<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 7, 1999
REGISTRATION NO. 333-86755
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 7
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.......... 4,140,000 $42.00 $173,880,000 $45,905(3)
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Includes 540,000 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) Of this amount, $25,000 has been 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 DECEMBER 7, 1999.
3,600,000 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 $40.00 and
$42.00 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 7 to read about factors you should consider
before buying shares of our common stock.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to FreeMarkets................... $ $
</TABLE>
If the underwriters sell more than 3,600,000 shares of common stock, the
underwriters have the option to purchase up to an additional 540,000 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 885,000 shares in this offering as
follows:
- up to 360,000 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 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 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, Honeywell International 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.
3
<PAGE> 5
THE OFFERING
Shares offered by FreeMarkets...... 3,600,000 shares
Shares to be outstanding after the
offering........................... 33,954,958 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.
4
<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 $41.00 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)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<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 $157,359
Working capital............................................. 33,717 168,817
Total assets................................................ 45,677 180,777
Long-term debt, excluding current portion................... 1,976 1,976
Total stockholders' equity.................................. 37,761 172,861
</TABLE>
5
<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.
6
<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.
7
<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 revenues. 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.
8
<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.
9
<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 a decrease in 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 too 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 $135.1
million, at an assumed initial public offering price of $41.00 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 33,954,958
shares of common stock. This includes the 3,600,000 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 3,075,000 shares in the public
market immediately. The remaining 90.9%, or 30,879,958 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
- ---------------------- -----------------------------------------------------------
<C> <S>
2,629,386/7.7% Immediately.
302,991/0.9% 90 days after the date of this prospectus.
25,585,377/75.3% 180 days after the date of this prospectus due to an
agreement many of our stockholders have with the
underwriters. However, the underwriters can waive this
restriction and allow these stockholders to sell their
shares at any time.
2,362,204/7.0% After September 2, 2000.
</TABLE>
As restrictions on resale end, the market price of our stock could drop
significantly if the holders of these restricted shares sell them or the market
perceives that they intend to sell them. For a more detailed description, please
see "Shares Eligible for Future Sale".
YOU WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION IN THE BOOK VALUE OF YOUR
INVESTMENT
The initial public offering price per share will significantly exceed our
net tangible book value per share. If we were to liquidate immediately after the
offering, investors purchasing shares in this offering would receive a per share
amount of tangible assets net of liabilities that would be less than the initial
public offering price per share. Investors purchasing shares in this offering
will suffer dilution of $35.92 per share from their investment. For more
information, please see "Dilution".
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<PAGE> 19
NOTE REGARDING 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 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 statements. In some cases, you can identify 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 statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. We are under no duty to update any of the statements after the
date of this prospectus to conform these statements to actual results.
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<PAGE> 20
USE OF PROCEEDS
We estimate that the net proceeds to us from the sale of the shares being
offered will be $135.1 million, at an assumed initial public offering price of
$41.00 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 $155.7 million.
The principal purposes of this offering are to increase our working
capital, create a public market for our common stock, facilitate our future
access to the public capital markets and increase our visibility in the
marketplace. We have no specific plans for the net proceeds of this offering
other than general corporate purposes and working capital, and our use of these
proceeds will be in the discretion of our management. We may, for example, use a
portion of the net proceeds to acquire complementary technologies or businesses;
however, we currently have no commitments or agreements and are not involved in
any negotiations involving any of these transactions. Pending deployment of the
net proceeds of this offering, we intend to invest the net proceeds in
interest-bearing, investment grade securities.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock. We do
not anticipate paying any cash dividends in the foreseeable future. We currently
intend to retain any future earnings to finance the expansion of our business.
Moreover, our bank credit facility restricts our ability to pay cash dividends.
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<PAGE> 21
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 1999
on an actual and as adjusted basis. The as adjusted column reflects our actual
capitalization plus:
- the filing of an amendment to our Certificate of Incorporation concurrent
with the closing of this offering to eliminate all existing classes of
preferred stock and to create 5,000,000 shares of undesignated preferred
stock;
- the automatic conversion of all shares of outstanding preferred stock
into 16,051,438 shares of common stock immediately prior to the closing
of this offering; and
- our sale of 3,600,000 shares of common stock at an assumed initial public
offering price of $41.00 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 $ 157,359
======== =========
Long-term debt, excluding current portion................... 1,976 1,976
-------- ---------
Stockholders' equity:
Convertible preferred stock, 50,000,000 shares authorized,
actual; no shares authorized, issued or outstanding, as
adjusted:
Series A; $.01 par value; 9,036,600 shares issued and
outstanding, actual.................................... 90 --
Series B; $.01 par value; 2,347,200 shares issued and
outstanding, actual.................................... 24 --
Series C; $.01 par value; 2,305,434 shares issued and
outstanding, actual.................................... 23 --
Series D; $.01 par value; 2,362,204 shares issued and
outstanding, actual.................................... 24 --
Preferred stock; $.01 par value, no shares authorized,
issued or outstanding, actual; 5,000,000 shares
authorized, no shares issued or outstanding, as
adjusted................................................ -- --
Common stock; $.01 par value, 200,000,000 shares
authorized; 14,303,520 shares issued and outstanding,
actual; 33,954,958 shares issued and outstanding, as
adjusted................................................ 143 340
Additional capital.......................................... 55,838 190,902
Unearned stock-based compensation........................... (1,751) (1,751)
Stock purchase warrants..................................... 30 30
Accumulated deficit......................................... (16,660) (16,660)
-------- ---------
Total stockholders' equity.............................. 37,761 172,861
-------- ---------
Total capitalization............................... $ 39,737 $ 174,837
======== =========
</TABLE>
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DILUTION
Our net tangible book value as of September 30, 1999 was $37.5 million, or
$1.23 per share. Net tangible book value per share represents the amount of our
total tangible assets, reduced by the amount of our total liabilities, and then
divided by the total number of shares of common stock outstanding after giving
effect to the automatic conversion of all shares of outstanding preferred stock.
Dilution in net tangible book value per share represents the difference between
the amount paid per share by purchasers of shares of common stock in this
offering and the net tangible book value per share of common stock immediately
after the completion of this offering. After giving effect to the sale of the
3,600,000 shares of common stock offered by us at an initial public offering
price of $41.00 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 $172.6 million or $5.08 per share of common
stock. This represents an immediate increase in net tangible book value of $3.85
per share to existing stockholders and an immediate dilution of $35.92 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..................... $41.00
Net tangible book value per share before the offering..... $ 1.23
Increase per share attributable to new investors.......... 3.85
------
Net tangible book value per share after the offering........ 5.08
------
Dilution per share to new investors......................... $35.92
======
</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 89.4% $ 51,268,303 25.8% $ 1.69
New investors......................... 3,600,000 10.6 147,600,000 74.2 41.00
---------- ----- ------------ -----
Totals........................... 33,954,958 100.0% $198,868,303 100.0%
========== ===== ============ =====
</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 $36.13.
21
<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>
22
<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
23
<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 clients 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.
24
<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.
25
<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>
26
<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
27
<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.
28
<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 revenues 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
29
<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 $1.4
million. Our lease payments will grow 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 fourth quarter of 1999, through a combination of proceeds from our
recent sale of Series D preferred stock and bank borrowings. We anticipate an
increase in our capital expenditures over future periods consistent with growth
in our operations, infrastructure and personnel.
We expect to experience significant growth in our operating costs for the
foreseeable future in order to execute our business plan, particularly in the
areas of research and development and sales and marketing. We also expect to
open new domestic and international offices in order to support the needs of our
existing and anticipated clients. As a result, we estimate that these operating
costs, as well as other planned expenditures, will constitute a significant use
of our cash resources. In addition, we may use cash resources to fund
acquisitions of complementary businesses and technologies; however,
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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 of development
resources, damage to our reputation and/or liability to our clients, any of
which could seriously harm our business.
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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
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
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<PAGE> 34
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, Honeywell International 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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<PAGE> 38
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
which 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 Emerson Electric Company Owens Corning
BP Amoco Corporation FirstEnergy Corp. Pepsico, Inc.
Commonwealth of Pennsylvania General Electric Company The Quaker Oats Company
Conopco, Inc. (acting through its Reliant Energy, Incorporated
(which does business as GE Industrial Systems (formerly known as Houston
Unilever Home & Personal business component) Lighting & Power)
Care USA) General Motors Corporation SmithKline Beecham plc
Delphi Automotive Systems Hillenbrand Industries, United Technologies Corporation
Corporation Inc. Welch Foods Inc.
Eaton Corporation Honeywell International
Inc.
(formerly AlliedSignal
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
auctions, 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 you 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 72,000
square feet of office space under a lease that expires in May 2004. 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 11,000 square feet in Brussels, Belgium and an
office 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 December 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.................................... 36 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
Thomas J. Meredith................................. 49 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.
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DAVID J. BECKER has served as an Executive Vice President and our Chief
Operating Officer since March 1998. From October 1996 to February 1998, Mr.
Becker served as our Vice President of Market Making. Prior to joining
FreeMarkets, from March 1992 to September 1996, Mr. Becker was employed 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 Systems' 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,
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Dr. Cooper was on the faculty of Carnegie Mellon University. Dr. Cooper earned a
Ph.D. in computer science from the University of California at Berkeley, and an
A.B. in mathematics from Harvard University.
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., excite@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.
THOMAS J. MEREDITH has served as a director of FreeMarkets since November
1999. Mr. Meredith has been Senior Vice President and Chief Financial Officer of
Dell Computer Corporation since November 1992. Prior to joining Dell, Mr.
Meredith was Vice President and Treasurer of Sun Microsystems, Inc. Mr. Meredith
is also a director of i2 Technologies Inc. and International Integration Inc.
(i-Cube). Mr. Meredith earned a bachelor's degree in political science from St.
Francis College, a J.D. from Duquesne University and a Masters of Law in
taxation from Georgetown University.
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 six 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. Meredith and Noble will serve as directors in the class having a term
first ending in 2000, Dr. Cooper and Mr. Doerr will serve as directors in the
class having a term first ending in 2001 and Messrs. Kinney and Meakem will
serve as directors in the class having a term first ending in 2002. 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.
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<PAGE> 49
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".
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 upon 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.
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<PAGE> 50
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
ANNUAL COMPENSATION (OPTION AWARDS)
---------------------------------- --------------------
OTHER ANNUAL NUMBER OF SECURITIES
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION UNDERLYING 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.
49
<PAGE> 51
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 market 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
50
<PAGE> 52
immediately upon grant. By letter agreement, each of Dr. Cooper and Mr. Noble,
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 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. In November 1999, Dr. Cooper exercised the 30,000
options granted to him.
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 were 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. In November 1999, Mr. Doerr exercised the 350,000
options granted to him.
In November 1999, we granted options to purchase 50,000 shares of common
stock to Thomas J. Meredith, a non-employee director, in connection with his
service on our Board. These options were exercisable at a price of $14.80 per
share and were to vest over a three-year term. In November 1999, our
Compensation Committee permitted Mr. Meredith to exercise all of the 50,000
options granted to him, at which time Mr. Meredith executed a Restricted Stock
Purchase Agreement under which the shares he acquired may be repurchased by us
for the exercise price in the event that Mr. Meredith ceases to serve as a
member of our Board for any reason other than his death or permanent disability.
Our repurchase rights lapse over a three-year period equivalent to the
three-year vesting period that was applicable to Mr. Meredith's options. The
shares owned by Mr. Meredith cannot be sold or otherwise transferred during the
period in which we have repurchase rights.
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
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT DECEMBER 31, IN-THE-MONEY OPTIONS AT
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,
51
<PAGE> 53
1999, and it will terminate on March 1, 2008, unless the Board of Directors
terminates it earlier. We may grant the following types of awards under the
Amended and Restated Stock Incentive Plan:
- incentive stock options;
- nonqualified stock options; and
- restricted stock.
As of September 30, 1999, we had granted options to purchase 10,482,500
shares of common stock under the Amended and Restated Stock Incentive Plan, of
which 59,520 had been exercised and 156,550 had been forfeited. We had not
granted any shares of restricted stock under the Amended and Restated Stock
Incentive Plan.
We may currently award a maximum of 15,450,000 shares of common stock under
the Amended and Restated Stock Incentive Plan, plus any shares of stock covered
by the unexercised portion of any terminated options granted under the 1996
Stock Incentive Plan, discussed below. In addition, the number of awardable
shares automatically increases on the first day of each year beginning in 2001
by an amount equal to the lesser of 1,500,000 shares or 3% of our total shares
outstanding on the last day of the immediately preceding year, unless the Board
of Directors determines to increase the amount by a lesser number of shares. Our
compensation committee administers the Amended and Restated Stock Incentive
Plan.
If control of our company changes through, for example, an acquisition of
more than 50% of our stock by another person or company, or through a merger
with another company, and the acquiror fails to assume or replace with
equivalent awards all outstanding awards under the Amended and Restated Stock
Incentive Plan, 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.
52
<PAGE> 54
The Employee Stock Purchase Plan is intended to qualify under Section 423
of the Internal Revenue Code. The Employee Stock Purchase Plan consists of a
series of overlapping 24-month offering periods. Each offering period consists
of four six-month purchase periods. Participating employees will automatically
make stock purchases at the end of each purchase period. The initial offering
period and the initial purchase period will begin on the date of this
prospectus. The Board of Directors has the authority under the plan to set new
offering or purchase periods.
The Board of Directors or a committee appointed by the Board of Directors
will administer the Employee Stock Purchase Plan. The Employee Stock Purchase
Plan permits eligible employees to purchase common stock through payroll
deductions, which may not exceed 20% of an employee's compensation, unless the
Board decides to increase such amount. The purchase price is equal to the lower
of 85% of the fair market value of the common stock at the beginning of the
applicable offering period or 85% of the fair market value of the common stock
at the end of each corresponding purchase period. In circumstances specified in
the Employee Stock Purchase Plan, we may adjust the purchase price during an
offering period to avoid our incurring adverse accounting charges. Our
employees, including officers and employee directors, are eligible to
participate in the Employee Stock Purchase Plan if they are employed by us for
at least 20 hours per week and more than five months in the year. Employees may
withdraw from participation in the Employee Stock Purchase Plan at any time and
receive a refund of their payroll deductions made since the last purchase date,
in which case they cannot resume participation until the beginning of the next
offering period. Participation ends automatically upon termination of
employment.
Each employee's purchase of common stock during any one purchase period is
subject to limitations. In the event that another company acquires us, the
Employee Stock Purchase Plan generally provides that the acquiror shall assume
each right to purchase stock or shall substitute equivalent rights; otherwise,
each right to purchase common stock will accelerate and become exercisable
immediately before the acquisition. The Board of Directors has the power to
amend or terminate the Employee Stock Purchase Plan.
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.
We have entered into agreements to indemnify our directors and officers in
addition to indemnification provided for in our Certificate of Incorporation and
our Bylaws. These agreements,
53
<PAGE> 55
among other things, provide for indemnification of our directors and officers
for expenses specified in the agreements, including attorneys' fees, judgments,
fines and settlement amounts incurred by any of these persons in any action or
proceeding arising out of these persons' services as a director or officer for
us, any of our subsidiaries or any other entity to which the person provides
services at our request. We believe that these provisions and agreements are
necessary to attract and retain qualified persons as directors and officers.
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> 56
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> 57
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%.
The table also does not include the beneficial ownership of our common
stock by Thomas J. Meredith, who became a director on November 17, 1999. On that
date, Mr. Meredith was granted options to purchase 50,000 shares of our common
stock at a price of $14.80 per share, which he exercised in November 1999. If
Mr. Meredith's beneficial ownership were included in the table, his percentage
ownership before and after the offering would be less than 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 Jeffrey S. McCormick, c/o Saturn Capital, Inc. is 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> 58
<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% 10.4%
Sam E. Kinney, Jr. (2)...... 1,857,600 288,000 2,145,600 7.0 6.3
David J. Becker (3)......... 283,444 261,000 544,444 1.8 1.6
Thomas L. McLeod (4)........ 60,000 144,000 204,000 * *
John P. Levis, III (5)...... 710,685 57,000 767,685 2.5 2.3
Dr. Eric Cooper (6)......... 31,892 -- 31,892 * *
David A. Noble (7).......... 184,200 -- 184,200 * *
CSM Partners (8)............ 2,319,912 -- 2,319,912 7.6 6.8
Jeffrey S. McCormick,
c/o Saturn Capital, Inc.
(9)....................... 2,428,269 -- 2,428,269 8.0 7.2
United Technologies
Corporation (10).......... 1,718,983 -- 1,718,983 5.7 5.1
All executive officers and
directors as a group (10
persons) (11)(12)......... 6,625,964 1,200,000 7,825,964 24.8 22.3
</TABLE>
- ---------------
* Less than 1% of the outstanding shares of common stock.
(1) Includes 2,542,200 shares 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 30,000 shares purchased by Dr. Cooper in November 1999
pursuant to immediately exercisable options granted to him on October 28,
1999. See Note (7).
(7) Does not include immediately exercisable options to purchase 30,000 shares
granted to Mr. Noble on October 28, 1999. If these options and the shares
referred to in Note (6) 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 22.4%.
(8) 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.
(9) Mr. McCormick is the majority stockholder of Saturn Capital, Inc. and
exercises voting and investment power over these shares.
(10) 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.
(11) Includes 15,000 shares held by a limited partnership controlled by an
executive officer of the Company. See also Notes (1) through (5).
(12) If Mr. Doerr and Mr. Meredith's aggregate beneficial ownership were
included in the table, the percentage ownership of all executive officers
and directors as a group before the offering would be 25.7% and after the
offering would be 23.1%.
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<PAGE> 59
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 33,954,958
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> 60
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> 61
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> 62
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock.
Future sales of substantial amounts of our common stock in the public market
could adversely affect prevailing market prices. Sales of substantial amounts of
our common stock in the public market after any restrictions on sale lapse could
adversely affect the prevailing market price of the common stock and impair our
ability to raise equity capital in the future.
Upon completion of the offering, we will have 33,954,958 outstanding shares
of common stock, outstanding options to purchase 11,201,230 shares of common
stock and outstanding warrants to purchase 195,600 shares of common stock,
assuming no additional option or warrant grants or exercises after September 30,
1999. Of the 3,600,000 shares sold in the offering, 525,000 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 3,075,000
shares, plus any shares issued upon exercise of the underwriters' over-allotment
option, will be freely tradable without restriction under the Securities Act,
unless purchased by our "affiliates" as that term is defined in Rule 144 under
the Securities Act. In general, affiliates include officers, directors and 10%
or greater stockholders.
The remaining 30,879,958 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,
such as under Rule 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. The lock-up
agreements executed by our employees and directors also cover any shares they
may acquire through our directed share program. 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, 3,075,000 of the 3,600,000 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 25,585,377
shares will be eligible for sale pursuant to Rule 144, Rule 144(k) and
Rule 701.
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<PAGE> 63
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 340,000 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
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 50,275 shares of our
common stock, and a partner of Morgan, Lewis & Bockius LLP who is our Assistant
Secretary holds options to purchase 20,000 shares of such stock.
62
<PAGE> 64
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> 65
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> 66
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> 67
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> 68
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> 69
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> 70
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> 71
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> 72
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> 73
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> 74
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> 75
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> 76
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> 77
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> 78
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> 79
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> 80
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> 81
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> 82
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> 83
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> 84
UNDERWRITING
FreeMarkets and the underwriters named below have entered into an
underwriting agreement with respect to the shares being offered. Subject to the
terms of the underwriting agreement, each underwriter has severally agreed to
purchase the number of shares indicated in the following table. Goldman, Sachs &
Co., Morgan Stanley & Co. Incorporated, Donaldson, Lufkin & Jenrette Securities
Corporation and Wit Capital Corporation are the representatives of the
underwriters.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
Goldman, Sachs & Co. .......................................
Morgan Stanley & Co. Incorporated...........................
Donaldson, Lufkin & Jenrette Securities Corporation.........
Wit Capital Corporation.....................................
---------
Total....................................................... 3,600,000
=========
</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 540,000
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> 85
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 360,000 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 Caufield & Byers IX L.P., an entity affiliated
with one of FreeMarkets' directors; 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.
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 $2.2 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> 86
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> 87
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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>
----
<S> <C>
Prospectus Summary..................... 3
Risk Factors........................... 7
Note Regarding Forward-Looking
Statements........................... 18
Use of Proceeds........................ 19
Dividend Policy........................ 19
Capitalization......................... 20
Dilution............................... 21
Selected Consolidated Financial Data... 22
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 23
Business............................... 34
Management............................. 45
Certain Transactions................... 55
Principal Stockholders................. 56
Description of Capital Stock........... 58
Shares Eligible for Future Sale........ 61
Legal Matters.......................... 62
Experts................................ 63
Additional Information................. 63
Index to Financial Statements.......... F-1
Underwriting........................... U-1
</TABLE>
------------------
Through and including , 1999 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to a dealer's obligation to deliver a prospectus when acting
as an underwriter and with respect to an unsold allotment or subscription.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,600,000 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> 88
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........................................ $ 45,905
NASD fee.................................................... 17,888
Nasdaq National Market listing fee.......................... 94,000
Printing expenses........................................... 350,000
Legal fees and expenses..................................... 800,000
Accounting fees and expenses................................ 550,000
Transfer agent and registrar fees........................... 3,500
Miscellaneous............................................... 306,707
----------
Total.............................................. $2,168,000
==========
</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 such liability under the DGCL. The registrant expects to maintain
directors' and officers' liability insurance.
II-1
<PAGE> 89
The registrant has entered into indemnification agreements with its
directors and officers and intends to enter into indemnification agreements with
any new directors or officers in the future.
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 November 1996, the registrant has sold and issued the following
securities:
1. 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.
2. 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.
3. In October 1997, the registrant issued 531,000 shares of common stock to
24 employees for an aggregate consideration of $287,625.
4. In December 1997, the registrant issued 5,017,200 shares of Series A-2
preferred stock and warrants to purchase 1,222,800 shares of Series A-2
preferred stock to 60 investors for an aggregate consideration of $2,717,650.
5. In October 1998, the registrant issued 780,000 shares of common stock to
78 employees for an aggregate consideration of $1,300,000.
6. In March 1999, the 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.
7. In April 1999, the registrant issued 2,305,434 shares of Series C
preferred stock to 78 investors for an aggregate consideration of $10,996,926.
8. In September 1999, the registrant issued 2,057,773 shares of Series D
preferred stock and warrants to purchase 304,431 shares of Series D preferred
stock to 44 investors for an aggregate consideration of $30,445,040.
9. In September 1999, the 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.
10. Since inception, the registrant has granted options to purchase an
aggregate of 12,986,450 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,
791,220 options have been exercised for an aggregate consideration of
$6,757,015.
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 3, 5 and 10 were intended to be exempt from
registration under the Securities Act in reliance upon Rule 701 and/or Rule 4(2)
promulgated under the Securities Act. The recipients of securities in each such
transaction represented their intentions to acquire the securities for
investment only and not with a view to, or for sale in connection with, any
distribution thereof and appropriate legends were affixed to the share
certificates, warrants and options issued in such transactions. The registrant
believes that all recipients had adequate access, through their relationships
with the registrant, to information about the registrant.
II-2
<PAGE> 90
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.
10.1(c) Framework Agreement for Information Technology between
General Motors Corporation and the registrant dated and
effective as of June 8, 1998.
10.1(d)* Software Licensing Category Agreement between General Motors
Corporation and the registrant dated and effective as of
June 8, 1998.
10.1(e)* Consulting Services Category Agreement between General
Motors Corporation and the registrant dated and effective as
of June 8, 1998.
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.).
</TABLE>
II-3
<PAGE> 91
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- -------- ------------------------------------------------------------
<S> <C>
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.
10.12* Form of Indemnification Agreement between the registrant and
each of its directors and officers.
10.13+* Restricted Stock Purchase Agreement between Thomas J.
Meredith and the registrant dated as of November 23, 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.
24.3* Power of Attorney granted by Thomas J. Meredith.
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> 92
(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> 93
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 December 7, 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 December 7, 1999
- --------------------------------------- and Chairman of the Board
Glen T. Meakem (Principal Executive Officer) and
Director
* Vice President and Chief Financial December 7, 1999
- --------------------------------------- Officer (Principal Financial and
Joan S. Hooper Accounting Officer)
* Director December 7, 1999
- ---------------------------------------
Sam E. Kinney, Jr.
* Director December 7, 1999
- ---------------------------------------
Eric C. Cooper
* Director December 7, 1999
- ---------------------------------------
David A. Noble
* Director December 7, 1999
- ---------------------------------------
L. John Doerr
* Director December 7, 1999
- ---------------------------------------
Thomas J. Meredith
*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> 94
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> 95
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> 96
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.
10.1(c) Framework Agreement for Information Technology between
General Motors Corporation and the registrant dated and
effective as of June 8, 1998.
10.1(d)* Software Licensing Category Agreement between General Motors
Corporation and the registrant dated and effective as of
June 8, 1998.
10.1(e)* Consulting Services Category Agreement between General
Motors Corporation and the registrant dated and effective as
of June 8, 1998.
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).
</TABLE>
<PAGE> 97
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- -------- ------------------------------------------------------------
<S> <C>
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.
10.12* Form of Indemnification Agreement between the registrant and
each of its directors and officers.
10.13+* Restricted Stock Purchase Agreement between Thomas J.
Meredith and the registrant dated as of November 23, 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.
24.3* Power of Attorney granted by Thomas J. Meredith.
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 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 Exhibit D
of this Transaction Agreement, or to purchase its own personal computers to run
the BidWare(R) Software.
<PAGE> 3
2.4 SERVICES FOR CBES. Upon the request of a Certified Buyer to use the
System to set up a CBE and Supplier's consent to the same, Supplier will provide
the following services related to such CBE:
(A) ASSISTANCE IN STRUCTURING EVENTS. Supplier will provide
CBE Management Services to Certified Buyers to assist the Certified Buyer in
structuring the CBE. "Structuring" shall include lot setting, establishing
bidding parameters and other factors relevant to the CBE. Additionally, if
requested by Customer, Supplier will provide OnLine Market Making(TM) Consulting
to Certified Buyers at a time which is mutually agreeable to the Parties. The
CBE Management Services and the OnLine Market Making(TM) consulting services
outlined in this Section 2.4 will be billed on a variable basis and are not
included in the fixed cost of this Transaction Agreement. A description of the
OnLine Market Making(TM) consulting services and associated costs is attached
hereto as Exhibit D.
(B) INTERACTION WITH BIDDERS. Supplier will contact each
Bidder properly identified by Customer which Customer desires to participate in
a particular CBE. Supplier shall attempt to identify the appropriate Bidder
contact, and explain the bidding process to such person. Supplier will provide
the relevant Certified Buyer with reasonable feedback on the status of each
Bidder.
(C) DISTRIBUTION OF SOFTWARE TO QUALIFIED BIDDERS. Upon
written notification of the CBE, the names of the Bidders and agreement on the
time line for the CBE, as set forth in Section 3.1, Supplier will attempt to
have Bidder execute the Bidder Agreement and to license Supplier's BidWare(R)
Software to the Bidders. All licenses for the BidWare(R) Software to Bidders
shall be pursuant to the terms and conditions of Supplier's then standard
license provided with each copy of the BidWare(R) Software supplied to Bidders.
A copy of Supplier's current license is attached hereto as Exhibit G. A Bidder
shall be considered a Qualified Bidder upon execution of the Bidder Agreement
and acceptance of the terms of the license agreement. In the event that a Bidder
does not agree to the terms of the Bidder Agreement and/or the terms of the
license agreement, the Bidder shall not be permitted to participate in the CBE.
Upon Bidder's execution of the Bidder Agreement, Supplier shall ship the
BidWare(R) Software and the BidWare Manual to the Bidder, and issue the Bidder a
unique user identification number and password to be used for the CBE, subject
to Bidder's acceptance of the license agreement. Customer shall pay the license
fee for each copy of the BidWare(R) Software licensed to Bidders. Bidders shall
be responsible for providing their own personal computers to run the BidWare(R)
Software and for the installation of such software onto such personal computers.
Bidders shall also be responsible for the connection of such personal computers
to the telecommunication service used for the CBE.
(D) TRAINING OF QUALIFIED BIDDERS. Supplier shall use
commercially reasonable efforts to identify the correct contact for each
Qualified Bidder to be trained in the use of the BidWare(R) Software. Customer
agrees to provide reasonable assistance in identifying such person if requested
by Supplier. Supplier will train that contact over the phone using real time
"mock" bidding sessions to ensure that the Qualified Bidder is reasonably
comfortable with the BidWare(R) Software and the System. Supplier does not
guarantee that the Qualified Bidder personnel will be properly trained and
reserves the right to request that a different person be provided by the
Qualified Bidder.
<PAGE> 4
(E) CONDUCT OF THE CBE. The Supplier will load all relevant
CBE and technical parameters provided by Customer into the System. During the
term of this Transaction Agreement, Supplier will staff an operations center
located at Supplier's facility in Pittsburgh to handle all CBE related
activities as follows:
(a) Maintain a call center for Qualified Bidders to call with
questions before the CBE or with technical problems during the CBE;
(b) Conduct procedures for ensuring that Qualified Bidders are
prepared and present on bid-day;
(c) Respond in a timely fashion to Qualified Bidder issues
with software or connectivity;
(d) Respond to Qualified Bidder problems that might prevent
bidding with a secure "surrogate bidding" system;
(e) Close bidding only after a reasonable determination that
no Qualified Bidders experienced difficulties material to the bidding process;
(f) Communicate any changes or adjustments to all Qualified
Bidders;
(g) Provide reasonable assistance to facilitate resolution of
any issues between Certified Buyers and Qualified Bidders;
(h) Establish and maintain a secure virtual private network;
(i) Authenticate the identities of all Qualified Bidders and
Certified Buyers involved in each CBE; and
(j) Ensure that only authorized Qualified Bidders and
Certified Buyers have access to appropriate CBE information.
3. CUSTOMER RESPONSIBILITY
3.1 GENERAL. At least [*] days prior to a CBE, a Certified Buyer shall
inform Supplier of its desire to hold a CBE. Supplier and the Certified Buyers
shall agree on mutually acceptable time and date for the CBE and a time line for
conducting the CBE. The Certified Buyer shall provide Supplier, in writing, all
of the necessary information regarding the parts, materials or services to be
bid on in the CBE and identify the Bidders who will be invited to participate in
the CBE. The Certified Buyer shall also provide the applicable completed RFQ to
each Bidder and Supplier. The Certified Buyer will coordinate with the Supplier
CBE Management Staff to structure 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.
<PAGE> 5
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.
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.
<PAGE> 6
5. DELIVERY AND INSTALLATION
5.1 BIDWARE(R) PCS. If Customer purchases BidWare(R) PCs from Supplier,
Supplier shall pre-load each BidWare(R) PC ordered from Supplier with one copy
of the BidWare(R) Software. Supplier will pre-test and ship each pre-loaded
BidWare(R) PC to Customer complete with modem, monitor and printer. If requested
by Customer in writing, Supplier will install the BidWare(R) PCs at Customer's
Site. Installation will be provided by Supplier's CBE Management personnel. In
the event that Customer installs the BidWare(R) PCs itself, Supplier will
provide telephone support by Technical Operations personnel. Customer shall be
deemed to have accepted a BidWare(R) PC if Customer does not report a failure of
such BidWare(R) PC during any thirty day period after its delivery. For purposes
of this Section 5.1, a "failure" means a failure caused solely by the BidWare(R)
PC which results in System unavailability.
5.2 BIDWARE(R) SOFTWARE TO QUALIFIED BUYERS. In the event that Customer
supplies its own personal computers to run the BidWare(R) Software, Customer
shall be responsible for the installation of such software onto such personal
computers. Supplier shall provide telephone support to assist Customer with the
installation of the BidWare(R) Software. All personal computers provided by
Customer to run the BidWare(R) Software must, at a minimum, conform to the
specifications set forth on Exhibit H of this Transaction Agreement. All
personal computers used during a CBE shall be located in a Supplier Room.
Customer shall also be responsible for the connection of such personal computers
to the telecommunication service used for the CBE.
5.3 BIDWARE(R) SOFTWARE TO BIDDERS. Supplier shall ship one copy of the
BidWare(R) Software to each Qualified Bidder for which Customer purchases a
BidWare(R) Software license pursuant to this Transaction Agreement. Each
Qualified Bidder shall be responsible for supplying their own personal computer
on which to load the BidWare(R) Software. Qualified Bidders shall be responsible
for loading the BidWare(R) Software on such personal computers. Supplier will
provide telephone support by Technical Operations personnel to assist Qualified
Bidders with the installation of the BidWare(R) Software.
6. FEES AND COSTS
6.1 FEES. In consideration of the Services and the licenses provided
pursuant to this Transaction Agreement, Customer agrees to pay a fixed fee as
well as certain variable charges, depending on 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.
<PAGE> 7
7. MODIFICATIONS
7.1 GENERAL. During the term of this Transaction Agreement, from time
to time, Supplier will modify the BidWare(R) Software and System, including
without limitation, correcting errors in the BidWare(R) Software or System. Such
error corrections or modifications may result in the creation of a new
version(s) of the BidWare(R) Software or System, under the same or one or more
different names (collectively, the Supplier Modifications). Supplier
Modifications shall in all cases be considered new versions of existing
BidWare(R) Software and/or System and not new Products. All rights to the
Supplier Modifications shall belong to Supplier. Exhibit E to this Transaction
Agreement contains a list of modifications currently scheduled by Supplier.
7.2 AVAILABILITY. During the term of this Transaction Agreement,
Supplier shall [*] supply Customer, and Customer shall accept, Supplier's then
current [*] over [*] not later than [*].
7.3 WARRANTY. Supplier Modifications to the BidWare(R) Software shall
be considered BidWare(R) Software for purposes of this Transaction Agreement;
provided, however, that all warranty provisions herein shall apply to each
Supplier Modification from the time such modifications are first delivered to
Customer. Supplier shall promptly deliver any Documentation, if any, relating to
the Supplier Modifications.
8. TERM AND TERMINATION
8.1 TERM. This Transaction Agreement and the Agreements shall continue
in force for an initial term of twelve (12) months from the Effective Date, and
shall be automatically renewed for one twelve (12) month term thereafter, and,
if still in effect, shall again automatically renew thereafter for a term that
begins on June 8, 2000 and ends on December 31, 2000. The foregoing automatic
renewals shall occur unless Customer provides written notice of its intent not
to renew this Transaction Agreement at least [*] days prior to the renewal date.
In the event that the term automatically renews from June 8, 2000 until December
31, 2000, as set forth above, the [*] fee set forth on Exhibit D shall be
prorated accordingly. This Transaction Agreement and the Agreements may be
extended for additional terms past December 31, 2000 if agreed to in writing by
both Parties, upon terms and conditions mutually agreed to in writing by the
Parties. [*].
8.2 TERMINATION. This Transaction Agreement and the Agreements may only
be terminated or canceled prior to the expiration of the term upon the terms and
conditions set forth in Sections 19.1(E), 19.3, 19.4 (except for a change in
stock ownership of less than fifty percent (50%) or pursuant to an initial
public offering under the Securities Act of 1933, as amended), 19.5 or 19.6 of
the Framework Agreement.
8.3 EFFECT OF TERMINATION. Upon the termination or expiration of this
Transaction Agreement, whether under this Article 8 or otherwise, Customer will
discontinue use of the BidWare(R) Software and access to the System, and both
parties shall return or destroy the other Party's Confidential Information as
set forth in Sections 12.9 and 12.10 of the Framework Agreement, as modified by
Sections 11.1, 11.2 and 17.3 of this Transaction Agreement.
<PAGE> 8
9. OWNERSHIP
9.1 SUPPLIER INTELLECTUAL PROPERTY. Customer shall have no rights or
interests in Supplier Intellectual Property except as described in this
Transaction Agreement. All right, title and interest in and to Supplier
Intellectual Property shall be and shall remain the sole property of the
Supplier or its third party subcontractors/licensors. Supplier hereby grants to
Customer a non-exclusive, non-transferable, royalty-free license to use the
Supplier Intellectual Property as required to effectuate the purposes of this
Transaction Agreement. Customer is not granted any other right to Supplier
Intellectual Property and shall not copy, modify, create derivative works,
sublicense, transfer, sell or otherwise use or dispose of the Supplier
Intellectual Property. Notwithstanding the above, Customer may make copies of
training materials provided by Supplier solely for the internal use of Customer.
9.2 DERIVATIVE WORKS. With respect to any Derivative Works developed
under the Agreements or in the provision of the Products or Services, the
allocation of rights in such works will be as follows:
(A) All Intellectual Property rights in a Derivative Work
developed by Customer for which the preexisting work is Customer Intellectual
Property, shall be owned by Customer and shall be deemed to be Customer
Intellectual Property.
(B) All Intellectual Property rights in a Derivative Work
developed by Supplier, by Supplier in conjunction with Customer when the
preexisting work is Supplier Intellectual Property shall be owned by Supplier
and shall be deemed to be Supplier Intellectual Property.
9.3 WORK PRODUCT. All Work Product shall be owned by Supplier. Customer
shall retain no rights in any Work Product.
10. SUPPLIERS WARRANTIES
10.1 WARRANTIES. Set forth below are certain exceptions to the
covenants, representations and warranties (collectively "Warranties") set forth
in the Framework Agreement and applicable Category Agreements.
A. All Warranties shall terminate upon the termination of the
Transaction Agreement.
B. No Warranties are made with respect to Third Party
Equipment, Software and Services.
C. Section 10.11 of the Framework Agreement is modified by
deleting "necessary conversions."
<PAGE> 9
D. Section 12.15 of the Software Licensing Agreement is
modified by deleting: "within the same time periods and under the terms
set forth in Article 11 of this Software Licensing Agreement."
E. Section 10.5 of the Framework Agreement and Section 12.16
of the Software Licensing Agreement are modified by making the illicit
code/virus warranties only apply to the presence of illicit
code/viruses on the BidWare(R) Software at the time of delivery by
Supplier.
10.2 DISCLAIMER OF WARRANTIES. EXCEPT FOR THE EXPRESS WARRANTIES MADE
IN THE AGREEMENTS, AS MODIFIED BY THIS TRANSACTION AGREEMENT, NEITHER PARTY
MAKES ANY OTHER WARRANTIES, EXPRESS OR IMPLIED, CONCERNING THE SUBJECT MATTER OF
THIS TRANSACTION AGREEMENT, INCLUDING WITHOUT LIMITATION ANY IMPLIED WARRANTIES
OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
10.3 REMEDY. If during the term of this Transaction Agreement, the
BidWare(R) Software fails to meet the Warranties, Supplier shall promptly repair
or replace the non-conforming BidWare(R) Software at no cost to Customer.
Supplier will not provide the foregoing warranty service if the nonconformity is
caused by malfunctions of hardware, non-Supplier software, modification of the
BidWare(R) Software not made by Supplier, by operator error, or by use of the
BidWare(R) Software that is not in accordance with the operating instructions
for the BidWare(R) Software.
11. CONFIDENTIALITY
11.1 CONFIDENTIAL INFORMATION OF SUPPLIER. Section 12.2 of the
Framework Agreement shall apply to this Transaction Agreement. However, Customer
agrees that: (i) the BidWare(R) Software, (ii) all training materials and
Documentation which are marked as "Confidential" and provided by Supplier to
Customer, and (iii) all pricing, cost information, business affairs information
and other information related to Supplier's business learned during a bench
marking study; 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.
<PAGE> 10
12. LIMITATION OF LIABILITY.
IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR CONSEQUENTIAL, INCIDENTAL OR
PUNITIVE LOSSES, DAMAGES OR EXPENSES (INCLUDING LOSS OF PROFITS, SAVINGS,
PENALTIES, FINES, LATE-PAYMENT CHARGES, INTEREST, COMPETITIVE ADVANTAGE,
GOODWILL, BUSINESS ADVANTAGE, GOODWILL, BUSINESS INTERRUPTION OR INDEMNITY
HEREUNDER), EVEN IF IT HAS BEEN ADVISED OF THE POSSIBLE EXISTENCE THEREOF.
EITHER PARTY'S LIABILITY FOR DAMAGES OF ANY KIND ARISING OUT OF THIS TRANSACTION
AGREEMENT AND THE AGREEMENTS, INCLUDING WITHOUT LIMITATION ANY AMOUNTS DUE
PURSUANT TO ARTICLE 15 OF THE FRAMEWORK AGREEMENT, SHALL BE LIMITED TO $[*].
NOTWITHSTANDING THE LIMITATION OF LIABILITY SET FORTH IN THE PRECEDING SENTENCE,
SUPPLIER'S LIABILITY FOR DAMAGES OF ANY KIND ARISING OUT OF SECTIONS 15.2(A),
AND 15.2(B) OF THE FRAMEWORK AGREEMENT (INFRINGEMENT), AND CUSTOMER'S LIABILITY
FOR DAMAGES OF ANY KIND ARISING OUT OF SECTIONS 15.1(A) AND 15.1(B) OF THE
FRAMEWORK AGREEMENT (INFRINGEMENT), SHALL BE LIMITED TO $[*]. THE FOREGOING
LIMITATIONS ON LIABILITY SHALL NOT APPLY TO FEES WHICH ARE OUTSTANDING UNDER
THIS TRANSACTION AGREEMENT.
13. CONTRACT ADMINISTRATION
13.1 DESIGNATION OF CONTRACT AND PROJECT MANAGERS. For purposes of
Article 3 of the Framework Agreement, a Party may assign the same individual to
be the Corporate Contract Manager and Project Manager. The Corporate Contract
Manager/Project Manager for the Parties shall be as follows:
Corporate Contract Manager:
Customer: James Scotti
Supplier: Glen Meakem
Project Manager:
Customer: Duane Bolinger
Supplier: Robert Stevens
A Party may change its Corporate Contract Manager and/or Project
Manager at any time in their sole discretion and shall provide notice of such
change to the other Party within ten (10) business days of such change.
<PAGE> 11
14. PERSONNEL
14.1 GENERAL. Each party shall choose personnel in their sole
discretion to perform their respective services and obligations under this
Transaction Agreement. In the event that a Party is not satisfied with the
performance, actions or inactions of an employee of the other Party, the Party
shall inform the other Party of such dissatisfaction. The other Party shall then
take commercially reasonable action to investigate the performance, inaction or
action of such employee and shall take appropriate measures, if any, as
determined by such other Party.
14.2 [*]. Supplier agrees that in the event that Customer [*] that
includes [*] required for Customer's performance under this Transaction
Agreement, such [*] may [*] provided that: (i) all [*] by the [*] shall be
provided by [*], (ii) the [*] has [*], and (iii) the [*] is not a competitor of
Supplier in [*].
15. SUPPLIER SERVICES
Supplier agrees that for a period lasting from the Effective Date to
the earlier of: (i) June 30, 2000, or (ii) the date this Transaction Agreement
terminates; as long as Customer is not in default under the terms of this
Transaction Agreement, Supplier shall not provide the services provided to
Customer hereunder to the automobile operations of the following
manufacturers:[*].
16. INSURANCE
16.1 LIMITS. The minimum limits of liability of insurance which
Supplier must maintain, as set forth in Section 17.1 of the Framework Agreement,
are modified as follows:
(i) The limits of liability for the insurance set forth in Section
17.1(B) (General Commercial) shall be [*] per occurrence.
(ii) The limits of liability for the insurance set forth in Section
17.1(C) (Automobile) shall be [*] per occurrence.
(iii) The limit for the insurance set forth in Section 17.1(D)
(Errors and Omissions) shall be [*] per occurrence.
16.2 LOSS PAYEES. Supplier is not required to name any other entity,
including without limitation, Customer, as a loss payee under any of Supplier's
insurance policies.
17. GENERAL
17.1 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
<PAGE> 12
conditions of this Transaction Agreement and the Agreements be resolved
according to the order of precedence set forth in Section 1.3 of the Framework
Agreement. In furtherance of, and not in limitation to the generality of the
preceding, the following provisions shall not apply to this Transaction
Agreement:
(A) Framework Agreement: Sections 1.2, 1.4, 1.5, 1.6, 1.7, 2.6, 4.1,
4.2, 4.3, 5.2, 5.6(C), 5.8(A)(3), 8.1(A), 8.3, 9.4, 9.8, 10.7 and 10.13, Article
11, Sections 12.13, 12.17, 13.2, 13.3(B) (iii), 13.3(C), 13.4, 13.5, 13.6, 13.7
and 13.9, Article 14, Sections 15.7, 19.1(A) - (D), 19.7, 19.9, 20.3, and
22.6(A) (source code), Article 23, and Section 25.17.
(B) Software Licensing Agreement: Sections 3.3, 3.4, 3.5, 4.1, 4.3,
5.1, that portion of Section 6.1(A) which states ", from which Customer may make
copies for its use consistent with all limitations of this Software Licensing
Agreement and the applicable Transaction Agreement," Sections 6.2, 7.3, Articles
8 and 9, Sections 10.1(B) (CD-ROMs), 12.4, 12.9, 12.10 and 12.14, and Articles
11, 13 and 14.
(C) Consulting Services Agreement: Section 3.4.
In addition, the Parties agree that any inconsistency, ambiguity or
conflict between the definitions attached to this Transaction Agreement in
Exhibit A and any other definitions contained in the Agreements or elsewhere
will be resolved in favor of the definitions attached to this Transaction
Agreement in Exhibit A.
17.4 ASSIGNMENT. Neither party may assign any of its rights or
obligations hereunder or the Agreements without the prior written consent of the
other party, which consent shall be in the other Party's sole discretion.
17.5 COMPETITIVE ASSESSMENT. 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 one benchmark or competitive assessment
per year period after the initial one-year period, (ii) Supplier shall only be
required to provide such information in such frequency, methodology and detail
which is reasonably required by Customer, and (iii) the bench marking company
performing the benchmark or competitive assessment 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.
<PAGE> 13
17.7 PUBLICITY. Section 25.15 of the Framework Agreement shall apply to
this Transaction Agreement. Notwithstanding anything to the contrary in the
foregoing, Supplier may use Customer's name as part of a general customer list
used by Supplier in promotional material and business presentations.
17.8 GOVERNING LAW; VENUE; SERVICE OF PROCESS. This Transaction
Agreement and the Agreements are to be construed according to the laws of
Michigan, without giving effect to the principals of conflicts of laws. Any
action or proceedings by Customer against Supplier shall be brought in the
federal or state courts located in Pittsburgh, Pennsylvania, and any action
brought by Supplier against Customer shall be brought in federal or state courts
in Detroit, Michigan.
IN WITNESS WHEREOF, this Transaction Agreement has been executed by the
Parties as of the Effective Date.
SUPPLIER CUSTOMER
By: /s/ Glen T. Meakem By: /s/ James Scotti
---------------------------- -------------------------------
Title: Chief Executive Officer Title: Commodity Manager
------------------------- ----------------------------
<PAGE> 14
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.
13. "Project" shall mean the implementation of the global online bidding
System provided by Supplier to be used by Buyers in North America.
<PAGE> 15
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> 16
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> 17
EXHIBIT C
[*]
<PAGE> 18
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
the then current System. Buyers in 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.
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 19
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
FEE ELEMENT DESCRIPTION RATE NOTES
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BidWare(R) Software License for each copy of [] for each BidWare(R) Cost covers the following:
License BidWare(R) Software for Software license shall
Buyers or Suppliers. 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.
- -------------------------------------------------------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 20
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
FEE ELEMENT DESCRIPTION RATE NOTES
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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).
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 [*].
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 21
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
FEE ELEMENT DESCRIPTION RATE NOTES
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- -------------------------------------------------------------------------------------------------------------------------------
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
Direct Labor are exclusive of and from 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> 22
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> 23
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>
1998 Begin pilot program in Europe [*]
[*]
1999 Begin roll-out for European o Agree on a European program
implementation
o Develop a Supplier European operations center
Begin pilot program in o Identify further opportunities
other region(s)
2000 Roll out into other regions o Complete agreements for 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> 24
ESTIMATED INCREMENTAL COSTS FOR INTERNATIONAL IMPLEMENTATION:
Item Fee Structure
- ---- -------------
System Access [*]. For example, if the potential bid volume in
License Fees Europe 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> 25
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" 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".
<PAGE> 26
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> 27
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> 28
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> 29
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> 30
EXHIBIT J
[*]
<PAGE> 1
Exhibit 10.1(c)
GENERAL MOTORS CORPORATION
GM Logo
FRAMEWORK AGREEMENT
FOR
INFORMATION TECHNOLOGY
This document contains confidential and proprietary information furnished for
evaluation purposes only; except with the express prior written permission of
General Motors Corporation, such information may not be published, disclosed or
used for any other purpose.
<PAGE> 2
General Motors Corporation
Framework Agreement
for
Information Technology
Table of Contents
<TABLE>
<CAPTION>
<S> <C>
1. SCOPE OF AGREEMENT ....................................................... 1
1.1 APPLICABILITY ........................................................ 1
1.2 RELATIONSHIP OF THE PARTIES .......................................... 1
1.3 ORDER OF PRECEDENCE .................................................. 2
1.4 SUPPLY ITEMS ......................................................... 2
1.5 ACCEPTANCE OF PHASES AND STAGES ...................................... 3
1.6 ACCEPTANCE ........................................................... 3
1.7 THIRD PARTY PRODUCTS AND SERVICES .................................... 3
1.8 THIRD PARTY COMPLIANCE ............................................... 4
1.9 ADDITIONAL SERVICES .................................................. 4
1.10 FUNDAMENTAL PRINCIPLE OF GOOD FAITH AND FAIR DEALING ................ 4
1.11 INFORMATION GATHERING PRACTICES ..................................... 4
2. CHANGES .................................................................. 5
2.1 CHANGE ORDER PROCEDURES .............................................. 5
2.2 CHANGE ORDER RESPONSE ................................................ 5
2.3 CHANGE IMPLEMENTATION ................................................ 6
2.4 PRICE INCREASE PURSUANT TO CHANGE ORDERS ............................. 6
2.5 NORMAL AND ROUTINE TASKS ............................................. 6
2.6 ADDITIONAL BUSINESS UNITS ............................................ 6
3. CONTRACT ADMINISTRATION .................................................. 7
3.1 DESIGNATION OF CONTRACT AND PROJECT MANAGERS ......................... 7
3.2 DELEGATION OF AUTHORITY .............................................. 8
3.3 REVIEW MEETINGS AND PROGRESS REPORTS ................................. 8
3.5 STATUS REPORTS ....................................................... 8
3.5 EFFECT OF SUPPLIER'S FAILURE TO IDENTIFY CERTAIN PROBLEMS ............ 8
3.6 EFFECT OF SUPPLIER'S SUBMISSION OF STATUS REPORTS .................... 9
3.7 EFFECT OF CUSTOMER'S FAILURE TO PERFORM CUSTOMER OBLIGATIONS ......... 9
4. SUPPLIER PERSONNEL AND SUBCONTRACTORS .................................... 9
4.1 KEY SUPPLIER PERSONNEL ............................................... 9
4.2 OTHER SUPPLIER PERSONNEL ............................................. 10
4.3 NO EFFECT ON WARRANTIES .............................................. 10
4.4 CUSTOMER ACCESS TO SUPPLIER PERSONNEL ................................ 11
4.5 SUBCONTRACTORS/SUPPLIER'S AGENTS ..................................... 11
4.6 SITE RULES AND REGULATIONS ........................................... 11
5. RELATIONSHIP BETWEEN CUSTOMER AND SUPPLIER ............................... 11
5.1 RELATIONSHIP DEVELOPMENT ............................................. 11
5.2 PREFERENTIAL SCHEDULING .............................................. 11
5.3 NEW TECHNOLOGY REPLACEMENT ........................................... 11
5.4 CONTINUOUS IMPROVEMENT AND BEST PRACTICES ............................ 12
5.5 SATISFACTION AND PERFORMANCE REVIEWS ................................. 12
5.6 COMPETITIVE ASSESSMENT ............................................... 13
5.7 SHARED ENVIRONMENT ................................................... 13
5.8 CONSENTS ............................................................. 14
</TABLE>
i
<PAGE> 3
General Motors Corporation
Framework Agreement
for
Information Technology
Table of Contents
<TABLE>
<CAPTION>
<S> <C>
6. CUSTOMER OBLIGATIONS AND ASSETS .......................................... 14
6.1 CUSTOMER OBLIGATIONS ................................................. 14
6.2 CUSTOMER ASSETS ...................................................... 15
7. TRANSACTION AGREEMENTS ................................................... 16
7.1 TERMS ................................................................ 16
8. CHARGES .................................................................. 18
8.1 PAYMENT REQUIREMENTS ................................................. 18
8.2 NO PRICE INCREASES ................................................... 18
8.3 NO RESTRICTIONS ON USE ............................................... 18
8.4 RIGHT OF SET-OFF ..................................................... 18
8.5 OUT-OF-POCKET ........................................................ 18
9. PRICING .................................................................. 19
9.1 INVOICING STANDARDS .................................................. 19
9.2 ISSUANCE AND DELIVERY OF INVOICES .................................... 19
9.3 CREDITS .............................................................. 19
9.4 DISCOUNTS ............................................................ 20
9.5 PAYMENT TERMS ........................................................ 20
9.6 SUPPLIER'S EFFORTS TO MINIMIZE CHARGES ............................... 20
9.7 FEE DISPUTES ......................................................... 20
9.8 CURRENCY ............................................................. 21
10. COVENANTS, REPRESENTATIONS AND WARRANTIES .............................. 21
10.1 CAPABILITIES ........................................................ 21
10.2 DELEGATION OF AUTHORITY ............................................. 21
10.3 RIGHT AND TITLE ..................................................... 21
10.4 MANUFACTURER'S WARRANTIES ........................................... 21
10.5 SOFTWARE ............................................................ 21
10.6 STANDARDS ........................................................... 22
10.7 TERMINATION BY ELECTRONIC MEANS ..................................... 22
10.8 SUPPLIER THIRD PARTY AGREEMENTS ..................................... 22
10.9 CUSTOMER THIRD PARTY AGREEMENTS ..................................... 22
10.10 YEAR 2000 .......................................................... 22
10.12 EMU CONVERSION ..................................................... 23
10.14 ESCROW SUFFICIENCY ................................................. 23
11. MUTUAL DISCLAIMER ....................................................... 23
12. CONFIDENTIAL INFORMATION ................................................ 23
12.1 CONFIDENTIAL INFORMATION OF CUSTOMER ................................ 23
12.2 CONFIDENTIAL INFORMATION OF SUPPLIER ................................ 24
12.3 SAFEGUARDING DATA ................................................... 25
12.4 FILE SECURITY ....................................................... 25
12.6 RESTRAINTS ON COPYING ............................................... 25
12.6 NOTIFICATION TO CUSTOMER ............................................ 25
12.7 SUPPLIER SOFTWARE ASSIGNMENT OF CODES ............................... 26
12.8 CODE SECURITY ....................................................... 26
12.9 USE AND RETURN OF CUSTOMER CONFIDENTIAL INFORMATION ................. 26
12.11 USE AND RETURN OF SUPPLIER CONFIDENTIAL INFORMATION ................ 26
12.11 SECURITY PROCEDURES ................................................ 27
12.12 PERSONNEL .......................................................... 27
12.13 INTERNET ADDRESSES ................................................. 27
12.15 ATTORNEY-CLIENT PRIVILEGE .......................................... 27
12.15 UNAUTHORIZED ACCESS ................................................ 28
12.16 COSTS .............................................................. 28
12.17 EXCLUSION .......................................................... 28
</TABLE>
ii
<PAGE> 4
General Motors Corporation
Framework Agreement
for
Information Technology
Table of Contents
<TABLE>
<CAPTION>
<S> <C>
13. PROPRIETARY RIGHTS ...................................................... 29
13.1 CUSTOMER INTELLECTUAL PROPERTY ...................................... 29
13.2 SUPPLIER INTELLECTUAL PROPERTY ...................................... 29
13.3 THIRD-PARTY INTELLECTUAL PROPERTY ................................... 30
13.4 DERIVATIVE WORKS .................................................... 31
13.5 WORK PRODUCT ........................................................ 32
13.6 DEVELOPED SOFTWARE .................................................. 32
13.7 REPRODUCTION OF SOFTWARE ............................................ 32
13.8 DOCUMENTATION ....................................................... 33
13.9 RIGHTS IN DATA ...................................................... 33
14. ESCROW OF SOURCE CODE ................................................... 33
14.1 RELEASE OF ESCROW ................................................... 33
14.2 CUSTOMER'S RIGHTS AND OBLIGATIONS AFTER RELEASE OF SOURCE CODE ...... 34
14.3 ESCROW VERIFICATION ................................................. 34
14.4 SOURCE CODE INSTALLATION ............................................ 34
16. INDEMNIFICATION ......................................................... 35
15.1 INDEMNIFICATION BY CUSTOMER ......................................... 35
15.2 INDEMNIFICATION BY SUPPLIER ......................................... 35
15.3 NOTICE .............................................................. 36
15.4 INDEMNIFICATION PROCEDURES .......................................... 36
15.5 USE OF INFRINGING PRODUCTS OR SERVICES .............................. 37
15.6 DISCONTINUATION OF PAYMENTS ......................................... 37
15.7 EXCLUSION ........................................................... 37
16. THIRD PARTY AGREEMENTS .................................................. 37
16.1 THIRD-PARTY AGREEMENTS ............................................. 38
16.2 PERFORMANCE UNDER THIRD-PARTY AGREEMENTS ........................... 38
16.3 PERFORMANCE UNDER SUPPLIER-ADMINISTERED AGREEMENTS ................. 38
16.4 THIRD-PARTY INVOICES ................................................ 38
17. INSURANCE ............................................................... 39
17.1 TYPES AND AMOUNT .................................................... 39
17.2 REPUTABLE INSURERS .................................................. 39
17.3 INSURANCE CERTIFICATES .............................................. 39
17.4 NO SATISFACTION OF OTHER OBLIGATIONS ................................ 40
17.5 SUBCONTRACTORS ...................................................... 40
18. TERM .................................................................... 40
18.1 INITIAL TERM ........................................................ 40
18.2 RENEWAL ............................................................. 40
18.3 MAXIMUM TERM ........................................................ 40
18.4 EFFECT OF EXPIRATION OR TERMINATION ................................. 40
19. TERMINATION AND CANCELLATION ............................................ 41
19.1 CANCELLATION ........................................................ 41
19.2 EFFECT OF CANCELLATION .............................................. 41
19.3 TERMINATION FOR CONVENIENCE ......................................... 41
19.4 TERMINATION FOR CHANGE IN CONTROL OF SUPPLIER ....................... 41
19.5 TERMINATION FOR CAUSE ............................................... 42
19.6 TERMINATION FOR INSOLVENCY .......................................... 42
19.7 EFFECT OF PARTIAL TERMINATION ....................................... 42
19.8 TERMINATION FEE ..................................................... 42
19.9 ABSOLUTE OBLIGATION ................................................. 43
19.10 RIGHTS UPON TERMINATION ............................................ 44
20. REMEDIES ................................................................ 45
20.1 REMEDIES OF EITHER PARTY ............................................ 45
20.2 NO WAIVER ........................................................... 45
20.3 CONSEQUENTIAL DAMAGES ............................................... 45
20.4 DIRECT DAMAGES ...................................................... 45
20.5 EXCLUSIONS .......................................................... 46
</TABLE>
iii
<PAGE> 5
General Motors Corporation
Framework Agreement
for
Information Technology
Table of Contents
<TABLE>
<CAPTION>
<S> <C>
21. RESOLUTION OF DISPUTES .................................................. 46
21.1 RESOLUTION OF DISPUTES OF INVOICES .................................. 46
21.2 RESOLUTION OF ALL DISPUTES .......................................... 47
22. AUDIT RIGHTS; RECORDS RETENTION ......................................... 47
22.1 AUDITS (PROCESSING) ................................................. 47
22.2 CUSTOMER EXPENSES ................................................... 47
22.3 SUPPLIER EXPENSES ................................................... 47
22.4 AUDITS (PERFORMANCE AND FEES) ....................................... 47
22.5 RECORDS RETENTION ................................................... 48
22.6 ACCESS .............................................................. 48
22.7 STATUS REPORTS ...................................................... 48
22.8 AUDIT SOFTWARE ...................................................... 48
22.9 FACILITIES .......................................................... 48
23. ASSIGNMENT .............................................................. 49
23.1 ASSIGNMENT BY SUPPLIER .............................................. 49
23.2 ASSIGNMENT BY CUSTOMER .............................................. 49
23.3 PARTIAL ASSIGNMENT TO RELATED ENTITY OR PURCHASER ................... 49
23.4 DIVESTED ENTITIES ................................................... 50
24. TAXES ................................................................... 50
24.1 INFORMATION ......................................................... 50
24.2 STRUCTURE ........................................................... 50
24.3 TAX CREDIT .......................................................... 50
24.4 COOPERATION ......................................................... 50
25. MISCELLANEOUS ........................................................... 51
25.1 COMPLIANCE WITH LAWS AND REGULATIONS ................................ 51
25.2 INDEPENDENT CONTRACTOR STATUS AND GENERAL LIABILITY PROVISION ....... 51
25.3 FORCE MAJEURE ....................................................... 51
25.4 RELEASES AND WAIVERS ................................................ 52
25.5 NOTICES ............................................................. 52
25.6 CUMULATIVE REMEDIES ................................................. 52
25.7 AMENDMENT ........................................................... 52
25.8 BUSINESS CONTINUITY ................................................. 52
25.9 NO BROKERS OR INTERMEDIARIES ........................................ 53
25.10 NO WAIVER .......................................................... 53
25.11 PARTIAL INVALIDITY ................................................. 53
25.12 HEADINGS ........................................................... 53
25.13 COUNTERPARTS ....................................................... 53
25.14 ENTIRE AGREEMENT ................................................... 53
25.15 PUBLICITY .......................................................... 53
25.16 SURVIVAL ........................................................... 53
25.17 GOVERNING LAW; VENUE; SERVICE OF PROCESS ........................... 54
25.18 THIRD PARTY BENEFICIARIES .......................................... 54
25.19 COVENANT OF FURTHER ASSURANCES ..................................... 54
</TABLE>
* * *
iv
<PAGE> 6
<TABLE>
<CAPTION>
<S> <C>
APPENDIX A - ............................................................. GLOSSARY
EXHIBITS
1.2 - EXISTING AGREEMENTS
3.3A - CUSTOMER DELEGATION OF AUTHORITY
5.1 - CUSTOMER INFORMATION SYSTEMS AND SERVICES ORGANIZATION CHART
5.4D - CUSTOMER CORPORATE INFORMATION TECHNOLOGY ARCHITECTURE AND TECHNICAL STANDARDS
8.5 - CUSTOMER TRAVEL GUIDELINES
10- SOFTWARE WITH ILLICIT CODE, KEY, NODE LOCK, TIME-OUT AND OTHER PRODUCT- OR SERVICE-LIMITING
FUNCTIONS
10.10- CUSTOMER YEAR 2000 COMPLIANCE TEST PROCEDURE
</TABLE>
v
<PAGE> 7
GENERAL MOTORS CORPORATION
FRAMEWORK AGREEMENT
FOR
INFORMATION TECHNOLOGY
THIS FRAMEWORK AGREEMENT FOR INFORMATION TECHNOLOGY 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 and FreeMarkets OnLine, Inc., with offices at 130 Seventh Street,
Century Building, Suite 500, Pittsburgh, Pennsylvania 15222.
Terms used with initial capital letters in this Framework
Agreement or in other Agreements are defined in Appendix A or herein or therein.
BACKGROUND AND OBJECTIVES
Customer and its Related Entities desire to procure certain information
technology products and services, and Supplier desires to be considered as a
potential supplier of such products and services to Customer. Customer desires
to solicit these products and services from Supplier from time to time,
generally through the issuance of Requests For Proposal to the Supplier and to
other suppliers of these products and services. The Parties' objectives in
entering into this Framework Agreement are: (i) to establish the Parties' desire
to create a mutually beneficial relationship in a globally competitive
marketplace; (ii) to ensure that Supplier understands Customer's requirements
for information technology products and services including Customer's
information technology strategy as set forth in Customer's Corporate Information
Technology Architecture and Technical Standards; (iii) to set forth the terms
that shall govern the provision of Products and Services by Supplier to
Customer; and (iv) to establish a structure by which all transactions between
the Parties may be completed in a time-efficient and cost-effective manner.
Supplier will share Customer's dedication to customer enthusiasm, integrity,
teamwork, innovation and continuous and measurable improvement. Both Parties
will strive to eliminate ambiguities and omissions from the spoken and written
terms of the relationship by communicating with clarity of purpose and
expectations.
THE AGREEMENT
1. SCOPE OF AGREEMENT
1.1 APPLICABILITY. This Framework Agreement is applicable to the
procurement by Customer or its Related Entities, for any Site, of any Products
or Services that are available during the Term of the applicable Agreements.
1.2 RELATIONSHIP OF THE PARTIES. Supplier and Customer will execute
this Framework Agreement and each Category Agreement, while Supplier, on the one
hand, and Customer or a Related Entity of Customer, on the other hand, will
execute
1
<PAGE> 8
each Transaction Agreement. Each Related Entity of Customer that is a party to
one or more of the Transaction Agreements shall be considered to be the
"Customer" as such term is used in this Framework Agreement and in all
applicable Category Agreements. Notwithstanding the foregoing, Supplier
acknowledges and agrees that only the Related Entity of Customer that is a party
to the applicable Agreement shall be held responsible for and liable to any
other party with respect to activities under that Agreement. In the event the
Supplier is a partnership, the partnership alone will be held responsible for,
and liable to, the Customer with respect to activities under any of the
applicable Agreements, and not the individual partners comprising the
partnership. General Motors Corporation shall be an intended third party
beneficiary of the rights of any of its Related Entities under all Transaction
Agreements to which any of such Related Entities is a party.
1.3 ORDER OF PRECEDENCE. This Framework Agreement is a general
procurement agreement that contemplates the execution by Supplier and Customer
of one or more Category Agreements and one or more Transaction Agreements. A
Transaction Agreement may be applicable to (and therefore incorporate the terms
of) more than one Category Agreement, and each Category Agreement may have more
than one applicable Transaction Agreement. The Parties intend that the terms of
this Framework Agreement be incorporated into all Category Agreements and
Transaction Agreements, and that the terms of the Agreements are consistent with
each other. Any inconsistency, ambiguity or conflict between or among the terms
and conditions of the operative documents will be resolved in the following
order of precedence:
(A) any applicable Change Order(s), with a later Change Order
taking precedence over any earlier, applicable Change Order(s);
(B) the applicable Transaction Agreement, with the Transaction
Agreement regarding an undertaking covered therein taking precedence over
Category Agreements and the Framework Agreement regarding the same undertaking;
(C) the applicable Category Agreement with the Category
Agreement regarding an undertaking covered therein taking precedence over
Framework Agreement regarding the same undertaking; and
(D) the Framework Agreement.
Notwithstanding the foregoing, the order of precedence applies only to the
extent an inconsistency, ambiguity or conflict exists. Any inconsistent,
ambiguous or conflicting terms shall not be deemed to be amended, modified,
canceled or waived with respect to any other Category Agreement or Transaction
Agreement or for any other purpose whatsoever. No amendment, modification,
cancellation or waiver shall be effective until Change Order Procedures are
completed.
1.4 SUPPLY ITEMS. Prior to the execution of the applicable Transaction
Agreements by Customer, Supplier shall provide Customer with specifications for
all Supply Items required to provide the Products or perform the Services
contemplated by such Transaction Agreements. Customer reserves the right to
obtain and use Supply Items from sources other than Supplier without affecting
Supplier obligations, including maintenance and performance warranties under the
related Category Agreement and Transaction Agreement, provided such
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Supply Items conform to the applicable specifications. If Customer obtains any
Supply Items from an authorized reseller of Supplier, such Supply Items will be
covered by the same warranty terms as if the Supply Items had been obtained
directly from Supplier.
1.5 ACCEPTANCE OF PHASES AND STAGES. Depending upon the nature of the
Products or Services, the applicable Category Agreements and Transaction
Agreements may provide that Supplier shall perform its obligations in two or
more phases or stages. In such event, each such phase or stage of performance
shall constitute a separate obligation of Supplier, the performance of which
shall be subject to all remedies available to Customer under the applicable
Agreements in the event the applicable Acceptance Criteria specified therein are
not fully satisfied.
1.6 ACCEPTANCE.
Customer may include in the terms and conditions of each
Transaction Agreement certain Acceptance Criteria for Supplier's delivery and
performance of the Products and Services and any related Deliverables. Customer
shall have the period of time, if any, as set forth in the applicable
Transaction Agreement in which to ascertain whether the Products and Services
meet or exceed all applicable Specifications, Deliverables, Service Levels and
all other representations, warranties, covenants and conditions of the
applicable Agreements, and that the Supplier has provided and performed the
Products and Services to successfully complete the Acceptance Criteria. Except
as otherwise expressly set forth in the Transaction Agreement, Customer's
obligation to compensate Supplier with respect to any Products or Services and
any related Deliverables shall arise only after Customer has reviewed such
items, performed such Acceptance Testing as set forth in the applicable
Transaction Agreement, and otherwise established that Supplier has fully
performed its obligations under the applicable Agreements, and that Supplier is
not otherwise in default under such Agreements. In no event shall use of the
Products or Services or any related Deliverables by Customer for business,
profit, revenue or any other purpose during Acceptance Testing constitute
acceptance by Customer. Supplier's failure to meet the Acceptance Criteria
within the time established in the applicable Transaction Agreement shall
constitute breach, and it shall be deemed that Customer has received no value
from the Products and Services.
1.7 THIRD PARTY PRODUCTS AND SERVICES.
(A) Except as otherwise expressly set forth in the Transaction
Agreement, Customer may at any time obtain any products and services, from any
third party in replacement of, or in addition to, the Products and Services from
the Supplier. If such products and services are procured as a result of
termination of Customer's obligation to procure the Products and Services, the
terms of Article 19 will apply based on the reasons for such termination. In the
event Customer contracts with a third party for products or services, Supplier
shall cooperate with Customer and such third party to the extent reasonably
required by Customer and such third party, which cooperation shall include, but
not be limited to, the following:
(1) providing such third party with the written
requirements, standards and procedures applicable to Customer's information
technology environment as requested by Customer;
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(2) providing assistance and support Services to such
third party on behalf of Customer at the rates set forth in the applicable
Transaction Agreement; and
(3) providing access to the Products and Services
being used by Supplier as may be reasonably required by such third party and
approved by Customer.
(B) Alternatively, upon Customer's request, Customer and
Supplier may jointly negotiate with a third party the terms and conditions
relating to the Products and Services Supplier will be providing to Customer
through such third party.
1.8 THIRD PARTY COMPLIANCE. Customer shall require all third party
suppliers to comply with Supplier's reasonable requirements regarding
operations, data center standards, confidentiality and security to the extent
applicable and necessary. Supplier will provide to such third parties, or to
Customer upon request, copies of any such reasonable requirements regarding
Supplier's operations, data center standards, confidentiality and security.
1.9 ADDITIONAL SERVICES. During the Term, Customer may desire to obtain
Additional Services. As soon as reasonably practicable and in no event later
than thirty (30) days after Supplier's receipt of Customer's request for
Additional Services, Supplier may submit to Customer, Supplier's Proposal for
provision of Additional Services, including Supplier's proposed charges for the
Additional Services; provided, however, if Supplier cannot provide its Proposal
within thirty (30) days, Supplier shall notify the Customer and may request an
extension for a reasonable period of time, which Customer, in its reasonable
discretion, may grant. Customer, in Customer's sole discretion, may obtain
additional services from suppliers other than Supplier.
1.10 FUNDAMENTAL PRINCIPLE OF GOOD FAITH AND FAIR DEALING. In entering
into this Framework Agreement, the Category Agreements and the Transaction
Agreements, each of Customer and Supplier acknowledges and agrees that all
aspects of the worldwide business relationship and dealings between Customer and
Supplier contemplated by the Agreements, including the performance of all
obligations and the exercise of all rights under the Agreements, will be
governed by the fundamental principle of good faith and fair dealing. Customer
and Supplier will assure that each of their respective Related Entities complies
with this principle of good faith and fair dealing.
1.11 INFORMATION GATHERING PRACTICES. Supplier agrees that its
acquisition of information on behalf of Customer shall be in compliance with all
applicable laws and regulations and shall be in compliance with the ethical
principles set forth by Customer as follows:
There are important limitations on how and what competitive
information may be obtained. No improper means may be used to
acquire confidential or proprietary information from any
competitor, supplier or customer. Improper means would include
any form of industrial espionage, the payment of money or
giving of any favor or consideration, or the hiring of a
competitor's employees to obtain confidential information.
Information which may not be sought would include data on a
competitor's unannounced new products or confidential data
relating to costs, prices or profits.
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2. CHANGES
2.1 CHANGE ORDER PROCEDURES.
(A) In the event that Customer desires to propose a Change, it
shall deliver a Change Order Request to the applicable Supplier Project Manager.
Supplier shall use reasonable efforts to promptly prepare and deliver to
Customer, at no charge to Customer, a Change Order Response in accordance with
the time period, if any, set forth in the Change Order Request. If Supplier
cannot provide a Change Order Response within the time period, if any, set forth
in the Change Order Request, Supplier shall notify the Customer and request an
extension for a reasonable period of time, which Customer, in its reasonable
discretion, may grant.
(B) In the event that Supplier desires to propose a Change, it
shall deliver a Change Order Response to the applicable Customer Project Manager
or to the Customer Corporate Contract Manager.
(C) A Change Order Response, whether in response to a Change
Order Request or not, shall constitute an irrevocable offer by Supplier for a
time period of sixty (60) days to implement the proposed Change described
therein on the terms set forth herein and therein.
(D) If Customer accepts Supplier's offer as set forth in the
Change Order Response, such Change Order Response shall be deemed to be a Change
Order.
2.2 CHANGE ORDER RESPONSE. Supplier shall include the following
information in all Change Order Responses:
(i) the effect, and manner of establishment thereof, of the
proposed Change, if any, on the amounts payable by Customer under the Agreements
(as determined by the procedure set forth in Section 2.4
(ii) the effect, and manner of establishment thereof, of the
proposed Change, if any, on Supplier's performance of its obligations under the
Agreements, including the effect on required Schedules and Service Levels as set
forth in the applicable Transaction Agreements;
(iii) a good faith estimate of the effect, and manner of
establishment thereof, of the proposed Change, if any, on Customer's costs and
expenses relating to Customer's obligations under the Agreements;
(iv) the anticipated time schedule for implementing the
proposed Change; and
(v) any other information requested by Customer or reasonably
necessary for Customer to make an informed decision.
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2.3 CHANGE IMPLEMENTATION. No Change Order shall become effective
without the written approval of the applicable Customer Project Manager. In
addition, certain Changes may only be approved by the Customer Corporate
Contract Manager or his or her designee as set forth in Customer's Delegation of
Authority. Under no circumstances shall Supplier be entitled to payment for any
Product or Service provided pursuant to a Change Order that has not been so
approved by the Customer Project Manager or the Customer Corporate Contract
Manager or his or her designee.
2.4 PRICE INCREASE PURSUANT TO CHANGE ORDERS. If either Party proposes
a Change in the Products or Services to be provided hereunder pursuant to the
Change Order Procedures, the price for such Change shall be determined in the
manner set forth below.
(A) To the extent the proposed Change can be reasonably
accommodated within the specified existing level of resources, not including
overtime work, then being used by Supplier in performing its obligations
hereunder or under the other applicable Agreements, and without degradation of
Supplier's compliance with all applicable performance requirements, the charges
payable by Customer under the Agreements shall not be increased. To the extent a
Change proposed by either Party will lower Supplier's cost to fully perform its
obligations hereunder, the charges payable by Customer under the Agreements
shall be equitably adjusted to reflect such projected cost savings.
(B) To the extent the proposed Change in Products or Services
is not subject to Section 2.4 (A) above or except as otherwise expressly set
forth in the Transaction Agreement, Supplier shall quote Customer a charge for
such Change equal to Supplier's incremental cost of providing such changed or
additional Products or Services plus a reasonable profit margin on such
incremental cost not exceeding the profit margin then charged by the Supplier.
Supplier shall include with its quote the information used by Supplier to
determine its incremental costs and the appropriate profit margin.
2.5 NORMAL AND ROUTINE TASKS. Notwithstanding anything to the contrary
in the Agreements, Supplier acknowledges that Supplier is expected to undertake
and accomplish normal and routine tasks necessary to perform its obligations
under the Agreements for the charges set forth in the applicable Agreements. No
Change Order Response will be approved by Customer for tasks that Customer
reasonably determines to be normal and routine tasks.
2.6 ADDITIONAL BUSINESS UNITS. Customer shall have the right to add
Related Entities or other additional Sites, entities and units under the
Agreements. The Parties shall follow the Change Order Procedures in the event
that Customer adds a Related Entity or other additional Site, entity or unit.
Customer's Change Order Request shall contain sufficient information for
Supplier to prepare an accurate and complete Change Order Response. The Change
Order Response shall contain a plan to accommodate Customer's needs in a
cost-effective manner without a disruption in service to Customer. Such Change
Order Response shall also include any adjustments to the compensation due
Supplier under the applicable
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Agreements (subject to such adjustments being limited to the rates or other
pricing in effect under the applicable Agreements for similar Products or
Services unless Supplier can demonstrate that the cost of delivery of the
Products and Services is significantly higher due to different circumstances).
Customer shall not be obligated to accept such Change Order Response with
respect to any Related Entities or other additional Sites, entities or units.
3. CONTRACT ADMINISTRATION
3.1 DESIGNATION OF CONTRACT AND PROJECT MANAGERS. The Parties will
designate Managers for all Agreements in accordance with the following:
(A) Customer and Supplier will each designate a Corporate
Contract Manager who shall be responsible for, among other things:
(1) Implementing, managing and enforcing Agreements
on behalf of that Party, including overall management of the Agreements;
(2) Supporting the implementation of the Transaction
Agreements by the Project Managers for the Parties thereto, including, through
the formulation of guidelines for use by the Project Managers to implement the
Transaction Agreements;
(3) Exercising day-to-day responsibility for
achieving resolution of corporate-wide issues relating to the Agreements;
(4) Working with the Project Managers to establish
uniform policies applicable to the Products and Services provided by Supplier to
Customer; and
(5) Monitoring the activities of the Project Managers
as applicable, of that Party.
(B) Each Party to a Transaction Agreement will appoint a
Project Manager who will be identified in the Transaction Agreement, and who
will be responsible for the following:
(1) implementing, managing and enforcing the
Agreement on behalf of the Party;
(2) supervising performance of that Party's
obligations under the Agreement;
(3) having principal responsibility to resolve
disputes between the Parties; and
(4) ensuring that the policies and procedures
established with respect to the Agreement are consistent with the policies and
procedures of general applicability established by the applicable Corporate
Contract Manager.
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3.2 DELEGATION OF AUTHORITY.
(A) The Customer Delegation of Authority limits the authority
of Customer Project Managers and other Customer personnel to undertake certain
obligations. Obligations undertaken by any Customer Project Manager or other
Customer personnel who are not authorized to enter into such obligations under
the Customer Delegation of Authority are voidable, in Customer's sole
discretion.
(B) Each Corporate Contract Manager or Project Manager may
delegate any of his or her authority to a designated representative by notifying
the other Party's Corporate Contract Manager or Project Manager of the
designated representative to whom such authority is delegated and the extent of
the authority delegated, which notice shall be confirmed in writing. Subject to
Section 3.2(A), each Party shall be entitled to rely upon instructions received:
(1) from the Corporate Contract Manager or Project
Manager for the other Party with respect to all matters relating to the
Agreements; and
(2) any designated representative of the Corporate
Contract Manager or Project Manager for the other Party so authorized with
respect to the areas for which such designated representative is responsible.
3.3 REVIEW MEETINGS AND PROGRESS REPORTS. During the Term, and as
requested by Customer Project Manager, the Customer Project Manager and Supplier
Project Manager, as well as additional personnel involved in the performance of
the applicable Transaction Agreements, shall meet at a location designated by
Customer or, at Customer's option, shall conduct a telephone conference call, to
discuss the progress made by Supplier and Customer in the performance of their
respective obligations during the period since the most recent meeting for such
purpose.
3.4 STATUS REPORTS. In order to facilitate proper management of the
Agreements, Supplier shall, at each such meeting, provide Customer with a
written status report in which Supplier identifies any material problem or
circumstance encountered by Supplier, or which Supplier gained knowledge of
during the period since the last such status report (including without
limitation the failure of Customer to perform, any delay of Customer in
performing, or the inadequacy in the performance of Customer of any Customer
obligation set forth in the Agreements), or any problem or circumstance that may
cause material harm to Customer, that: (i) may prevent or tend to prevent
Supplier from completing any of its obligations hereunder; (ii) may cause or
tend to cause Supplier to generate charges in excess of those previously agreed
to by the Parties; or (iii) result in increased costs or obligations for
Customer in complying with the terms of the Agreements. Supplier shall identify
such costs, the amount of excess charges, if any, and the cause of any
identified problem or circumstance and steps taken or proposed to be taken by
Supplier to remedy same.
3.5 EFFECT OF SUPPLIER'S FAILURE TO IDENTIFY CERTAIN PROBLEMS. In the
event Supplier fails to specify in writing
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any material problem or circumstance, or any problem or circumstance that may
cause material harm to Customer, that the Supplier knew or should have known,
with respect to the time covered by Supplier's status report, it shall be
conclusively presumed for purposes of the Agreements that no such problem or
circumstance arose during such time, and Supplier shall not be entitled to rely
upon such problem or circumstance as a purported justification for either:
(A) claiming Supplier is entitled to receive any amount
(including without limitation damages or additional charges arising out of a
breach by Customer of a Customer obligation as set forth in the Agreements) with
respect to any of Supplier's obligations hereunder in excess of those previously
agreed to; or
(B) failing to complete any of Supplier's obligations
hereunder.
3.6 EFFECT OF SUPPLIER'S SUBMISSION OF STATUS. Submission by Supplier
of the status reports pursuant to Section 3.4 shall not alter, amend or modify
Supplier's or Customer's rights or obligations pursuant to any provision of the
Agreements.
3.7 EFFECT OF CUSTOMER'S FAILURE TO PERFORM CUSTOMER OBLIGATIONS. For
any problem or circumstance included in any Supplier status report and which
Supplier claims was the result of Customer's or Customer's subcontractors' or
agents' failure or delay in discharging a Customer obligation as set forth in
the Agreements, Customer shall review the same and determine if such problem or
circumstance was in fact the result of such failure or delay. If Customer agrees
as to the cause of such problem or circumstance, then the Parties shall follow
the Change Order Procedures. If Customer does not agree as to the cause of such
problem or circumstance, the Parties shall each attempt to resolve the problem
or circumstance in a manner satisfactory to both Parties.
4. SUPPLIER PERSONNEL AND SUBCONTRACTORS
4.1 KEY SUPPLIER PERSONNEL.
(A) Supplier shall propose names and provide resumes for
Supplier's recommendation for the position of the Supplier Corporate Contract
Manager to Customer for Customer's approval, such approval not to be
unreasonably withheld. The Customer Corporate Contract Manager and Supplier
Corporate Contract Manager may designate as Key Supplier Personnel, a reasonable
number of key Supplier positions that are critical to the Customer/Supplier
relationship and the successful performance under the Agreements including, but
not limited to, the Supplier Project Managers. In addition, Customer shall have
the right to designate up to ten percent (10%) of Supplier personnel assigned
under any Transaction Agreement as Key Supplier Personnel.
(B) Before any Supplier employee is assigned as a Key Supplier
Personnel, Supplier will propose to Customer that such employee be assigned as a
Key Supplier Personnel. Supplier will introduce the employee to Customer
representatives and will provide Customer with a resume and any other
information about the Supplier employee requested by the Customer. If
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Customer reasonably objects to the proposed assignment within ten (10) working
days following actual receipt of the aforementioned notification, then Supplier
will not assign that Supplier employee to that position. However, Supplier may
appoint another Supplier employee to serve in that position on an interim basis
until a Supplier employee who is reasonably acceptable to Customer can be
assigned to that position.
(C) Key Supplier Personnel shall not be replaced or reassigned
by Supplier without Customer's prior written consent, which consent shall not be
unreasonably withheld. Notwithstanding the foregoing, Key Supplier Personnel may
be temporarily replaced by Supplier for absences due to vacation, illness,
accident or other events outside of Supplier's reasonable control. The terms of
this Section 4.1 (C) shall not apply in the event that Key Supplier Personnel
becomes disabled, dies or voluntarily resigns from his or her position with
Supplier. In such an event, Supplier shall be responsible: (i) for replacing
such Key Supplier Personnel within thirty (30) days of the last day of such Key
Supplier Personnel's employment with Supplier; and (ii) for training such Key
Supplier Personnel's replacement at Supplier's sole expense.
(D) Customer may require Supplier to replace any individual
Key Supplier Personnel immediately for any reason including but not limited to:
(i) violation of the terms of any Agreement; (ii) violation of Customer's
policies, rules or regulations; (iii) violation of local, state, federal or
municipal laws, statutes or regulations; (iv) such individual's engagement in
activities that could be detrimental to Customer or Customer's personnel, or
because Customer believes such individual is not compatible with Customer's
personnel. Should Customer so request, Supplier shall replace any Key Supplier
Personnel within thirty (30) days from the date of Customer's notification.
(E) Key Supplier Personnel shall not be assigned to a
competitor of the Related Entity under the applicable Transaction Agreement for
one (1) year from the date such Key Supplier Personnel last worked for Customer
without Customer's prior written consent, which consent shall not be
unreasonably withheld.
4.2 OTHER SUPPLIER PERSONNEL. Customer reserves the right to review the
qualifications of Supplier's personnel providing Products or Services under the
Agreements, and to make recommendations regarding placement of such personnel
for the benefit of Customer. Supplier shall make a commercially reasonable
effort to honor Customer's requests to replace any Supplier personnel.
Notwithstanding the foregoing, Customer may require Supplier to replace any
Supplier personnel immediately for reasons including but not limited to: (i)
violation of the terms of any Agreement; (ii) violation of Customer's policies,
rules or regulations; (iii) violation of local, state, federal or municipal
laws, statutes or regulations; or (iv) such individual's engagement in
activities that could be detrimental to Customer or Customer's personnel.
4.3 NO EFFECT ON WARRANTIES. Customer's selection, use or election not
to use any of its rights and remedies regarding Supplier Key Personnel and other
Supplier personnel shall not affect in any way Supplier's responsibilities,
liabilities or warranties under the Agreements.
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4.4 CUSTOMER ACCESS TO SUPPLIER PERSONNEL. Without limitation on any
other obligation of Supplier or right of Customer hereunder, Supplier agrees
that it shall, upon Customer's reasonable request, provide Customer with
reasonable access to Supplier's specialized technical personnel and resources to
an extent no less than that provided to any other of Supplier's customers.
4.5 SUBCONTRACTORS/SUPPLIER'S AGENTS.
(A) Supplier shall not subcontract all or any material portion
of its obligations hereunder without Customer's prior written consent.
Customer's consent with respect to any subcontractor shall not relieve Supplier
of its responsibility for the performance of any of its obligations hereunder or
constitute Customer's consent to further subcontracting.
(B) Supplier shall retain responsibility for the acts or
omissions of all of its employees, subcontractors, consultants, representatives
and agents in connection with the performance of its obligations hereunder.
Supplier shall be responsible for all payments to, and claims by, such
employees, subcontractors, consultants, representatives and agents relating to
performance or nonperformance under the Agreements. Customer, in its sole
discretion, shall approve all Supplier employees, subcontractors, consultants,
representatives and agents requiring access to any Customer Site or facility.
4.6 SITE RULES AND REGULATIONS. Supplier employees, subcontractors,
consultants, representatives and agents shall comply with Customer's reasonable
safety and access policies and holiday schedule, provided Customer gives
Supplier employees, subcontractors, consultants, representatives and agents
notice of such policies. Supplier agrees that it will comply with all Customer
policies and procedures applicable to the security and safety of Customer
Confidential Information in the possession of Supplier, and shall establish and
maintain safeguards for the protection thereof in accordance with the applicable
Agreements.
5. RELATIONSHIP BETWEEN CUSTOMER AND SUPPLIER
5.1 RELATIONSHIP DEVELOPMENT. At Customer's request, in order to
further develop the Customer/Supplier relationship, Supplier will appoint a
senior executive to act as an interface with the appropriate Information Officer
or Department Head from Customer's IS&S Organization identified on the chart
attached as Exhibit 5.1 as modified by Customer from time to time.
5.2 PREFERENTIAL SCHEDULING. In determining the availability of a
Product or replacement Product, if necessary to meet Customer's requirements or
to replace damaged Products, Supplier shall use commercially reasonable efforts
to allocate to Customer the next available Product at Supplier's warehouse or
factory, waiving to the extent permitted by law, other contracts, or all other
delivery commitments and schedules.
5.3 NEW TECHNOLOGY REPLACEMENT. Customer and Supplier recognize that
Supplier will develop and market New Technology. To
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accommodate each Party's requirements, Supplier agrees to include the New
Technology as part of its Product or Services offered to Customer within the
terms provided for in the Agreements. Customer's acquisition of New Technology
will be included in any pricing discounts for Product or Services or counted
toward purchase volumes stated within the Agreements.
5.4 CONTINUOUS IMPROVEMENT AND BEST PRACTICES.
(A) On a continuous basis and at Supplier's expense, as part
of its total quality management process, Supplier shall identify ways to improve
the quality of the Products, Services, pricing and technology provided and
available to Customer and its Related Entities under the Agreements, including
through participation in PICOS methodology and other initiatives of Customer's
Worldwide Purchasing Organization.
(B) Supplier shall identify and apply proven processes,
techniques, tools and other methods and instruments from other installations
within its operations that would benefit Customer either operationally or
financially.
(C) Supplier shall use commercially reasonable efforts to
advise Customer of any new developments relating to its obligations to Customer
under the Agreements, including but not limited to, obligations under all
Category Agreements and Transaction Agreements in effect from time to time, and
shall, upon Customer's request, assist in the evaluation and testing of such
developments in connection with the performance of such obligations. Without
limiting the foregoing, Supplier shall use commercially reasonable efforts to
inform Customer of any new Services, Products, processes, techniques, tools and
other methods and instruments Supplier is developing or information technology
trends and directions of which Supplier is aware, which may be applicable to
Customer's business. Except as otherwise expressly set forth in the Transaction
Agreement, such activities will be performed within the specified existing level
of resources, not including overtime work, then being used by Supplier in
performing its obligations hereunder or under the other applicable Agreements,
and without degradation of Supplier's compliance with all applicable performance
requirements. Advice on all new Services or Products will be subject to
then-existing nondisclosure or confidentiality restrictions between Supplier and
its other customers and third parties in accordance with Article 12.
(D) Supplier shall perform its duties and obligations under
the Agreements in accordance with standards set forth in the applicable
Transaction Agreement which standards shall be consistent with the then-current
Customer Corporate Information Technology Architecture and Technical Standards.
5.5 SATISFACTION AND PERFORMANCE REVIEWS. Customer shall have the right
to develop, adopt and implement on at least an annual basis, customer
satisfaction surveys, Supplier performance reviews, and any other surveys or
reviews as deemed appropriate by Customer. The content, scope, method and timing
of such surveys and reviews shall be developed by Customer in coordination with
Supplier. Supplier shall: (i) support such surveys and reviews to the extent
reasonably requested by Customer; and (ii) work with Customer to increase
customer satisfaction and customer performance on an ongoing
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basis. At Customer's request, Supplier shall meet and discuss with Customer the
results of such surveys and reviews, and shall prepare a plan for improvement of
performance and customer satisfaction. Such surveys and reviews, and Supplier's
assistance to Customer in improving performance and customer satisfaction, shall
be factors to be considered by Customer in evaluating Supplier's performance
under the Agreements.
5.6 COMPETITIVE ASSESSMENT.
(A) Customer shall have the right, at any time during the
Term, but after a one-year period from the Effective Date of this Framework
Agreement and/or at regular intervals as set forth in the Transaction Agreement,
to benchmark or competitively assess any of the Products or Services being
performed by Supplier, to ensure that such Products or Services are competitive
with respect to price, quality, service and technology. Customer may consult
with Supplier in advance regarding the definition and specifications of each
such Product or Service to be benchmarked or competitively assessed, provided
that Customer shall finally determine such definitions and specifications.
(B) Supplier shall, at Customer's reasonable request, prepare
and provide, or cooperate with Customer or its consultants in the preparation or
provision of, comparative competitive information and data verifying the
competitive nature of the Products or Services being performed or that are
available from Supplier, in such frequency, methodology and detail as required
by Customer, including but not limited to the provision of access to Customer
and its consultants. Customer agrees to select one or more experienced
benchmarking companies which are not generally considered to be direct
competitors of Supplier and such benchmarking companies shall be subject to the
same confidentiality requirements the Customer is subject to under the
Agreements.
(C) If the written benchmarking report indicates, in
Customer's reasonable judgment, that all or part of the Products or Services
provided by Supplier are not competitive with respect to price, quality, service
or technology, then Customer shall provide Supplier with a copy of the benchmark
results and the Parties shall negotiate in good faith to adjust the related
price, quality, service or technology of the Products or Services to meet the
benchmark results or such other standards as the Parties may have agreed to
during the review period. If the Parties are unable to reach an agreement on
price adjustments to meet the benchmark results or such other standards as the
Parties may have agreed to during the review period, Customer shall have the
right to procure such benchmarked Products and Services under the terms of
Section 1.7 and such procurement shall be deemed a termination without any
penalties.
5.7 SHARED ENVIRONMENT.
(A) Supplier will notify Customer if Supplier is to provide
Customer with Products or Services from a Shared Environment.
(B) Supplier will not provide any Services to Customer from a
site or facility of any person or entity that is now or in the future
competitive with Customer's business, without Customer's prior written consent.
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(C) Supplier will develop a process, subject to Customer's
approval, to restrict access in any Shared Environment so that Customer
Confidential Information cannot be accessed by any other customer of Supplier.
(D) Supplier will not provide or market Products or Services
to a third party from a Customer Site without Customer's prior written consent.
5.8 CONSENTS.
(A) Except as otherwise expressly set forth in the Transaction
Agreement, Supplier shall be responsible for, and shall pay any costs associated
with, obtaining consents, approvals, authorizations, notices, requests and
acknowledgments that are necessary to allow:
(1) Supplier to use the Customer Software, Customer
Equipment and the services under Third-Party Agreements, to provide the Products
and Services;
(2) Supplier to use the Supplier Software and
Supplier Equipment to provide the Products and Services;
(3) Supplier to assign to Customer all right, title
and interest to the Developed Software and Work Product; and
(4) Customer to use the Developed Software and
Supplier Intellectual Property during the period Supplier is to provide the
Products or Services requiring such use, and upon the expiration or termination
thereof including but not limited to signing any applicable confidentiality,
license or noncompetition agreements required by licensor to allow Customer's
use thereof by Supplier at all applicable Sites.
(B) Customer shall cooperate with Supplier in obtaining such
consents.
6. CUSTOMER OBLIGATIONS AND ASSETS
6.1 CUSTOMER OBLIGATIONS.
(A) Customer shall be responsible for assigning the Customer
Corporate Contract Manager and Customer Project Managers.
(B) Except as otherwise expressly set forth in the applicable
Agreements, Customer shall provide Supplier personnel with access to Customer
Sites as is appropriate to Supplier's responsibilities under the Agreements. If
Supplier personnel require access to a Customer Site outside of normal working
hours, Supplier shall request the necessary security clearance from Customer and
Customer shall not unreasonably withhold such clearance.
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(C) Except as otherwise expressly set forth in the applicable
Agreements, Customer shall be responsible for providing to Supplier personnel
located on Customer's premises, in connection with the Supplier's performance
under the Agreements, office space and office furnishings, janitorial services
and utilities in connection with such office space (all such space, furnishings
and utilities shall be consistent with those that Customer provides to its own
similarly situated personnel). Supplier may not provide Products or Services to
other customers from Customer's space or using items or utilities provided by
Customer without Customer's consent, which consent may be withheld in Customer's
sole discretion. Customer shall have the option to relocate Supplier personnel
located on Customer's premises to another comparable location or facility, at
Customer's expense.
(D) Customer shall provide Supplier with access to all
Customer Software, the use of which is necessary or appropriate in connection
with the provision of Products and Services, and will cooperate with Supplier to
help Supplier secure the necessary approvals and consents from third parties for
the use of Customer Third-Party Software or Supplier Third-Party Software, the
use of which is necessary or appropriate in connection with Supplier's provision
of Products or Services.
(E) Customer shall have no obligations under the Agreements,
except as otherwise expressly set forth in the applicable Agreements, that
Customer must perform as a condition to the full and timely performance by
Supplier of Supplier's obligations under the Agreements. Except for the
execution and delivery of Category Agreements and Transaction Agreements
pursuant to this Framework Agreement, no language or provision of any document
or correspondence delivered by Supplier to Customer prior to or during the Term
(including Supplier's Proposal) shall be deemed or construed as expanding,
adding to or altering Customer's obligations as set forth in the Agreements.
(F) Without limiting the foregoing, Customer's agreement to
the terms of this Framework Agreement or a Category Agreement shall in no way
give rise to any presumption that Customer has or shall agree to acquire any
Products or Services from Supplier, except and only to the extent agreed to in
an executed Transaction Agreement.
6.2 CUSTOMER ASSETS.
(A) Prior to the execution of any Transaction Agreement,
Supplier shall provide to Customer a list of all Customer Assets required by
Supplier in order to perform its obligations under the Transaction Agreement.
Customer will review Supplier's list and will advise Supplier of any Customer
Assets that will not be available for Supplier's requested use. Supplier shall
then revise the list accordingly. The revised list of Customer Assets shall be
set forth in detail in the applicable Transaction Agreements.
(B) Except as otherwise expressly set forth in the applicable
Transaction Agreement, Customer Assets shall at all times remain the property of
Customer. Supplier shall have access to and use of the Customer Assets as set
forth in the applicable Transaction Agreements and such ability to manage the
Customer Assets as may be necessary or appropriate to enable Supplier to
properly perform its obligations hereunder.
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(C) As and when any Customer Assets are no longer required for
the performance of Supplier's obligations hereunder, Supplier, upon Customer's
request, shall arrange for the sale or disposal of such Customer Assets on such
terms as Supplier determines to be advantageous to Customer using the same
efforts as Supplier uses with respect to its own similar assets and shall advise
Customer of those terms. Upon Customer's approval, Supplier shall sell or
dispose of such Customer Assets on the terms approved by Customer, and shall
forward to Customer the proceeds of such sale or disposal that shall be net of
Supplier's reasonable and direct third-party costs and expenses. In the event
Customer does not approve of the proposed terms of sale or does not wish
Supplier to dispose of a Customer Asset, Supplier shall return such Customer
Asset to Customer or Customer's designee.
7. TRANSACTION AGREEMENTS
7.1 TERMS. Each Transaction Agreement executed pursuant to this
Framework Agreement shall contain, at a minimum, the following terms to the
extent applicable (all such terms must be addressed, at least with a "not
applicable" notation):
(A) the scope of work to be performed thereunder;
(B) a list of Customer Assets as described in Section 6.2;
(C) the applicable term, termination and cancellation
provisions, and a matrix of the rights and duties of the Parties upon
termination or cancellation;
(D) a complete list of the Products or Services covered by the
Transaction Agreement (specifying the quantity, type and model number, and
description of each Product, and specifying scope and other information
regarding performance for each Service);
(E) the price to the Customer for the Products or Services,
any additional charges and costs, including, without limitation, costs for any
non-standard Services and special features or applicable default price lists.
(F) the total, timing and currencies of amounts payable to
Supplier or, if applicable, other payment bases;
(G) the location at which the Products shall be delivered and,
if different, the location at which the Products shall be initially installed or
used;
(H) any non-standard Site specifications for the Product;
(I) the dates by which Customer shall complete preparation of
the installation Site or perform other specified obligations and the dates, if
any, by which Supplier shall inspect Customer's installation Site to determine
its compliance with Supplier's Site requirements;
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(J) the delivery date for the Products and, if applicable, any
interim delivery schedule;
(K) the installation date for the Products, or the cut-over or
implementation date for the Services;
(L) the maintenance schedule for the Products and Services, if
applicable;
(M) the identification of any critical Products and Services;
(N) the transportation method to be used to ship Products to
Customer;
(O) the Acceptance Criteria, Service Levels, performance
specifications and response times specific to the Products or Services;
(P) a detailed list of Deliverables and related due dates and
prerequisites, performance milestones, and related project timetables and
compensation schedules for Services;
(Q) an itemized estimate of all Supplier's anticipated travel
and other reimbursable expenses, unless specified otherwise as being included as
part of the fixed price;
(R) the terms of any supplemental agreements or licenses,
including, without limitation, any Supplier Third-Party Software licenses that
may be applicable;
(S) a list of Key Supplier Personnel including name, location,
title and responsibilities;
(T) a list of any provisions of this Framework Agreement or
any Category Document that the Parties desire to Change, together with
appropriate documentation containing any required approval for such change
pursuant to Customer's Delegation of Authority;
(U) the then-current Customer Related Entities to which the
Products and Services are to be provided;
(V) all applicable Category Agreements and the order of
precedence therein;
(W) the amounts payable by Customer upon termination by
Customer for its convenience;
(X) the then-current Sites;
(Y) the choice of law and forum; and
(Z) any special or additional terms agreed upon by Supplier
and Customer as set forth in the applicable Category Agreement or Transaction
Agreement.
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8. CHARGES
8.1 PAYMENT REQUIREMENTS.
(A) Except as otherwise expressly set forth in the applicable
Agreements, Customer shall commence payments to Supplier on the Acceptance Date.
(B) Customer shall not be billed or liable for any charges or
expenses other than those charges or expenses stated and expressly authorized in
the applicable Agreements.
(C) Monthly charges under any Transaction Agreement that have
been in effect for less than a full calendar month shall be prorated on the
basis of a thirty (30) day month.
8.2 NO PRICE INCREASES. Unless otherwise agreed in writing by Customer
in a Change Order, Supplier shall not, during the effective term of an
applicable Transaction Agreement, increase the prices for any Product or Service
above the prices for such Product or Service as specified in the Transaction
Agreement.
8.3 NO RESTRICTIONS ON USE. Except as otherwise expressly set forth in
the applicable Transaction Agreement, applicable charges as set forth in the
applicable Transaction Agreement: (i) shall entitle Customer and, its Related
Entities and other assignees or third party suppliers with whom they have
contracted to perform functions requiring the use of Products or Services
provided by Supplier, to unlimited use of such Products or Services, and to
operate any such Products or Services at any time and for any period of time at
the convenience of Customer, within the scope of the Customer's rights to such
Products or Services; and (ii) Customer may use the Products or Services
acquired hereunder for such purposes and functions as may be necessary or
convenient, and Customer's use of the Products or Services shall not be
restricted to any particular purpose or function.
8.4 RIGHT OF SET-OFF. With respect to any amount that is due a Party
pursuant to an Agreement, such Party may, upon notice to the other Party, deduct
the entire amount owed to such Party against the charges otherwise payable, or
expenses owed to the other Party, pursuant to the Agreements. The exercise of
this right of set-off shall not affect a Party's right to other remedies
provided for in the Agreements.
8.5 OUT-OF-POCKET EXPENSES. Except as otherwise expressly set forth in
the Transaction Agreement, Customer will reimburse Supplier for all reasonable
and necessary out-of-pocket costs (including travel costs in accordance with
Customer's Travel Guidelines) and subcontracted costs associated with the
Products or Services, provided such costs have been previously approved by
Customer in writing and are not included as part of any fixed pricing
arrangement. All out-of-pocket and subcontracted costs will be billed net,
without mark-up; provided, however, if such subcontracted costs are material,
Supplier may submit a Change Order Response to Customer pursuant to Article 2 of
this Framework Agreement.
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9. PRICING
9.1 INVOICING STANDARDS. Supplier shall render one (1) copy of an
invoice not later than the month following the month for which the charges in
the invoice accrue. Provided that the amounts covered by the invoice are
accurate and not in dispute, each invoice shall be paid in accordance with the
terms of this Section 9.1. Invoices shall include, at a minimum, the following
information as applicable:
(A) a description of the Products and Services;
(B) the base charges for each Product and Service;
(C) other charges, as applicable and any credits applied;
(D) total charges;
(E) other detail required by the applicable Category Agreement
or Transaction Agreement;
(F) any reimbursable expenses;
(G) serial numbers for all Equipment that carries a serial
number;
(H) third party charges for Products and Services procured by
Supplier that are passed-through to Customer, detailed by category of resource
consumption by each Customer entity or unit in such frequency, methodology and
detail as may be required by Customer; and
(I) With respect to any Taxes, Supplier shall segregate the
charges on each invoice into aggregate categories for each of the following
categories: (a) Services provided to the Customer for which Taxes are collected;
(b) Services provided to the Customer for which Taxes are not collected; (c)
Products for which Taxes are collected; and (d) Products for which Taxes are not
collected.
(J) Without limiting the foregoing, Supplier agrees to provide
Customer with additional supporting documentation and other information as
requested by Customer to verify the accuracy of the invoice.
9.2 ISSUANCE AND DELIVERY OF INVOICES. Invoices shall be issued and
delivered to the Related Entities specified by the Customer Project Manager in a
format and on the media agreed upon by Customer and Supplier. Customer may
require a change the invoice format, as well as the detail and summary billing
formats, and Supplier shall implement such changes as soon as reasonably
practicable.
9.3 CREDITS. Any credits due Customer may be applied by Customer
against Supplier's invoices with appropriate information attached. Any credits
due
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Customer that are not so applied against Supplier's invoices for any reason
shall be paid to Customer by Supplier within thirty (30) days after Supplier's
receipt of Customer's written request for such payment.
9.4 DISCOUNTS. The price Supplier will charge Customer for Products and
Services pursuant to the Agreements shall be the least of: (i) the list price
for the Product or Service minus the discount percentage specified in the
Transaction Agreement; (ii) the lowest price charged by Supplier to any Customer
Related Entity; (iii) a price negotiated by the Parties specifically pursuant to
a given Transaction Agreement; and (iv) the price determined by benchmarking
conducted in accordance with and subject to Section 5.6.
9.5 PAYMENT TERMS. Payment will be made by Supplier net 25th PROX. (on
the 25th day of the month following the month of Customer's receipt of an
invoice prepared in accordance with Section 9.1).
9.6 SUPPLIER'S EFFORTS TO MINIMIZE CHARGES. To the extent any Products
or Services are rendered on a time and materials basis under any of the Category
Agreements or Transaction Agreement, Supplier shall use commercially reasonable
efforts to complete each assigned task in as economical a manner as possible and
to minimize the T&M Charges and other charges or fees and expenses incurred in
connection therewith, to the maximum extent possible, consistent with Supplier's
other obligations under the Agreements.
9.7 FEE DISPUTES.
(A) In the event Customer disputes all or any portion of an
invoice submitted by Supplier, Customer may withhold payment of the amount
subject to the dispute; provided, however, that: (i) Customer shall continue to
be obligated to pay the undisputed amount when it becomes due and payable in
accordance with the terms of the Agreements; and (ii) Supplier shall continue to
perform its obligations hereunder. The Parties shall resolve the dispute in
accordance with the procedures set forth in Section 21.1. No failure by Customer
to identify a contested fee or charge prior to payment of the invoiced amount
shall limit or waive any of Customer's rights or remedies with respect to such
fee or charges, including Customer's right to withhold such disputed amounts
from subsequent fees or charges due to Supplier.
(B) In the event that it is determined that one Party should
pay all or part of a disputed amount to the other, such Party shall pay such
amount plus interest at a rate per annum equal to the base rate established by
CitiBank N.A. or a comparable financial institution mutually agreed to by
Customer and Supplier. Unpaid fees or charges that are in dispute shall not be
considered a basis for termination under the Agreements. Each of Customer and
Supplier acknowledge that the performance of the Agreements is critical to the
business and operations of Customer and Supplier. Accordingly, in the event of a
good-faith fee dispute between Customer and Supplier, Supplier shall continue to
perform its obligations hereunder and Customer shall continue to pay Supplier as
set forth in this Article 9.
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9.8 CURRENCY. Except as otherwise expressly set forth in a Transaction
Agreement, the invoicing and payment for Products and Services shall be in the
currency of the country(ies) in which the Related Entity receiving the Products
are delivered or Services are performed.
10. COVENANTS, REPRESENTATIONS AND WARRANTIES
10.1 CAPABILITIES. The Products and Services, and all Software and
Equipment utilized by Supplier in the performance thereof, shall include all
items, components and services necessary to provide Customer with all services
and processing capabilities required by Customer to meet the Service Levels for
as long as the Supplier performs the applicable Services.
10.2 DELEGATION OF AUTHORITY.
(A) Customer represents and warrants that those individuals
specified in a written Customer Delegation of Authority provided to the Supplier
shall be duly authorized to enter into the Agreements on behalf of the Related
Entity, and that each Related Entity is duly authorized by all corporate action
to enter into and perform each of the Agreements to which it is a party.
(B) Supplier represents and warrants that those individuals
specified in a written delegation of authority provided to the Customer shall be
duly authorized to enter into the Agreements on behalf of the Supplier.
10.3 RIGHT AND TITLE. Supplier shall have, throughout the applicable
period of delivery of the Products and performance of the Services, free and
clear title to, or the right to possess, use, sell, transfer, assign, license or
sublicense, any and all Products that are sold, licensed or otherwise provided
to Customer in connection with Supplier's performance under the Agreements.
10.4 MANUFACTURER'S WARRANTIES. All manufacturer's warranties relating
to Equipment to be utilized by Supplier in performing the Agreements shall, to
the extent assignable, be passed through and assigned to Customer.
10.5 SOFTWARE. Except as set forth in Exhibit 10.5 or as authorized in
writing by Customer, or as necessary for Supplier to perform it's obligations
under the Agreements, Supplier Software:
(A) shall not contain Illicit Code, and for any viruses in the
Supplier Software or Equipment of which Supplier had no knowledge of, Supplier
shall immediately undertake to remove such virus, and to correct and repair any
damage to data or Software caused by such virus; and
(B) shall not alter, damage and erase any data or computer
programs without control of a person operating the computing equipment on which
it resides.
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10.6 STANDARDS. Supplier will provide all Products and Services under
the Agreements in accordance with the highest professional standards in the
applicable area or areas of expertise required to provide the applicable
Products and Services. The Services, and all Equipment and Software utilized by
Supplier in the performance of the Services, shall conform to the Service Levels
and other requirements of the applicable Transaction Agreement in all material
respects, and shall be fit and sufficient for the purposes expressed in the
applicable Transaction Agreement. Without limitation on any other rights of
Customer hereunder, Supplier further warrants that in the event of its failure
to fulfill all or part of the warranty in this item at any time during the
period Supplier is providing the Products or Services to Customer, Supplier
shall take all necessary or appropriate actions to correct such failure, at no
cost to Customer.
10.7 TERMINATION BY ELECTRONIC MEANS. Supplier shall not use any
electronic means to enforce termination under any Agreement.
10.8 SUPPLIER THIRD PARTY AGREEMENTS. Supplier is not a party to any
agreement with a third party the performance of which is reasonably likely to
adversely affect the ability of Customer or Supplier to fully perform their
respective obligations under the Agreements.
10.9 CUSTOMER THIRD PARTY AGREEMENTS. Customer is not a party to any
agreement with a third party, the performance of which is reasonably likely to
adversely affect the ability of Customer or Supplier to fully perform their
respective obligations under the Agreements.
10.10 YEAR 2000.
(A) All Products and Services developed, provided or used (not
including Customer Software) by Supplier under the Agreements must be fully Year
2000 Compliant except as specified herein and in the applicable Transaction
Agreement. With respect to Supplier Third-Party Software and Equipment, Supplier
shall use all reasonable efforts: (i) to obtain the warranty set forth in this
Section 10.10; and (ii) to ensure that such Supplier Third-Party Software or
Equipment, as applicable, is Year 2000 Compliant before using such Software and
Equipment for the provision of the Products and Services. If Supplier is unable
to obtain such warranty for Supplier Third-Party Software or Equipment, Supplier
shall promptly notify Customer and shall promptly undertake to test such
Supplier Third-Party Software or Equipment using, at a minimum, Customer's Year
2000 Compliance Test Procedure, or any comparable procedure approved by
Customer. If such Supplier Third-Party Software or Equipment fails the Year 2000
Compliance Test Procedure, Customer shall have the option to do one of the
following: (i) reject such Supplier Third-Party Software or Equipment and pursue
other alternatives; or (ii) require Supplier to upgrade the such Supplier
Third-Party Software or Equipment to render it Year 2000 Compliant.
(B) To be "Year 2000 Compliant" a Product or Service must at
all times before, during, and after January 1, 2000, accurately process and
handle date and time data (including, but not limited to, calculating, comparing
and sequencing) from, into, and between the twentieth and twenty-first
centuries, and the years 1999 and 2000, including leap year calculations, to the
extent
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that other information technology used in combination with such Products and
Services properly exchange date/time data with it. To the extent any Products
and Services provided by Supplier under the Agreements must perform as a System
as set forth in the applicable Transaction Agreement, such Products and Services
(e.g., Equipment or Software) used in combination with the Products and Services
as set forth therein, must properly exchange date/time data with it in
accordance with the foregoing warranty.
10.11 EMU CONVERSION. Except as otherwise expressly set forth in the
Transaction Agreement, all Products and Services developed, provided or used
(not including Customer Software) by Supplier under the Agreements, must be able
to accurately process and handle all applicable currencies of any of the Sites
or countries, including the European Monetary Unit (EMU) where applicable, and
conduct the necessary conversions from the local or national currency to the EMU
("EMU Compliance"). With respect to Supplier Third-Party Software and Equipment,
Supplier shall use all reasonable efforts: (i) to obtain the warranty set forth
in this Section 10.11; and (ii) to ensure that such Supplier Third-Party
Software or Equipment, as applicable, is EMU Compliant before using such
Software and Equipment for the provision of the Products and Services. If
Supplier is unable to obtain such warranty for Supplier Third-Party Software and
Equipment, Supplier shall promptly notify Customer and shall promptly undertake
to test such Supplier Third-Party Software and Equipment using any procedure
approved by Customer. If such Supplier Third-Party Software or Equipment fails
the EMU Compliance test, Customer shall have the option to do one of the
following: (i) reject such Supplier Third-Party Software or Equipment and pursue
other alternatives; or (ii) require Supplier to upgrade the such Supplier
Third-Party Software or Equipment to render it EMU Compliant.
10.13 ESCROW SUFFICIENCY. Supplier represents and warrants that the
escrow maintained on behalf of Customer, pursuant to the Escrow Agreement, shall
contain Source Code that operates in accordance with the applicable
Specifications in the event that the Source Code is released to Customer, and
Customer or Customer's agent is required to maintain the Source Code.
11. MUTUAL DISCLAIMER
EXCEPT FOR THE EXPRESS WARRANTIES MADE OR REFERENCED IN THE AGREEMENTS,
NEITHER PARTY MAKES ANY OTHER WARRANTIES, EXPRESS OR IMPLIED, CONCERNING THE
SUBJECT MATTER OF THE AGREEMENTS, INCLUDING WITHOUT LIMITATION ANY IMPLIED
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
12. CONFIDENTIAL INFORMATION
12.1 CONFIDENTIAL INFORMATION OF CUSTOMER. Supplier agrees to treat
Customer Confidential Information with the same degree of care as Supplier uses
to avoid disclosure, publication or dissemination of its own information of a
similar nature, but not less than a reasonable degree of care, except that
Supplier may disclose such information if:
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(A) required to do so pursuant to applicable law (and then
only on the entry of a protective order, if available, acceptable to Customer);
(B) it was rightfully in the possession of Supplier from a
source other than Customer prior to the Time of Receipt;
(C) it became public knowledge prior to the Time of Receipt;
(D) it became public knowledge after the Time of Receipt by
any means other than an unauthorized act or omission on the part of Supplier;
(E) it is supplied to Supplier after the Time of Receipt
without restriction by a third party who is under no obligation to Customer to
maintain such information in confidence; or
(F) it was independently developed by Supplier prior to the
Time of Receipt.
12.2 CONFIDENTIAL INFORMATION OF SUPPLIER. Prior to any disclosures of
Supplier Confidential Information to Customer, Supplier must receive the
approval of the applicable Customer Project Manager. Supplier will follow the
following process to obtain such approval:
(A) Supplier will prepare a written description of the
Supplier Confidential Information, without actually disclosing the Supplier
Confidential Information, and send it to the Customer Project Manager.
(B) At the time of such transmission, the Customer Project
Manager will decide, on the basis of Supplier's written description of the
Supplier Confidential Information and not upon receipt of the Confidential
Information itself, the following: (i) if Customer agrees that the information
is confidential; (ii) if Customer needs the information; and (iii) if the
answers to (1) and (2) are "yes" and Customer agrees to accept the Supplier
Confidential Information, Customer agrees to treat Supplier Confidential
Information with the same degree of care as Customer uses to avoid disclosure,
publication or dissemination of its own information of a similar nature, but not
less than a reasonable degree of care, except that Customer may disclose such
information if :
(1) required to do so pursuant to applicable law (and
then only on the entry of a protective order, if available, acceptable to
Supplier);
(2) it was rightfully in the possession of Customer
from a source other than Supplier prior to the Time of Receipt;
(3) it became public knowledge prior to the Time of
Receipt;
(4) it became public knowledge after the Time of
Receipt by any means other than an unauthorized act or omission on the part of
Customer;
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(5) it is supplied to Customer after the Time of
Receipt without restriction by a third party who is under no obligation to
Supplier to maintain such information in confidence;
(6) it was independently developed by Customer prior
to the Time of Receipt; or
(7) it was developed by Supplier at Customer's
expense.
To the extent a decision not to approve or use Supplier
Confidential Information jeopardizes Supplier's ability to perform it
obligations under the Agreements, Supplier shall be relieved of adverse
consequences, solely and to the extent its performance is materially and
adversely affected thereby; provided, however, that Supplier shall promptly
notify Customer of the possibility of such adverse consequences and both Parties
shall attempt to reach a mutually satisfactory solution to alleviate or prevent
such adverse consequences.
12.3 SAFEGUARDING DATA. Supplier shall establish and maintain
reasonable precautions against the destruction, loss or erroneous alteration of
Customer's data in the possession of Supplier. At a minimum, such precautions
shall conform to those maintained by Customer as of the Effective Date of the
applicable Transaction Agreement and in Customer's Corporate Information
Security Practices and Procedures.
12.4 FILE SECURITY. Supplier will provide reasonable protection for
Customer's computer-stored files and programs from unauthorized access by third
parties. Supplier shall be responsible for no less than the security procedures
set forth in Supplier's security manuals or comparable documents in existence at
the time of the applicable Category Agreements and their Transaction Agreements,
and which are incorporated by reference herein. Customer shall have the
unconditional right to make security inspections of Supplier's organization at
any time without notice to Supplier. If Customer requests additional security
provisions, Supplier shall not unreasonably delay or refuse to institute same.
12.5 RESTRAINTS ON COPYING. Except as required by law, at the request
or direction of Customer, or as required in the normal course of providing the
Products and Services to Customer hereunder, Supplier will not: (i) copy or
endeavor to copy Customer's computer-stored files and programs except as backup
media for data protection purposes in accordance with Supplier's standard
security procedures; and (ii) make any attempt to translate or convert
Customer's computer-stored files and programs or any copies thereof from
machine-readable form to human-readable form.
12.6 NOTIFICATION TO CUSTOMER. In the event Supplier receives a
subpoena or any other order or request from a governmental body or any other
entity or person for any of Customer's computer-stored or backup files and
programs, Supplier shall, as soon as reasonably practicable, notify Customer of
such subpoena, order or request and shall not, without Customer's prior written
consent, accede to such subpoena, order or request unless required to do so
under applicable laws and regulations or when otherwise necessary to
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avoid legal penalties, notwithstanding Customer's efforts, if any, to contest
such subpoena, order or request.
12.7 SUPPLIER SOFTWARE ASSIGNMENT OF CODES. At Customer's request,
Supplier will assign Customer any necessary user codes, identification numbers
or codes, user numbers or other special identifying or system features as may be
necessary to ensure that access to Supplier's Equipment configuration and other
data processing facilities chargeable to Customer is confined to Customer and
its authorized representatives or agents.
12.8 CODE SECURITY. Customer shall take appropriate steps to protect
the use of the identifying or system features set forth in Section 12.7 and
Supplier will provide all assistance reasonably required, including but not
limited to, changing such identifying or system features, at the request of
Customer.
12.9 USE AND RETURN OF CUSTOMER CONFIDENTIAL INFORMATION. Without
limitation on other obligations of Supplier relative to the use and care of
Customer Confidential Information, Supplier agrees that, upon Customer's request
at any time and upon the cessation of the Services and Termination Assistance
Services, Supplier shall, as directed by Customer: (i) promptly return to
Customer, in the format and on the media in use as of the date of the request,
all or the portion requested of the Customer Confidential Information; (ii)
erase or destroy all other of the Customer Confidential Information in
Supplier's possession prior to the cessation of the Services or Termination
Assistance Services and promptly confirm to Customer in writing that such
erasure or destruction has occurred; provided, however, that if Customer directs
Supplier to erase or destroy any Customer Confidential Information prior to the
cessation of the Termination Assistance Services, Customer will waive any
obligations of Supplier to the extent that they cannot reasonably be performed
without such Customer Confidential Information; and (iii) use the Customer
Confidential Information only for the purpose of fulfilling Supplier's
obligations under the Agreement.
12.10 USE AND RETURN OF SUPPLIER CONFIDENTIAL INFORMATION. Without
limitation on other obligations of Customer relative to the use and care of
Supplier Confidential Information or on the rights of Customer to continue to
use Supplier Confidential Information after termination of the applicable
Agreements pursuant to Article 13 and Article 19 of this Framework Agreement,
Customer agrees that, upon the cessation of the Services and Termination
Assistance Services, Customer shall, as directed by Supplier: (i) promptly
return to Supplier, in the format and on the media in use as of the date of
return, all or the portion requested of the Supplier Confidential Information,
to the extent Customer no longer needs the Supplier Confidential Information to
exercise its rights under the Agreements; (ii) erase or destroy all other of the
Supplier Confidential Information in Customer's possession prior to the date of
return and promptly confirm to Supplier in writing that such erasure or
destruction has occurred.; and (iii) use the Supplier Confidential Information
only for the purpose of fulfilling Customer's obligations under the Agreements
and exercising its rights under the Agreements including, but not limited to,
Article 13 and Article 19 of this Framework Agreement. Notwithstanding the
foregoing, Customer shall be entitled to use
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Supplier Confidential Information during the Term, the Termination Assistance
Period and any additional periods in order to exercise its rights under the
Agreements.
12.11 SECURITY PROCEDURES. Supplier shall maintain and enforce data and
physical security standards and procedures at each Site to which Supplier has
access in connection with the provision of the Products and Services. At a
minimum, such standards and procedures shall conform to those maintained by
Customer as of the Effective Date of the applicable Transaction Agreement and in
Customer's Corporate Information Security Practices and Procedures.
12.12 PERSONNEL. Each of Supplier and Customer shall communicate its
obligations pursuant to this Article 12 to its employees, subcontractors,
consultants, representatives and agents. Each Party shall also be liable to the
other for any violations of Article 12 by its employees, subcontractors,
consultants, representatives and agents.
12.13 INTERNET ADDRESSES.
(A) Upon Customer's request and expense, Supplier shall
register, or re-register as the case may be, all Internet addresses used by
Customer or Supplier in connection with the provision of Products and Services
by Supplier hereunder and receipt of same in Customer's name.
(B) All network identification and access codes issued to
Customer users by Supplier or its employees, subcontractors, consultants,
representatives and agents, shall be owned by Customer. Supplier hereby assigns
to Customer all rights in and to such codes, and agrees to execute such
documents as may be reasonably necessary to effect this assignment.
12.14 ATTORNEY-CLIENT PRIVILEGE.
(A) Supplier acknowledges that it may have access to Customer
Privileged Work Product over the course of Supplier's performance under the
Agreements. Supplier further acknowledges that Privileged Work Product has been
or will be prepared in anticipation of litigation, and that Supplier is
performing hereunder in respect of Privileged Work Product as an agent of
Customer.
(B) Customer shall notify Supplier of any Privileged Work
Product to which Supplier has or may have access. After the Supplier Project
Manager is notified or otherwise becomes aware that such documents, data,
database, or communications are Privileged Work Product, only Supplier personnel
for whom such access is necessary for the purpose of Supplier's performance
hereunder may have access to Privileged Work Product.
(C) Should Supplier ever be notified of any judicial or other
proceeding seeking to obtain access to Privileged Work Product, Supplier: (i)
shall immediately notify Customer; and (ii) shall take such reasonable actions
as may be specified by Customer to resist providing such access. Customer may
have the right to represent Supplier in such resistance or to select and
compensate counsel to so represent Supplier. If Supplier is ultimately required,
pursuant to an order of a court of competent jurisdiction, to produce documents,
disclose data or otherwise act in
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contravention of the confidentiality obligations imposed hereunder or otherwise
with respect to maintaining the confidentiality, proprietary nature and secrecy
of Privileged Work Product, Supplier shall not be liable for breach of such
obligation.
12.15 UNAUTHORIZED ACCESS. Each Party shall:
(A) as soon as reasonably practicable, notify the other Party
of any unauthorized possession, use or knowledge, or attempt thereof, of the
other Party's Confidential Information, of which it becomes aware, including any
material breach or potential material breach of security on a system, LAN or
telecommunications network which contains, processes or transmits Customer
Confidential Information;
(B) as soon as reasonably practicable, furnish to the other
Party, full details of the unauthorized possession, use or knowledge, or attempt
thereof, and use reasonable efforts to assist the other Party in investigating
or preventing the recurrence of any unauthorized possession, use or knowledge,
or attempt thereof, of Confidential Information; provided, however, that if
additional security measures are required and such cannot reasonably be provided
by the specified existing level of resources (not including overtime work)
without jeopardizing the performance of their other duties under the Agreements,
such measures shall be taken pursuant to Article 2;
(C) use reasonable efforts to cooperate with the other Party
in any litigation and investigation against third parties deemed necessary by
the other Party to protect its proprietary rights. Either Party shall have the
right to conduct and control any investigation relating to such breach or
potential breach of its Confidential Information that it determines is
appropriate; and
(D) use all reasonable efforts to prevent a recurrence of any
such unauthorized possession, use or knowledge of Confidential Information.
12.16 COSTS. Except as set forth in 12.15(B), when applicable, each
Party shall bear the costs it incurs as a result of compliance with this Article
12.
12.17 EXCLUSION. The limitations or exculpations of liability set forth
in Sections 20.3 and 20.4 of the Framework Agreement are not applicable to
liability under this Article 12.
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13. PROPRIETARY RIGHTS
13.1 CUSTOMER INTELLECTUAL PROPERTY.
(A) Supplier shall have no rights or interests in the Customer
Intellectual Property except as described in this Section. All right, title and
interest in and to Customer Intellectual Property shall be and shall remain the
sole property of the Customer, its Related Entities, or its and their suppliers,
contractors and third parties. Prior to using any Customer Intellectual Property
pursuant to the license granted under Section 13.1(B) to provide any of the
Products and Services, Supplier shall notify Customer that it intends to use
Customer Intellectual Property and shall obtain Customer's consent to such use.
If Customer does not consent to such use, Supplier shall recommend a
functionally equivalent alternative that Supplier shall use upon Customer's
consent.
(B) Except as otherwise expressly set forth in a Transaction
Agreement, Customer hereby grants to Supplier, to the extent permitted by any
third-party licenses to Customer, a worldwide, nonexclusive, royalty-free,
personal, nontransferable and limited right and license: (i) to use; (ii) to
operate; (iii) to maintain; (iv) to copy solely for backup and archival
purposes; (v) to modify; and (vi) to create derivative works of, with the right
to grant sublicenses to as provided below, to only that portion of Customer
Intellectual Property that is necessary to provide Products and Services and
solely for such purpose to Customer during the Term of an applicable Transaction
Agreement.
Supplier may not decompile, disassemble or otherwise
reverse-engineer the Customer Intellectual Property in any manner. As of the
Effective Date of an applicable Transaction Agreement, Customer shall be
obligated to provide Supplier, at no cost to Supplier, with access to the
Customer Software only in the form in use by Customer as of such Effective Date.
To the extent provided for in the applicable Transaction Agreement or otherwise
approved by Customer, and to the extent permitted by third party licenses to
Customer, Supplier may grant a sublicense to Supplier's subcontractors under the
same terms as this Section and the terms and conditions set forth in Section 4.5
of the Framework Agreement, as may be necessary in connection with the provision
of the Products and Services.
(C) Upon the expiration or termination of a Transaction
Agreement for any reason, Supplier's rights and license to the Customer
Intellectual Property for the performance by Supplier of its obligations under
such Transaction Agreement shall terminate, and Supplier shall return the same
to Customer, except to the extent the Customer Intellectual Property is
necessary or appropriate in connection with Supplier's provision of Termination
Assistance Services under the applicable Transaction Agreement.
13.2 SUPPLIER INTELLECTUAL PROPERTY.
(A) Customer shall have no rights or interests in Supplier
Intellectual Property except as described in this Section. 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
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subcontractors/licensors. Prior to using any Supplier Intellectual Property to
provide any of the Products and Services, Supplier shall notify Customer that it
intends to use Supplier Intellectual Property and shall obtain Customer's
consent to such use. If Customer does not consent to such use, Supplier shall
recommend a functionally equivalent alternative which Supplier shall use upon
Customer's consent.
(B) In providing the Products and Services, Supplier shall:
(i) use the Supplier Intellectual Property as set forth in the applicable
Transaction Agreement and as may be required to provide the Products and
Services; (ii) make available to Customer such Supplier Intellectual Property
for use by Customer in connection with the use of the Products and Services; and
(iii) deliver to Customer, at its request, no more than once during every
quarter during the provision of the Products and Services, a copy of the
Supplier Software (including related Source Code) that is owned by Supplier
(i.e., excluding Supplier Third Party Software) for backup and archival purposes
only.
(C) Except as otherwise expressly set forth in a Transaction
Agreement, Supplier hereby grants to Customer a perpetual, worldwide,
nonexclusive, nontransferable, royalty-free license to all rights now known or
later devised to Supplier Intellectual Property as necessary to effectuate the
purposes of the applicable Agreements including, but not limited to, the right
and license under Supplier Intellectual Property: (i) to use; (ii) to operate;
(iii) to maintain; (iv) to copy; (v) to modify; (vi) to create derivative works
of, with the right to grant sublicenses to third parties engaged by Customer.
(D) Except as otherwise expressly set forth in the applicable
Transaction Agreement, Supplier hereby grants Customer a perpetual,
nonexclusive, nontransferable license, with the right to sublicense (solely for
the performance by a third-party service provider of services on behalf of
Customer and its Related Entities) effective upon the expiration or termination
of the applicable Transaction Agreement hereunder for any reason, to Supplier
Intellectual Property under the same terms as Section 13.2(C); provided,
however, such third-party service provider shall be subject to Supplier's
safety, security and confidentiality requirements that are consistent with such
requirements of the Agreements.
13.3 THIRD-PARTY INTELLECTUAL PROPERTY.
(A) Supplier may utilize Supplier Third-Party Intellectual
Property in the provision of Products and Services. The Supplier Third-Party
Intellectual Property shall be and shall remain the exclusive property of
Supplier's third-party licensors and Customer shall have no rights or interests
in the Supplier Third-Party Intellectual Property except as described in this
Section.
(B) In providing the Products and Services, Supplier shall:
(i) use the Supplier Third-Party Intellectual Property solely as set forth in
the applicable Transaction Agreement, and as may be required to provide the
Products and Services; (ii) make available to Customer such Supplier Third-Party
Intellectual Property for use by Customer in connection with the use of the
Products and Services; and (iii) to the extent possible deliver to Customer, at
its request, no more
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than once during every quarter during the provision of the Products and
Services, a copy of the Supplier Third-Party Software (including related Source
Code) for archival purposes only.
(C) Upon the expiration or termination of the applicable
Transaction Agreement hereunder for any reason, Supplier shall use all
reasonable efforts to obtain from the applicable third-party a perpetual,
nonexclusive, nontransferable license, with the right to sublicense (solely for
the performance by a third-party service provider on behalf of Customer and its
Related Entities), Third-Party Intellectual Property under the same terms as
Section 13.2 (C); provided, however, that such third-party service provider
shall be subject to Supplier's and the other third party's safety, security and
confidentiality requirements that are consistent with such requirements of the
Agreements. Customer shall be responsible for any third-party charges associated
with such sublicense. Supplier agrees that any new agreement it enters into with
any third party for any Supplier Third-Party Intellectual Property shall include
terms permitting a sublicense for Customer as described in this Section.
13.4 DERIVATIVE WORKS. With respect to any Derivative Works developed
under the Agreements or in the provision of the Products and Services, the
allocation of rights in such works will be as follows.
(A) All Intellectual Property rights in a Derivative Work
(whether developed solely by Customer, its Related Entities, Supplier, or
jointly by Customer and Supplier), for which the preexisting work is Customer
Intellectual Property ("Customer Derivative Work"), 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 or third party for Customer in support of the performance
of Supplier's obligations under the Agreements, developed by Customer, or any
combination of the foregoing, for which the preexisting work is Supplier
Intellectual Property, shall be owned by Customer, provided however, Customer's
right to use the preexisting work (i.e., Supplier Intellectual Property) shall
be limited to the terms set forth in the Agreements. Customer shall be free to
exploit any portions of the Derivative Work that are developed for Customer
under this Section to the extent such portions can be segregated from the
preexisting work, and such portions of the Derivative Work shall be deemed Work
Product subject to Section 13.5.
(C) All Intellectual Property rights in a Derivative Work
developed by Supplier or a third party for customers other than Customer and not
pursuant to the Supplier's performance obligations under the Agreements, for
which the preexisting work is Supplier Intellectual Property ("Supplier
Derivative Work"), shall be owned by Supplier, and shall be deemed to be
Supplier Intellectual Property.
(D) All Intellectual Property rights in a Derivative Work
(whether developed solely by Customer, its Related Entities, Supplier, a third
party, or any combination of the foregoing), for which the preexisting work is
owned by a third party, shall be deemed to be a Customer Intellectual Property
to the extent permitted by the applicable third-party license agreement;
provided, however, if such Derivative Work is developed in support of the
performance
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of Supplier's obligations under the Agreements, it shall be deemed Work Product
subject to Section 13.5.
13.5 WORK PRODUCT.
(A) All Work Product shall be owned by Customer as a "work
made for hire," if such Work Product fits within the specified categories of the
definitions of such term under the United States Copyright Act. Customer shall
own all right, title and interest, including ownership of copyright, in and to
the Work Product and all copies of the Work Product. Supplier or any applicable
third party shall retain no rights in any Work Product.
(B) To the extent any of the Work Product may not be deemed,
by operation of law, a "work made for hire," Supplier hereby irrevocably
assigns, transfers and conveys, and shall cause Supplier's employees,
subcontractors, consultants, representatives and agents and any applicable third
parties to irrevocably assign, transfer and convey, to Customer without further
consideration, all right, title and interest in and to such Work Product,
including all rights of copyright, patent, trademark or other proprietary rights
in such materials. Supplier acknowledges that Customer and the assigns of
Customer shall have the right to obtain and hold in their own name any
intellectual property rights in and to such Work Product. Supplier agrees to and
shall cause any applicable third parties to agree to, execute any documents or
take any other actions as may reasonably be necessary, or as Customer may
reasonably request, to perfect Customer's ownership of any such Work Product.
Supplier shall, and shall cause any applicable third parties to, at no cost to
Customer:
(1) deliver to Customer, upon Customer's request
during the Term and upon the expiration or termination of all or part of
Supplier's performance hereunder, a current copy of all Work Product in the form
and on the media in use as of the date of Customer's request or as of such
expiration or termination, as the case may be; and
(2) upon the expiration or termination of the
applicable Agreements, destroy or erase all other copies of Work Product in
Supplier's possession.
13.6 DEVELOPED SOFTWARE. Developed Software shall be deemed to be Work
Product.
13.7 REPRODUCTION OF SOFTWARE. Subject to the following sentence and
notwithstanding the limitations of Section 12.10, Customer shall have the right,
at no additional cost, to reproduce any and all Supplier Software regardless of
whether the same be copyrighted or otherwise restricted as proprietary
information and Customer shall be granted such rights in the reproduction as are
conferred upon an "owner" under Section 117 of the Copyright Act; provided,
however, that such reproductions shall be subject to the same restrictions on
use and disclosure as are set forth in this Framework Agreement. Prior to using
any Supplier Third Party Software for which such rights of reproduction are not
available, Supplier shall notify Customer that Supplier intends to use such
Supplier Third Party Software and shall obtain Customer's prior consent to such
use. Any and all copies of Supplier Software made by Customer
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shall include a valid copyright notice indicating Supplier's or a third party's
proprietary interest therein, as applicable.
13.8 DOCUMENTATION. Supplier shall supply Customer with all applicable
Documentation. Whenever such Documentation is revised, modified or altered in
any material way, Supplier shall promptly supply copies of the revised, modified
or altered Documentation to Customer. Supplier agrees that all Documentation
shall provide Customer with sufficient information to properly operate, diagnose
and maintain Equipment or Software safely and efficiently.
13.9 RIGHTS IN DATA. Supplier does not convey, and Customer does not
obtain any right, in the programs, systems, data or materials utilized or
provided by Supplier in the ordinary course of business in the performance of
any of the Agreements, except that all files, software, programs, packages or
systems (together with, but not limited to, their Source Codes), input materials
and output materials, and the media upon which they are located (including,
without limitation, cards, tapes, discs and other storage facilities) which are
utilized or developed for, and paid for by, Customer in connection with the
provision of Products and Services, and which may or may not be either
confidential or proprietary, shall be the property of Customer, and Supplier
shall place an appropriate plaque, emblem and decal or other appropriate label
or marking thereon evidencing Customer's ownership of such property while it is
in the possession of Supplier. Upon the termination of the Transaction Agreement
for any reason, all such properties, together with, but not limited to, their
Source Codes, which are in the possession of Supplier, shall be immediately
delivered to Customer.
14. ESCROW OF SOURCE CODE
With respect to the Licensed Software and Supplier-owned Software that
Supplier utilizes in providing the Products or Services, and to the extent
Third-Party Supplier Software is not subject to an escrow agreement that is
satisfactory to Customer, Customer and Supplier hereby agree to enter into the
Escrow Agreement with an escrow agent selected by Customer, concurrently with
the Transaction Agreement. A copy of the Escrow Agreement shall be attached to
the applicable Transaction Agreement and approved as part of the Parties'
agreement to execute the Transaction Agreement.
14.1 RELEASE OF ESCROW. Customer and Supplier agree that the occurrence
of any of the following conditions that Customer determines, in the exercise of
good faith and reasonable commercial judgment, will permit Customer to require a
release of Source Code pursuant to the Escrow Agreement. Customer and Supplier
agree that the following conditions will be incorporated into the Escrow
Agreement.
(A) Supplier has materially defaulted in performance or
otherwise has failed to perform its obligations under: (i) the applicable
Transaction Agreement or any of the Category Agreements; (ii) the license
whereby Supplier acquired its rights to such Source Code; or (iii) any agreement
between Supplier and Customer for the maintenance or correction of such
Software, and such material default or failure to perform has continued for a
period of thirty (30) days following written notice thereof to Supplier from
Customer.
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(B) Supplier has made an assignment for the benefit of
creditors, has admitted in writing its inability to pay debts as they mature, or
has ceased operating in the normal course of business.
(C) A trustee or receiver of Supplier or of any substantial
part of Supplier's assets has been appointed by any court.
(D) An involuntary proceeding has been commenced by any party
against Supplier under any one of the chapters of Title 11 of the United States
Code and: (i) the proceeding has been pending for at least sixty (60) days; (ii)
Supplier has consented, either expressly or by operation of law, to the entry of
an order for relief; or (iii) Supplier has been decreed or adjudged a debtor.
(E) A voluntary petition has been filed by Supplier under any
of the chapters of Title 11 of the United States Code.
(F) Supplier has or announces it will discontinue support,
upgrades or enhancements of the Products or Services or of the Licensed
Software.
(G) Supplier assigns or attempts to assign or transfer all or
a substantial part of its assets related to the Products and Services or to the
Licensed Software without Customer's prior written consent.
14.2 CUSTOMER'S RIGHTS AND OBLIGATIONS AFTER RELEASE OF SOURCE CODE.
Customer shall not have any rights of ownership to the Source Code, or any
rights other than the rights to the Software as conveyed in any of the
applicable Category Agreements and except such license rights to the Source Code
as are provided in the Escrow Agreement.
14.3 ESCROW VERIFICATION. Customer shall have the right for the term of
this Framework Agreement, to verify the accuracy and completeness of the deposit
made pursuant to the Escrow Agreement at any time during normal business hours,
with reasonable notification to Supplier by having a representative of the
escrow agent and Customer present at Supplier's site to verify, audit and
inspect the escrow deposit, or optionally to pay escrow agent to perform the
verification on behalf of Customer. Customer shall pay all fees for the escrow
and any related services resulting from any of the Agreements.
14.4 SOURCE CODE INSTALLATION. If requested by Customer, Supplier shall
install the Source Code on the Equipment designated by Customer within three (3)
business days after delivery by the Escrow Agent or within such other time that
is mutually agreed between the Parties. Such installation shall include a
successful compilation of the Source Code on such Equipment and performance of
Supplier's installation tests using Supplier's test data. Supplier shall
promptly provide Customer with documentation demonstrating the successful
installation of the Software. Customer may elect to install the Source Code by
itself or through Customer's appointed agent. Any such installation shall be for
the purpose of validating
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that the escrowed Source Code will compile properly and that once validation has
occurred, all copies of the Source Code and compiled codes shall be deleted from
Customer's Equipment.
15. INDEMNIFICATION.
15.1 INDEMNIFICATION BY CUSTOMERS. Customer shall, at its sole expense,
defend (as provided in this Article 15), indemnify and hold harmless Supplier,
its Related Entities, and its and their successors and assigns and its and their
officers, directors, employees, subcontractors, consultants, representatives and
agents, from and against any and all losses, damages, injuries (including
death), causes of action, claims, penalties, interest, additional taxes, demands
and expenses, including reasonable legal fees and expenses, of any kind or
nature arising out or on account of, or resulting from any claim or allegation
of a third party for an action based on:
(A) infringement of patent, copyright or trademark with
respect to Customer Assets and Customer Intellectual Property;
(B) misappropriation of trade secret or other proprietary
rights with respect to Customer Assets and Customer Intellectual Property;
(C) failure of Customer, Related Entities and its and their
officers, directors, employees, subcontractors, consultants, representatives and
agents, to comply with applicable laws, ordinances, regulations or codes;
(D) any tort (including any wrongful, negligent or intentional
act or omission), or breach or default in the performance of its obligations
pursuant to the Agreements by Customer, its Related Entities, its and their
successors and assigns, or its or their officers, directors, employees,
subcontractors, consultants, representatives and agents, including but not
limited to the breach of any representation or warranty of Customer;
(E) failure or delay to file any return or information
required by law, rule or regulation; and
(F) any other basis expressly set forth in any Agreement that
provides for indemnity by Customer to Supplier.
15.2 INDEMNIFICATION BY SUPPLIER. Supplier shall, at its sole expense,
defend (as provided in this Article 15), indemnify and hold harmless Customer,
its Related Entities, and its and their successors and assigns and its and their
officers, directors, employees, subcontractors, consultants, representatives and
agents, and any third parties with which Customer contracts to perform any
aspect of Customer's information technology business functions, from and against
any and all losses, damages, injuries (including death), causes of action,
claims, penalties, interest, additional taxes, demands and expenses, including
reasonable legal fees and expenses, of any kind or nature arising out or on
account of, or resulting from any claim or allegation of a third party for an
action based on):
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(A) infringement of patent, copyright or trademark by the
provision of Products or Services (including Supplier Intellectual Property) or
anything that Supplier uses in the provision of the Products and Services;
(B) misappropriation of trade secret or other proprietary
rights with respect to Supplier Intellectual Property;
(C) failure or delay to file any return or information
required by law, rule or regulation;
(D) failure of Supplier or its officers, directors, employees,
subcontractors, consultants, representatives and agents, to comply with laws,
ordinances, regulations or codes;
(E) the breach of any representation or warranty of Supplier;
(F) the claim of any Supplier personnel removed or replaced by
Supplier where such personnel are Transferred Employees after the date of
hiring;
(G) any tort (including any wrongful, negligent or intentional
act or omission) or breach or default in the performance of its obligations
pursuant to the Agreements by Supplier, its Related Entities, its and their
successors and assigns, or its subcontractors, officers, directors, employees,
subcontractors, consultants, representatives and agents; and
(H) any other basis expressly set forth in any Agreement that
provides for indemnity by Supplier to Customer.
15.3 NOTICE. Each Party shall give the other Party prompt written
notice of any claim or liability hereby indemnified against by such other Party
and thereupon such other Party shall be entitled to control, and shall assume
full responsibility for, the defense of such matter. If the indemnifying Party
elects to assume such responsibility, it shall so notify the indemnified Party.
The indemnities contained herein shall not be deemed to be a waiver of or in
limitation of any other rights either Party may have, including but not limited
to rights of indemnity or contribution.
15.4 INDEMNIFICATION PROCEDURES.
(A) Supplier Responsible. The indemnified Party shall
cooperate in all reasonable respects with the indemnifying Party and its
attorneys in the investigation, trial and defense of such claim or liability and
any appeal arising therefrom; provided, however, that the indemnified Party may,
at its own cost and expense, participate, through its attorneys or otherwise, in
such investigation, trial and defense of such claim or liability and any appeal
arising therefrom. No settlement of a claim that involves a remedy other than
the payment of money by the indemnifying Party shall be entered into without the
consent of the indemnified Party. After notice by the indemnifying Party to the
indemnified Party of its election to assume full control of the defense of any
such claim, the indemnifying Party shall not be liable to the indemnified Party
for
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any legal expenses incurred thereafter by such indemnified Party in connection
with the defense of such claim.
(B) If the indemnifying Party does not assume full control
over the defense of a claim subject to defense as provided in this Section
15.4(B), the indemnifying Party may participate in such defense, at its sole
cost and expense, and the indemnified Party shall have the right to defend such
claim in the manner it deems appropriate, at the cost and expense of the
indemnifying Party.
15.5 USE OF INFRINGING PRODUCTS OR SERVICES. If an injunction or order
shall be obtained against the indemnified Party's use of any Products or
Services by reason of the allegations, or if in the indemnifying Party's opinion
any such Products or Services are likely to become a subject of a claim of
infringement or violation of a copyright, trade secret or other proprietary
right of a third party, the indemnifying Party will, at the indemnified Party's
option and the indemnifying Party's its expense:
(A) procure for the indemnified Party the right to continue
using the Products or Services;
(B) replace or modify the same so that it becomes
non-infringing (which modification or replacement shall not adversely affect the
applicable specifications for, or the use or operation by the indemnified Party
of, the Products or Services);
(C) if the Products or Services are purchased, and the other
options stated are not practicable, repurchase the Products or Services; or
(D) if the Products or Services are licensed, and the other
options stated are not practicable, remove such Products or Services from the
indemnified Party's Sites and refund to the indemnified Party any charges paid
by the indemnified Party, other than charges for license payments for any actual
period of use by the indemnified Party in excess of twenty-four (24) months
amortized over a useful life of sixty (60) months, and release the indemnified
Party from any further liability hereunder.
15.6 DISCONTINUATION OF PAYMENTS. In no event shall Customer be liable
to Supplier for any license or maintenance payments for those Products and
Services that Customer no longer uses after the date, if any, that Customer no
longer uses such Products or Services because of such actual or claimed
infringement or misappropriation. If removal or replacement of the Products or
Services is required or undertaken pursuant to the Agreements, Supplier shall
use reasonable care in the removal or modification thereof and shall, at its own
expense, restore the premises as nearly to their original condition as is
reasonably possible.
15.7 EXCLUSION. Except as set forth in Section 20.5, the limitations or
exculpations of liability set forth in Sections 20.3 and 20.4 of the Framework
Agreement are not applicable to liability under this Article 15.
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16. THIRD PARTY AGREEMENTS
16.1 THIRD-PARTY AGREEMENTS. Supplier shall abide by, and comply with,
the terms of the Third-Party Agreements.
16.2 PERFORMANCE UNDER THIRD-PARTY AGREEMENTS. Supplier shall promptly
inform the Customer of any breach of, misuse or fraud in connection with, any
Third-Party Agreements and shall cooperate with Customer to prevent or stay any
such breach, misuse or fraud. Supplier shall pay all amounts due for any
penalties or charges (including amounts due to a third-party as a result of
Supplier's failure to promptly notify Customer pursuant to the preceding
sentence), associated taxes, legal expenses and other incidental expenses
incurred by Customer as a result of Supplier's nonperformance of its obligations
under the applicable Transaction Agreement with respect to the Third-Party
Agreements.
16.3 PERFORMANCE UNDER SUPPLIER-ADMINISTERED AGREEMENTS. Supplier shall
be responsible for:
(A) notifying Customer of any performance obligations and
maintaining any warranties, under the Supplier-Administered Agreements;
(B) cooperating with the third-party supplier, including
problem resolution in respect of the services provided under the
Supplier-Administered Agreements; and
(C) providing Customer reasonable notice of any renewal,
termination or cancellation dates and fees in respect of the
Supplier-Administered Agreements. At Supplier's request and upon Customer's
consent, Supplier shall, to the extent permitted by the Supplier-Administered
Agreements, modify, terminate or cancel any such Supplier- Administered
Agreements. Any modification, termination or cancellation fees or charges
imposed upon Customer in connection with any such modification, termination or
cancellation shall be paid by Supplier. The late fees and incremental charges
described in this Section shall be paid by Supplier to the appropriate
third-party.
16.4 THIRD-PARTY INVOICES.
(D) Supplier Responsible. If Supplier is financially
responsible for any of the Supplier-Administered Agreements, Supplier shall: (i)
receive all Third-Party Invoices; (ii) review and make reasonable commercial
efforts to correct any errors in any such Third-Party Invoices in a timely
manner; and (iii) pay such Third-Party Invoice prior to the due date or, if a
discount for such payment is given, the date on which Supplier may pay such
Third-Party Invoice with a discount. Customer shall reimburse Supplier for the
amount of the Third-Party Invoice (with the applicable discount). Supplier shall
be responsible for discounts not received or any late fees in respect of the
Third-Party Invoices.
(E) Customer Responsible. If Customer is financially
responsible for any Supplier-Administered Agreements pursuant to the applicable
Transaction Agreement, Supplier shall: (i) receive all Third-Party Invoices;
(ii) review and use reasonable commercial efforts to
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correct any errors in any such Third-Party Invoices in a timely manner; and
(iii) promptly submit such Third-Party Invoices to Customer for payment.
(1) Customer shall pay the Third-Party Invoices
received and approved by Supplier. Customer shall only be responsible for
payment of the Third-Party Invoices, and shall not be responsible for late fees
thereon unless due solely to Customer's failure to pay same after having
received the Third-Party Invoice as provided for in this paragraph. Except as
otherwise expressly set forth in the Transaction Agreement specifically agreed
to by Customer, all Third-Party Invoices will be paid in accordance with
Customer's standard invoicing requirements.
(2) If Supplier fails to submit a Third-Party Invoice
to Customer for payment in a timely manner as provided in this Section, Supplier
shall be responsible for any discount not received or any late fees in respect
of such Third-Party Invoice.
17. INSURANCE
17.1 TYPES AND AMOUNT. During the Term, Supplier will maintain policies
of insurance in the following types and amounts:
(A) Workers compensation in an amount not less than the
statutory limits for the state(s) in which Services are to be performed,
including employer's liability insurance in an amount not less than $1,000,000.
If Supplier is self-insured, a certificate of the state in which the Services
are to be performed must be furnished by such state agency directly to Customer.
(B) Commercial general liability insurance, including
contractual liability coverage, with minimum limits of liability of not less
than $10,000,000 per occurrence.
(C) Automobile liability insurance (including owned,
non-owned, and hired vehicles), with minimum limits of not less than $10,000,000
per occurrence.
(D) Professional/Errors and Omissions Liability insurance in
an amount not less than $10,000,000 per occurrence.
17.2 REPUTABLE INSURERS. All insurance policies will be issued by
reputable insurance companies rated "A" or better by A.M. Best. If such policies
do not contain a separation of insureds provision, they will be endorsed to
provide cross-liability coverage. Supplier will maintain all such required
insurance in force except as otherwise expressly set forth in the Transaction
Agreement.
17.3 INSURANCE CERTIFICATES. Before Services are started, Supplier will
furnish to Customer certificates(s) of insurance evidencing compliance with the
insurance requirements. Each certificate will: (i) set forth the amount of
coverage, policy number and date of expiration, (ii) name Customer as an loss
payee under all of the above policies, except those listed in Sections 17.1(A)
and (D), but only with respect to operations performed by Supplier for Customer
under the Agreements, (iii) provide that such insurance carrier will not
terminate, cancel, or materially modify such insurance coverage without thirty
(30) days prior
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written notice to Customer, and (iv) state that such insurance is primary in
coverage to any other insurance or self-insurance programs which may be
available to Customer or is Related Entities.
17.4 NO SATISFACTION OF OTHER OBLIGATIONS. The purchase of insurance
coverage and furnishing of certificate(s) will neither modify Supplier's
obligation to indemnify Customer under Section 15.2 of this Agreement nor be in
satisfaction of Supplier's liability under the Agreements.
17.5 SUBCONTRACTORS. Supplier will include all subcontractors employed
by it as loss payees under its policies or will cause each subcontractor to
purchase and maintain insurance of the type specified above and listing Customer
as a loss payee. When requested by Customer, Supplier will furnish copies of
certificates of insurance evidencing coverage for each subcontractor.
18. TERM
18.1 INITIAL TERM.
(A) This Framework Agreement and the Category Agreements shall
have an initial term commencing with the Effective Date and unless otherwise
terminated as provided herein, shall continue for a period of three (3)
consecutive years thereafter.
(B) The initial term of a Transaction Agreement will be the
term set forth therein.
18.2 RENEWAL.
(A) Upon expiration of the initial term, the Parties may agree
in writing to additional renewal period(s). Each of the Parties shall provide
the other with written notice of its desire to renew at least three (3) months
prior to the expiration of the initial term or the then-current renewal term, as
applicable and any renewal shall occur only upon mutual agreement between the
Parties. If such notices are not given, this Framework Agreement shall continue
only until the end of the Initial Term, unless terminated sooner, or the end of
then-current renewal term, as applicable.
(B) Category Agreements may not be renewed beyond the term of
the Framework Agreement. However, if the Framework Agreement is renewed the
Parties may agree to renew all, some or none of the Category Agreements.
18.3 MAXIMUM TERM. In no event shall the Term of any Agreement extend
beyond the earlier of June 6, 2006 or the expiration or termination of the MSA.
18.4 EFFECT OF EXPIRATION OR TERMINATION. Upon expiration or
termination of this Framework Agreement or any Category Agreement, the Parties
shall not execute any new Transaction Agreements to be incorporated into this
Framework or any Category Agreement. Except as otherwise expressly set forth in
the
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Transaction Agreement, expiration or termination of this Framework Agreement or
any Category Agreement shall not affect the obligations of the Parties under any
Category Agreement or Transaction Agreement that is still in effect as of the
date of expiration or termination of this Framework Agreement, and the terms of
this Framework Agreement or Category Agreement will continue to apply to the
Parties' relationship pursuant to any such Category Agreements and Transaction
Agreements until termination or expiration of such Category Agreements and
Transaction Agreements.
19. TERMINATION AND CANCELLATION
19.1 CANCELLATION. Except as otherwise expressly set forth in the
Transaction Agreement specified otherwise in a Transaction Agreement, a
Transaction Agreement may be canceled under the following circumstances:
(A) a Transaction Agreement involving Products manufactured by
Supplier may be canceled up to fifteen (15) days prior to the delivery date for
the Products;
(B) a Transaction Agreement involving Products manufactured by
a third party may be canceled by Customer prior to the date on which Supplier's
order with such third party becomes non-cancelable without penalty;
(C) a Transaction Agreement involving Products manufactured by
a third party may be canceled by Customer at any time if Customer reimburses
Supplier for any resulting penalty imposed by such third party;
(D) Customer may cancel any Transaction Agreement involving
Supplier Third-Party Software prior to the acceptance date provided therein; and
(E) Customer may cancel any Transaction Agreement for Services
at any time upon thirty (30) days prior written notice to Supplier provided
Services have begun, or immediately if Services have not yet begun.
19.2 EFFECT OF CANCELLATION. Upon cancellation of a Transaction
Agreement by Customer, Customer shall have no liability for any payments
accruing after the cancellation date; provided, however, that Customer shall
comply with its obligations, if any, relating to the return or redelivery of any
Products to Supplier that are covered by the canceled Transaction Agreement.
19.3 TERMINATION FOR CONVENIENCE. Customer may, in its sole discretion,
terminate the Agreements, in whole or in part, upon not less than ninety (90)
calendar days' notice to Supplier.
19.4 TERMINATION FOR CHANGE IN CONTROL OF SUPPLIER. In the event of a
sale of: (i) all or substantially all of the assets of Supplier; (ii) sufficient
stock of Supplier to effect a change in control of Supplier; (iii) more than
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twenty percent (20%) of issued voting rights stock of Supplier to a competitor
of Customer; or (iv) more than twenty percent (20%) of issued voting rights
stock of Supplier to other person or entity, which in Customer's reasonable
opinion, creates a substantial uncertainty as to Supplier's continued ability to
perform under the Agreements, Customer may terminate the Agreements in whole or
in part upon at least sixty (60) calendar days' notice to Supplier and require
Supplier to reimburse Customer for all reasonable costs and expenses
attributable to Supplier's change of control and Customer's need to procure the
products and services from other suppliers.
19.5 TERMINATION FOR CAUSE. If either Customer or Supplier materially
fails to perform any of its obligations or materially breaches any
representations or warranties hereunder and such failure is not cured within
thirty (30) calendar days after notice is given to the breaching Party, then the
non-breaching Party may, upon further notice to the breaching Party, terminate
any and all Agreements as to all or part of the Products and Services being or
to be provided by Supplier hereunder, as of the date specified in the notice of
termination; provided, however, that if, after the breaching Party's best
efforts, such breach cannot be cured within such thirty (30) day period, the
time to cure such breach shall be extended for up to fifteen (15) calendar days
from the date on which such notice of termination is received by the breaching
Party, if the breaching Party has promptly commenced to cure the breach and
continues to use its best efforts to cure such breach during the fifteen (15)
day period.
19.6 TERMINATION FOR INSOLVENCY. In the event either Party is unable to
pay its debts generally as they come due, or is declared insolvent or bankrupt,
is the subject of any proceedings relating to its liquidation, insolvency or for
the appointment of a receiver or similar officer for it, makes an assignment for
the benefit of all or substantially all of its creditors, or enters into an
agreement for the composition, extension or adjustment of all or substantially
all of its obligations, then the other Party hereto may, by giving written
notice thereof to such Party, terminate the Agreements as of the date specified
in the notice of termination.
19.7 EFFECT OF PARTIAL TERMINATION. In the event of a termination of
the Agreements pursuant to this Article 19 as to part of the Products and
Services provided or to be provided by Supplier hereunder and thereunder, the
Agreements shall remain in effect with respect to those Products and Services
still to be provided by Supplier.
19.8 TERMINATION FEE.
(A) Except as expressly set forth in the Transaction
Agreement, in the event of a termination of any of the Agreements by Supplier
pursuant to Section 19.5, or by Customer pursuant to Section 19.3, Customer
shall reimburse Supplier for the following amounts:
(1) an amount equal to the net book value of any
Supplier Equipment or Supplier Software purchased, leased or licensed by
Supplier in connection with the provision of the Products and Services affected
by the termination, but only to the extent such cost has not then been amortized
in accordance with generally accepted accounting principles, and cannot be used
by Supplier for other business; and
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(2) the actual and reasonable third party costs
(without mark-up) and redundancy payments as required by local law for a maximum
period of six (6) months incurred by Supplier to re-deploy or terminate any of
its employees dedicated to the performance of Supplier's obligations relative to
the Products and Services affected by the termination for more than six (6)
months, and whose employment cannot reasonably be continued by Supplier for
other business; provided, however, that Customer shall only be liable to
reimburse termination benefits for the lesser of actual relocation expenses or
four (4) weeks severance pay.
(B) With respect to any termination fee payable by Customer
pursuant to this Section 19.8, Supplier shall use commercially reasonable
efforts to minimize such fees. Customer shall not pay to Supplier any fees or
charges relating to a termination pursuant to this Article 19 other than the
applicable termination fees as set forth herein.
19.9 ABSOLUTE OBLIGATION. Supplier acknowledges and agrees that it
shall have an absolute and unconditional obligation to provide Customer with
Termination Assistance Services. Termination Assistance Services shall be set
forth in the Transaction Agreements and shall be provided by Supplier at the
same rates it charged Customer for comparable services under the applicable
Agreements.
(A) In the event of the expiration or termination of any
Transaction Agreement hereunder, Supplier shall, upon Customer's request,
continue to provide the applicable Products and Services that were provided by
Supplier prior thereto, as well as the Termination Assistance Services, as
follows.
(B) At no additional cost, Supplier shall provide to Customer
and any designated third-party provider: (i) in writing, to the extent available
and in the form then maintained by Supplier, applicable requirements, standards,
policies, operating procedures and other documentation relating to the affected
Products and Services; and (ii) necessary access to the systems and sites from
which the affected Products and Services were provided, provided such access by
Customer's third-party providers shall be subject to such providers' compliance
with Supplier's safety, security and confidentiality requirements..
(C) If and to the extent requested by Customer, Supplier shall
assist Customer in developing a plan which shall specify the tasks to be
performed by the Parties in connection with the Termination Assistance Services
and the schedule for the performance of such tasks.
(D) Supplier will provide the Termination Assistance Services
for the Termination Assistance Period at no additional cost except to the extent
that resources included in the fees otherwise being paid by Customer to Supplier
cannot be used to provide the Termination Assistance Services.
(E) Following the Termination Assistance Period, Supplier
shall: (i) answer questions from Customer or Customer's designee regarding the
Products and Services on an "as needed" basis as agreed upon by Customer and
Supplier; and (ii) deliver to Customer any remaining Customer-owned reports and
documentation still in Supplier's possession.
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(F) Upon request from Customer, Supplier shall, to the extent
permitted by third-party contracts:
(1) make available any Supplier Equipment or Systems
dedicated to the performance of the affected Products or Services, by allowing
Customer or its designee to: (a) purchase, at the lesser of fair market value
and book value, any such Supplier Equipment or System owned by Supplier; and (b)
assume the lease of any such Supplier Equipment or System leased by Supplier;
(2) transfer or assign, upon Customer's request, any
third-party contracts applicable to the affected Products and Services for
maintenance, business continuity services or other necessary third-party
services being used by Supplier and dedicated to the delivery and performance of
the affected Products and Services, to Customer or its designee, on terms
acceptable to all parties;
(3) continue to provide the Products and Services and
any Termination Assistance Services requested by Customer that may be required
to facilitate the transfer of the Products and Services requested by Customer to
Customer or Customer's designee;
(4) upon request from Customer, allow Customer or its
designee to offer employment to, and to hire, Supplier employees performing
full-time as of the date the termination notice is given, or who have performed
full-time 3 of the last 6 months prior to the date termination notice is given,
the affected Products and Services; and
(5) provide to Customer, in the form and of the
content requested by Customer, inventories of the Equipment and Software used in
connection with the provision of the Products and Services as needed.
(G) Supplier shall not degrade the quality or level of its
performance during the Termination Assistance Period.
19.10 RIGHTS UPON TERMINATION. Upon termination or expiration of this
Framework Agreement, any Category Agreement or Transaction Agreement, each Party
shall forthwith return to the other all papers, materials and properties of the
other held by such Party in accordance with the terms of Section 12.9 and 10 and
subject to the terms of Article 13. In addition, each Party will assist the
other Party in the orderly termination of the applicable Agreements and the
transfer of all items, tangible and intangible, as may be necessary for the
orderly, non-disrupted business continuation of each Party. Other rights and
duties of each of the Parties upon termination or expiration of any Category
Agreement or Transaction Agreement shall be set forth in the applicable Category
Agreement or Transaction Agreement.
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20. REMEDIES
20.1 REMEDIES OF EITHER PARTY. If a material breach by either Party
shall occur and be continuing, the other Party shall have the following remedies
(except as specified otherwise in any other applicable Agreement):
(A) terminate all or part of the applicable Agreement to the
extent of the terms contained therein and return any and all Products covered
thereunder to the Party furnishing same, in the manner required therein for
redelivery at the end of the applicable Agreement's term, except that such
return shall be at the sole expense of the defaulting Party;
(B) by written notice to the defaulting Party, declare the
applicable Agreement to be terminated, without prejudice to either Party's
rights in respect to the obligations then accrued and remaining unsatisfied;
(C) pursue the recovery of actual damages arising out of such
breach, subject to the limitations set forth in Sections 20.3 and 20.4;
(D) seek specific performance by the defaulting Party of its
obligations hereunder; and
(E) exercise any other right or remedy that may be available
under the applicable Category Agreement and Transaction Agreement, at law or in
equity.
20.2 NO WAIVER. In no event shall the acceptance by Customer, or the
application by Supplier, of any license, maintenance or other credit pursuant to
the Agreements be deemed to be a waiver by Customer of any of its rights under
the Agreements or at law or in equity. Notwithstanding the foregoing, either
Party's failure or delay in performing any minor or technical aspect of its
performance obligations hereunder shall not be considered a material breach
under the Agreements unless and until such failure or delay remains uncured for
a period of thirty (30) days following the first occurrence thereof, or recurs
repeatedly to the extent that the successful performance of the Agreements may
be adversely affected.
20.3 CONSEQUENTIAL DAMAGES. Except with respect to claims or actions
resulting from a Party's gross negligence, willful, wanton or reckless
misconduct or intentional misconduct, 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 interruption or indemnity hereunder),
even if it has been advised of the possible existence thereof.
20.4 DIRECT DAMAGES. Neither Customer nor Supplier shall be liable to
the other Party for any direct damages arising out of or relating to its
performance hereunder, whether based on an action or claim in contract, equity,
negligence, tort or otherwise, for all events, acts or omissions, in the
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aggregate, in an amount exceeding the Direct Damages Cap. In the event a Party
is liable hereunder for damages in excess of the Direct Damages Cap, in the
aggregate, the other Party may terminate the applicable Agreement in whole or in
part. The following shall be considered direct damages and a Party shall not
assert that they are consequential damages pursuant to Section 20.3 to the
extent they result from a Party's failure to perform its obligations in
accordance with the terms of the Agreements:
(A) costs and expenses of recreating or reloading any of
Customer's lost, stolen or damaged information;
(B) costs and expenses of implementing a work-around or
temporary fix in respect of a failure by Supplier to perform all or any part of
its obligations hereunder;
(C) costs and expenses of replacing lost, stolen or damaged
Products or Services;
(D) costs and expenses incurred by Customer to cover and
correct errors in Software maintenance and enhancements provided as part of
Supplier's performance hereunder;
(E) costs and expenses incurred by Customer to procure from an
alternate supplier, or to perform itself, all or any part of Services the
performance of which is the obligation of Supplier hereunder, to the extent in
excess of Supplier's charges hereunder;
(F) straight time, overtime or related expenses incurred by
Customer, including overhead allocations of Customer for Customer's employees,
wages and salaries of additional employees, travel expenses, overtime expenses,
telecommunications charges and similar charges, due to failure of Supplier to
provide all or any part of the Services incurred in connection with any of the
above; and
(G) fines, penalties, assessments or other charges incurred in
connection with any of the above.
20.5 EXCLUSIONS. The limitations or exculpations of liability set forth
in Sections 20.3 and 20.4 are not applicable: (i) to indemnification claims as
set forth in Article 15 except for those indemnification claims based on a
breach of Sections 10.1, 10.2, 10.4, 10.6, 10.8, 10.9, 10.10 and 10.11; (ii) to
liability resulting from the gross negligence or willful or wanton misconduct or
intentional misconduct of a Party; (iii) to any other liability expressly
excluded from limitation by the applicable Agreement.
21. RESOLUTION OF DISPUTES
21.1 RESOLUTION OF DISPUTES OF INVOICES. If Customer disputes
any amount on any Supplier invoice, Customer and Supplier agree to use all
reasonable efforts to resolve such dispute within sixty (60) days after Customer
provides written notification of the dispute to Supplier. Both Parties agree to
provide full supporting documentation concerning any disputed amount or invoice
within thirty (30) days after written notification of the dispute. Provided that
one Party furnishes written notification of the dispute to the other Party
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within thirty (30) days, neither Party shall have any obligation, during the
sixty (60) day period specified above, to pay any amount that remains in
dispute.
21.2 RESOLUTION OF ALL DISPUTES. Except as otherwise expressly set
forth in a Category Agreement or Transaction Agreement, disputes arising out of
or relating to the Agreements shall first be discussed by the Customer Project
Manager and Supplier Project Manager. Any dispute that cannot be resolved within
twenty (20) business days at the Project Manager level shall be referred to the
Corporate Contract Managers. Upon notification to the Corporate Contract
Managers, the Parties may pursue available legal and equitable remedies.
22. AUDIT RIGHTS; RECORDS RETENTION
22.1 AUDITS (PROCESSING). Upon notice from Customer, Supplier shall
grant to such auditors and inspectors as Customer may designate in writing, with
access to any of Supplier's sites or facilities used in the provision of the
Products or Services (including, but not limited to, any Supplier Equipment) for
the purposes of performing audits or inspections of the Customer's financial
statements. Supplier shall provide such auditors and inspectors any assistance
that they may reasonably require. If any audit by an auditor designated by
Customer or a regulatory authority results in Supplier being notified that it is
not in compliance with any law, regulation, audit requirement or generally
accepted accounting principle relating to Supplier's performance hereunder,
Supplier shall take actions to comply with such audit.
22.2 CUSTOMER EXPENSES. Customer shall bear the expense of any such
compliance that is:
(A) required by a law, regulation or other audit requirement
that relates to Customer's business irrespective of Supplier's obligations
hereunder; or
(B) necessary due to Customer's noncompliance with any law,
regulation or audit requirement imposed on Customer.
22.3 SUPPLIER EXPENSES. Supplier shall bear the expense of any such
response that is: (i) required by a law, regulation or other audit requirement
relating to Supplier's business; (ii) the performance of Supplier of its
obligations hereunder; or (iii) necessary due to Supplier's noncompliance with
any law, regulation or audit requirement imposed on Supplier.
22.4 AUDITS (PERFORMANCE AND FEES). Upon reasonable notice from
Customer, Supplier shall provide Customer and its employees, subcontractors,
consultants, representatives and agents with access to any of Supplier's sites
or facilities used in the provision of the Products or Services (including, but
not limited to, any Supplier Equipment) and to such financial records and
supporting documentation as may be reasonably requested by Customer for the
purposes of performing audits and inspections of Supplier's performance and of
the fees charged by Supplier to Customer to determine that Supplier has fully
performed its obligations and that such fees are accurate and in accordance with
the
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Agreements, and that work charged was actually performed. If, as a result of
such audit, Customer determines that Supplier has not performed, Supplier shall
promptly remedy the non-performance and/or issue a credit for the fees related
to the Products or Services that were not provided in accordance with the
applicable Agreements. If, as a result of such audit, Customer determines that
Supplier has overcharged or undercharged Customer, Customer shall notify
Supplier of the amount of such overcharge or undercharge as the case may be, and
Supplier shall promptly pay to Customer the amount of the overcharge, or shall
add the amount of the undercharge to the next invoice. In the event any such
audit reveals an overcharge to Customer during any twelve (12) month period
exceeding five percent (5%) of the aggregate fees paid by Customer to Supplier
during such period with respect to any separate Transaction Agreement, Supplier
shall reimburse Customer for the cost of such audit.
22.5 RECORDS RETENTION. Supplier shall retain records and supporting
documentation sufficient to document the performance of its obligations
hereunder and the related fees charged to Customer, for a minimum of three (3)
years, or such longer period required by law, following the completion of the
transaction to which such performance and fees relate.
22.6 ACCESS. Supplier shall provide to Customer and its employees,
subcontractors, consultants, representatives and agents access to:
(A) records and supporting documentation (including, where
applicable, program Source Code to the extent permitted by law or under the
applicable third party agreements) relating to Supplier's performance hereunder
and the related fees charged by Supplier;
(B) Supplier sites or facilities, as may be necessary for
Customer or its employees, subcontractors, consultants, representatives and
agents to perform the audits described in this Article 22.
22.7 STATUS REPORTS. Supplier shall provide to Customer periodic status
reports in accordance with Customer's audit procedures regarding Supplier's
resolution of any audit-related compliance activity for which Supplier is
responsible.
22.8 AUDIT SOFTWARE. Supplier shall, to the extent permitted under
applicable third party agreements and to the extent such audit software will not
materially degrade Supplier's performance under any of the Agreements or for any
of its other customers, operate and maintain such audit software as Customer or
its employees, subcontractors, consultants, representatives and agents may
provide to Supplier during the Term.
22.9 FACILITIES. Supplier shall provide to Customer and such auditors
and inspectors as Customer may designate in writing, on Supplier's sites and
facilities (or if the audit is being performed on a subcontractor, the
subcontractor's premises if necessary) space, office furnishings (including
lockable cabinets), telephone and facsimile services, utilities and
office-related equipment and duplicating services as Customer or such auditors
and inspectors may reasonably require to perform the audits described in this
Article 22.
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23. ASSIGNMENT
23.1 ASSIGNMENT BY SUPPLIER. Supplier shall not assign any of its
rights or obligations hereunder without Customer's prior written consent to such
assignment. Except where otherwise agreed in writing by Customer, no such
assignment shall release Supplier from its obligations pursuant to the
Agreements.
23.2 ASSIGNMENT BY CUSTOMER. Customer may assign the Agreements in
their entirety to: (i) any majority owned or controlled subsidiary of Customer;
or (ii) a purchaser of the business of Customer applicable to the Products and
Services, upon written notice to, but without the consent of, Supplier. Upon
such assignment and an assumption of liability hereunder by the assignee
Customer shall not be discharged of any further liability pursuant to the
Agreements without Supplier's consent, such consent not to be unreasonably
withheld. Any other assignment of the Agreements in its entirety by Customer may
occur only with the prior written consent of Supplier, which consent shall not
be unreasonably withheld or delayed.
23.3 PARTIAL ASSIGNMENT TO RELATED ENTITY OR PURCHASER.
(A) Customer's rights and obligations with respect to one or
more Transaction Agreements executed pursuant to the Agreements may be assigned
in whole or in part by Customer, and, to the extent permitted by applicable
third-party agreements, any Product owned or licensed hereunder may be leased,
rented or sublicensed to: (i) any majority owned or controlled subsidiary of
Customer; or (ii) to a purchaser of the business of Customer applicable to the
Products and Services upon written notice to, but without the consent of,
Supplier. Such assignment may be to a Related Entity or business unit that is
sold by Customer, to the extent that such assignment relates to the business of
such Related Entity or business unit. Upon such assignment and an assumption of
liability hereunder by the assignee Customer shall not be discharged of any
further liability pursuant to the Agreements insofar as it relates to the rights
and obligations so assigned and the Products that are so leased, rented or
sublicensed, without Supplier's consent, such consent not to be unreasonably
withheld.
(B) Any Related Entity, at its election, shall be deemed to be
Customer under the Agreements for the purposes of purchasing, licensing or
otherwise acquiring Products or Services covered by the Agreements with
Supplier. In such event, the Related Entity shall be deemed Customer for the
purposes of purchasing, licensing or otherwise acquiring any such Products
covered by the Agreements, with all of the rights and privileges hereunder;
provided, however, that the obligations and liabilities of Customer's Related
Entity shall be limited to those set forth in the terms of the Agreements that
are applicable to the specific Transaction Agreements that relate to the rights
and obligations so assigned with respect to the acquisition, purchase, license
or lease between Supplier and the Related Entity.
(C) No partial assignment to any Related Entity of Customer's
rights and obligations relative to any one or more Transaction Agreements shall
preclude any other
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assignment of Customer's rights and obligations under any other Transaction
Agreements to that or any other Related Entity.
23.4 DIVESTED ENTITIES. Supplier shall, upon Customer's request and
subject to the Divested Entity providing Supplier with reasonable assurances
that it will pay all amounts due, provide all or part of the applicable Services
to any Divested Entity for a period of three (3) years after the effective date
of the sale or divestiture, on the same terms as the terms under which such
Services are then being provided to Customer under the applicable Agreements.
24. TAXES
24.1 INFORMATION. Each Party shall provide and make available to the
other Party any applicable resale certificates, information regarding
out-of-state sales or use of Products or Services, and other exemption
certificates or information reasonably requested by the other Party.
24.2 STRUCTURE. The Parties agree to utilize reasonable efforts to
structure the provision and receipt of Products or Services, as the case may be,
in such a fashion as to minimize, to the extent legally permissible, any sales,
use, value-added, withholding, and similar taxes payable by the Customer.
24.3 TAX CREDIT. In the event that the Supplier is entitled to claim a
foreign tax credit benefit with regard to withholding taxes associated with
cross border payments under any Agreement, the parties agree that the Customer
shall not be charged or otherwise billed for such taxes.
24.4 COOPERATION. The Parties shall reasonably cooperate with each
other in connection with the other Party's efforts to minimize its liability for
Taxes, to the extent legally permissible, and to support the other Party upon
audit by applicable taxing authorities in the following manner:
(A) The parties will work together to ensure that the
taxability positions are jointly discussed. Further, Supplier agrees to allow
the Customer Tax Staff, at least annually, and more frequently if reasonably
requested by Customer, and at Customer's expense, to review Supplier's billing
and collection systems relating to Taxes collected by Supplier from Customer
under an Agreement.
(B) In the event Supplier has previously collected Taxes from
Customer and remitted such Taxes to the applicable taxing authority, and such
Taxes pertain to the items described in Section 9.1 (I) (a) or (c), Supplier
shall disclose to Customer, if reasonably requested by Customer, the type of
Taxes, the applicable taxing authority, and the amount of such Taxes.
(C) In the event that a taxing authority does not agree to
audit the charges payable in connection with the Agreement for sales and use tax
purposes, as part of Supplier's sales and use tax audits, and proposes to assess
sales and use taxes directly against Customer on the
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aggregate charges described in sub-Section 9.1 (I) (b) or (d), Supplier shall
work directly with the taxing authority to address audit concerns as they
pertain to the charges or sales and use taxes payable in connection with the
Agreement. In the event that the taxing authority requires any documentation to
be submitted directly by Customer, Supplier agrees to cooperate with Customer in
providing the necessary documentation.
(D) Supplier agrees to pay, and to hold Customer harmless
against, any penalty, interest, or additional tax that may be assessed or levied
as a result of the failure or delay of Supplier or its agents to file any return
or information required by law, rule or regulation. Supplier agrees to provide
reasonable assistance to Customer should Customer contest any taxes imposed on
it which result from the Agreements.
25. MISCELLANEOUS
25.1 COMPLIANCE WITH LAWS AND REGULATIONS. Each of the Parties agrees
that it will comply with all applicable laws, rules, regulations, orders,
conventions, ordinances or standards of the country(ies) of destination or which
relate to the manufacture, labeling, transportation, importation, exportation,
licensing, approval or certification of the goods or services, including, but
not limited to, those relating to environmental matters, wages, hours and
conditions of employment, forced labor, subcontractor selection, government
contracts, discrimination, occupational health/safety and motor vehicle safety.
25.2 INDEPENDENT CONTRACTOR STATUS AND GENERAL LIABILITY PROVISION.
Both Parties shall be deemed to be independent contractors hereunder and, except
as otherwise expressly provided herein or in any other Agreement, shall not be
considered or permitted to be an employee, subcontractor, consultants,
representative, agent, servant, joint venturer or partner of the other. Both
Parties agree to take such steps as may be necessary to ensure that each
subcontractor of the other will be deemed to be an independent contractor and
will not be considered or permitted to be an employee, subcontractor,
consultants, representative, agent, servant, joint venturer or partner of the
other Party. All persons furnished, used, retained or hired by or on behalf of
each Party or any of its subcontractors shall be considered to be solely the
employees or agents of that Party of such subcontractor, and each Party shall be
responsible for insuring there is payment of any and all unemployment, workers
compensation, social security, and other payroll taxes for such persons,
including any related assessments or contributions required by law.
25.3 FORCE MAJEURE. Any delay or failure of either party to perform its
obligations hereunder shall be excused if, and to the extent that, it is caused
by an event or occurrence beyond the reasonable control of the party and without
its fault or negligence, such as, by way of example and not by way of
limitation, acts of God, actions by any governmental authority (whether valid or
invalid), fires, floods, windstorms, explosions, riots, natural disasters, wars,
sabotage, labor problems (including lockouts, strikes and slowdowns), inability
to obtain power, material, labor equipment or transportation, or court
injunction or order; provided, however, that, except as provided in Section
10.10, any Year 2000 compliance problem shall not be deemed to be an event of
force majeure subject to this Section 25.3 and provided that written notice of
such delay (including the anticipated duration of the delay) shall be given by
the affected party to the
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other party as soon as possible after the event or occurrence (but in no event
more than ten (10) days). During the period of such delay or failure to perform
by Supplier, Customer, at its option, may procure Products or Services from
other sources, without liability to Supplier, or have Supplier provide the
Products and Services from other sources in quantities and at times requested by
Customer, and at the price set forth in the applicable Agreement. In addition,
Supplier, at its expense, shall take such actions as are necessary to ensure the
supply of Products and Services to Customer for a period of at least thirty (30)
days during any anticipated labor disruption or resulting from the expiration of
Supplier's labor contract(s). If requested by Customer, Supplier shall, within
ten (10) days provide adequate assurances that the delay shall not exceed thirty
(30) days. If the delay lasts more than thirty (30) days or Supplier does not
provide adequate assurance that the delay will cease within thirty (30) days,
Customer may immediately terminate the affected Services under the Agreements
without liability.
25.4 RELEASES AND WAIVERS. Neither Party shall require waivers or
releases of any personal rights from representatives of the other in connection
with visits to its premises and both Parties agree that no such releases or
waivers shall be pleaded by them or third parties in any action or proceeding.
25.5 NOTICES. Any and all notices permitted or required to be given
under the Agreements shall be deemed duly given: (i) upon actual delivery, if
delivery is by hand; or (ii) upon receipt by the transmitting Party of a
separate confirmation that the facsimile was received; or (iii) upon delivery
into the U.S. mail or any other reputable courier or delivery service, if
delivery is by postage paid registered, certified, or any other traceable method
and that such mail or delivery has been received within five (5) days following
delivery into the U.S. mail or such courier or delivery service. Each such
notice shall be sent to the respective Party at the address indicated below or
to any other address as the respective Party may designate by notice delivered
pursuant to this Section or as set forth in the applicable Transaction
Agreement.
25.6 CUMULATIVE REMEDIES. Except as specifically provided herein, no
remedy made available to Customer or Supplier hereunder is intended to be
exclusive of any other remedy, and each and every remedy shall be cumulative and
shall be in addition to every other remedy provided hereunder or available at
law or in equity.
25.7 AMENDMENT. The Agreements shall not be modified, amended or in any
way altered except by a Change Order or by another instrument in writing signed
by authorized personnel of the Parties for that express purpose. All Change
Orders and amendments executed by authorized personnel pursuant to the terms of
the applicable Agreement shall be binding upon the Parties despite any lack of
consideration.
25.8 BUSINESS CONTINUITY. Terms regarding business continuity may be
set forth in either the applicable Category Agreement or Transaction Agreements.
Supplier acknowledges and agrees that Customer may not have a business
continuity plan in place with respect to a particular Transaction Agreement, and
that Customer's failure to have a business continuity plan in place with respect
to a particular Transaction Agreement shall not be the basis for a claim of a
failure to mitigate damages with respect to that or any other Agreement.
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25.9 NO BROKERS OR INTERMEDIARIES. The Parties agree that the
Agreements and any amendment or modification hereof shall be entered into by and
between Customer and Supplier without representation or involvement of any
broker, intermediary or other third party, and shall be binding upon Customer
and Supplier according to the terms hereof.
25.10 NO WAIVER. No term or condition of the Agreements or of any
document incorporated herein by reference shall be deemed waived and no breach
shall be deemed excused unless such waiver or consent shall be in writing and
signed by the Party claimed to have waived or consented. No consent by any Party
to, or waiver of, a breach by the other, whether express or implied, shall
constitute a consent to, waiver of, or excuse for any different or subsequent
breach.
25.11 PARTIAL INVALIDITY. If any term or provision of the Agreements,
or of any document incorporated herein by reference, shall be found to be
illegal or unenforceable then, notwithstanding such illegality or
unenforceability, the Agreements, and each incorporated document, shall remain
in full force and effect and such term or provision shall be deemed to be
deleted.
25.12 HEADINGS. The headings used in the Agreements are for reference
purposes only and shall not be deemed a part of the Agreements.
25.13 COUNTERPARTS. The Agreements may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
25.14 ENTIRE AGREEMENT. The Agreements are the entire agreement between
the Parties with respect to the subject matter herein or therein, and there are
no other representations, understandings or agreements between the Parties
relative to such subject matter.
25.15 PUBLICITY. Neither Party shall use the other Party's name or
refer to the other Party directly or indirectly in any media release, public
announcement or public disclosure relating to the Agreements or any acquisition
pursuant hereto, including in any promotional or marketing materials, customer
lists, referral lists or business presentations, without consent from the other
Party for each such use or release or if required by law. Neither Party may use
any trademark or service mark of the other Party without that Party's consent,
which consent shall be given in the Party's sole discretion.
25.16 SURVIVAL. All terms of this Framework Agreement shall survive its
expiration or termination for any reason with respect to any Category Agreements
and Transaction Agreements still in effect as of the date of such expiration or
termination. The terms of this Framework Agreement that by their sense and
context are intended to survive shall survive termination or expiration of this
Framework Agreement for any reason whatsoever.
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25.17 GOVERNING LAW; VENUE; SERVICE OF PROCESS. Except as otherwise
expressly set forth in a Transaction Agreement, the Agreements are to be
construed according to the laws of the country (and state/province, if
applicable) from which the applicable Agreement issues as shown by the address
of Customer (including any Related Entity), excluding the provisions of the
United Nations Convention on Contracts for the International Sale of Goods and
any conflict of law provisions which would require application of another choice
of law. Any action or proceedings by Customer against Seller may be brought by
Customer in any court(s) having jurisdiction over Supplier or, at Customer's
option, in the court(s) having jurisdiction over Customer's location, in which
event Supplier consents to jurisdiction and service of process in accordance
with applicable procedures. Any actions or proceedings by Supplier against
Customer may be brought by Supplier only in the court(s) having jurisdiction
over Customer's location.
25.18 THIRD PARTY BENEFICIARIES. Except as set forth otherwise in
Section 1.2, the Parties intend that the Agreements, including any amendments or
modifications hereto, shall not benefit any person or entity other than Customer
or Supplier, or create any right or cause of action in or on behalf of, any
person or entity other than Customer or Supplier.
25.19 COVENANT OF FURTHER ASSURANCES. The Parties covenant and agree
that, during the Term and thereafter and without any additional consideration,
each of Customer and Supplier shall execute and deliver any further legal
instruments and perform any acts which are or may become necessary to effectuate
the purposes of the Agreements and any amendment or modification hereto.
* * *
IN WITNESS WHEREOF, each of the Parties, by its duly
authorized representative, has executed this Framework Agreement as of the
Effective Date.
SUPPLIER CUSTOMER
By: /s/ Glen T. Meakem By: /s/ James Scotti
--------------------------------- ------------------------------
(Print) Glen T. Meakem (Print) James Scotti
----------------------------- ---------------------------
Title: Chief Executive Officer Title: Commodity Manager
------------------------------ ----------------------------
Date: Date:
------------------------------- -----------------------------
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APPENDIX A
GENERAL MOTORS CORPORATION
GLOSSARY
FOR
INFORMATION TECHNOLOGY AGREEMENTS
DEFINITIONS
The following terms when used with initial capital letters (in both singular and
plural forms) in any of the Agreements shall have the respective meanings set
forth in this Appendix.
ACCEPTANCE CRITERIA shall mean the criteria set forth in the applicable
Transaction Agreement regarding Customer's acceptance of the applicable Products
or Services including but not limited to, Year 2000 Compliance and EMU
Compliance as set forth in Section 10.10 and 10.11, respectively, of the
Framework Agreement.
ACCEPTANCE DATE shall mean the date on which Customer notifies Supplier in
writing that Acceptance Testing has been successfully completed based on
satisfactory performance of the Acceptance Criteria.
ACCEPTANCE TEST shall mean one or more procedures, as specified in Category
Agreement or Transaction Agreement for verifying that the Acceptance Criteria
for the applicable Product or System have been satisfied.
ACCEPTANCE TESTING shall mean the process, as specified in a Category Agreement
or Transaction Agreement, through which a Product or System is subjected to the
applicable Acceptance Test.
ADDITIONAL SERVICES shall mean services from Supplier that are within the scope
of Supplier's obligations under existing Category Agreements and Transaction
Agreements.
AGREEMENTS shall mean the Framework Agreement and all Category Agreements and
Transaction Agreements currently in effect.
AUTHORIZED USER shall mean Customer, its Related entities, and Outsourcing
Companies, and its and their employees, agents, consultants or contractors who
need to use a Product or System in the performance of their duties on behalf of
Customer and who are authorized and enabled by Customer to access and utilize
the Product or System.
CATEGORY AGREEMENT shall mean an agreement governing a specific type or category
of transaction (e.g., outsourcing, consulting services, equipment purchase,
software development and software license).
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CHANGE shall mean an addition, deletion or modification to any term, obligation
or other aspect of an Agreement.
CHANGE ORDER shall mean a Change Order Response that has been proposed by
Supplier and accepted by Customer pursuant to the Change Order Procedures.
CHANGE ORDER PROCEDURES shall mean those procedures set forth in Article 2 of
the Framework Agreement as the same may be modified in an Agreement.
CHANGE ORDER REQUEST shall mean a written document prepared by Customer
describing a proposed Change and establishing a reasonably prompt period for
Supplier to respond with a Change Order Response.
CHANGE ORDER RESPONSE shall mean a written document prepared by Supplier that
either: (i) describes a Change desired by Supplier and includes the information
set forth in the Change Order Procedures; or (ii) responds to a Change Order
Request and includes the information set forth in the Change Order Procedures.
COMPENSATION PACKAGE shall mean that compensation package offered to Transferred
Employees, the net effect of which shall be to provide overall compensation that
is no less favorable to such Transferred Employees taken as a whole to that
received by them from Customer or from Customer's existing Outsourcing Company,
as applicable, but that is, to the extent possible in light of the foregoing,
consistent with Supplier's standard policies in existence at that time.
COMPONENT shall mean any constituent part of a Product, whether provided by
Supplier or any other source.
CONFIDENTIAL INFORMATION shall mean Customer Confidential Information or
Supplier Confidential Information, as applicable.
CONSULTING SERVICES shall mean Services generally described as consulting to be
provided by Supplier to Customer that are related to Customer's information
technology environment, as such Consulting Services are further defined in the
applicable Transaction Agreements.
CONVERSION PERIOD shall mean a reasonable period of time, not to exceed six
(6)months, during which Customer converts to a new Operating System Software.
CORPORATE CONTRACT MANAGER shall mean the individual designated by Customer and
Supplier, respectively, pursuant to Section 3.1 of the Framework Agreement.
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CORPORATE SOFTWARE LICENSE shall mean the Software license as defined in Section
4.1 of the Software Licensing Agreement.
CPU shall mean any computer or computer system that is used in the Customer's
business to store, process, or retrieve data or perform other functions using
Operating Systems and application program Software.
CPU SOFTWARE LICENSE shall mean the Software license as defined in Section 4.1
of the Software Licensing Agreement.
CRITICAL PROGRAM ERROR shall me an any Program Error, whether or not known to
Customer, that prohibits or significantly impairs use of a Product as
contemplated in the Documentation, Specifications or any of the applicable
Agreements.
CRITICAL SYSTEMS shall mean the systems identified as critical in the applicable
Transaction Agreement.
CUSTOMER shall mean General Motors Corporation with respect to this Framework
Agreement and the Category Agreements and, as applicable with respect to
Transaction Agreements, those Related Entities of General Motors Corporation as
specified in the applicable Transaction Agreement.
CUSTOMER ASSETS shall mean those assets owned, leased or otherwise held by
Customer and to be used by Supplier in connection with the performance of
Supplier's obligations under the Agreements.
CUSTOMER CONFIDENTIAL INFORMATION shall mean any confidential information
received by Supplier directly or indirectly from Customer or its Related
Entities, or acquired or developed in the course of performance of the
Agreements, including, by way of example only, business affairs, data, designs,
discounts, manuals, training materials and documentation, formulas, ideas,
inventions, know-how, manufacturing processes, mask works, methods (including
but not limited to, PICOS), prices, processes, financial and accounting data,
products and product specifications, systems and technical information and the
terms of the Agreements.
CUSTOMER CORPORATE CONTRACT MANAGER shall mean the individual designated by
Customer from time to time, pursuant to Section 3.1(A) of the Framework
Agreement, that will act as the primary point of contact with respect to
communications to, and from, Supplier regarding the overall relationship of the
Parties. The Customer Corporate Contract Manager will have overall authority to
issue, execute, grand and provide on behalf of Customer any approvals, requests,
notices and other communications required by and Agreement.
CUSTOMER CORPORATE INFORMATION SECURITY PRACTICES AND PROCEDURES OR ISP&P shall
mean Customer's Corporate policy and practices related to information security
prepared by Customer's
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Corporate Chief Technology Officer as the same may be revised from time to time
by Customer's Corporate Chief Technology Officer and will be attached to the
Framework Agreement as Exhibit __.
CUSTOMER CORPORATE INFORMATION TECHNOLOGY ARCHITECTURE AND TECHNICAL STANDARDS
shall mean the document published by Customer's Corporate Chief Technology
Officer containing Customer's information technology strategy, architecture and
standards as the same may be amended from time to time by the Corporate Chief
Technology Officer. When published, such document will be attached to the
Framework Agreement as Exhibit 5.4(D) thereto.
CUSTOMER DELEGATION OF AUTHORITY shall mean the authority delegated by (i) the
Customer Corporate Contract Manager, to Customer Project Managers, or other
Customer personnel, and (ii) the Customer Project Managers to other Customer
personnel, thereby permitting the designee to undertake and obligation on behalf
of Customer or any of its Related Entities. When completed, the Customer
Delegation of Authority will be attached as Exhibit 3.2(A) to the Framework
Agreement and may be modified by Customer at any time, and from time to time, as
set forth on said Exhibit 3.2(A).
CUSTOMER DERIVATIVE WORKS shall have the meaning as set forth in Section 13.4(A)
of the Framework Agreement.
CUSTOMER EQUIPMENT shall mean the computers, hardware and related equipment used
by Customer for its information technology requirements an owned by, or leased
or otherwise provided to, Customer by a third party.
CUSTOMER INFORMATION SYSTEMS AND SERVICES ORGANIZATION OR IS&S shall mean the
organization responsible for the acquisition, implementation and deployment of
Customer's information technology.
CUSTOMER INTELLECTUAL PROPERTY shall mean all Intellectual Property and Customer
Confidential Information (as those terms are understood under United States
law), including any Derivative Works thereof, created, developed or prepared by
or on behalf of Customer or one of its Related Entities, or that are proprietary
to, or otherwise owned by, Customer, one of its Related Entities or one of its
or their third party licensors.
CUSTOMER MODIFICATIONS shall have the meaning set forth in Section 12.2 of the
Software Licensing Category Agreement.
CUSTOMER PROJECT MANAGER shall mean the individual designated by Customer,
pursuant to Section 3.1(B) of the Framework Agreement, and set forth in a
Transaction Agreement that will act as the primary point of contact with respect
to communications to and from Supplier regarding the project contemplated by the
Transaction Agreement. Customer Project Manager will have the authority to
issue, execute, grant and provide on behalf of Customer any approvals,
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requests, notices and other communications required by the project contemplated
by the Transaction Agreement, except as such authority is otherwise reserved to
Customer Corporate Contract Manager.
CUSTOMER SOFTWARE shall mean Software used, owned by or licensed to Customer,
including Customer Third-Party Software.
CUSTOMER THIRD-PARTY SOFTWARE shall mean Software that is used or owned by a
party other than Customer or Supplier and that is licensed to Customer.
CUSTOMER TRAVEL GUIDELINES shall mean the Customer's guidelines for business
travel by its employees, attached as Exhibit 8.5 to the Framework Agreement, as
the same may be modified by Customer from time to time.
CUSTOMER YEAR 2000 COMPLIANCE TEST PROCEDURE shall mean such document containing
Customer's test procedure to test Year 2000 Compliance of any Equipment or
Software, as such may be amended from time to time by the Customer's Corporate
Chief Technology Officer, and which shall be attached to the Framework Agreement
as Exhibit 10.10.
DELIVERABLES shall mean those items to be delivered by Supplier to Customer for
Customer's approval in accordance with the terms set forth in the applicable
Category Agreement or Transaction Agreement.
DELIVERY DATE shall mean that date as defined in Section 5.1 of the Equipment
Agreement.
DERIVATIVE WORKS shall mean a work based on one or more preexisting works,
including, without limitation, a condensation, transformation, expansion or
adaption, that if prepared without authorization of the owner of the copyright
of the preexisting work, would constitute copyright infringement.
DESIGNATED CPU shall mean any CPU or multiple CPU complex forming a part of the
Equipment, including is associated peripheral units, as set forth in the
applicable Transaction Agreement, or the CPU or multiple CPU complex on which
the Licensed Software was first used. The Transaction Agreement may designate
more than one CPU.
DEVELOPED SOFTWARE shall mean Software developed by Supplier by original
authorship or through contracts with third parties as part of or in order to
perform Services.
DIAGNOSTIC TESTING shall mean one of the Acceptance Tests, as specified in a
Category Agreement or Transaction Agreement.
DIRECT DAMAGES CAP shall mean the amount of direct damages equal to the total
amount paid or payable to Supplier under the applicable Transaction Agreement.
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DIVESTED ENTITY shall mean an entity or unit of Customer that is sold or
otherwise divested.
DIVESTED RELATED ENTITY shall mean such Related Entity as defined in Article 8
of the Software Licensing Agreement.
DOCUMENTATION shall mean the user manuals and any other materials in any form or
medium customarily provided by Supplier to the Customer of the related Product
or Service.
EFFECTIVE DATE shall mean, with respect to an Agreement, the date set forth in
the applicable Agreement, or, if no such date is identified, the later date upon
which such Agreement is executed by both Supplier and Customer.
EFFECTIVENESS LEVEL shall mean the result of dividing the Operational Use Time
of the System or Module by the sum of that time plus System or Module Failure
Downtime for the System or Component.
EMPLOYEE TRANSITION DATE shall mean the date identified as the Employee
Transition Date in the applicable Transaction Agreement.
EQUIPMENT shall mean, without limitation, the computers, hardware and related
equipment used in connection with the delivery or receipt of Services, including
central processing units and other processors, controllers, modems,
communications and telecommunications equipment (voice, data and video), cables,
storage devices, printers, terminals, other peripherals and input and output
devices, and other tangible mechanical and electronic equipment intended for the
processing, input, output, storage, manipulation, communication, transmission
and retrieval of information and data.
EMU COMPLIANCE shall have the meaning as set forth in Section 10.11 of the
Framework Agreement.
EQUIPMENT MAINTENANCE shall mean both Preventive and Remedial Maintenance such
that any Customer Equipment in the custody of Supplier will be maintained in a
manner to ensure its continued usability and value, including cosmetic
condition.
EQUIPMENT TESTING shall mean one of the Acceptance Tests as specified in Section
7.5(B) of the Equipment Agreement, or in any Category Agreement or Transaction
Agreement.
ESCROW AGREEMENT shall mean a source code escrow agreement among Customer,
Supplier and an escrow company selected by Customer, a copy of which shall be
attached to the applicable Transaction Agreement and which shall be approved as
part of the Parties' agreement to execute such Transaction Agreement.
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FRAMEWORK AGREEMENT shall mean the Framework Agreement for Information
Technology executed by the Parties as of the Effective Date.
ILLICIT CODE shall mean any (i) illicit code, (ii) hidden files, (iii)
automatically replicating, transmitting or activating code, (iv) virus about
which Supplier knows or should have known, or (v) key, node lock, time-out or
other Product-limiting or Service-limiting function, whether implemented by
electronic or other means.
INSTALLATION DATE shall mean the date, as specified in a Category Agreement or
Transaction Agreement, by which all Components of the applicable Product shall
be installed at the applicable designated Site.
INTELLECTUAL PROPERTY shall mean: all patents and patent applications;
copyrights and copyrightable works; trade secrets, confidential information and
know-how (including but not limited to ideas, formulae, compositions,
manufacturing and production processes and techniques, research and development
information, drawings, specifications, designs, plans, proposals, technical
data, business and marketing plans, customer lists, dealer lists, supplier lists
and related information); and computer software (including but not limited to
data, data bases and documentation), but not including any trademarks, service
marks or trade names.
KEY SUPPLIER PERSONNEL shall mean those employees or contractors of Supplier who
have been or will be assigned substantially full-time to Customer to be
designated Key Supplier Personnel as agreed to by the Parties in a Transaction
Agreement.
LICENSED SITE shall mean, from along all of Customer's Sites, a collection of
geographically contiguous (i.e., adjacent tracts or parcels of real property
separated, if at all, only by publicly dedicated rights of way or private
easements) buildings, each of which, in whole or in part, is occupied or
accessed by Customer and each of which is a permitted locale where the
applicable Licensed Software may be used in accordance with the applicable Site
Software License.
LICENSED SOFTWARE shall mean Software provided or to be provided by Supplier to
Customer under the Software Licensing Agreement and any applicable Transaction
Agreement.
MALFUNCTION INCIDENT REPORT shall mean a report, as specified in a Category
Agreement or Transaction Agreement, by which information about the failure of
the applicable Product or System to meet the performance warranties set forth in
the Agreements is memorialized.
MAINTENANCE SERVICES shall mean Preventive Maintenance and Remedial Maintenance
Services.
MANAGERS shall mean the Corporate Contract Managers and Project Managers.
MINIMUM ACCEPTABLE LEVEL OF PERFORMANCE shall mean the threshold performance
standard, as specified in a Category Agreement or Transaction Agreement, below
which the applicable Product or System is not performing satisfactorily.
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MODULE shall mean a collection of routines and data structures that perform a
specific function within Software.
MSA shall mean that Master Service Agreement between Customer and Electronic
Data Systems Corporation dated June 7, 1996.
NEW TECHNOLOGY shall mean new products, processes, methods or other means
designed to enhance or replace the Products or Services provided pursuant to the
Agreements.
OPERATING SYSTEM SOFTWARE shall mean the Software control program in a CPU that
provides the interface to the CPU and its associated Equipment, and the usage
and allocation of memory resources, processor resources, input/output resources,
and security resources.
OPERATIONAL USE TIME shall mean the accumulated time during which the applicable
Product or System is in actual operation.
OUTSOURCING shall mean obtaining computing or related services from a source
outside of Customer or Customer's Related Entities, possibly as Outsourcing
Services. Such computing or related services may include programming or
executing the Customer's Licensed Software on Customer's CPUs, programming
executing Customer's programs and Licensed Software on Outsourcing Company's
CPUs, or any combination thereof.
OUTSOURCING COMPANY shall mean an entity that provides Outsourcing services or
similar services in the nature of Outsourcing under contract to Customer.
OUTSTANDING SERVICES shall mean Services that are related to Customer's
information technology that have been provided by Customer, Supplier or a third
party outsourcing service provider, to be further defined in the applicable
Transaction Agreements.
PARTY(IES) shall mean the party or parties executing the applicable Agreement.
PERFORMANCE PERIOD shall mean the period of time during which System Acceptance
Testing is measured, as specified in a Category Agreement or Transaction
Agreement.
PICOS shall mean Customer's Purchasing Input Cost Optimization of Suppliers
methodology, as set forth in the booklet entitled "Selling to General Motors",
as modified by Customer from time to time.
PLATFORM shall mean a specific Equipment and Operating System Software
combination that is different from other Equipment and Operating System Software
combinations to the extent that a different version of the Licensed Software is
required to execute properly in the environment established by such Equipment
and Operating System combination.
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PREVENTIVE MAINTENANCE shall mean maintenance performed, or required to be
performed, by Supplier on a scheduled basis to keep a Product or System in good
operating condition in accordance with Supplier's published specifications
therefor and in accordance with any additional specifications contained or
referenced in this Equipment Agreement or any applicable maintenance agreement.
Preventive Maintenance shall include: (i) calibration, testing and any necessary
adjustments, cleaning, lubrication, replacement of worn, defective, or
questionable parts, and minor circuit updating and modifications; (ii)
maintenance and engineering services necessary to retrofit or otherwise install
engineering changes, modifications, and improvements (including the latest
Supplier engineering revision and any and all reliability improvements) made to
any Product or Supplier at any time during the maintenance term for the Product;
and (iii) automatic update services for any and all manuals and documentation
furnished with any Product that is subject to maintenance under this Equipment
Agreement.
PRICING AND PAYMENT EXHIBIT shall mean the exhibit setting forth the pricing
that applies in connection with the applicable Transaction Agreement.
PRIVILEGED WORK PRODUCT shall mean documents, data and databases and all
associated communications that may be subject to the attorney-client privilege.
PRODUCT shall mean any Supplier Equipment, Supplier Software or Supply Item
provided by Supplier pursuant to an Agreement.
PROGRAM ERROR shall mean code in the Licensed Software that produces unintended
results or actions, or that produces results or actions other than those
described in the applicable Specifications. A Program Error includes, without
limitations, any "Critical Program Error."
PROGRAM SET shall mean the group of Products including the Licensed Software
specified in the applicable Transaction Agreement plus any additional Products
licensed by Customer under the Software Licensing Agreement and any applicable
Transaction Agreement.
PROJECT shall mean the total of all Software and related Documentation,
Equipment and Services to be provided by Supplier under a Category Agreement or
any applicable Transaction Agreement.
PROJECT MANAGER shall mean the individuals designated by Customer and Supplier,
respectively, pursuant to Section 3.1(B) of the Framework Agreement.
PROPOSAL shall mean the Supplier's written proposal submitted in response to
Customer's solicitation of same in whatever form such request is made (including
an RFP), and on which Customer's decision to acquire Products or Services from
Supplier through one or more specific transactions as set forth in the
applicable Category Agreements and Transaction Agreements will be based.
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RECOMMENDED EQUIPMENT CONFIGURATION shall mean the Equipment to the extent
utilized by Customer recommended by the Supplier in Supplier's Proposal relating
to a specific proposed transaction that results in the execution of a
Transaction Agreement.
RELATED ENTITIES shall mean any functional entity, division, department, group
affiliates, subsidiaries or parents of a Party. For purposes of this definition,
"affiliate" shall mean any company, partnership or joint venture more than ten
percent (10%) of the interest in which is owned by or under the control of a
Party, parent or subsidiary, at any tier, and any customer, dealer, distributor,
supplier or agent to which Customer wishes to extend Products and Services;
"subsidiary" shall mean any company, partnership or joint venture more than ten
percent (10%) of the voting shares of which, or interest in which, are owned or
controlled by a Party or any parent, other subsidiary or affiliate at any tier;
and "parent" shall mean any company, partnership, or joint venture that owns or
controls more than fifty percent (50%) interest of a Party.
REMEDIAL MAINTENANCE shall mean maintenance performed, or required to be
performed, by Supplier upon the written or oral request of Customer to place the
applicable Product or System back into good operating condition, in accordance
with the standards specified in the definition of "Preventive Maintenance"
herein after it has become inoperative or subject to malfunction.
REQUEST FOR PROPOSAL OR RFP shall mean formal requests by Customer to Supplier
that solicit a Proposal by Supplier to provide certain Products and Services to
Customer.
SERVICES shall mean any Outsourcing Services, programming service, Preventive
Maintenance service, Remedial Maintenance service, Software maintenance service,
conversion service, consulting service, support service or other service
provided by Supplier to Customer as further in the applicable Agreements.
SERVICE LEVELS shall mean the required availability, response times or other
performance standards of Customer's information technology business operations,
including but not limited to such performance standards relating to Critical
Systems, Products and Services, as such performance standards are set forth in
the applicable Transaction Agreement.
SHARED ENVIRONMENT shall mean a site or facility from which Supplier provides
Products or Services to more than one customer.
SITE shall mean all Customer designated locations worldwide, including all
present and future Customer-controlled locations, Customer's customers,
suppliers, dealers and other third parties. Supplier Corporate Contract Manager
will have the authority to issue, execute, grant and provide on behalf of
Supplier any approvals, requests, notices and other communications required by
an Agreement.
SUPPLIER DERIVATIVE WORKS shall have the meaning as set forth in Section 13.4(C)
of the Framework Agreement.
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SUPPLIER EQUIPMENT shall mean Equipment owned by, leased by, or otherwise under
the control of, Supplier.
SUPPLIER INTELLECTUAL PROPERTY shall mean all Intellectual Property including
without limitation, Supplier Confidential Information and any improvements or
modifications thereto and Derivative Works thereof, created, developed or
prepared by or on behalf of Supplier or that are proprietary to, or otherwise
owned by, Supplier or its third party licensors, but not including anything
developed under or in support of the performance of Supplier's obligations under
the Agreements or in accordance with the terms of Section 13.4(B) of the
Framework Agreement.
SUPPLIER MODIFICATIONS shall have the meaning set forth in Section 13.1 of the
Software Licensing Category Agreement.
SUPPLIER PROJECT MANAGER shall mean the individual designated by Supplier,
pursuant to Section 3.1(B) of the Framework Agreement, and set forth in a
Transaction Agreement that will act as the primary point of contact with respect
to communications to and from Customer regarding the project contemplated by the
Transaction Agreement. Supplier Project Manager will have the authority to
issue, execute, grant and provide on behalf of Supplier any approvals, requests,
notices and other communications required by the project contemplated by the
Transaction Agreement, except as such authority is otherwise reserved by
Supplier Corporate Contract Manager.
SUPPLIER SOFTWARE shall mean Software owned by, or licensed to, or otherwise
under the control of, Supplier, including Supplier Third-Party Software.
SUPPLIER THIRD-PARTY SOFTWARE shall mean Software owned by a party other than
Customer or Supplier and which is licensed to Supplier.
SUPPLY ITEM shall mean any cards, paper, ribbons, magnetic tape, other magnetic
storage media and similar items used in connection with the Products and
Services.
SYSTEM shall mean any collection or aggregation of two (2) or more Products that
are designed to perform, or are represented by Supplier as performing or being
capable of performing, as a functional entity. A System may be provided to
Customer by Supplier or by any other supplier and may include Component s or
Products offered by Supplier and those offered by one (1) or more other
suppliers. The Products comprising each System, along with designations of
whether the Supplier is responsible for providing them, are to be specified in
the applicable Transaction Agreement.
SYSTEM ACCEPTANCE TESTING shall mean one of the Acceptance Tests, as specified
in a Category Agreement or Transaction Agreement.
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SYSTEM OR MODULE FAILURE DOWNTIME shall have the meaning as set forth in Section
9.3(C) of the Software Licensing Agreement.
T&M CHARGES shall mean time and material charges.
TAXES shall mean any value-added, country or local sales, use or similar taxes
imposed by and collected on behalf of any taxing authority and any
telecommunications excise taxes, except taxes on the net income of a Party.
TERM shall mean, collectively, the initial term and renewal term, if applicable.
TERMINATION ASSISTANCE PERIOD shall mean a period of up to three (3) years as
may be reasonably required by Customer for the orderly transition of the
affected Services.
TERMINATION ASSISTANCE SERVICES shall mean any services requested by Customer
that may be required during the Termination Assistance Period to facilitate the
transfer of the affected Services to Customer or to a third-party service
provider, as applicable, including providing to Customer or third-party
personnel training in the performance of the affected services.
THIRD-PARTY AGREEMENTS shall mean those third-party agreement identified in the
applicable Transaction Agreement to which Customer is a party and which will
affect, or be affected by, the provision of the Outsourcing Services by
Supplier.
THIRD-PARTY INVOICES shall mean invoices received in connection with the
Supplier-Administered Agreements.
TIME OF RECEIPT shall mean the time of disclosure of the applicable information
to the receiving Party.
TOTAL PURCHASE PRICE shall mean the total amount payable by Customer as set
forth nit eh applicable Transaction Agreement.
TRANSACTION AGREEMENT shall mean an agreement invoking and supplementing this
Framework Agreement and one or more Category Agreements that sets forth terms
specific to that category or categories (e.g., Service Levels).
TRANSFERRED EMPLOYEE shall mean those employees and individual independent
subcontractor personnel of Customer or of its existing outsourcing service
provider previously agreed upon between the Parties and identified in the
applicable Transaction Agreement that will be offered employment or
subcontractor contracts, as applicable, by Supplier.
TRANSITION PERIOD shall mean the period from the Effective Date of the
applicable Transaction Agreement until the Acceptance Date.
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UPGRADE shall mean the exchange, modification or conversion of a Product for or
into a Product that has greater or improved capability, performance or
specifications.
WARRANTY PERIOD shall mean the period of time set forth in a Category Agreement
or Transaction Agreement during which Supplier, at its expense, has specific
responsibilities with respect to Products set forth in a Category Agreement or a
Transaction Agreement.
WORK PRODUCT shall mean all Intellectual Property and Deliverables including any
improvements or modifications thereto, created, developed or prepared by
Supplier or a third party under or in support of the performance of its
obligations under the Agreements, or in accordance with the terms of Section
13.4(B) of the Framework Agreement, but shall not include Supplier Derivative
Works.
YEAR 200 COMPLIANT shall have the meaning as set forth in Section 10.10(B) of
the Framework Agreement.
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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
December 7, 1999
