<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): MARCH 24, 2000
FREEMARKETS, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<CAPTION>
<S> <C> <C>
DELAWARE 000-27913 04-3265483
(State or Other Jurisdiction (Commission File Number) (I.R.S. Employer Identification No.)
of Incorporation or Organization)
</TABLE>
FREEMARKETS CENTER
210 SIXTH AVENUE
PITTSBURGH, PA 15222
(Address of Principal Executive Offices) (Zip Code)
(412) 434-0500
(Registrant's Telephone Number, Including Area Code)
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<PAGE> 2
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) The following audited financial statements of iMark.com, Inc. are filed
as part of this Current Report on Form 8-K, as amended by Form 8-K/A:
Report of Independent Accountants.....................................3
Balance Sheet as of December 31, 1999.................................4
Statement of Operations for the period from January 28, 1999
(inception) through December 31, 1999............................5
Statement of Stockholders' Deficit for the period from
January 28, 1999 (inception) through December 31, 1999...........6
Statement of Cash Flows for the period from January 28, 1999
(inception) through December 31, 1999............................7
Notes to Financial Statements.........................................8
(b) The following unaudited pro forma condensed consolidated financial
statements are filed as part of this Current Report on Form 8-K, as amended
by Form 8-K/A:
Introduction to Unaudited Pro Forma Financial Information............16
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of
December 31, 1999...............................................17
Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet....18
Unaudited Pro Forma Condensed Consolidated Statement of Operations
for the year ended December 31, 1999............................19
Notes to Unaudited Pro Forma Condensed Consolidated Statement of
Operations......................................................20
(c) Exhibits.
2.1 Agreement and Plan of Merger, dated as of March 14, 2000, by
and among FreeMarkets, Inc., EMark Acquisition Corporation and
iMark.com, Inc. (previously filed)
23.1 Consent of PricewaterhouseCoopers LLP
99.1 Press Release dated March 15, 2000 (previously filed)
<PAGE> 3
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of iMark.com, Inc.:
In our opinion, the accompanying balance sheet and the related statements
of operations, stockholders' deficit and cash flows present fairly, in all
material respects, the financial position of iMark.com, Inc. (a development
stage company) at December 31, 1999, and the results of its operations and its
cash flows for the period from January 28, 1999 (inception) through December 31,
1999 in conformity with accounting principles generally accepted in the United
States. 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 audit. We conducted our audit of these statements in
accordance with auditing standards generally accepted in the United States,
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 audit provides a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
April 5, 2000
3
<PAGE> 4
IMARK.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
DECEMBER 31, 1999
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,693,294
Accounts receivable 1,538
Other current assets 582,033
-----------
Total current assets 4,276,865
Property and equipment, net 1,126,858
Other assets, net 50,429
-----------
Total assets $ 5,454,152
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 883,067
Current portion of long-term debt 517,910
Other current liabilities 115,662
-----------
Total current liabilities 1,516,639
Long-term debt, net of discounts 3,568,524
-----------
Total liabilities 5,085,163
-----------
Redeemable convertible preferred stock, $0.0001 par value, 4,590,647 shares
authorized; 4,485,047 shares issued and outstanding;
aggregate liquidation preference of $11,212,617 6,180,352
-----------
Stockholders' deficit:
Common stock, $0.0001 par value, 35,000,000 shares authorized;
4,574,500 shares issued and outstanding 457
Additional capital 1,535,844
Unearned stock-based compensation (1,457,628)
Loans issued for purchase of common stock (1,414)
Deficit accumulated during development stage (5,888,622)
-----------
Total stockholders' deficit (5,811,363)
-----------
Total liabilities and stockholders' deficit $ 5,454,152
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE> 5
IMARK.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
PERIOD FROM JANUARY 28, 1999 (INCEPTION) THROUGH DECEMBER 31, 1999
Revenues $ 1,400
Operating costs:
Research and development 861,286
Sales and marketing 2,905,027
General and administrative 2,020,517
-----------
Total operating costs 5,786,830
-----------
Operating loss (5,785,430)
Interest income 84,984
Interest expense (188,176)
-----------
Net loss from development stage activities $(5,888,622)
===========
The accompanying notes are an integral part of the financial statements.
5
<PAGE> 6
IMARK.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' DEFICIT
PERIOD FROM JANUARY 28, 1999 (INCEPTION) THROUGH DECEMBER 31, 1999
<TABLE>
<CAPTION>
Deficit
Accumulated
Shares of Unearned Loans Issued During the Total
Common Common Additional Stock-based for Purchase Development Stockholders'
Stock Stock Capital Compensation of Common Stock Stage Deficit
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 28, 1999
(inception) -- $ -- $ -- $ -- $ -- $ -- $ --
Issuance of common stock for cash 4,574,500 457 19,735 -- (1,414) -- 18,778
Unearned stock-based compensation,
Net of amortization of $58,481 -- -- 1,516,109 (1,457,628) -- -- 58,481
Net loss from development stage
activities -- -- -- -- -- (5,888,622) (5,888,622)
----------------------------------------------------------------------------------------------
Balance at December 31, 1999 4,574,500 $457 $1,535,844 $(1,457,628) $(1,414) $(5,888,622) $(5,811,363)
==============================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE> 7
IMARK.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
PERIOD FROM JANUARY 28, 1999 (INCEPTION) THROUGH DECEMBER 31, 1999
<TABLE>
<CAPTION>
<S> <C>
Cash flows from operating activities:
Net loss from development stage activities $(5,888,622)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 87,689
Non-cash interest expense 139,348
Amortization of stock-based compensation 58,481
Cash (used in) provided by changes in:
Accounts receivable (1,538)
Other current assets (582,033)
Other assets (50,429)
Accounts payable 883,067
Other current liabilities 115,662
-----------
Net cash used in operating activities (5,238,375)
-----------
Cash flows from investing activities:
Capital expenditures (1,214,547)
-----------
Net cash used in investing activities (1,214,547)
-----------
Cash flows from financing activities:
Proceeds from long-term debt and notes payable 5,204,648
Debt issuance costs (50,000)
Proceeds from issuance of redeemable convertible preferred stock, net 4,972,790
Proceeds from issuance of common stock, net 18,778
-----------
Net cash provided by financing activities 10,146,216
-----------
Net change in cash and cash equivalents 3,693,294
Cash and cash equivalents at beginning of period --
-----------
Cash and cash equivalents at end of period $ 3,693,294
===========
Supplemental disclosure:
Cash paid for interest $ 40,163
===========
Supplemental disclosure of non-cash financing activities:
Conversion of notes payable to redeemable convertible preferred stock $ 600,000
===========
Issuance of redeemable convertible preferred stock warrants in connection with
long-term debt $ 481,216
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE> 8
IMARK.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS
iMark.com, Inc. (a development stage company) was incorporated in Delaware
on January 28, 1999 for the purpose of providing a business-to-business online
marketplace for surplus equipment and inventory. Since its inception, iMark.com,
Inc. ("iMark.com" or the "Company") has devoted its efforts primarily to
creating its website, developing markets for its services and raising capital.
As such, iMark.com is considered a development stage company.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
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.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated using 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.
DEFERRED FINANCING COSTS
Deferred financing costs are amortized into interest expense over the life
of the related financing instruments.
IMPAIRMENT OF LONG-LIVED ASSETS
The carrying values of long-lived assets 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 the expected future net
cash flows is less than the carrying value.
REVENUE RECOGNITION
The Company recognizes revenue primarily from fees charged for transactions
conducted between a buyer and seller on the Company's website. Transaction fees
are recorded when persuasive evidence of an agreement exists, the fee is fixed
and determinable, the buyer and seller have consummated their transaction and
collectibility is probable. Amounts billed and/or collected in excess of revenue
earned are recorded as deferred revenue.
8
<PAGE> 9
IMARK.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred, and include costs
to enhance and maintain the Company's website, which is used to conduct
transactions on the Internet.
ADVERTISING COSTS
Advertising costs represent the costs of both media advertising and
direct-mail promotions. Media advertising costs are expensed at the time the
advertisement is first published, while direct-mail promotion costs are expensed
as the materials are mailed. Advertising expenses were $1,740,000 for the period
from January 28, 1999 (inception) through December 31, 1999. As of December 31,
1999, the Company had prepaid advertising costs of $234,000 representing
advertising costs for which first publishing had not occurred. No direct-mail
promotion costs were recorded as assets as of December 31, 1999.
STOCK-BASED COMPENSATION
The Company accounts for the grant of stock options to employees in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation". SFAS No. 123 gives companies the
option to adopt the fair value method for expense recognition of employee stock
options or to continue to account for employee stock options using the intrinsic
value method, as outlined under Accounting Principles Board 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. The Company records deferred stock compensation for stock options
granted at exercise prices less than fair value. Such deferred stock
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.
INCOME TAXES
Deferred income taxes are recorded using the liability method. Under this
method, deferred tax assets and liabilities are determined based on the
differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
COMPREHENSIVE INCOME (LOSS)
There are no differences between net loss and comprehensive loss for the
period from January 28, 1999 (inception) through December 31, 1999.
9
<PAGE> 10
IMARK.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 financial statements.
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment (and their related useful lives) consisted of the
following at December 31, 1999:
Computer hardware (5 years) $ 713,666
Computer software (3 years) 496,588
Furniture and fixtures (5 years) 4,293
----------
1,214,547
Less accumulated depreciation 87,689
----------
$1,126,858
==========
NOTE 4. LONG-TERM DEBT
In March and April 1999, the Company borrowed $600,000 in convertible
subordinated notes payable from certain investors. In May 1999, all principal
and related accrued interest payable outstanding under the notes was converted
into 485,047 shares of Series A preferred stock. In addition, the investors
received warrants to purchase 105,600 shares of redeemable convertible preferred
stock at $1.25 per share. The warrants expire in July 2003. The Company recorded
the warrant value of $126,000 as interest expense with a corresponding increase
in the carrying value of the redeemable convertible preferred stock. The value
of the warrant was determined using the Black-Scholes pricing model, an
estimated volatility of 198%, a risk-free interest rate of 5.63%, an expected
life of four years and a dividend rate of 0%.
10
<PAGE> 11
IMARK.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In December 1999, the Company borrowed $4,000,000 from a bank under a
subordinated loan agreement. Amounts outstanding under the loan agreement bore
interest at 11.0% and were due in monthly payments beginning in January 2000 and
ending in December 2002. The loan agreement was collateralized by all of the
assets of the Company. In connection with the loan agreement, the lender had the
right to purchase up to $1,000,000 of the Company's preferred stock. If the
Company had closed its next sale of preferred stock prior to May 31, 2000, the
purchase price of the stock to be purchased by the lender would have been 70% of
the price paid by other investors; otherwise, the purchase price of the stock
would have been $1.25 per share. This purchase right, valued at $429,000, was
recorded as a discount on debt with a corresponding increase in the carrying
value of the preferred stock when the loan agreement was executed. Amortization
of the debt discount was $12,000 during the period ended December 31, 1999.
Additionally, the lender had the right to purchase $500,000 of equity at an
undiscounted price if and when the next equity-financing event occurred. The
loan agreement required obtaining the lender's consent prior to paying any cash
dividends.
In December 1999, the Company borrowed $605,000 under a $1,000,000 loan
facility to finance computer hardware and software equipment. This debt bears
interest at an effective interest rate of 12.9% per annum, is payable in 48
installments of $14,806 per month with a balloon interest payment of $91,000 at
maturity, and is secured by the computer equipment purchased. In connection with
this facility, the Company agreed to grant the lender a warrant to purchase up
to $55,000 worth of the Company's preferred stock. The timing of the next
equity-financing event will determine the number and price of shares and may
result in a share price less than fair value. The Company recorded the warrant
value of $53,000 as a discount on debt with a corresponding increase in the
carrying value of the preferred stock when the loan agreement was executed. The
value of the warrant was determined using the Black-Scholes pricing model, an
estimated volatility of 198%, a risk-free interest rate of 5.63%, an expected
life of four years and a dividend rate of 0%. Additionally, the lender had the
right to purchase $250,000 of equity at an undiscounted price if and when the
next equity-financing event occurs.
Scheduled maturities of debt, exclusive of amounts representing discounts
on debt, for each of the years ending December 31 are as follows:
2000 $ 517,910
2001 1,846,964
2002 2,055,976
2003 169,089
2004 14,709
----------
$4,604,648
==========
NOTE 5. REDEEMABLE CONVERTIBLE PREFERRED STOCK
In July 1999, the Company completed an offering of 4,000,000 shares of
Series A preferred stock at $1.25 per share. Each share of Series A preferred
stock is convertible into common stock on a one-for-one basis. Conversion is
automatic upon the closing of an initial public offering of common stock with
gross proceeds to the Company of at least $15,000,000 and with a minimum
pre-money valuation of the Company of $60,000,000.
11
<PAGE> 12
IMARK.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Holders of Series A preferred stock are entitled to the number of votes
equal to the number of shares of common stock into which their preferred stock
is convertible. Holders of Series A preferred stock are entitled to receive,
when and as declared by the board of directors, non-cumulative dividends at the
annual rate of $0.10 per share, payable in preference and priority to any
payment of a dividend on common stock.
In the event of liquidation, the holders of Series A preferred stock are
entitled to a liquidation preference equal to $1.25 per share plus all declared
but unpaid dividends for each outstanding share. Any remaining assets shall be
distributed on a pro rata basis to both common and preferred stockholders until
aggregate distributions on the Series A preferred stock total $2.50 per share.
Any remaining assets shall be distributed among the holders of the common stock.
At any time after May 28, 2007, the holders of not less than 50% of the
preferred stock then outstanding may elect to have the outstanding Series A
preferred stock partially or fully redeemed. The redemption amount is payable in
cash in an amount equal to $1.25 per share (appropriately adjusted for any
dilution) plus any declared and unpaid dividends on the outstanding shares of
Series A preferred stock.
NOTE 6. INCOME TAXES
The Company had no income tax provision for the period from January 28,
1999 (inception) to December 31, 1999 since the Company had a net taxable loss
in the period. At December 31, 1999, the Company had federal net operating loss
carryforwards of approximately $5,721,000, which expire in 2019. Deferred tax
assets and liabilities reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Deferred tax assets and liabilities consisted of the following at December
31, 1999:
Net operating losses $ 2,116,838
Deferred stock-based expense 21,638
Depreciation (13,750)
-----------
Net deferred tax asset 2,124,726
Less valuation allowance (2,124,726)
-----------
$ --
===========
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, 1999
since the realization of these assets in future periods is uncertain.
12
<PAGE> 13
IMARK.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. COMMITMENTS AND CONTINGENCIES
The Company leases its office facilities under an operating lease. Rent
expense for the period from January 28, 1999 (inception) through December 31,
1999 was approximately $224,000. Future minimum payments under this operating
lease as of December 31, 1999 are as follows:
2000 $528,000
2001 542,000
2002 361,000
NOTE 8. STOCKHOLDERS' EQUITY
COMMON STOCK
In March 1999, the Company issued 3,820,000 shares of common stock to the
two founders of the Company, 75% of which shares are subject to a repurchase
right at the option of the Company. One quarter of such repurchase right expired
in March 2000, and the remainder expires ratably over the subsequent 36 months.
Upon termination of employment, any unvested shares may be repurchased by the
Company at the issuance price. As of December 31, 1999, 2,865,000 of these
shares remained subject to repurchase.
As of December 31, 1999, the Company had reserved 1,550,500 shares of
common stock for issuance under its 1999 Stock Option Plan, 149,600 shares of
common stock for issuance pursuant to outstanding warrants, and 4,590,647 shares
of common stock for issuance upon the conversion of the Series A preferred
stock.
1999 STOCK OPTION PLAN
During 1999, the Company adopted the 1999 Stock Option Plan. Under the 1999
Stock Option Plan, options to purchase up to 2,085,000 shares of the Company's
common stock may be granted to eligible participants at exercise prices
determined by the Board of Directors. Stock options granted under the 1999 Stock
Option Plan are immediately exercisable and vest in accordance with a vesting
schedule, not to exceed 10 years. On January 12, 2000, the Company increased the
total number of shares available for option grants under the 1999 Stock Option
Plan from 2,085,000 shares to 4,261,479 shares. Activity in 1999 under the 1999
Stock Option Plan was as follows:
<TABLE>
<CAPTION>
SHARES EXERCISE WEIGHTED-
AVAILABLE FOR OPTIONS PRICE PER AVERAGE
GRANT OUTSTANDING SHARE EXERCISE PRICE
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at January 28, 1999 (inception) -- -- -- --
Shares authorized 2,085,000 -- -- --
Options granted (1,696,801) 1,696,801 $0.01-$0.13 $0.08
Options exercised -- (534,500) $0.02-$0.13 $0.03
--------------------------
Balance at December 31, 1999 388,199 1,162,301 $0.02-$0.13 $0.11
==========================
</TABLE>
13
<PAGE> 14
IMARK.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Certain unvested options have been exercised and are subject to repurchase
by the Company until such shares vest. As of December 31, 1999, 529,500 shares
were subject to right of repurchase at prices ranging from $0.02 to $0.13 per
share. The weighted-average remaining contractual life of the options
outstanding as of December 31, 1999 was 9.5 years.
Included in the 1999 Stock Option Plan activity are grants of 60,000 stock
options to three of the Company's advisors. The Company also issued, outside of
the 1999 Stock Option Plan, 40,000 shares of restricted stock to two additional
Company advisors. The instruments issued to the Company's advisors vest over 36
months. At December 31, 1999, approximately 77,600 of these options and shares
remained unvested. The Company recorded stock compensation of approximately
$25,000 in 1999 on these grants. Also included in the 1999 Stock Option Plan
activity are stock options for 85,500 shares of common stock that were granted
to three consultants to the Company and vested immediately. The Company recorded
stock compensation of approximately $10,000 in 1999 in connection with these
grants. The value of the stock options and restricted stock was determined using
the Black-Scholes pricing model, an estimated volatility of 198%, a risk-free
interest rate of 5.63%, an expected life of three years and a dividend rate of
0%.
In connection with certain options to purchase common stock granted to an
employee in December 1999, the Company recorded deferred compensation of
$1,234,000. This amount represents the difference between the exercise price and
the deemed fair value of the Company's common stock at the time of such grant,
which were $0.13 per share and $4.74 per share, respectively.
The Company's pro forma net loss, assuming that the Company had recorded
compensation for the fair value of employee stock option grants in accordance
with SFAS No. 123, was $5,891,000. The fair value of options granted was
estimated at the date of grant using the minimum value method option pricing
model with the following assumptions: a risk-free interest rate of 5.63%, an
expected life of three years and a dividend rate of 0%. The weighted-average
fair value of options granted to employees during 1999 was $0.81 per share.
EQUITY INSTRUMENTS GRANTED TO CONSULTANTS
During 1999, the Company granted 120,000 shares of restricted stock to
three consultants. These instruments vest over 12 months. As of December 31,
1999, 26,400 of these shares were subject to a right of repurchase at prices
ranging from $0.01 to $0.02 per share. The Company recorded stock compensation
of $24,000 in 1999 as a result of these grants. The value of the restricted
stock was determined using the Black-Scholes pricing model, an estimated
volatility of 198%, a risk-free interest rate of 5.63%, an expected life of
three years and a dividend rate of 0%.
NOTE 9. RELATED PARTY TRANSACTION
In 1999, the Company paid approximately $76,000 for legal services to a law
firm that is also a stockholder in the Company.
14
<PAGE> 15
IMARK.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. EMPLOYEE BENEFIT PLAN
During 1999 the Company established a defined contribution retirement plan
qualifying under Section 401(k) of the Internal Revenue Code. The Company made
no contributions to the plan during the period ended December 31, 1999.
NOTE 11. SUBSEQUENT EVENTS
In January 2000, the Company issued to an investor a $1,000,000 convertible
note and a warrant to purchase up to $200,000 worth of preferred stock of the
Company, in exchange for $1,000,000 in cash.
In March 2000, the Company was sold to FreeMarkets, Inc. Under the terms of
the agreement, all outstanding shares and options were exchanged for 1,750,000
shares of common stock and options of FreeMarkets, Inc. The acquisition was
accounted for as a purchase business combination.
15
<PAGE> 16
INTRODUCTION TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information of FreeMarkets,
Inc. and Subsidiaries (the "Company") has been prepared to give effect to the
acquisition of iMark.com, Inc. ("iMark"), as discussed more fully below.
The acquisition of iMark was accounted for using the purchase method of
accounting pursuant to which the purchase price was allocated to the tangible
and intangible assets acquired and liabilities assumed based on their estimated
fair values.
The pro forma adjustments presented are based upon available information
and include certain assumptions and adjustments that the Company believes are
reasonable under the circumstances. These adjustments are directly attributable
to the transaction referenced above and are expected to have a continuing impact
on the Company's business, results of operations and financial condition.
The historical condensed consolidated balance sheet of the Company as of
December 31, 1999 and the historical condensed consolidated statement of
operations of the Company for the year ended December 31, 1999 were derived from
the audited consolidated financial statements of the Company included in its
1999 Annual Report on Form 10-K.
The historical condensed balance sheet of iMark as of December 31, 1999 and
the historical condensed statement of operations of iMark for the period from
January 28, 1999 (inception) through December 31, 1999 was derived from the
audited financial statements of iMark included elsewhere herein.
The unaudited pro forma condensed consolidated balance sheet of the Company
as of December 31, 1999 gives effect to the acquisition of iMark as if it
occurred on December 31, 1999. The unaudited pro forma condensed consolidated
statement of operations of the Company for the year ended December 31, 1999
gives effect to the acquisition of iMark as if it occurred on January 1, 1999.
The unaudited pro forma financial information and related notes are
provided for informational purposes only and (i) do not necessarily reflect the
financial condition or results of operations of the Company that would have
actually resulted had the acquisition referred to above been consummated as of
the dates indicated; (ii) are not intended to project the Company's financial
condition or results of operations for any future period; and (iii) with respect
to the unaudited pro forma condensed consolidated statement of operations for
the year ended December 31, 1999, do not reflect the estimated effect of a
non-recurring income statement charge of $7.4 million resulting from the
write-off of in-process research and development associated with the acquisition
of iMark.
The unaudited pro forma financial information should be read in conjunction
with the section of the Company's 1999 Annual Report on Form 10-K entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the audited consolidated financial statements and notes thereto
as of December 31, 1999 and 1998, and for each of the three years in the period
ended December 31, 1999 also included in the Company's 1999 Annual Report on
Form 10-K.
16
<PAGE> 17
FREEMARKETS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1999
<TABLE>
<CAPTION>
FreeMarkets, Inc. FreeMarkets, Inc.
and Subsidiaries iMark.com, Inc. and Subsidiaries
Historical Historical Adjustments Pro Forma
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $177,204,143 $ 3,693,294 $ -- $180,897,437
Short-term investments 33,040,205 -- -- 33,040,205
Accounts receivable, net 6,887,270 1,538 -- 6,888,808
1,441,111 582,033 -- 2,023,144
------------ ----------- ------------ ------------
Total current assets 218,572,729 4,276,865 -- 222,849,594
Property and equipment, net 12,114,672 1,126,858 -- 13,241,530
Other assets, net 966,680 50,429 332,309,908 A 333,327,017
------------ ----------- ------------ ------------
Total assets $231,654,081 $ 5,454,152 $332,309,908 $569,418,141
============ =========== ============ ============
Accounts payable $ 4,763,795 $ 883,067 $ -- $ 5,646,862
Other current liabilities 3,458,872 115,662 6,000,000 B 9,574,534
Current portion of long-term debt 1,499,962 517,910 -- 2,017,872
------------ ----------- ------------ ------------
Total current liabilities 9,722,629 1,516,639 6,000,000 17,239,268
Long-term debt 3,277,716 3,568,524 (573,000)C 6,273,240
------------ ----------- ------------ ------------
Total liabilities 13,000,345 5,085,163 5,427,000 23,512,508
Redeemable convertible preferred stock -- 6,180,352 (6,180,352)D --
Stockholders' equity 218,653,736 (5,811,363) 333,063,260 E 545,905,633
------------ ----------- ------------ ------------
Total liabilities and stockholders'
equity $231,654,081 $ 5,454,152 $332,309,908 $569,418,141
============ =========== ============ ============
</TABLE>
See notes to unaudited pro forma condensed consolidated balance sheet.
17
<PAGE> 18
FREEMARKETS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
A The acquisition of iMark is to be accounted for as a purchase business
combination. The purchase price was $339.6 million, consisting of the
issuance of 1,556,007 shares of the Company's common stock valued at $296.6
million, the issuance of 193,993 options to purchase the Company's common
stock with a fair value of $37.0 million upon assumption of iMark options
and estimated transaction costs of $6.0 million. The purchase price was
calculated based on the average closing price per share of the Company's
common stock from March 14, 2000 through March 16, 2000 of $190.625. The
fair value of the assumed options is calculated using a Black-Scholes
pricing model. For purposes of the unaudited pro forma condensed
consolidated financial information, the purchase price allocation is as
follows:
Issuance of stock $296,613,834
Fair value of options 36,979,916
Estimated transaction costs 6,000,000
------------
Purchase price 339,593,750
Excess fair value of liabilities assumed over assets
acquired (including $482,000 increase in the fair
value of long-term debt) 113,011
------------
$339,706,761
============
Goodwill $329,891,983
Developed technology 2,417,925
------------
Subtotal 332,309,908
In-process research and development 7,396,853
------------
$339,706,761
============
B Represents estimated transaction costs of $6.0 million associated with the
acquisition of iMark.
C Assumes the issuance of 157,596 shares of iMark in exchange for a
$1.1 million reduction in the outstanding balance of long-term debt. This
issuance is subject to the terms of an existing iMark debt agreement. At
the time the debt was issued by iMark, the value of this equity feature was
recorded as a discount on the long-term debt. Partially offsetting this
decrease is an increase in the fair value of the long-term debt of
$482,000.
D Represents the conversion of 4,485,047 shares of iMark redeemable
convertible preferred stock into iMark common stock at a conversion ratio
of one-to-one immediately prior to the acquisition.
E Represents the issuance of 1,556,007 shares of the Company's common stock
at $190.625 per share and the issuance of 193,993 options to purchase the
Company's common stock with a fair value of $37.0 million, upon assumption
of iMark options, discussed in (A) above, the issuance of 157,596 shares of
iMark to the holder of long-term debt discussed in (C) above, the
conversion of iMark convertible preferred stock discussed in (D) above, the
elimination of the stockholders' equity of iMark (adjusted for the
conversion of iMark redeemable convertible preferred) and the write-off of
$7.4 million of estimated in-process research and development associated
with the acquisition.
Issuance of stock $296,613,834
Fair value of options 36,979,916
------------
333,593,750
Additional investment discussed in (C) above 1,055,000
Conversion of iMark convertible preferred stock 6,180,352
Elimination of iMark stockholders' equity (368,989)
In-process research and development (7,396,853)
------------
$333,063,260
============
18
<PAGE> 19
FREEMARKETS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
FreeMarkets, Inc. FreeMarkets, Inc.
and Subsidiaries iMark.com, Inc. and Subsidiaries
Historical Historical Adjustments Pro Forma
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 20,880,024 $ 1,400 $ -- $ 20,881,424
Cost of revenues 12,166,097 -- -- 12,166,097
------------ ----------- ------------- -------------
Gross profit 8,713,927 1,400 -- 8,715,327
Operating costs:
Research and development 4,912,672 861,286 -- 5,773,958
Sales and marketing 11,938,960 2,905,027 -- 14,843,987
General and administrative 9,316,266 2,020,517 -- 11,336,783
Goodwill and other amortization -- -- 110,769,969 A 110,769,969
Stock-based expense 5,200,321 -- -- 5,200,321
------------ ----------- ------------- -------------
Total operating costs 31,368,219 5,786,830 110,769,969 147,925,018
------------ ----------- ------------- -------------
Operating loss (22,654,292) (5,785,430) (110,769,969) (139,209,691)
Other income, net 832,883 (103,192) 25,105 B 754,796
------------ ----------- ------------- -------------
Net loss $(21,821,409) $(5,888,622) $(110,744,864) $(138,454,895)
============= =========== ============= =============
Earnings per share:
Basic and diluted $ (1.46) $ (8.41) D
------------ -------------
Weighted average shares outstanding 14,914,189 16,470,196 D
Pro forma earnings per share:
Basic and diluted $ (0.79) C $ (4.73) D
------------- -------------
Weighted average shares outstanding 27,717,073 C 29,273,080 D
------------- -------------
</TABLE>
See notes to unaudited pro forma condensed consolidated statement of operations.
19
<PAGE> 20
FREEMARKETS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
A Represents the amortization of goodwill and developed technology resulting
from the acquisition of iMark over a period of three years.
B Represents the elimination of $12,000 of interest expense related to the
amortization of discounts associated with a beneficial conversion feature
and a stock purchase warrant and a reduction in interest expense of $13,000
attributable to the differential between Company's borrowing rate of 9.25%
compared to iMark's borrowing rate and the decrease in the outstanding
principal amount of $1.1 million due to the issuance of 157,596 shares of
iMark described elsewhere herein.
C Pro forma earnings per share included in the Company's historical statement
of operations for the year ended December 31, 1999 is computed using the
weighted average shares outstanding including the conversion of the
Company's convertible preferred stock as of January 1, 1999 or when issued
if later. All of the Company's outstanding convertible preferred stock
converted into common stock at a ratio of one-to-one in connection with the
Company's initial public offering completed in December 1999.
D Represents the Company's historical and pro forma earnings per share
adjusted for the issuance of 1,556,007 shares in connection with the
acquisition of iMark.
20
<PAGE> 21
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of
Pittsburgh, Commonwealth of Pennsylvania on June 5, 2000.
FREEMARKETS, INC.
/s/ JOAN S. HOOPER
------------------------------------
JOAN S. HOOPER
Chief Financial Officer
(Principal Financial and Accounting Officer)
