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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT
TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 000-27913
FREEMARKETS, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 04-3265483
(State or Other Jurisdiction of Incorporation or
Organization) (I.R.S. Employer Identification No.)
ONE OLIVER PLAZA
210 SIXTH AVENUE
PITTSBURGH, PA 15222
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (412) 434-0500
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
NONE NOT APPLICABLE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 1, 2000, the aggregate market value of voting common stock held
by non-affiliates of the registrant, based upon the last reported sale price for
the registrant's common stock on the Nasdaq National Market on such date, as
reported in The Wall Street Journal, was $5,629,830,517 (calculated by excluding
shares owned beneficially by directors and executive officers as a group from
total outstanding shares solely for the purpose of this response).
The number of shares of the registrant's common stock outstanding as of the
close of business on March 1, 2000 was 35,481,605.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the definitive Proxy Statement of FreeMarkets, Inc. to
be used in connection with the 2000 Annual Meeting of Stockholders (the "Proxy
Statement") are incorporated by reference into Part III of this Annual Report on
Form 10-K to the extent provided herein. Except as specifically incorporated by
reference herein, the Proxy Statement is not to be deemed filed as part of this
Annual Report on Form 10-K.
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PART I
ITEM 1. BUSINESS
Certain statements contained in this Annual Report on Form 10-K ("Form
10-K") constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements involve known and
unknown risks, uncertainties and other factors that may cause our or our
industry's actual results, levels of activity, performance or achievements to be
materially different than any expressed or implied by these forward-looking
statements. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential," "continue," or the negative of
these terms or other comparable terminology.
Although we believe that the expectations in the forward-looking statements
are reasonable, we cannot guarantee future results, levels of activity,
performance or achievements.
THE COMPANY
FreeMarkets creates business-to-business online auctions for buyers of
industrial parts, raw materials, commodities and services. We created online
auctions for over $2.7 billion worth of purchase orders in 1999 and nearly $1.0
billion worth of purchase orders in 1998. Since 1995, we have created online
auctions for products in more than 70 supply verticals, including injection
molded plastic parts, commercial machinings, metal fabrications, chemicals,
printed circuit boards, corrugated packaging and coal. More than 3,000 suppliers
from over 45 countries have participated in our auctions.
We provide access to our online auction marketplace to industrial buyers
and suppliers. The FreeMarkets marketplace includes proprietary online auction
technology, technical operations, market making services, access to a global
database of suppliers and supplier research, call center support to buyers and
suppliers in over 30 languages and marketplace rules. Our current clients
include the Commonwealth of Pennsylvania, United Technologies Corporation, The
Quaker Oats Company, Owens Corning, Eaton Corporation, Emerson Electric Company,
FirstEnergy Corp., SmithKline Beecham plc, Navistar International and Delphi
Automotive Systems Corporation.
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 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.
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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 a buyer's specifications. Because these
materials are typically not standardized, they ordinarily 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 frequently 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 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 these factors limit competition among suppliers, 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.
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. This 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 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 technology in many different formats to address the
characteristics of a specific 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.
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- 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, commodities
and services. Each client has its own unique organizational structure,
approach to purchasing and 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 and related services and technology. 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
material categories 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 have recently expanded our operations in
Europe and have opened offices in Asia. We plan to continue to expand in
these markets and to create a presence in Latin America to better serve
multinational enterprises. We have served buyers in the United States,
Europe and Asia, with over 3,000 suppliers from more than 45 countries
participating in our online auctions. We believe that we can assist
buyers in identifying potential suppliers worldwide and that our service
will continue to 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.
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- 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.
- EXPAND OUR ASSET RECOVERY MARKETPLACE. We recently announced the
execution of a definitive agreement to acquire iMark.com, Inc., an
Internet marketplace for surplus equipment and inventory. We intend to
expand the operations of iMark.com by combining its Internet marketplace
with our existing asset recovery website in order to provide a full range
of assets recovery services and client support to buyers and sellers of
surplus equipment and inventory.
- DEVELOP STRATEGIC RELATIONSHIPS. We intend to develop strategic
relationships with vendors of enterprise resource planning and other
software, systems integrators, other Internet marketplaces and consulting
firms to encourage the adoption of our technology and the use of our
services.
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 each custom market, we work with a
client, typically over a period that ranges from two to eight weeks, to
accomplish the following:
Prepare Select Suppliers
Identify Request and Distribute Conduct Implement
Potential for Request for Online Results
Savings Quotation Quotation Auction
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 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
that 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
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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 for 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 Centers in
Pittsburgh and Brussels provide 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 30 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 instances, our client may perform
additional analyses and due diligence before making an award. Because 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 60 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 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 United Technologies 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
United Technologies 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.
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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 50
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 our client previously paid for these components. 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
our client previously paid for these components. The package included 813
different precision machined metal components, which previously were produced by
as many as 56 different 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 our
client previously paid for these labels. 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 8% below the prices our client
previously paid for this material. 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.
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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 conducted auctions grew to more than 70
as of December 31, 1999. The following list includes some of the product
categories in which we have had the most experience:
Ball bearings Corrugated packaging Injection molded plastics Pallets
Chemicals Die castings Metal fabrications Printed circuit boards
Coal Diesel fuel Metal stampings Service center metals
Commercial machinings Fasteners Molded rubber Sugar
Computer monitors Hotel services Motor freight Transformers
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, commodities and services. To date, we have created online auctions
for more than 50 clients. We served the following clients in 1999:
Allegheny Ludlum Corporation Fleetguard/Nelson, Inc. Northern Border Pipeline Company
BP Amoco Corporation (which does business as (a subsidiary of Enron)
Cinergy Services, Inc. Cummins Engine) Owens Corning
Commonwealth of Pennsylvania General Electric Company Pepsico, Inc.
Compagnie de Saint-Gobain (acting through its The Quaker Oats Company
Conopco, Inc. GE Industrial Systems Ralston Purina Company
(which does business as business component) Raytheon Company
Unilever General Motors Corporation Reliant Energy, Incorporated
Home & Personal Care USA) Hillenbrand Industries, Inc. (formerly known as Houston
Dell Computer Corporation Honeywell International Inc. Lighting & Power)
Delphi Automotive Systems (formerly AlliedSignal Inc.) Remington Arms Inc.
Corporation ISPAT Mexicana, S.A. de C.V. SmithKline Beecham plc
Dofasco Inc. McKinsey & Company, Inc. Austria TRW Inc.
The Dow Chemical Company (together serving Voest Alpine United Technologies Corporation
Eaton Corporation Industries Company) Visteon Automotive Systems
Emerson Electric Company Navistar International Welch Foods Inc.
FirstEnergy Corp.
We provide services to our clients under 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 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 December
31, 1999, our direct sales force consisted of 21 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 analyze which portions of
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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 three 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 technology provides an easy-to-use graphical interface
that suppliers use to submit bids and that our clients use to watch their
auctions progress. Suppliers participate from their own offices, where key
decision makers submit bids. Our BidWare technology 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.
Our BidWare technology is designed for high-value online bidding involving
complex market conditions. This Internet-based technology supports global,
real-time auctions and has driven more than $4 billion in global
business-to-business commerce. Our BidWare technology supports a significant
number of auction formats, enabling global suppliers to bid in multiple
currencies, across multiple countries for multi-year contracts, all over the
Internet.
We operate Market Operations Centers in Pittsburgh and Brussels to ensure
that our auctions are actively managed and run 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 Centers can
quickly respond in the event of technical or other difficulties. In addition,
the staff in our Market Operations Centers actively support 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 technology includes: real-time price feedback, which allows
bidders to see market dynamics at work; an overtime feature that extends the
market bid time in highly competitive situations; continuous remote connections
with bidders worldwide; and advanced security features to protect the
confidentiality of online bids. Our technology also incorporates a wide range of
bidding features and auction formats that we developed to address specific needs
of industrial purchasers. Examples of the types of auctions we can conduct using
our BidWare technology include:
- "transformation auctions", where our clients can make direct price
comparisons of similar products with unique attributes (such as coal from
different mines);
- "multi-currency auctions", where our clients and suppliers can choose to
monitor the auction in the currency of their choice;
- "index auctions", where our clients can bid upon commodities
characterized by volatile pricing, against known indices (such as
agricultural commodities); and
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- "net present value auctions", where our clients can evaluate proposals
that have varying prices over time (such as materials for which suppliers
bid decreasing costs over time to reflect anticipated productivity
improvements).
Because our BidWare technology may be operated in many different formats
and set many different control parameters, we can create tailored auctions that
address particular industrial purchasing situations.
We spent $842,000 on research and development in 1998 and $4.9 million in
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;
- business-to-business exchanges that are established by industrial
companies and are designed to provide industry-wide electronic
procurement solutions;
- 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 may consider. 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,
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
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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
Hong Kong and the European Community. We have cleared the opposition period in
the European Community for our trademark application for FreeMarkets and we have
applied for these trademarks in other jurisdictions, including China, Japan and
Singapore. We have also applied for United States and foreign registration for
many marks associated with our business, including the FreeMarkets logo,
FreeMarketPlace, CBE, Smart RFQ and a family of HUB marks including CoalHub,
SupplyHub and FuelHub.
We have filed patent applications in the United States with respect to
proprietary features of our technology which we currently use or intend to use
in the future including applications relating to how we conduct auctions and the
business processes for making markets and innovative uses of sophisticated
auction techniques. We cannot assure you that these patents will be issued, or
that even if issued, these patents will not be successfully challenged by others
or invalidated or 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. At times, we may 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, patents 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 in general. 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 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.
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EMPLOYEES
As of December 31, 1999, we had 376 employees worldwide, including 193 in
market making, 52 in research and development, 33 in sales and marketing, 33 in
technical operations and 65 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.
RECENT DEVELOPMENTS
In March 2000, we announced that we have signed a definitive agreement to
acquire iMark.com, a privately-held Internet marketplace for surplus equipment
and inventory based in Austin, Texas. Under the terms of the agreement,
1,750,000 shares of our common stock and options to acquire our common stock
will be exchanged for all outstanding shares, options and warrants in iMark.com.
The acquisition will be accounted for as a purchase and is expected to close by
the end of March 2000.
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."
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
The following risk factors and other information included in this Annual
Report should be carefully considered. The risks and uncertainties described
below are not the only ones we face. Additional risks and uncertainties not
presently known to us or that we currently deem immaterial also may impair our
business operations. If any of the following risks actually occurs, our
business, financial condition and operating results could be materially
adversely affected.
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 confront 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 utilized our
services 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
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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 incurred 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.
WE HAVE EXPERIENCED REVENUE CONCENTRATION IN THE PAST; THE LOSS OF OUR LARGEST
CLIENT WOULD REDUCE OUR REVENUES AND NET INCOME
Revenue concentration from United Technologies, our largest client, was 34%
in 1999 and 58% in 1998. Our agreement with United Technologies expires in
December 2000 and may be terminated by United Technologies upon 30 days' prior
notice. Although United Technologies would be required to pay us a substantial
fee upon termination, the fee would not compensate us for the resulting loss of
revenues. We may not be able to keep United Technologies as a client in the
future, and United Technologies may terminate or fail to renew its agreement
with us. The loss of this client would diminish our revenues and operating
results, possibly forcing us to curtail our growth plans and incur greater
losses.
Revenue concentration from General Motors Corporation, our second largest
client, was 15% in 1999 and 19% in 1998. Our agreement with General Motors was
to originally expire in September 2001, but was cancelable by General Motors at
any time upon 90 days' prior notice. In January 2000, General Motors notified us
that it was exercising its right to terminate the agreement. The termination
will become effective in April 2000. General Motors is not required to pay any
termination fee for terminating its agreement with us. There was a significant
drop in our stock price after the announcement of General Motors' intention to
terminate. Any similar terminations from United Technologies or from other
clients may also cause our stock price to decrease.
OUR CURRENT CLIENTS OR PROSPECTIVE CLIENTS MAY ESTABLISH THEIR OWN
BUSINESS-TO-BUSINESS EXCHANGES.
In recent months, many industrial companies have announced their intentions
to establish their own business-to-business exchanges. These exchanges may
provide auction functionality and other services similar to ours and may
diminish the need for our services. While we do not know the effect that these
exchanges may have on the market for online auction services, it is possible
that the existence of these exchanges, or even the anticipated existence of
planned exchanges, may result in our losing clients and revenue and may impair
our ability to grow our business.
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.
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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 relatively
small number of 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.
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 could 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
information 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 adequate 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
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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 1999 increasing 168% compared to 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.
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, and any such
acquisitions may be material in size. 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 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 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 12 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 clients 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.
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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.
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
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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.
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. Further, any new technology we implement, including, for example,
FreeMarketPlace, may not achieve the results or gain the market acceptance we
anticipate. Reduced market acceptance of our services or our software 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.
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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 not continue to develop at recent rates and a
sufficiently broad base of business clients 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
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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 auction technology and business 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 and applied for Unites States and foreign registrations for some
certain trademarks, domain names and logos and our software, documentation and
other written materials are copyrighted, but these protections may not be
adequate. Although we require each of our employees to enter into a
confidentiality agreement and some key employees are subject to non-competition
agreements, these agreements may not satisfactorily safeguard our intellectual
property against unauthorized disclosure.
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, patents,
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
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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 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.
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 recently established an office in Asia and 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.
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;
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- 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.
OUR STOCK PRICE IS VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES FOR
STOCKHOLDERS
The market price for our common stock is 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.
SUBSTANTIAL SALES OF OUR COMMON STOCK IN THE FUTURE 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.
As of December 31, 1999, we had outstanding 35,139,147 shares of common
stock. This includes the 4,140,000 shares we sold in our initial public
offering. Investors could resell 3,255,000 sold in our public offering
immediately. The remaining 90.7%, or 31,884,147 shares, of our total outstanding
shares became, or will become, available for resale in the public market as
shown in the chart below:
NUMBER PERCENTAGE OF
OF SHARES TOTAL OUTSTANDING DATE OF AVAILABILITY FOR RESALE INTO PUBLIC MARKET
- ---------- ----------------- --------------------------------------------------
2,629,386 7.5% December 10, 1999.
302,991 0.8% March 9, 2000.
26,589,566 75.7% June 7, 2000. However, the underwriters can waive
this restriction and allow these stockholders to
sell their shares at any time.
2,362,204 6.7% After September 2, 2000.
- ---------- -----------
31,884,147 90.7%
========== ===========
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.
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MANAGEMENT
EXECUTIVE OFFICERS
The following table sets forth specific information regarding our executive
officers as of March 1, 2000:
NAME AGE POSITION(S)
- ---------------------------- --- ------------------------------------------------------------
Glen T. Meakem.............. 36 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
Scott D. Grimes............. 37 Vice President of Corporate Business Development
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
GLEN T. MEAKEM co-founded FreeMarkets in 1995 and has served as our
President, Chief Executive Officer, Chairman of the Board and a director since
our inception. Prior to co-founding FreeMarkets, from May 1994 to February 1995,
Mr. Meakem was employed as a manager in the Corporate Business Development Group
of General Electric Co. From January 1992 to April 1994, Mr. Meakem was an
associate with McKinsey & Company, Inc., a management consulting firm, where he
focused on industrial sourcing and commodities trading for clients in the United
States and Mexico. From June 1986 to December 1991, Mr. Meakem was an officer in
the United States Army Reserve. During this period, Mr. Meakem served two
separate active duty tours in the Army, the first from July 1986 to December
1986, and the second from December 1990 to June 1991. During his second active
duty tour, Mr. Meakem volunteered for and served as a combat engineer platoon
leader in Operation Desert Storm. From January 1987 to July 1989, Mr. Meakem
held product marketing positions of increasing responsibility with Kraft-General
Foods Corporation. Mr. Meakem earned an A.B. in government from Harvard
University and an M.B.A. from Harvard Business School.
SAM E. KINNEY, JR. co-founded FreeMarkets in 1995 and has served as our
Secretary and a director since our inception. From April 1995 to May 1998, he
was a Vice President of FreeMarkets, and since May 1998 he has been an Executive
Vice President. He also served as Acting Chief Financial Officer from June 1998
to September 1999, and as our Treasurer from our inception until September 1999.
Prior to co-founding FreeMarkets, from March 1992 to April 1995, Mr. Kinney was
employed as a consultant and engagement manager at McKinsey & Company, Inc. From
July 1990 to March 1992, Mr. Kinney worked as a special projects and budget
manager for Lucas Aerospace Power Equipment Corporation. From July 1986 to June
1988, Mr. Kinney was employed as a consultant with Booz-Allen & Hamilton, Inc.,
a management consulting firm. During his tenure as a consultant with McKinsey &
Company and Booz-Allen & Hamilton, Mr. Kinney worked on issues of sourcing,
industrial distribution and operations effectiveness for industrial, healthcare
and financial institution clients. Mr. Kinney earned an A.B. in economics from
Dartmouth College and an M.B.A. from the Amos Tuck School of Business
Administration at Dartmouth College.
DAVID J. BECKER has served as an Executive Vice President and our Chief
Operating Officer since March 1998. From October 1996 to February 1998, Mr.
Becker served as our Vice President of Market Making. Prior to joining
FreeMarkets, from March 1992 to September 1996, Mr. Becker was employed 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.
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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.
SCOTT D. GRIMES has served as our Vice President of Corporate Business
Development since February 2000. Prior to joining FreeMarkets, Mr. Grimes was
employed by Paging Network Inc., a leading provider of wireless messaging and
information services across the United States and Canada. Most recently, Mr.
Grimes served as senior vice president of corporate development for Vast
Solutions, a Paging Network subsidiary that provides wireless data communication
and software solutions to businesses. Prior to joining Paging Network, Mr.
Grimes was a principal in the Los Angeles office of McKinsey & Company, Inc.,
where he focused on strategy, mergers and acquisitions and marketing issues in
the semiconductor, telecommunications, energy, healthcare, media and consumer
goods industries. Mr. Grimes earned a B.S. in electrical engineering from Union
College and an M.B.A. from Stanford 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.
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ITEM 2. PROPERTIES
Our corporate offices are located in leased space at One Oliver Plaza, 210
Sixth Avenue, Pittsburgh, Pennsylvania. The telephone number of our principal
executive office is (412) 434-0500.
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 several
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.
ITEM 3. LEGAL PROCEEDINGS
Ten securities fraud class action complaints have been filed against us and
three executive officers in the federal court in Pittsburgh. The complaints
allege that we and the other defendants violated Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 because we and they allegedly knew that General
Motors would terminate its contract by the first quarter of 2000 and allegedly
concealed this information.
By order dated February 29, 2000, the court consolidated all of the cases
into a single proceeding. That order also established a timetable for the filing
of: motions to appoint lead plaintiffs and lead counsel, an amended consolidated
complaint and our response to the amended consolidated complaint.
We and the individual defendants believe that the claims asserted against
us misstate the facts and are completely without merit, and we and they intend
to vigorously defend the litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET FOR THE COMPANY'S COMMON STOCK
Our common stock has been quoted on the Nasdaq National Market since
December 10, 1999. On March 1, 2000, the last sale price of the common stock was
$207.44 per share. The following table sets forth the range of high and low bid
prices for the common stock for the periods indicated. Such over-the-counter
market quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not necessarily represent actual transactions.
HIGH LOW
------- -------
1999
Fourth Quarter (December 10, 1999 to December 31,
1999).............................................. $367.88 $ 48.00
2000
First Quarter (January 1, 2000 to March 1, 2000)...... $370.00 $163.88
As of March 1, 2000, there were approximately 496 holders of record of our
common Stock. We believe that a substantially larger number of beneficial owners
hold shares of our common Stock in depository or nominee form.
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.
RECENT SALES OF UNREGISTERED SECURITIES
Since January 1, 1999, we have sold and issued the following securities:
1. In March 1999, we 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.
2. In April 1999, we issued 2,305,434 shares of Series C preferred stock to
78 investors for an aggregate consideration of $10,996,920.
3. In September 1999, we 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 $30,455,040.
4. In September 1999, we 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.
5. From January 1, 1999 through December 9, 1999, we granted options to
purchase an aggregate of 5,425,300 shares of common stock to a number of
our employees, directors, officers and individuals who served as
consultants. No consideration was received by us upon grant of any such
options. As of March 1, 2000, 943,568 of the total options granted have
been exercised for an aggregate consideration of $6,844,372.
6. In January 2000, we issued 195,600 shares of common stock upon the
exercise of warrants previously issued to an investor for an aggregate
consideration of $105,950.
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, the
issuances described in Item 9 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 of these transactions
represented their intentions to acquire the securities for investment only
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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 options
issued in such transactions. We believe that all recipients had adequate access,
through their relationships with the registrant, to information about the
registrant.
USES OF PROCEEDS FROM REGISTERED SECURITIES
On December 9, 1999, the Commission declared effective our Registration
Statement on Form S-1 (File No. 333-86755). The Registration Statement covered
the sale of 3,600,000 shares of our common stock at an offering price of $48 per
share. The managing underwriters in the offering were Goldman, Sachs & Co,
Morgan Stanley Dean Witter, Donaldson Lufkin & Jenrette and Wit Sound View
(formerly Wit Capital Corporation) (the "Underwriters"). In addition to the
3,600,000 shares of common stock offered, the Underwriters were given an option
to purchase up to an additional 540,000 shares of common stock at an offering
price of $48 per share. On December 15, 1999 we sold to the Underwriters
4,140,000 shares of common stock for an aggregate consideration of $198,720,000,
less underwriting discounts and commissions of $13,910,400, and other expenses
of $2,582,368, for net proceeds to us of $182,227,232. The other expenses of
$2,582,368 were paid to third parties not affiliated with us. Principally all of
the net proceeds have been invested in interest-bearing investment grade
securities. As disclosed in our Registration Statement on Form S-1, we have no
specific plans for the net proceeds other than general corporate purposes and
working capital.
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ITEM 6. SELECTED FINANCIAL DATA
MARCH 13, 1995
(INCEPTION)
YEAR ENDED DECEMBER 31, THROUGH
----------------------------------------------------- DECEMBER 31,
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- --------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues..................... $ 20,880 $ 7,801 $ 1,783 $ 409 $ 17
Cost of revenues............. 12,166 4,258 1,149 506 25
----------- ----------- ----------- ----------- ----------
Gross profit (loss).......... 8,714 3,543 634 (97) (8)
----------- ----------- ----------- ----------- ----------
Operating costs:
Research and development... 4,913 842 292 394 333
Sales and marketing........ 11,939 656 586 321 59
General and
administrative.......... 9,316 2,026 837 630 526
Stock-based expense........ 5,200 -- -- -- --
----------- ----------- ----------- ----------- ----------
Total operating costs........ 31,368 3,524 1,715 1,345 918
----------- ----------- ----------- ----------- ----------
Operating (loss) income...... (22,654) 19 (1,081) (1,442) (926)
Other income, net.......... 833 215 20 11 4
----------- ----------- ----------- ----------- ----------
Net (loss) income............ $ (21,821) $ 234 $ (1,061) $ (1,431) $ (922)
=========== =========== =========== =========== ==========
Earnings per share:
Basic...................... $ (1.46) $ 0.02 $ (0.10) $ (0.14) $ (0.13)
Diluted.................... (1.46) 0.01 (0.10) (0.14) (0.13)
Pro forma basic and
diluted................. (0.79)
Weighted average shares:
Basic...................... 14,914,189 11,191,670 10,618,481 10,316,599 7,262,352
Diluted.................... 14,914,189 26,776,611 10,618,481 10,316,599 7,262,352
Pro forma basic and
diluted................. 27,717,073
AS OF DECEMBER 31,
-----------------------------------------------
1999 1998 1997 1996 1995
-------- ------ ------ ---- -----------
(UNAUDITED)
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash and short-term investments.................. $210,244 $1,656 $1,999 $523 $106
Working capital.................................. 208,850 3,814 2,783 505 (81)
Total assets..................................... 231,654 6,870 3,336 985 306
Long-term debt, excluding current portion........ 3,278 413 -- 21 --
Total stockholders' equity....................... 218,654 4,592 3,052 792 104
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ITEM 7. 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 our consolidated
financial statements and related notes.
OVERVIEW
FreeMarkets creates business-to-business online auctions for buyers of
industrial parts, raw materials, commodities and services. We created online
auctions for over $2.7 billion worth of purchase orders in 1999 and nearly $1.0
billion worth of purchase orders in 1998. Since 1995, we have created online
auctions for products in more than 70 supply verticals, including injection
molded plastic parts, commercial machinings, metal fabrications, chemicals,
printed circuit boards, corrugated packaging and coal. More than 3,000 suppliers
from over 45 countries have participated in our auctions.
DETERMINATION OF AUCTION VOLUME AND ACHIEVABLE SAVINGS
We believe that one indicator of our market acceptance is the estimated
dollar volume of 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.
Auction volume does not necessarily correlate with either our revenues or
our operating results in any particular period due to the seasonality of our
clients' purchasing needs and the timing of the addition of new clients. Over
longer periods of time, we anticipate a stronger relationship between auction
volume and our revenues and operating results. However, 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:
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997 1996 1995
------ ---- ---- ---- ----
(IN MILLIONS)
Auction volume....................... $2,725 $979 $257 $124 $9
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.
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 materials, commodities or
services. The monthly fees that we receive are for the use of our technology,
supplier and supply market information, market making and market operations
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
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. We recognize revenues from our fixed monthly
fees ratably as we provide services. Our agreements range in length from a
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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 the thresholds are achieved. The majority of our agreements
entered into since January 1999 include incentive payment provisions. We expect
that as our auction volume grows, the percentage of revenues attributable to
these incentive payments will also grow over time.
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. Most of our service agreements that we have signed since January 1999
do not include supplier-paid commissions, although we continue to receive
supplier-paid commissions under some agreements.
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.
CLIENT CONCENTRATION
We depend on United Technologies for a substantial portion of our revenues.
This client represented 34% of our revenues in 1999 and 58% of our revenues in
1998. 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 will continue to
decrease.
We have also experienced concentration from General Motors, our second
largest client, which represented 15% of our revenues in 1999 and 19% of our
revenues in 1998. In January 2000, General Motors notified us that it was
exercising its right to terminate its agreement with us on 90 days' prior
notice. The termination will be effective in April 2000. We do not expect the
termination of this agreement to have a material impact on our revenues or
results of operations in 2000 due to the anticipated continued diversification
of our revenue base and the fact that a majority of the revenues earned under
the General Motors agreement were derived from its former subsidiary, Delphi
Automotive Systems. In January 2000, we entered into an agreement with Delphi,
but due to the continued diversification of our client base and our revenue
growth, we do not expect this agreement to be material to our revenues in the
year ending December 31, 2000.
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RESULTS OF OPERATIONS
The following table sets forth consolidated statement of operations data as
a percentage of revenues for the periods indicated:
YEAR ENDED DECEMBER 31,
------------------------
1999 1998 1997
------ ----- -----
Revenues................................................... 100.0% 100.0% 100.0%
Cost of revenues........................................... 58.3 54.6 64.4
------ ----- -----
Gross profit............................................... 41.7 45.4 35.6
Operating costs:
Research and development................................. 23.5 10.8 16.4
Sales and marketing...................................... 57.2 8.4 32.9
General and administrative............................... 44.6 26.0 46.9
Stock-based expense...................................... 24.9 -- --
------ ----- -----
Operating (loss) income.................................... (108.5) 0.2 (60.6)
Other income, net.......................................... 4.0 2.8 1.1
------ ----- -----
Net (loss) income.......................................... (104.5%) 3.0% (59.5%)
------ ----- -----
------ ----- -----
YEARS ENDED DECEMBER 31, 1999 AND 1998
REVENUES
Revenues increased 168% from $7.8 million in 1998 to $20.9 million 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. The number of clients served increased 192% from
12 in 1998 to 35 in 1999. Revenues in both periods were concentrated in two
clients, United Technologies and General Motors. Revenues from United
Tec