Exhibit 99.1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
SupplierMarket.com, Inc.:
In our opinion, the accompanying balance sheet and the related statements
of operations, of stockholders' deficit and of cash flows present fairly, in all
material respects, the financial position of SupplierMarket.com, Inc. as of
December 31, 1999 and the results of its operations and cash flows for the
period from inception (February 12, 1999) through December 31, 1999 in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
March 1, 2000
1
SUPPLIERMARKET.COM, INC.
BALANCE SHEETS
DECEMBER 31, 1999 JUNE 30, 2000
----------------- -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 36,761,018 $13,343,874
Accounts receivable, net of allowances of $0 and
$62,600 at December 31, 1999 and June 30, 2000
(unaudited), respectively................................. 7,475 517,487
Prepaid expenses and other assets......................... 684,913 1,390,301
Loan receivable from related party........................ 133,634 -
------------ -----------
Total current assets................................... 37,587,040 15,251,662
Property and equipment, net............................... 1,554,043 4,435,069
------------ -----------
Total assets........................................... $ 39,141,083 $19,686,731
------------ -----------
------------ -----------
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 1,405,508 $1,765,645
Accrued expenses and other liabilities.................... 396,574 1,166,522
------------ -----------
Total current liabilities.............................. 1,802,082 2,932,167
Commitments and contingencies (Note 10)
Redeemable convertible Series A preferred stock, $0.001 par
value, 6,612,873 shares authorized, 6,562,873 shares issued
and outstanding at December 31, 1999 and June 30, 2000
(unaudited), respectively.................................... 6,080,501 6,080,501
Redeemable convertible Series B preferred stock, $0.001 par
value, 16,040,040 shares authorized, 14,863,770 and
16,040,039 shares issued and outstanding at December 31,
1999 and June 30, 2000 (unaudited), respectively............. 34,750,003 34,640,339
Stockholders' (deficit) equity:
Common stock, $0.001 par value, 85,000,000 shares
authorized, 9,884,246 and 10,163,665 shares issued
and outstanding at December 31, 1999 and
June 30, 2000 (unaudited), respectively.................. 9,884 10,164
Additional paid-in capital................................. 7,946,736 27,864,302
Deferred stock-based compensation.......................... (5,386,142) (19,180,273)
Accumulated deficit........................................ (6,061,981) (32,660,469)
------------ -----------
Total stockholders' (deficit).......................... (3,491,503) (23,966,276)
------------ -----------
Total liabilities, redeemable convertible preferred
stock and stockholders' (deficit) ................... $ 39,141,083 $19,686,731
------------ -----------
------------ -----------
The accompanying notes are an integral part of these financial statements.
2
SUPPLIERMARKET.COM, INC.
STATEMENTS OF OPERATIONS
PERIOD FROM
INCEPTION
(FEBRUARY 12, 1999) SIX MONTHS
THROUGH ENDED
DECEMBER 31, 1999 JUNE 30, 2000
----------------- --------------
(UNAUDITED)
Revenue........................................................................ $ 51,541 $ 752,519
Operating expenses:
Costs of revenue (excluding $5,942 and $109,090 of stock-based
compensation, respectively)..................................... 107,605 501,925
Sales and marketing (excluding $97,552 and $479,648 of stock-based
compensation, respectively)..................................... 2,397,405 17,939,033
Research and development (excluding $43,190 and $261,989 of stock-
based compensation, respectively)............................... 515,993 1,419,724
General and administrative (excluding $2,584,831 and $2,367,233 of
stock-based compensation, respectively)......................... 636,171 4,938,998
Stock-based compensation.......................................... 2,731,515 3,217,960
---------- ----------
Total operating expenses...................................... 6,388,689 28,017,640
---------- ----------
Operating loss................................................ (6,337,148) (27,265,121)
Interest income................................................................ 280,109 666,633
---------- ----------
Net loss...................................................... $ (6,057,039) $(26,598,488)
---------- ----------
---------- ----------
Net loss per share, basic and diluted.......................................... $ (2.66) $ (4.05)
---------- ----------
---------- ----------
Weighted average common shares outstanding, basic and diluted.................. 2,344,874 6,627,437
---------- ----------
---------- ----------
The accompanying notes are an integral part of these financial statements.
3
SUPPLIERMARKET.COM, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
PERIOD FROM INCEPTION (FEBRUARY 12, 1999) THROUGH JUNE 30, 2000
DEFERRED TOTAL
COMMON ADDITIONAL STOCK-BASED ACCUMULATED STOCKHOLDERS'
STOCK PAID-IN CAPITAL COMPENSATION DEFICIT DEFICIT
------- --------------- ------------- ------------ ------------
Issuance of 9,859,246 shares of
common stock.......................... $9,859 $ -- $ -- $ (4,930) $ 4,929
Exercise of stock options for 25,000
shares................................ 25 -- -- (12) 13
Deferred stock-based compensation........ -- 8,117,657 (8,117,657) -- --
Amortization of deferred
compensation.......................... -- -- 2,731,515 -- 2,731,515
Accretion of preferred stock to
redemption value...................... -- (170,921) -- -- (170,921)
Net loss................................. -- -- -- (6,057,039) (6,057,039)
------- ------------ ------------- ------------- -------------
Balance at December 31, 1999............. 9,884 7,946,736 (5,386,142) (6,061,981) (3,491,503)
Value of preferred stock beneficial
conversion feature (unaudited)........ -- 3,128,876 -- -- 3,128,876
Exercise of stock options for 279,419
shares (unaudited).................... 280 45,813 -- -- 46,093
Deferred stock-based compensation,
net of option cancellations
(unaudited)........................... -- 17,012,091 (17,012,091) -- --
Amortization of deferred
compensation (unaudited).............. -- -- 3,217,960 -- 3,217,960
Accretion of preferred stock to
redemption value (unaudited).......... -- (269,214) -- -- (269,214)
Net loss (unaudited)..................... -- -- -- (26,598,488) (26,598,488)
------- ------------ ------------- ------------- -------------
Balance at June 30, 2000
(unaudited)........................... $10,164 $27,864,302 $(19,180,273) $(32,660,469) $(23,966,276)
======= ============ ============= ============= =============
The accompanying notes are an integral part of these financial statements.
4
SUPPLIERMARKET.COM, INC.
STATEMENTS OF CASH FLOWS
PERIOD FROM
INCEPTION
(FEBRUARY 12, 1999) SIX MONTHS
THROUGH ENDED
DECEMBER 31, 1999 JUNE 30, 2000
------------------ --------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.......................................................... $ (6,057,039) $(26,598,488)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization.................................. 95,526 648,689
Stock-based compensation....................................... 2,731,515 3,217,960
Changes in operating assets and liabilities:
Accounts receivable........................................ (7,475) (510,012)
Prepaid expenses and other assets.......................... (684,913) (705,388)
Loan receivable from related party......................... (133,634) 133,634
Accounts payable........................................... 1,405,508 360,137
Accrued expenses and other liabilities..................... 396,574 769,948
----------- ------------
Net cash used in operating activities...................... (2,253,938) (22,683,520)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............................... (1,649,569) (3,529,715)
----------- ------------
Net cash used in investing activities...................... (1,649,569) (3,529,715)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of redeemable convertible preferred
stock............................................................. 40,659,583 2,749,998
Proceeds from issuance of common stock............................ 4,942 46,093
----------- ------------
Net cash provided by financing activities.................. 40,664,525 2,796,091
----------- ------------
Net increase (decrease) in cash and cash equivalents..................... 36,761,018 (23,417,144)
Cash and cash equivalents, beginning of period........................... -- 36,761,018
----------- ------------
Cash and cash equivalents, end of period................................. $36,761,018 $ 13,343,874
=========== ============
The accompanying notes are an integral part of these financial statements.
5
SUPPLIERMARKET.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(THE INFORMATION AS OF AND FOR THE SIX MONTHS ENDED
JUNE 30, 2000 IS UNAUDITED)
NOTE 1. DESCRIPTION OF BUSINESS
SupplierMarket.com, Inc. (the "Company") is a business-to-business,
Internet-based marketplace serving the direct materials market. Our marketplace
allows participants to buy and sell direct materials across a wide variety of
industrial segments. We feature an anonymous bidding event with a competitive,
reverse auction.
The Company was formed on February 12, 1999 under the laws of the state of
Delaware. During the period from inception through October 1999, the Company was
a development stage enterprise and did not have any revenue. During this period,
the Company's operating activities related to the design and development of our
Internet-based marketplace, the development of our corporate infrastructure and
the establishment of relationships with buyers and suppliers of direct
materials. The Company began providing business-to-business online bidding
events in October 1999 through the launch of its Internet-based marketplace.
The Company expects to experience continuing operating losses and negative
cash flows as management executes its current business plan. At December 31,
1999, the Company had cash and cash equivalents totaling approximately
$36,800,000. In June 1999, the Company completed its Series A preferred stock
offering and received net proceeds of approximately $6,100,000. In November
1999, the Company conducted a Series B preferred stock offering and received net
proceeds of approximately $34,600,000. The Company's Board of Directors has
authorized the filing of a registration statement with the Securities and
Exchange Commission that would permit the Company to sell shares of the
Company's common stock in a proposed initial public offering. Management
believes that it has sufficient funds to sustain its current business plan
through March 31, 2001.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
UNAUDITED INTERIM FINANCIAL DATA
The financial information as of June 30, 2000 and for the six months ended
June 30, 2000 is unaudited. In the opinion of management, the interim financial
information includes all adjustments, consisting only of normal recurring
adjustments necessary for a fair presentation of the results for the interim
period. The results of operations for the six months ended June 30, 2000 are not
necessarily indicative of the results to be expected for any future period.
Financial information has not been presented for the period from inception
through June 30, 1999 because expenses incurred during that period were not
significant.
CASH AND CASH EQUIVALENTS
The Company considers all unrestricted, highly liquid investments with
initial maturities of less than three months to be cash equivalents. Such
investments are carried at cost, which approximates fair value.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated using the
straight-line method over their estimated useful lives ranging from three to
five years. Upon sale or retirement, the cost and related accumulated
depreciation are eliminated from the respective accounts, and the resulting gain
or loss is included in income or loss for the period. Repair and maintenance
expenditures are expensed as incurred. Depreciation expense was approximately
$48,000 for the period from inception (February 12, 1999) through December 31,
1999.
6
SUPPLIERMARKET.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(THE INFORMATION AS OF AND FOR THE SIX MONTHS ENDED
JUNE 30, 2000 IS UNAUDITED)
REVENUE RECOGNITION
The Company generates revenue from transaction fees earned on bidding
events that result in a buyer selecting a supplier to fulfill its request for
quotation. Revenue is recognized when all of the following criteria have been
met: the Company has rendered its service to the supplier; the Company has an
enforceable right to collect from the supplier; collection of the transaction
fee is reasonably assured; and, the amount of the transaction fee is fixed or
determinable. Transaction fee revenue is recognized when the buyer has selected
a supplier, the supplier has agreed to the payment terms, the supplier has
issued a purchase order for the transaction fee and payment is not contingent on
a future event. A sales allowance is recorded for transaction fees which are
subject to adjustment for changes in price and volume of material ultimately
delivered to the buyer.
COSTS OF REVENUE
Costs of revenue consist primarily of expenses related to staffing and
operation of the Company's Internet-based marketplace services and amortization
of capitalized web site development costs.
ADVERTISING COSTS
Advertising costs are expensed at the time the first advertisement is aired
or printed or when the promotion occurs. No amounts have been deferred on the
balance sheet as of December 31, 1999. Advertising expense was approximately
$461,000 for the period from inception (February 12, 1999) through December 31,
1999.
CAPITALIZED WEB SITE DEVELOPMENT COSTS
The Company accounts for costs incurred to design and develop its
Internet-based marketplace in accordance with Statement of Position 98-1, which
requires computer software costs associated with internal use software to be
charged to operations until certain capitalization criteria are met. Costs of
approximately $424,000 were capitalized for the period from inception (February
12, 1999) through December 31, 1999 and are being amortized over 18 months.
Amortization expense was approximately $47,000 for the period from inception
(February 12, 1999) through December 31, 1999. These costs are included in
property and equipment (Note 4).
START-UP COSTS
Start-up costs are expensed as incurred, and primarily include costs to
establish the Company, new locations or new operations.
STOCK-BASED COMPENSATION EXPENSE
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and complies with the
disclosure provisions of Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation." Under APB No. 25,
compensation expense is based on the difference, if any, on the date of the
grant between the fair value of the Company's stock and the exercise price. All
stock-based awards to non-employees are accounted for at their fair value in
accordance with SFAS No. 123 and Emerging Issues Task Force Issue No. 96-18.
NET LOSS PER SHARE
Basic and diluted net loss per common share is presented in conformity with
SFAS 128, "Earnings Per Share." Basic net loss per share is computed by dividing
the net loss for the period by the weighted average number of common shares
outstanding during the period, excluding unvested restricted stock held by
7
SUPPLIERMARKET.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(THE INFORMATION AS OF AND FOR THE SIX MONTHS ENDED
JUNE 30, 2000 IS UNAUDITED)
employees. Diluted net loss per share is computed by dividing the net loss for
the period by the weighted average number of common and potentially dilutive
common shares outstanding during the period. Potentially dilutive common shares
consist of the common shares issuable upon the exercise of stock options and
warrants (using the treasury stock method) and upon the conversion of
convertible preferred stock (using the if-converted method) as well as unvested
restricted stock held by employees. Potentially dilutive common shares are
excluded from the calculation if their effect is antidilutive.
The following table sets forth the computations of net loss per share:
PERIOD FROM
INCEPTION
(FEBRUARY 12,
1999) TO
DECEMBER 31, SIX MONTHS
1999 ENDED JUNE 30, 2000
----------------------------------
(UNAUDITED)
Basic and diluted:
Net loss................................. $(6,057,039) $(26,598,488)
Accretion of preferred stock to
redemption value ...................... (170,921) (269,214)
----------- ------------
Net loss attributable to common
shareholders .......................... $(6,227,960) $(26,867,702)
=========== ============
Weighted average common shares
outstanding............................ 2,344,874 6,627,437
=========== ============
Net loss per share, basic and diluted.... $ (2.66) $ (4.05)
=========== ============
For the period from inception (February 12, 1999) through December 31, 1999
and for the six months ended June 30, 2000, respectively, 23,011,439 and
25,659,108 potentially dilutive common shares in the form of stock options,
warrants and convertible preferred stock were excluded from the calculation of
net loss per share because their effect was antidilutive. In addition, 3,919,205
and 2,685,799 shares of restricted stock at December 31, 1999 and at June 30,
2000, respectively, were excluded from the calculations of basic net loss per
share because the shares revert to the Company if the related vesting conditions
are not met and from the calculations of diluted net loss per share because
their effect was antidilutive.
8
SUPPLIERMARKET.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(THE INFORMATION AS OF AND FOR THE SIX MONTHS ENDED
JUNE 30, 2000 IS UNAUDITED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments, including cash and cash equivalents,
accounts receivable and accounts payable are carried at cost, which approximates
their fair value because of the short-term nature of these instruments.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and cash equivalents and accounts
receivable. Cash and cash equivalents are deposited with high credit quality
financial institutions. The Company's accounts receivable are derived from
revenue earned from customers located in the U.S. and are denominated in U.S.
dollars. Portions of the Company's accounts receivable balances are settled
through electronic fund transfers. As a result, the majority of accounts
receivable are collected upon processing of those transactions. As of December
31, 1999, two customers accounted for 100% of accounts receivable and, during
the period from inception through December 31, 1999, two additional customers
accounted for 100% of revenue.
INCOME TAXES
Deferred taxes are determined based on the difference between the financial
statement and tax basis of assets and liabilities using enacted tax rates in
effect in the years in which the differences are expected to reverse. Valuation
allowances are provided if, based upon the weight of available evidence, it is
more likely than not some or all of the deferred tax assets will not be
realized.
COMPREHENSIVE INCOME (LOSS)
The Company has adopted SFAS 130, "Reporting Comprehensive Income,"
effective February 12, 1999. No material differences exist between net loss and
comprehensive loss.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which established accounting and reporting
standards for derivative instruments and hedging. It requires entities to
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. The Company, to date, has not
engaged in derivative or hedging activities, and accordingly does not believe
the adoption of SFAS No. 133 will have a material impact on the financial
reporting and related disclosures of the Company. The Company will adopt SFAS
No. 133 as required by SFAS No. 137, "Deferral of Effective Date of the FASB
Statement No. 133," in 2001.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." This
bulletin summarizes certain views of the staff on
9
SUPPLIERMARKET.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(THE INFORMATION AS OF AND FOR THE SIX MONTHS ENDED
JUNE 30, 2000 IS UNAUDITED)
applying generally accepted accounting principles to revenue recognition in
financial statements. The staff believes that revenue is realized or realizable
and earned when all of the following criteria are met: persuasive evidence of an
arrangement exists; delivery has occurred or services have been rendered; the
seller's price to the buyer is fixed or determinable; and collectibility is
reasonably assured. The Company believes that its current revenue recognition
policy complies with the Commission's guidelines.
NOTE 3. PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses and other assets consist of the following:
DECEMBER 31, 1999 JUNE 30, 2000
----------------- -------------
Deposits................................................................... $ 156,578 $ 527,908
Other prepaid expenses..................................................... 528,335 862,393
----------- -----------
$ 684,913 $ 1,390,301
=========== ===========
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
DECEMBER 31, 1999 JUNE 30, 2000
----------------- -------------
Computer equipment......................................................... $ 511,184 $ 2,745,392
Purchased software......................................................... 437,806 694,428
Web site development costs................................................. 424,281 1,046,661
Office equipment........................................................... 161,720 310,266
Furniture and fixtures..................................................... 114,578 382,537
------------ -----------
1,649,569 5,179,284
Less: accumulated depreciation and amortization............................ (95,526) (744,215)
------------ -----------
$ 1,554,043 $ 4,435,069
============= ===========
Depreciation and amortization expense was approximately $96,000 and
$649,000 for the period from inception through December 31, 1999 and for the six
months ended June 30, 2000, respectively.
NOTE 5. ACCRUED EXPENSES
Accrued expenses consist of the following:
DECEMBER 31, 1999 JUNE 30, 2000
----------------- -------------
Accrued payroll and related costs.......................................... $ 114,422 $ 278,858
Accrued commissions........................................................ 106,750 287,313
Accrued initial public offering costs...................................... -- 466,876
Accrued other expenses..................................................... 175,402 133,475
---------- ----------
$ 396,574 $1,166,522
========== ==========
10
SUPPLIERMARKET.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(THE INFORMATION AS OF AND FOR THE SIX MONTHS ENDED
JUNE 30, 2000 IS UNAUDITED)
NOTE 6. LINES OF CREDIT
In September 1999, the Company entered into working capital and equipment
lines of credit with its bank. The working capital line of credit provided for
borrowings up to a maximum of $500,000. The equipment line of credit agreement
allowed for borrowings of up to $1,000,000. Borrowings under these facilities
were payable in 36 equal monthly installments of principal and interest. The
underlying notes were secured by substantially all of the assets of the Company.
Interest on the working capital line was charged at the prime rate plus 1% (9.5%
as of December 31, 1999). Interest on the equipment line was charged at the
36-month U.S. Treasury rate plus 245 basis points (8.71% as of December 31,
1999). As of December 31, 1999, there were no amounts outstanding under either
facility. These facilities were terminated by the Company on February 17, 2000.
In connection with these agreements, the Company issued a detachable
warrant, which permits the holder to purchase 50,000 shares of the Company's
Series A Redeemable Convertible Preferred stock at an exercise price of $0.93
per share. The warrant is exercisable immediately and expires on September 21,
2006. The fair value of the warrant at the date of issuance was not material to
the Company's financial statements.
NOTE 7. INCOME TAXES
The Company had no income tax provision during the period from inception
through December 31, 1999 since the Company had a net taxable loss during this
period.
Deferred tax assets and liabilities consist of the following as of December
31, 1999:
Net operating losses ....................................... $ 1,712,606
Stock-based compensation ................................... 935,617
Research and development tax credits and other ............. 81,580
-----------
Net deferred tax assets .................................... 2,729,803
Valuation allowance ........................................ (2,729,803)
-----------
Net deferred tax assets .................................... $ --
-----------
-----------
In assessing the realizability of net deferred tax assets, management
considers whether it is more likely than not that some portion of the net
deferred tax assets will not be realized. The ultimate realization of net
deferred tax assets is dependent upon the generation of future taxable income
during the periods in which temporary differences representing net future
deductible amounts become deductible. Management has established a full
valuation allowance against the net deferred tax assets at December 31, 1999,
since it is more likely than not that these future tax benefits will not be
realized.
As of December 31, 1999, the Company had available federal and state net
operating loss carryforwards of $4,200,000 and $4,100,000, respectively. These
net operating loss carryforwards may be used to offset future federal and state
income taxes through 2019 and 2009, respectively. However, changes in the
Company's ownership as defined in the Internal Revenue Code, may limit the
Company's ability to utilize the net operating loss and tax credit
carryforwards.
11
SUPPLIERMARKET.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(THE INFORMATION AS OF AND FOR THE SIX MONTHS ENDED
JUNE 30, 2000 IS UNAUDITED)
NOTE 8. STOCKHOLDERS' EQUITY
REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Company has authorized 22,652,913 shares of preferred stock. The
Company designated 6,612,873 of these shares as Series A Convertible Preferred
Stock, par value $0.001 ("Series A") and 16,040,040 of these shares as Series B
Convertible Preferred Stock, par value $0.001 ("Series B"). In July and August
1999, the Company sold 6,562,873 Series A shares at $0.93 per share. Proceeds
from the offering totaled $6,041,000, net of offering costs of approximately
$40,000. In November 1999, the Company sold 14,863,770 Series B shares at $2.34
per share. Proceeds from the offering totaled $34,619,000, net of offering costs
of approximately $131,000.
The Company's Series A and Series B preferred stock are convertible into
common stock upon a conversion ratio of one-to-two and two-to-one, respectively,
which is subject to adjustment as defined in the Company's Amended and Restated
Certificate of Incorporation. All series of preferred stock will be converted
automatically into an appropriate number of common stock immediately upon the
closing of an initial public offering pursuant to an effective registration
statement under the Securities Act of 1933, as amended. The holders of Series A
and Series B preferred stock each have the right to elect two directors, for a
total of four directors. The holders of the Series A and Series B preferred
stock have a liquidation preference over the holders of common stock equal to
the purchase price of the preferred stock, adjusted for certain events as
defined in the Amended and Restated Certificate of Incorporation, and have
certain anti-dilution protection.
The Company is required to redeem the Series A and Series B redeemable
convertible preferred stock from the holders upon receipt of request from
holders of shares representing a majority of the then outstanding shares of
preferred stock. Redemption could first be required by the holders on June 28,
2004 for Series A and on November 18, 2004 for Series B and later upon the first
anniversaries thereof. The redemption price is equal to the purchase price of
the preferred stock plus accrued, unpaid dividends at the redemption date.
The Company has granted preemptive rights to the holders of Series A and
Series B preferred stock. In the event that the Company seeks to raise
additional capital, these rights allow holders, under certain circumstances, to
maintain their percentage ownership of the Company. All preemptive rights
terminate upon an initial public offering of the Company's common stock.
ISSUANCE OF ADDITIONAL PREFERRED STOCK
In January and February 2000, the Company issued 1,176,270 shares of Series
B preferred stock for net proceeds of $2,750,000. Approximately 386,954 shares
were sold to related parties. The intrinsic value of the associated beneficial
conversion feature of approximately $3,100,000 was initially recorded as
additional paid-in capital and as a reduction in the carrying amount of
preferred stock. This amount will be accreted to increase the carrying amount of
preferred stock using the straight-line method over the 58 month period until
the first required redemption date of the preferred stock.
COMMON STOCK
The Company has authorized 85,000,000 shares of common stock. On February
29, 2000, the Company effected a one-for-two reverse stock split of the common
stock. All common share and per share amounts in the accompanying financial
statements, including stock options and warrants, have been restated to reflect
the effect of this reverse stock split. The preferred shares were not affected
by the reverse stock split; however, the conversion features discussed above
reflect the effect of this reverse stock split.
12
SUPPLIERMARKET.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(THE INFORMATION AS OF AND FOR THE SIX MONTHS ENDED
JUNE 30, 2000 IS UNAUDITED)
The Company has entered into agreements with two officers of the Company
pursuant to which 6,988,500 shares of common stock were subject to restriction
as to the sale or transfer of the shares until the restrictions have lapsed. In
the event these officers are no longer employed by the Company before the
restrictions lapse, the Company has the right to repurchase any or all unvested
shares at their original issuance price. Under these stock restriction
agreements, 3,493,250 shares of common stock owned by the two officers were
fully vested and no longer subject to restriction at December 31, 1999. The
remaining 3,495,250 shares vest ratably each month through June 2001.
Additionally at December 31, 1999, an employee and an advisor hold in the
aggregate 423,955 shares of common stock subject to similar restrictions, which
lapse over a two to four year period.
NOTE 9. STOCK PLANS
1999 STOCK OPTION PLAN
In 1999, the Company adopted the 1999 Stock Option Plan, the "1999 Plan",
that provides for the granting of incentive and nonqualified stock options. The
exercise price for incentive stock options issued under the 1999 Plan are equal
to 100% of the fair market value of the stock on the date of grant, and 110% for
stockholders with 10% or more ownership of the Company, if applicable, as
determined by the Company's Board of Directors. The exercise price of
nonqualified stock options may be less than the fair market value of the common
stock on the date of grant, as determined by the Board of Directors, but in no
case may the exercise price be less than the statutory minimum. The options have
a term of ten years. Vesting of options granted is set at the discretion of the
Board of Directors, but is generally 12.5% after six months and then monthly for
the next 42 months. The aggregate number of common shares authorized to be
issued under the 1999 Plan is 5,251,924.
Through December 31, 1999, the Company had issued options to purchase a
total of 728,224 shares of common stock to non-employees, including options to
purchase 172,328 shares issued to a related party, with exercise prices ranging
from $0.001-$0.93. In connection with the grant of these options to
non-employees, the Company recorded deferred compensation of approximately
$6,400,000 at December 31, 1999. Compensation expense related to non-employee
stock options was $2,500,000 in 1999, of which $579,000 related to grants to
related parties. Compensation expense related to non-employee stock options was
$1,196,000 for the six months ended June 30, 2000, of which none related to
grants to related parties.
In connection with the grant of certain stock options to employees during
1999, the Company recorded deferred compensation of approximately $2,800,000,
representing the difference between the option exercise price and the
subsequently determined fair value of the common stock at the grant date
multiplied by the 1,650,584 shares under option. Such amount is presented as
deferred compensation in stockholders' deficit and is amortized over the vesting
periods of the applicable options. The Company recorded compensation expense of
$166,000 in 1999 related to these options. In the six months ended June 30,
2000, the Company recorded additional deferred compensation of approximately
$17,012,000 related to the grants to employees of stock options to purchase
2,741,875 shares.
13
SUPPLIERMARKET.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(THE INFORMATION AS OF AND FOR THE SIX MONTHS ENDED
JUNE 30, 2000 IS UNAUDITED)
A summary of the options granted under the 1999 Plan during the period from
inception (February 12, 1999) through December 31, 1999 and for the six months
ended June 30, 2000 is presented below:
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
---------------------
Granted.............................................................. 2,378,808 $ 0.31
Exercised............................................................ (25,000) 0.00
Cancelled............................................................ -- --
--------- ------
Options outstanding at December 31, 1999......................... 2,353,808 0.38
Granted.............................................................. 2,741,875 3.06
Exercised............................................................ (279,419) 0.17
Cancelled............................................................ (402,922) 1.24
--------- ------
Options outstanding at June 30, 2000............................. 4,413,342 $ 1.98
========= ======
The following table summarizes information about the options outstanding as
of December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- -------------------------------
WEIGHTED AVERAGE
RANGE REMAINING
OF NUMBER CONTRACTUAL LIFE WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
PRICES OUTSTANDING (IN YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
-------- ------------ ----------------- ---------------- ----------- ----------------
$0.093-$0.935 2,353,808 9.74 $ 0.38 49,921 $ 0.093
At December 31, 1999, there were 2,873,116 shares available for future
grant under the 1999 Plan. The weighted average fair value of options granted
during 1999 was $6.99.
The Company applies the provisions of APB No. 25 and its related
interpretations in accounting for its stock option plans. Had the Company
accounted for these plans under SFAS No. 123, the Company's net loss and net
loss per share would have been increased to the following pro forma amounts for
the period from inception through December 31, 1999:
Net loss attributable to common stockholders:
As reported.......................................................... $(6,227,960)
===========
Pro forma............................................................ $(6,274,960)
===========
Net loss per share, basic and diluted
As reported.......................................................... $ (2.66)
========
Pro forma............................................................ $ (2.68)
========
For the purpose of determining stock-based compensation expense, the fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions used for
grants during the period from inception through December 31, 1999: risk-free
interest rate of 6%; no expected dividend yield; expected life of 4.0 years; and
an expected volatility of 0%.
14
SUPPLIERMARKET.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(THE INFORMATION AS OF AND FOR THE SIX MONTHS ENDED
JUNE 30, 2000 IS UNAUDITED)
NOTE 10. COMMITMENTS AND CONTINGENCIES
The Company is party to a non-cancelable lease agreement for its corporate
headquarters. Rent expense under this non-cancelable operating lease totaled
approximately $70,000 for the period from inception (February 12, 1999) through
December 31, 1999. Minimum future lease obligations under the non-cancelable
operating lease in effect at December 31, 1999 are as follows:
Year Ending December 31,
2000................................... $ 741,051
2001................................... 761,089
2002................................... 761,089
2003................................... 761,089
2004................................... 761,089
----------
Total............................... $3,785,407
----------
----------
NOTE 11. LOAN RECEIVABLE FROM RELATED PARTY
During 1999, the Company loaned approximately $134,000 to its President
which was paid in full in April 2000.
NOTE 12. SUBSEQUENT EVENTS
The Company has executed non-binding letters of intent with several
strategic partners ("Partners") whereby the Partners receive consideration, in
the form of common stock purchase warrants, in exchange for utilizing the
Company's service for their direct materials purchasing. It is expected that the
majority of the warrants, if issued, will vest during the final two calendar
quarters of 2000 and each calendar quarter of 2001,contingent upon the quarterly
volume of each Partners' RFQs submitted to the Company's marketplace which
result in an executed purchase order between the Company and the supplier for
the RFQ.
In July 2000, the Company amended its non-cancelable lease agreement for
its corporate headquarters. In exchange for additional leased space, the
Company's minimum future lease obligations increased by approximately $275,000
annually through December 31, 2004.
In August 2000, the Company completed its merger with and into Ariba, Inc.
The purchase price paid by Ariba, Inc. approximated $607 million in the form of
common stock of Ariba, Inc., which was based on the average price of Ariba,
Inc.'s stock on the five days before and after the announcement of the
transaction. In connection with this merger, the Company converted all of its
redeemable convertible preferred stock into common stock. In addition, the
Company granted stock option grants for 6,883,271 shares (16% of the
fully-diluted common stock) of common stock of SupplierMarket.com to employees
in connection with the transaction with Ariba, Inc.
15