<PAGE>
As filed with the Securities and Exchange Commission on June 7, 1999
Registration No. 333-78505
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
AMENDMENT NO. 2
To
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
---------------
CHEMDEX CORPORATION
(Exact Name of Registrant as Specified in its Charter)
---------------
<TABLE>
<C> <C> <S>
Delaware 5169 77-0465469
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
3950 Fabian Way
Palo Alto, CA 94303
(650) 813-0300
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------
David P. Perry
President and Chief Executive Officer
Chemdex Corporation
3950 Fabian Way
Palo Alto, CA 94303
(650) 813-0300
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
<TABLE>
<S> <C>
Jeffrey Y. Suto David J. Segre
Sonya F. Erickson Michael S. Ringler
Kenneth D. Cramer David R. Bowman
Alissa L. Lee Wilson Sonsini Goodrich & Rosati
Venture Law Group Professional Corporation
Professional Corporation 650 Page Mill Road
2800 Sand Hill Road Palo Alto, California 94304
Menlo Park, California 94025 (650) 493-9300
(650) 854-4488
</TABLE>
---------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration
Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
<TABLE>
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- ------------------------------------------------------------------------------
<CAPTION>
Title of Each Class of Maximum Aggregate Amount of
Securities to be Registered Proposed Offering Price(1) Registration Fee(2)
- ------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, par value $.0001....... $86,250,000 $23,978
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- ------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(o).
(2) Previously paid.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment that specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until this Registration Statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and we are not soliciting offers to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued June 7, 1999
Shares
[LOGO FOR CHEMDEX CORPORATION]
COMMON STOCK
-----------
Chemdex Corporation is offering shares of its common stock. This is our
initial public offering and no public market currently exists for our shares.
We anticipate that the initial public offering price will be between $ and
$ per share.
-----------
We have filed an application for the common stock to be quoted on the Nasdaq
National Market under the symbol "CMDX."
-----------
Investing in the common stock involves risks. See "Risk Factors" beginning on
page 5.
-----------
PRICE $ A SHARE
-----------
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions Chemdex
-------- ------------- -----------
<S> <C> <C> <C>
Per Share........................ $ $ $
Total............................ $ $ $
</TABLE>
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Chemdex has granted the underwriters the right to purchase up to an additional
shares of common stock to cover over-allotments. Morgan Stanley & Co.
Incorporated expects to deliver the shares of common stock to purchasers on
, 1999.
-----------
MORGAN STANLEY DEAN WITTER
BANCBOSTON ROBERTSON STEPHENS
VOLPE BROWN WHELAN & COMPANY
, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary................... 3
Risk Factors......................... 5
Special Note Regarding Forward-
Looking Statements.................. 19
Use of Proceeds...................... 20
Dividend Policy...................... 20
Capitalization....................... 21
Dilution............................. 22
Selected Financial Data.............. 23
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 24
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Business........................... 32
Management......................... 45
Related Party Transactions......... 55
Principal Stockholders............. 58
Description of Capital Stock....... 61
Shares Eligible for Future Sale.... 64
Underwriters....................... 66
Legal Matters...................... 68
Experts............................ 68
Change in Independent Accountants.. 68
Additional Information............. 69
Index to Financial Statements...... F-1
</TABLE>
We were incorporated in Delaware in September 1997. Our principal executive
offices are located at 3950 Fabian Way, Palo Alto, California 94303, and our
telephone number is (650) 813-0300. We maintain a worldwide web site at
www.chemdex.com. The information in our web site is not incorporated by
reference into this prospectus.
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of our common stock only in those jurisdictions where offers and
sales are permitted. The information contained in this prospectus is accurate
only as of the date of this prospectus, regardless of the time of delivery of
this prospectus or any sale of our common stock. In this prospectus, unless
the context otherwise requires, the "company," "Chemdex," "we," "us," and
"our" refer to Chemdex Corporation, and "common stock" refers to the common
stock, par value $.0001 per share, of Chemdex.
Unless otherwise specifically stated, the information in this prospectus
has been adjusted to reflect the conversion of all outstanding shares of our
preferred stock into common stock upon the completion of this offering, but
does not take into account the possible issuance of additional shares of
common stock to the underwriters pursuant to their right to purchase
additional shares to cover over-allotments.
Until , 1999, 25 days after the date of this prospectus, all dealers
that buy, sell or trade in our common stock, whether or not participating in
this offering, may be required to deliver a prospectus. This delivery
requirement is in addition to the dealers' obligation to deliver a prospectus
when acting as underwriters and with respect to their unsold allotments or
subscriptions.
----------------
Chemdex, Chemdex's logo, Chemdex Marketplace and chemdex.com are some of
our trademarks. Each other trademark, trade name or service mark of any other
company appearing in this prospectus is the property of its holder.
2
<PAGE>
[Inside Front Cover--a foldout of graphics and text]
[Left Page]
[Artwork of screen shots illustrating the graphical user interface for
ordering products through the Chemdex Marketplace]
Chemdex Accelerating Science
Chemdex enables life sciences enterprises, researchers and suppliers to
efficiently buy and sell research products through the Chemdex Marketplace, a
secure, Internet-based procurement solution.
[Right Page]
[Artwork illustrating the benefits of the Chemdex Marketplace to enterprise
customers, researchers and suppliers of life sciences research products]
Enterprise
. Automated Procurement
. Volume Discounts
. Standardized Approvals
Researchers
. Expanded Product Search
. Online Product Comparison
. Streamlined Ordering
Suppliers
. New Customers
. Timely Product Updates
. Supplier-Neutral Marketplace
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding Chemdex and the common stock being sold in this offering
and our financial statements and notes thereto appearing elsewhere in this
prospectus.
Chemdex is a leading provider of e-commerce solutions to the life sciences
industry. We enable life sciences enterprises, researchers and suppliers to
efficiently buy and sell research products through the Chemdex Marketplace, a
secure, Internet-based procurement solution. The Chemdex Marketplace utilizes
an advanced search engine and transaction software to allow users to easily
identify, locate and purchase life sciences research products from a database
of approximately 240,000 products from approximately 100 suppliers. We have
agreements in place with additional suppliers and distributors to add
approximately 550,000 products to the Chemdex Marketplace during 1999. We
attract suppliers by providing them with a neutral marketplace and allowing
them to reach incremental customers. We believe that a growing number of
suppliers and products in the Chemdex Marketplace will potentially draw more
enterprise customers to adopt our procurement solution and accelerate its usage
by researchers. To encourage adoption of our solution by enterprises, we
minimize the upfront commitment of time and capital required to install,
maintain and use our procurement solution, thereby encouraging enterprise
adoption. We also educate users within our enterprise customers about the
benefits of our solution and provide training on its use, thereby accelerating
system usage.
Recently, the widespread adoption of intranets and the acceptance of the
Internet as a business communications platform has created a foundation for
business-to-business e-commerce that offers the potential for organizations to
streamline complex processes, lower costs and improve productivity. According
to Forrester Research, business-to-business e-commerce is expected to grow from
$43 billion in 1998 to $1.3 trillion in 2003, accounting for more than 90% of
the dollar value of e-commerce in the United States by 2003. The life sciences
research products industry is particularly well suited for business-to-business
e-commerce because of its high degree of fragmentation and because of the
inefficiencies inherent in its traditional paper-based procurement process.
According to the Laboratory Products Association, the North American life
sciences research products market was approximately $9.4 billion in 1998.
We believe the Chemdex Marketplace and procurement solution provide
significant benefits to enterprises, researchers and suppliers. Chemdex's
procurement solution enables enterprises to reduce procurement costs and obtain
volume discounts and other economies of scale by integrating their customized
workflow, business rules and processes, and negotiated supplier pricing with
the Chemdex Marketplace. Our solution automates, consolidates and monitors the
approval and invoicing process as well as order placement and delivery
information for the enterprise. Researchers, research assistants and other
users within the enterprises benefit from the Chemdex Marketplace because it
offers them convenient one-stop-shopping. A researcher can use our automated
ordering and approval process to purchase and track orders, resulting in
significant time savings. We offer suppliers a cost-effective opportunity to
reach more customers and sell more products by establishing or enhancing their
Internet presence and providing links to existing online or electronic
catalogs. The Chemdex Marketplace also offers suppliers the capability to
implement customer-specific pricing, update product information and introduce
new products without being limited by catalog publication cycles.
Our strategic objective is to expand our position as a leading e-commerce
solution for the life science research products market. In order to implement
this objective, we intend to capitalize on our first-mover advantage and build
brand awareness. To accomplish this, we have entered into strategic
relationships with VWR Scientific Products, Inc., one of the laboratory supply
industry's largest distributors, and the Biotechnology Industry Organization, a
leading industry organization. Further, we intend to increase usage of the
Chemdex Marketplace and drive operating efficiencies, maintain technological
leadership and expand internationally.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered.............. shares
Common stock to be outstanding
after the offering............... shares
Use of proceeds................... For working capital and general corporate
purposes. See "Use of Proceeds."
Dividend policy................... We do not anticipate paying cash dividends.
Proposed Nasdaq National Market
symbol........................... CMDX
</TABLE>
The number of shares of our common stock to be outstanding immediately after
the offering is based on the number of shares outstanding at May 12, 1999. This
number does not take into account 8,061,161 shares of our common stock subject
to options and warrants outstanding or reserved for issuance under our stock
plans at May 12, 1999.
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
September 4,
1997 Three Months
(Inception) Ended
through Year Ended March 31,
December 31, December 31, -------------
1997 1998 1998 1999
------------ ------------ ----- ------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Statements of Operations Data:
Net revenues......................... $ -- $ 29 $ -- $ 165
Operating loss....................... (403) (8,796) (795) (6,839)
Net loss............................. (403) (8,488) (793) (6,809)
Basic and diluted net loss per
share............................... $(.12) $(2.40) $(.23) $(1.69)
Weighted average common shares--basic
and diluted......................... 3,409 3,543 3,409 4,032
Pro forma basic and diluted net loss
per share........................... $ (.43) $ (.24)
Pro forma weighted average common
shares--basic and diluted........... 19,905 28,557
</TABLE>
The following table presents actual summary balance sheet data as of March
31, 1999, which have been adjusted to reflect the subsequent conversion of all
outstanding shares of our preferred stock into 32,691,416 shares of common
stock upon completion of this offering, our sale of shares of our
common stock in this offering at an assumed initial public offering price of
$ per share and the application of our estimated net proceeds. See "Use of
Proceeds" and "Capitalization."
<TABLE>
<CAPTION>
As of March 31, 1999
-------------------------
Actual As Adjusted
------------ ------------
(in thousands)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents........................... $ 27,784 $
Working capital..................................... 24,360
Total assets........................................ 32,636
Long-term debt and capital lease obligations, net of
current portion.................................... 803
Total liabilities................................... 4,770
Total stockholders' equity.......................... 27,866
</TABLE>
4
<PAGE>
RISK FACTORS
This offering and an investment in our common stock involve a high degree
of risk. You should carefully consider the following risks before making an
investment decision. The trading price of our common stock could decline due
to any of these risks, and you could lose all or part of your investment. You
also should refer to the other information appearing elsewhere in this
prospectus, including our combined financial statements and the related notes
thereto.
This prospectus contains forward-looking statements. These statements
relate to future events or future financial performance. In some cases, you
can identify forward-looking statements by terminology such as "may," "will,"
"should," "could," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," or "continue" or the negative of such terms and other
comparable terminology. These statements are only predictions. In evaluating
these statements, you should specifically consider various factors, including
the risks outlined below. These factors may cause our actual results to differ
materially from any forward-looking statement. See "Special Note Regarding
Forward-Looking Statements."
Our limited operating history makes it difficult for you to evaluate our
business and our prospects
We were founded in September 1997 and have a limited operating history.
Prior to investing in our common stock, you should consider the risks and
difficulties that we face as an early stage company in a new and rapidly
evolving market. Some of these specific risks and difficulties include:
. we may be unable to significantly increase and maintain customer
adoption and use of our Internet-based procurement solution;
. we depend substantially on a procurement solution that has been present
in the market for a limited time and may not be successful;
. we may be unable to develop and enhance the Chemdex brand;
. we may be unable to maintain existing or establish new relationships
with suppliers of life sciences research products;
. we depend substantially on revenues from product sales and we may be
unable to significantly increase revenues from product sales or generate
revenues from other sources;
. we may be unable to adapt to rapidly changing technologies and
developing markets;
. we may be unable to effectively manage our rapidly expanding operations
and the increasing use of our services;
. we may be unable to attract, retain and motivate qualified personnel,
particularly people who understand specialized life sciences research
products or the life sciences industry in general;
. we may be unable to compete in a highly competitive market dominated by
larger, more established companies with substantial financial resources
and significant customer relationships; and
. we may be unable to comply with applicable laws and regulations to
economically compete in a highly competitive market.
We have generated only immaterial revenues to date. In 1998, we generated
revenues of $29,000 and in the three months ended March 31, 1999 we generated
revenues of $165,000. Due to our limited operating history, we believe that
period-to-period comparisons of our revenues and results of operation are not
meaningful. As a result, you should not rely on our revenues or results of
operations for any prior period as an indication of future performance or
prospects.
5
<PAGE>
We have a history of losses and anticipate continued losses for the
foreseeable future
We have had substantial losses since our inception. We currently expect our
losses to increase in the future and we cannot assure you that we will ever
achieve or sustain profitability. As of March 31, 1999, we had an accumulated
deficit of approximately $15.7 million. The extent of these losses will be
contingent, in part, on the amount of growth in our revenue, and we have only
recognized immaterial revenues to date. The extent of these losses will also
be contingent, in part, on the amount of growth in our operating expenses,
which we plan to increase. If our revenues fail to grow at anticipated rates
or our operating expenses increase without a commensurate increase in our
revenues, or we fail to adjust operating expense levels accordingly, our
business, revenues, results of operations and financial condition will be
negatively affected.
To date we have derived our revenues primarily from product sales. In order
to increase our revenues, we must, among other things:
. attract new enterprise customers and retain existing enterprise
customers;
. encourage researchers employed by our enterprise customers to adopt our
Internet-based procurement solution and to use it frequently;
. increase our product offering by adding and maintaining supplier
relationships; and
. develop new sources of revenues beyond our existing revenue sources.
If we are unable to accomplish one or more of these objectives, our
revenues may not grow as we anticipate, if at all, and our business, revenues,
financial condition and results of operations will be negatively affected. We
may not be able to build on our current sources of revenues by adding
additional products or services. Even if we do add additional products or
services, there are economic, legal, regulatory and other risks associated
with adding these new revenue sources. For example, we may post advertisements
on our web site to generate advertising revenue. However, our supplier
relationships may be harmed if our suppliers associate advertisements posted
on our web site with a bias in our offering of life sciences research
products.
Our business model is not proven and may not be successful
Our business-to-business e-commerce model is based on the development of
the Chemdex Marketplace for the purchase and sale of life sciences research
products. This business model is new and not proven and depends upon our
ability to, among other things:
. sell our procurement solution to pharmaceutical and biotechnology
companies and academic and research institutions;
. achieve high rates of adoption by researchers within enterprise
customers;
. maintain our current suppliers and enter into agreements with additional
suppliers;
. generate significant revenues from the use of our Internet-based
procurement solution; and
. obtain higher transaction volumes and leverage operating efficiencies.
We cannot be certain that our business model will be successful or that we
can achieve or sustain revenue growth or generate any profits. The success of
this business model will require, among other things, that we develop and
market solutions with broad market acceptance by our customers, suppliers,
users and strategic partners. We cannot be certain that business-to-business
commerce on the Internet generally, or our procurement solution, services and
brand in particular, will achieve broad market acceptance. For example,
purchasers may continue purchasing products through their existing methods and
may not adopt an Internet-based procurement solution because of their comfort
with existing purchasing habits and direct supplier relationships, the costs
and
6
<PAGE>
resources required to switch purchasing methods, the need for products not
offered through the Chemdex Marketplace, security and privacy concerns, or
general reticence about technology or the Internet.
Our gross margins are low and we will have to achieve substantial scale and
operating efficiencies in our business to be profitable
Our gross margin for the three months ended March 31, 1999 was
approximately 5.8% and was trending downward. We are dependent on the price
discounts we receive from our suppliers, and thus we are vulnerable to any
decrease in these discount rates. Any such decrease would have a significant
negative impact on our financial results. If we do not increase these
discounts, substantially increase our revenues, and scale our business in a
manner that generates significant operating efficiencies, including further
automation of our procurement solution, we may never achieve profitability.
Distributors, in general, operate with low margins. This is especially true in
the life sciences research products market.
In addition, due to our low gross margins, unexpected costs or expenses we
incur would substantially affect our ability to achieve or maintain operating
profits. For example, we generally bear the risks of product loss upon
shipment of product by the supplier to the customer, of product returns and
refunds to the customer, and of non-collection of accounts receivable
generated by our customer purchases. Although we maintain insurance related to
product loss, we cannot assure you that the insurance amounts would be
sufficient to cover losses we may incur, and we do not have insurance or
established reserves with respect to these other risks.
Most of our revenues have come from one customer and our margins associated
with this customer have been small
Chemdex's initial enterprise customer, Genentech, Inc., accounted for
approximately 82% of our revenues in the three months ended March 31, 1999,
and we currently expect to continue to derive a significant portion of our
revenues from Genentech for the foreseeable future. Our agreement with
Genentech, in connection with its role as our initial beta site, provides that
Chemdex will not receive discounts on products of certain suppliers purchased
by Genentech if Genentech purchases specified minimum quantities of product
through the Chemdex Marketplace. As a result, we receive little or no gross
margins on sales of these supplier products to Genentech. The loss of revenues
from Genentech, or the negotiation by other large enterprise customers of
similar programs, would have a significant negative effect on our business,
revenues and results of operations.
We rely on a limited number of enterprise customers, and any loss of an
enterprise customer could have a negative effect on us
We expect that for the foreseeable future we will generate a significant
portion of our revenues from a limited number of enterprise customers.
Further, our enterprise customers are not obligated to use our procurement
solution exclusively or for any minimum number of transactions or dollar
amounts. We currently do not offer all of the life science research products
required by our customers, and we expect that our customers will continue to
use multiple sources to meet their needs. In addition, our contracts with our
customers are for limited terms and our customers may discontinue use of our
Chemdex Marketplace at any time upon short notice and without penalty. If we
lose any of our enterprise customers, or if we are unable to add new
enterprise customers, our revenues will not increase as expected, we will lose
access to the researchers employed by these enterprises, we could lose a
number of our product suppliers, and our brand name and customer and supplier
perceptions of our procurement solution would be harmed.
We will be very dependent on our strategic relationship with VWR for the
foreseeable future
We recently entered into a strategic relationship agreement with VWR
Scientific Products Corporation to jointly market VWR laboratory products
using the Chemdex Marketplace. VWR is one of the laboratory supply industry's
largest distributors. The agreement gives us the right to offer approximately
350,000 VWR-distributed products to our customers through the Chemdex
Marketplace. We currently expect to make these products available through the
Chemdex Marketplace in the third quarter of 1999. VWR and Chemdex are also
jointly
7
<PAGE>
developing a hosted, co-branded Internet procurement solution for VWR's
existing and future customers that will provide access to three categories of
products:
. products distributed by VWR (VWR core products),
. products distributed by Chemdex (Chemdex core products), and
. products that are not distributed by either VWR or Chemdex but are
purchased from third parties (spot buying service).
With respect to sales of VWR core products, we will act as an intermediary
and will forward orders received through the Chemdex Marketplace to VWR for
fulfillment and customer service. We will receive no fee for orders for VWR
core products from VWR's 40 largest customers and we will receive a minimal
fee for all other orders for VWR core products forwarded to VWR. We will be
responsible for fulfillment and customer service for all Chemdex core product
and spot buying orders received from VWR customers through the Chemdex
Marketplace. Under the terms of the agreement, VWR will provide certain
support services for spot buying in exchange for a fee which approximates
VWR's costs incurred. VWR and Chemdex will jointly market the co-branded
version of the Chemdex Marketplace to VWR's existing and new customers, and
will jointly solicit several key existing VWR suppliers to distribute, market
and sell their products through the co-branded procurement solution.
We may experience technical or logistical difficulties in integrating VWR's
suppliers, products and services with the Chemdex Marketplace. If we are
unable to do so in a timely manner, our business, revenues, financial
condition and results of operations could be negatively affected. In addition,
our agreement with VWR is nonexclusive except as to the spot buying service
and some other provisions and has a limited term. We cannot be certain that
VWR will not enter into a similar relationship with one of our competitors, or
that VWR will renew our agreement at the end of its term.
We will not recognize any revenues on sales of VWR core products to VWR's
40 largest customers. Further, since we will receive minimal gross margins for
sales of products through the spot buying service, our gross profit margins on
these sales will be lower than our margins on sales of Chemdex core products.
To the extent sales of VWR core products or products sold through the spot
buying service increase relative to, or displace our sales of Chemdex core
products, our revenues and gross margins will likely decline, which would make
it more difficult for us to achieve profitability.
Our business model depends on building a critical mass of suppliers and
customers
Our business model depends in large part on our ability to build a critical
mass of products and suppliers. To attract and maintain suppliers, we must
build a critical mass of customers. However, customers must perceive value in
our procurement solution and this, in part, depends upon the breadth of our
product offerings from our suppliers. If we are unable to increase the number
of suppliers and draw more customers to the Chemdex Marketplace, we will not
be able to benefit from any network effect, where the value to each
participant in the Chemdex Marketplace increases with the addition of each new
participant. As a result, the overall value of the Chemdex Marketplace and our
procurement solution would be harmed. Our failure to create and maintain this
network effect would negatively affect our business, revenues, financial
condition and results of operations.
The sales and implementation cycle for our solution is long, which could
negatively affect our revenue growth, if any, and make it difficult to predict
our revenues and results of operations
A key element of our strategy is to market our solution directly to life
sciences organizations, and to succeed we must satisfy the enterprise
purchasing departments, the information technology groups and the individual
researchers who are the users of our Internet-based procurement solution. The
sales and implementation cycle for our solution is long and we devote
significant sales, marketing and management resources to the sales process
without any assurance that the customer will use the Chemdex Marketplace. We
are generally required to provide a significant level of education to our
customers and potential customers regarding the use and benefits of our
8
<PAGE>
Internet-based procurement solution. Furthermore, potential enterprise
customers and a number of their departments typically engage in extensive
internal reviews and analyses before making purchase decisions. The sale and
implementation of our solution are subject to delays due to our customers'
internal budgeting and procedures for approving capital expenditures and
deploying new technologies within their networks. These delays also could
impair our ability to generate revenue and could negatively affect our
business, results of operations and financial condition.
Even if enterprise customers adopt our procurement solution, we may not
increase our revenues if researchers within these enterprises do not use the
Chemdex Marketplace
Our revenues are primarily derived from purchases of life sciences research
products by researchers, research assistants and other users within our
enterprise customers. These persons may or may not use our Chemdex Marketplace
to purchase their research products. Even if we successfully maintain existing
enterprise customers and add new enterprise customers, we may not be able to
increase revenues if researchers within our enterprise customers do not adopt
and use the Chemdex Marketplace. Once an enterprise customer adopts our
Internet-based procurement solution, it takes time for researchers and other
users within the enterprise to become aware of, learn to use and begin using
our Chemdex Marketplace. The long sales cycle and the time it takes for
researchers to begin using our Internet-based procurement solution could
negatively affect our revenue growth, if any, and makes it difficult to
predict our results of operations. Also, our efforts to attract researchers to
adopt and to increase their use of our solution may not be successful, which
would limit our ability to generate revenues from these customers.
Our revenues depend on the research and development budgets and government
research funding of our customers
Our procurement solution is used by researchers and their assistants and
staff at pharmaceutical and biotechnology companies, and academic and research
institutions. Changes in the research and development budgets of these
companies and institutions and the timing of spending under these budgets can
have a significant effect on the demand for life sciences research products.
These budgets are based on a wide variety of factors including the resources
available to make such expenditures, the spending priorities among various
types of research, and the policies regarding these expenditures during
recessionary periods. Any decrease in life sciences research and development
expenditures by these companies and institutions could have a negative effect
on our business, revenues, results of operations and financial condition.
A significant portion of our sales are expected to be to research
scientists and entities whose funding is dependent on grants from government
agencies such as the U.S. National Institutes of Health (NIH) and similar
domestic and international agencies. The funding associated with approved NIH
grants generally becomes available at particular times of the year, as
determined by the federal government, and may result in fluctuations in our
revenues and results of operations. Although NIH research funding has
increased during the past several years, grants have, in the past, been frozen
for extended periods or have otherwise become unavailable to various
institutions, sometimes without advance notice. Furthermore, recent government
proposals designed to reduce or eliminate budgetary deficits have included
reduced allocations to the NIH and other government agencies that fund
research and development activities. If government funding, especially NIH
grants, were to become unavailable to researchers for any extended period of
time, or if overall research funding were to decrease, there could be a
negative effect on our business, revenues, results of operations and financial
condition.
The success of our business depends on maintaining and expanding our supplier
base
Our future success depends in large part upon our ability to offer and
deliver a broad and deep life sciences research product offering to our
customers. We rely on independent suppliers and manufacturers for products
offered through our Chemdex Marketplace. To increase the breadth of our
product offering, including related products that we do not currently offer
such as laboratory equipment and supplies, we must establish relationships
with additional suppliers. Some potential suppliers may view us as detrimental
to their business,
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since suppliers compete with one another and with us for sales and customers.
Our agreements with suppliers are typically for one-year terms and we cannot
assure you that these agreements will be renewed beyond the initial term. In
addition, these suppliers are not required to accept purchase orders from us.
If we fail to secure products from our suppliers or if a significant number of
suppliers do not renew their agreements with us, the breadth and depth of
products that we can offer users would be decreased. In addition, there are
significant costs, difficulties and risks associated with adding new products
in related markets, such as the difficulty of signing up new suppliers,
obtaining necessary permits, complying with governmental regulation, pressures
on margins, new competition and integration of these new products into the
Chemdex Marketplace. These events could result in decreased adoption and use
of our procurement solution and decreased revenues, which could have a
negative effect on our business, results of operations and financial
condition.
Our cost of revenues includes cost of goods payable to suppliers. We cannot
assure you that our suppliers will enter into or renew agreements with us on
the same or similar terms as those currently in effect or that the cost of
goods payable to our suppliers will remain the same. Less favorable terms will
make it difficult for us to achieve profitable operations. Any decreases in
our already low gross margins will have a significant negative effect on our
business, results of operations and financial condition.
Our supplier agreements are nonexclusive and many of our suppliers sell
their products directly to our customers. In addition, the growing reach and
use of the Internet has further intensified competition in this industry. Some
suppliers provide customers with direct access to products, and if suppliers,
including our current suppliers, provide products to enterprise customers and
their researchers at a cost lower than ours, our business, revenues, results
of operations and financial condition could be negatively affected.
If we cannot timely and accurately add supplier product data to our
procurement solution database our business will be harmed
Currently, we are responsible for loading supplier product information into
our database and categorizing the information for search purposes. This
process entails a number of risks, including dependence on our suppliers to
provide us in a timely manner with accurate, complete and current information
about their products, and to promptly update this information when it changes.
We currently have a backlog of approximately 550,000 products to be loaded in
our Chemdex Marketplace. We anticipate that a majority of these products,
which are related to VWR, will be loaded in the Chemdex Marketplace by the
third quarter of 1999 and that the remaining products will be loaded by the
end of the fourth quarter of 1999. We will not derive revenue from these
products until these data are loaded in our system. The time period in which
we estimate loading these supplier product data is a forward-looking statement
that is subject to risks and uncertainties and actual results may differ
materially from those described in these forward-looking statements. Timely
loading of these products in our database depends upon a number of factors,
including the file formats of the data provided to us by suppliers and our
ability to further automate and expand our operations to accurately load these
data in our product database, any of which could delay the actual loading of
these products beyond the dates estimated by us.
In addition, we are generally obligated under our supplier agreements to
load updated product data onto our database for access through the Chemdex
Marketplace within a specified period of time following their delivery from
the supplier. Our current supplier data backlog could make it difficult for us
to meet these data update obligations to our suppliers. While we intend to
further automate the loading and updating of supplier data on our system, we
cannot assure you that we will be able to do so in a timely manner, in part
because achieving the highest level of such automation is dependent upon our
suppliers' automating their delivery of product data to us. If our suppliers
do not provide us in a timely manner with accurate, complete and current
information about the products we offer, our database may be less useful to
our customers and users and may expose us to liability. Although we screen our
suppliers' information before we make it available to our customers and users,
we cannot guarantee that the product information available in our Chemdex
Marketplace will always be accurate, complete and current, or comply with
governmental regulations. This could expose us to liability or result in
decreased adoption and use of our Internet-based procurement solution, which
could have a negative effect on our business, results of operations and
financial condition.
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If our suppliers do not provide timely and professional delivery of products
to our customers our business will be harmed
We also rely on our suppliers and manufacturers to deliver life sciences
research products to our customers in a professional, safe and timely manner.
If our suppliers do not deliver the products to our customers in a
professional, safe and timely manner, then our service will not meet customer
expectations and our reputation and brand will be damaged. In addition,
deliveries that are nonconforming, late or are not accompanied by information
required by applicable law or regulations, could expose us to liability or
result in decreased adoption and use of our Internet-based procurement
solution, which could have a negative effect on our business, results of
operations and financial condition. Further we, and not our suppliers,
typically bear the responsibility for product refunds and returns and the risk
of non-collectibility of accounts receivable from our customers.
We must maintain marketplace neutrality to attract customers and suppliers to
our Chemdex Marketplace
The life sciences research products market consists of a complex set of
relationships among manufacturers, suppliers, distributors and customers.
Adoption of our solution by suppliers and customers is dependent on their
perception that we provide a neutral, unbiased marketplace to purchase and
sell life sciences research products. To the extent that we are perceived by
our customers or suppliers as favoring one supplier over another, customers
and suppliers may lose confidence in the Chemdex Marketplace as a fair and
neutral marketplace and choose alternative solutions. Our relationship with
VWR, including the fact that VWR is a stockholder and is represented on our
Board of Directors, may compromise the perception that we provide a neutral
and unbiased marketplace for life sciences research products. Any bias,
whether perceived or actual, could have a negative impact on our ability to
maintain or increase our supplier base, which in turn may limit our ability to
maintain or increase our customer base and have a negative impact on our
business, results of operations and financial condition.
We face intense competition that could negatively affect our business
The market for business-to-business e-commerce and Internet ordering and
purchasing is new and rapidly evolving, and competition is intense and is
expected to increase significantly in the future. We face competition from
four main areas: other companies with e-commerce offerings, traditional
suppliers and distributors of life sciences research products, life sciences
companies that have developed their own procurement solutions and enterprise
software companies that offer, or may develop, alternative procurement
solutions. We may not be able to compete successfully against our current or
future competitors and competition could have a material adverse effect on our
business, results of operations and financial condition. Our competitors and
potential competitors may develop superior Internet procurement solutions that
achieve greater market acceptance than our solution. In addition,
substantially all of our prospective customers have established long-standing
relationships with certain of our competitors or potential competitors,
including most of our suppliers. Accordingly, we cannot be certain that we
will be able to expand our customer list and user base, or retain our current
customers or suppliers. See "Business--Competition."
Our solution and services are new and face rapid technological changes and if
we do not respond appropriately, our business would be harmed
The market for our solution is characterized by rapid technological
advances, evolving standards in the Internet and software markets, changes in
customer requirements and frequent new product and service introductions and
enhancements. As a result, our future success depends upon our ability to
enhance our current Internet-based procurement solution and services, to
develop and introduce new solutions and services that will achieve market
acceptance, and where necessary to integrate our Internet-based procurement
solution with our customers' enterprise resource planning systems. If we do
not adequately respond to the need to develop and introduce new solutions or
services, or to integrate with our customers' enterprise resource planning
systems, then our business, revenues, results of operations and financial
condition will be negatively affected. For example, we may lose market share
and ultimately revenue as our customers switch to our competitors'
offerings if:
. we are unable to develop technology that is a success in the
marketplace;
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. our technology does not integrate with our customers' systems; and
. our technology is surpassed by the superior technology of a competitor.
Further, we may incur significant expense to integrate our procurement
solution with our customers' enterprise resource planning systems and business
rules, and to maintain this integration as our customers' enterprise resource
planning systems evolve. Failure to provide this integration may delay or
altogether dissuade the market or a particular customer from adopting our
Internet-based procurement solution, which could have a material adverse
effect on our business, results of operations and financial condition.
If we do not successfully develop and timely introduce new versions of our
procurement solution in the next several months our business will be harmed
We are currently in the process of developing and integrating new
technology into our Internet-based procurement solution as part of our planned
release of several enhanced versions of the Chemdex Marketplace over the next
few months. These new releases are planned to include significant enhancements
to the user interfaces, database management and search technology, and
security controls, and will allow us to offer VWR's products to our customers.
The planned timing of introduction of new releases of our procurement solution
is a forward-looking statement that is subject to risks and uncertainties, and
actual timing may differ materially from that set forth in these forward-
looking statements as a result of a number of factors. Enhancing and
introducing new technology into our purchasing solution involves numerous
technical challenges and substantial personnel resources, and often takes many
months to complete. We cannot be certain that we will be successful at
enhancing or integrating this technology into our Internet-based procurement
solution on a timely basis, or in accordance with our milestones or our
product release objectives. In addition, we cannot be certain that, once
integrated, this technology or our Internet-based procurement solution will
function as expected. If we are unable to enhance and integrate this new
technology into our purchasing solution on a timely basis, we may lose
customers or experience difficulty obtaining new customers, which could
adversely affect our business, revenues, financial condition and results of
operations. Major enhancements and new solutions and services often require
long development and testing periods. In addition, our Internet-based
procurement solution is complex and, despite vigorous testing and quality
control procedures, may contain undetected errors or "bugs" when first
introduced or updated. Any inability to timely deliver a quality solution and
services could have a negative effect on our business, revenues, financial
condition and results of operations.
We may not be able to determine or design the features and functionality that
our enterprise customers and researchers require or prefer
Our success depends upon our ability to accurately determine the features
and functionality that our enterprise and research customers require or prefer
in an e-commerce solution, and our ability to successfully design and
implement procurement solutions that include these features and functionality.
If we are unable to determine or design in the features and functionality that
enterprise and research customers require or prefer in an e-commerce solution,
our business will be negatively affected. We have designed the Chemdex
Marketplace based upon internal development efforts and feedback from a
relatively limited number of enterprise and research customers. We cannot be
certain, however, that the features and functionality that we currently offer
in the Chemdex Marketplace, or those that we may offer in future releases of
our solution, will satisfy the requirements or preferences of our current or
potential enterprise and research customers.
We will need to manage our expanding business effectively in order to meet
customer and investor expectations
We have rapidly and significantly expanded our operations and expect to
continue to do so. This growth has placed, and is expected to continue to
place, a significant demand on our sales, marketing, managerial, operational,
financial and other resources. If we cannot manage our growth effectively, it
is likely that our revenues and results of operations will not meet customer
and investor expectations. As of March 31, 1999, we had grown to 87 employees.
We expect to hire a significant number of new employees to support our
business.
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Our current information systems, procedures and controls may not continue
to support our operations and may hinder our ability to exploit the market for
selling products to the life sciences industry. We are in the process of
implementing a new enterprise resource planning system that will replace our
existing accounting and management information systems and allow for future
scalability and enhancements. In addition, we anticipate requiring additional
space to accommodate our growth in the next six months. We could experience
interruptions to our business when we transition to the new enterprise
resource planning system and when we relocate to new facilities. Even after we
implement our new system and relocate to new facilities, our personnel,
systems, procedures, controls and facilities may be inadequate to support our
future operations.
We depend on our key personnel to manage our business effectively in a rapidly
changing market
Our performance is substantially dependent on the performance of our
executive officers and other key employees. Our failure to successfully manage
our personnel requirements would have a negative effect on our business,
revenues, financial condition and results of operations. We have experienced
difficulty from time to time in hiring the personnel necessary to support the
growth of our business, and we may experience similar difficulty in hiring and
retaining personnel in the future. Four of our eight executive officers have
only been employed by us since January 1999. Competition for senior
management, experienced sales and marketing personnel, software developers,
qualified engineers and other employees is intense, and we cannot be certain
that we will be successful in attracting and retaining such personnel. The
loss of the services of any of our executive officers or other key employees
could have a negative effect on our business, revenues, financial condition
and results of operations.
The unpredictability of our quarterly results may negatively affect the
trading price of our common stock
Our revenues and results of operations may fluctuate significantly in the
future as a result of a variety of factors, many of which are outside of our
control. As a result, you should not rely on period-to-period comparisons of
revenues and results of operations as an indication of our future performance.
Some of the factors that may affect our revenues and results of operations
include:
. demand for and market acceptance of our Internet-based procurement
solution and services;
. introduction of new and enhanced procurement solutions and services by
us or our competitors;
. budgeting cycles of customers and users;
. loss of one or more of our key suppliers, customers or strategic
relationships;
. changes in our pricing policy or those of our competitors or suppliers;
. amount and timing of capital expenditures and other costs relating to
the expansion of our operations;
. timing and number of new hires;
. ability to comply with applicable laws and regulations or obtain
necessary permits and licenses to sell or ship products to customers;
. technical difficulties with our web site or Internet-based procurement
solution;
. level of activity and funding in the life sciences industry; and
. general economic conditions.
We may from time to time make certain pricing, service or marketing
decisions or enter into strategic business combinations that could have a
negative effect on our business, revenues, financial condition or results of
operations for any number of quarterly periods. For example, we intend to
significantly expand our development and engineering expenses to improve our
Internet-based procurement solution. In addition, in order to accelerate the
promotion of the Chemdex brand, we intend to increase our marketing budget
significantly.
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These increases in expenses may negatively affect our results of operations
for a number of quarterly periods and we cannot assure that these measures
will increase our revenues.
Due to our relatively short operating history we have limited meaningful
historical financial data upon which to base our planned operating expenses.
Accordingly, our expense levels are based in part on our expectations as to
future revenues from new customers and are relatively fixed in the short term.
We cannot be certain that we will be able to accurately predict our revenues,
particularly in light of our limited operating history, the intense
competition in the life sciences industry, and the resulting uncertainty as to
the success of our business model. If we fail to accurately predict revenues
in relation to fixed expense levels and we are unable to adjust our operating
expenses in a timely manner in response to lower-than-expected revenues, our
business, revenues, results of operations and financial condition could be
negatively affected.
There has been no prior market for our common stock and we expect the price of
our common stock to be volatile
Prior to this offering, you could not buy or sell our common stock
publicly. An active public market for our common stock may not develop or be
sustained after the offering. Although the initial public offering price will
be determined based on several factors, the market price after the offering
may vary from the initial offering price. The market price of the common stock
may fluctuate significantly in response to a number of factors, some which are
beyond our control, including:
. quarterly variations in our operating results;
. changes in estimates of our financial performance by securities
analysts;
. changes in market valuation of Internet commerce companies generally;
. announcements by us of significant contracts, acquisitions, strategic
partnerships, joint ventures or capital commitments;
. loss of a major customer, supplier or strategic partner, or failure to
complete a sale of our procurement solution to a significant customer;
. additions or departures of any of our key personnel;
. future sales of our common stock; and
. stock market price and volume fluctuations, which are particularly
common among highly volatile securities of Internet companies.
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. We may in the future be the target of similar litigation.
Securities litigation could result in substantial costs and divert
management's attention and resources, which could have a negative effect on
our business, operating results and financial condition.
Our business will suffer if the life sciences industry does not accept
Internet solutions
Business-to-business e-commerce is a new and emerging business practice
that remains largely untested in the marketplace. Growth in the demand for our
Internet-based procurement solution and services depends on the adoption of e-
commerce and Internet solutions by life sciences industry participants, which
requires the acceptance of a new way of conducting business and purchasing
supplies. Our business could suffer dramatically if e-commerce and Internet
solutions are not accepted or not perceived to be effective.
The Internet may not prove to be a viable commercial marketplace for the
life sciences industry for a number of reasons, including:
. inadequate development of the necessary infrastructure for Internet-
based communications within life sciences organizations;
. security and confidentiality concerns of customers and suppliers;
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. lack of development of complementary products, such as high-speed modems
and high-speed communication lines;
. implementation of competing procurement solutions;
. lack of human contact that current, traditional suppliers provide; and
. governmental regulation.
The accelerated growth and increasing volume of Internet traffic may cause
performance problems which may slow adoption of our Internet-based procurement
solution and the Chemdex Marketplace
The growth of Internet traffic to very high volumes of use over a
relatively short period of time has caused frequent periods of decreased
Internet performance, delays, and in certain cases, system outages. This
decreased performance is caused by limitations inherent in the technology
infrastructure supporting the Internet and the internal networks of Internet
users. If Internet usage continues to grow rapidly, the infrastructure of the
Internet and its users may be unable to support the demands of growing e-
commerce usage, and the Internet's performance and reliability may decline. If
our existing or potential enterprise and research customers experience
frequent outages or delays on the Internet, the adoption or use of our
Internet-based, e-commerce procurement solution may grow more slowly than we
expect or even decline. Our ability to increase the speed and reliability of
our Internet-based procurement solution is limited by and depends upon the
reliability of both the Internet and the internal networks of our existing and
potential customers. As a result, if improvements in the infrastructure
supporting both the Internet and the internal networks of our enterprise
customers and their researchers are not made in a timely fashion, we may have
difficulty obtaining new customers, or maintaining our existing customers,
either of which could have a negative impact on our business, revenues,
results of operations and financial condition.
Security and disruption problems with the Internet or transacting business
over the Internet may inhibit the growth of our Internet-based procurement
solution
The secure transmission of confidential information over the Internet is
essential to maintaining customer and supplier confidence in our Chemdex
Marketplace. Customers generally are concerned with security and privacy on
the Internet and any publicized security problems could inhibit the growth of
the Internet, and therefore our procurement solution, as a means of conducting
transactions. Substantial security breaches on our system could significantly
harm our business. A party that is able to circumvent our security systems
could misappropriate proprietary information or cause interruptions in our
operations. We incur substantial expense to protect against and remedy
security breaches and their consequences. Despite the implementation of
security measures, our networks may be vulnerable to unauthorized and illegal
access, computer viruses and other disruptive problems. Eliminating computer
viruses and alleviating other security problems may require interruptions,
delays or cessation of service to users accessing our solution, which could
have a negative effect on our business, results of operation and financial
condition.
Internet service providers and on-line service providers have in the past
experienced, and may in the future experience, interruptions in service as a
result of the accidental or intentional actions of Internet users, current and
former employees or others. We may be required to expend significant capital
or other resources to protect against the threat of security breaches or to
alleviate problems caused by such breaches. Although we intend to continue to
implement industry-standard security measures, we cannot be certain that
measures implemented by us will not be circumvented in the future.
If we experience a security breach that results in the misappropriation of
proprietary information maintained in our systems or if we experience
interruptions in our service, our reputation and brand may be damaged and we
may be exposed to a risk of loss or litigation and possible liability. Damage
to our reputation and brand could cause us to lose suppliers and customers and
negatively affect our business, results of operations and financial condition.
Our insurance policies may not be adequate to reimburse us for losses caused
by security breaches or service disruption.
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System failure may cause interruption of our services
The performance of our server and networking hardware and software
infrastructure is critical to our business and reputation and our ability to
process transactions, provide high quality customer service, and attract and
retain customers, suppliers, users and strategic partners. Currently our
infrastructure and systems are located at one site at Exodus Communications in
Sunnyvale, California. We anticipate adding a mirror site at a different,
distant location. Until then, we depend on our single-site infrastructure and
any disruption to this infrastructure resulting from a natural disaster or
other event could result in an interruption in our service, fewer transactions
and, if sustained or repeated, could impair our reputation and the
attractiveness of our services, which would have an adverse effect on our
business, revenues, financial condition and results of operations.
Our systems and operations are vulnerable to damage or interruption from
human error, natural disasters, power loss, telecommunications failures,
break-ins, sabotage, computer viruses, intentional acts of vandalism and
similar events. We do not have a formal disaster recovery plan or alternative
provider of hosting services. In addition, we do not carry sufficient business
interruption insurance to compensate us for losses that could occur. Any
failure on our part to expand our system or Internet infrastructure to keep up
with the demands of our customers and users, or any system failure that causes
an interruption in service or a decrease in responsiveness of our Internet-
based procurement solution or web site, could result in fewer transactions
and, if sustained or repeated, could impair our reputation and the
attractiveness of our brand name, which would adversely affect our business,
revenues, financial condition and results of operations.
We face year 2000 risks associated with our own systems and those of our
customers, suppliers and the Internet
Significant uncertainty exists concerning the potential costs and effects
associated with any year 2000 compliance problems. Any year 2000 compliance
problems faced by us, our customers, suppliers and strategic partners could
have a negative effect on our business, revenues, results of operations and
financial condition. In addition, our ability to operate is dependent upon
delivery of accurate, electronic information via the Internet. To the extent
year 2000 issues result in the long-term inoperability of the Internet, the
Chemdex Marketplace or the systems of VWR, our business, revenues, financial
condition and results of operations could be seriously harmed.
Although we believe that our internally developed applications and systems
are designed to be year 2000 compliant, we use third party equipment and
software that may not be year 2000 compliant. In addition, until some of the
billing and cash collection functions for spot buying services are
transitioned to Chemdex, we are dependent upon VWR's systems for receiving
payment for products purchased using the spot buying services. Failure of our
applications and services, VWR's billing and collection system, or third party
equipment and software that we use, to be year 2000 compliant could result in
the Chemdex Marketplace not being used for purchasing life sciences research
products, the termination of our customer agreements or in liability for
damages, any of which could have a material adverse effect on our business,
results of operations and financial condition. Many of our customers' systems
with which the Chemdex Marketplace integrates may not yet be year 2000
compliant. In addition, our suppliers' systems may not be year 2000 compliant.
Any negative effects on our customers' or suppliers' systems as a result of
the year 2000 problem, or unknown, non-compliance of our own systems, could
have a negative effect on our business, results of operations and financial
condition and we do not have a formal contingency plan to address year 2000
issues. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Year 2000 Compliance."
We may require additional capital for our operations that could have a
negative effect on your investment
We currently anticipate that the net proceeds of the offering, together
with our existing borrowing arrangements and available funds will be
sufficient to meet our anticipated needs for working capital and capital
expenditures for at least the next 12 months. This is a forward-looking
statement that is subject to risks and uncertainties and actual results may
differ materially from those described in this forward-looking statement. We
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may need to raise additional funds in the future in order to fund rapid
expansion, to pursue customer sales and implementation, to develop new or
enhanced solutions and services, to respond to competitive pressures or to
acquire complementary businesses, technologies or services.
If we raise additional funds through the issuance of equity or convertible
debt securities, the percentage ownership of our stockholders will be reduced,
stockholders may experience additional dilution and such securities may have
powers, preferences and rights that are senior to those of the rights of our
common stock. We cannot be certain that additional financing will be available
on terms favorable to us, if at all. If adequate funds are not available or
not available on acceptable terms, we may be unable to fund our expansion,
promote our brand identity, take advantage of unanticipated acquisition
opportunities, develop or enhance services or respond to competitive
pressures. Any such inability could have a negative effect on our business,
revenues, financial condition and results of operations.
Our planned international expansion may make it more difficult to manage our
business
We expect to enter the international market. To do so, we plan to establish
international operations, hire additional personnel and establish
relationships with additional suppliers and partners. This expansion will
require significant management attention and financial resources and could
have a negative effect on our business, revenues, financial condition and
results of operations. We cannot assure you that we will be able to create or
sustain international demand for our Internet-based procurement solution and
services. In addition, our international business may be subject to a variety
of risks, including applicable government regulation, difficulties in
collecting international accounts receivable, longer payment cycles, increased
costs associated with maintaining international marketing efforts, the
introduction of non-tariff barriers and higher duty rates and difficulties in
enforcement of contractual obligations and intellectual property rights. We
cannot assure you that these factors will not have a negative effect on any
future international sales and, consequently, on our business, results of
operations and financial condition.
We are subject to government regulation
We currently seek to rely upon our suppliers to meet the various regulatory
and other legal requirements applicable to our business. However, we are
unable to verify that they have, in the past, or will, in the future, always
do so, or that their actions are adequate or sufficient to satisfy all
governmental or other legal requirements that may be applicable to our sales,
particularly in light of the fact that we generally hold title to the products
during their delivery to and return from customers. We could be fined or
exposed to civil or criminal liability, and we could receive potential
negative publicity, if these requirements have not been fully met by our
suppliers or by us directly. These fines, liabilities, and negative publicity
could also occur if an unqualified person (or even a qualified customer, if we
or the customer lack the appropriate permits to sell, use, or ship) improperly
receives a dangerous or licensed product through the Chemdex Marketplace. We
are currently reviewing applicable requirements with regard to past, present
and continuing compliance with respect to sales and distribution of our
products, particularly concerning various licensing and sales issues. The risk
that any noncompliance may be discovered in the future is currently unknown.
Although any potential impact on us for noncompliance cannot currently be
established, it could result in civil or criminal penalties, including
monetary fines and injunctions, and negative publicity, and have a material
adverse impact on our business, revenues, results of operations and financial
condition. In addition, it is possible that a number of laws and regulations
may be adopted or interpreted in the United States and abroad with particular
applicability to the Internet. See "Business--Government Regulation."
We may be exposed to product liability claims
We face potential liability for claims based on the type and adequacy of
the information and data that we obtain from suppliers and make available, and
the nature of the products that we sell and distribute utilizing the Internet,
including claims for breach of warranty, product liability, misrepresentation,
violation of governmental
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regulations and other commercial claims. In particular, we bear the risk of
liability for product loss, spill, or release, and resulting damages to
persons and property during delivery by the supplier to the customer and
return by the customer to the supplier. We do not pass through the
manufacturers' warranties on the products we distribute. However, we bear the
risk of loss of revenue from the product sale if a purchaser does not pay for
a defective product. Although we maintain general liability insurance, our
insurance may not cover some claims, penalties, or spills, is subject to
policy limits and exclusions, and may not be adequate to fully indemnify us or
our employees for any civil, governmental or criminal liability that may be
imposed. Furthermore, this insurance may not be available at commercially
reasonable rates in the future. Any liability not covered by our insurance or
in excess of our insurance coverage could have a negative effect on our
business, results of operations and financial condition. Our liability is
potentially greater with respect to sales to researchers and others who are
not affiliated with an enterprise customer.
We also seek to obtain indemnification from our suppliers against some of
these claims. However, the scope of the indemnification is limited, a few of
our suppliers have not agreed to indemnify us and some suppliers may be unable
or unwilling to indemnify us in the future. In addition, we are not in a
position to monitor our suppliers' activities. Therefore, we are exposed to
liability and risk for these claims.
We depend on our intellectual property rights and are subject to the risk of
infringement
Our intellectual property is important to our business, and we seek to
protect our intellectual property through copyrights, trademarks, trade
secrets, confidentiality provisions in our customer, supplier and strategic
relationship agreements, nondisclosure agreements with third parties, and
invention assignment agreements with our employees and contractors. We cannot
assure that measures we take to protect our intellectual property will be
successful or that third parties will not develop alternative procurement
solutions that do not infringe upon our intellectual property. In addition, we
could be subject to intellectual property infringement claims by others. Our
failure to protect against misappropriation of our intellectual property, or
claims that we are infringing the intellectual property of third parties could
have a negative effect on our business, revenues, financial condition and
results of operations. See "Business--Proprietary Rights and Licensing."
Officers and directors and their affiliates will continue to have substantial
control over Chemdex after the offering
Upon completion of this offering, our executive officers and directors and
their affiliates will beneficially own approximately % of the shares of
common stock ( % if the underwriters exercise the over-allotment option in
full). As a result, our officers, directors and their affiliates will have the
ability to influence the election of our Board of Directors and the outcome of
corporate actions requiring stockholder approval. This concentration of
ownership may have the effect of delaying or preventing a change in control of
Chemdex. See "Principal Stockholders."
Regulation or taxation of the Internet or transacting business over the
Internet may inhibit the growth of our Internet-based procurement solution
Due to the increasing popularity and use of the Internet and of e-commerce,
it is possible that a number of taxes, laws and regulations may be adopted in
the U.S. and abroad with particular applicability to the Internet and e-
commerce transactions. It is possible that governments will adopt taxes and
enact legislation that may be applicable to us in areas such as content,
product distribution, network security, encryption and the use of key escrow,
data and privacy protection, electronic authentication or "digital"
signatures, illegal and harmful content, access charges and re-transmission
activities. Moreover, the applicability to the Internet of existing laws
governing issues such as property ownership, content, taxation, defamation and
personal privacy is uncertain. Taxes, laws or regulations may limit the growth
of the Internet, dampen e-commerce and reduce the number of transactions,
increase our cost of doing business or increase our legal exposure. Any of
these factors could have a negative effect on our business, revenues, results
of operations and financial condition.
18
<PAGE>
The trading market price of our stock may decline as a result of substantial
sales of our common stock after the offering
Sales of a substantial number of shares of our common stock after the
offering could negatively affect the market price of our common stock and
could impair our ability to raise capital through the sale of additional
equity securities. Upon completion of this offering, we will have shares
of common stock outstanding or subject to currently exercisable options (
shares if the underwriters' over-allotment option is exercised in full). The
shares sold in this offering ( shares if the underwriters' over-
allotment option is exercised in full) will be freely tradable without
restriction or further registration under the federal securities laws unless
purchased by our "affiliates" as that term is defined in Rule 144. The
remaining shares of common stock outstanding upon completion of the
offering will be "restricted securities" as that term is defined in Rule 144.
Stockholders holding more than 76% of the outstanding common stock and
options to purchase common stock exercisable within 180 days after the date of
this prospectus have executed lock-up agreements that limit their ability to
sell common stock. These stockholders and option holders have agreed not to
sell or otherwise dispose of any shares of common stock for a period of at
least 180 days after the date of this prospectus without the prior written
approval of Morgan Stanley & Co. Incorporated. When the lock-up agreements
expire, these shares and the shares underlying the options will become
eligible for sale, in some cases only pursuant to the volume, manner of sale
and notice requirements of Rule 144. See "Management--Employee Stock Plans."
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business," and elsewhere in this prospectus are forward-looking
statements. Some of these forward-looking statements are attributed to third
parties and relate to their statements relating to the growth of Internet
users, e-commerce, and the life sciences research products market. 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 from any future
results, levels of activity, performance, or achievements expressed or implied
by such forward-looking statements. Such factors include, among other things,
those listed under "Risk Factors" and elsewhere in this prospectus.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential," or "continue" or the
negative of such terms or other comparable terminology.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, growth rates,
levels of activity, performance, or achievements. Moreover, neither we nor any
other person assumes responsibility for the accuracy and completeness of such
statements. We are under no duty to update any of the forward-looking
statements after the date of this prospectus to conform such statements to
actual results.
19
<PAGE>
USE OF PROCEEDS
The primary purposes of this offering are to obtain additional capital,
create a public market for the common stock and facilitate future access to
public markets. The net proceeds to Chemdex from the sale of the
shares of common stock offered hereby are estimated to be approximately
$ million after deducting estimated offering expenses of $1.0 million
and the underwriting discounts and commissions payable by Chemdex. Chemdex
intends to use the net proceeds for general corporate purposes, including
working capital to fund anticipated operating losses, expenses associated with
its advertising campaigns, brand-name promotions and other marketing efforts
and capital expenditures. Chemdex also could use a portion of the net proceeds
to acquire or invest in complementary businesses, technologies, products or
services, although no specific acquisitions are currently planned. Chemdex's
management will have broad discretion in the application of the net proceeds.
Pending such uses, Chemdex intends to invest the net proceeds from this
offering in short-term, interest-bearing, investment-grade securities.
DIVIDEND POLICY
Chemdex has not declared or paid any cash dividends on its capital stock
since its inception and does not expect to pay any cash dividends in the
foreseeable future. Chemdex currently intends to retain future earnings, if
any, to finance the expansion of its business. The terms of one of Chemdex's
current credit agreements prohibit the payment of cash dividends on its
capital stock without the prior written consent of the creditor.
20
<PAGE>
CAPITALIZATION
The Actual column in the following table sets forth Chemdex's actual
capitalization as of March 31, 1999. The Pro Forma column in the following
table gives effect to:
. the filing of an amendment to Chemdex's Amended and Restated Certificate
of Incorporation to provide for authorized capital stock of 350,000,000
shares of common stock and 5,000,000 shares of undesignated preferred
stock;
. the issuance of 5,076,810 shares of common stock to VWR pursuant to the
Strategic Relationship Agreement;
. the issuance of 799,882 shares of Series C Preferred Stock in April
1999;
. the issuance of 375,000 shares of common stock to BIO pursuant to the
Joint Marketing Agreement; and
. the conversion of all outstanding shares of preferred stock into shares
of common stock upon the closing of this offering.
The As Adjusted column in the following table gives effect to the receipt
of the net proceeds from the sale by Chemdex of the shares of common stock
offered at an assumed initial public offering price of $ per share, after
deducting estimated underwriting discounts and commissions and estimated
offering expenses. See "Use of Proceeds."
The following table does not include:
. 879,705 shares of common stock issuable on exercise of options
outstanding as of March 31, 1999, with a weighted average exercise price
of $.51;
. 310,000 shares of common stock issuable upon the exercise of warrants
outstanding as of March 31, 1999 with a weighted average exercise price
of $1.35 per share;
. 1,189,560 shares of common stock issuable upon exercise of options
granted after March 31, 1999; and
. 1,349,456 additional shares of common stock reserved for issuance under
the 1998 Stock Plan.
See "Management--Employee Stock Plans" and Note 6 of Notes to Financial
Statements.
<TABLE>
<CAPTION>
March 31, 1999
------------------------------
Actual Pro Forma As Adjusted
------- --------- -----------
(in thousands, except share
data)
<S> <C> <C> <C>
Long-term debt, net of current portion.......... $ 803 $ $
Stockholders' equity:
Preferred stock, $.0001 par value; 68,149,266
shares authorized, 32,691,416 shares issued
and outstanding, actual; 5,000,000 shares
authorized, no shares issued or outstanding,
pro forma and as adjusted.................... 3 -- --
Common stock, Chemdex, $.0001 par value;
100,000,000 shares authorized, 9,638,839
shares issued and outstanding, actual;
350,000,000 shares authorized, 48,581,947
shares issued and outstanding, pro forma;
350,000,000 shares authorized, shares
issued and outstanding, as adjusted.......... --
Additional paid-in capital...................... 48,665
Deferred compensation........................... (4,016)
Notes receivable from stockholders.............. (1,085)
Accumulated deficit............................. (15,701)
------- --- ---
Total stockholders' equity.................... 27,866
------- --- ---
Total capitalization........................ $28,669 $ $
======= === ===
</TABLE>
21
<PAGE>
DILUTION
The pro forma net tangible book value of Chemdex as of March 31, 1999 was
$27.9 million, or $.66 per share. Pro forma net tangible book value per share
is determined by dividing the pro forma number of shares of common stock,
after giving effect to the conversion of all outstanding shares of our
convertible preferred stock into 32,691,416 shares of common stock, into the
net tangible book value of Chemdex (total tangible assets less total
liabilities). Dilution per share represents the difference between the amount
per share paid by purchasers of shares of common stock in this offering and
the net tangible book value per share of common stock immediately after
completion of this offering. Assuming the sale by Chemdex of the shares
of common stock offered hereby, after deducting estimated underwriting
discounts and commissions and estimated offering expenses, the pro forma net
tangible book value of Chemdex as of March 31, 1999 would have been
approximately $ million, or $ per share. This represents an
immediate increase in pro forma net tangible book value of $ per share to
existing stockholders and an immediate dilution of $ per share to new
investors purchasing shares at the initial public offering price. The
following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share.......................... $
Pro forma net tangible book value per share as of March 31,
1999.......................................................... $
Increase in pro forma net tangible book value per share
attributable to new investors.................................
---
Pro forma net tangible book value per share after the offering...
---
Dilution per share to new investors.............................. $
===
</TABLE>
The following table summarizes as of March 31, 1999 on the pro forma basis
described above, the number of shares of common stock purchased from Chemdex,
the total consideration paid to Chemdex and the average price per share paid
by existing stockholders and by investors purchasing shares of common stock in
this offering (before deducting the underwriting discount and estimated
offering expenses):
<TABLE>
<CAPTION>
Average
Shares Purchased Total Consideration Price
------------------ ------------------- Per
Number Percent Amount Percent Share
---------- ------- ----------- ------- -------
<S> <C> <C> <C> <C> <C>
Existing stockholders............ 42,352,255 % $44,070,182 % $1.04
New investors....................
---------- ----- ----------- -----
Totals......................... 100.0% $ 100.0%
========== ===== =========== =====
</TABLE>
The foregoing discussion and tables exclude:
. 879,705 shares of common stock issuable on exercise of options
outstanding as of March 31, 1999, with a weighted average exercise price
of $.51;
. 1,349,456 additional shares of common stock reserved for issuance under
the 1998 Stock Plan;
. 310,000 shares of common stock issuable upon the exercise of warrants
outstanding as of March 31, 1999 with a weighted average exercise price
of $1.35 per share; and
. 1,189,560 shares of common stock issuable upon exercise of options
granted after March 31, 1999.
See "Management--Employee Stock Plans" and Note 6 of Notes to Financial
Statements.
22
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the financial statements of Chemdex and related notes thereto, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. The statement of operations
data for the period from September 4, 1997 (inception) through December 31,
1997 and for the year ended December 31, 1998, and the balance sheet data at
December 31, 1997 and 1998, have been derived from financial statements that
have been audited by Ernst & Young LLP, independent auditors, included
elsewhere in this prospectus. The statements of operations data for the three-
month period ended March 31, 1998 and 1999 and the balance sheet data as of
March 31, 1999 are derived from unaudited financial statements included
elsewhere in this prospectus and, in the opinion of Chemdex's management,
include all adjustments, consisting only of normal recurring adjustments,
which are necessary for a fair presentation of the results of operations for
this period. See Note 1 of Notes to Financial Statements for an explanation of
the determination of the shares used in computing basic and diluted net loss
per common share.
<TABLE>
<CAPTION>
September 4,
1997
(Inception) Fiscal Year
Through Ended Three Months Ended
December 31, December 31, March 31,
------------ ------------ --------------------
1997 1998 1998 1999
------------ ------------ --------- ----------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues.................. $ -- $ 29 $ -- $ 165
Cost of revenues.............. -- 22 -- 156
------ ------- -------- ----------
Gross profit.................. -- 7 -- 9
Operating expenses:
Research and development.... 196 3,439 364 2,293
Sales and marketing......... 86 3,247 219 3,188
General and administrative.. 121 1,745 190 1,015
Amortization of deferred
compensation............... -- 372 22 352
------ ------- -------- ----------
Total operating expenses.... 403 8,803 795 6,848
------ ------- -------- ----------
Operating loss................ (403) (8,796) (795) (6,839)
Interest and other income,
net.......................... -- 308 2 30
------ ------- -------- ----------
Net loss...................... $ (403) $(8,488) $ (793) $ (6,809)
====== ======= ======== ==========
Basic and diluted net loss per
share........................ $ (.12) $ (2.40) $ (.23) $ (1.69)
====== ======= ======== ==========
Weighted average common shares
outstanding--basic and
diluted...................... 3,409 3,543 3,409 4,032
====== ======= ======== ==========
Pro forma basic and diluted
net loss per share........... $ (.43) $ (.24)
======= ==========
Pro forma weighted average
common shares--basic and
diluted...................... 19,905 28,557
======= ==========
Balance Sheet Data:
Cash and cash equivalents..... $1,346 $ 5,990 $27,784
Working capital............... 1,116 4,490 24,360
Total assets.................. 1,728 8,168 32,636
Long-term debt and capital
lease obligations, net of
current portion.............. 6 -- 803
Total liabilities............. 280 1,820 4,770
Total stockholders' equity.... 1,448 6,348 27,866
</TABLE>
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This prospectus contains forward-looking statements that involve risks,
uncertainties and assumptions. Actual events or results may differ materially
from those indicated in these forward-looking statements. See "Special Note
Regarding Forward-Looking Statements." The following discussion of the
financial condition and results of operations of Chemdex should be read in
conjunction with "Selected Financial Data" and the Financial Statements and
related Notes included elsewhere in this prospectus.
Overview
Chemdex is a leading provider of e-commerce solutions to the life sciences
research products market. The Chemdex Marketplace is a secure, Internet-based
procurement solution that enables enterprises, researchers and suppliers to
efficiently buy and sell life sciences research products. The Chemdex
Marketplace utilizes a robust database of approximately 240,000 life sciences
research products, an advanced search engine and transaction software that
enable users to identify, locate and purchase the products they need.
We were formed in September 1997 and began offering products for sale on
the Chemdex Marketplace in November 1998. During the period from September
1997 through November 1998, we were a development stage enterprise and did not
have significant sales. Our operating activities during this period were
related primarily to the design and development of the Chemdex Marketplace,
building our corporate infrastructure, establishing relationships with
suppliers and customers and raising capital. To date, revenues have been
derived from sales of life sciences research products through the Chemdex
Marketplace. In 1997 and 1998 we grew our organization by hiring personnel in
key areas, particularly sales, research and development and marketing.
We have generated only immaterial revenues to date and our ability to
generate significant revenues is uncertain. We have incurred significant
losses since inception and, as of March 31, 1999, we had an accumulated
deficit of approximately $15.7 million. We currently expect our losses to
increase in the future and we cannot assure you that we will ever achieve or
sustain profitability. We believe our success depends on establishing
additional key strategic supplier and customer relationships, enhancing the
features and functionality of the Chemdex Marketplace and enterprise
procurement solution, and accelerating market awareness and demand for the
Chemdex Marketplace. Accordingly, we intend to continue to invest heavily in
sales, marketing and research and development activities. We have limited
operating history upon which to base an evaluation of our business and we
cannot assure you that our revenues will increase in future periods. Our
business and prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in early stages of
development, particularly companies in new and rapidly evolving markets such
as electronic commerce.
From inception, we have increased our level of spending to build our
infrastructure and to develop our Chemdex Marketplace. We intend to continue
to increase our marketing, sales, research and development and administrative
activities and to increase other operating expenses as required to integrate
the operations and technologies of any future acquisitions. We anticipate that
these expenses could significantly precede any revenues generated by such
increased spending.
Our gross margin for the three months ended March 31, 1999 was 5.8% and was
trending downward. Distributors in general operate on very low margins. This
is especially true in the life sciences research products market. Our gross
margins on sales of life sciences research products are small relative to the
margins earned by traditional distributors of life sciences research products.
If we are unable to increase our revenues at a greater rate than our related
costs, our margins may be reduced further, or possibly eliminated, which would
have a significant negative impact on our financial results. We are dependent
on the discounts we receive from our suppliers, and thus we are vulnerable to
any potential decrease in these discount rates. Any such decrease would have a
significant negative impact on our financial results. If we do not increase
these discounts, and substantially increase our revenues and scale our
business in a manner that generates significant operating efficiencies,
including further automation of our procurement solution, we may not be able
to achieve profitability.
24
<PAGE>
Our gross profit margins on sales of VWR-distributed products will be lower
than our margins on the other supplier products that we offer. We will
generate no gross margin on sales of VWR-distributed products purchased
through our Chemdex Marketplace by VWR's current top forty customers. In
addition, we will receive minimal margins on the spot buying service. To the
extent sales of VWR-distributed products, or products sold through the spot
buying service, increase relative to, or displace, our sales of other supplier
products, our average gross margins will likely decline, which would make it
more difficult to achieve profitability.
Genentech, Inc. accounted for approximately 82% of our revenues in the
period ended March 31, 1999, and we currently expect to continue to derive a
significant portion of our revenues from Genentech for the forseeable future.
Our agreement with Genentech, in connection with its role as our initial beta
site, provides that Chemdex will not receive price discounts on products of
certain suppliers purchased by Genentech if Genentech purchases specified
minimum quantities of product through the Chemdex Marketplace. As a result, we
receive little or no gross margins on sales of these supplier products to
Genentech. The loss of revenues from Genentech, or the negotiation by other
large enterprise customers for similar programs, would have a significant
negative effect on our business, revenues, results of operations and financial
condition.
A key element of our strategy is to market our solution directly to life
sciences organizations, and to succeed we must satisfy the purchasing
departments, information technology groups and the individual researchers who
are the users of our Internet-based procurement solution. The sales and
implementation cycle for our solution is long and we devote significant sales,
marketing and management resources to the sales process without any assurance
that the customer will use the Chemdex Marketplace. We are generally required
to provide a significant level of education regarding the use and benefits of
our Internet-based procurement solution, due in part to the significant
departure from traditional means of commerce and communications entailed by
its adoption and use. Further, potential enterprise customers and a number of
their departments typically engage in extensive internal reviews and analyses
before making purchase decisions. The sale and implementation of our solution
are subject to delays due to our customers' internal budgets and procedures
for approving capital expenditures and deploying new technologies within their
networks. These delays also impair our ability to generate revenue and could
negatively affect our results of operations. Once an enterprise customer
adopts our Internet-based procurement solution, it takes time for researchers
and other users within the enterprise to become aware of, learn to use and
begin using our Chemdex Marketplace. The long sales cycle and the time it
takes for researchers to begin using our Internet-based procurement solution,
could negatively affect our revenue growth, and makes it difficult to predict
our results of operations.
We recently entered into an agreement with VWR Scientific Products
Corporation to jointly market VWR laboratory products using the Chemdex e-
commerce platform. The agreement gives us the right to offer approximately
350,000 VWR-distributed products to our customers through the Chemdex
Marketplace. We currently expect to make these products available through the
Chemdex Marketplace in the third quarter of 1999. VWR and Chemdex are jointly
developing a hosted, co-branded Internet procurement solution for VWR's
existing and future customers that will provide access to three categories of
products:
. products distributed by VWR (VWR core products),
. products distributed by Chemdex (Chemdex core products), and
. products that are not distributed by either VWR or Chemdex but are
purchased from third parties (spot buying services).
We will act as an intermediary under this agreement and will forward orders
for VWR core products received through the Chemdex Marketplace to VWR for
fulfillment and customer service. We will receive no fee for orders from VWR's
40 largest customers and we will receive a minimal fee for all other orders
forwarded to VWR. We will be responsible for fulfillment and customer service
for all Chemdex core product orders and spot buying orders from VWR customers
received through the Chemdex Marketplace on similar terms and
25
<PAGE>
conditions as our other enterprise customers. VWR will provide spot buying
services for the products available from third parties for a processing fee
paid by Chemdex. VWR and Chemdex will jointly market the co-branded version of
the Chemdex Marketplace to VWR's existing and new customers, and will jointly
solicit several key existing VWR suppliers to distribute, market and sell
their products through the co-branded procurement solution.
We will not recognize any revenues on sales to VWR's 40 largest customers.
Further, since we will receive a minimal fee for sales of products through the
spot buying service, our gross profit margins on these sales will be lower
than our margins on sales of Chemdex core products. To the extent sales of VWR
core products or products sold through the spot buying service increase
relative to, or displace our sales of Chemdex core products, our revenues and
gross margins will likely decline, which would make it more difficult for us
to achieve profitability.
Quarterly Results of Operations
Because we were a development stage company during 1997 and 1998 and have a
short operating history, we believe that period-to-period comparisons prior to
1999 are less meaningful than an analysis of recent quarterly operating
results. Accordingly, we are providing a discussion and analysis of our
results of operations that is focused on the six quarters in the period ended
March 31, 1999.
The following table presents our unaudited quarterly operating results for
the six quarters in the period ended March 31, 1999. You should read the
following table together with our Financial Statements and related Notes in
this prospectus. We have prepared this unaudited information on the same basis
as the audited Financial Statements. This table includes all adjustments,
consisting only of normal recurring adjustments, that we consider necessary
for a fair presentation of our financial position and operating results for
the quarters presented. You should not draw any conclusions about our future
results from the operating results of any quarter.
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------
June Sept. Dec. Mar.
Dec. 31, Mar. 31, 30, 30, 31, 31,
1997 1998 1998 1998 1998 1999
-------- -------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Net revenues............. $ -- $ -- $ 3 $ -- $ 26 $ 165
Cost of revenues......... -- -- -- -- 22 156
----- ----- ------- ------- ------- -------
Gross profit............. -- -- 3 -- 4 9
Operating expenses:
Research and
development........... 196 364 414 1,026 1,635 2,293
Sales and marketing.... 86 219 297 710 2,021 3,188
General and
administrative........ 121 190 422 489 644 1,015
Amortization of
deferred
compensation.......... -- 22 44 104 202 352
----- ----- ------- ------- ------- -------
Total operating
expenses.............. 403 795 1,177 2,329 4,502 6,848
----- ----- ------- ------- ------- -------
Operating loss........... (403) (795) (1,174) (2,329) (4,498) (6,839)
Interest and other
income, net............. -- 2 70 136 100 30
----- ----- ------- ------- ------- -------
Net loss................. $(403) $(793) $(1,104) $(2,193) $(4,398) $(6,809)
===== ===== ======= ======= ======= =======
</TABLE>
Results of Operations
Net revenues
From inception through November 1998, Chemdex was in the development stage
and had only nominal net revenues. Net revenues increased to $165,000 in the
quarter ended March 31, 1999 as it was the first full quarter
26
<PAGE>
in which the Chemdex Marketplace was operational. Net revenues consist
primarily of product sales to customers and charges to customers for outbound
freight. Under most of our supplier agreements we are acting as a principal in
purchasing products from our suppliers and reselling them to our customers so
that we recognize revenues equal to the amount paid by our customers and cost
of revenues equal to the amount we pay to our suppliers for such products.
Under our principal-based agreements, we are responsible for selling the
products, collecting payment from customers, ensuring that the shipment
reaches customers and processing returns. In addition, we take title to
products upon shipment and bear the risk of loss for collection, delivery and
merchandise returns from customers. Some of our agreements with our suppliers
treat us as an agent of the supplier, in which case we receive a percentage
fee on product sales. We recognize revenue from product sales, net of any
discounts, and from fees under our agency-based supplier agreements, when the
products are shipped to customers. Products are shipped directly to customers
by suppliers based on customer delivery date specifications.
Cost of Revenues
Cost of revenues consists primarily of the costs of acquiring products from
our suppliers for sale to our customers. During the quarter ended March 31,
1999, cost of revenues increased primarily due to the increase in revenues.
Cost of revenues is expected to increase in future periods reflecting
increases in sales volume. Our gross margin for the three months ended March
31, 1999 was approximately 5.8%. The low gross margin on product sales was due
to our short-term strategy to accept low margins in order to increase sales
volume, customer adoption, and brand awareness. We expect margins to remain
low until we are able to negotiate larger discounts from our suppliers.
Operating Expenses
Research and Development. Research and development expenses consist of
personnel and other expenses associated with developing and enhancing software
in support of the Chemdex Marketplace. Our research and development expenses
have increased each quarter since inception primarily due to increased
staffing and associated costs related to the design and development and
maintenance of the Chemdex Marketplace, and content and design expenses. We
believe that our success is dependent in large part on continued enhancement
of the Chemdex Marketplace. Accordingly, we expect research and development
expenses to increase in future periods.
Sales and Marketing. Sales and marketing expenses consist primarily of
advertising and promotion in support of the development of our marketing
strategy and payroll and related expenses for personnel engaged in supplier
relations and sales activities. Sales and marketing expenses have increased
since inception as we have expanded our sales and marketing efforts. We intend
to aggressively expand our supplier and customer relationships and to increase
revenues and expand our brand awareness. Consequently, we expect to increase
the sales and marketing expenses in future periods. In addition, sales and
marketing expenses will increase significantly due to our recently established
relationships with BIO and VWR.
General and Administrative. General and administrative expenses consist
primarily of salaries, fees for professional services and lease expenses.
General and administrative expenses have increased primarily as a result of
the addition of finance and administrative personnel and the costs of leasing
additional office space to support our growth, as well as expenses related to
increased professional service fees. We expect general and administrative
expenses to increase in future periods to support our expanded operations and
the expenses of being a public company.
Amortization of Deferred Compensation. Chemdex recorded aggregate deferred
compensation of $4.7 million in connection with certain stock options granted
through March 31, 1999. For the year ended December 31, 1998 and the three
months ended March 31, 1999, Chemdex amortized $372,000 and $352,000,
respectively, related to stock options. In April 1999, we recorded additional
deferred compensation of $2.5 million related to stock option grants. The
deferred compensation amounts are being amortized over the vesting period of
the stock options, generally four years. See Note 6 of Notes to Financial
Statements.
27
<PAGE>
Interest and Other Income, Net
Interest and other income, net has been derived primarily from earnings on
cash investments, offset by interest expense associated with our capitalized
lease obligations for equipment purchases.
Income Taxes
Chemdex incurred operating losses and accordingly did not record a
provision for income taxes for any of the periods presented. At December 31,
1998, we had net operating loss carryforwards and federal tax credits for
federal income tax purposes of $7.5 million and $100,000, respectively. In
addition, the Company had state net operating loss and research and
development credit carryforwards of approximately $7.4 million and $100,000,
respectively. These net operating losses and credits will expire in the years
2002 through 2018 if not utilized. Certain future changes in the share
ownership of Chemdex, as defined in the Tax Reform Act of 1986 and similar
state provisions, may restrict the utilization of carryforwards. A valuation
allowance has been recorded for the entire deferred tax asset as a result of
uncertainties regarding the realization of the assets due to the lack of
earnings history at Chemdex. See Note 8 of Notes to Financial Statements.
VWR Transaction
We recently entered into an agreement with VWR to jointly market VWR
laboratory products using the Chemdex e-commerce platform. The agreement gives
us the right to offer VWR's approximately 350,000 core products to our
customers through the Chemdex Marketplace. We are also jointly developing a
hosted, co-branded Internet procurement solution for VWR's existing and future
customers. In connection with the agreement, VWR transferred to Chemdex
information concerning VWR customers who purchased products from third party
suppliers outside of VWR's primary product offering, and in exchange Chemdex
issued shares of common stock to VWR. We intend to use this information to
expand sales of our procurement solution to these customers and adoption of
the Chemdex Marketplace by these customers and suppliers. The deemed fair
value of the common stock will be amortized as sales and marketing expense
over five years, the estimated useful life of this intangible asset. The
annual amortization will be approximately $2.6 million. See "Business--
Strategic Relationship with VWR" and Note 9 of Notes to Financial Statements.
BIO Transaction
The Biotechnology Industry Organization (BIO) recently selected Chemdex as
its preferred supplier of electronic commerce purchasing solutions. As a
result, we entered into a five-year, exclusive joint marketing agreement. As
part of the joint marketing agreement, Chemdex will discount the fees we
charge to BIO members for our solution and contribute cash payments to a joint
marketing fund, to be used in connection with both parties' obligations under
the joint marketing agreement. In addition, we sold 375,000 shares of our
common stock to BIO for a nominal amount in consideration for BIO's
participation in these joint marketing activities. BIO has the right to use a
portion of the cash payments and any proceeds it receives from the sale of the
common stock to support activities which may be unrelated to BIO's obligations
under the agreement and which benefit its members and the biotechnology
industry. The charge for BIO marketing activities will be expensed to sales
and marketing as they are incurred. We will also record the difference between
the nominal amount per share price paid by BIO for the purchase of our common
stock and the fair value as of the date of issuance, which is approximately
$1.8 million, ratably over the five-year term of the joint marketing
agreement. See "Business--Relationship with BIO" and Note 9 of Notes to
Financial Statements.
Liquidity and Capital Resources
We have funded our operations primarily through the private sale of our
equity securities, through which we have raised net proceeds of approximately
$42.8 million through the quarter ended March 31, 1999. We have also financed
our operations through equipment lease financing. As of March 31, 1999, our
principal sources of liquidity included approximately $27.8 million of cash
and cash equivalents and $4.1 million in equipment financing arrangements. At
March 31, 1999 there was $1.1 million in borrowings outstanding under the
equipment financing arrangements. Subsequent to March 31, 1999, in April 1999,
we raised an additional approximately $2.3 million in net proceeds from the
private sale of our Series C Preferred Stock.
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Cash used in operating activities totaled $6.8 million in 1998 and $4.6
million for the quarter ended March 31, 1999, primarily due to our net losses,
which were partially offset by non-cash charges of depreciation and
amortization of deferred compensation and sales and marketing and interest
expense related to warrants and increases in accounts payable and accrued
expenses.
Cash used in investing activities totaled $1.6 million in 1998 and $1.5
million for the quarter ended March 31, 1999. We have made substantial
investments in computer equipment, computer software, office furniture and
leasehold improvements.
Net cash provided by financing activities was $13.0 million in 1998 and
$27.9 million for the quarter ended March 31, 1999. Net cash from financing
activities during 1998 and for the quarter ended March 31, 1999 resulted
primarily from the sale of preferred stock. We expect to fund future operating
expenses from revenues received from the sale of our products, public or
private financing and the proceeds of this offering.
We currently anticipate that the net proceeds from this offering, together
with our current cash, cash equivalents, and equipment lease line, will be
sufficient to meet our anticipated cash needs for working capital and capital
expenditures for at least the next 12 months. However, we may need to raise
additional funds in future periods through public or private financings, or
other arrangements to fund our operations and potential acquisitions, if any,
over a long-term basis until we achieve profitability, if ever. Any such
additional financings, if needed, might not be available on reasonable terms
or at all. Failure to raise capital when needed could seriously harm our
business and results of operations. If additional funds are raised through the
issuance of equity securities, the percentage of ownership of our stockholders
would be reduced. Furthermore, such equity securities might have rights,
preferences or privileges senior to our common stock.
Year 2000 Compliance
Many currently installed computer systems and software products are unable
to distinguish year 2000 dates. This situation could result in system failures
or miscalculations causing disruptions in the operations of any business. As a
result, many companies' software and computer systems may need to be upgraded
or replaced to comply with such year 2000 requirements. Our ability to operate
is dependent upon delivery of accurate, electronic information via the
Internet. To the extent year 2000 issues result in the long-term inoperability
of the Internet or the Chemdex Marketplace, our business, results of
operations and financial condition could be seriously harmed.
Representations and Warranties to Our Customers
We generally represent and warrant to our customers that the occurrence of
the date January 1, 2000 and any related leap-year issues will not cause the
Chemdex Marketplace application software to fail to operate properly. Our
warranty generally applies only to our software and excludes failures
resulting from the combination of our software with other software or
hardware, unauthorized changes to the software or network connectivity
problems, including, without limitation, problems connecting to the Internet
or problems relating to Internet service providers.
Our Testing of Our Online Marketplace Application Software
We have internally reviewed the Chemdex Marketplace application software.
We have performed industry-standard procedures to test our internally
developed applications for year 2000 compliance. In addition, we have hired a
consultant to perform additional testing. Based on our testing, we believe
that our internally developed applications and systems are designed to be year
2000 compliant. However, we utilize third-party equipment and software that
may not be year 2000 compliant. Failure of third party equipment or software,
or the interface of our applications with this equipment or software could
result in a material adverse effect on our business, results of operations and
financial condition. We are currently assessing the year 2000 risks of our
third-party desktop systems that are unrelated to the Chemdex Marketplace.
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Interaction of Our Online Marketplace with Third-Party Software
Furthermore, the success of our efforts may depend on the success of our
suppliers, customers and strategic partners in dealing with their year 2000
issues. Many of these organizations' systems may not yet be year 2000
compliant, and the impact of failure of these systems on the Chemdex
Marketplace is difficult to determine. The availability of products from our
suppliers and the procurement patterns of our customers or potential customers
may be affected by year 2000 issues.
In addition, until some of the billing and cash collection functions for
spot buying services are transitioned to Chemdex, we are dependent upon VWR's
systems, which may not be year 2000 compliant, for receiving payment for
products purchased using the spot buying services. If the systems of any of
our suppliers or customers, and particularly, if VWR's billing and cash
collection systems, are not year 2000 compliant, our business, revenues,
results of operations and financial condition could be severely harmed.
Our Contingency Plan
We are engaged in an ongoing year 2000 assessment and the development of
contingency plans. The results of our year 2000 testing and the responses
received from suppliers, customers and strategic partners will be taken into
account in determining the nature and extent of any contingency plans. We have
not yet identified our worst-case scenario resulting from a year 2000 failure
and have not yet completed our worst-case scenario contingency plan. Without a
worst-case scenario contingency plan we may not have enough time to complete
remedial measures and implement contingency planning for the worst-case
scenario. We plan to complete our contingency plan in the fourth quarter of
1999.
Costs of Addressing Year 2000 Compliance
To date, our costs to address year 2000 compliance have been approximately
$500,000 and are included in operating expenses funded from working capital.
We anticipate the additional costs to address year 2000 compliance will be
approximately $800,000. We currently have not deferred other information
technology projects due to our year 2000 efforts. Significant uncertainty
exists concerning the potential costs and effects associated with year 2000
compliance. Any year 2000 compliance problem experienced by us, our customers,
suppliers or strategic partners could decrease the demand for or availability
of products, which could seriously harm our business, operating results and
financial condition.
Recent Accounting Pronouncements
In June 1998, the FASB issued FAS 133, Accounting for Derivative
Instruments and Hedging Activities, which Chemdex will be required to adopt
for the year ending December 31, 2000. This statement establishes a new model
for accounting for derivatives and hedging activities. FAS 133 establishes
methods of accounting for derivative financial instruments and hedging
activities related to those instruments as well as other hedging activities.
Because Chemdex currently holds no derivative financial instruments and does
not currently engage in hedging activities, adoption of FAS 133 is expected to
have no material impact on Chemdex's financial condition or results of
operations.
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) No. 98-1, Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use. SOP No. 98-1
requires entities to capitalize certain costs related to internal-use software
once certain criteria have been met. We expect that the adoption of SOP No.
98-1 will not have a material impact on our financial position or results of
operations. We will be required to implement SOP No. 98-1 for the year ending
December 31, 1999.
In April 1998, the AICPA issued SOP 98-5, Reporting for the Costs of Start-
Up Activities. SOP No. 98-5 requires that all start-up costs related to new
operations to be expensed as incurred. In addition, all start-up costs
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that were capitalized in the past must be written off when SOP No. 98-5 is
adopted. We expect that the adoption of SOP No. 98-5 will not have a material
impact on our financial position or results of operations. We will be required
to implement SOP No. 98-5 for the year ending December 31, 1999.
Qualitative and Quantitative Disclosures about Market Risk
Our sales from inception to date have been made to U.S. customers and, as a
result, we have not had any exposure to factors such as changes in foreign
currency exchange rates or weak economic conditions in foreign markets.
However, in future periods, we expect to sell in foreign markets, including
Europe and Asia. As our sales are made in U.S. dollars, a strengthening of the
U.S. dollar could make our products less competitive in foreign markets. At
March 31, 1999, we did not hold any short or long-term investments and,
therefore, did not have any market risk exposure related to changes in
interest rates. Therefore, no quantitative tabular disclosures are required.
At March 31, 1999, our cash and cash equivalents consisted primarily of money
market funds and commercial paper held by large institutions in the U.S.
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BUSINESS
Overview
Chemdex is a leading provider of e-commerce solutions to the highly
fragmented life sciences industry. We enable life sciences enterprises,
researchers and suppliers to efficiently buy and sell research products
through the Chemdex Marketplace, a secure, Internet-based procurement
solution. The Chemdex Marketplace utilizes an advanced search engine and
transaction software to allow users to easily identify, locate and purchase
life sciences research products. We believe the Chemdex Marketplace and
procurement solution provide significant benefits to enterprises, researchers
and suppliers.
Industry Background
Growth of Business-to-Business Commerce on the Internet
The Internet has emerged as the fastest growing communications medium in
history and is dramatically changing how businesses and individuals
communicate and share information. International Data Corporation estimates
that the number of Internet users will grow from 97 million at the end of 1998
to 320 million by 2002. The Internet has created new opportunities for
conducting commerce, such as business-to-consumer and person-to-person e-
commerce. Recently, the widespread adoption of intranets and the acceptance of
the Internet as a business communications platform has created a foundation
for business-to-business e-commerce that offers the potential for
organizations to streamline complex processes, lower costs and improve
productivity. Internet-based business-to-business e-commerce is poised for
rapid growth and is expected to represent a significantly larger opportunity
than business-to-consumer or person-to-person e-commerce. According to
Forrester Research, business-to-business e-commerce is expected to grow from
$43 billion in 1998 to $1.3 trillion in 2003, accounting for more than 90% of
the dollar value of e-commerce in the United States by 2003.
The dynamics of business-to-business e-commerce relationships differ
significantly from those of other e-commerce relationships. Business-to-
business e-commerce solutions frequently automate or otherwise impact
workflows or processes that are fundamental to a business's operations. In
addition, business-to-business e-commerce solutions must often be integrated
with an enterprise's existing information systems, a process that can be
complex, time-consuming and expensive. Finally, personnel throughout the
enterprise must be trained to use the solution. Consequently, selection and
implementation of a business-to-business e-commerce solution represents a
significant commitment by the enterprise, and the costs of switching solutions
are high. In addition, because business transactions are typically recurring
and non-discretionary, the average order size and lifetime value of a
business-to-business e-commerce customer is generally greater than that of a
business-to-consumer e-commerce customer.
Business-to-business e-commerce solutions that offer improved efficiency
through the automation of business processes and workflows are being targeted
toward a variety of industries. These solutions are likely to be most readily
accepted by industries characterized by a large number of buyers and sellers,
a high degree of fragmentation among buyers, sellers or both, significant
dependence on information exchange, large transaction volume and user
acceptance of the Internet.
The Life Sciences Research Products Market
The life sciences research products market is large and growing, with a
myriad of customers and suppliers. According to the Laboratory Products
Association, the North American life sciences research products market was
approximately $9.4 billion in 1998. Outside of North America, the life
sciences research products market is concentrated in Europe and Japan. The
growth in the life sciences research products market is driven by increasing
research and development expenditures by pharmaceutical and biotechnology
companies, as well as an increase in the level of research funding available
for grant by the National Institutes of Health, similar international
government agencies and private foundations. Research and development budgets
have been
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increasing as new discovery tools, such as genomics, combinatorial chemistry
and high-throughput screening, are developed and utilized. These new
technologies allow researchers to experiment with thousands of chemical
compounds simultaneously, which requires extensive use of reagents and other
life sciences research products.
The life sciences research products market is highly fragmented. There are
over 5,000 suppliers offering more than one million products, many of which
are highly specialized. Life sciences research products include reagents,
chemical compounds, specialty chemicals, consumables, research instruments and
other equipment. The primary purchasers and users of life sciences research
products are research scientists working in pharmaceutical and biotechnology
companies, and academic and research institutions.
Limitations of Traditional Purchasing Methods for Life Sciences Research
Products
Traditional purchasing methods in the life sciences industry are
inefficient, costly and time consuming for both the researcher and the
enterprise. Product orders are traditionally handled through an internal,
paper-based procurement process that requires manual preparation of a purchase
order, written approval by the researcher's purchasing manager and manual
order tracking, billing and reporting across multiple departments within the
enterprise. Researchers, or their purchasing agents, place orders by
telephone, fax or e-mail and typically must place orders with multiple
suppliers to obtain all products related to a single research experiment.
Additionally, the paper-based orders are costly for purchasers and suppliers
to track and bill, and the decentralized order process does not facilitate
data collection, which is required to take full advantage of volume discounts
or other economies of scale. In addition, given the specialized and complex
nature of life sciences research products, the researchers have specific and
unique knowledge regarding product selection. Therefore it is difficult to
integrate these purchases with the enterprise's procurement policies and
business rules.
The fragmentation of the life sciences supplier base also creates
inefficiencies for researchers. Since the researcher is often searching for a
specific product to meet the parameters of a research experiment, the current
paper-based procurement process is complex, cumbersome and time-consuming. For
example, a life sciences researcher studying intracellular communications
related to cancer cells may need to purchase select antibodies for use in a
research experiment. There are numerous suppliers of antibodies, and product
specificity, reactivity, purity and other characteristics vary among
suppliers. Researchers may spend several hours examining multiple paper
product catalogs and other information from different suppliers to identify
the most appropriate product.
Traditional purchasing methods also present a number of challenges to
suppliers trying to reach life sciences researchers with product information.
Due to the high cost of printing and distributing paper catalogs, suppliers
cannot cost-effectively manage frequent updates and distribution of time-
sensitive information. In addition, individual researchers frequently move
from enterprise to enterprise, making it difficult for suppliers to maintain
contact with them. While some suppliers have developed Internet websites to
communicate with individual researchers, few have invested the significant
time and money required to establish an effective e-commerce channel with
their customer base. Most suppliers, often very small in size, have limited
resources available to support the growing challenge of marketing and selling
to the fragmented, worldwide life sciences research products market.
Opportunity for Business-to-Business E-commerce Solution
Recognizing the limitations of traditional procurement methods, several
large pharmaceutical and biotechnology companies have developed automated
procurement systems. These systems attempt to streamline the purchasing
process and leverage purchasing volumes, but often have limitations. These
solutions may only offer access to the products of a limited number of
suppliers and may not be scalable. In addition, enterprises incur significant
costs developing such internal solutions, integrating them with other
enterprise systems and maintaining their compliance with the enterprise's
business rules and purchasing policies.
Despite such efforts by certain enterprises, the fragmentation and
complexities of the life sciences industry and the current paper-based
procurement process create the need for a business-to-business e-commerce
solution
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that seamlessly links suppliers and purchasers of research products. To
effectively address the needs of the life sciences enterprise, a solution must
be cost-effective, easily implemented and maintained, enable the enterprise to
enforce its particular purchasing policies and business rules, enable the
collection of data to maximize volume purchase discounts and interface to
multiple suppliers. To effectively address the needs of the researcher, a
solution must be easy to use and provide comprehensive product selection, in-
depth product information, specialized search capabilities and an efficient
order and order-tracking mechanism. To effectively address the needs of
customers and suppliers, it is important that the solution offer a neutral and
fair marketplace with full catalog descriptions of products and retail product
pricing information. Such information must also be fairly and accurately
presented to researchers. In addition, the solution should offer suppliers an
opportunity for incremental sales, the ability to offer customer-specific
pricing and an opportunity to leverage any existing electronic catalogs that
may have been implemented by the supplier.
The Chemdex Solution
Chemdex is a leading provider of e-commerce solutions to the life sciences
research products market. The Chemdex Marketplace is a secure, Internet-based
procurement system that enables life sciences enterprises, researchers and
suppliers to efficiently buy and sell life sciences research products. The
Chemdex Marketplace utilizes a database of approximately 240,000 life sciences
research products, advanced search engines and transaction software that
enable users to easily identify, locate and purchase the products they need.
We also provide applications that enable our customers and suppliers to
interface with the Chemdex Marketplace to automate their transactions. In
addition to the Chemdex Marketplace, we provide professional and
implementation services to enable our customers to take full advantage of the
capabilities of the Chemdex Marketplace.
Benefits to the Enterprise
Chemdex's procurement solution enables enterprises to integrate their
customized workflow, business rules and processes, and negotiated supplier
pricing with the Chemdex Marketplace. We also provide the enterprise the
option of a customized user interface. Our procurement solution requires
minimal investment of time and capital by our enterprise customers to install,
maintain and use. Our solution automates, consolidates and monitors the
approval and invoicing process as well as the order placement and delivery
information for the enterprise. In addition to reducing the cost of
procurement, our solution allows our enterprise customers to enforce their
particular business rules and aggregate purchases to obtain volume discounts
and other economies of scale. The Chemdex Marketplace resides entirely on our
servers, is accessible by standard browsers and requires minimal software
installation or integration at the customer site.
Benefits to the Researcher
Researchers, research assistants and other users within enterprises benefit
from the Chemdex Marketplace because it offers them convenient and easy one-
stop shopping. A researcher can use our advanced search engine to identify and
locate products from a broad product database and can use our automated
ordering and approval process to purchase products. For example, our solution
allows a researcher to personalize a list of product favorites to facilitate
product selection and recurring orders. The Chemdex Marketplace offers other
advantages over the traditional paper catalog alternative, including the
online ability to compare various products from a single or multiple suppliers
and track the progress of an order. These features result in significant time
savings for the researcher.
Benefits to the Supplier
We offer suppliers a cost-effective opportunity to reach more customers and
sell more products by establishing or enhancing their Internet presence and
providing links to existing online or electronic catalogs. The Chemdex
Marketplace also offers suppliers the capability to implement customer-
specific pricing, update product information and introduce new products
without being limited by specific catalog publication cycles. In
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many cases, the Chemdex Marketplace will appeal to suppliers as being lower
cost compared to traditional distribution or representation arrangements
because, among other factors, our purchasing discounts may be less than those
of traditional distributors. We plan to provide tools to our suppliers that
enable the online update and modification of their product databases hosted on
our servers, or to integrate the Chemdex Marketplace directly with their
systems. The Chemdex Marketplace is neutral in that its search capability
identifies products that meet the researchers' search criteria, and provides
an unbiased comparison of product characteristics and pricing to allow the
researcher to make a reasoned choice based upon the information provided by
suppliers.
The Chemdex Strategy
Our objective is to expand upon our position as a leading e-commerce
solution for the life sciences industry. Our strategy to achieve this
objective includes the following key elements:
Capitalize on First-Mover Advantage and Build Brand Awareness. We intend to
capitalize on our "first-mover" advantage by offering the most comprehensive
e-commerce solution to the life sciences research products market. We also
intend to pursue strategic relationships with industry leaders, such as those
we have established with VWR Scientific Products Corporation (VWR) and the
Biotechnology Industry Organization (BIO), to accelerate market awareness and
demand for our e-commerce solution. We intend to leverage our strategic
relationship with VWR to gain entry into and establish relationships with
their enterprise customers and life sciences research product suppliers. We
also intend to pursue an aggressive brand development strategy through
targeted advertising and promotions, press coverage and participation in trade
associations and industry events.
Expand Product Offering and Increase Adoption of Our Chemdex Marketplace.
We believe our breadth of products and procurement solution provide us with an
essential foundation for a comprehensive e-commerce solution for the life
sciences industry. We currently offer approximately 240,000 products from
approximately 100 suppliers. We have agreements with suppliers that provide us
access to approximately 550,000 additional products that we plan to add to our
Chemdex Marketplace, including approximately 350,000 VWR-distributed products.
We intend to advance our market leadership by continuing to expand the
selection of life sciences research products offered through the Chemdex
Marketplace. A growing number of suppliers and products in the Chemdex
Marketplace will potentially draw more enterprise customers and accelerate
adoption by researchers. As the Chemdex Marketplace attracts a critical mass
of enterprise customers and researchers, we believe the buying power of these
customers will attract additional suppliers to our marketplace. We also
believe this growth cycle will help create a network effect, where the value
to each in the network increases with the addition of each new participant,
increasing the overall value of the Chemdex Marketplace.
Increase Usage of Chemdex Marketplace and Drive Operating Efficiencies. We
intend to aggressively increase the base of enterprise customers using the
Chemdex Marketplace, and drive rapid adoption within current and future
enterprise customers. Our hosted, Internet-based procurement solution can be
quickly and easily installed at the enterprise, reducing the initial
commitment of time and capital for new enterprises adopting our solution. To
encourage implementation throughout the enterprise, we charge minimal initial
fees, and in certain cases waive initial fees if customers achieve minimum
purchase volumes. Additionally, we will continue to educate users within our
existing and future enterprise customers about the benefits of our solution
and provide training on its use, thereby accelerating adoption. The cost of
processing individual transactions will drop as the volume of transactions
processed by the Chemdex Marketplace continues to grow, and through such
increased volumes and further automation of our solution, we will strive to
achieve economies of scale across our business.
Maintain Technological Leadership. We intend to continue to improve our
technology to meet the evolving needs of our customers. We will continue to
expend substantial efforts to develop, purchase or license technological
advancements to our procurement solution to enhance its reliability,
functionality and ease of integration with existing or newly developed
enterprise resource planning applications and other procurement systems. We
intend to further automate interfaces with key suppliers, which will enable
timely updates of product
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information, as well as inventory availability. We also intend to improve our
customer- and supplier-specific pricing flexibility and to enable purchasing
in multiple foreign currencies.
Expand Internationally. We believe the international scope of the Internet,
the global reach of many of our customers and the worldwide demand for life
sciences research products present opportunities to expand our Chemdex
Marketplace internationally. The non-U.S. life sciences research products
market is highly concentrated in Europe and Japan, and U.S. suppliers have a
substantial presence in these markets. We plan to leverage our technology,
expertise and existing supplier relationships to expand our Chemdex
Marketplace to Europe and Asia.
The Chemdex Marketplace
Our Chemdex Marketplace consists of a broad database of approximately
240,000 life sciences research products and advanced search engine and
transaction software that enable users to easily identify, locate and purchase
the products they need. We also provide applications that enable our customers
and suppliers to interface and automate the information exchange with the
Chemdex Marketplace. In addition to our Chemdex Marketplace and Internet-based
applications, we provide professional and implementation services to enable
our customers to take full advantage of the capabilities of the Chemdex
Marketplace. We believe that our business model, which is based on negotiated
price discounts from our suppliers rather than transaction fees payable by the
customer, will further drive usage of the Chemdex Marketplace. In addition,
our customer support and sales group helps customers understand both the
business and technical benefits of the Chemdex Marketplace and provides one-
on-one education and training to increase user adoption.
The following chart summarizes the key services supported by the Chemdex
Marketplace and the features of such services.
<TABLE>
<CAPTION>
Services Supported Chemdex Features
- -------------------------------------------------------------------------------------
<C> <C> <S>
Enterprise . Procurement system management . Interface to existing enterprise
. Approval and purchase of life network and ERP software
sciences research products . Automated order approval process
. Summary invoicing and reporting
. Enforcement of business rules
. Customized supplier pricing
. Comparative price/product
shopping
- -------------------------------------------------------------------------------------
Researcher . Identification, comparison and . One-stop shopping
purchase of life sciences . Search engine to identify,
research products locate and compare products
. Current, detailed product
information
. Automated order submission and
status
. Recurring order form
- -------------------------------------------------------------------------------------
Supplier . Sale of life sciences research . Support integration with
products supplier sales order flow
. Automated order submission and
tracking
. Automated process for updating
and adding product/price
information
. Customer support services
</TABLE>
How it works for the enterprise. The enterprise customer interface with the
Chemdex Marketplace varies based upon the customer's existing procurement
system. Our applications and services can be implemented as a stand-alone
solution, or can be integrated with existing systems or other commercially
available procurement solutions. Our applications are designed to be easily
customized to match the workflow requirements and business rules of the
enterprise. We also provide access to the Chemdex Marketplace through our web
site. In most cases, the most important impact of our solution is paperless
automation of the procurement approval process. Purchasing limits are most
often applied on an individual researcher or project basis, and the Chemdex
Marketplace interfaces with the enterprise's system to ensure compliance with
defined limits. Our solution can
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be integrated with enterprise financial accounting systems to further automate
specific product purchase information. The enterprise's information technology
group has few support requirements beyond the initial installation, since the
Chemdex Marketplace is entirely hosted on our client servers with all
recurring product upgrades managed and installed by us.
How it works for the researcher. The researcher most often interfaces with
the Chemdex Marketplace to order specific products for research experiments.
In many cases, the researcher needs the same items on a regular basis and our
solution allows a researcher to personalize a list of "favorites" to
facilitate product selection and recurring orders. The Chemdex Marketplace
also provides robust product search capabilities that help researchers
identify new products needed to meet the specific characteristics required for
an experiment. Researchers have password access to the system, and can easily
process their recurring orders, as well as orders for new products. The system
allows the researcher to identify the incremental shipping costs for expedited
processing, and provides for automated paperless processing of an order once
the product selection is complete. The researcher is also able to track the
status of individual orders within the system, reducing the time required to
communicate with procurement personnel or suppliers.
How it works for the supplier. Electronic versions of product catalogs are
provided to us in a variety of file formats. These files are converted to
searchable data which is loaded into the Chemdex Marketplace using a number of
sophisticated product loading algorithms. Our content engineering staff then
reviews the data as loaded in the Chemdex Marketplace to ensure proper
classification for purposes of product searches. The ability to process large
volumes of complex catalog information is an important core competency which
allows us to afford maximum flexibility to our suppliers in loading data and
updating information. We also provide suppliers the ability to readily update
their product information to include revised pricing, new product
introductions or additional product details of interest to the customers. We
send product order information to suppliers in a number of electronic media
forms, including electronic data interchange, e-mail, HTML or flat file, to
maximize automation and integration with existing supplier software systems.
Future Services. Chemdex anticipates that aggregated product purchasing and
sales information will ultimately be valuable to both suppliers and customers.
After accumulating significant historical data regarding buying patterns, we
intend to make non-confidential, aggregated information available to both
suppliers and customers as an additional service.
Customers
Our target customers are pharmaceutical and biotechnology companies and
academic and research institutions. As of March 31, 1999, we have entered into
agreements to provide our procurement solution to 17 enterprise customers and
sold life sciences research products to over 250 users. Sales to Genentech
researchers accounted for approximately 82% of our total revenue for the
quarter ended March 31, 1999.
The following is a list of our enterprise customers that have used the
Chemdex Marketplace to purchase life sciences research products as of March
31, 1999:
<TABLE>
<S> <C>
CV Therapeutics Phyton, Inc.
Elan Pharmaceuticals Raven Biotechnologies
Eos Roche Bioscience
Genentech, Inc. Telik, Inc.
Harvard University University of California, San Francisco
HemaSure, Inc. University of Illinois
Immune Complex Corporation VaxGen, Inc.
Maxygen, Inc.
</TABLE>
We also sell life sciences research products to registered users who are
not affiliated with our enterprise customers through our web site at
www.chemdex.com. Because of the nature of some of the products we sell,
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<PAGE>
we are taking steps to register unaffiliated users to our web site to ensure
that they are associated with pharmaceutical or biotechnology companies, or
academic or research institutions.
Although we intend to increase our sales and marketing efforts, we expect
that we will continue to generate a significant portion of our revenue from a
limited number of customers for the foreseeable future. If we do not increase
the number of our customers, or if we lose any of our current customers or do
not generate as much revenue from them as we expect, our business would be
significantly harmed.
Suppliers
We believe the value and benefit to our customers of our procurement
solution is directly related to the breadth and depth of life sciences
research products offered through our Chemdex Marketplace. We currently offer
approximately 240,000 products from approximately 100 suppliers. We have
agreements for approximately 550,000 additional products which we plan to add
to our Chemdex Marketplace, including approximately 350,000 of VWR-distributed
products. We anticipate that a majority of these products, which are related
to VWR, will be loaded in the Chemdex Marketplace by the third quarter of 1999
and that the remaining products will be loaded by the end of the fourth
quarter of 1999. The following is a list of our twenty largest product
suppliers based on our revenues for the quarter ended March 31, 1999;
<TABLE>
<S> <C>
Accurate Surgical and Scientific Life Technologies, Inc.
Amersham Life Science Inc. Molecular Probes, Inc.
Biosource International, Inc. New England BioLabs Inc.
CN Biosciences, Inc. PeproTech, Inc.
CHEMICON International, Inc. PharMingen
Clontech Laboratories, Inc. Pierce Chemical Company
Dako Corporation Research Organics, Inc.
Endogen, Inc. Spectrum Quality Products, Inc.
Kirkegaard & Perry Laboratories, Inc. Stratagene
Lancaster Synthesis Ltd. United States Biological
</TABLE>
We currently have seven employees who are responsible for maintaining
existing relationships and establishing new relationships with suppliers.
Strategic Relationship with VWR
We recently entered into a strategic relationship agreement with VWR
Scientific Products Corporation to jointly market VWR laboratory products
using the Chemdex Marketplace. VWR is one of the laboratory supply industry's
largest distributors. The agreement gives us the right to offer approximately
350,000 VWR-distributed products to our customers through the Chemdex
Marketplace. We currently expect to make the majority of these products
available through the Chemdex Marketplace in the third quarter of 1999. VWR
and Chemdex are jointly developing a hosted, co-branded Internet procurement
solution for VWR's existing and future customers that will provide access to
three categories of products:
. products distributed by VWR (VWR core products),
. products distributed by Chemdex (Chemdex core products) and
. products that are not distributed by either VWR or Chemdex but are
purchased from third parties (spot buying service).
With respect to sales of VWR core products, we will act as an intermediary
and will forward orders received through the Chemdex Marketplace to VWR for
fulfillment and customer service. We will receive no fee for orders for VWR
core products from VWR's 40 largest customers and we will receive a minimal
fee for all other orders for VWR core products forwarded to VWR. We will be
responsible for fulfillment and customer service
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<PAGE>
for all Chemdex core product and spot buying orders received from VWR
customers through the Chemdex Marketplace. Under the terms of the agreement,
VWR will provide support for the spot buying services in return for a fee
which approximates VWR's costs incurred.
VWR and Chemdex will jointly market the co-branded version of the Chemdex
Marketplace to VWR's existing and new customers and will jointly solicit
several key existing VWR suppliers to distribute, market and sell their
products through the co-branded procurement solution. We believe the VWR
strategic relationship will enhance and broaden the Chemdex Marketplace, and
the spot buying services will enable Chemdex to offer complete fulfillment
capability to current and future VWR customers through the co-branded Chemdex
Marketplace. We believe the VWR strategic relationship will accelerate
adoption of the Chemdex Marketplace by VWR customers, which include major U.S.
pharmaceutical and biotechnology companies, and will enable us to establish
relationships with additional key suppliers and customers.
As part of the strategic relationship, Jerrold Harris, the President and
Chief Executive Officer of VWR, joined our board. In addition, VWR received
5,076,810 shares of our common stock. VWR is subject to contractual limits on
their percentage ownership of our stock, except in connection with the
acquisition of our stock by specified companies. See "Related Party
Transactions."
Relationship with BIO
The Biotechnology Industry Organization (BIO) recently selected Chemdex as
its preferred supplier of electronic commerce solutions. As a result, we
entered into a five-year, exclusive joint marketing agreement with BIO. We
believe this agreement will significantly facilitate the selection and
adoption of the Chemdex solution by BIO's members and provide Chemdex with a
significant competitive advantage. Under the agreement, BIO will endorse
Chemdex as the preferred provider of electronic commerce purchasing solutions
to the biotechnology industry and engage with Chemdex in joint marketing
activities, including endorsement of Chemdex through BIO-sponsored speaking
engagements, in BIO publications and direct marketing materials, at BIO shows
and conferences, and on the BIO web site. As part of the joint marketing
agreement, Chemdex will discount the fees we charge to BIO members and
contribute cash payments to a joint marketing fund, to be used in connection
with both parties' obligations under the joint marketing agreement. In
addition, we sold 375,000 shares of our common stock to BIO for a nominal
amount in consideration for BIO's participation in these joint marketing
activities. BIO is an industry organization that serves and represents the
biotechnology industry, including more than 850 biotechnology companies,
academic institutions, and state biotechnology centers, with 25 state
affiliates and related organizations in 47 states and more than 26 countries.
In addition to other industry supporting activities, BIO provides strategic
purchasing services for its members through BIOPurchasing, BIO's national
group purchasing division.
Technology
The Chemdex Marketplace is a hosted procurement solution that resides
entirely on our fault-tolerant servers and is accessible by standard browsers,
requiring minimal software installation at the customer site, and enabling
rapid deployment of applications, enhancements and updates. Our production
data center is hosted at Exodus Communication in Sunnyvale, California. This
data center provides us with conditioned space and high bandwidth Internet
connectivity.
System Architecture. The Chemdex Marketplace includes three layers of
technology:
. Process and Communication Layer. This layer integrates our system with
our customers' client applications using protocols that traverse
corporate firewalls, such as http, ftp and EDI, to provide a seamless
operation of the Chemdex Marketplace and procurement solution. This
layer is implemented using standard web servers, and supports standard
Internet protocols such as http, ftp and XML.
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<PAGE>
. Electronic Services Layer. This layer delivers all of our system's
functionality. The Chemdex Marketplace and procurement solution uses
existing and proprietary software to deliver proprietary services
including Internet catalog development and maintenance tools, search
functionality, workflow integration, product pricing and estimated
shipping, handling and freight charges.
. Enterprise Services Layer. This layer delivers certain services required
to run Chemdex's system, including financial services, development and
maintenance of the product master database, customer service systems and
the data warehouse. To meet our unique scale requirements for product
information management, we developed a proprietary data warehouse
system.
Customer Integration. The Chemdex Marketplace can be configured and
integrated to meet an enterprise customer's needs, including:
. Customer View. The procurement solution graphical user interface may be
tailored for each enterprise customer, allowing an enterprise customer
to select specific suppliers from our supplier list, and to customize
the user's view in accordance with business rules and policies
implemented by the purchasing department.
. Login and Authentication. For enterprises that do not have a single
authoritative directory services system enabling single login
functionality across the enterprise, the Chemdex procurement solution
provides an authoritative enterprise authentication and authorization
list along with the user roles, credit limits, and approval workflow.
For enterprises that have a single authoritative directory services
system, the Chemdex procurement solution directly integrates with the
enterprise's authoritative data source to maintain the current permitted
user list, and provides seamless access by the user and simple
management for the enterprise.
. Purchasing Application Integration. The Chemdex procurement solution
integrates with commercial purchasing applications, such as Ariba or
Commerce One, as well as internally developed purchasing applications,
through Open Buying on the Internet (OBI), an industry standard protocol
for Internet purchasing, or by integrating directly with a proprietary
format such as Ariba's cXML protocol.
. Custom Pricing. We have developed algorithms to support existing
contract pricing agreements between customers and suppliers. This custom
pricing can be implemented either by (a) pricing contract tables that
list discount rates for a specific product, buyer or supplier
relationship; or (b) direct integration with the supplier systems to
extract real time pricing and availability information.
Search Services. Our search software leverages a combination of full text
search and relational technology to deliver a unique search tool customized to
the life sciences industry. Our search engine is customized to 11 levels of
specific search categories associated with life sciences research products
such as antibodies, enzymes, or other compounds. Each of the product specific
search levels also includes parametric searching capabilities to search for
products with specific attributes, or ranges of attributes.
Product Pricing Estimation. We have developed algorithms to estimate
shipping, handling and freight charges associated with any customer order.
These algorithms integrate customer requirements for shipping delivery time,
product weight, and product type (including requirements for hazardous
materials and product packaging such as blue ice). These algorithms provide
our users with estimated shipping, handling and freight cost, and make
appropriate decisions given their delivery timing requirements.
Workflow. We have developed simple workflow technology to implement each
enterprise customer's business rules and processes. These workflow rules
include credit limit checks, multilevel approval and e-mail based notification
of any order changes. This system streamlines the purchasing process by
automating approval routing, and enables real time customer service through
direct customer notification.
Technical Support. We offer technical support to respond to any customer
service disruption. In addition to off-the-shelf site instrumentation and
monitoring software, we have developed custom monitoring agents that
40
<PAGE>
measure key Chemdex application parameters. This proprietary software enables
us to provide high quality technical support.
Sales, Marketing and Support
We market and sell the Chemdex Marketplace and procurement solution through
a combination of our direct sales force, internal telemarketing sales and
strategic relationships with partners such as VWR and BIO. Since our potential
customers and users fall within a defined market segment, we are able to
identify and target the purchasing decision makers and potential users who
will influence the decision to adopt a procurement solution.
Our sales and marketing approach is designed to help customers and
suppliers understand both the business and technical benefits of the Chemdex
Marketplace and procurement solution, and to promote user adoption through
one-on-one education and training. Our field sales force focuses on large
pharmaceutical and biotechnology companies and large academic and research
institutions. Our telephone sales group focuses on small biotechnology
companies and smaller research institutions. We are building an experienced
professional services organization to facilitate the successful deployment of
our procurement solution, including integration with any enterprise resource
planning software and customization with the enterprise's business rules. We
intend to expand our direct sales force and professional services organization
and to establish additional sales offices domestically and internationally.
Competition for sales personnel is intense, and we may not be able to attract,
assimilate or retain additional qualified personnel in the future.
We conduct a variety of marketing programs to educate our target market,
create awareness and attract customers to our Chemdex Marketplace. To achieve
these goals, we leverage our existing customer base and engage in marketing
activities such as seminars, direct mailings, trade shows, speaking
engagements and web site marketing. We also conduct comprehensive public
relations programs that include establishing and maintaining relationships
with key trade press, business press and industry analysts. In addition, we
engage in marketing programs within our enterprise customers to educate,
convert and train researchers and purchasing agents to use the Chemdex
Marketplace for their life sciences research product orders.
We believe that we can establish and maintain long-term relationships with
our customers and suppliers, and encourage repeat visits and purchases by our
customers if, among other things, we have good account management, customer
support and service. Our customer support and service personnel handle general
customer inquiries and basic technical questions, answer customer questions
about the ordering process and investigate the status of orders, shipments and
payments. We have automated certain of the tools used by our customer support
and service staff, such as tracking screens that let our support staff track a
transaction by any of a variety of information sources. At any time in the
purchasing process, a customer can access our support staff by fax or e-mail
by following prompts located throughout our web site or by calling our call
center through our toll free telephone line. Our support staff is
knowledgeable in life sciences research products and the life sciences
industry.
Our worldwide sales and marketing group consisted of 39 individuals as of
March 31, 1999, 29 of whom were located at our Palo Alto, California
headquarters and 10 of whom were located in regional offices in Ann Arbor,
Michigan; Cambridge, Massachusetts; Princeton, New Jersey; and Columbia,
Maryland.
Research and Development
Our development organization is focused on developing and enhancing our
enterprise procurement solution, developing applications for and supporting
the Chemdex Marketplace, and maintaining and improving our technology,
infrastructure and database. The development group is supported by our quality
assurance group, which implements a process designed to identify defects
through the entire development cycle. We are currently in the process of
developing and integrating new technology into our Internet-based procurement
solution as part of our planned release of several enhanced versions of the
Chemdex Marketplace over the next few months. These new releases are planned
to include significant enhancements to the user interfaces, database
management and search technology, and security controls, and will allow us to
offer VWR's products to our customers. As of
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<PAGE>
March 31, 1999, our research and development group was comprised of 34
employees responsible for development and quality assurance.
Research and development expenses were $196,000 in 1997 and $3.4 million in
1998. To date, substantially all software development costs related to the
Chemdex Marketplace have been expensed as incurred by our employees. We
believe that significant investments in research and development are required
to remain competitive.
Proprietary Rights and Licensing
Our success and ability to compete are dependent on our ability to develop
and maintain the proprietary aspects of our technology. We rely on a
combination of copyright, trademark and trade secret laws and contractual
restrictions to establish and protect the proprietary aspects of our
technology. We seek to protect our source code for our software, documentation
and other written materials under trade secret and copyright laws. Finally, we
seek to avoid disclosure of our intellectual property by requiring employees
and consultants with access to our proprietary information to execute
confidentiality agreements with us and by restricting access to our source
code.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Litigation may be necessary in the future to
enforce our intellectual property rights, to protect our trade secrets, and to
determine the validity and scope of the proprietary rights of others. Any such
resulting litigation could result in substantial costs and diversion of
resources and could have a material adverse effect on our business operating
results.
Our success and ability to compete are also dependent on our ability to
operate without infringing upon the proprietary rights of others. In the event
of a successful claim of infringement against us and our failure or inability
to license the infringed technology, our business and operating results would
be significantly harmed.
Competition
The market for business-to-business e-commerce and Internet ordering and
purchasing is new and rapidly evolving, and competition is intense and is
expected to increase significantly in the future. Barriers to entry are
relatively insubstantial. We believe that the critical success factors for
companies seeking to create Internet business-to-business e-commerce solutions
include the following:
. quality and reliability of the Internet procurement solution;
. breadth and depth of product offerings;
. brand recognition;
. installed base of customers; and
. ease of use and convenience.
We face competition from four main areas: other companies with e-commerce
offerings, traditional suppliers and distributors of life sciences research
products, life sciences companies that have developed their own procurement
solutions and enterprise software companies that offer, or may develop,
alternative procurement solutions. Companies primarily focused on creating
Internet procurement solutions for the life sciences industry include
SciQuest.com and Anderson Unicom Group, Inc. Traditional suppliers and
distributors including Sigma Aldrich Corp., Fisher Scientific International,
Inc., Merck KGaA Darmstaadt and VWR currently sell life sciences research
products through paper catalogs and web sites. We could face further
competition in the future from traditional suppliers and distributors that
enter into business-to-business e-commerce over the Internet either on their
own or by partnering with other companies. In addition, life sciences
companies may already have, or may develop, their own procurement solutions.
Traditional enterprise software
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<PAGE>
companies, such as SAP, IBM and Oracle, could in the future develop and offer
a competitive procurement solution that our customers could customize to link
to their suppliers. Additionally, emerging enterprise software companies, such
as Ariba, Inc. and Commerce One, Inc. offer procurement solutions that could
be customized to link to suppliers of life sciences research products.
Our current and potential competitors may develop superior Internet
procurement solutions that achieve greater market acceptance than our
solution. Many of our existing and potential competitors, including large
traditional distributors, have longer operating histories in the life sciences
research products market, greater name recognition, larger customer bases and
significantly greater financial, technical and marketing resources than we do.
Such competitors can undertake more extensive marketing campaigns for their
brands, products and services, adopt more aggressive pricing policies and make
more attractive offers to customers, potential employees, distribution
partners, commerce companies and third-party suppliers.
In addition, substantially all of our prospective customers have
established long-standing relationships with certain of our competitors or
potential competitors. Accordingly, we cannot be certain that we will be able
to expand our customer list and user base, or retain our current customers. We
may not be able to compete successfully against our current or future
competitors and competition could have a material adverse effect on our
business, results of operations and financial condition.
Government Regulation
In addition to regulations applicable to businesses generally, we are
subject to direct regulation by governmental agencies, which includes numerous
laws and regulations generally applicable to the chemical, pharmaceutical,
controlled substances, human and animal biological reagents, and nuclear
chemical businesses, and environmental spills, as well as U.S. export controls
and import controls of other countries, including controls on the use and
distribution of chemical reagents. Regulatory agencies potentially involved
include the:
. Food and Drug Administration under, for example, the Federal Food, Drug
and Cosmetics Act;
. Environmental Protection Agency under, for example, the Comprehensive
Environmental Response, Compensation and Liability Act, the Toxic
Substances Control Act, the Clean Water Act and the Clean Air Act;
. Drug Enforcement Agency under, for example, the Controlled Substances
Act;
. Centers for Disease Control under, for example, the Clinical
Laboratories Improvement Act;
. Department of Agriculture under, for example, the Virus and Serum Act;
. Occupational Safety and Health Administration under, for example, the
Occupational Safety and Health Act;
. Department of Commerce under, for example, the Export Administration
Act;
. Nuclear Regulatory Commission under, for example, the Atomic Energy Act;
. U.S. Department of Interior under, for example, the Comprehensive
Environmental Response, Compensation, and Liability Act; and
. various state and local counterparts and laws, for example California
Proposition 65, the California Safe Drinking Water and the Toxic
Enforcement Act.
Researchers and others who are not affiliated with an enterprise customer
may register with our Chemdex Marketplace and purchase life sciences research
products through our website, www.chemdex.com. Although we require
unaffiliated users to register information about themselves and their research
experiments, we do not independently verify this information or screen or
qualify these unaffiliated users.
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<PAGE>
We currently seek to rely upon our suppliers to meet the various regulatory
and other legal requirements applicable to our business. However, we are
unable to verify that they have in the past, or will, in the future, always do
so, or that their actions are adequate or sufficient to satisfy all
governmental requirements that may applicable to these sales, particularly in
light of the fact that we generally hold title to the products during their
delivery to and return from customers. We could be fined or exposed to civil
or criminal liability, and we could receive potential negative publicity, if
these requirements have not been fully met by our suppliers or by us directly.
These fines, liabilities, and negative publicity could also occur if an
unqualified person (or even a qualified customer, if we or the customer lack
the appropriate permits to sell, use, or ship) improperly receives a dangerous
or licensed product through the Chemdex Marketplace.
There are, to our knowledge, currently no investigations, inquiries,
citations, fines, or allegations of violations or noncompliance pending by
government agencies or by third parties against us. It is possible that there
may be investigations or allegations in the future. We are currently reviewing
applicable requirements with regard to past, present and continuing
compliance, particularly concerning various licensing and sales issues. The
risk that any noncompliance may be discovered in the future is currently
unknown. Although any potential impact on us for noncompliance cannot
currently be established, it could result in civil or criminal penalties,
including monetary fines and injunctions, for noncompliance and negative
publicity, and have a material adverse impact on our business, revenues,
results of operations and financial condition.
Due to the increasing popularity and use of the Internet, it is possible
that a number of laws and regulations may be adopted or interpreted in the
United States and abroad with particular applicability to the Internet. For
example, the above-listed examples of existing laws and regulations, as well
as new tax laws and regulations, may be adopted or interpreted by the United
States and foreign governments, to address the sale and distribution of life
sciences research products utilizing the Internet. In addition, it is possible
that governments will enact legislation that may be applicable to us in areas
such as content, product distribution, network security, encryption and the
use of key escrow, data and privacy protection, electronic authentication or
"digital" signatures, illegal and harmful content, access charges and re-
transmission activities. Moreover, the applicability to the Internet of
existing laws governing issues such as property ownership, content, taxation,
defamation, personal privacy, product liability and environmental protection,
as well as the necessity for governmental permits, labeling, certifications
and the need to supply information to relevant parties, is uncertain. Most of
these laws were adopted before the widespread use and commercialization of the
Internet and, as a result, do not contemplate or address the unique issues of
the Internet and related technologies. Any export or import restrictions, new
legislation or regulation or governmental enforcement of existing regulations
may limit the growth of the Internet, increase our cost of doing business or
increase our legal exposure. Any of these factors could have a negative effect
on our business, revenues, results of operations and financial condition.
Employees
As of March 31, 1999, we had 87 full-time employees, including 34 in
engineering, 39 in sales and marketing and 14 in general and administrative
functions. We also employ independent contractors to support our engineering,
marketing, sales and support, and administrative organizations.
Facilities
Our executive, administrative and operating offices are located in
approximately 33,000 square feet of leased office space located in Palo Alto,
California under a lease expiring in December, 2003. We also maintain sales
offices in Ann Arbor, Michigan; Cambridge, Massachusetts; Princeton, New
Jersey; and Columbia, Maryland. We are in the process of identifying new
facilities to accommodate our growth and currently plan to relocate our
executive, administration and operating offices to new facilities within the
next six months.
44
<PAGE>
MANAGEMENT
Directors and Executive Officers
Set forth below is certain information regarding the directors and
executive officers of Chemdex as of May 12, 1999.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
David P. Perry................... 31 President, Chief Executive Officer and
Director
Pierre V. Samec.................. 36 Chief Information Officer
James G. Stewart................. 46 Chief Financial Officer and Assistant
Secretary
Martha D. Greer.................. 45 Vice President, Marketing
Thomas P. Kudrycki............... 40 Vice President, Engineering
Robert W. Perreault.............. 41 Vice President, Professional Services
James S. Wambach................. 45 Vice President, Worldwide Sales
David A. Weber................... 45 Vice President, Supplier Relations
Charles R. Burke(1).............. 56 Director
Brook H. Byers(1)................ 53 Director
Jonathan D. Callaghan(1)......... 30 Director
Jerrold B. Harris................ 56 Director
S. Joshua Lewis(2)............... 35 Director
John A. Pritzker................. 45 Director
Robert A. Swanson................ 51 Director
L. John Wilkerson(2)............. 55 Director
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
David P. Perry co-founded Chemdex in September 1997 and has served as its
President, Chief Executive Officer and a director since September 1997. From
December 1995 to April 1997, he co-founded and served in various positions,
including Chief Executive Officer, of Virogen, Inc., a biotechnology company.
Mr. Perry has also held various positions at Exxon Corporation, including as a
Refinery Operations Supervisor from January 1994 to May 1995, a financial
analyst from March 1993 to January 1994, a project manager from September 1992
to March 1993 and an engineer from September 1990 to March 1992. Mr. Perry
holds an M.B.A. from Harvard University and a B.S. in chemical engineering
from the University of Tulsa.
Pierre V. Samec joined Chemdex as its Chief Information Officer in July
1998. He previously held various positions at Charles Schwab and Co., Inc., a
financial services company, including as its Senior Vice President, Retail
Technology from January 1998 to July 1998, its Vice President, Software
Engineering from July 1996 to February 1998 and its Vice President and
Architect from January 1996 to June 1996. Mr. Samec also served as the Vice
President, Software Engineering of Quintus Corporation, a software company,
from August 1993 to December 1995. Mr. Samec holds an engineering degree from
Ecole des Mines de Paris and a Ph.D. from Stanford University.
James G. Stewart joined Chemdex as its Chief Financial Officer in February
1999. Previously, Mr. Stewart served as the Chief Financial Officer of CN
Biosciences, Inc., a chemical manufacturing and distribution company, from
June 1995 to March 1999, and the President of CN Corporation, the principal
operating division of CN Biosciences, Inc., from March 1998 to March 1999.
From April 1994 to April 1995, Mr. Stewart served as the Chief Financial
Officer of Fightertown Entertainment, Inc., a virtual reality entertainment
company. From November 1988 to April 1994, Mr. Stewart held various positions
at Verteq, Inc., a semiconductor equipment company, including most recently as
its Chief Financial Officer. Mr. Stewart was formerly an Audit Partner of
Arthur Young & Co. and holds a B.S. from the University of Southern
California.
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Martha D. Greer joined Chemdex as its Vice President, Marketing in January
1999. Previously, she served as the Vice President, Merchandise Management of
Onsale, Inc., an electronic commerce company, from December 1996 to November
1998. Ms. Greer was employed as an independent consultant from January to
December 1996. From 1992 to 1996, Ms. Greer served in various positions at PC
Connection, a computer direct marketing company, including as its Vice
President, Product Management from September 1994 to February 1996, as its
Vice President, Marketing from September 1993 to September 1994, as its
Director, Marketing from May 1993 to September 1993 and as its Director,
Business Development from November 1992 to May 1993. Ms. Greer holds a B.A. in
linguistics from Macalester College and a Ph.D. in experimental psychology
from Harvard University.
Thomas P. Kudrycki joined Chemdex as its Vice President, Engineering in
September 1998. Previously, from January 1996 to July 1998, Mr. Kudrycki
served as the Vice President, Content Technology of CNET, an online publishing
company. From September 1988 to December 1995, he served as a technical
manager at AT&T Corporation, a voice and data communications company. Mr.
Kudrycki holds a B.Eng. in Physics from Warsaw Polytechnic, a B.S. in computer
science from Central State University and a M.S. in electrical and computer
engineering from University of Cincinnati.
Robert W. Perreault joined Chemdex as its Vice President, Professional
Services in April 1999. From February 1998 to April 1999, he served as Vice
President of Worldwide Professional Services at Inprise Corporation, an
enterprise software and services company. From August 1995 to February 1998,
Mr. Perreault was Vice President of Professional Services and Vice President
of Engineering at Visigenic Software, Inc., which was acquired by Inprise in
March 1998. Prior to 1990, Mr. Perreault held various senior management
positions at Compuware Corporation, Uniface Corporation and Hewlett-Packard
Company, most recently serving as Vice President of Client Server Technology.
Mr. Perreault holds a B.A. from Stanford and an M.B.A. from the University of
Michigan.
James S. Wambach has served as the Vice President, Worldwide Sales of
Chemdex since September 1998. From January 1997 to June 1998, Mr. Wambach
served as the Senior Vice President of North American Sales Operations of
Forte Software, Inc., a software company. From January 1990 to December 1996,
Mr. Wambach served in various positions at Sybase, Inc., a software products
and services company, including most recently as its Vice President and
General Manager from October 1995 to December 1996. Mr. Wambach has also
served in various positions at Oracle Corporation, a database management and
business applications company. Mr. Wambach holds a B.S. degree in business
administration from Ohio State University.
David A. Weber joined Chemdex in February 1999 as its Vice President,
Supplier Relations. Previously, Mr. Weber served as the Vice President,
Marketing at Amersham Pharmacia Biotech, a scientific services and tools
company, from October 1997 to February 1999. He also served as the Vice
President, Direct Marketing from 1995 to 1997 and as Area Director from 1990
to 1995, of Pharmacia Biotech, a division of Pharmacia & Upjohn, Inc. He holds
a B.S. in biochemistry from Rutgers University.
Charles R. Burke has served as a director of Chemdex since January 1998.
Mr. Burke has served as the President of Monument Partners, Inc., a consulting
firm, since January 1998. From January 1994 to December 1997, he served as the
Chief Executive Officer of Research Biochemicals Incorporated, a research
reagent supply company. Mr. Burke is also a director of Endogen, Inc. Mr.
Burke holds an A.B. in Chemistry from Cornell University, a M.A. with honors
in Biology from Colgate University and a Ph.D. in Biochemistry from the
University of Illinois.
Brook H. Byers has served as a director of Chemdex since May 1998. Mr.
Byers is a general partner of Kleiner Perkins Caufield & Byers, a venture
capital firm which he joined in 1977. He was the founding president and
chairman of four lifesciences companies: Hybritech Inc., IDEC Pharmaceuticals
Corporation, InSite Vision Inc. and Ligand Pharmaceuticals Inc. Mr. Byers
currently serves as a director of Nanogen, Inc. and a number of privately-held
technology companies. Mr. Byers serves on the Board of Directors of the
University of California, San Francisco Foundation and the California
Healthcare Institute. Mr. Byers holds a B.S. in electrical engineering from
Georgia Institute of Technology and an M.B.A. from the Stanford Graduate
School of Business.
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Jonathan D. Callaghan has served as a director of Chemdex since September
1997. Mr. Callaghan has been a general partner of CMG@Ventures, a venture
capital firm, since September 1997. Previously, from June 1991 to June 1995,
Mr. Callaghan was an associate of Summit Partners, a venture capital firm. He
holds a B.A. from Dartmouth College and an M.B.A. with Distinction from
Harvard University.
Jerrold B. Harris has served as a director of Chemdex since April 1999. Mr.
Harris has been the President and Chief Executive Officer of VWR Scientific
Products Corporation, a scientific supplies and products company, since March
1990. Mr. Harris is a director of VWR and of the Provident Institutional
Funds.
S. Joshua Lewis has served as a director of Chemdex since May 1998. Mr.
Lewis is a Managing Director of E.M. Warburg, Pincus & Co., LLC and a director
of a number of privately held companies. Mr. Lewis holds a D.Phil. from Oxford
University and an A.B. from Princeton University.
John A. Pritzker has served as a director of Chemdex since March 1998. Mr.
Pritzker served as a Divisional Vice President of Hyatt Hotels and Resorts
from 1984 to 1988. In 1988, he founded Red Sail Merchandising/The Corporate
Choice, a sports, retail and entertainment company, and Mandara Spa LLC, a spa
company. Mr. Pritzker currently serves as President of Red Sail Sports,
Mandara Spa LLC and Hyatt Ventures, Inc., a venture capital firm. Mr. Pritzker
served as director of Ticketmaster Group, Inc. for five years. He holds an
A.A. from Menlo College.
Robert A. Swanson has served as a director of Chemdex since May 1998. Mr.
Swanson has served as the Chairman and Chief Executive Officer of K&E
Management, a private investment company since October 1996. Previously, Mr.
Swanson co-founded and served as the Chief Executive Officer of Genentech,
Inc., a biotechnology company, from April 1976 to February 1990 and served as
its Chairman from February 1990 to December 1996. Prior to forming Genentech,
Mr. Swanson was a partner of Kleiner & Perkins, a venture capital firm. Mr.
Swanson holds a S.B. in chemistry from Massachusetts Institute of Technology
and a S.M. in management from the Alfred P. Sloan School of Management at
Massachusetts Institute of Technology.
L. John Wilkerson has served as a director of Chemdex since March 1999. Dr.
Wilkerson is a co-founder and has been a general partner of Galen Associates,
a venture capital firm, since May 1990, and has been a consultant to The
Wilkerson Group, a health care products consulting firm, since May 1996.
Previously, Dr. Wilkerson served as a Vice President of Smith Barney. He is
currently a director of British Biotech Plc, Stericycle, Inc. and TheraTX,
Incorporated. Dr. Wilkerson holds a Ph.D. in economics from Cornell University
and a B.S. in plant science from Utah State University.
Board of Directors
Directors are elected annually at the annual meeting of Chemdex
stockholders, and serve for the term for which they are elected and until
their successors are duly elected and qualified. Chemdex's Bylaws currently
provide for a Board of Directors comprised of nine directors.
Board Committees
Chemdex's Board of Directors has an Audit Committee and a Compensation
Committee. The Audit Committee of the Board of Directors consists of Mr. Lewis
and Mr. Wilkerson. The Audit Committee reviews Chemdex's financial statements
and accounting practices and makes recommendations to the Board of Directors
regarding the selection of independent auditors. Mr. Lewis is the Chairman of
the Audit Committee. The Compensation Committee of the Board of Directors
consists of Messrs. Burke, Byers and Callaghan. The Compensation Committee
makes recommendations to the Board of Directors concerning salaries and
incentive compensation for Chemdex's officers and employees and administers
Chemdex's employee benefit plans. Mr. Byers is Chairman of the Compensation
Committee.
Director Compensation
None of the directors is paid any fee or other compensation for acting as
such, although certain directors are reimbursed for reasonable expenses
incurred in attending Board or committee meetings. Officers of Chemdex
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<PAGE>
are appointed by the Board of Directors and serve at its discretion. Directors
who are employees of Chemdex are eligible to participate in Chemdex's 1998
Stock Plan and, as of the offering, they will also be eligible to participate
in Chemdex's 1999 Employee Stock Purchase Plan. Mr. Burke was granted an
option to purchase 15,000 shares of common stock under the 1998 Stock Plan at
an exercise price of $.05 per share in February 1998 and an additional option
to purchase 35,000 shares of common stock under the 1998 Stock Plan at an
exercise price of $.075 per share in July 1998. These options vest over a
four-year period. Mr. Swanson was granted an option to purchase 150,000 shares
of common stock under the 1998 Stock Plan at an exercise price of $.05 per
share in May 1998. Fifty percent of these option shares were vested as of the
date of grant and the remaining 50% of these option shares vest over a four-
year period. Beginning in 1999, directors who are not employees of Chemdex
will be eligible to participate in Chemdex's 1999 Directors' Stock Plan. See
"Stock Plans."
Chemdex has entered into indemnification agreements with each member of the
Board of Directors and certain of its officers providing for the
indemnification of such persons to the fullest extent authorized, permitted or
allowed by law.
Compensation Committee Interlocks and Insider Participation
None of the members of the Compensation Committee of the Board of Directors
is an officer or employee of Chemdex. No executive officer of Chemdex serves
as a member of the Board of Directors or compensation committee of any entity
that has one or more executive officers serving on Chemdex's Compensation
Committee.
Executive Compensation
The following table sets forth information concerning compensation earned
in the fiscal year ended December 31, 1998 paid to Chemdex's Chief Executive
Officer and Chemdex's next most highly compensated executive officers who
earned more than $100,000 during the fiscal year ended December 31, 1998
("Named Officers"). All options granted by the Board of Directors prior to
February 16, 1999 allowed for early exercise. The number of securities
underlying options in the "Long-Term Compensation" column includes securities
issued upon the exercise of options subject to repurchase at cost by Chemdex.
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
--------------------------------- ------------
Other Number of
Annual Securities All Other
Name and Principal Salary Bonus Compensation Underlying Compensation
Position(1) Year ($) ($) ($) Options (#) ($)
------------------ ---- ------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
David P. Perry(2)...... 1998 $98,375 $20,000 $-- -- $--
President, Chief
Executive Officer and
Director
Pierre V. Samec(3)..... 1998 83,333 150,000 -- 450,000 --
Chief Information
Officer
Scott Waterhouse(4).... 1998 150,070 27,237 -- 265,780 --
Vice President,
Supplier Relations
</TABLE>
- --------
(1) Mr. Stewart, Chemdex's Chief Financial Officer, commenced employment with
Chemdex in February 1999. Mr. Stewart's salary on an annualized basis for
1999 is $200,000, which does not include a bonus of $50,000 payable upon
the achievement of performance goals, housing expenses or an annual life
insurance premium of approximately $9,000 per year paid for by Chemdex on
behalf of Mr. Stewart. Ms. Greer, Chemdex's Vice President, Marketing,
commenced employment with Chemdex in January 1999. Ms. Greer's salary on
an annualized basis for 1999 is $200,000, which does not include a signing
bonus of $75,000 paid upon commencement of employment with Chemdex or a
bonus of $50,000 payable upon the achievement of performance goals.
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<PAGE>
(2) Mr. Perry founded Chemdex in September 1997. His salary on an annualized
basis is currently $180,000. His salary was increased from $55,000 to
$125,000 on May 11, 1998 to $180,000 on March 1, 1999. As of December 31,
1998, Mr. Perry held 3,451,708 shares of common stock valued at $2,588,781
based on a per share price of $.75.
(3) Mr. Samec commenced his employment with Chemdex in July 1998. His salary
on an annualized basis is $200,000. Mr. Samec earned a total bonus of
$150,000 in 1998, $25,000 of which was paid in 1999.
(4) Mr. Waterhouse terminated his employment with Chemdex in January 1999.
Stock Options
The following table sets forth information concerning the grant of stock
options to the Named Officers during the fiscal year ended December 31, 1998.
The individual grants consist of options granted pursuant to Chemdex's 1998
Stock Plan. For the purposes of calculating the percent of total options
granted to employees during the last fiscal year, Chemdex granted options to
purchase 3,957,670 shares of common stock to employees and consultants. The
exercise price per share of each option was equal to the fair market value of
common stock on the date of grant as determined by the Board of Directors. In
determining the fair market value of the common stock on each grant date, the
Board of Directors considered, among other things, Chemdex's absolute and
relative levels of revenues and operating results, the state of Chemdex's
technology development, increases in operating expenses, the absence of a
public trading market for Chemdex's securities, the intensely competitive
nature of Chemdex's market and the appreciation of stock values of generally
comparable companies. The potential realizable value is based on the
assumption that the common stock of Chemdex appreciates at the annual rate
shown, compounded annually, from the date of grant until the expiration of the
ten-year term. These numbers are calculated based on Securities and Exchange
Commission requirements and do not reflect Chemdex's projections or estimates
of future stock price growth. Potential realizable values are computed by:
. Multiplying the number of shares of common stock subject to a given
option by the exercise price;
. Assuming that the total stock value derived from that calculation
compounds at the annual 5% or 10% rate shown in the table for the entire
ten-year term of the option; and
. Subtracting from that result the total option exercise price.
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<PAGE>
Option Grants in Fiscal Year ended December 31, 1998
<TABLE>
<CAPTION>
Individual Grants(1)
---------------------------------
Potential Realizable
Number of Value At Assumed
Securities % of Annual Rates of Stock
Underlying Total Options Price Appreciation
Options Granted to Exercise for Option Term
Granted Employees in Price Expiration ----------------------
Name (#) Fiscal Year ($/Sh) Date 5% 10%
- ---- ---------- ------------- -------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
David P. Perry.......... -- -- % $ -- -- $ -- $ --
Pierre V. Samec(2)...... 450,000 11.37 .075 9/1/08 21,225 53,789
Scott Waterhouse........ 265,780 6.72 .050 1/21/08 8,357 21,179
</TABLE>
- --------
(1) Mr. Stewart was granted an option to purchase 450,000 shares of common
stock on February 16, 1999 pursuant to Chemdex's 1998 Stock Plan. The
exercise price per share of the option is $.75; the expiration date of the
option is February 15, 2009 and the potential realizable values at assumed
rates of stock appreciation for the option term are $212,252 at 5% and
$537,888 at 10%.
Ms. Greer was granted an option to purchase 450,000 shares of common stock
on January 27, 1999 pursuant to Chemdex's 1998 Stock Plan. The exercise
price per share of the option is $.75; the expiration date of the option
is January 26, 2009 and the potential realizable values at assumed rates
of stock appreciation for the option term are $212,252 at 5% and $537,888
at 10%. Ms. Greer was granted an additional option to purchase 20,000
shares of common stock on April 27, 1999 pursuant to Chemdex's 1998 Stock
Plan. The exercise price per share of the option is $2.50; the expiration
date of the option is April 26, 2009 and the potential realizable values
at assumed rates of stock appreciation for the option term are $31,445 at
5% and $79,687 at 10%.
(2) Mr. Samec was granted an additional option to purchase 150,000 shares of
common stock on April 27, 1999 pursuant to Chemdex's 1998 Stock Plan. The
exercise price per share of the option is $2.50; the expiration date of
the option is April 26, 2009 and the potential realizable values at
assumed rates of stock appreciation for the option term are $235,835 at 5%
and $597,653 at 10%.
Exercise of Options and Year-End Values
The following table sets forth information concerning the exercise of stock
options during the fiscal year ended December 31, 1998 by the Named Officers
and the fiscal year-end value of unexercised options. Since there was no
public trading market for Chemdex's common stock as of December 31, 1998, the
values of unexercised options at December 31, 1998 are based on a fair market
value of common stock of $.75 per share as determined by the Board of
Directors on January 27, 1999. Therefore, these values are calculated based on
the $.75 per share value for value at fiscal year-end or the fair market value
as determined by the Board of Directors on the date of exercise for value
realized, less the applicable exercise price per share, multiplied by the
number of shares underlying these options. All options granted by the Board of
Directors prior to February 16, 1999 allowed for early exercise. The number of
securities underlying unexercised options in the "Unexercisable" column and
the related value of such securities at year end reflects such information as
it relates to options that although are exercisable, would if exercised result
in the ownership of common stock subject to repurchase at cost by Chemdex.
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<PAGE>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Shares Options at In-the-Money Options
Acquired on December 31, 1998 (#) at December 31, 1998 ($)
Exercise Value ------------------------- -------------------------
Name(1) (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ------- ----------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
David P. Perry.......... -- $-- -- -- $-- $--
Pierre V. Samec(2)...... 450,000 -- -- -- -- --
Scott Waterhouse(3)..... 265,780 -- -- -- -- --
</TABLE>
- --------
(1) Mr. Stewart has not exercised any of his options. Ms. Greer exercised an
option to purchase 450,000 shares of common stock in February 1999 at an
exercise price per share of $.75.
(2) Does not include an option to purchase 150,000 shares of common stock
granted to Mr. Samec in April 1999 at an exercise price per share of
$2.50.
(3) Mr. Waterhouse exercised an option to purchase 265,780 shares of common
stock in May 1998 at an exercise price per share of $.05.
Employee Stock Plans
1998 Stock Plan
General. Our 1998 Stock Plan provides for the granting of stock options and
stock purchase rights to eligible employees, officers, directors, including
non-employee directors, and consultants of Chemdex. Stock options granted
under the 1998 Stock Plan may be either "incentive stock options" within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended, or
nonstatutory stock options, which are options not intended to qualify as
incentive stock options. Stock purchase rights granted under the 1998 Stock
Plan allow a recipient to purchase shares of common stock directly from
Chemdex. Incentive stock options may be granted to employees, officers and
employee directors of Chemdex and nonstatutory stock options and stock
purchase rights may be granted to employees, officers, directors and
consultants.
As of May 12, 1999, an aggregate of 12,250,000 shares of common stock had
been reserved for issuance under the 1998 Stock Plan. As of May 12, 1999,
2,069,265 shares of common stock were issuable upon the exercise of
outstanding options granted under the 1998 Stock Plan at a weighted average
exercise price of $.67, 4,498,839 shares of common stock have been issued upon
exercise of options or pursuant to stock purchase rights at exercise or
purchase prices ranging between $.05 and $.75, net of repurchases, and
5,681,896 shares of common stock remained available for future issuance under
the 1998 Stock Plan. The 1998 Stock Plan was originally adopted by the Board
of Directors in January 1998 and approved by the stockholders in March 1998.
The 1998 Stock Plan was amended by our Board of Directors in April 1999 to
increase the total number of shares reserved for issuance by 3,000,000 shares.
In May 1999 the Board of Directors amended the 1998 Stock Plan to increase the
total number of shares reserved for issuance by 2,500,000 shares plus an
automatic annual increase on the first day of each of our fiscal years
beginning in 2000, 2001, 2002, 2003 and 2004 equal to the lesser of 2,500,000
shares, 3% of our outstanding common stock on the last day of the preceding
fiscal year or a lesser number determined by our Board of Directors. The
amendment to the 1998 Stock Plan will be submitted for approval by our
stockholders prior to the completion of this offering. Unless terminated
earlier by our Board of Directors, the 1998 Stock Plan will terminate in
January 2008.
Stock options granted under the 1998 Stock Plan may not have a term of more
than ten years and generally remain exercisable for a period of three months
following termination of the optionee's employment or consulting relationship
with Chemdex, with longer periods applying in the event such termination
occurs as a result of death or disability. The exercise price of all incentive
stock options must be at least equal to the fair market value of the common
stock at the time of grant, except in the case of incentive stock options
granted to persons owning stock that represents more than 10% of the total
combined voting power of all classes of the outstanding capital stock of
Chemdex, in which case the exercise price must equal at least 110% of the fair
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<PAGE>
market value of the common stock at the time of grant. The exercise price of
nonstatutory stock options will be determined by the Administrator, except
that for grants to certain executive officers of Chemdex, the exercise price
must be at least 100% of the fair market value if the option is intended to
qualify as performance-based compensation under certain tax rules. Options
granted under the 1998 Stock Plan are generally subject to vesting at a rate
of twenty-five percent at the end of the first year and 1/48th of the original
number of shares subject to the option per month thereafter. The Administrator
has the authority to grant options which are exercisable prior to vesting, in
which case the unvested portion of the exercised shares are subject to a right
of repurchase in favor of Chemdex at the optionee's original cost. Options
granted under the 1998 Stock Plan are generally not transferable, although the
Administrator has the discretion to allow limited transferability of
nonstatutory stock options. In the event of a merger or consolidation of
Chemdex with or into another corporation where the successor corporation
issues its securities to Chemdex stockholders or the sale of all or
substantially all of Chemdex's assets, each outstanding option or stock
purchase right shall be assumed or an equivalent option or stock purchase
right shall be substituted by the successor corporation. If the successor
corporation refuses to do an assumption or substitution, each outstanding
option and stock purchase right shall terminate upon completion of the
transaction. In the event of a proposed dissolution or liquidation of Chemdex,
each outstanding option or stock purchase right granted under the 1998 Stock
Plan shall terminate. The Administrator has the authority to amend or
terminate the 1998 Stock Plan provided that no action that impairs the rights
of any holder of an outstanding option may be taken without the holders'
consent. In addition, stockholder approval will be obtained for any amendment
to the extent required by applicable law.
In addition to stock options, the Administrator may issue stock purchase
rights under the 1998 Stock Plan to employees, directors and consultants. The
Administrator determines the number of shares, price, term and condition and
restrictions related to a grant of stock purchase rights.
The purchase price of common stock purchased pursuant to stock purchase
rights granted under the 1998 Stock Plan shall be the price determined by the
Administrator. These shares of common stock are generally subject to a right
of repurchase in favor of Chemdex at the holder's original purchase price,
which repurchase right generally lapses at a rate of 25% percent at the end of
the first year and 1/48th of the original number of shares per month
thereafter.
Administration. The 1998 Stock Plan may be administered by the Board of
Directors or a committee appointed by the Board of Directors to administer the
1998 Stock Plan. The Administrator has the authority to grant options and
stock purchase rights and to determine the terms of such awards, provided such
grants are not inconsistent with the terms of the 1998 Stock Plan. In no
event, however, may an individual receive option and stock purchase right
grants for more than 10,000,000 shares under the 1998 Stock Plan in any fiscal
year. Decisions of the Administrator are final and binding on all 1998 Stock
Plan participants.
1999 Directors' Stock Plan
Our 1999 Directors' Stock Plan was adopted by the Board of Directors in May
1999 and is expected to be approved by the stockholders prior to the closing
of this offering. A total of 500,000 shares of common stock has been reserved
for issuance under the Directors' Plan. The Directors' Plan provides for the
grant of nonstatutory stock options to nonemployee directors of Chemdex. The
Directors' Plan is designed to work automatically without administration;
however, to the extent administration is necessary, it will be performed by
the Board of Directors. To the extent they arise, it is expected that
conflicts of interest will be addressed by abstention of any interested
director from both deliberations and voting regarding matters in which this
director has a personal interest.
The Directors' Plan provides that each person who is or becomes a
nonemployee director of Chemdex will be granted a nonstatutory stock option to
purchase 25,000 shares of common stock on the later of the date on which the
optionee first becomes a nonemployee director of Chemdex or the effective date
of the registration statement for this offering. Thereafter, on the date of
Chemdex's Annual Stockholders Meeting each year, each
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<PAGE>
nonemployee director of Chemdex will be granted an additional option to
purchase 10,000 shares of common stock if, on that date, he or she has served
on Chemdex's Board of Directors for at least six months.
The Directors' Plan sets neither a maximum nor a minimum number of shares
for which options may be granted to any one non-employee director, but does
specify the number of shares that may be included in any grant and the method
of making a grant. No option granted under the Directors' Plan is transferable
by the optionee other than by will or the laws of descent or distribution or
pursuant to a qualified domestic relations order, and each option is
exercisable, during the lifetime of the optionee, only by the optionee. The
Directors' Plan provides that each option granted under the Directors' Plan
shall vest and become exercisable in full immediately upon grant of the
option. If a nonemployee director ceases to serve as a director for any reason
other than death or disability, he or she may, but only within 90 days after
the date he or she ceases to be a director of Chemdex, exercise options
granted under the Directors' Plan. If he or she does not exercise the option
within this 90 day period, such option shall terminate. The exercise price of
all stock options granted under the Directors' Plan shall be equal to the fair
market value of a share of Chemdex's common stock on the date of grant of the
option. Options granted under the Directors' Plan have a term of ten years.
In the event of a sale of all or substantially all of the assets of
Chemdex, the merger of Chemdex with or into another corporation or any other
reorganization of Chemdex in which more than 50% of the shares of Chemdex
entitled to vote are exchanged, each nonemployee director shall have the right
to exercise each option immediately prior to completion of the transaction.
The Board of Directors may amend or terminate the Directors' Plan; provided,
however, that no such action may adversely affect any outstanding option. We
will obtain stockholder approval for any amendment to the extent required by
applicable law. If not terminated earlier, the Directors' Plan will have a
term of ten years.
1999 Employee Stock Purchase Plan
Chemdex's 1999 Employee Stock Purchase Plan was adopted by the Board of
Directors in May 1999 and is expected to be approved by the stockholders prior
to the closing of this offering. A total of 1,500,000 shares of common stock
has been reserved for issuance under the Purchase Plan, as well as an
automatic annual increase on the first day of each of Chemdex's fiscal years
beginning in 2000, 2001, 2002, 2003 and 2004 equal to the lesser of 400,000
shares, 1/2% of Chemdex's outstanding common stock on the last day of the
immediately preceding fiscal year or a lesser number of shares determined by
the Board of Directors. The Purchase Plan becomes effective upon the effective
date of the registration statement for this offering.
The Purchase Plan, which is intended to qualify under Section 423 of the
Code, will be implemented by a series of overlapping offering periods of
approximately 24 months' duration, with new offering periods (other than the
first offering period) commencing on February 1st and August 1st of each year.
Each offering period will generally consist of four consecutive purchase
periods of six months' duration, at the end of which an automatic purchase
will be made by the participant. The initial offering period is expected to
begin on the date of this offering and end on July 31, 2001; the initial
purchase period is expected to end on January 31, 2000. The Purchase Plan will
be administered by the Board of Directors or by a committee appointed by the
Board of Directors. The Purchase Plan will be administered by the Compensation
Committee (comprised of Messrs. Burke, Byers and Callaghan, outside directors
of Chemdex who are not eligible to participate in the Purchase Plan).
Employees (including officers and employee directors) of Chemdex, or of any
majority-owned subsidiary designated by the Board of Directors, are eligible
to participate in the Purchase Plan if they are employed by Chemdex or any
such subsidiary for at least 20 hours per week and more than five months per
year. The Purchase Plan permits eligible employees to purchase common stock
through payroll deductions, which may not exceed 20% of an employee's
compensation, at a price equal to the lower of 85% of the fair market value of
Chemdex's common stock at the beginning of each offering period or at the end
of each purchase period. Employees may end their participation in the offering
at any time during the offering period, and participation ends automatically
on termination of employment. If not terminated earlier, the Purchase Plan
will have a term of 20 years.
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<PAGE>
An employee cannot be granted an option under the Purchase Plan if
immediately after the grant such employee would own stock and/or hold
outstanding options to purchase stock equaling 5% or more of the total voting
power or value of all classes of our stock or stock of our subsidiaries, or if
such option would permit an employee to purchase stock under the Purchase Plan
at a rate that exceeds $25,000 of fair market value of such stock for each
calendar year in which the option is outstanding. In addition, no employee may
purchase more than 2,500 shares of Common Stock under the Purchase Plan in any
one purchase period. If the fair market value of the Common Stock on a
purchase date is less than the fair market value at the beginning of the
offering period, each participant in that offering period shall automatically
be withdrawn from the offering period as of the end of the purchase date and
re-enrolled in the new twenty-four month offering period beginning on the
first business day following the purchase date. In the event of a merger of
Chemdex with or into another corporation or a sale of all or substantially all
of Chemdex's assets, each right to purchase stock under the Purchase Plan will
be assumed or an equivalent right substituted by the successor corporation.
However, the Board of Directors will shorten any ongoing offering period so
that participants' rights to purchase stock under the Purchase Plan are
exercised prior to the transaction in the event the successor corporation
refuses to assume each purchase right or to substitute an equivalent right of
such corporation. The Board of Directors has the power to amend or terminate
the Purchase Plan as long as the action does not adversely affect any
outstanding rights to purchase stock thereunder. However, the Board of
Directors may amend or terminate the Purchase Plan or an offering period even
if it would adversely affect outstanding options in order to avoid our
incurring adverse accounting charges.
Limitation of Liability and Indemnification Matters
As permitted by the Delaware General Corporation Law, Chemdex has included
in its Amended and Restated Certificate of Incorporation a provision to
eliminate the personal liability of its officers and directors for monetary
damages for breach or alleged breach of their fiduciary duties as officers or
directors, respectively, subject to certain exceptions. In addition, Chemdex's
Bylaws provide that Chemdex is required to indemnify its officers and
directors, including under circumstances in which indemnification would
otherwise be discretionary, and Chemdex is required to advance expenses to its
officers and directors as incurred in connection with proceedings against them
for which they may be indemnified. Chemdex has entered into indemnification
agreements with its officers and directors containing provisions that are in
some respects broader than the specific indemnification provisions contained
in the Delaware General Corporation Law. The indemnification agreements
require Chemdex, among other things, to indemnify its officers and directors
against certain liabilities that may arise by reason of their status or
service as officers and directors (other than liabilities arising from willful
misconduct of a culpable nature), to advance their expenses incurred as a
result of any proceeding against them as to which they could be indemnified,
and to obtain directors' and officers' insurance if available on reasonable
terms. Chemdex has also obtained directors' and officers' liability insurance.
At present, Chemdex is not aware of any pending or threatened litigation or
proceeding involving a director, officer, employee or agent of Chemdex in
which indemnification would be required or permitted. Chemdex is not aware of
any threatened litigation or proceeding that might result in a claim for
indemnification. Chemdex believes that its charter provisions and
indemnification agreements are necessary to attract and retain qualified
persons as directors and officers.
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<PAGE>
RELATED PARTY TRANSACTIONS
Equity Transactions
In September 1997, Chemdex issued and sold 5,140,000 shares of common stock
to the founders of Chemdex, including, among others, 3,811,708 shares of
common stock to Mr. Perry and 51,400 shares of common stock to Mr. Callaghan,
a director of Chemdex.
In September 1997, Chemdex issued and sold 1,601,600 shares of its Series A
Preferred Stock at a price of $.347 per share to CMG@Ventures II, LLC
(formerly CMG@Ventures, L.P.), an entity with which Mr. Callaghan, a director
of Chemdex, is affiliated, a partnership affiliated with Mr. Swanson, a
director of Chemdex, and two other private investors. In December 1997 and
March 1998, Chemdex issued and sold 3,989,700 shares of its Series A Preferred
Stock at a price of $.347 per share to The Bay City Capital Fund I, L.P., an
entity with which Mr. Pritzker, a director of Chemdex, is affiliated, Mr.
Burke, a director of Chemdex, CMG@Ventures, and other private investors.
In October 1997, Chemdex loaned $10,000 to Mr. Perry pursuant to a
promissory note bearing interest at a rate of 8% per annum which matures on
October 15, 1999. This note has been forgiven by the Board of Directors of
Chemdex.
In May 1998, Chemdex issued and sold 17,299,998 shares of its Series B
Preferred Stock at a price of $.75 per share to entities affiliated with
Kleiner Perkins Caufield & Byers, an entity with which Mr. Byers, a director
of Chemdex, is affiliated; Warburg, Pincus Ventures L.P., an entity with which
Mr. Lewis, a director of Chemdex, is affiliated; CMG@Ventures II, LLC, an
entity with which Mr. Callaghan, a director of Chemdex, is affiliated; The Bay
City Capital Fund I, L.P., an entity with which Mr. Pritzker is affiliated,
Mr. Burke, a partnership affiliated with Mr. Swanson, and certain other
private investors.
In January 1999, Chemdex issued a warrant to purchase 210,000 shares of
Series B Preferred Stock at an exercise price of $.75 per share to Comdisco,
Inc. in connection with a Master Lease Agreement dated as of January 20, 1999.
In March 1999 and April 1999, Chemdex issued and sold 10,600,000 shares of
its Series C Preferred Stock at a price of $2.858 per share to entities
affiliated with Galen Associates, an entity with which Dr. Wilkerson, a
director of Chemdex, is affiliated; Genentech, Inc., an entity with which Mr.
Swanson, a director of Chemdex, was formerly affiliated; Kleiner Perkins
Caufield & Byers, an entity with which Mr. Byers, a director of Chemdex, is
affiliated; Warburg, Pincus Ventures L.P., an entity with which Mr. Lewis, a
director of Chemdex, is affiliated; CMG@Ventures II, LLC, an entity with which
Mr. Callaghan, a director of Chemdex, is affiliated; The Bay City Capital Fund
I, L.P., an entity with which Mr. Pritzker, a director of Chemdex, is
affiliated; Mr. Burke, and certain other private investors. In addition, in
March 1999, Chemdex issued warrants to purchase a total of 100,000 shares of
common stock at an exercise price of $2.60 per share to entities affiliated
with Galen, an entity with which Dr. Wilkerson, a director of Chemdex, is
affiliated.
Chemdex recently entered into a strategic relationship agreement with VWR
Scientific Products Corporation to jointly market VWR laboratory products
using the Chemdex Marketplace. Mr. Harris, a director of Chemdex, is President
and Chief Executive Officer of VWR. The agreement gives us the right to offer
approximately 350,000 VWR core products to our customers through the Chemdex
Marketplace. VWR and Chemdex are jointly developing a hosted, co-branded
Internet procurement solution for VWR's existing and future customers that
will provide access to VWR core products, Chemdex core products and products
that are not distributed by either VWR or Chemdex, but are purchased from
third parties. In connection with the strategic relationship agreement, VWR
transferred to Chemdex information concerning VWR customers who purchased
products from third party suppliers outside VWR's primary product offering and
in exchange Chemdex issued shares of common stock valued at $13.0 million to
VWR. VWR also entered into a standstill agreement limiting its ownership in
Chemdex to 10% of Chemdex's outstanding securities, including outstanding
options and warrants. This percentage can be exceeded if any one company from
a specified list of companies acquires more than 10% of Chemdex's outstanding
securities, including outstanding options and warrants.
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<PAGE>
The following members of the Board of Directors are affiliated with certain
private investors that participated in the foregoing transactions: Charles
Burke, Brooke Byers, Jonathan D. Callaghan, Jerrold B. Harris, S. Joshua
Lewis, John A. Pritzker, Robert A. Swanson and L. John Wilkerson.
Other Transactions
In January 1998, Chemdex entered into an Electronic Commerce Agreement with
Genentech, Inc., a company of which Mr. Swanson, a director of Chemdex, is a
founder and the former Chief Executive Officer and Chairman.
In May 1998, Chemdex entered into a Stock Restriction Agreement with Mr.
Perry, pursuant to which shares held by Mr. Perry are subject to a repurchase
option in favor of Chemdex in accordance with the terms therein.
In January 1999, Chemdex entered into a Separation Agreement with Scott
Waterhouse, pursuant to which Mr. Waterhouse received severance benefits upon
the termination of his employment with Chemdex.
Some of the officers of Chemdex, including Ms. Greer, Mr. Samec, Mr.
Wambach and Mr. Weber, will receive 6 months of accelerated vesting of stock
then held in the event of their termination without cause. In addition, in the
event of a termination with or without cause, Ms. Greer will receive the
greater of six months of then-current salary or $100,000, Mr. Samec will
receive six months of then-current salary, Mr. Stewart and Mr. Weber will
receive the greater of six months of then-current salary or an amount equal to
salary for 15 months less the time they have been employed by Chemdex and Mr.
Wambach will receive the greater of six months of then-current salary or
$87,500. If Mr. Stewart is terminated without cause or resigns due to pressing
family concerns during the first six months of his employment, he will receive
an additional six months of vesting for his stock, and if after the first six
months, but during the first twelve months of employment, his stock will vest
in an amount equal to what he would have vested had he been employed for the
full twelve months. If Mr. Stewart is terminated without cause or resigns due
to pressing family concerns after the first twelve months but during the first
24 months of his employment, his stock will vest in an amount equal to what he
would have vested had he been employed for the full 24 months. In addition,
Chemdex has entered into Change of Control Agreements with Ms. Greer, Mr.
Kudrycki, Mr. Perreault, Mr. Perry, Mr. Samec, Mr. Stewart, Mr. Wambach, Mr.
Weber and other employees of Chemdex, where the shares held by these employees
shall become fully vested if (a) Chemdex is merged into another entity or sold
and (b) this employee is terminated by the surviving entity without cause or
within twelve months of the closing of the transaction.
Chemdex has also entered into a Change of Control Agreement with each of
Mr. Burke and Mr. Swanson, under which any options subject to vesting or
shares subject to a right of repurchase of Chemdex then held by Mr. Burke or
Mr. Swanson will become fully vested upon the closing of a merger in which
more than 50% of the total voting power of Chemdex is transferred or a sale of
all or substantially all of Chemdex's assets in a complete liquidation or
dissolution of Chemdex.
Since inception, Chemdex from time to time has issued and sold shares of
its common stock and granted options to purchase common stock to its
employees, directors and consultants.
The following executive officers have executed full-recourse promissory
notes in the amounts set forth after their names in connection with their
purchases of shares of Chemdex's common stock:
<TABLE>
<CAPTION>
Principal
Name Amount
---- ---------
<S> <C>
Martha D. Greer.................................................. $337,455
Thomas P. Kudrycki............................................... 22,470
Pierre V. Samec.................................................. 33,705
James S. Wambach................................................. 33,705
David A. Weber................................................... 299,970
</TABLE>
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<PAGE>
These notes become due the earlier of five years after the date of issuance
or nine months after the date of this offering. They bear interest at the
lowest rate allowed under federal tax law to avoid the imputation of interest,
compounded annually.
Chemdex has entered into compensation arrangements with certain of its
directors and officers. See "Management--Executive Compensation" and "--Stock
Plans."
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to Chemdex with
respect to the beneficial ownership of Chemdex's common stock as of May 12,
1999 by the following individuals or groups:
. each stockholder known by Chemdex to be the beneficial owner of more
than 5% of Chemdex's common stock;
. each director of Chemdex;
. the "Named Officers"; and
. all executive officers and directors as a group.
Except as otherwise noted, the address of each person listed in the table
is c/o Chemdex Corporation, 3950 Fabian Way, Palo Alto, CA 94303. The table
includes all shares of common stock issuable within 60 days of May 12, 1999
upon the exercise of options and other rights beneficially owned by the
indicated stockholders on that date. These shares, however, are not deemed
outstanding for the purposes of computing the percentage of ownership of each
other person. Beneficial ownership is determined in accordance with the rules
of the Securities and Exchange Commission and includes voting and investment
power with respect to these shares. To the knowledge of Chemdex, except under
applicable community property laws or as otherwise indicated, the persons
named in this table have sole voting and investment power with respect to all
shares of common stock shown as beneficially owned by them. The applicable
percentage of ownership for each stockholder is based on 48,581,947 shares of
common stock outstanding as of May 12, 1999, together with applicable options
for that stockholder. The table assumes that the underwriters' over-allotment
to purchase shares of common stock is not exercised. Percentage
ownership figures after the offering do not include shares that may be
purchased by each person in the offering.
<TABLE>
<CAPTION>
Percentage of Shares
Beneficially Owned
Number of Shares -------------------------
Beneficially Before After
Name of Beneficial Owner Owned Offering Offering
- ------------------------ ---------------- ---------- ----------
<S> <C> <C> <C>
Entities affiliated with Kleiner
Perkins Caufield & Byers(1) ... 6,120,596 12.6% %
2750 Sand Hill Road
Menlo Park, CA 94025
Entities affiliated with
Warburg, Pincus Ventures(2) ... 6,120,596 12.6
466 Lexington Avenue
New York, New York 10017-3147
The Bay City Capital Fund I,
L.P.(3)........................ 5,590,037 11.5
750 Battery Street
San Francisco, CA 94104
Entities affiliated with
CMG@Ventures(4)................ 5,456,715 11.2
3000 Alpine Road
Menlo Park, CA 94028
VWR Scientific Products
Corporation.................... 5,076,810 10.5
1310 Goshen Parkway
West Chester, PA 19380
Entities affiliated with Galen
Associates(5).................. 3,598,950 7.4
610 Fifth Avenue, 5th Floor
Rockefeller Center
New York, NY 10020
David P. Perry.................. 3,451,708 7.1
Pierre V. Samec(6).............. 450,000 *
Scott P. Waterhouse............. 136,240 *
Charles R. Burke(7)............. 125,569 *
Brook H. Byers(8)............... 6,120,596 12.6
S. Joshua Lewis(9).............. 6,120,596 12.6
John A. Pritzker(10)............ 5,590,037 11.5
Jonathan D. Callaghan(11)....... 5,456,715 11.2
Jerrold B. Harris(12)........... 5,094,305 10.5
L. John Wilkerson(13)........... 3,598,980 7.4
Robert A. Swanson(14)........... 1,398,333 2.9
All executive officers and
directors as a group (16
persons)....................... 39,143,079 80.6% %
</TABLE>
- --------
* Less than 1%.
58
<PAGE>
(1) Includes:
. 5,496,296 shares held by Kleiner Perkins Caufield & Byers VIII, L.P.
. 306,029 shares held by KPCB Life Sciences Zaibatsu Fund II, L.P. and
. 318,271 shares held by KPCB VIII Founders Fund, L.P.
The general partner of Kleiner Perkins Caufield & Byers VIII, L.P. and
KPCB VIII Founders Fund is KPCB VIII Associates. The general partner of
KPCB Life Sciences Zaibatsu Fund II, L.P. is KPCB VII Associates. Brook
H. Byers, a director of Chemdex, is a general partner of the Kleiner
Perkins Caufield & Byers funds. Mr. Byers disclaims beneficial ownership
of the shares held by Kleiner Perkins Caufield & Byers VIII, L.P., KPCB
Life Sciences Zaibatsu Fund II, L.P. and KPCB VIII Founders Fund, L.P.,
except to the extent of his pecuniary interest therein arising from his
general partnership interest in these funds.
(2) Warburg, Pincus & Co. is the sole general partner of Warburg, Pincus
Ventures, L.P., which is managed by E.M. Warburg, Pincus & Co., LLC.
Lionel I. Pincus is the managing partner of Warburg, Pincus & Co. and the
managing member of E. M. Warburg, Pincus & Co., LLC, and may be deemed to
control both entities.
(3) Trusts for the benefit of members of the Pritzker family (including Mr.
Pritzker) are indirect investors in The Bay City Capital Fund I, L.P. Mr.
Pritzker a director of Chemdex, disclaims any beneficial ownership in
shares held by The Bay City Capital Fund I, L.P.
(4) Includes:
. 5,405,315 shares held by CMG@Ventures II, LLC and
. 51,400 shares held by Johnathan D. Callaghan, a general partner of
CMG@Ventures and a director of Chemdex.
Mr. Callaghan disclaims beneficial ownership of the shares held by
CMG@Ventures II, LLC except to the extent of his pecuniary interest
therein arising from his general partnership interest in these funds.
(5) Includes:
. 3,196,521 shares and a warrant to purchase 91,357 shares of common stock
exercisable within 60 days of May 1, 1999 held by Galen Partners III,
L.P.
. 289,340 shares and a warrant to purchase 8,269 shares of common stock
exercisable within 60 days of May 1, 1999 held by Galen Partners
International III, L.P. and
. 13,089 shares and a warrant to purchase 374 shares of common stock
exercisable within 60 days of May 1, 1999 held by Galen Employee Fund
III, L.P.
Dr. Wilkerson, a co-founder of Galen Associates and a director of
Chemdex, disclaims beneficial ownership of the shares held by Galen
Partners III, L.P., Galen Partners International III, L.P., and Galen
Employee Fund III, L.P., except to the extent of his pecuniary interest
therein arising from his general partnership interest in these funds.
(6) All shares held by Mr. Samec are subject to repurchase by Chemdex within
60 days of May 12, 1999 in the event of a termination of his employment
with Chemdex.
(7) Includes 35,312 shares held by Mr. Burke subject to repurchase by Chemdex
within 60 days of May 12, 1999.
(8) Includes:
. 5,496,296 shares held by Kleiner Perkins Caufield & Byers VIII, L.P.
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<PAGE>
. 306,029 shares held by KPCB Life Sciences Zaibatsu Fund II, L.P. and
. 318,271 shares held by KPCB VIII Founders Fund, L.P.
Mr. Byers, a Senior Partner of Kleiner Perkins Caufield & Byers,
disclaims beneficial ownership of the shares held by Kleiner Perkins
Caufield & Byers VIII, L.P., KPCB Life Sciences Zaibatsu Fund II, L.P.
and KPCB VIII Founders Fund, L.P., except to the extent of his pecuniary
interest therein arising from his general partnership interest in these
funds.
(9) Mr. Lewis, a director of Chemdex, is a managing director and member of
E.M. Warburg, Pincus & Co., LLC, the manager of Warburg, Pincus Ventures
L.P. Mr. Lewis may be deemed to have an indirect pecuniary interest
(within the meaning of Rule 16a-1 of the Securities Exchange Act of 1934,
as amended) in an indeterminate portion of the shares beneficially owned
by Warburg, Pincus Ventures, L.P. Mr. Lewis disclaims beneficial
ownership of all shares held by Warburg, Pincus entities.
(10) Includes 5,590,037 shares held by The Bay City Capital Fund I, L.P.
Trusts for the benefit of members of the Pritzker family (including Mr.
Pritzker) are indirect investors in The Bay City Capital Fund I, L.P.
Mr. Pritzker disclaims any beneficial ownership in shares held by The Bay
City Capital Fund I, L.P.
(11) Includes:
. 5,405,315 shares held by CMG@Ventures II, LLC and
. 51,400 shares held by Mr. Callaghan, a General Partner of CMG@Ventures
and a director of Chemdex.
Mr. Callaghan disclaims beneficial ownership of the shares held by
CMG@Ventures II, LLC, except to the extent of his pecuniary interest
therein arising from his general partnership interest in these funds.
(12) Includes 5,076,810 shares held by VWR Scientific Products Corporation, a
company of which Mr. Harris is the President and Chief Executive Officer
and 17,495 shares held by Mr. Harris. Mr. Harris disclaims beneficial
ownership of the shares held by VWR Scientific Products Corporation,
except to the extent of his pecuniary interest therein.
(13) Includes 3,598,950 shares held by entities affiliated with Galen
Associates, an entity with which Dr. Wilkerson is affiliated. Dr.
Wilkerson disclaims beneficial ownership of the shares held by entities
affiliated with Galen Associates, except to the extent of his pecuniary
interest therein arising from his general partnership interest in these
funds.
(14) Includes 54,688 shares held by Mr. Swanson as trustee of an irrevocable
trust and subject to repurchase by Chemdex within 60 days of May 12, 1999
in the event of termination of his relationship with Chemdex. Also
includes 1,248,333 shares held by a partnership affiliated with Mr.
Swanson.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Immediately following the consummation of this offering, the authorized
capital stock of Chemdex will consist of 350,000,000 shares of common stock,
$.0001 par value, and 5,000,000 shares of undesignated preferred stock, $.0001
par value. Upon completion of this offering, there will be
outstanding shares of common stock outstanding, no outstanding shares of
preferred stock, options to purchase shares of common stock and
outstanding warrants to purchase 310,000 shares of common stock.
Common Stock
As of May 12, 1999, there were 48,581,947 shares of common stock
outstanding that were held of record by approximately 267 stockholders. There
will be shares of common stock outstanding (assuming no exercise of the
underwriters' over-allotment option and assuming no exercise after May 12,
1999 of outstanding options) after giving effect to the sale of the shares of
common stock to the public offered hereby and the conversion of our preferred
stock into common stock at a one-to-one ratio.
Subject to preferences that may apply to shares of preferred stock
outstanding at the time, the holders of outstanding shares of common stock are
entitled to receive dividends out of assets legally available therefor at such
times and in such amounts as the board of directors may determine. See
"Dividend Policy." Each stockholder is entitled to one vote for each share of
common stock held on all matters submitted to a vote of the stockholders.
Cumulative voting is not provided for in the Chemdex's Amended and Restated
Certificate of Incorporation, which means that the majority of the shares
voted can elect all of the directors then standing for election. The common
stock is not entitled to preemptive rights and is not subject to conversion or
redemption. Upon the occurrence of a liquidation, dissolution or winding-up,
the holders of shares of common stock are entitled to share ratably in all
assets remaining after payment of liabilities and satisfaction of preferential
rights of any outstanding preferred stock. There are no sinking fund
provisions applicable to the common stock. The outstanding shares of common
stock are, and the shares of common stock to be issued upon completion of this
offering will be, fully paid and non-assessable.
Preferred Stock
Upon filing our Amended and Restated Certificate of Incorporation after the
closing of this offering, we will authorize 5,000,000 shares of preferred
stock. The Board of Directors has the authority, within the limitations and
restrictions in the Amended and Restated Certificate of Incorporation, to
provide by resolution for the issuance of shares of preferred stock in one or
more series and to fix the rights, preferences, privileges and restrictions
thereof, including dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption, redemption prices, liquidation preferences and
the number of shares constituting any series or the designation of such
series, without further vote or action by the stockholders. The issuance of
preferred stock may have the effect of delaying, deferring or preventing a
change in control of Chemdex without further action by the stockholders. The
issuance of preferred stock with voting and conversion rights may adversely
affect the voting power of the holders of common stock, including voting
rights, of the holders of common stock. In some circumstances, this issuance
could have the effect of decreasing the market price of the common stock. As
of the closing of the offering, no shares of preferred stock will be
outstanding and Chemdex currently has no plans to issue any shares of
preferred stock.
Options
As of May 12, 1999, options to purchase a total of 2,069,265 shares of
common stock were outstanding, and up to 5,681,896 additional shares of common
stock may be subject to options granted in the future under the 1998 Stock
Plan. See "Management--Employee Stock Plans--1998 Stock Plan."
Warrants
As of May 12, 1999, Chemdex had the following outstanding warrants:
warrants to purchase a total of 100,000 shares of common stock at an exercise
price of $2.60 that are held by entities affiliated with Galen
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<PAGE>
Partners; and a warrant to purchase 210,000 shares of Series B Preferred Stock
at an exercise price of $.75 that is held by Comdisco, Inc. All of the
warrants contain standard anti-dilution provisions.
Anti-takeover Effects of Provisions of the Certificate of Incorporation,
Bylaws and Delaware Law
Certificate of Incorporation and Bylaws. Our Amended and Restated
Certificate of Incorporation provides that, effective on the closing of this
offering, all stockholder actions must be effected at a duly called meeting
and not by a consent in writing. Further, provisions of the Bylaws and the
Amended and Restated Certificate of Incorporation provide that the
stockholders may amend the Bylaws or certain provisions of the Amended and
Restated Certificate of Incorporation only with the affirmative vote of more
than 50% of our capital stock. These provisions of the Amended and Restated
Certificate of Incorporation and Bylaws could discourage potential acquisition
proposals and could delay or prevent a change in control of Chemdex. These
provisions are intended to enhance the likelihood of continuity and stability
in the composition of the Board of Directors and in the policies formulated by
the Board of Directors and to discourage certain types of transactions that
may involve an actual or threatened change of control of Chemdex. These
provisions are designed to reduce our vulnerability to an unsolicited
acquisition proposal. The provisions also are intended to discourage certain
tactics that may be used in proxy fights. However, such provisions could have
the effect of discouraging others from making tender offers for our shares
and, as a consequence, they also may inhibit fluctuations in the market price
of our shares that could result from actual or rumored takeover attempts. Such
provisions also may have the effect of preventing changes in our management.
Delaware Takeover Statute. We are subject to Section 203 of the Delaware
General Corporation Law, or DGCL Section 203, which regulates corporate
acquisitions. DGCL Section 203 prevents certain Delaware corporations,
including those whose securities are listed for trading on the Nasdaq National
Market, from engaging, under certain circumstances in a "business combination"
with any "interested stockholder" for three years following the date that such
stockholder became an interested stockholder. For purposes of DGCL Section
203, a "business combination" includes, among other things, a merger or
consolidation involving Chemdex and the interested stockholder and the sale of
more than ten percent (10%) of Chemdex's assets. In general, DGCL Section 203
defines an "interested stockholder" as any entity or person beneficially
owning 15% or more the outstanding voting stock of Chemdex and any entity or
person affiliated with or controlling or controlled by such entity or person.
A Delaware corporation may "opt out" of DGCL Section 203 with an express
provision in its original certificate of incorporation or an express provision
in its certificate of incorporation or bylaws resulting from amendments
approved by the holders of at least a majority of the corporation's
outstanding voting shares. We have not "opted out" of the provisions of DGCL
Section 203.
Registration Rights
As of the completion of this offering, the holders of 39,253,108 shares of
common stock and common stock issuable upon exercise of warrants held by
Comdisco, Inc. and entities affiliated with Galen Associates or their
transferees are entitled to rights with respect to the registration of such
shares under the Securities Act. These rights are provided under the terms of
an agreement between Chemdex and the holders of the registrable securities.
Pursuant to such Agreement, on the written demand of holders of more than 20%
of the then outstanding registrable securities, Chemdex shall use its best
efforts to register such shares and those of any other stockholders who, by
prompt notice, request registration, subject to cutbacks in participation made
by the managing underwriter. Chemdex is not required to effect more than two
demand registrations on Form S-1 at any time and more than one demand
registration on Form S-3 in any twelve-month period. Such holders are also
entitled to unlimited piggyback registration rights, subject to cutbacks in
participation made by the managing underwriter. All offering expenses in
connection with such registration will be borne by Chemdex, excluding
underwriting discounts and commissions.
Effect of Amended and Restated Certificate of Incorporation and Bylaw
Provisions
Our Amended and Restated Certificate of Incorporation to be effective upon
the closing of this offering provides, among other things, that directors of
Chemdex will be elected without the application of cumulative
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<PAGE>
voting. This Amended and Restated Certificate of Incorporation also provides
that after the closing of the offering contemplated hereby, any action
required or permitted to be taken by the stockholders of Chemdex may be taken
only at a duly called annual or special meeting of the stockholders. Our
Bylaws to be effective upon the closing of this offering also establish
procedures, including advance notice procedures with regard to the nomination,
other than by or at the direction of the Board of Directors, of candidates for
election as directors. See "Description of Capital Stock -- Common Stock."
The foregoing provisions could have the effect of making it more difficult
for a third party to effect a change in the control of the Board of Directors.
In addition, these provisions could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
attempting to acquire, a majority of the outstanding voting stock of Chemdex.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the common stock is HSBC Bank USA. The
Transfer Agent's address and telephone number is 140 Broadway, New York, NY
10005-1180, (212) 658-6553.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for the common stock of
Chemdex. Future sales of substantial amounts of common stock in the public
market could adversely affect prevailing market prices. Furthermore, since
only a limited number of shares will be available for sale shortly after this
offering because of contractual and legal restrictions on resale (as described
below), sales of substantial amounts of common stock of Chemdex in the public
market after the restrictions lapse could adversely affect the prevailing
market price and the ability of Chemdex to raise equity capital in the future.
Upon completion of the offering, Chemdex will have outstanding shares
of common stock. Of these shares, the shares sold in the offering (plus
any shares issued upon exercise of the Underwriters' over-allotment option)
will be freely tradeable without restriction under the Securities Act, unless
purchased by "affiliates" of Chemdex as that term is defined in Rule 144 under
the Securities Act.
The remaining shares of common stock outstanding are "restricted
securities" within the meaning of Rule 144 under the Securities Act.
Restricted securities may be sold in the public market only if registered or
if they qualify for an exemption from registration under Rules 144, 144(k) or
701 promulgated under the Securities Act, which are summarized below. Sales of
the restricted securities in the public market, or the availability of such
shares for sale, could adversely affect the market price of the common stock.
The stockholders of Chemdex have entered into lock-up agreements generally
providing that they will not offer, sell, contract to sell or grant any option
to purchase or otherwise dispose of the shares of common stock of Chemdex or
any securities exercisable for or convertible into Chemdex's common stock
owned by them for a period of 180 days after the effective date of the
registration statement filed pursuant to this offering without the prior
written consent of Morgan Stanley & Co. Incorporated. As a result of these
contractual restrictions, notwithstanding possible earlier eligibility for
sale under the provisions of Rules 144, 144(k) and 701, shares subject to
lock-up agreements will not be saleable until these agreements expire or are
waived by Morgan Stanley & Co. Incorporated. Taking into account the lock-up
agreements, and assuming Morgan Stanley & Co. Incorporated does not release
stockholders from these agreements, the following shares will be eligible for
sale in the public market at the following times: beginning on the effective
date, only the shares sold in the offering will be immediately available for
sale in the public market; beginning 180 days after the effective date,
approximately shares will be eligible for sale pursuant to Rule 701 and
approximately additional shares will be eligible for sale pursuant to Rule
144, of which all but shares are held by affiliates of Chemdex. An
additional shares will be eligible for sale pursuant to Rule 144 by
1999. Shares eligible to be sold by affiliates pursuant to Rule 144
are subject to volume restrictions as described below.
In general, under Rule 144 as currently in effect, and beginning after the
expiration of the lock-up agreements (180 days after the effective date of the
offering), a person (or persons whose shares are aggregated) who has
beneficially owned restricted securities for at least one year would be
entitled to sell within any three-month period a number of shares that does
not exceed the greater of: (i) one percent of the number of shares of common
stock then outstanding (which will equal approximately shares immediately
after the offering); or (ii) the average weekly trading volume of the common
stock during the four calendar weeks preceding the sale. Sales under Rule 144
are also subject to manner of sale provisions and notice requirements and to
the availability of current public information about Chemdex. Under Rule
144(k), a person who is not deemed to have been an affiliate of Chemdex at any
time during the three months preceding a sale, and who has beneficially owned
the shares proposed to be sold for at least two years, is entitled to sell
these shares without complying with the manner of sale, public information,
volume limitation or notice provisions of Rule 144.
Pursuant to the lock-up agreements, all Chemdex employees holding common
stock or stock options may not sell shares acquired upon exercise until after
180 days following the effective date. Beginning after 180 days following the
effective date of the registration statement for this offering, any employee,
officer or director of or consultant to Chemdex who purchased his or her
shares pursuant to a written compensatory plan or contract may
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<PAGE>
be entitled to rely on the resale provisions of Rule 701. Rule 701 permits
affiliates to sell their Rule 701 shares under Rule 144 without complying with
the holding period requirements of Rule 144. Rule 701 further provides that
non-affiliates may sell such shares in reliance on Rule 144 without having to
comply with the holding period, public information, volume limitation or
notice provisions of Rule 144. In addition, Chemdex intends to file
registration statements under the Securities Act as promptly as possible after
the effective date to register shares to be issued pursuant to Chemdex's
employee benefit plans. As a result, any options exercised under the Stock
Plan or any other benefit plan after the effectiveness of such registration
statement will also be freely tradeable in the public market, except that
shares held by affiliates will still be subject to the volume limitation,
manner of sale, notice and public information requirements of Rule 144 unless
otherwise resaleable under Rule 701. As of May 12, 1999, there were
outstanding options for the purchase of 2,069,265 shares, of which options to
purchase 269,206 shares were exercisable. No shares have been issued to date
under Chemdex's Purchase Plan or Directors Plan. See "Management--Stock Plans"
and "Description of Capital Stock--Registration Rights."
Morgan Stanley & Co. Incorporated may choose to release some or all of the
shares subject to the lockup restrictions described above prior to the
expiration of the 180-day period with or without prior public notice, although
it has no current intention to do so.
65
<PAGE>
UNDERWRITERS
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 1999, the underwriters named below, for whom
Morgan Stanley & Co. Incorporated, BancBoston Robertson Stephens Inc. and
Volpe Brown Whelan & Company, LLC are acting as representatives, have
severally agreed to purchase, and Chemdex has agreed to sell to them, the
respective number of shares of common stock set forth opposite the names of
such underwriters below:
<TABLE>
<CAPTION>
Number
of
Name Shares
---- ------
<S> <C>
Morgan Stanley & Co. Incorporated.....................................
BancBoston Robertson Stephens Inc.....................................
Volpe Brown Whelan & Company, LLC.....................................
----
Total...............................................................
====
</TABLE>
The underwriters are offering the shares of common stock subject to their
acceptance of the shares from Chemdex and subject to prior sale. The
underwriting agreement provides that the obligations of the several
underwriters to pay for and accept delivery of the shares of common stock
offered hereby are subject to the approval of legal matters by their counsel
and to other conditions. The underwriters are obligated to take and pay for
all of the shares of common stock offered hereby, other than those covered by
the overallotment option described below, if any shares are taken. Discover
Brokerage Direct Inc., an affiliate of Morgan Stanley & Co. Incorporated and
facilitator of internet distribution, is acting as a selected dealer in
connection with the offering.
The underwriters initially propose to offer part of the shares of the
common stock directly to the public at the public offering price set forth on
the cover page hereof and part to certain dealers at a price that represents a
concession not in excess of $ a share under the public offering price. Any
underwriter may allow, and such dealers may reallow, a concession not in
excess of $ a share to other underwriters or to certain other dealers.
After the initial offering of the shares of common stock, the offering price
and other selling terms may from time to time be varied by the
representatives.
The underwriters have informed Chemdex that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
common stock offered by them.
At the request of Chemdex, the underwriters have reserved up to
shares of common stock offered hereby for sale at the initial public offering
price to employees, friends and families of employees of Chemdex, service
providers, employees of customers and others. The number of shares available
for sale to the general public will be reduced to the extent that these
persons purchase reserved shares. Any reserved shares not so purchased will be
offered by the underwriters to the general public on the same basis as other
shares of common stock offered hereby.
Chemdex has submitted an application to have its common stock approved for
quotation on the Nasdaq National Market under the symbol "CMDX."
Each of Chemdex and the directors, officers and substantially all other
stockholders of Chemdex has agreed that, without the prior written consent of
Morgan Stanley & Co. Incorporated on behalf of the underwriters, it will not,
during the period ending 180 days after the effective date of the registration
statement filed for this offering:
. offer, pledge, sell, contract to sell, engage in any short sale, sell
any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase, or otherwise
transfer or dispose of, directly or indirectly, any shares of common
stock or any securities convertible into or exercisable or exchangeable
for common stock;
. enter into any swap or similar agreement that transfers, in whole or in
part, the economic consequences of ownership of the common stock;
66
<PAGE>
whether any such transaction described above is to be settled by delivery of
common stock or such other securities, in cash or otherwise.
The restrictions described in the previous paragraph do not apply to
certain circumstances, including:
. the sale of the shares to the underwriters;
. the issuance by Chemdex of shares of restricted stock awards under
Chemdex's existing employee benefit plans or of common stock upon the
exercise of an option or a warrant or the conversion of a security
outstanding on the date of this prospectus subject to a lock up period
at least 180 days after the effective date of the registration statement
for this offering; or
. the grant of options by Chemdex to officers, directors, employees or
consultants provided such options are subject to a lock up period at
least 180 days after the effective date of the registration statement
for this offering; or
. transactions by any person other than Chemdex relating to shares of
common stock or other securities acquired in open market transactions
after the completion of the offering of the shares.
In addition, the stockholders of Chemdex have agreed that, without the
prior written consent of Morgan Stanley & Co. Incorporated on behalf of the
underwriters, neither it nor any of its affiliates will, during the period
ending 180 days after the date of this prospectus, make any demand for, or
exercise any right with respect to, the registration of any shares of common
stock or any security convertible into or exercisable or exchangeable for
common stock.
Morgan Stanley & Co. Incorporated may choose to release some or all of the
shares subject to the lock up restrictions described above prior to the
expiration of the 180 day period with or without prior public notice, although
it has no current intention to do so.
Chemdex has granted to the underwriters an option, exercisable for 30 days
from the date of this prospectus, to purchase up to additional shares
of common stock at the public offering price set forth on the cover page
hereof, less underwriting discounts and commissions. The underwriters may
exercise such option solely for the purpose of covering over-allotments, if
any, made in connection with the offering of the shares of common stock
offered hereby. To the extent such option is exercised, each underwriter will
become obligated, subject to conditions, to purchase approximately the same
percentage of such additional shares of common stock as the number set forth
next to such underwriter's name in the preceding table bears to the total
number of shares of common stock set forth next to the names of all
underwriters in the preceding table.
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in the common stock
for their own account. In addition, to cover over-allotments or to stabilize
the price of the common stock, the underwriters may bid for, and purchase,
shares of common stock in the open market. Finally, the underwriting syndicate
may reclaim selling concessions allowed to an underwriter or a dealer for
distributing the common stock in the offering if the syndicate repurchases
previously distributed common stock in transactions to cover syndicate short
positions, in stabilization transactions or otherwise. Any of these activities
may stabilize or maintain the market price of the common stock above
independent market levels. The underwriters are not required to engage in
these activities, and may end any of these activities at any time.
Chemdex and the underwriters have agreed to indemnify each other against
liabilities, including liabilities under the Securities Act.
Certain of the underwriters from time to time perform various investment
banking services for Chemdex, for which such underwriters receive customary
compensation.
67
<PAGE>
Pricing of the Offering
Prior to this offering, there has been no public market for the common
stock. The initial public offering price will be determined by negotiations
between Chemdex and the underwriters. Among the factors considered in
determining the initial public offering price will be the future prospects of
Chemdex and its industry in general, sales, earnings and other financial and
operating information of Chemdex in recent periods, and the price-earnings
ratios, price-sales ratios, market prices of securities and financial and
operating information of companies engaged in activities similar to those of
Chemdex. The estimated initial public offering price range set forth on the
cover page of this preliminary prospectus is subject to change as a result of
market conditions and other factors.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
Chemdex by Venture Law Group, a Professional Corporation, Menlo Park,
California. Jeffrey Y. Suto, a director of Venture Law Group, is the Secretary
of Chemdex. Legal matters in connection with this offering will be passed upon
for the Underwriters by Wilson Sonsini Goodrich & Rosati, Professional
Corporation. As of the date of this prospectus, employees of Venture Law Group
and an investment partnership affiliated with Venture Law Group own a total of
145,577 shares of Chemdex's common stock.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements and schedule at December 31, 1997 and 1998, and for the period from
September 4, 1997 (inception) through December 31, 1997 and for the year ended
December 31, 1998, as set forth in their report. We have included our
financial statements and schedule in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.
CHANGE IN INDEPENDENT ACCOUNTANTS
Effective September 1998, Ernst & Young LLP was engaged as our independent
auditors and replaced other auditors who were dismissed as our independent
accountants on the same date. The decision to change auditors was approved by
our Board of Directors on September 2, 1998. Prior to September 2, 1998, our
former auditors issued a report on the period from September 4, 1997
(inception) to December 31, 1997. The report did not contain an adverse
opinion or disclaimer of opinion qualified or modified as to any uncertainty,
audit scope or accounting principle. In connection with the audit for the
period from September 4, 1997, there were no disagreements with our former
auditors on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which disagreements if
not resolved to the satisfaction of our former auditors, would have caused
them to make reference thereto in their report. Our former auditors have not
audited or reported on any of the financial statements or information included
in this prospectus. Prior to September 2, 1998, we had not consulted with
Ernst & Young LLP on items that involved our accounting principles or the form
of audit opinion to be issued on our financial statements.
68
<PAGE>
ADDITIONAL INFORMATION
Chemdex has filed with the Securities and Exchange Commission a
registration statement on Form S-1 under the Securities Act with respect to
the common stock offered under this prospectus. This prospectus does not
contain all of the information set forth in the registration statement and the
exhibits. For further information with respect to Chemdex and the common stock
offered under this prospectus, reference is made to the registration statement
and the exhibits. Statements contained in this prospectus regarding the
contents of any contract or any other document to which reference is made are
not necessarily complete. In each instance where a copy of such contract or
other document has been filed as an exhibit to the registration statement,
reference is made to the exhibit for a more complete description of the matter
involved. A copy of the registration statement and the exhibits may be
inspected without charge at the Public Reference Room of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of
all or any part of the registration statement may be obtained from the Public
Reference Section of the Commission upon the payment of the fees prescribed by
the Commission. The public may obtain information on the operation of the
Public Reference Room by calling the Commission at 1-800-SEC-0330. The
Commission also maintains a Web site (http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding
registrants, such as Chemdex, that file electronically with the Commission.
Chemdex intends to provide its stockholders with annual reports containing
combined financial statements audited by an independent accounting firm and
quarterly reports containing unaudited combined financial data for the first
three quarters of each fiscal year.
69
<PAGE>
CHEMDEX CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........................... F-2
Balance Sheets.............................................................. F-3
Statements of Operations.................................................... F-4
Statements of Stockholders' Equity.......................................... F-5
Statements of Cash Flows.................................................... F-6
Notes to Financial Statements............................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Chemdex Corporation
We have audited the accompanying balance sheets of Chemdex Corporation as
of December 31, 1997 and 1998, and the related statements of operations,
stockholders' equity, and cash flows for the period from September 4, 1997
(inception) through December 31, 1997 and for the year ended December 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Chemdex Corporation at
December 31, 1997 and 1998, and the results of its operations and its cash
flows for the period from September 4, 1997 (inception) through December 31,
1997 and for the year ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
San Jose, California
May 7, 1999,
except for Note 9,
as to which the date is
May 11, 1999
F-2
<PAGE>
CHEMDEX CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
December 31, Equity as of
----------------------- March 31, March 31,
1997 1998 1999 1999
---------- ----------- ------------ -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash
equivalents............. $1,346,478 $ 5,990,188 $ 27,783,684
Accounts receivable, net
of allowances for bad
debt of $0, $2,000 and
$4,000 at December 31,
1997 and 1998 and March
31, 1999................ -- 32,259 126,354
Other current assets..... 43,137 286,991 416,973
---------- ----------- ------------
Total current assets... 1,389,615 6,309,438 28,327,011
Property and equipment:
Furniture and fixtures... 9,719 298,591 551,843
Computer hardware and
software................ 245,826 1,498,220 3,805,930
Leasehold improvements... 12,911 46,470 139,105
---------- ----------- ------------
268,456 1,843,281 4,496,878
Less accumulated
depreciation and
amortization............ 7,337 285,036 495,090
---------- ----------- ------------
261,119 1,558,245 4,001,788
Other assets.............. 77,278 300,472 307,087
---------- ----------- ------------
Total assets.............. $1,728,012 $ 8,168,155 $ 32,635,886
========== =========== ============
Liabilities and
stockholders' equity
Current liabilities:
Accounts payable......... $ 181,671 $ 543,141 $ 1,042,656
Accrued compensation..... 31,621 511,578 692,545
Accrued expenses......... 54,120 759,654 1,902,725
Current obligations
under capital leases.... 6,483 5,425 --
Current portion of note
payable................. -- -- 328,833
---------- ----------- ------------
Total current
liabilities........... 273,895 1,819,798 3,966,759
Obligations under
capital leases.......... 5,982 -- --
Note payable, less
current portion......... -- -- 803,028
---------- ----------- ------------
Total liabilities...... 279,877 1,819,798 4,769,787
Commitments and
contingencies
Stockholders' equity:
Convertible preferred
stock, $.0001 par
value:
Authorized shares --
68,149,266 in 1999 and
none pro forma
Issued and outstanding
shares -- 5,391,100 in
1997, 22,891,298 in
1998, 32,691,416 in
1999 and none pro
forma (liquidation
preference of
$42,939,012 at March
31,1999)............... 539 2,289 3,269 $ --
Common stock, $.0001 par
value:
Authorized shares --
19,000,000 in 1997,
35,000,000 in 1998 and
100,000,000 in 1999 ...
Issued and outstanding
shares--5,140,000 in
1997, 7,843,670 in
1998, 9,660,839 in
1999, and 42,352,255
pro forma.............. -- 270 452 3,721
Additional paid-in
capital................. 1,850,989 18,379,421 48,664,894 48,664,894
Deferred compensation.... -- (2,992,099) (4,016,489) (4,016,489)
Notes receivable from
stockholders............ -- (149,717) (1,085,374) (1,085,374)
Accumulated deficit...... (403,393) (8,891,807) (15,700,653) (15,700,653)
---------- ----------- ------------ ------------
Total stockholders'
equity................ 1,448,135 6,348,357 27,866,099 $ 27,866,099
---------- ----------- ------------ ============
Total liabilities and
stockholders' equity..... $1,728,012 $ 8,168,155 $ 32,635,886
========== =========== ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
CHEMDEX CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
Inception
(September 4, 1997) Year Ended Three Months Ended
through December March 31,
December 31, 31, ----------------------
1997 1998 1998 1999
------------------- ----------- --------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Net revenues............ $ -- $ 29,355 $ -- $ 165,552
Cost of revenues........ -- 22,105 -- 155,960
---------- ----------- --------- -----------
Gross profit............ -- 7,250 -- 9,592
Operating expenses:
Research and
development.......... 196,388 3,439,135 363,745 2,293,311
Sales and marketing... 86,346 3,247,136 219,086 3,188,058
General and
administrative....... 120,659 1,744,898 189,896 1,014,748
Amortization of
deferred
compensation......... -- 372,285 22,434 352,291
---------- ----------- --------- -----------
Total operating
expenses............. 403,393 8,803,454 795,161 6,848,408
---------- ----------- --------- -----------
Operating loss.......... (403,393) (8,796,204) (795,161) (6,838,816)
Interest expense........ -- (2,620) (754) (24,928)
Interest income and
other, net............. -- 310,410 3,319 54,898
---------- ----------- --------- -----------
Net loss................ $ (403,393) $(8,488,414) $(792,596) $(6,808,846)
========== =========== ========= ===========
Basic and diluted net
loss per share......... $ (.12) $ (2.40) $ (.23) $ (1.69)
========== =========== ========= ===========
Weighted average shares
of common stock
outstanding used in
computing basic and
diluted net loss per
share.................. 3,408,824 3,543,017 3,408,824 4,032,353
========== =========== ========= ===========
Pro forma basic and
diluted net loss per
share.................. $ (.43) $ (.24)
=========== ===========
Weighted average shares
used in computing pro
forma basic and diluted
net loss per share..... 19,905,108 28,557,081
=========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE>
CHEMDEX CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock Additional Total
----------------- ----------------- Paid-in Deferred Notes Accumulated Stockholders'
Shares Amount Shares Amount Capital Compensation Receivable Deficit Equity
---------- ------ --------- ------ ----------- ------------ ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of Series
A preferred stock
at $0.3497 per
share, net of
issuance costs... 5,391,100 $ 539 -- $ -- $ 1,850,989 $ -- $ -- $ -- $ 1,851,528
Issuance of common
stock to founders
on
incorporation.... -- -- 5,140,000 -- -- -- -- -- --
Net loss.......... (403,393) (403,393)
---------- ------ --------- ---- ----------- ----------- ----------- ------------ -----------
Balance at
December 31,
1997............. 5,391,100 539 5,140,000 -- 1,850,989 -- -- (403,393) 1,448,135
Issuance of Series
A preferred stock
at $0.3497 per
share, net of
issuance costs... 200,200 20 -- -- 44,847 -- -- -- 44,867
Issuance of Series
B preferred stock
at $0.75 per
share, net of
issuance costs... 17,299,998 1,730 -- -- 12,928,827 -- -- -- 12,930,557
Exercise of stock
options.......... -- -- 2,838,670 284 197,486 -- (156,843) -- 40,927
Repurchase of
unvested shares.. -- -- (135,000) (14) (7,112) -- 7,126 -- --
Deferred
compensation
relating to stock
options.......... -- -- -- -- 3,364,384 (3,364,384) -- -- --
Amortization of
deferred
compensation
relating to stock
options.......... -- -- -- -- -- 372,285 -- -- 372,285
Net loss.......... -- -- -- -- -- -- -- (8,488,414) (8,488,414)
---------- ------ --------- ---- ----------- ----------- ----------- ------------ -----------
Balance at
December 31,
1998............. 22,891,298 2,289 7,843,670 270 18,379,421 (2,992,099) (149,717) (8,891,807) 6,348,357
Issuance of Series
C preferred stock
at $2.858 per
share, net of
issuance costs
(unaudited)...... 9,800,118 980 -- -- 27,934,075 -- -- -- 27,935,055
Exercise of stock
options
(unaudited)...... -- -- 2,142,000 214 958,303 -- (956,964) -- 1,553
Repurchase of
unvested shares
(unaudited)...... -- -- (324,831) (32) (17,959) -- 17,991 -- --
Payments of
stockholders'
notes receivable
(unaudited)...... -- -- -- -- -- -- 3,316 -- 3,316
Issuance of
warrants
(unaudited)...... -- -- -- -- 34,373 -- -- -- 34,373
Deferred
compensation
relating to stock
options
(unaudited)...... -- -- -- -- 1,376,681 (1,376,681) -- -- --
Amortization of
deferred
compensation
relating to stock
options
(unaudited)...... -- -- -- -- -- 352,291 -- -- 352,291
Net loss
(unaudited)...... -- -- -- -- -- -- -- (6,808,846) (6,808,846)
---------- ------ --------- ---- ----------- ----------- ----------- ------------ -----------
Balance at March
31, 1999
(unaudited)...... 32,691,416 $3,269 9,660,839 $452 $48,664,894 $(4,016,489) $(1,085,374) $(15,700,653) $27,866,099
========== ====== ========= ==== =========== =========== =========== ============ ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
CHEMDEX CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
Inception
(September 4, Three Months Ended
1997) through Year Ended March 31,
December 31, December 31, ----------------------
1997 1998 1998 1999
------------- ------------ --------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Operating activities
Net loss.................... $ (403,393) $(8,488,414) $(792,596) $(6,808,846)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization.............. 7,337 301,201 31,093 210,054
Amortization of deferred
compensation and sales and
marketing and interest
expense related to
warrants.................. -- 372,285 22,434 386,664
Loss on disposal of
property and equipment.... -- 7,925 -- --
Changes in operating assets
and liabilities:
Accounts receivable........ -- (32,259) (15,454) (94,095)
Other current assets....... (43,137) (243,854) (5,101) (129,982)
Other assets............... (67,064) (239,812) (14,521) (6,615)
Accounts payable........... 181,671 361,470 (11,534) 499,515
Accrued compensation....... 31,621 479,957 28,891 180,967
Accrued expenses........... 54,120 705,534 94,757 1,143,071
---------- ----------- --------- -----------
Net cash used in operating
activities................. (238,845) (6,775,967) (662,031) (4,619,267)
---------- ----------- --------- -----------
Investing activities
Sales of short-term
investments................ -- 6,593,495 -- --
Purchases of short-term
investments................ -- (6,593,495) -- --
Purchases of property and
equipment.................. (255,545) (1,614,129) (181,130) (1,521,736)
Proceeds from sales of
property and equipment..... -- 24,495 -- --
Purchase of other assets.... (10,214) -- -- --
---------- ----------- --------- -----------
Net cash used in investing
activities................. (265,759) (1,589,634) (181,130) (1,521,736)
---------- ----------- --------- -----------
Financing activities
Principal payments on
capital lease obligations.. (446) (7,040) (1,854) (5,425)
Net proceeds from issuance
of preferred stock......... 1,851,528 12,975,424 -- 27,935,055
Issuance of common stock.... -- 40,927 9,867 1,553
Payments of stockholders'
notes receivable........... -- -- -- 3,316
---------- ----------- --------- -----------
Net cash provided by
financing activities....... 1,851,082 13,009,311 8,013 27,934,499
---------- ----------- --------- -----------
Net increase (decrease) in
cash and cash equivalents.. 1,346,478 4,643,710 (835,148) 21,793,496
Cash and cash equivalents at
beginning of period........ -- 1,346,478 1,346,478 5,990,188
---------- ----------- --------- -----------
Cash and cash equivalents at
end of period.............. $1,346,478 $ 5,990,188 $ 511,330 $27,783,684
========== =========== ========= ===========
Supplemental disclosures of
noncash activities:
Issuance of shares in
exchange for stockholders'
notes receivable........... $ -- $ 156,843 $ -- $ 956,964
========== =========== ========= ===========
Repurchase of common stock
issued in exchange for
stockholders' notes
receivable................. $ -- $ 7,126 $ -- $ 17,991
========== =========== ========= ===========
Equipment purchased under
capital lease and note
payable.................... $ 12,911 $ -- $ -- $ 1,131,861
========== =========== ========= ===========
Supplemental disclosure of
cash flow information:
Cash paid for interest...... $ 207 $ 2,620 $ 754 $ 165
========== =========== ========= ===========
Cash paid for taxes......... $ -- $ 1,991 $ 1,973 $ 1,700
========== =========== ========= ===========
</TABLE>
See accompanying notes.
F-6
<PAGE>
CHEMDEX CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Information as of March 31, 1999 and for the three months ended March 31,
1998 and 1999 is unaudited)
1. Description of Business
Chemdex is a provider of e-commerce solutions to the life sciences research
products market. Chemdex enables life sciences enterprises, researchers and
suppliers to efficiently buy and sell research products through the Chemdex
Marketplace, a secure, Internet-based procurement solution.
Chemdex was incorporated in Delaware on September 4, 1997. During the
period from inception through November 1998, Chemdex was a development stage
company and did not have significant sales. During this period, operating
activities related primarily to the design and development of Chemdex's online
marketplace and corporate infrastructure and the establishment of
relationships with suppliers and customers. Chemdex has incurred operating
losses to date and had an accumulated deficit of approximately $15.7 million
at March 31, 1999. Chemdex's activities have been primarily financed through
private placements of equity securities. Chemdex is no longer in the
development stage.
2. Summary of Significant Accounting Policies
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Interim Financial Information
The financial information as of March 31, 1999 and for the three months
ended March 31, 1998 and 1999 is unaudited and includes all adjustments,
consisting only of normal recurring adjustments, that Chemdex's management
considers necessary for a fair presentation of Chemdex's operating results and
cash flows for such period. Results for the three month period ended March 31,
1999 are not necessarily indicative of results to be expected for the full
fiscal year of 1999 or for any future period.
Revenue Recognition
Net revenues consist primarily of product sales to customers and charges to
customers for outbound freight. Under most supplier agreements, Chemdex acts
as a principal when purchasing products from suppliers and reselling them to
customers. Products are shipped directly to customers by suppliers based on
customer delivery date specifications. Under principal-based agreements,
Chemdex is responsible for selling products, collecting payment from
customers, ensuring that the shipment reaches customers and processing
returns. In addition, Chemdex takes title to products upon shipment and bears
the risk of loss for collection, delivery and product returns from customers.
Chemdex provides an allowance for sales returns, which has been insignificant
to date, at the time of sale. Chemdex recognizes revenues from product sales
when products are shipped to customers.
To date, an insignificant amount of revenue is from agreements with
suppliers for which Chemdex is acting as an agent. Under agency-based supplier
agreements, Chemdex recognizes a percentage share of revenues generated by
suppliers when products are shipped to customers.
For the year ended December 31, 1998 and the three months ended March 31,
1999, one customer accounted for 79% and 82% of net revenues, respectively.
For the year ended December 31, 1998, another
F-7
<PAGE>
CHEMDEX CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of March 31, 1999 and for the three months ended
March 31, 1998 and 1999 is unaudited)
customer accounted for 14% of net revenues. There were no sales to customers
outside the United States since inception through March 31, 1999.
Cash and Cash Equivalents
Cash equivalents consist of financial instruments which are readily
convertible to cash and have original maturities of three months or less at
the time of acquisition. Chemdex's cash and cash equivalents as of December
31, 1997 and 1998 and March 31, 1999 consisted primarily of commercial paper
and money market funds held by large financial institutions in the United
States, and their carrying value approximated fair value.
Property and Leasehold Improvements
Chemdex records property and equipment at cost and calculates depreciation
using the straight-line method over estimated useful lives of three to five
years. Property under capital leases is depreciated over the lesser of the
useful lives of the assets or lease term.
Stock-Based Compensation
Chemdex has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, ("APB Opinion No. 25"), and related
interpretations in accounting for its employee stock options because, as
discussed in Note 6, the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation, ("FAS 123"), requires use of option valuation models that
were not developed for use in valuing employee stock options. Under APB
Opinion No. 25, when the exercise price of Chemdex's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized. See pro forma disclosures of applying
FAS 123 included in Note 6.
Advertising Costs
Advertising costs are charged to expense when incurred. No advertising
expense was incurred for the period from September 4, 1997 (inception) through
December 31, 1997. Advertising expense was $786,520 and $1.2 million for the
year ended December 31, 1998 and the three months ended March 31, 1999,
respectively.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued FAS 130,
Reporting Comprehensive Income. FAS 130 establishes standards for the
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements and is effective for fiscal years
beginning after December 15, 1997. Chemdex adopted FAS 130 in the year ended
December 31, 1998. Chemdex had no comprehensive income items to report for the
year ended December 31, 1998 and the three months ended March 31, 1999.
Segment Information
In June 1997, the Financial Accounting Standards Board issued FAS 131,
Disclosures about Segments of an Enterprise and Related Information ("FAS
131"). FAS 131 changes the way companies report selected segment information
in annual financial statements and requires companies to report selected
segment information in interim financial reports to stockholders. Chemdex
adopted FAS 131 in the year ended December 31, 1998.
Chemdex operates solely in one operating segment, the development and
marketing of an online marketplace for the procurement and distribution of
products and, therefore there is no impact to Chemdex's financial statements
of adopting FAS 131.
F-8
<PAGE>
CHEMDEX CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of March 31, 1999 and for the three months ended
March 31, 1998 and 1999 is unaudited)
Net Loss Per Share
Basic and diluted net loss per common share is presented in conformity with
FAS No. 128, Earnings Per Share ("FAS 128"), for all periods presented.
Pursuant to the Securities and Exchange Commission Staff Accounting Bulletin
No. 98, common stock and convertible preferred stock issued or granted for
nominal consideration prior to the anticipated effective date of Chemdex's
initial public offering must be included in the calculation of basic and
diluted net loss per common share as if they had been outstanding for all
periods presented. To date, Chemdex has not had any issuances or grants for
nominal consideration.
In accordance with FAS 128, basic and diluted net loss per share has been
computed using the weighted-average number of shares of common stock
outstanding during the period, less shares subject to repurchase. Pro forma
basic and diluted net loss per share, as presented in the statements of
operations, has been computed as described above and also gives effect, under
Securities and Exchange Commission guidance, to the conversion of the
convertible preferred stock (using the if-converted method) from the original
date of issuance.
The following table presents the calculation of basic and diluted and pro
forma basic and diluted net loss per share:
<TABLE>
<CAPTION>
Period from
Inception
(September 4, Three Months Ended
1997) through Year Ended March 31,
December 31, December 31, -----------------------
1997 1998 1998 1999
------------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Net loss................... $ (403,393) $(8,488,414) $ (792,596) $(6,808,846)
========== =========== ========== ===========
Basic and diluted:
Weighted-average shares of
common stock
outstanding.............. 5,140,000 6,485,590 5,140,000 9,046,131
Less weighted-average
shares subject to
repurchase............... (1,731,176) (2,942,573) (1,731,176) (5,013,778)
---------- ----------- ---------- -----------
Weighted-average shares
used in computing basic
and diluted net loss per
common share............. 3,408,824 3,543,017 3,408,824 4,032,353
---------- ----------- ---------- -----------
Basic and diluted net loss
per common share......... $ (.12) $ (2.40) $ (.23) $ (1.69)
========== =========== ========== ===========
Pro forma:
Shares used above.......... 3,543,017 4,032,353
Pro forma adjustment to
reflect weighted-average
effect of the assumed
conversion of convertible
preferred stock.......... 16,362,091 24,524,728
----------- -----------
Shares used in computing
pro forma basic and
diluted net loss per
share.................... 19,905,108 28,557,081
----------- -----------
Pro forma basic and
diluted net loss per
share.................... $ (.43) $ (.24)
=========== ===========
</TABLE>
Chemdex has excluded all outstanding stock options and shares subject to
repurchase by Chemdex from the calculation of diluted loss per share because
all such securities are antidilutive for all periods presented. Weighted-
average options outstanding to purchase -0-, 1,017,500 and 879,705 shares of
common stock for the period from inception through December 31, 1997, the year
ended December 31, 1998 and the three months ended March 31, 1999,
respectively, were not included in the computation of diluted net loss per
share because the effect would be antidilutive. Such securities, had they been
dilutive, would have been included in the computation of diluted net loss per
share using the treasury stock method.
F-9
<PAGE>
CHEMDEX CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of March 31, 1999 and for the three months ended
March 31, 1998 and 1999 is unaudited)
Unaudited Pro Forma Stockholders' Equity
If the offering contemplated by this prospectus is consummated, each share
of convertible preferred stock outstanding will automatically be converted
into one share of common stock. Unaudited pro forma stockholders' equity at
March 31, 1999, as adjusted for the assumed conversion of convertible
preferred stock based on the shares of convertible preferred stock outstanding
at March 31, 1999, is disclosed on the balance sheet.
Recent Accounting Pronouncements
In June 1998, the FASB issued FAS 133, Accounting for Derivative
Instruments and Hedging Activities ("FAS 133"), which Chemdex will be required
to adopt for the year ending December 31, 2000. This statement establishes a
new model for accounting for derivatives and hedging activities. FAS 133
establishes methods of accounting for derivative financial instruments and
hedging activities related to those instruments as well as other hedging
activities. Because Chemdex currently holds no derivative financial
instruments and does not currently engage in hedging activities, adoption of
FAS 133 is expected to have no material impact on Chemdex's financial
condition or results of operations.
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued SOP 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use, ("SOP 98-1"). SOP 98-1 requires that
entities capitalize certain costs related to internal use software once
certain criteria have been met. Chemdex is required to implement SOP 98-1 for
the year ending December 31, 1999. Adoption of SOP 98-1 is not expected to
have a material impact on Chemdex's financial condition or results of
operations.
In April 1998, the AICPA issued SOP No. 98-5, Reporting on the Costs of
Start-Up Activities, ("SOP 98-5"). SOP No. 98-5 requires that all start-up
costs related to new operations must be expensed as incurred. In addition, all
start-up cost that were capitalized in the past must be written off when SOP
No. 98-5 is adopted. Chemdex implemented SOP No. 98-5 on January 1, 1999. The
adoption of SOP No. 98-5 did not have a material impact on its financial
position or results of operations.
3. Concentrations of Credit Risk and Other Risks
Financial instruments that potentially subject Chemdex to credit risk
consist primarily of uninsured cash and cash equivalents. Cash and cash
equivalents are deposited with a federally insured commercial bank in the
United States.
Chemdex sells primarily to pharmaceutical and biotechnology companies and
academic and research institutions. Chemdex performs ongoing credit
evaluations of its customers but does not require collateral. Chemdex analyzes
the need for reserves for potential credit losses and records reserves when
necessary. These losses have been within management's expectations. To date,
Chemdex has not had significant write-offs of bad debt.
F-10
<PAGE>
CHEMDEX CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of March 31, 1999 and for the three months ended
March 31, 1998 and 1999 is unaudited)
4. Commitments
Chemdex leases its office facilities under noncancelable operating leases
expiring through 2003. Minimum annual operating lease commitments at December
31, 1998 were as follows:
<TABLE>
<S> <C>
1999.......................................................... $1,080,184
2000.......................................................... 1,094,662
2001.......................................................... 1,127,501
2002.......................................................... 1,161,331
2003.......................................................... 1,196,165
----------
Total minimum payments........................................ $5,659,843
==========
</TABLE>
Rental expense for the period from Inception through December 31, 1997 and
the year ended December 31, 1998 was $13,939 and $342,977, respectively.
5. Financing Arrangements
In February 1998, Chemdex entered into a line of credit with a bank, which
provides for borrowings of up to $400,000 with interest at the bank's prime
rate plus 1.0%. The aggregate credit line has a compensating balance
requirement of $210,000. Borrowings under the line are secured by
substantially all of the Chemdex's assets. At December 31, 1998, Chemdex had
no outstanding borrowings under this line of credit. The line of credit
expired on February 17, 1999.
In 1997, Chemdex entered into a noncancelable capital lease agreement for
equipment. Aggregate future minimum capital lease payments under this lease
were $5,425 at December 31, 1998. The lease expires in October 1999.
In January 1999, Chemdex entered into a $3.0 million equipment lease line
agreement with a financial institution for a term of 48 months, with interest
imputed at 13.02% per year. At December 31, 1998 and March 31, 1999, Chemdex
had no outstanding borrowings under the equipment lease line.
In February 1999, Chemdex entered into a financing arrangement in the
amount of $1,131,861 for the purchase of certain computer software and related
support. This arrangement provides for 12 equal quarterly payments of the
financed amount commencing May 1, 1999, with interest imputed at 13.24% per
year.
As of March 31, 1999, aggregate future minimum payments under this
financing agreement were as follows:
<TABLE>
<S> <C>
1999........................................................... $ 270,977
2000........................................................... 366,973
2001........................................................... 418,623
2002........................................................... 75,288
---------
Total payments................................................. 1,131,861
Less current portion........................................... (328,833)
---------
Long-term portion.............................................. $ 803,028
=========
</TABLE>
F-11
<PAGE>
CHEMDEX CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of March 31, 1999 and for the three months ended
March 31, 1998 and 1999 is unaudited)
6. Stockholders' Equity
Convertible Preferred Stock
Convertible preferred stock at December 31, 1997 and 1998 and March 31,
1999 is as follows:
<TABLE>
<CAPTION>
Shares Issued and Outstanding
-------------------------------
Shares
Authorized December 31, March 31,
Liquidation March 31, -------------------- ----------
Preference 1999 1997 1998 1999
----------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Series A................ $.3497 5,591,300 5,391,100 5,591,300 5,591,300
Series A-1.............. $.3497 5,591,300 -- -- --
Series B................ $ .75 17,583,333 -- 17,299,998 17,299,998
Series B-1.............. $ .75 17,583,333 -- -- --
Series C................ $2.858 10,600,000 -- -- 9,800,118
Series C-1.............. $2.858 10,600,000 -- -- --
Undesignated............ 600,000 -- -- --
---------- --------- ---------- ----------
Total convertible
preferred stock........ 68,149,266 5,391,100 22,891,298 32,691,416
========== ========= ========== ==========
</TABLE>
To date, shares have been designated as Series A and A-1, Series B and B-1
and Series C and C-1 (collectively, "the Series A, B and C preferred stock").
Chemdex is authorized to issue additional preferred stock with such
designations, rights, and preferences as may be determined from time to time
by the Board of Directors provided, however, that any such preferred stock
must be subordinate to, or in parity with, the Series A, B and C preferred
stock.
Series A, B and C preferred stockholders have voting rights equal to the
common shares issuable upon conversion of the Series A, B and C preferred
stock.
Each share of Series A, B and C preferred stock is convertible, at the
option of the holder, into one share of common stock, subject to certain
adjustments for dilutive issuances. Outstanding shares of Series A, B and C
preferred stock automatically convert into common stock upon the closing of an
underwritten public offering of Chemdex's common stock with gross proceeds to
Chemdex of at least $20,000,000 and a per share price of at least $3.75, or at
the election of the holders of more than 50%, at least 66 2/3% and at least
60% of outstanding Series A, B and C preferred stock, respectively.
Holders of Series A, B and C preferred stock are entitled to noncumulative
dividends of $.0315 and $.0675 and $.2572 per annum per outstanding share.
Dividends will be paid only when declared by the Board of Directors out of
legally available funds. No dividends have been declared or accrued as of
March 31, 1999.
Series A, B and C preferred stockholders are entitled to receive, upon a
liquidating event, an amount per share equal to the issuance price, plus all
declared but unpaid dividends. The remaining assets and funds, if any, shall
be distributed among the holders of Series A, B and C preferred stock and
common stock pro rata based on the number of shares of common stock held by
each (assuming conversion of all such Series A, B and C preferred stock). If
any assets remain after the holders of Series A, B and C preferred stock have
received an aggregate of $.874, $1.875 and $7.145 per share, the remaining
assets will be distributed to the holders of the common stock pro rata based
on the number of shares of common stock held by each.
F-12
<PAGE>
CHEMDEX CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of March 31, 1999 and for the three months ended
March 31, 1998 and 1999 is unaudited)
Warrants
In January 1999, in connection with an equipment lease line, Chemdex issued
a fully vested warrant that entitles the holder to purchase 210,000 shares of
the Chemdex's Series B preferred stock at an exercise price of $.75 per share.
This warrant is exercisable, through the later of the initial public offering
of Chemdex's common stock or January 2006. The fair value of this warrant,
approximately $195,300, will be expensed as a cost of financing over the four
year period of the lease line. The fair value of this warrant was calculated
using the Black-Scholes option pricing model.
In March 1999, Chemdex issued a fully vested, non-forfeitable warrant in
exchange for consulting services. The warrant entitles the holder to purchase
100,000 shares of Chemdex's common stock at an exercise price of $2.60 per
share. This warrant is exercisable through the earlier of two years from the
date of the initial public offering of Chemdex's common stock or March 2006.
The fair value of this warrant, approximately $133,000, will be expensed over
the six month period of the consulting agreement. The fair value of this
warrant was calculated using the Black-Scholes option pricing model.
Common Stock
Each share of common stock is entitled to one vote. The holders of common
stock are also entitled to receive dividends from legally available funds when
and if declared by the Board of Directors, subject to the prior rights of
holders of Series A, B and C preferred stock.
Certain of the shares of common stock issued to founders of Chemdex,
totaling 1,731,176 shares, are subject to repurchase by Chemdex. The stock
vests over a period of four years. As of December 31, 1998 and March 31, 1999,
1,460,273 and 1,355,042 shares, respectively, were subject to repurchase.
At March 31, 1999, common stock was reserved for future issuance as
follows:
<TABLE>
<S> <C>
Conversion of Series A preferred stock......................... 5,591,300
Conversion of Series B preferred stock......................... 17,299,998
Conversion of Series C preferred stock......................... 9,800,118
Warrants....................................................... 310,000
Stock Option Plan.............................................. 2,229,161
----------
35,230,577
==========
</TABLE>
Stock Option Plans
In January 1998, the Board of Directors terminated the 1997 Option Plan,
under which no options had been granted, and adopted the 1998 Stock Plan (the
"1998 Plan") for issuance of common stock to eligible participants. The Plan
provides for the granting of incentive stock options and non-qualified stock
options. Incentive stock options and non-qualified stock options may be
granted under the 1998 Plan at prices not less than 100% and 85% of the fair
value at the date of grant, or at prices not less than 110% for individuals
owning more than 10% of the combined voting power of all classes of stock at
the date of grant. Options generally expire after ten years. Certain options
under the plan are immediately exercisable; however, such shares issued are
subject to Chemdex's right to repurchase at the original issuance price, which
right lapses in a series of installments measured from the vesting
commencement date of the option. As of December 31, 1998 and March 31, 1999,
3,386,659 and 5,124,513 shares, respectively, were subject to repurchase.
Options generally vest, and the repurchase rights lapse ratably, over a period
of four years from the date of grant.
F-13
<PAGE>
CHEMDEX CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of March 31, 1999 and for the three months ended
March 31, 1998 and 1999 is unaudited)
Pro forma information regarding net loss and net loss per share is required
by FAS 123, and has been determined as if Chemdex had accounted for its
employee stock options under the fair value method provided for in FAS 123.
The fair value of options was estimated at the date of grant using a minimum
value option pricing model with the following weighted-average assumptions for
options granted during the year ended December 31, 1998: risk-free interest
rate of 5.42%, an expected life of four years and no dividends.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period of the options using a
graded vesting method. The effects of applying FAS 123 for pro forma
disclosures are not likely to be representative of the effects on reported net
loss for future years.
The option valuation models were developed for use in estimating the fair
value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
Chemdex's employee stock options have characteristics significantly different
from those of traded options and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
<TABLE>
<CAPTION>
Period from
Inception Three Months
(September 4, Ended
1997) through Year Ended March 31,
December 31, December 31, --------------
1997 1998 1998 1999
------------- ------------ ----- -------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C>
Net loss:
As reported...................... $(403) $(8,488) $(793) $(6,809)
Pro forma........................ $(403) $(8,495) $(793) $(6,818)
Pro forma basic and diluted net
loss per share:
As reported...................... $ (.43) $ (.24)
Pro forma........................ $ (.43) $ (.24)
</TABLE>
Activity under the 1998 Stock Plan was as follows:
<TABLE>
<CAPTION>
Options Outstanding
Shares --------------------------------------
Available Number of Price per Weighted-Average
for Grant Shares Share Exercise Price
---------- ---------- --------- ----------------
<S> <C> <C> <C> <C>
Authorized............... 6,750,000 -- -- --
Granted.................. (3,957,670) 3,957,670 $.05-$.50 $.08
Exercised................ -- (2,838,670) $.05-$.08 $.07
Canceled................. 101,500 (101,500) $.05-$.50 $.06
Repurchased.............. 135,000 -- $.05-$.08 --
---------- ----------
Balance at December 31,
1998...................... 3,028,830 1,017,500 $.05-$.50 $.07
Granted.................. (2,020,205) 2,020,205 $.75 $.75
Exercised................ -- (2,142,000) $.08-$.75 $.45
Canceled................. 16,000 (16,000) $.75 $.75
Repurchased.............. 324,831 -- $.05-$.08 $.05
---------- ----------
Balance at March 31, 1999.. 1,349,456 879,705 $.05-$.75 $.51
========== ==========
</TABLE>
F-14
<PAGE>
CHEMDEX CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of March 31, 1999 and for the three months ended
March 31, 1998 and 1999 is unaudited)
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding and Exercisable
---------------------------------------------------------------
Weighted-
Weighted- Average
Range of Average Remaining
Exercise Number of Exercise Contractual
Prices Shares Price Life
-------- --------- --------- -----------
(In Years)
<S> <C> <C> <C>
$.05--$.50 1,017,500 $.07 9.14
</TABLE>
Certain grants of options to employees to purchase common stock under
Chemdex's 1998 Stock Option Plan were exercised in exchange for full recourse
notes receivable. These notes receivable generally bear interest at a rate
equal to the minimum rate necessary to avoid the imputation of interest income
to the Company and compensation income to the maker under the Internal Revenue
Code and are collateralized by the underlying common stock. At December 31,
1998 and March 31, 1999, notes receivable in exchange for exercises of options
totaled $149,717 and $1,085,374, respectively. These shares are subject to
right of repurchase that generally lapse over four years.
The weighted-average fair value of options granted during 1998 with an
exercise price equal to the fair value of common stock on the date of grant
was $.08. The weighted-average fair value of options granted during 1998 with
an exercise price below the deemed fair value of Chemdex's common stock on the
date of grant was $.08.
In connection with the grant of certain share options to employees through
March 31, 1999, Chemdex recorded deferred compensation of $4,741,065 for the
aggregate differences between the exercise prices of options at their dates of
grant and the deemed fair value for accounting purposes of the common shares
subject to such options. Such amount is included as a reduction of
stockholders' equity and is being amortized on a graded vesting method over
the option vesting periods, which are generally four years. The compensation
expense of $724,576 through March 31, 1999 relates to options awarded to
employees in all operating expense categories. This amount has not been
separately allocated to these categories.
7. Employee Savings and Retirement Plan
Chemdex has a 401(k) plan that allows eligible employees to contribute up
to 15% of their salary, subject to annual limits. Under the plan, eligible
employees may defer a portion of their pretax salaries but not more than
statutory limits. Chemdex may make discretionary contributions to the plan
based on profitability as determined by the Board of Directors. Chemdex did
not make any contributions to the plan during the year ended December 31,
1998, and the three months ended March 31, 1999.
8. Income Taxes
The difference between the amount of income tax benefit recorded and the
amount of income tax benefit calculated using the federal statutory rate of
34% is due to net operating losses having a valuation allowance, due to past
operating results and uncertainties regarding Chemdex's future results of
operations. Accordingly, there is no provision for income taxes for the period
from September 4, 1997 (inception) through December 31, 1997 and for the year
ended December 31, 1998.
As of December 31, 1998, Chemdex had federal and state net operating loss
carryforwards of approximately $7,500,000 and $7,400,000, respectively.
Chemdex also had federal and state research credit carryforwards of
F-15
<PAGE>
CHEMDEX CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of March 31, 1999 and for the three months ended
March 31, 1998 and 1999 is unaudited)
approximately $100,000 and $100,000, respectively. The net operating loss and
credit carryforwards will expire at various dates beginning in 2002 through
2018, if not utilized. The net operating loss carryforwards differ from the
accumulated deficit primarily as a result of certain reserves and accruals not
currently deductible for tax purposes.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986, as amended, and similar state
provisions. The annual limitation may result in the expiration of net
operating losses and credits before utilization.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Chemdex's deferred tax assets are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------
1997 1998
-------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.................. $157,000 $3,000,000
Research credit carryforwards..................... 13,000 200,000
Reserves and accruals............................. 3,000 300,000
-------- ----------
Total deferred tax assets....................... 173,000 3,500,000
Valuation Allowance................................. (173,000) (3,500,000)
-------- ----------
Net deferred tax assets............................. $ -- $ --
======== ==========
</TABLE>
Under FAS 109, Accounting for Income Taxes, deferred tax assets and
liabilities are determined based on differences between financial reporting
and tax bases of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse. Based upon the weight of available evidence, which includes Chemdex's
historical operating performance, the reported net losses for the period from
inception through December 31, 1997 and for the year ended December 31, 1998,
and the uncertainties regarding Chemdex's future results of operations, a full
valuation allowance has been provided against its net deferred tax assets. It
is more likely than not that the deferred tax assets will not be realized. The
valuation allowance increased by $173,000 for the period from inception
through December 31, 1997 and $3,327,000 during 1998.
9. Events Subsequent To Date Of Auditor's Report
1999 Employee Stock Purchase Plan
On May 11, 1999, Chemdex's Board of Directors approved, subject to
stockholder approval, the adoption of the 1999 Employee Stock Purchase Plan
(the "Purchase Plan"). A total of 1,500,000 shares of common stock has been
reserved for issuance under the 1999 Purchase Plan, as well as an automatic
annual increase on the first day of each of Chemdex's fiscal years beginning
in 2000, 2001, 2002, 2003 and 2004 equal to the lesser of 400,000 shares, 1/2%
of Chemdex's outstanding common stock on the last day of the immediately
preceding fiscal year or a lesser number of shares determined by the Board of
Directors. Each offering period will consist of four consecutive purchase
periods of six months' duration. The initial offering period is expected to
begin on the date of this offering and end on July 31, 2001; the initial
purchase period is expected to end on January 31, 2000.
F-16
<PAGE>
CHEMDEX CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of March 31, 1999 and for the three months ended
March 31, 1998 and 1999 is unaudited)
The Purchase Plan permits eligible employees to purchase common stock
through payroll deductions, which may not exceed 20% of an employee's
compensation, at a price equal to the lower of 85% of the fair market value of
Chemdex's common stock at the beginning of each offering period or at the end
of each purchase period. If not terminated earlier, the Purchase Plan has a
term of 20 years.
Series C Preferred Stock
In April 1999, Chemdex issued an additional 799,882 shares of Series C
preferred stock to investors, resulting in net proceeds of $2,286,063.
Deferred Compensation
In April 1999, Chemdex granted to employees options to purchase 1,189,560
shares of common stock at an exercise price of $2.50 per share. We estimate
that we will record additional deferred compensation of approximately $2.5
million with regard to these grants.
1998 Stock Plan
On April 27, 1999, Chemdex's Board of Directors approved an increase in the
number of shares reserved for issuance under the 1998 Plan of 3,000,000 shares
and, on May 11, 1999 an additional increase of 2,500,000 shares. The 1998 Plan
was also amended to provide for automatic annual increases on the first day of
each fiscal year beginning in 2000, 2001, 2002, 2003 and 2004 equal to the
lesser of 2,500,000 shares, 3% of Chemdex's outstanding common stock on the
last day of the immediately preceding fiscal year or a lesser number of shares
as determined by the Board of Directors.
Authorization of Shares
On May 11, 1999, Chemdex's Board of Directors authorized 350,000,000 shares
of common stock and 5,000,000 shares of preferred stock, each with a par value
of $.0001 per share, effective in connection with this offering. The preferred
stock may be issued from time to time in one or more series. The Board of
Directors has the authority, within the limitations and restrictions in the
certificate of incorporation, to provide by resolution for the issuance of
shares of preferred stock in one or more series and to fix the rights,
preferences, privileges and restrictions thereof, including dividend rights,
dividend rates, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares
constituting any series or the designation of such series, without further
vote or action by the stockholders.
1999 Directors' Plan
On May 11, 1999, Chemdex's Board of Directors approved, subject to
stockholder approval, the 1999 Directors' Stock Plan (the "Directors' Plan").
A total of 500,000 shares of common stock has been reserved under the
Directors' Plan.
BIO Agreement
In May 1999, the Biotechnology Industry Organization (BIO) selected Chemdex
as its preferred supplier of e-commerce procurement solutions. As a result, we
entered into a five-year, exclusive joint marketing agreement with BIO. As
part of the joint marketing agreement, Chemdex will discount the fees we
charge to BIO members
F-17
<PAGE>
CHEMDEX CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information as of March 31, 1999 and for the three months ended
March 31, 1998 and 1999 is unaudited)
for our solution and will contribute cash payments to a joint marketing fund,
to be used in connection with both parties' obligations under the joint
marketing agreement. In addition, we sold 375,000 shares of our common stock
to BIO for a nominal amount in consideration for BIO's participation in these
joint marketing activities. BIO has the right to use a portion of the cash
payments and any proceeds it receives from the sale of the common stock for
the benefit of its members and the biotechnology industry. The charge for BIO
marketing activities will be expensed to sales and marketing as they are
incurred. We will also record the difference between the nominal amount per
share price paid by BIO for the purchase of our common stock and the fair
value as of the date of issuance, which is approximately $1.8 million, ratably
over the five-year term of the joint marketing agreement.
VWR Agreement
In March 1999, Chemdex entered into a strategic relationship agreement with
VWR, which was consummated in April 1999, pursuant to which Chemdex and VWR
agreed to market jointly VWR laboratory products using the Chemdex
Marketplace.
The agreement gives Chemdex the right to offer approximately 350,000 VWR-
distributed products to Chemdex customers and both parties agreed to jointly
develop an online purchasing solution for VWR's existing customers. In
connection with the strategic relationship agreement, VWR transferred to
Chemdex information concerning VWR customers who purchased products from third
party suppliers outside VWR's primary product offering and Chemdex issued
5,076,810 shares of common stock valued at $13.0 million to VWR.
We intend to use this information to expand sales of our procurement
solution to these customers and adoption of the Chemdex Marketplace by these
customers and suppliers. The fair value of $13.0 million will be amortized
into sales and marketing expense over five years, the estimated useful life of
this intangible asset.
F-18
<PAGE>
[CHEMDEX LOGO APPEARS HERE]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by Chemdex in connection with
the sale of common stock being registered. All amounts are estimates except
the SEC registration fee and the NASD filing fee and the Nasdaq National
Market listing fee.
<TABLE>
<CAPTION>
Amount
to be Paid
----------
<S> <C>
SEC registration fee............................................. $ 23,978
NASD filing fee.................................................. 9,125
Nasdaq National Market listing fee............................... 25,000
Printing and engraving expenses.................................. 225,000
Legal fees and expenses.......................................... 350,000
Accounting fees and expenses..................................... 250,000
Blue Sky qualification fees and expenses......................... 10,000
Transfer Agent and Registrar fees................................ 25,000
Miscellaneous fees and expenses.................................. 81,897
----------
Total.......................................................... $1,000,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law (the "Delaware Law")
authorizes a court to award, or a corporation's Board of Directors to grant,
indemnity to directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). Article Seven of Chemdex's Certificate of
Incorporation (Exhibit 3.1 hereto) and Article VI of Chemdex's Bylaws (Exhibit
3.3 hereto) provide for indemnification of Chemdex's directors, officers,
employees and other agents to the maximum extent permitted by Delaware Law. In
addition, Chemdex has entered into Indemnification Agreements (Exhibit 10.1
hereto) with its officers and directors. The Underwriting Agreement (Exhibit
1.1) also provides for cross-indemnification among Chemdex and the
Underwriters with respect to some matters, including matters arising under the
Securities Act.
Item 15. Recent Sales of Unregistered Securities
Since inception (September 1997), Chemdex has sold and issued the following
securities:
1. Upon its inception, Chemdex issued and sold 5,140,000 shares of its
common stock at a price of $.01 per share to four individuals.
2. In September 1997, Chemdex issued and sold 1,601,600 shares of its
Series A Preferred Stock at a price of $.347 per share to a total of 4
purchasers, including CMG@Ventures II, LLC (formerly CMG@Ventures, L.P.),
an entity with which Mr. Callaghan, a director of Chemdex, is affiliated, a
partnership affiliated with Mr. Swanson, a director of Chemdex, and two
other private investors, and in December 1997 and March 1998, Chemdex
issued and sold 3,989,700 shares of its Series A Preferred Stock at a price
of $.347 per share to The Bay City Capital Fund I, L.P., Mr. Burke, a
director of Chemdex, CMG@Ventures, and five other private investors.
II-1
<PAGE>
3. In May 1998, Chemdex issued and sold 17,299,998 shares of its Series
B Preferred Stock at a price of $0.75 per share to entities affiliated with
Kleiner Perkins Caufield & Byers, an entity with which Mr. Byers is
affiliated, Warburg, Pincus Ventures L.P., an entity with which Mr. Lewis
is affiliated, CMG@Ventures II, LLC, an entity with which Mr. Callaghan, a
director of Chemdex, is affiliated, The Bay City Capital Fund I, L.P., an
entity with which Mr. Pritzker is affiliated, Mr. Burke, a partnership
affiliated with Mr. Swanson, and thirteen other private investors.
4. In January 1999, Chemdex issued a warrant to purchase 210,000 shares
of Series B Preferred Stock at an exercise price of $0.75 per share to
Comdisco, Inc. in connection with a Master Lease Agreement dated as of
January 20, 1999.
5. In March 1999 and April 1999, Chemdex issued and sold 10,600,000
shares of its Series C Preferred Stock at a price of $2.858 per share to
Mr. Burke, The Bay City Capital Fund I, L.P., CMG@Ventures II, LLC, Galen
Employee Fund III, L.P., Galen Partners III, L.P., Galen Partners
International III, L.P., Genentech, Inc., Kleiner Perkins Caufield & Byers
VIII, L.P., KPCB Life Sciences Zaibatsu Fund II, L.P., KPCB VIII Founders
Fund, L.P., Warburg, Pincus Ventures L.P., Mr. Harris, Mr. Waterhouse and
123 other private investors. In addition, in March 1999, Chemdex issued
warrants to purchase a total of 100,000 shares of common stock at an
exercise price of $2.60 per share to entities affiliated with Galen
Partners.
6. In March 1999, Chemdex entered into a Strategic Relationship
Agreement and a Common Stock Purchase Agreement with VWR Scientific
Products Corporation, pursuant to which Chemdex issued 5,076,810 shares of
Common Stock to VWR.
7. In May 1999, Chemdex entered into a BIO Common Stock Purchase
Agreement with Biotechnology Industry Organization, pursuant to which
Biotechnology Industry Organization purchased 375,000 shares of Common
Stock at a price per share of $0.0001.
8. As of May 12, 1999, Chemdex has granted stock options to purchase a
total 7,167,435 shares of common stock at exercise prices ranging from
$0.05 to $2.50 per share to a total of 123 employees, consultants and
directors pursuant to its 1998 Stock Plan.
The issuances of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) or
Regulation D of the Securities Act as transactions by an issuer not involving
any public offering, with the issuances described in Item 5 being made
pursuant to Rule 506 promulgated under Regulation D of the Securities Act. The
issuances described in Item 9 were deemed exempt from registration under the
Securities Act in reliance upon Rule 701 promulgated under the Securities Act.
The recipients of securities in each transaction listed above represented
their intentions to acquire the securities for investment only and not with a
view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the share certificates and warrants issued
in such transactions. All recipients had adequate access, through their
relationships with Chemdex, to information about Chemdex.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1* Amended and Restated Certificate of Incorporation of Chemdex.
3.2** Amended and Restated Certificate of Incorporation of Chemdex
(proposed).
3.3** Amended and Restated Bylaws of Chemdex.
3.4** Amended and Restated Bylaws of Chemdex (proposed).
4.1* Specimen Stock Certificate.
4.2** Third Amended and Restated Investors' Rights Agreement dated March
24, 1999.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Number Description
------- -----------
<C> <S>
4.3** Amendment dated May 12, 1999 to Third Amended and Restated
Investors' Rights Agreement.
5.1** Opinion of Venture Law Group, A Professional Corporation.
10.1** Form of Indemnification Agreement between Chemdex and each of its
officers and directors.
10.2** Form of Change of Control Agreement between Chemdex, each of its
officers and certain employees.
10.3** Change of Control Agreement between Chemdex and Robert A. Swanson.
10.4** Change of Control Agreement between Chemdex and Charles R. Burke.
10.5** 1998 Stock Plan, as amended, and form of option agreement.
10.6** 1999 Employee Stock Purchase Plan and form of subscription
agreement.
10.7** 1999 Directors' Stock Plan.
10.8** Standard Office Lease dated June 11, 1998 between Chemdex and
Fabian Partners II, a California General Partnership, as amended.
10.9** Master Lease Agreement dated January 20, 1999, as amended, between
Chemdex and Comdisco, Inc.
10.10** Starter Kit Loan and Security Agreement dated February 18, 1998
between Chemdex and Imperial Bank.
10.11** Warrant Agreement to Purchase Shares of the Series B Preferred
Stock of Chemdex dated January 20, 1999 between Chemdex and
Comdisco, Inc.
10.12** Common Stock Purchase Warrant to Purchase Shares of Common Stock of
Chemdex dated March 24, 1999 between Chemdex and Galen Partners
III, L.P.
10.13** Common Stock Purchase Warrant to Purchase Shares of Common Stock of
Chemdex dated March 24, 1999 between Chemdex and Galen Partners
International III, L.P.
10.14** Common Stock Purchase Warrant to Purchase Shares of Common Stock of
Chemdex dated March 24, 1999 between Chemdex and Galen Employee
Fund III, L.P.
10.15+** Electronic Commerce Agreement dated January 5, 1998 between Chemdex
and Genentech, Inc.
10.16+** Standstill Agreement dated April 23, 1999 between Chemdex and VWR
Scientific Products Corporation.
10.17+ Strategic Relationship Agreement dated April 30, 1999 between
Chemdex and VWR Scientific Products Corporation.
10.18+** Joint Marketing Agreement dated May 11, 1999 between Chemdex and
Biotechnology Industry Organization.
16.1* Letter re change in certifying accountant.
23.1 Independent Auditors' Consent.
23.2** Consent of Counsel (included in Exhibit 5.1).
24.1** Power of Attorney.
27.1** Financial Data Schedule.
</TABLE>
- --------
*To be filed by amendment.
**Previously filed.
+Confidential treatment requested as to portions of this Exhibit.
II-3
<PAGE>
(b) Financial Statement Schedules
II - Valuation and Qualifying Accountants
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
financial statements or notes thereto.
Item 17. Undertakings
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer, or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amenndment to registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Palo
Alto, State of California on June 7, 1999.
CHEMDEX CORPORATION
/s/ David P. Perry
By: __________________________________
David P. Perry
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ David P. Perry President, Chief Executive June 7, 1999
____________________________________ Officer and Director
David P. Perry (Principal Executive
Officer)
* Chief Financial Officer and June 7, 1999
____________________________________ Assistant Secretary
James Stewart (Principal Financial and
Accounting Officer)
* Director June 7, 1999
____________________________________
Charles R. Burke
* Director June 7, 1999
____________________________________
Brook H. Byers
* Director June 7, 1999
____________________________________
Jonathan D. Callaghan
* Director June 7, 1999
____________________________________
Jerrold B. Harris
* Director June 7, 1999
____________________________________
S. Joshua Lewis
* Director June 7, 1999
____________________________________
John A. Pritzker
* Director June 7, 1999
____________________________________
Robert A. Swanson
* Director June 7, 1999
____________________________________
L. John Wilkerson
*By: /s/ David P. Perry
-------------------------- June 7, 1999
David P. Perry
Attorney-in-fact
</TABLE>
II-5
<PAGE>
CHEMDEX CORPORATION
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTANTS
December 31, 1997 and December 31, 1998
<TABLE>
<CAPTION>
Amounts
Charged to
Balance Revenue, Write-offs Balance
Beginning Costs or and at End
Description of Year Expenses Recoveries of Year
----------- --------- ---------- ---------- -------
<S> <C> <C> <C> <C>
1997
Allowance for Doubtful Accounts....... $-- $ -- $-- $ --
1998
Allowance for Doubtful Accounts....... $-- $2,000 $-- $2,000
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Description
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1* Amended and Restated Certificate of Incorporation of Chemdex.
3.2** Amended and Restated Certificate of Incorporation of Chemdex
(proposed).
3.3** Amended and Restated Bylaws of Chemdex.
3.4** Amended and Restated Bylaws of Chemdex (proposed).
4.1* Specimen Stock Certificate.
4.2** Third Amended and Restated Investors' Rights Agreement dated March
24, 1999.
4.3** Amendment dated May 12, 1999 to Third Amended and Restated Investors'
Rights Agreement.
5.1** Opinion of Venture Law Group, A Professional Corporation.
10.1** Form of Indemnification Agreement between Chemdex and each of its
officers and directors.
10.2** Form of Change of Control Agreement between Chemdex, each of its
officers and certain employees.
10.3** Change of Control Agreement between Chemdex and Robert A. Swanson.
10.4** Change of Control Agreement between Chemdex and Charles R. Burke.
10.5** 1998 Stock Plan, as amended, and form of option agreement.
10.6** 1999 Employee Stock Purchase Plan and form of subscription agreement.
10.7** 1999 Directors' Stock Plan.
10.8** Standard Office Lease dated June 11, 1998 between Chemdex and Fabian
Partners II, a California General Partnership, as amended.
10.9** Master Lease Agreement dated January 20, 1999, as amended, between
Chemdex and Comdisco, Inc.
10.10** Starter Kit Loan and Security Agreement dated February 18, 1998
between Chemdex and Imperial Bank.
10.11** Warrant Agreement to Purchase Shares of the Series B Preferred Stock
of Chemdex dated January 20, 1999 between Chemdex and Comdisco, Inc.
10.12** Common Stock Purchase Warrant to Purchase Shares of Common Stock of
Chemdex dated March 24, 1999 between Chemdex and Galen Partners III,
L.P.
10.13** Common Stock Purchase Warrant to Purchase Shares of Common Stock of
Chemdex dated March 24, 1999 between Chemdex and Galen Partners
International III, L.P.
10.14** Common Stock Purchase Warrant to Purchase Shares of Common Stock of
Chemdex dated March 24, 1999 between Chemdex and Galen Employee Fund
III, L.P.
10.15+** Electronic Commerce Agreement dated January 5, 1998 between Chemdex
and Genentech, Inc.
10.16+** Standstill Agreement dated April 23, 1999 between Chemdex and VWR
Scientific Products Corporation.
10.17+ Strategic Relationship Agreement dated April 30, 1999 between Chemdex
and VWR Scientific Products Corporation.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
10.18+** Joint Marketing Agreement dated May 11, 1999 between Chemdex and
Biotechnology Industry Organization.
16.1* Letter re change in certifying accountant.
23.1 Independent Auditors' Consent.
23.2** Consent of Counsel (included in Exhibit 5.1).
24.1** Power of Attorney.
27.1** Financial Data Schedule.
</TABLE>
- --------
*To be filed by amendment.
** Previously filed.
+Confidential treatment requested as to portions of this Exhibit.
<PAGE>
EXHIBIT 10.17
EXECUTION COPY
STRATEGIC RELATIONSHIP AGREEMENT
THIS STRATEGIC RELATIONSHIP AGREEMENT (this "Agreement"), dated as of April
30, 1999, is by and between VWR Scientific Products Corporation, a Pennsylvania
corporation ("VWR"), and Chemdex Corporation, a Delaware corporation
("Chemdex").
BACKGROUND
----------
VWR is a distributor of laboratory supplies and equipment. Any of such
supplies and equipment which are purchased from suppliers that are part of VWR's
core supplier portfolio or which are available from time to time on VWR's web
site or through its electronic catalog are hereinafter referred to as VWR's
"Core Products." From time to time, VWR's customers order Core Products from VWR
along with other products that are not among VWR's Core Products ("Third Party
Products"). Currently, VWR offers to purchase Third Party Products for certain
customers and distribute such Third Party Products to VWR's customers (each such
customer, a "Third Party Customer").
Chemdex is a provider of Internet purchasing services. It provides an
electronic marketplace which brings together buyers and sellers of laboratory
chemicals and other products.
Pursuant to a Common Stock Purchase Agreement, dated March 5, 1999, as
amended in certain respects, and for convenience restated in its entirety, by
the Amended Common Stock Purchase Agreement dated April 23,1999 (as so amended,
the "Purchase Agreement"), VWR purchased shares of capital stock in Chemdex in
consideration for certain rights relating to a list of the Third Party
Customers, as more fully described in the Purchase Agreement. In addition, VWR
and Chemdex intend to work jointly to create a comprehensive electronic
purchasing medium that will offer a single electronic point of contact for all
VWR customers in their ordering and purchasing of Core Products and Third Party
Products (the "System"). The System is not intended to be or become the sole
means (electronic or otherwise) by which a customer will have access to
purchasing from VWR or Chemdex.
VWR and Chemdex desire to set forth herein the terms and conditions of
their joint effort.
1. DESCRIPTION OF THE SYSTEM.
-------------------------
1.1 General. The System developed and offered by Chemdex and VWR will
-------
include a front-end user interface produced by Chemdex which has traditional
purchasing application functionality. VWR and Chemdex shall agree on the form
and content of the System's front end-user interface. The front end-user
interface of the System shall be conspicuously and prominently branded
"VWR/Chemdex." The System will provide access to all products in the
<PAGE>
VWR catalog, all VWR franchise suppliers, and all VWR services (including order
processing and physical distribution), as well as access to the Chemdex
electronic marketplace for the purchase of Third Party Products. The System is
intended to provide a seamless order system - the customer is to be able to
place a single order for both Core Products and Third Party Products without the
burden of having to contact multiple suppliers to fulfill its complete purchase
order. Orders for Core Products shall be filled by VWR and orders for Third
Party Products shall be filled by Chemdex. The parties intend that VWR's
Requisition Review Functionality be a part of the System, with implementation of
that functionality to be done on a customer-by-customer basis.
The System will also be able to accommodate a spot buying order fulfillment
functionality with respect to spot buying services to be provided by VWR. Such
spot buying services are more fully described in Section 4 hereof.
For purposes of this Section 1.1, VWR's "Requisition Review Functionality"
means the following process: From time to time, VWR will receive a purchase
requisition that includes a specific request for a product from a supplier other
than VWR (a "Non-VWR Product"). Pursuant to a program that has been pre-approved
by VWR's customers, VWR personnel review the purchase requisition and determine
whether the customer order for a Non-VWR Product can be substituted with a VWR
Core Product; if VWR personnel make such a determination, they will fill the
purchase requisition with a VWR Core Product.
1.2 Ownership. VWR understands and acknowledges that the System is owned
---------
by, and title shall remain with, Chemdex, and that all improvements,
modifications and enhancements (including, without limitation, the software
developed by Chemdex pertaining to VWR's Requisition Review Functionality) to
the System shall be and remain the property of Chemdex. VWR hereby assigns, and
upon creation of the System and each improvement, modification, and enhancement
thereto, automatically assigns to Chemdex, its successors and assigns, ownership
of all intellectual property rights in the System and each improvement,
modification, and enhancement thereto. From time to time upon Chemdex's request,
VWR and/or its personnel shall confirm such assignment by execution and delivery
of such assignments, confirmations, or other written instruments that Chemdex
may reasonably request. Notwithstanding the foregoing, Chemdex understands and
acknowledges that neither such assignment of intellectual property rights nor
Chemdex's ownership of the System includes, or implies that Chemdex owns or has
any rights in, any data from or about VWR, its customers or suppliers,
including, without limitation, customer names, purchasing histories and
purchasing practices (collectively, "VWR Data"); all rights to VWR data are and
shall remain the exclusive property of VWR. Chemdex, however, has the right to
use, sell or otherwise distribute aggregated statistical information regarding
use of the System, including purchasing histories and practices; provided,
however that Chemdex shall not disclose the name or identity of a customer or of
VWR, or any information or data from which such name or identity could
reasonably be discerned. The preceding sentence is an exception to the
provisions of Article 6 of this Agreement.
<PAGE>
2. JOINT MARKETING EFFORTS
-----------------------
2.1 Joint Sales Calls - Customers.
-----------------------------
(a) VWR and Chemdex shall cooperate in encouraging existing VWR
customers to adopt the System as the medium by which they order and purchase
products. These efforts shall include, but not be limited to, creating
incentives for salespersons and other employees to facilitate customers'
utilization of the System, such as Chemdex's sharing of fees with VWR specified
in Section 3.2 below.
(b) VWR and Chemdex shall cooperate to market the System to new VWR
customers, especially those whose projected product purchases will be between
[.........] and [.........] annually. These efforts shall include, but not be
limited to, creating incentives for salespersons and other employees to
facilitate customers' utilization of the System, such as Chemdex's sharing of
fees with VWR specified in Section 3.2 below. Notwithstanding such fee sharing
arrangement, VWR shall retain sole responsibility for determining the specific
details of sales incentive plans established for VWR personnel.
(c) In furtherance of the foregoing, VWR and Chemdex shall jointly
develop a semi-annual sales plan with a corresponding operating budget. The
sales plan shall be developed and managed by an electronic commerce group ("Ecom
Group") consisting of four members, two of which shall be appointed by VWR and
two of which shall be appointed by Chemdex. The two members of the Ecom Group
appointed by VWR shall be located at VWR's headquarters in Pennsylvania ("VWR
HQ") and the two members of the Ecom Group appointed by Chemdex shall be located
at Chemdex's headquarters in California ("Chemdex HQ"). The Ecom Group shall
report directly to Mark Robillard, the VWR Vice-President of Electronic
Commerce.
(d) Each semi-annual sales plan shall be approved by the senior
management of each of VWR and Chemdex prior to implementation. At least semi-
annually senior management of VWR and Chemdex shall also meet to review the
implementation of this Agreement and to agree upon amendments to this Agreement
that may be necessary or appropriate. Each such review shall include, but not be
limited to, the adequacy of the reimbursements to VWR for its direct costs
incurred in connection with the spot buying program discussed in Article 3.
(e) Each of VWR and Chemdex shall fund 50% of the costs associated
with special marketing efforts provided for in the duly-approved semi-annual
sales plans.
2.2 Joint Sales Calls - Suppliers
-----------------------------
(a) VWR and Chemdex shall cooperate to jointly solicit suppliers in
the laboratory supplies and equipment industry to distribute, market and sell
products through the System. It is anticipated that those suppliers that
currently supply products through Chemdex will continue to do so and that those
suppliers that currently supply products through VWR will continue to do so.
[....] CONFIDENTIAL TREATMENT REQUESTED
OMITTED PORTIONS FILED SEPARATELY WITH THE SECURITY AND EXCHANGE COMMISSION
<PAGE>
(b) In the event that defined segments of a Supplier's product line
("Product Segments") are at the date hereof distributed by both VWR and Chemdex,
VWR and Chemdex shall ask such Supplier to choose either VWR or Chemdex to
distribute such Product Segments on a customer-by-customer basis. Whichever
party is not so chosen by the Supplier shall discontinue its distribution of
such Product Segments as promptly as possible; provided, however, to the extent
-------- -------
such discontinuation of distribution constitutes a breach under the contract
with Supplier, VWR and Chemdex shall cooperate to negotiate a mutually
satisfactory arrangement with Supplier.
(c) With respect to suppliers that are not currently doing business
with either VWR or Chemdex, but who are jointly solicited by VWR and Chemdex to
utilize the System, VWR and Chemdex shall ask such suppliers at the onset of
their use of the System to choose either VWR or Chemdex to distribute their
Product Segments. Whichever party is not so chosen by the suppliers shall not
distribute said Product Segments through the System.
(d) VWR and Chemdex shall review on a semi-annual basis any potential
change by a Supplier from VWR to Chemdex or from Chemdex to VWR, and shall
mutually determine the best course of action with respect to such Supplier.
(e) VWR and Chemdex shall cooperate to jointly solicit suppliers in
an effort to expand the product lines currently offered. Each of VWR and Chemdex
shall appoint a representative to undertake this solicitation effort, with the
VWR representative being located at VWR HQ and the Chemdex representative being
located at the Chemdex HQ. These representatives shall report directly to David
Weber, the Chemdex Vice-President of Supplier Relations.
2.3 With respect to customers for which VWR is the primary supplier,
Chemdex shall coordinate with VWR to ensure that only representatives of VWR or
the Ecom Group referred to in Section 2.1(c) will communicate with such
customers for all sales and marketing purposes. Chemdex may communicate directly
with such customers only concerning operational aspects of the System. VWR shall
identify for Chemdex VWR's status as primary supplier for any given customer at
the time such customer initially logs on to the System. VWR shall review such
designations annually and modify as necessary at that time.
3. OPERATIONAL FLOW.
-----------------
3.1 Transition. VWR and Chemdex shall cooperate to transition VWR
----------
customers to become customers of Chemdex pursuant to a mutually agreed upon
plan. From the date hereof until such time as VWR customers are transitioned in
accordance with such plan, VWR shall provide spot buying, order, billing and
collection services as discussed below; provided, however, that the spot buying
services shall be provided until such time as determined pursuant to Section 4
below.
<PAGE>
3.2 Spot Buying Services. VWR shall provide to Chemdex the spot buying
--------------------
services more fully described in Section 4 below.
3.3 Orders (a) Subject to the further provisions of this Section 3, all
------
customer orders for Third Party Products initially may be processed by, and the
responsibility of, VWR. VWR and Chemdex shall cooperate to develop a plan by
which Chemdex ultimately will process, and be responsible for, all such customer
orders.
(b) Notwithstanding VWR's responsibility initially to process customer
orders pursuant to subclause (a):
(i) all costs of filling customer orders for Third Party Products
(including, without limitation, costs of goods sold and freight and handling)
shall be borne by Chemdex; provided, however, that (A) with respect to those
customers who have in the past in the ordinary course of business accepted and
paid for freight charges being passed through to them, such freight charges
shall continue to be passed through by Chemdex, and (B) for all Third Party
Customers, the [.....] fee set forth in Section 3.7 paid to VWR shall cover all
costs of delivering the product, including freight and handling.
(ii) all costs of filling customer orders for Core Products
(including, without limitation, costs of goods sold and delivery) shall be borne
by VWR; and
(iii) responsibility for customer orders, and related customer
service, shall pass to Chemdex at the time the customer places an order, and VWR
shall bear no risk of loss with respect to any such orders. It is acknowledged
by VWR and Chemdex that VWR will assist where practicable in providing
continuity in customer service, and will assist Chemdex where possible with
order follow-up.
(c) In connection with all Third Party Products ordered as contemplated in
Section 3.3(a), products shall be ordered by VWR on Chemdex's behalf subject to
Section 3.3(b)(iii). Products shall be ordered using Chemdex purchase orders, as
soon as practicable. In order to facilitate transition with suppliers where VWR
has a long-term relationship, VWR may be required to make joint payments for
Chemdex inventory purchases and VWR purchases. In such cases, VWR shall be
reimbursed monthly by Chemdex for such payments by check or wire transfer of
immediately available funds (pursuant to wire instructions previously provided
by VWR for that purpose ("VWR Wire Instructions")), with such payment being made
no later than the fifteenth day of the month following the purchases.
3.4 Billing. (a) Customers shall be billed separately for Core Products
-------
and Third Party Products (e.g., two separate invoices, with the invoice for
----
Core Products coming from VWR and the invoice for Third Party Products coming
from Chemdex).
(b) VWR and Chemdex acknowledge that in certain instances, VWR
customers who purchase Core Products may request that billing for Core Products
from VWR and Third
[....] CONFIDENTIAL TREATMENT REQUESTED
OMITTED PORTIONS FILED SEPARATELY WITH THE SECURITY AND EXCHANGE COMMISSION
<PAGE>
Party Products from Chemdex be combined into a single billing process in
connection with procurement services provided by VWR. In such instances, where
customers elect to have VWR act as their agent for purposes of aggregating
billing, such agreement shall be documented between VWR and such customers. In
such instances, VWR may also act as those customers' agent, if so elected by the
customers, for purposes of receiving cash payments related to amounts invoiced.
VWR agrees to remit the portion of collected cash related to Chemdex billings as
quickly as is practicable, but in no event later than two (2) days following
application of cash receipts by VWR to outstanding invoices.
(c) Chemdex and VWR acknowledge that the foregoing provisions of this
Section 3 shall not in any way minimize the responsibility of Chemdex to service
such customers, collect related accounts receivable or bear the risk of product
returns and allowances. The services being provided by VWR pursuant to this
Section 3 are merely intended to facilitate VWR current practices of providing
high quality customer service, and coordinated procurement services.
3.5 Sales Tax Liability. (a) VWR shall, at a time and in a manner
-------------------
mutually agreed upon by the parties, provide Chemdex with financial data
necessary for Chemdex to calculate its sales tax liability and prepare its sales
tax returns in connection with Chemdex revenues.
(b) Chemdex shall be solely responsible for (i) timely filing all sales
tax returns, (ii) all expenses incurred as a result of any audits conducted by
governmental authorities, and (iii) all assessments, penalties and fines levied
as a result of any such audit.
(c) All costs of preparing and filing sales tax returns shall be borne
solely by Chemdex.
3.6 Transaction Data. VWR shall provide Chemdex, on a monthly basis, with
----------------
data regarding Chemdex customer transactions in respect of which VWR charges the
service fees set forth in Section 3.7.
3.7 Fees for Services Performed by VWR. (a) Chemdex shall pay VWR fees
----------------------------------
for the services performed, including spot buying services, by VWR on behalf of
Chemdex (except where expressly stated otherwise in this Agreement) equal to
[.....] of total gross revenues associated with customer purchases made in the
[.......] period from [...........] through [............]. After such [.......]
period expires, the percentage amount of such fees may be adjusted pursuant to
mutual agreement of VWR and Chemdex. VWR shall submit a detailed invoice to
Chemdex for payment of such fees on a monthly basis. Chemdex shall pay the
service fees to VWR by check or wire transfer of immediately available funds (in
accordance with VWR Wire Instructions), which funds shall be received by VWR
with respect to any month on or before the fifteenth day of the following month.
3.8 Other Fees. (a) In consideration of VWR's customers being offered
access to the System, VWR shall pay to Chemdex, for each customer that places a
product order for Core Products using the System, a transaction fee equal to
[....] of the total sales revenue resulting from such product order; provided,
however, that VWR shall pay such transaction fees only in
[....] CONFIDENTIAL TREATMENT REQUESTED
OMITTED PORTIONS FILED SEPARATELY WITH THE SECURITY AND EXCHANGE COMMISSION
<PAGE>
respect of customer orders placed by those VWR customers that were not among
VWR's Top Forty Customers. For purposes of this Section 3.8,"Top Forty
Customers" means the forty customers who accounted for the most annual sales in
the most-recently-completed fiscal year of VWR. Chemdex shall submit a detailed
invoice to VWR for payment of such transaction fees on a monthly basis. VWR
shall pay the transaction fees to Chemdex by check or wire transfer of funds (in
accordance with wire instructions previously provided by Chemdex for that
purpose) within [..........] days after receipt of Chemdex's invoice. VWR shall
provide a list of the Top Forty Customers to Chemdex as soon as possible, and in
no event later than [.........].
(b) In consideration of VWR's sales and marketing efforts to solicit its
new customers to utilize the System, Chemdex shall pay to VWR [............].
Financial incentives from these fees will be provided at VWR's discretion to VWR
sales and marketing personnel who have principal account management
responsibility. Within thirty (30) days after receiving such fees, Chemdex shall
pay the hook-up fees to VWR by check or wire transfer of funds (in accordance
with wire instructions previously provided by VWR for that purpose) and shall
provide VWR with a written calculation of the hook-up fees.
4. SPOT BUYING PROGRAM.
-------------------
4.1 Through its existing third-party purchasing group, VWR shall furnish
spot buying services on behalf of Chemdex, and act as the agent of Chemdex, with
respect to those customers of the Third Party Customers being acquired pursuant
to the Purchase Agreement and for new customers of VWR that require such
services (collectively, "Spot Buying Customers"). Spot buying services consist
of processing customer orders for Third Party Products that are not available
through Chemdex's suppliers ("Non-Chemdex Third Party Products"), locating a
manufacturer, supplier or distributor of the Non-Chemdex Third Party Products
being ordered and procuring such products for the customers ("Spot Buying
Program"). Through its existing third party purchasing group, VWR shall furnish
spot buying services on behalf of Chemdex, and act as the agent of Chemdex, with
respect to the Spot Buying Customers. As the base of suppliers who offer
products for sale through the System increases, if at all, VWR and Chemdex shall
transition Spot Buying Customers to utilize the System as promptly as
practicable.
4.2 (a) VWR shall furnish spot buying services for a minimum of [.......]
from the date hereof, which period may be extended by mutual agreement of VWR
and Chemdex. Such extension of time will depend on the ability to transition
Spot Buying Customers to the System as mentioned above. VWR may terminate its
spot buying services at any time following the [......] period provided that it
provides at least [.........] prior written notice of termination to Chemdex.
(b) Chemdex shall pay VWR fees for the spot buying services that are
included in the fee rate set forth in Section 3.7.
4.2 In the event that Chemdex's order processing under the System causes
the quality of customer service to transitioned Spot Buying Customers to
materially diminish when compared to the services currently provided to them
under VWR's spot buying program, VWR
[....] CONFIDENTIAL TREATMENT REQUESTED
OMITTED PORTIONS FILED SEPARATELY WITH THE SECURITY AND EXCHANGE COMMISSION
<PAGE>
shall have the right to immediately add customer service resources or other
resources to the System that it deems necessary or advisable to ensure that the
quality of customer service is restored to the quality level it was under VWR's
current spot buying program.
4.3 In the event that the quality of spot buying services provided by VWR
under this Article 4 materially diminishes when compared to the spot buying
services provided by VWR to them prior to the date of this Agreement, Chemdex
shall have the right to immediately add customer service resources or other
resources that it deems necessary or advisable to ensure that the quality of
customer service is restored to the quality level it was under the spot buying
program maintained by VWR prior to the date of this Agreement.
4.4 The Chief Executive Officer (or equivalent thereof) of each of VWR and
Chemdex shall use good faith efforts to resolve any dispute concerning whether
levels of service actually diminished under Sections 4.2 or 4.3 and/or which
party should bear the costs of adding resources to enhance customer service. In
the event that the Chief Executive Officers cannot reach agreement on such
issues, the determination shall then be made by an independent three-person
committee comprised of one outside director of VWR, one outside director of
Chemdex and one independent industry expert mutually selected by the VWR outside
director and the Chemdex outside director. Such committee shall resolve the
dispute within ninety (90) days after its submission to it. The procedure set
forth in this Section 4.4 need not precede or delay the exercise by VWR or
Chemdex of its right to enhance the spot buying program by immediately adding
customer service or other resources under Section 4.2 or Section 4.3,
respectively.
5. EXCLUSIVITY
-----------
5.1 VWR shall be Chemdex's Preferred Laboratory Supply Distributor. VWR's
"Preferred Laboratory Supply Distributor" status shall mean that: (1) any
electronic functionality enhancements or upgrades to the System developed by
Chemdex or jointly by Chemdex and VWR shall be installed in and operated on the
System for a period of at least six (6) months prior to their installation in
any other electronic procurement system that Chemdex operates or will operate
with or on behalf of any other business concern; and (2) VWR shall be involved
in the development of, and have priority access to, all Chemdex supplier-related
initiatives relating to the System.
5.2 Chemdex shall not develop or offer a comprehensive electronic
purchasing medium that offers a Spot Buying Program to any person or entity
other than VWR, without VWR's prior written consent.
5.3 Chemdex may enlist any Supplier to provide products in the electronic
marketplace on the System or any other Chemdex product or service, subject to
Sections 5.1, 5.2 and 2.2(a) through (d).
<PAGE>
5.4 Subject to Section 5.5, VWR may enter into a contract or business
relationship, or otherwise deal, with any provider of an Internet electronic
purchasing program, without the prior consent of or notice to Chemdex.
5.5 VWR shall not (a) participate in sales and marketing activities
promoting any other third party procurement application or with any other third
party procurement software service vendor or (b) provide an integrated spot
buying program through any competitor of Chemdex.
5.6 Notwithstanding anything to the contrary contained herein, Chemdex
acknowledges that VWR shall own and retain exclusive title to the Requisition
Review Functionality process and that Chemdex's rights with respect to such
process, as referred to in Section 1.2 are limited to ownership of the software
that it develops to computerize the process and do not extend to ownership of
the process itself. Accordingly, Chemdex shall not develop or offer a
comprehensive electronic purchasing medium that offers a Requisition Review
Functionality or similar process to any person or entity other than VWR, without
VWR's prior written consent.
6. CONFIDENTIALITY AND PROPRIETARY INFORMATION.
-------------------------------------------
6.1 Each of VWR and Chemdex recognizes that it will from time to time
obtain certain Information (as defined below) concerning the other that
constitutes confidential and trade secret information which would not otherwise
be available to it. Consequently, each of VWR and Chemdex agrees to receive and
maintain such Information in strictest confidence, and to use, disclose and
distribute such information only for the purpose intended under this Agreement,
subject to the confidentiality provisions hereof. For purpose of this Section
6.1, specific items of Information shall not be considered to fall within any of
the exclusions set forth in Section 6.4 merely because such items are embraced
by more general information which would fall within any of such exclusions.
6.2 Each of VWR and Chemdex agrees that access to Information of the other
party shall be at all times restricted to those of its officers, employees,
agents or representatives who have a need to know it or use it in the
performance of their obligations pursuant to this Agreement. Each of VWR and
Chemdex shall use its best efforts to ensure that its officers, employees,
agents or representatives who are to receive such Information or have access
thereto shall be properly advised of and be bound by its confidentiality
obligations hereunder. In any case, each of VWR and Chemdex shall be responsible
for the breach of these obligations by its officers, employees, agents or
representatives.
6.3 Neither VWR nor Chemdex shall disclose any Information of the other to
a third party without the prior written consent of the other; provided, that
--------
such disclosure shall be authorized hereunder to the extent necessary for the
performance of the parties' respective obligations pursuant to this Agreement.
6.4 The obligations of VWR and Chemdex pursuant to this Article 6 shall
not apply to any part of the Information which the receiving party can show by
reasonable proof (i) was at any time of disclosure to the receiving party
already in the public domain, (ii) was generally
<PAGE>
known to the public through no fault of the receiving party, (iii) was known to
the receiving party prior to its receipt hereunder, (iv) was received by the
receiving party from a third party after such disclosure, unless the receiving
party knew that such third party acquired such information directly or
indirectly from the other party and was not free to disclose it without
violating a confidentiality obligation, (v) was independently developed by the
receiving party without the benefit of any disclosure hereunder, or (vi) was
required to be divulged by the receiving party to a third party under an
obligation as a result of the operation of law, including pursuant to the rules
and regulations promulgated by the Securities and Exchange Commission ("SEC")
with respect to exhibits required to be filed in connection with filings with
the SEC; provided, that the receiving party first gives the other party written
--------
notice and a reasonable opportunity to oppose disclosure or otherwise protect
such Information.
6.5 Upon any termination of this Agreement, each of VWR and Chemdex shall
immediately either return all Information (and all copies thereof) to the other
party, or certify in writing that all tangible Information (and copies thereof)
have been destroyed.
6.6 As used herein, "Information" means information in whatever form
furnished to one party by or on behalf of the other party, which information
relates in any way to the furnishing party's business including, without
limitation (i) technical information including ideas, inventions, research and
development work, production methods and techniques, computer programs, know-
how, designs, design specifications, test equipment and procedures, equipment,
processes and unpublished data, (ii) business information including personnel,
staffing, costs, pricing, profits, marketing data, customer data and customer
lists, supplier data and supplier lists, and (iii) other information proprietary
to either party held in confidence.
6.7 The covenants set forth in this Article 6 shall survive the
termination of this Agreement and shall be specifically enforceable.
7. INDEMNIFICATION.
---------------
7.1 VWR shall indemnify and hold Chemdex and its directors, officers,
employees, agents and representatives and their respective affiliates harmless
against and in respect of any and all actions, suits, proceedings, hearings,
investigations, charges, complaints, claims, demands, injunctions, judgments,
orders, decrees, rulings, damages, dues, penalties, fines, costs, amounts paid
in settlement, liabilities, obligations, taxes, liens, losses, expenses, and
fees, including court costs and reasonable attorneys' fees and expenses
(collectively, "Adverse Consequences"), which Chemdex and such other parties may
suffer, incur or become subject to arising out of, based upon or in connection
with: (i) any grossly negligent act or omission by VWR or its directors,
officers, employees, agents or representatives or their respective affiliates,
in connection with VWR's fulfillment of its obligations under this Agreement, or
(ii) any failure by VWR to comply with any of the covenants, agreements or terms
of this Agreement or with applicable laws.
7.2 Chemdex shall indemnify and hold VWR and its directors, officers,
employees, agents and representatives and their respective affiliates harmless
against and in respect of any
<PAGE>
and all Adverse Consequences which VWR or such other parties may suffer, incur
or become subject to arising out of, based upon or in connection with: (i) any
grossly negligent act or omission by Chemdex or its directors, officers,
employees, agents or representatives or their respective affiliates in
connection with Chemdex's fulfillment of its obligations under this Agreement;
(ii) any failure by Chemdex to comply with any of the covenants, agreements and
terms of this Agreement or with applicable laws; or (iii) any claims by third
parties that the System violates, infringes or otherwise conflicts with any
copyright, patent or other intellectual property rights.
7.3 If any third party shall notify a party (the "Indemnified Party") with
respect to any matter (a "Third Party Claim") which may give rise to a claim for
indemnification against the other party (the "Indemnifying Party") under this
Article 7, then the Indemnified Party shall promptly notify the Indemnifying
Party thereof in writing; provided, however, that no delay on the part of the
-------- -------
Indemnified Party in notifying the Indemnifying Party shall relieve the
Indemnifying Party from any obligation hereunder unless (and then solely to the
extent) the Indemnifying Party thereby is prejudiced. The Indemnifying Party
will have the right to defend the Indemnified Party against the Third Party
Claim with counsel of its choice reasonably satisfactory to the Indemnified
Party so long as (i) the Indemnifying Party notifies the Indemnified Party in
writing within 15 days after the Indemnified Party has given notice of the Third
Party Claim that the Indemnifying Party will indemnify the Indemnified Party
from and against the entirety of any Adverse Consequences the Indemnified Party
may suffer resulting from, arising out of, relating to, in the nature of, or
caused by the Third Party Claim, (ii) the Indemnifying Party provides the
Indemnified Party with evidence reasonably acceptable to the Indemnified Party
that the Indemnifying Party will have the financial resources to defend against
the Third Party Claim and fulfill its indemnification obligations hereunder,
(iii) the Third Party Claim involves only money damages and does not seek an
injunction or other equitable relief, (iv) settlement of, or an adverse judgment
with respect to, the Third Party Claim is not, in the good faith judgment of the
Indemnified Party, likely to establish a precedential custom or practice
materially adverse to the continuing business interests of the Indemnified
Party, and (v) the Indemnifying Party conducts the defense of the Third Party
Claim actively and diligently.
7.4 So long as the Indemnifying Party is conducting the defense of the
Third Party Claim in accordance with Section 7.3 above, (i) the Indemnified
Party may retain separate co-counsel at its sole cost and expense and
participate in the defense of the Third Party Claim, (ii) the Indemnified Party
will not consent to the entry of any judgment or enter into any settlement with
respect to the Third Party Claim without the prior written consent of the
Indemnifying Party (not to be withheld or delayed unreasonably), and (iii) the
Indemnifying Party will not consent to the entry of any judgment or enter into
any settlement with respect to the Third Party Claim without the prior written
consent of the Indemnified Party (not to be withheld or delayed unreasonably).
7.5 In the event any of the conditions in Section 7.3 above is or becomes
unsatisfied in the reasonable judgment of the Indemnified Party, however, (i)
the Indemnified Party may defend against, and consent to the entry of any
judgment or enter into any settlement with respect to, the Third Party Claim in
any manner it reasonably may deem appropriate (and the
<PAGE>
Indemnified Party need not consult with, or obtain any consent from, any
Indemnifying Party in connection therewith), (ii) the Indemnifying Parties will
reimburse the Indemnified Party promptly and periodically for the reasonable
costs of defending against the Third Party Claim (including attorneys' fees and
expenses), and (iii) the Indemnifying Parties will remain responsible for any
Adverse Consequences the Indemnified Party may suffer resulting from, arising
out of, relating to, in the nature of, or caused by the Third Party Claim to the
fullest extent provided in this Article 7.
7.6 Limitation of Liability.
-----------------------
(a) Each of VWR and Chemdex acknowledges that the other is not the
manufacturer of any of the Core Products or Third Party Products and that
accordingly, the only remedy with respect to any product liability action
relating to the Core Products or the Third Party Products shall be against the
manufacturer thereof, and not against VWR or Chemdex.
(b) IN NO EVENT SHALL EITHER PARTY HAVE ANY LIABILITY TO THE OTHER
PARTY FOR ANY EXEMPLARY, PUNITIVE, INCIDENTAL, INDIRECT, SPECIAL OR
CONSEQUENTIAL DAMAGES, INCLUDING BUT NOT LIMITED TO LOST PROFITS AND SIMILAR
CLAIMS, WHETHER BASED ON CONTRACT, TORT, STRICT LIABILITY OR ANY OTHER THEORY OR
FORM OF ACTION, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY THEREOF.
(c) The obligations of the parties under this Section 8.6 arising by
reason of any occurrence taking place while this Agreement is in effect shall
survive any expiration or termination of this Agreement.
8. GENERAL PROVISIONS.
------------------
8.1 The initial term of this Agreement shall be four (4) years from the
date hereof, and shall automatically renew for additional one (1) year periods
thereafter. Either party may terminate this Agreement at the end of the initial
or any renewal term hereof by written notice provided to the other party at
least one year prior to the termination date.
8.2 During the term of this Agreement, Chemdex shall not solicit, or
contact with a view to engage or employ, any person who is an employee of VWR or
any of VWR's affiliates, without the prior written consent of VWR. During the
term of this Agreement, VWR shall not solicit, or contact with a view to engage
or employ, any person who is an employee of Chemdex or any of Chemdex's
affiliates, without the prior written consent of Chemdex. This provision shall
not prohibit either party from conducting general solicitations for employment
through newspaper advertisements, job postings on website(s) and other such
general, non-targeted means of solicitation.
8.3 Each of VWR and Chemdex represents and warrants that it is authorized
to enter into this Agreement and that in so doing it is not in violation of the
terms and conditions of any contract or other agreement to which it may be a
party.
<PAGE>
8.4 Except for the payment of monies when due and owing, for the period
and to the extent that either VWR or Chemdex is prevented from fulfilling, in
whole or in part, its obligations hereunder by reason of any law or governmental
regulation or other governmental act, or flood, war, fire, riots, strikes,
explosion or other natural catastrophe or act of God, or acts of third parties
or other causes beyond such party's reasonable control (a "Force Majeure
Event"), such party shall be temporarily excused from such obligations as are
and to the extent so prevented until the abatement of such Force Majeure Event.
The term of this Agreement will be extended by the period of duration of the
Force Majeure Event. Notice of any such disability and the abatement will be
promptly given to the other party by the party claiming same.
8.5 (a) Other than as expressly set forth in this Agreement, Chemdex shall
have no right to use the marks, trade names or other proprietary rights of VWR
or its affiliates without the prior written approval of VWR. Other than
expressly forth in this Agreement, VWR shall have no right to use the marks,
trade names or other proprietary rights of Chemdex affiliates or its without the
prior written approval of Chemdex.
(b) VWR hereby grants a non-exclusive, non-transferable (except as
set forth in Section 8.7), perpetual, worldwide license to Chemdex to use trade
names, logos and trademarks solely for purposes of effecting the transactions
contemplated by this Agreement. Chemdex hereby grants a non-exclusive, non-
transferable, revocable license to VWR to use Chemdex's name solely for purposes
of effecting the transactions contemplated by this Agreement, including, without
limitation, the creation and use of the System set forth in Article 1, and the
marketing activities described in Article 2.
8.6 This Agreement may not be modified, amended or altered except pursuant
to a written instrument signed by both parties.
8.7 Neither party shall assign any of its rights and obligations under
this Agreement without the prior written consent of the other party; provided
that if the assets or stock of that portion of either party to which this
Agreement pertains hereafter becomes owned or controlled, directly or
indirectly, by a third party, such party may assign its entire right, title and
interest to this Agreement to such third party.
8.8 Except as set forth in Section 8.7, the parties do not intend the
benefits of this Agreement to inure to any third party, and nothing contained
herein shall be construed as creating any right, claim or cause of action in
favor of any such third party against either of the parties hereto.
8.9 This Agreement is made subject to the laws of the Commonwealth of
Pennsylvania, without reference to the choice of law provisions of that
Commonwealth. Nothing contained herein shall prevent or delay either party from
seeking, in any court of competent jurisdiction, specific performance or other
equitable remedies in the event of any breach or intended breach by the other
party of any of its obligations hereunder.
8.10 The parties agree to determine jointly the contents of any public
announcement informing the public about the existence of this Agreement between
the parties and, except as
<PAGE>
may be required by law or the rules of any national securities exchange, neither
party shall issue or cause the issuance of any such public announcement without
the express prior approval of an executive officer of each party.
8.11 Any and all notices permitted or required to be given hereunder will
be deemed duly given: (a) upon actual delivery, if delivery is by hand; (b)
three (3) business days after delivery into the official mail if delivery is by
postage paid registered or certified return receipt request mail; (c) or one
business day after delivery to an overnight carrier if delivery is made by a
reputable overnight carrier guaranteeing next business day delivery. Each such
notice shall be sent to the respective party at the address indicated below or
at any other address as the respective party may designate by notice delivered
pursuant hereto.
<PAGE>
If to VWR:
VWR Scientific Products Corporation
1310 Goshen Parkway
West Chester, PA 19380
Telephone: 610-429-2762
Telecopier: 610-436-1760
Attention: Deborah Corr
with a copy to:
Drinker Biddle & Reath LLP
1000 Westlakes Drive, Suite 300
Berwyn, Pennsylvania 19312
Telephone: 610-993-2211
Telecopier: 610-993-8585
Attention: Thomas E. Wood, Esq.
If to Chemdex:
Chemdex Corporation
3950 Fabian Way
Palo Alto, CA 94303
Telephone: (650) 813-0300 ext. 117
Telecopier: (650) 813-0304
Attention: David Perry, President and CEO
with a copy to:
Venture Law Group
Palo Alto, CA 94025
Telephone: (650) 854-4488
Telecopier: (650) 233-8386
Attention: Jeffrey Y. Suto
8.12 Subject to the terms and conditions herein provided, each of the
parties shall use its respective commercially reasonable efforts to take, or
cause to be taken, such action, to execute and deliver, or cause to be executed
and delivered, such additional documents and instruments and to do, or cause to
be done, all things necessary, proper or advisable under the provisions of this
Agreement and under applicable law to consummate and make effective the
transactions contemplated by this Agreement.
8.13 No term or provision of this Agreement will be deemed waived and no
default or breach will be deemed excused, unless such waiver or consent is in
writing and signed by a representative of the party claimed to have waived or
consented. Consent by a party to, or
<PAGE>
waiver of, a breach or default by the other party, whether express or implied,
will not constitute a consent to, waiver of, or excuse of any different or
subsequent breach or default.
8.14 If any term or provision of this Agreement is finally found to be
illegal or unenforceable by a court or other tribunal of competent jurisdiction,
then, notwithstanding such illegality or unenforceability, this Agreement will
remain in full force and effect unless this Agreement is thereby rendered
impossible to perform.
8.15 The section headings used in this Agreement are for the convenience
and reference of the parties only, and shall not be deemed a part of, or
utilized in interpreting this Agreement.
8.16 The provisions of Sections 1.2, 3.7 (as to unpaid amounts) and 3.8 (as
to unpaid amounts), Article 6, Article 7, Sections 8.4, 8.7, 8.8, 8.9, 8.11,
8.13, 8.14, 8.15 and 8.18 of this Agreement shall continue as valid and
enforceable obligations of the parties notwithstanding any termination,
cancellation, completion or expiration of this Agreement.
8.17 This Agreement may be executed in two or more counterparts, each of
which will be deemed an original, but all of which together will constitute one
and the same instrument.
8.18 This Agreement is a total and complete integration of any and all
undertakings existing between Chemdex and VWR concerning the subject matter
hereof and supersedes any prior written agreements, promises or representations
between them concerning the subject matter hereof.
IN WITNESS WHEREOF, the parties have set forth their respective hands
as of the date first above written, each by its duly authorized representative.
VWR SCIENTIFIC PRODUCTS CORPORATION
By: /s/ Jerrold B. Harris
---------------------
Name: Jerrold B. Harris
Title: President
CHEMDEX CORPORATION
By: /s/ David P. Perry
------------------
Name: David P. Perry
Title: President and CEO
<PAGE>
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Financial Data" and "Experts" and to the use of our report dated May 7, 1999
(except for Note 9, as to which the date is May 11, 1999) in Amendment No. 2 to
the Registration Statement (Form S-1 No. 33-78505) and the related Prospectus
of Chemdex Corporation dated June 7, 1999.
Our audits also included the financial statement schedule of Chemdex
Corporation listed in Item 16(b). This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
San Jose, California
June 7, 1999
