrant or scrip in lieu thereof. If any fraction
of a share of Series D Stock would, except for the provisions of this Section
2.5, be issuable upon exercise of this Warrant, then the Company shall in lieu
thereof pay to the person entitled thereto an amount in cash equal to the fair
market value of such fraction (as determined in good faith by the Board of
Directors of the Company), less the equivalent fraction of the then applicable
Exercise Price which would otherwise have been payable in respect of such
fractional share.
2.6 Certificate as to Adjustments. Whenever the Exercise Price shall be adjusted
as provided in Article II, the Company shall promptly compute such adjustment
and furnish to the Holder a certificate setting forth such adjustment and
showing in reasonable detail the facts requiring such adjustment, the Exercise
Price that will be effective after such adjustment and the number of shares and
the amount, if any, of other property that at the time would be received upon
the exercise of this Warrant.
ARTICLE III -- NO IMPAIRMENT
The Company will not, by amendment of its charter or through reorganization,
consolidation, merger, dissolution, sale of assets or any other voluntary
action, avoid or seek to avoid the observance or performance of any of the terms
of this Warrant, but will at all times in good faith assist in the carrying out
of all such terms and in the taking of all such action as may be necessary or
appropriate in order to protect the rights of the Holder against impairment.
Without limiting the generality of the foregoing, the Company will not increase
the par value of any shares of stock receivable upon the exercise of this
Warrant above the amount payable therefor upon such exercise, and at all times
will take all such action as may be necessary or appropriate in order that the
Company may validly and legally issue fully paid and non-assessable stock upon
the exercise of this Warrant.
ARTICLE IV -- RESERVATION OF STOCK
The Company shall at all times reserve and keep available out of its authorized
but unissued stock, solely for the issuance and delivery upon the exercise of
this Warrant, such number of its duly authorized shares of Series D Stock (and
Common Stock issuable upon conversion thereof) as from time to time shall be
issuable upon the exercise of this Warrant. All of the shares of Series D Stock
issuable upon exercise of this Warrant, when issued and delivered in accordance
with the terms hereof, will be duly authorized, validly issued, fully paid and
non-assessable.
ARTICLE V -- REPLACEMENT OF WARRANT
Upon receipt of evidence reasonably satisfactory to the Company of the loss,
theft, destruction or mutilation of this Warrant and (in the case of loss, theft
or destruction) upon delivery of an indemnity agreement reasonably satisfactory
to the Company (with surety if reasonably required), or (in the case of
mutilation) upon surrender and cancellation thereof, the Company will issue, in
lieu thereof, a new Warrant of like tenor and amount.
ARTICLE VI -- NEGOTIABILITY
This Warrant is issued upon the following terms, to all of which each taker or
owner hereof consents and agrees:
6.1 Transfer. Subject to the legend appearing on the first page hereof and any
restrictions to which the holders of the Company's Series D Stock are subject,
title to this Warrant may be transferred by endorsement (by the Holder executing
the Notice of Transfer attached hereto as Annex B) and delivery in the same
manner as in
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the case of a negotiable instrument transferable by endorsement and delivery;
provided that this Warrant may not be transferred in part unless such transfer
is to a transferee who pursuant to such transfer receives the right to purchase
at least fifty thousand (50,000) shares of Series D Stock hereunder. Absent an
effective registration statement under the Securities Act of 1933, as amended
(the "Securities Act"), covering the disposition of this Warrant or the shares
of Series D Stock and Common Stock issued or issuable upon exercise hereof and
conversion thereof, the Holder will not sell or transfer any or all of such
Warrant or shares, as the case may be, without first providing the Company with
an opinion of counsel (which may be counsel for the Company) to the effect that
such sale or transfer will be exempt from the registration and prospectus
delivery requirements of the Securities Act. Each certificate representing
shares of Series D Stock or Common Stock issued upon exercise hereof or
conversion thereof shall bear a legend in substantially the following form on
the face thereof:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 OR APPLICABLE STATE SECURITIES LAWS AND MAY BE TRANSFERRED OR
RESOLD ONLY IN COMPLIANCE WITH SUCH SECURITIES LAWS.
Any certificate issued at any time in exchange or substitution for any
certificate bearing such legend (except a certificate issued upon completion of
a distribution under a registration statement covering the securities
represented) shall also bear such legend unless, in the opinion of counsel to
the Company, the securities represented thereby may be transferred as
contemplated by such Holder without violation of the registration requirements
of the Securities Act.
6.2 Title. Any person in possession of this Warrant properly endorsed is
authorized to represent himself as absolute owner hereof and is granted power to
transfer absolute title hereto by endorsement and delivery hereof to a bona fide
purchaser hereof for value; each prior taker or owner waives and renounces all
of its equities or rights in this Warrant in favor of every such bona fide
purchaser, and every such bona fide purchaser shall acquire title hereto and to
all rights represented hereby.
6.3 Warrant Register. The Company will maintain a warrant register containing
the name and address of the Holder. The Holder may change its address as shown
on the warrant register by written notice to the Company requesting such change.
Until this Warrant is transferred on the books of the Company, the Company may
treat the registered Holder of this Warrant as the absolute owner hereof for all
purposes without being affected by any notice to the contrary.
6.4 No Rights as Stockholder. Prior to the exercise of this Warrant, the Holder
shall not be entitled to any rights of a Stockholder of the Company with respect
to shares for which this Warrant shall be exercisable, including, without
limitation, the right to vote, to receive dividends or other distributions or to
exercise any preemptive rights, and shall not be entitled to receive any notice
of any proceedings of the Company.
6.5 Transfer Taxes. The Company shall not be required to pay any federal or
state transfer tax or charge that may be payable in respect of any transfer
involved in the transfer or delivery of this Warrant or the issuance or
conversion or delivery of certificates for Series D Stock in a name other than
that of the registered Holder of this Warrant or to issue or deliver any
certificates for Series D Stock upon the exercise of this Warrant until any and
all such taxes and charges shall have been paid by the Holder of this Warrant or
until it has been established to the Company's reasonable satisfaction that no
such tax or charge is due.
6.6 Compliance with Securities Laws. The Holder of this Warrant, by acceptance
hereof, acknowledges that this Warrant and the shares of Series D Stock or
Common Stock to be issued upon exercise hereof or conversion thereof are being
acquired solely for the Holder's own account and not as a nominee for any other
party, and for investment, and that the Holder will not offer, sell or otherwise
dispose of this Warrant or any shares of Series D Stock or Common Stock to be
issued upon exercise hereof or conversion thereof except under circumstances
that will not result in a violation of applicable federal and state securities
laws. Upon exercise of this Warrant, the
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Holder shall, if requested by the Company, confirm in writing, in a form
satisfactory to the Company, that the shares of Series D Stock so purchased are
being acquired solely for the Holder's own account and not as a nominee for any
other party, for investment, and not with a view toward distribution or resale.
ARTICLE VII -- SUBDIVISION OF RIGHTS
This Warrant (as well as any new Warrants issued pursuant to the provisions of
this Article VII) is exchangeable, upon the surrender hereof by the Holder, at
the principal executive office of the Company for any number of new Warrants of
like tenor and date representing in the aggregate the right to subscribe for and
purchase the number of shares of Series D Stock of the Company which may be
subscribed for and purchased hereunder.
ARTICLE VIII -- MISCELLANEOUS
8.1 Headings. The headings in this Warrant are for purposes of reference only,
and shall not limit or otherwise affect the meaning hereof.
8.2 Amendment; Waiver. This Warrant may be amended only by a writing executed by
both the Company and the Holder. Any term of this Warrant may be waived by the
party entitled to the benefit thereof by an instrument in writing signed by such
party. No waiver of any term, condition or provision of this Warrant, in any one
or more instances, shall be deemed to be, or construed as, a further or
continuing waiver of any such term, condition or provision.
8.3 Governing Law. This Warrant shall be construed and interpreted according to
the laws of the State of Delaware, without giving effect to any of the conflicts
of laws or choice of law provisions thereof that would compel the application of
the substantive laws of any other jurisdiction.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the Company has executed and issued this Warrant on the date
first written above.
Attest: FREEMARKETS, INC.
_________________________ By:_________________________________
Secretary Name:
Title:
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ANNEX A
-------
NOTICE OF EXERCISE
[To be signed only upon exercise of Warrant]
To: FREEMARKETS, INC.
The undersigned, the Holder of the within Warrant, hereby [check the box that
applies]:
[ ] elects to exercise the purchase right represented by such Warrant for,
and to purchase thereunder, ________ shares of Series D Stock of
FreeMarkets, Inc., and herewith makes payment of $________ therefor.
[ ] elects to exercise the Warrant for the purchase of _________ shares of
Series D Stock pursuant to Section 1.1(c) of the Warrant.
In exercising this Warrant, the undersigned hereby confirms and acknowledges
that the shares of Series D Stock to be issued upon exercise hereof (and any
shares of Common Stock acquired upon conversion thereof) are being acquired
solely for the Holder's own account and not as a nominee for any other party,
and for investment, and that the Holder will not offer, sell or otherwise
dispose of any such securities except under circumstances that will not result
in a violation of applicable federal and state securities laws.
Please issue a certificate or certificates representing said shares of Series D
Stock in the name of the undersigned or in such other name as is specified
below:
Dated: _____________ ______________________________
NAME
By: ___________________________
(Signature must conform in all respects to
name of Holder as specified on the face of
the Warrant)
Address:
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ANNEX B
-------
NOTICE OF TRANSFER
[To be signed only upon transfer of Warrant]
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto the
Assignee named below the right represented by the within Warrant with respect to
the number of shares of Series D Stock of FreeMarkets, Inc. set forth below:
NAME OF ASSIGNEE ADDRESS NO. OF SHARES
and appoints _______________ attorney to transfer said right on the warrant
register of FreeMarkets, Inc. with full power of substitution in the premises.
Dated: _____________ _______________________________
By:
(Signature must conform in all respects to
name of Holder as specified on the face of
the Warrant)
Address:
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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
November 8, 1999
