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Filed Pursuant to Rule 424(b)(1)
Registration No. 333-87433
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Prospectus
November 19, 1999
LOGO OF SCIQUEST.COM
SciQuest.com, Inc.
7,500,000 Shares of Common Stock
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SciQuest.com, Inc.: The Offering:
. We provide a Web-based, . We are offering 7,500,000
interactive marketplace for shares of our common stock.
scientific and laboratory
products.
. The underwriters have an
option to purchase an
additional 1,125,000 shares
from us to cover over-
allotments.
. 5151 McCrimmon Parkway,
Suite 208, Morrisville, NC
27560
Symbol and Market: . The initial public offering
price is $16.00 per share.
. SQST/Nasdaq National Market
. This is our initial public
offering, and no public
market currently exists for
our common stock.
. Closing: November 24, 1999
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Per Share Total
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Public offering price: $16.00 $120,000,000
Underwriting fees: 1.12 8,400,000
Proceeds to SciQuest.com, Inc.: 14.88 111,600,000
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This investment involves risks. See "Risk Factors" beginning on Page 6.
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Neither the SEC nor any state securities commission has determined whether
this prospectus is truthful or complete. Nor have they made, nor will they
make, any determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
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Donaldson, Lufkin & Jenrette
Deutsche Banc Alex. Brown
Hambrecht & Quist
DLJdirect Inc.
E*OFFERING
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TABLE OF CONTENTS
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Page
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Prospectus Summary.................. 1
Risk Factors........................ 6
Forward-Looking Statements.......... 18
Use of Proceeds..................... 19
Dividend Policy..................... 19
Capitalization...................... 20
Dilution............................ 21
Unaudited Pro Forma Combined
Statements of Operations Data...... 23
Selected Consolidated Financial
Data............................... 25
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 26
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Page
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Business............................ 36
Management.......................... 48
Related Party Transactions ......... 54
Principal Stockholders.............. 55
Description of Capital Stock........ 57
Shares Eligible for Future Sale..... 60
Underwriting........................ 62
Legal Matters....................... 65
Experts............................. 65
Change in Accountants............... 65
Where You Can Find More Information. 65
Index to Consolidated Financial
Statements......................... F-1
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"SciQuest," "SciMail" and "BioSupplyNet" are our registered trademarks.
This prospectus also includes trademarks, service marks and trade names of
other companies.
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PROSPECTUS SUMMARY
The information below is only a summary of more detailed information
included in other sections of this prospectus. This summary may not contain all
the information that is important to you or that you should consider before
buying shares in the offering. The other information is important, so please
read this entire prospectus carefully.
SciQuest.com
Our Business
SciQuest.com is a Web-based, interactive marketplace for scientific and
laboratory products used by pharmaceutical, clinical, biotechnology, chemical,
industrial and educational organizations worldwide. We have used our extensive
industry experience to design a marketplace that streamlines the traditionally
inefficient scientific products supply chain. Our marketplace solutions allow
buyers of scientific products to cross-search content and purchase products
from multiple suppliers with a single order. Our approach does not give
priority to any particular scientific products distributor, which allows us to
create an open and scalable marketplace that we believe is more attractive to
both buyers and sellers. We do not carry inventory or directly supply products.
Since our founding in 1995, we have developed a comprehensive online
database of over 8,000 suppliers with over 550,000 scientific products. Our
online database is a tool used by scientists and purchasing professionals to
locate supplies and products. On September 29, 1998, we acquired BioSupplyNet,
Inc., which publishes the Source Book, an annual printed catalog of vendors of
biomedical research supplies and equipment and scientific products for the
biomedical research industry. In April 1999, we introduced our e-commerce
marketplace solution to this growing community of online scientific product
buyers and suppliers. In October 1999, we entered into agreements to be the
exclusive third party provider of electronic marketplace services in the United
States for a period of five years for the following leading suppliers: Ambion,
Inc., Amersham Pharmacia Biotech, Inc., BioWhittaker, a Cambrex Company,
Endogen, Inc., NEN Life Science Products, Inc., PerkinElmer, Inc., Pierce
Chemical Company and QIAGEN N.V. In October 1999, we also entered into binding
letters of intent with Dow Chemical Company and DuPont Pharmaceuticals Company
to be their exclusive third party electronic aggregator for purchases of
scientific products in North America for a period of three years, which may be
terminated if definitive agreements are not entered into by December 31, 1999.
Our revenues from these agreements have been immaterial to date.
To date, our revenues have consisted primarily of banner advertising
revenues from our Web sites and advertising revenue from the Source Book. Since
the introduction of our marketplace, we have also recognized revenues from the
sales of scientific products. We expect these sales to comprise a significant
portion of our revenue in the future. We recognized revenues of $432,000 for
the nine months ended September 30, 1999 from the sale of scientific products,
which represented approximately 35% of our total revenues in this period.
Our marketplace benefits scientists by reducing the time required to find,
compare, purchase, trace and manage critical laboratory items. Our marketplace
benefits purchasing professionals by reducing procurement costs by automating
order processing, consolidating purchase orders and payments, reducing errors
and providing more control and information to support enterprise purchasing
policies. Our marketplace also serves as a more efficient sales channel that
enables suppliers to expand their market reach and reduce customer acquisition
and order processing costs.
Based upon data from the Laboratory Products Association and Strategic
Directions International, we estimate that the market for scientific products
in 1999 will be approximately $11.8 billion in North America and $36.4 billion
worldwide. The current scientific products market is characterized by:
. complex, information-intensive products;
. a highly fragmented supply chain; and
. a heavy concentration of manual purchasing processes consisting of
printed catalogs, paper requisitions and telephone and fax orders.
As the demand for scientific products grows, the need for efficient
procurement processes becomes more critical.
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Our objective is to be the leading global solution for buying and selling
scientific products. We intend to achieve this objective through the following
strategies:
. leverage and build upon our current brand equity;
. enhance customer loyalty to increase repeat purchases;
. maintain the distributor-neutrality of our marketplace;
. maximize the enterprise software compatibility of our solutions;
. expand our portfolio of solutions; and
. expand our sales and marketing efforts internationally.
We have incorporated under the laws of the State of Delaware. Our
headquarters is located at 5151 McCrimmon Parkway, Suite 208, Morrisville, NC
27560 and our telephone number is (919) 659-2100. Our Web site is located at
www.sciquest.com. Information contained on our Web site is not part of this
prospectus.
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The Offering
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Common stock offered......................... 7,500,000 shares
Common stock outstanding after this offering. 24,665,604 shares
Use of proceeds.............................. We intend to use the net
proceeds from this offering to
expand our sales and marketing
efforts, enhance our technology,
add to our online content and
for general corporate purposes,
including working capital needs.
Nasdaq Stock Market symbol................... SQST
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The share information is based on shares outstanding as of September 30,
1999. This information excludes:
. 2,372,826 shares of common stock issuable upon exercise of options
granted under our stock option plan, of which 1,577,953 shares are
subject to outstanding options at a weighted average exercise price of
$1.75 per share;
. 3,724,307 shares of common stock issuable upon exercise of warrants to be
issued upon consummation of this offering at an exercise price of $0.01
per share and up to 1,408,112 shares of common stock issuable upon
exercise of additional warrants that may be issued upon consummation of
this offering or afterwards at an exercise price of $0.01 per share;
. 1,183,183 shares of common stock issuable upon exercise of outstanding
warrants at a weighted average exercise price of $6.87 per share; and
. 57,545 shares of series B preferred stock issuable upon exercise of
outstanding warrants at an exercise price of $2.80 per share, which will
convert upon the consummation of this offering into warrants to purchase
87,275 shares of our common stock at an exercise price of $1.85.
Unless we indicate otherwise, all information in this prospectus:
. reflects the reclassification of all outstanding shares of our class A
common stock to shares of our common stock and the conversion of all
outstanding shares of our class B common stock and all outstanding shares
of our preferred stock into shares of common stock upon the effectiveness
of this offering;
. assumes no exercise of the underwriters' over-allotment option; and
. assumes the effectiveness of a 1.516643-for-one split of common stock
prior to the effective date of this prospectus.
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SUMMARY FINANCIAL DATA
(In thousands, except per share data)
The following financial data is a summary of the more complete financial
information provided in our financial statements appearing elsewhere in this
prospectus.
The amounts below exclude:
. 2,372,826 shares of common stock issuable upon exercise of options
granted under our stock option plan, of which 1,577,953 shares are
subject to outstanding options as of September 30, 1999 at a weighted
average exercise price of $1.75 per share;
. 3,724,307 shares of common stock issuable upon exercise of warrants to be
issued upon consummation of this offering at an exercise price of $0.01
per share to certain key suppliers and purchasers of scientific products;
and up to 1,408,112 shares of common stock issuable upon exercise of
additional warrants that may be issued upon consummation of this offering
or afterwards at an exercise price of $0.01 per share to other key
suppliers and purchasers of scientific products;
. 1,183,183 shares of common stock issuable upon exercise of outstanding
warrants as of September 30, 1999 at a weighted average exercise price of
$6.87 per share; and
. 57,545 shares of series B preferred stock issuable upon exercise of
outstanding warrants at an exercise price of $2.80 per share, which will
convert upon consummation of this offering into 87,275 warrants to
purchase shares of our common stock at an exercise price of $1.85 per
share.
The pro forma statement of operations data for the year ended December 31,
1998 and the nine months ended September 30, 1998 reflect the acquisition of
BioSupplyNet, Inc., which occurred on September 29, 1998, as if it had occurred
on January 1, 1998. The pro forma net loss per common share reflects the
conversion of our preferred stock into common stock.
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Nine Months
Years Ended Ended September 30,
December 31, (unaudited)
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Pro
Pro Forma Forma
1996 1997 1998 1998 1998 1998 1999
(unaudited)
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Statement of Operations
Data:
Revenues................ $ -- $ 196 $ 478 $ 1,098 $ 308 $ 928 $ 1,244
Gross profit............ -- 196 436 702 308 574 421
Operating loss.......... (536) (658) (4,356) (4,427) (2,077) (2,148) (16,060)
Net loss................ (545) (690) (4,222) (4,140) (2,065) (1,983) (15,141)
Net loss available to
common stockholders.... $ (545) $ (690) $(4,550) $(4,468) $(2,177) $(2,095) $(61,788)
====== ====== ======= ======= ======= ======= ========
Net loss per common
share--basic and
diluted................ $(0.16) $(0.20) $ (1.33) $ (1.31) $ (0.64) $ (0.61) $ (17.60)
Weighted average common
shares outstanding..... 3,412 3,412 3,412 3,412 3,412 3,412 3,511
Pro forma net loss per
common share--basic and
diluted................ $ (0.62) $ (0.61) $ (1.08)
Pro forma weighted
average common shares
outstanding--basic and
diluted................ 6,806 6,806 13,976
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The following balance sheet data is presented:
. on an unaudited actual basis;
. on an unaudited pro forma basis to the reflect the reclassification of
all outstanding shares of our class A common stock to shares of our
common stock and the conversion of all outstanding shares of our class B
common stock and all outstanding shares of our preferred stock into
shares of our common stock; and
. on an unaudited pro forma as adjusted basis to reflect the
reclassification of all outstanding shares of our class A common stock to
shares of our common stock and the conversion of all outstanding shares
of our class B common stock and all outstanding shares of our preferred
stock into shares of common stock, the issuance of 3,724,307 warrants to
purchase our common stock at an exercise price of $0.01 per share to
certain key suppliers and purchasers of scientific products and our
receipt of the net proceeds from our sale of 7,500,000 shares of our
common stock at an initial public offering price of $16.00 per share,
after deducting underwriting discounts and commissions and offering
expenses payable by us.
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September 30, 1999
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Pro Forma
Actual Pro Forma As Adjusted
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Balance Sheet Data:
Cash and cash equivalents...................... $ 4,911 $ 4,911 $115,521
Working capital................................ 14,950 14,950 125,560
Total assets................................... 34,761 34,761 145,371
Long term liabilities.......................... 1,156 1,156 1,156
Mandatorily redeemable convertible preferred
stock......................................... 92,664 -- --
Stockholders' equity (deficit)................. (62,838) 29,826 140,436
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RISK FACTORS
An investment in our common stock involves a high degree of risk. You should
carefully consider the risks described below before making an investment
decision. You should also refer to the other information in this prospectus,
including our financial statements and accompanying notes appearing elsewhere
in this prospectus.
Risks Relating to Our Business
Since we have a limited operating history, forecasting future performance may
be difficult.
We commenced operations in 1995, first recognized revenues in 1997 and
launched our interactive e-commerce Web site in April 1999. Accordingly, we
have only a limited operating history on which to evaluate our business. As a
result of our limited operating history, the emerging nature of the online
scientific products market and the evolving nature of our business model, we
may be unable to accurately forecast our revenues. We incur expenses based
predominantly on operating plans and estimates of future revenues. Our expenses
are to a large extent fixed. We may be unable to adjust our spending in a
timely manner to compensate for any unexpected revenue shortfalls. Accordingly,
a failure to meet our revenue projections will have an immediate and negative
impact on profitability. In addition, we cannot be certain that our evolving
business model will be successful, particularly in light of our limited
operating history.
We have a history of losses and anticipate incurring losses in the future. We
may not achieve profitability.
We incurred net losses of $4.2 million for the year ended December 31, 1998
and $15.1 million for the nine months ended September 30, 1999. As of September
30, 1999, we had an accumulated deficit of $63.8 million. We expect to incur
substantial operating losses and continued negative cash flow from operations
for the foreseeable future. In fact, we expect these losses to increase
significantly through at least December 31, 2000 because, as part of our
strategy to achieve profitability, we intend to significantly increase our
spending on items such as sales and marketing, content development, technology
and operating infrastructure. If these expenses do not generate increased
revenues, our earnings may be materially and adversely affected and anticipated
net losses may be greater than expected. We may not be able to increase
revenues sufficiently to achieve profitability.
Unless a broad range of purchasers and suppliers of scientific products adopt
our e-commerce solution, we will not be successful.
Our success will require, among other things, that our solutions gain broad
market acceptance by our customers, suppliers, users and strategic partners.
For example, purchasers may continue purchasing products through their existing
methods and may not adopt a Web-based solution because of:
. their comfort with current purchasing habits and direct supplier
relationships;
. the costs and resources required to switch purchasing methods;
. the need for products not offered through Sciquest.com;
. security and privacy concerns; or
. general reticence about technology or the Internet.
If we do not successfully market the SciQuest.com brand, our business may
suffer.
We believe that establishing, maintaining and enhancing the SciQuest.com
brand is critical in attracting and expanding traffic to our Web sites. There
are a number of Web sites that offer competing services. Some of these sites
already have well-established brands in either online services or the
scientific products industry. As a result, it is critical that we establish and
enhance the SciQuest.com brand. We believe that increased competition
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may make establishing our brand significantly more expensive. Promotion of our
brand will depend largely on expanding our sales and marketing capabilities and
providing a high-quality online experience. We intend to use a portion of the
proceeds of this offering to expand our sales and marketing activities and
further develop our online services. We cannot be certain that we will be
successful in marketing the SciQuest.com brand. If we are unable to
successfully promote our brand, or if we incur substantial expenses in
attempting to do so, our revenues and earnings could be materially and
adversely affected.
If we are unable to increase our transaction volume, our future revenues may
suffer.
We expect that a substantial portion of our future revenues will be
generated by the products offered by us for sale through our e-commerce
marketplace. Accordingly, our revenues will be highly dependent on the dollar
volume of transactions conducted through our Web sites. Our profits depend upon
the discount levels we are able to negotiate with our suppliers. To maintain
revenue growth, we will need to increase the total dollar value of transactions
conducted through our Web sites. In order to increase our transaction volume,
we will need to:
. generate higher and continuously increasing levels of traffic, from both
new and repeat visitors, to our Web sites;
. increase the percentage of visitors to our Web sites who purchase
scientific products; and
. increase the average transaction size.
Failure to do one or more of the foregoing could have a material adverse effect
on our revenues.
Unless we negotiate favorable pricing terms with our suppliers, our profit
margins will be adversely affected.
Our profits depend upon the prices we are able to negotiate with our
suppliers. We anticipate that the prices we negotiate with our suppliers will
vary based on a number of factors such as:
. size of supplier;
. product portfolio;
. relationship with key SciQuest.com customers;
. degree to which products are critical to our customers;
. extent to which transactions are conducted electronically; and
. extent that costs are shared with us.
Our profit margins may decline in the future, particularly as competition in
the scientific products industry increases. A significant decline in profit
margins without a corresponding increase in transaction volume would adversely
affect our earnings.
If we cannot timely and accurately add supplier product data to our e-commerce
database, we may lose sales and customers, which would adversely affect our
revenues.
Currently, we are responsible for loading supplier product information into
our database and categorizing the information for search purposes. We currently
have a backlog of varying amounts of product data from 148 companies to be
loaded in our e-commerce marketplace. We anticipate that a majority of these
products will be loaded into the e-commerce marketplace by the end of the first
quarter of 2000. However, we continuously receive new product data to load. We
will not derive revenue from these products until this data is loaded into our
system. Timely loading of these products into 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
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operations to accurately load this data into 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 into our database for access through our marketplace
within a reasonable 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. 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 e-commerce
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 purchasing solution, which
could reduce our revenues and therefore have a negative effect on our results
of operations and financial condition.
Sales to larger customers may increase the length of our sales cycle and
decrease our profit margins.
Increasing sales to larger buyers is an important element of our business
strategy. As we sell more sophisticated solutions to larger organizations, we
expect the time from initial contact to final approval to increase. During this
sales cycle, we may expend substantial funds and management resources without
any corresponding revenue. If approval is delayed or does not occur, our
financial condition and operating results for a particular period may be
adversely affected. Approvals are subject to delays over which we have little
or no control, including the following:
. potential customers' internal approval processes;
. implementation of systems integration solutions;
. customers' concerns about implementing a new strategy and method of doing
business; and
. seasonal and other timing effects.
Increased sales to larger accounts may result in lower or negative profit
margins as larger customers typically have greater leverage in negotiating the
price and other terms of business relationships. We also typically incur costs
associated with customization of our systems with a sale to a large account. If
we do not generate sufficient transaction volume to offset any lower margins or
these increased costs, our operating results may be materially and adversely
affected. Also, the time between billing and receipt of revenues is often
longer when dealing with larger accounts due to increased administrative
overhead.
If we are unable to list a broad range of products on commercially favorable
terms, our marketplace will be less attractive to potential buyers.
A number of factors could significantly reduce the number of products and
product sources listed on our Web sites, including the following:
. consolidation among suppliers; and
. exclusive arrangements signed by suppliers with our competitors.
If the number of products and product sources that are available for listing
is reduced, the effectiveness of our Web sites and their attractiveness to
potential buyers could be materially and adversely affected.
If we are unable to retain a critical mass of suppliers and customers, our
ability to grow our business will be adversely affected.
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
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perceive value in our purchasing solution which, in large part, depends upon
the breadth of the product offerings from our suppliers. Creating a network
effect, where the value to buyers and suppliers alike increases as the number
of participants increases, is a key component of our strategy. If we are unable
to increase the number of suppliers and draw more customers to our Web sites,
we will not be able to benefit from this network effect. As a result, the
overall value of our purchasing solution would be harmed, which would
negatively affect our revenues and earnings.
If suppliers terminate their agreements with us, our product offerings may
suffer.
Following an initial one-year term, many of our standard supplier agreements
may be terminated by either party on 90 days' notice. After expiration of the
initial term, such suppliers may terminate or seek to renegotiate their
agreements. If a significant number of suppliers terminate their agreements
with us, the range of products we can offer would be adversely affected. The
ability of suppliers to terminate their agreements may result in negotiating
new agreement terms that are less favorable to us, which could have a material
adverse effect on our earnings.
If our exclusive suppliers elect to terminate the exclusive nature of their
agreements with us, our business could be adversely affected.
Our exclusive supplier agreements have a five-year term, but the exclusive
nature of such agreements may be terminated after 18 months. If a significant
number of the exclusive suppliers terminate the exclusive nature of such
agreements, the volume of our order flow will be reduced significantly. We may
also be forced to negotiate new agreements with terms that are less favorable
to us.
If we do not enter into definitive agreements with Dow Chemical Company and
Monsanto Company by December 31, 1999, our business could be adversely
affected.
Under the terms of binding letters of intent with Dow Chemical Corporation
and Monsanto Company, either party may terminate the relationship on or after
December 31, 1999 if we do not enter into definitive agreements before such
time. A failure to enter into mutually satisfactory definitive agreements could
have a material adverse effect on our business.
We have relied and continue to rely on a limited number of large customers for
a significant portion of our revenues. Losing one or more of these customers
may adversely affect our revenues.
We expect that for the foreseeable future we will generate a significant
portion of our revenues from a limited number of large customers. Further, our
large customers are not obligated to use our purchasing solution exclusively or
for any minimum number of transactions or dollar amounts. In addition, our
contracts with our customers are for limited terms and our customers may
discontinue use of our system at any time upon short notice and without
penalty. If we lose any of our large customers or if we are unable to add new
large customers, our revenues will not increase as expected. In addition, our
reputation and brand name would be harmed. For the nine months ended September
30, 1999, one customer, PPD Development, Inc., accounted for twelve percent of
revenues.
Since we rely on third-party suppliers and carriers to fulfill orders for our
customers, we have limited control over the timing and accuracy of order
fulfillment. As a result, we may not be able to guarantee customer
satisfaction.
We do not carry inventory or directly supply products. As a result, we rely
on our suppliers and carriers for rapid order fulfillment and other customer
service functions to ensure buyer satisfaction. If our suppliers do not provide
high quality customer service, our business reputation and customer
satisfaction could be materially and adversely affected. Most of our supplier
arrangements do not guarantee the availability of merchandise,
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establish guaranteed prices or require continuity of pricing practices. As a
result, we have little or no control over the fulfillment of buyers' orders. In
order to be successful, we must maintain relationships with suppliers that will
produce, stock and deliver high quality products to buyers through our Web
sites.
We rely on third-party carriers to ensure accurate and timely delivery of
products to buyers. Although suppliers are responsible for product shipment, we
designate the carrier and are responsible for carrier charges. We cannot be
certain that our carriers will consistently provide high quality performance.
If our carriers fail to deliver products accurately and on a timely basis, our
reputation and business could be materially and adversely affected.
If our Web sites and transaction processing systems are not able to adequately
service increasing traffic levels, our ability to satisfy our customers and
maintain revenue growth may suffer.
Our success depends in large part on the number of buyers who use our Web
sites to purchase scientific supplies and products. Accordingly, our Web sites,
transaction-processing systems and network infrastructure must be able to
service increasing traffic levels while maintaining adequate buyer service
levels. Any system interruptions or delays in our transaction system would
reduce the volume of sales and the attractiveness of our service offerings,
which could have a material adverse effect on our customer satisfaction and our
ability to maintain revenue growth. We have experienced infrequent system
interruptions in the past during implementation of system upgrades. These
interruptions could continue to occur from time to time and could have a
material adverse effect on our service offerings. Substantial increases in the
volume of traffic on our Web sites or the number of purchases made by buyers
will require expansion and upgrades of our technology, transaction-processing
systems and network infrastructure. We cannot be certain that our transaction-
processing systems and network infrastructure will be able to accommodate
traffic in the future.
If we are not able to successfully integrate our systems with the internal
systems of our key suppliers and buyers, our operating costs and relationships
with our suppliers and buyers will be adversely affected.
A key component of all services is the efficiencies created for suppliers
and buyers through our online systems. In order to create these efficiencies,
it will often be necessary that our systems integrate with each major
supplier's and buyer's internal systems, such as inventory, customer service,
technical service, freight programs and financial systems. In addition, there
is little uniformity in the systems used by our suppliers and buyers. The
integration with our suppliers' systems also involves the downloading of a
significant amount of data, which increases the resources needed to execute the
integration. If these systems are not successfully integrated, our operating
costs and relationships with our suppliers and buyers would be adversely
affected, which could have a material adverse effect on our financial condition
and results of operations.
Our computer and telecommunications systems are in a single location, which
makes them more vulnerable to damage or interruption.
Substantially all of our computer and telecommunications systems are located
in the same geographic area. These systems are vulnerable to damage or
interruption from fire, flood, power loss, telecommunications failure, break-
ins and similar events. While we have business interruption insurance, this
coverage may not adequately compensate us for lost business. Although we have
implemented network security measures, our systems, like all systems, are
vulnerable to computer viruses, physical or electronic break-ins and similar
disruptions. These disruptions could lead to interruptions, delays, loss of
data or the inability to accept and confirm buyer purchases. Any of these
occurrences could have a material adverse effect on our revenues.
If our exclusive sales representative does not perform adequately, our
advertising revenues could be adversely affected.
To date, a majority of our revenues has come from the sale of print and
online advertising to our suppliers, although we expect advertising revenue as
a percentage of total revenue to decrease significantly in the future. Cahners
Business Information is the exclusive sales representative for online
advertising on our Web sites and
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for print advertising in our Source Book. Accordingly, our advertising revenues
are highly dependent on the success of Cahners' efforts. We cannot assure you
that Cahners will be successful in selling advertising for us.
We bear the risk of credit sales on SciQuest.com, which could put a significant
strain on our liquidity and capital resources.
Our supplier agreements generally require us to pay the supplier for any
orders processed through our Web sites as we usually take title to these
products at the time of shipment. Accordingly, if a buyer fails to pay for the
products it purchased, we would be obligated to pay the supplier. Thus, we bear
the risk of collection. We also may be required to refund payments to buyers
for products returned to the supplier. Slow payment by buyers for products
purchased would negatively impact our cash flows. As our transaction volume and
average transaction size grow, these risks will increase. We generally do not
process an order from a buyer without a credit card or other payment
confirmation although we do extend credit terms to certain qualified buyers.
However, we cannot be certain that our credit confirmation practices will be
effective to protect us against these payment obligations. If a significant
number of buyers default on their payment obligations, or suppliers fail to
refund payments to us for products returned by our buyers, or buyers do not pay
their obligations to us on time, we could incur significant and immediate cash
payment obligations or suffer significant cash flow constraints. These
obligations could put a significant strain on our liquidity and capital
resources, which could prevent us from using our working capital to further
expand our business or require us to obtain additional financing.
If we are not able to effectively manage our growth, our business may suffer.
We are rapidly expanding our operations. In particular, we have
significantly expanded our operations and sales, marketing and technology
staffs. We have also expanded our management and administration to support this
growth. We expect this expansion to continue at an accelerated rate. This
expansion has placed, and is expected to continue to place, a significant
strain on our management, operational and financial resources. For example, we
may be unable to increase the scale of our operations (including order
fulfillment, customer service, transaction processing and other "back office"
operations) to account for the increase in transaction volume that our supplier
and buyer growth creates. If we are unable to manage the growth of our business
effectively, our earnings could be materially and adversely affected.
Many of our employees have only recently joined us. Additionally, several of
our key executives have been employed by us for one year or less. If our
employees do not work well together or some of our employees do not succeed in
their designated roles, our financial condition and results of operations could
be materially adversely affected. We cannot be certain that our management,
operational and financial resources will be adequate to support our future
operations.
If we fail to attract and retain key employees, our business may suffer.
A key factor of our success will be the continued services and performance
of our executive officers and other key personnel. If we lose the services of
any of our executive officers, our financial condition and results of
operations could be materially and adversely affected. We do not have long-term
employment agreements with any of our key personnel. Our success also depends
upon our ability to identify, hire and retain other highly skilled technical,
managerial, editorial, marketing and customer service professionals.
Competition for this personnel is intense. In particular, it is important that
we hire additional customer service personnel in order to maintain high quality
service and maintain buyer and supplier loyalty. We cannot be certain of our
ability to identify, hire and retain sufficiently qualified personnel. For
example, we may encounter difficulties in attracting a sufficient number of
qualified software developers and operations personnel for our online services
and transaction-processing systems. Failure to identify, hire and retain
necessary technical, managerial, editorial, merchandising, marketing and buyer
service personnel could have a material adverse effect on our financial
condition and results of operations.
11
<PAGE>
If we are unable to adapt our services to rapid technological change in online
commerce, our revenues and profits could be adversely affected.
The Internet and the online commerce industry undergo rapid changes in
technology, products and services, user profiles and operating standards. These
changes could render our Web sites and proprietary technology and systems
obsolete. We must continually improve the performance, features and reliability
of our online services, particularly in response to our competition. Our
success will depend, in part, on our ability to:
. enhance our existing services;
. develop new services and technology that address the increasingly
sophisticated and varied needs of our target markets; and
. respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis.
We cannot be certain of our success in accomplishing the foregoing. If we
are unable, for technical, legal, financial or other reasons, to adapt to
changing market conditions or buyer requirements, our market share could be
materially adversely affected.
We may become exposed to product liability claims, which could result in
substantial costs and liability.
The sale of scientific products involves the risk of product liability
claims. We face potential liability for claims based on the type and adequacy
of the information and data that suppliers publish on our Web sites as well as
the nature of the products that are sold through our Web sites, including
claims for breach of warranty, product liability, misrepresentation, violation
of governmental regulations and other commercial claims. Although we maintain
general liability insurance and product liability insurance, our insurance may
not cover some claims and may not be adequate to fully indemnify us for
liabilities that may be imposed. A product liability claim against us, if
successful, could result in a significant liability that would have a material
adverse effect on our liquidity and capital resources. In addition, even the
successful defense of a product liability claim could result in substantial
costs and diversion of our management's efforts.
If we are not able to offer new services, we may not be able to maintain
revenue growth.
We plan to introduce new and expanded services and to expand our third-party
relationships in order to attract more buyers and suppliers to our Web sites
and increase transaction volume. We cannot be certain that we will be able to
offer these services in a cost-effective or timely manner. Any new services
that are not favorably received by buyers or suppliers could damage our
reputation or brand name. Expansion of our services will require us to develop
a significant amount of time and money and may strain our management, financial
and operating resources. The failure to generate profits from our expanded
services could have a material adverse effect on our earnings.
The content of our Web sites may expose us to various claims, which could
result in substantial costs and liabilities.
Our Web sites contain information concerning the products offered by
suppliers, including product descriptions, specifications and pricing. This
information is provided by suppliers, and we generally do not independently
verify this information. As a result, we could potentially face liability for
fraud, negligence, copyright, patent or trademark infringement and other claims
based on the information contained on our Web sites. A successful claim could
subject us to significant liability that would have a material adverse effect
on our liquidity and capital resources. In addition, even the successful
defense of a claim could result in substantial costs and division of our
management's efforts and damage to our brand perception by our customers.
12
<PAGE>
If we are unable to protect our intellectual property rights, our business
could be adversely affected.
Our software technology is not patented and existing copyright laws offer
only limited practical protection. We cannot guarantee that the legal
protections that we rely on will be adequate to prevent misappropriation of our
technology. Also, these protections do not prevent independent third-party
development of competitive products or services. Failure to protect against the
misappropriation of our intellectual property could have a material adverse
effect on our business operations.
We are dependent on proprietary technology licensed from third parties, the
loss of which could be costly.
We license a portion of the content for our online services from third
parties. Additionally, we intend to license a significant portion of our
transaction fulfillment systems from third parties. These third-party content
licenses may not be available to us on favorable terms, or at all, in the
future. In addition, we must be able to successfully integrate this content in
a timely and cost-effective manner to create an effective finished product. If
we fail to obtain necessary content on favorable terms or are unable to
successfully integrate this content or if we are unable to continue to license
our order fulfillment transaction systems on favorable terms, it could have a
material adverse effect on our business operations.
Our products, trademarks and other proprietary rights may infringe on the
proprietary rights of third parties, which may expose us to litigation.
While we believe that our products, trademarks and other proprietary rights
do not infringe upon the proprietary rights of third parties, we cannot provide
any guarantees about the third party products that are sold on our Web site or
guarantee that third parties will not assert infringement claims against us in
the future or that any such assertion will not require us to enter into a
license agreement or royalty agreement with the party asserting a claim. If the
third party products sold on our Web site infringe the proprietary rights of
third parties, we may be deemed to infringe those rights by selling such
products. Even the successful defense of an infringement claim could result in
substantial costs and diversion of our management's efforts.
The failure to integrate successfully other businesses that we acquire could
adversely affect our business.
In September 1998, we acquired BioSupplyNet, Inc. in a stock acquisition. In
July 1999, we acquired Internet Auctioneers International, Inc. in a stock
acquisition. While we have no current agreements or binding commitments
regarding any potential acquisitions, an element of our strategy is to broaden
the scope and content of our products and services through the acquisition of
existing products, technologies, services and businesses. Acquisitions entail
numerous risks, including:
. the integration of new operations, products, services and personnel;
. the diversion of resources from our existing businesses, sites and
technologies;
. the inability to generate revenues from new products and services
sufficient to offset associated acquisition costs;
. the maintenance of uniform standards, controls, procedures and policies;
. accounting effects that may adversely affect our financial results;
. the impairment of employee and customer relations as a result of any
integration of new management personnel;
. dilution to existing stockholders from the issuance of equity securities;
and
.liabilities or other problems associated with an acquired business,
13
<PAGE>
Any problems we encounter in connection with our acquisitions could have a
material adverse effect on our business.
Our planned international expansion will require significant financial
resources and management attention and could have a negative effect on our
earnings.
We intend to invest resources and capital to expand internationally. As a
result, we may need to establish international operations, hire additional
personnel and establish relationships with additional suppliers and customers.
This expansion will require significant financial resources and management
attention and could have a negative effect on our earnings. We cannot assure
you that we will be successful in creating international demand for our e-
commerce solutions and services. In addition, our international business may be
subject to a variety of risks, including, among other things, increased costs
associated with maintaining international marketing efforts, applicable
government regulation, fluctuations in foreign currency, difficulties in
collecting international accounts receivable and the enforcement of
intellectual property rights. We cannot assure you that these factors will not
have an adverse effect on future international sales and earnings. In addition,
we are currently contemplating registering our trademarks in other countries.
We cannot assure you that we will be able to do so.
We rely on our suppliers and carriers in complying with government regulations
regarding the sale and distribution of regulated products, and their failure to
so comply could result in substantial civil and criminal liability.
Many of the products offered through our Web sites are subject to direct
regulation by governmental agencies, which includes numerous laws and
regulations generally applicable to the chemical, pharmaceutical, controlled
substances, human and biological reagents, nuclear chemical businesses, and
environmental spills. Because of our presence in the distribution chain, we may
be subject to significant liability for violations of these regulations
regardless of our actual involvement in a violation. We could be fined or
exposed to civil or criminal liability, including monetary fines and
injunctions for any violations. We have historically relied, and will in the
future rely, upon our suppliers to meet all packaging, distribution, labeling,
hazard and health information notices to purchasers, record keeping and
licensing requirements applicable to transactions conducted through our system.
In addition, we rely upon our carriers to comply with regulations regarding the
shipment of hazardous materials sold through our system. We cannot assure you
that our suppliers and carriers will comply with all applicable government
regulations.
Potential year 2000 problems could adversely affect our business.
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These systems cannot
reliably distinguish dates beginning on January 1, 2000 from dates prior to the
year 2000.
Our internally developed software has been designed to accept only four
digit entries in order to resolve year 2000 ambiguities. However, we also
utilize third-party equipment and software that may not be year 2000 compliant.
We cannot guarantee that the systems of our suppliers or service providers will
be year 2000 compliant. The failure of such parties to correct year 2000
problems could substantially disrupt our business and may have a material
adverse effect on our financial condition and results of operations.
In addition, the computer systems necessary to maintain the viability of the
Internet or any of the Web sites that direct buyers to our Web sites may not be
year 2000 compliant. The computers of potential buyers also may not be year
2000 compliant, thus preventing such buyers from accessing and making purchases
through our Web sites. To the extent that major buyers experience such year
2000 difficulties, our business could be materially adversely affected.
14
<PAGE>
Finally, we are dependent upon third-party carriers and suppliers to
efficiently ship and fulfill orders from buyers. We cannot be certain that
these carriers or suppliers will be year 2000 compliant. Failure of these
carriers or suppliers to correct any year 2000 problems could disrupt our
ability to distribute purchased products, which could have a material adverse
effect on our revenues.
Please see "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Year 2000" for a more complete discussion of year 2000
related issues.
Risks Relating To Our Industry
Our future revenue growth would be adversely affected by a reduction in
spending in the scientific products industry.
We derive substantially all of our revenue from the scientific products
industry. We expect our future growth to depend on spending levels in this
industry. Any reduction in spending in the scientific products industry would
have a material adverse effect on our revenues.
Unless Web-based purchasing achieves widespread acceptance, we will have
difficulty achieving revenue growth.
Use of the Internet to purchase products, particularly in the scientific
products market, is at an early stage of development. Convincing buyers to
purchase scientific products online may be particularly difficult as such
buyers have traditionally relied on distributors of scientific products and
mail order catalogs to purchase their scientific products. If the use of e-
commerce services does not grow in the future, our Web site traffic and
resulting revenue could be materially and adversely affected.
The continued growth of e-commerce services is dependent upon a number of
factors that are beyond our control, including the following:
. continued growth in the number of buyers who use e-commerce services;
. continued development of transaction security technology;
. continued development of e-commerce technology;
. continued development and successful implementation of enterprise
software solutions;
. emergence of standard and common nomenclature and methodology for e-
commerce; and
. development of complementary services and products.
The online scientific products market is highly competitive, which makes
achieving market share and profitability more difficult.
The online scientific products market is new, rapidly evolving and intensely
competitive. Our primary competition includes e-commerce providers, online
scientific communities and suppliers' e-commerce initiatives.
Competition is likely to intensify as this market matures. As competitive
conditions intensify, competitors may:
. enter into strategic or commercial relationships with larger, more
established and well-financed companies;
. secure services and products from suppliers on more favorable terms;
. devote greater resources to marketing and promotional campaigns;
. secure exclusive deals with buyers that impede our sales; and
. devote substantially more resources to Web site and systems development.
15
<PAGE>
In addition, new technologies and the expansion of existing technologies may
increase competitive pressures. As a result of increased competition, we may
experience reduced operating margins, as well as loss of market share and brand
recognition. We may not be able to compete successfully against current and
future competitors. These competitive pressures could have a material adverse
effect on our revenue growth and earnings.
Online commerce and database security concerns could adversely affect traffic
on our Web site and our revenues.
The secure transmission of confidential information over public networks is
a fundamental requirement for online commerce. Concerns over the security of
transactions and commercial online services and other privacy issues may also
inhibit the growth of the Internet and the online commerce industry. We license
encryption and authentication technology for the transmission of confidential
information, such as buyer credit card numbers, through our online system. In
addition, we maintain an extensive confidential database of buyer profiles and
transaction information. Technological advances, including new discoveries in
the field of cryptography, could result in a compromise or breach of our
security systems. Security breaches could have a material adverse effect on our
reputation, financial condition and results of operations. An intruder who
breaches our security measures could misappropriate proprietary information or
cause interruptions in our operations. We could be required to spend a
significant amount of time and money to protect against security breaches or to
alleviate problems caused by such breaches. Security breaches could also expose
us to a risk of loss or litigation and possible liability. We cannot be certain
that our security measures will prevent security breaches.
Additional regulation of online commerce could adversely affect demand for our
products and services.
There are currently few laws and regulations directly applicable to the
Internet and e-commerce services. However, we expect that additional regulation
may be adopted covering issues such as user privacy, pricing, content,
copyrights, distribution, antitrust and characteristics and quality of products
and services. In addition, the growth and development of e-commerce may prompt
calls for more stringent buyer protection laws that may impose additional
burdens on those companies conducting business online. The adoption of any
additional laws or regulations may decrease the growth of the Internet or
commercial online services, which could, in turn, decrease the demand for our
products and services. Additional regulation could also increase our cost of
doing business.
The application of sales and other taxes to online commerce could adversely
affect demand for our products and services and are administratively
burdensome.
The application of sales and other taxes by state and local governments to
online commerce is uncertain and may take years to resolve. In particular, a
number of states are currently reviewing the appropriate tax treatment of
online commerce, and new state tax regulations may subject us and/or the
suppliers and buyers that use our Web sites to additional state sales and
income taxes. The imposition of additional sales taxes on transactions
conducted through our Web sites could make this service less valuable to buyers
and adversely impact transaction volume. The imposition of any such taxes or
other regulations could have a material adverse effect on our revenues and
earnings. In addition, the collection and payment of such taxes may cause us to
incur significant administrative effort and expense. Our failure to properly
collect and pay such taxes in any jurisdiction could subject us to penalties
that could adversely affect our earnings.
Risks Relating To Our Offering
Investors will incur immediate dilution and may experience further dilution.
The initial public offering price of our common stock is substantially
higher than the net tangible book value per share of the outstanding common
stock immediately after the offering. If you purchase common stock in this
offering, you will incur immediate and substantial dilution in the pro forma
net tangible book value per share of the common stock from the price you pay
for common stock. We also have a large number of options and warrants to
purchase the common stock with exercise prices significantly below the
estimated initial public offering price of our common stock. To the extent
these options and warrants are exercised, there will be further substantial
dilution. See "Dilution."
16
<PAGE>
Significant fluctuation in the market price of our common stock could result in
securities class action claims against us.
Significant price and value fluctuations have occurred with respect to the
securities of Internet-related companies. Our common stock price is likely to
be volatile in the future. In the past, following periods of downward
volatility in the market price of a company's securities, class action
litigation has often been pursued against such companies. If similar litigation
were pursued against us, it could result in substantial costs and a diversion
of our management's attention and resources.
17
<PAGE>
FORWARD-LOOKING STATEMENTS
Some of the statements contained in this prospectus contain forward-looking
information. These statements are found in the sections entitled "Prospectus
Summary," "Risk Factors," "Use of Proceeds," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Business" and
elsewhere in this prospectus. They include statements concerning:
. our business strategy;
. liquidity and capital expenditures;
. our use of the proceeds of the offering;
. future sources and nature of revenues;
. future expenses and investments;
. future profitability;
. expansion of our products and services;
. sales trends;
. trends in Internet activity generally;
. year 2000 preparations;
. trends in government regulation; and
. payment of dividends.
You can identify these statements by forward-looking words such as "expect,"
"anticipate," "believe," "goal," "plan," "intend," "estimate," "predict,"
"potential," "continue," "may," "will," and "should" or similar words. You
should be aware that these statements are subject to known and unknown risks,
uncertainties and other factors, including those discussed in the section
entitled "Risk Factors," that could cause the actual results to differ
materially from those suggested by the forward-looking statements.
18
<PAGE>
USE OF PROCEEDS
The net proceeds to us from this offering, after deducting the underwriting
discounts and offering expenses payable by us, will be approximately
$110,610,000, or $127,350,000 if the underwriters exercise their over-allotment
option in full, based upon an initial public offering price of $16.00 per
share.
As of the date of this prospectus, we have not made any specific plans with
respect to the proceeds of this offering. Therefore, we cannot specify with
certainty the particular uses for the net proceeds to be received upon
completion of this offering. Accordingly, our management will have significant
flexibility in applying the net proceeds of the offering. We intend to use the
net proceeds from this offering to expand our sales and marketing efforts,
enhance our technology and add to our online content and for general corporate
purposes, including working capital needs. We also may use a portion of the net
proceeds of this offering to acquire or invest in complementary businesses or
technologies, although we have no present commitments or agreements with
respect to any material acquisition or investment. Pending the application of
the proceeds towards one of the above uses, we intend to invest the net
offering proceeds in short-term, interest-bearing, investment-grade securities.
The principal purposes of this offering are to increase our working capital,
to create a public market for our common stock, to facilitate future access to
the public capital markets and to increase our visibility in the marketplace.
The description above represents our present intentions based upon present
plans and business conditions. They may vary significantly and are subject to
change at our discretion depending upon certain factors, including economic or
industry conditions, changes in the competitive environment and strategic
opportunities that may arise.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock and we do
not anticipate declaring or paying any cash dividends for the foreseeable
future. We currently expect to retain all earnings, if any, for investment in
our business.
19
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 1999.
Our capitalization is presented:
. on an actual basis after giving effect to the 1.516643-for-one common
stock split;
. on an unaudited pro forma basis to reflect the reclassification of all
outstanding shares of our class A common stock to shares of our common
stock and the conversion of all outstanding shares of our class B common
stock and all outstanding shares of our preferred stock into shares of
our common stock; and
. on an unaudited pro forma as adjusted basis to reflect the
reclassification of all outstanding shares of our class A common stock to
shares of our common stock and the conversion of all outstanding shares
of our class B common stock and all outstanding shares of our preferred
stock into shares of our common stock, the issuance of 3,724,307 warrants
to certain key suppliers and purchasers of scientific products to
purchase our common stock at an exercise price of $0.01 per share and our
receipt of the net proceeds from our sale of 7,500,000 shares of common
stock at an initial public offering price of $16.00 per share, after
deducting underwriting discounts and commissions and offering expenses
payable by us.
<TABLE>
<CAPTION>
As of September 30, 1999
----------------------------------
Pro Forma
Actual Pro Forma As Adjusted
(In Thousands)
<S> <C> <C> <C>
Debt and capital lease obligations, long-
term portion............................... $ 1,035 $ 1,035 $ 1,035
Mandatorily redeemable convertible preferred
stock, $0.001 par value, 7,147,900 shares
authorized actual; no shares authorized pro
forma or pro forma as adjusted:
Series B--3,835,180 shares designated;
3,777,626 issued and outstanding actual;
no shares designated, issued or
outstanding pro forma or pro forma as
adjusted.................................. 56,098 -- --
Series D--3,312,720 shares designated;
3,312,720 issued and outstanding actual;
no shares designated, issued or
outstanding pro forma or pro forma as
adjusted.................................. 36,566 -- --
-------- -------- --------
Total mandatorily redeemable convertible
preferred stock......................... 92,664 -- --
Stockholders' deficit:
Series A convertible preferred stock,
$0.001 par value, 769,231 shares
designated; 769,221 shares issued and
outstanding actual; no shares designated,
issued or outstanding pro forma or pro
forma as adjusted......................... 683 -- --
Series C convertible preferred stock,
$0.001 par value, 700,000 shares
designated; 635,813 shares issued and
outstanding actual; no shares designated,
issued or outstanding pro forma or pro
forma as adjusted......................... 1,774 -- --
Series E convertible preferred stock,
$0.001 par value, 126,500 shares
designated; 114,995 shares issued and
outstanding actual; no shares designated,
issued or outstanding pro forma or pro
forma as adjusted......................... 1,256 -- --
Preferred stock, undesignated, $0.001 par
value, 10,000,000 shares authorized; no
shares issued or outstanding actual; no
shares authorized, issued or outstanding
pro forma or pro forma as adjusted........
Common stock, $0.001 par value; 90,000,000
shares authorized; 3,727,548 shares
issued and outstanding actual; 17,165,604
shares issued and outstanding pro forma;
24,665,604 shares issued and outstanding
pro forma as adjusted..................... 4 17 24
Class B common stock, $0.001 par value,
250,020 shares authorized, issued and
outstanding actual; no shares issued or
outstanding pro forma or pro forma
adjusted.................................. 100 -- --
Additional paid-in capital................. -- 96,464 266,619
Supplier and purchaser unearned
compensation.............................. -- -- (59,552)
Deferred compensation...................... (2,842) (2,842) (2,842)
Accumulated deficit........................ (63,813) (63,813) (63,813)
-------- -------- --------
Total stockholders' equity (deficit)..... (62,838) 29,826 140,436
-------- -------- --------
Total capitalization................... $ 30,861 $ 30,861 $141,471
======== ======== ========
</TABLE>
20
<PAGE>
DILUTION
As of September 30, 1999, our pro forma net tangible book value was
approximately $28.1 million, or $1.64 per share of common stock. Pro forma net
tangible book value per share represents the amount of our total tangible
assets less total liabilities, divided by the number of shares of common stock
outstanding after giving effect to the conversion of all outstanding shares of
our class B common stock and all outstanding shares of our preferred stock into
common stock. After giving effect to our sale of 7,500,000 shares of common
stock in this offering at an initial public offering price of $16.00 per share
and the application of the estimated net proceeds from this sale, our pro forma
as adjusted net tangible book value at September 30, 1999 would have been
approximately $138.7 million, or $5.62 per share of common stock. This
represents an immediate increase in such pro forma as adjusted net tangible
book value of $3.98 per share to existing stockholders and an immediate
decrease in pro forma as adjusted net tangible book value of $10.38 per share
to new investors. The following table illustrates this per share dilution to
new investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share (weighted
average)...................................................... $16.00
------
Pro forma net tangible book value per share at September 30,
1999........................................................ $1.64
Increase attributable to new investors ...................... 3.98
-----
Pro forma as adjusted net tangible book value per share after
this offering................................................. 5.62
------
Dilution per share to new investors in this offering........... $10.38
======
</TABLE>
The following table summarizes, as of September 30, 1999, differences
between the existing stockholders and new investors with respect to the number
of shares of common stock purchased, the total consideration paid and the
average price paid per share.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
or to be Purchased Paid or to be Paid
------------------ -------------------- Average Price
Number Percent Amount Percent Per Share
<S> <C> <C> <C> <C> <C>
Existing stockholders..... 17,165,604 69.6% $ 48,907,959 29.0% $ 2.85
New investors............. 7,500,000 30.4 120,000,000 71.0 16.00
---------- ----- ------------ ----- ------
Total................... 24,665,604 100.0% $168,907,959 100.0% $ 6.85
========== ===== ============ ===== ======
</TABLE>
The discussion and table assumes no exercise of options outstanding under
our stock option plan and no exercise of warrants that will remain outstanding
after this offering. As of September 30, 1999, there were 2,372,826 shares of
common stock reserved for issuance upon exercise of options granted under our
stock option plan, of which options to purchase 1,577,953 shares were
outstanding as of September 30, 1999 at exercise prices ranging from $0.002 to
$7.58 per share and a weighted average exercise price of $1.75 per share. There
were also 1,183,183 shares of common stock issuable upon exercise of warrants
outstanding as of September 30, 1999 at a weighted average exercise price of
$6.87 per share. In addition, there were 57,545 warrants outstanding for
purchase of our series B preferred stock at an exercise price of $2.80 per
share, which will convert upon consummation of this offering into 87,275
warrants to purchase our common stock at an exercise price of $1.85 per share.
The exercise of these options and warrants will have the effect of increasing
the dilution per share to new investors in this offering. In addition, we have
agreed to issue upon consummation of this offering warrants to acquire up to
3,724,307 shares of common stock at an exercise price of $0.01 per share to
certain key suppliers and purchasers of scientific products and may in the
future issue warrants to acquire up to an additional 1,408,112 shares of common
stock at an exercise price of $0.01 per share to other key suppliers and
purchasers of scientific products. Assuming the 3,724,307 warrants we have
committed to issue to certain key suppliers and purchasers of scientific
products are exercised, the dilution to new investors upon completion of this
offering would be approximately $11.11 per share. Assuming that all options and
warrants discussed above, including the 3,724,307 warrants to be issued to
certain key suppliers and purchasers of scientific products, are exercised, the
dilution to new investors upon completion of this offering would be
approximately $11.21 per share and shares held by new investors would comprise
approximately 24.0% of outstanding shares.
21
<PAGE>
Assuming full exercise of the underwriters' over-allotment option, the
percentage of shares held by existing stockholders would be 66.6% of the total
number of shares of common stock to be outstanding after the offering, and the
number of shares held by new stockholders would be increased to 8,625,000
shares, or 33.4% of the total number of shares of common stock to be
outstanding after this offering.
22
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS DATA
The unaudited pro forma combined statements of operations data for the year
ended December 31, 1998 and the nine months ended September 30, 1998 combine
the historical statements of operations of SciQuest.com and BioSupplyNet as if
the acquisition of BioSupplyNet, which occurred on September 29, 1998, had been
completed on January 1, 1998. The total cost of the acquisition was
approximately $2.0 million and has been accounted for using the purchase method
of accounting. The unaudited pro forma statement of operations and the
accompanying notes should be read in conjunction with the historical financial
statements (including the related notes) of SciQuest.com and BioSupplyNet, and
Management's Discussion and Analysis of Financial Condition and Results of
Operations, appearing elsewhere in this prospectus.
The pro forma adjustments reflecting the consummation of the acquisition are
based on the purchase method of accounting, available financial information and
certain estimates and assumptions set forth in the notes to the unaudited pro
forma statements of operations data. The unaudited pro forma statements of
operations data reflects SciQuest.com's best estimates; however, the actual
financial position and results of operations may differ significantly from the
pro forma amounts reflected herein due to various factors, including, without
limitation, access to additional information and changes in value. The pro
forma adjustments do not reflect any operating efficiencies or cost savings
that may be achievable with respect to the combined businesses of SciQuest.com
and BioSupplyNet.
The unaudited pro forma financial data for the year ended December 31, 1998
and the nine months ended September 30, 1998, do not purport to represent what
the actual results of the combined businesses would have been if the
acquisition of BioSupplyNet had occurred on January 1, 1998, nor does this
information purport to project our results for any future period.
<TABLE>
<CAPTION>
Year Ended December 31, 1998
------------------------------------------------------------------
Pro Forma Pro Forma
SciQuest.com BioSupplyNet Combined Adjustments Combined
(audited) (unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Revenues................ $ 477,818 $ 620,359 $ 1,098,177 $ -- $ 1,098,177
Cost of revenues........ (41,880) (354,361) (396,241) -- (396,241)
----------- --------- ----------- --------- -----------
Gross profit.......... 435,938 265,998 701,936 -- 701,936
----------- --------- ----------- --------- -----------
Product development..... 1,191,135 132,840 1,323,975 121,383 (a) 1,445,358
Sales and marketing..... 1,706,033 370,601 2,076,634 2,076,634
General and
administrative......... 1,104,010 120,261 1,224,271 382,801 (a) 1,607,072
Purchased in process
research and
development............ 791,102 -- 791,102 (791,102)(b) --
----------- --------- ----------- --------- -----------
Total operating
expenses........... 4,792,280 623,702 5,415,982 (286,918) 5,129,064
----------- --------- ----------- --------- -----------
Operating loss.......... (4,356,342) (357,704) (4,714,046) 286,918 (4,427,128)
Interest income......... 110,565 1,608 112,173 -- 112,173
Interest expense........ (30,524) (12,997) (43,521) -- (43,521)
----------- --------- ----------- --------- -----------
Loss before income
taxes.................. (4,276,301) (369,093) (4,645,394) 286,918 (4,358,476)
Income tax benefit...... 54,695 -- 54,695 164,085 (c) 218,780
----------- --------- ----------- --------- -----------
Net loss................ (4,221,606) (369,093) (4,590,699) 451,003 (4,139,696)
Accretion on mandatorily
redeemable convertible
preferred stock........ 328,723 -- 328,723 -- 328,723
----------- --------- ----------- --------- -----------
Net loss available to
common stockholders.... $(4,550,329) $(369,093) $(4,919,422) $ 451,003 $(4,468,419)
=========== ========= =========== ========= ===========
Net loss per common
share.................. $ (1.31)
Weighted average common
shares outstanding..... 3,412,447
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1998
------------------------------------------------------------------
Pro Forma Pro Forma
SciQuest.com BioSupplyNet Combined Adjustments Combined
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Revenues................ $ 308,365 $ 620,359 $ 928,724 $ -- $ 928,724
Cost of revenues........ -- (354,361) (354,361) -- (354,361)
----------- --------- ----------- -------- -----------
Gross profit.......... 308,365 265,998 574,363 -- 574,363
----------- --------- ----------- -------- -----------
Product development..... 389,901 132,840 522,741 121,383 (d) 644,124
Sales and marketing..... 828,294 370,601 1,198,895 -- 1,198,895
General and
administrative......... 375,793 120,261 496,054 382,801 (d) 878,855
Purchased in-process
research and
development............ 791,102 -- 791,102 (791,102)(b) --
----------- --------- ----------- -------- -----------
Total operating
expenses........... 2,385,090 623,702 3,008,792 (286,918) 2,721,874
----------- --------- ----------- -------- -----------
Operating loss.......... (2,076,725) (357,704) (2,434,429) 286,918 (2,147,511)
Interest income......... 34,259 1,608 35,867 -- 35,867
Interest expense........ (22,638) (12,997) (35,635) -- (35,635)
----------- --------- ----------- -------- -----------
Loss before income
taxes.................. (2,065,104) (369,093) (2,434,197) 286,918 (2,147,279)
Income tax benefit...... -- -- -- 164,085 (e) 164,085
----------- --------- ----------- -------- -----------
Net loss................ (2,065,104) (369,093) (2,434,197) 451,003 (1,983,194)
Accretion on mandatorily
redeemable convertible
preferred stock........ 112,155 -- 112,155 -- 112,155
----------- --------- ----------- -------- -----------
Net loss available to
common stockholders.... $(2,177,259) $(369,093) $(2,546,352) $451,003 $(2,095,349)
=========== ========= =========== ======== ===========
Net loss per common
share.................. $ (0.64) $ (0.61)
Weighted average common
shares outstanding..... 3,412,447 3,412,447
</TABLE>
Notes to the Unaudited Pro Forma Statements of Operations Data
The following pro forma adjustments were made to our consolidated statements
operations to arrive at our unaudited pro forma statements of operations data:
(a) We recorded additional amortization of intangible assets and goodwill
related to the acquisition of BioSupplyNet for all twelve months of
1998.
(b) We eliminated the charge to operations related to the portion of the
purchase price of BioSupplyNet allocated to in-process research and
development.
(c) We recorded a deferred tax benefit related to reduction in deferred tax
liabilities resulting from the increased amortization of the intangible
assets and goodwill recorded with the acquisition of BioSupplyNet for
all twelve months of 1998.
(d) We recorded amortization of intangible assets and goodwill related to
the acquisition of BioSupplyNet for the period from January 1, 1998 to
September 30, 1998.
(e) We recorded a deferred tax benefit related to reduction in deferred tax
liabilities resulting from the increased amortization of the intangible
assets and goodwill recorded with the acquisition of BioSupplyNet
during the period from January 1, 1998 to September 30, 1998.
24
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
Our selected financial data set forth below should be read in conjunction
with our financial statements and accompanying notes appearing elsewhere in
this prospectus and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The historical statements of operations
data for the years ended December 31, 1996, 1997 and 1998, and the balance
sheet data as of December 31, 1997 and 1998 are derived from, and are qualified
by reference to, our financial statements, which have been audited by
PricewaterhouseCoopers LLP. The balance sheet data as of December 31, 1996 is
derived from an audited balance sheet not included in this prospectus. The
acquisition of BioSupplyNet has been accounted for using the purchase method of
accounting. Accordingly, the actual consolidated statement of operations data
reflects the results of operations of BioSupplyNet since its acquisition on
September 29, 1998. The statement of operations data for the nine months ended
September 30, 1998 and 1999 and the balance sheet data as of September 30, 1999
are derived from our unaudited financial statements appearing elsewhere in this
prospectus. In the opinion of our management, the unaudited financial
statements have been prepared on a basis consistent with the financial
statements which appear elsewhere in the prospectus, and include all
adjustments, consisting only of normal recurring adjustments necessary for a
fair statement of the financial position and results of operations for these
unaudited periods. Historical results are not necessarily indicative of results
to be expected in the future.
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended September 30,
------------------------------------- -----------------------------------
Pro Forma Pro Forma
1996 1997 1998 1998 1998 1998 1999
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues................ $ -- $ 196 $ 478 $ 1,098 $ 308 $ 928 $ 1,244
Cost of revenues........ -- -- 42 396 -- 354 823
------ ------ -------- -------- -------- -------- ---------
Gross profit........... -- 196 436 702 308 574 421
Operating expenses:
Product development.... 85 140 1,191 1,445 390 644 6,299
Sales and marketing.... 150 257 1,706 2,077 828 1,199 6,219
General and administra-
tive.................. 301 457 1,104 1,607 376 879 3,963
Purchased in process
research and
development........... -- -- 791 -- 791 -- --
------ ------ -------- -------- -------- -------- ---------
Total operating ex-
penses................. 536 855 4,792 5,129 2,385 2,722 16,481
------ ------ -------- -------- -------- -------- ---------
Operating loss.......... (536) (658) (4,356) (4,427) (2,077) (2,148) (16,060)
Net interest income (ex-
pense)................. (9) (32) 80 69 12 1 755
------ ------ -------- -------- -------- -------- ---------
Loss before income tax-
es..................... (545) (690) (4,276) (4,358) (2,065) (2,147) (15,305)
Income tax benefit...... -- -- 54 218 -- 164 164
------ ------ -------- -------- -------- -------- ---------
Net loss................ (545) (690) (4,222) (4,140) (2,065) 1,983 (15,141)
Accretion on mandatorily
redeemable preferred
stock.................. -- -- 328 328 112 112 46,647
------ ------ -------- -------- -------- -------- ---------
Net loss available to
common stockholders.... $ (545) $ (690) $ (4,550) $ (4,468) $ (2,177) $ (2,095) $ (61,788)
====== ====== ======== ======== ======== ======== =========
Net loss per common
share--basic and dilut-
ed..................... $(0.16) $(0.20) $ (1.33) $ (1.31) $ (0.64) $ (0.61) $ (17.60)
Weighted average common
shares outstanding..... 3,412 3,412 3,412 3,412 3,412 3,412 3,511
Pro forma net loss per
common share--basic and
diluted................ $ (0.62) $ (0.61) $ (1.08)
Pro forma weighted aver-
age common shares
outstanding............ 6,806 6,806 13,976
</TABLE>
<TABLE>
<CAPTION>
As of December 31, As of
--------------------- September 30,
1996 1997 1998 1999
(unaudited)
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents................. $ 9 $ 331 $ 5,391 $ 4,911
Working capital (deficit)................. (227) (28) 6,413 14,950
Total assets.............................. 77 385 9,173 34,761
Long-term liabilities..................... 66 79 385 1,156
Mandatorily redeemable convertible pre-
ferred stock............................. -- -- 10,883 92,664
Stockholders' equity (deficit)............ (254) (81) (3,102) (62,838)
</TABLE>
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and accompanying notes, which appear elsewhere in this
prospectus. It contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those
anticipated in these forwarding-looking statements as a result of various
factors, including those discussed below and elsewhere in this prospectus,
particularly under the heading "Risk Factors."
Overview
SciQuest.com is a Web-based, interactive marketplace for scientific and
laboratory products used by pharmaceutical, clinical, biotechnology, chemical,
industrial and educational organizations worldwide. We have used our extensive
industry expertise to design a marketplace that streamlines the traditionally
inefficient scientific products supply chain. Our marketplace solutions allow
buyers of scientific products to cross-search content and purchase products
from multiple suppliers with a single order. Our approach does not give
priority to any particular scientific products distributor, which allows us to
create an open and scalable marketplace that we believe is more attractive to
both buyers and sellers.
We were incorporated in November 1995 and commenced operations in January
1996. During 1996, we focused on developing our business model and the required
technology. We did not begin to recognize any revenues until 1997.
On September 29, 1998, we acquired BioSupplyNet in exchange for the issuance
of 546,405 shares of our series C convertible preferred stock and 162,718
warrants to purchase our common stock at an exercise price of $1.85 per share.
In addition, we issued 192,280 options to purchase our common stock with
exercise prices ranging from $0.002 to $0.18 per share primarily to former
employees of BioSupplyNet who became our employees. The series C convertible
preferred stock, at the option of the holder, is convertible into shares of our
common stock at a 1.516643-for-one conversion ratio and automatically converts
to common stock upon the closing of a firm commitment underwritten public
offering. This acquisition was accounted for using the purchase method of
accounting with a total purchase price of approximately $2.0 million. Of the
total purchase price, $0.8 million was allocated to in-process research and
development and immediately charged to operations because the in-process e-
commerce technology acquired had not reached technological feasibility at the
date of the acquisition and had no alternative future use. At the date of the
acquisition, BioSupplyNet's e-commerce technology was approximately 50%
complete. We estimated at the acquisition date that we would incur
approximately $1.9 million to complete the development of this e-commerce
technology and that the development would be completed by March 2000. Since the
date of the acquisition of BioSupplyNet we have completed the development of
the e-commerce taxonomy and ontology functionality and made significant
progress in the completion of the Web-based directory services and search
engine technology that was being developed by BioSupplyNet. The development of
the BioSupplyNet e-commerce technology is approximately 20% complete at
September 30, 1999 and there have been no significant changes in the estimated
scope of the work to be performed since the date of the acquisition. The
remaining $1.2 million of the purchase price of BioSupplyNet was allocated to
the tangible and intangible assets of BioSupplyNet. The fair values assigned to
in-process research and development, tangible and intangible assets of
BioSupplyNet were based on an management's valuation.
BioSupplyNet publishes the Source Book, an annual printed catalogue of
vendors of biomedical research supplies and equipment and scientific products
for the biomedical research industry. In addition, at the time of acquisition,
BioSupplyNet was in the process of developing e-commerce technology to allow
research scientists, lab technicians and purchasing agents to quickly identify
suppliers of specific scientific products. We intend to continue to enhance and
develop this technology. Since the acquisition of BioSupplyNet, we have derived
revenues from the sale of advertising in the Source Book.
On July 30, 1999, we acquired all of the outstanding common stock of
Internet Auctioneers International, Inc. in exchange for the issuance of
114,995 shares of our series E convertible preferred stock. Each share of
26
<PAGE>
series E convertible preferred stock is convertible at the option of the holder
into 1.516643 shares of our common stock and will automatically convert to
common stock upon the closing of this offering. Internet Auctioneers
International provides auction services to laboratories for the sale of used
equipment. We will receive a commission for performing these services, which
will be recognized as revenues at the time the sale is finalized.
In October 1999, we entered into strategic relationships with a number of
key suppliers and buyers of scientific products, whereby we agreed to issue
warrants to these suppliers and buyers to purchase approximately 3,724,307
shares of common stock at an exercise price of $0.01 per share. These warrants
will be issued upon consummation of this offering, will vest over a period of
three to five years and will be exercisable until 2004. In addition, we have
set aside warrants to purchase approximately 1,408,112 shares of common stock
at an exercise price of $0.01 per share that may be issued to additional
strategic partners. We intend to issue these additional warrants as we enter
into similar agreements with a limited number of other key suppliers and buyers
of scientific products. We have issued, and intend to issue, these warrants in
connection with these agreements as we believe that these relationships are an
integral component of our business plan.
These strategic relationships include agreements to be the exclusive third
party provider of electronic marketplace services in the United States for a
period of five years for eight key suppliers. Under the terms of these
agreements, these suppliers are not required to sell a minimum amount of
products through our electronic marketplace. The warrants to purchase our
common stock that will be issued in connection with these agreements will vest
over a four or five year period regardless of the level of sales by the
suppliers through our electronic marketplace.
These strategic relationships also include binding letters of intent with
Dow Chemical Company, DuPont Pharmaceuticals Company and Monsanto Company to be
their exclusive third party electronic aggregator for purchases of scientific
products in North America for a period of three years. Although these buyers
have agreed to use reasonable efforts to purchase at least $5 million of
scientific products annually through our marketplace, there are no minimum
purchase commitments. The warrants to be issued in connection with these
relationships will vest over a period of three years regardless of their level
of purchases through our electronic marketplace. The letters of intent with Dow
Chemical Company and Monsanto Company may be terminated by either party on or
after December 31, 1999 in the event that the parties have not completed
mutually satisfactory definitive agreements.
We will record unearned compensation of approximately $59.6 million upon
consummation of this offering, which will be included as a separate component
of stockholder's equity, related to the warrants to purchase 3,724,307 shares
of common stock that we have agreed to issue. In the event the remaining
available warrants are issued prior to consummation of this offering additional
unearned compensation of approximately $22.5 million will be recorded. In the
event these warrants are issued subsequent to the completion of this offering,
the amount of the unearned compensation to be recognized at the date of
issuance will be based on the difference between our common stock price on the
date of the grant and the exercise price of $0.01 per share. The amount of
unearned compensation recognized will be adjusted in future reporting periods
based on changes in the fair value of the warrants until such date as the
warrants are fully vested. Unearned compensation will be amortized to operating
expense over the term of the related contractual relationship, which in the
case of the buyer agreements is three years and in the case of the supplier
agreements is five years.
We have also agreed to issue to Dow Chemical Company, DuPont Pharmaceuticals
Company and Monsanto Company additional incentive warrants, the number of which
will be based on each purchaser's volume of purchases through our marketplace
during the years 2000, 2001 and 2002. These incentive warrants will be issued
on February 15, 2001, 2002 and 2003, at an exercise price equal to the initial
public offering price, will be exercisable upon issuance and will be
exercisable for five years after issuance. A charge will be recognized as a
reduction of net revenues upon each issuance of the incentive warrants in an
amount equal to the difference between the fair market value of our common
shares on the issuance date less the exercise price for these warrants.
Revenues consist of (1) sales of scientific products in e-commerce
transactions originating on our Web sites, (2) banner advertising revenues from
our Web sites and (3) advertising revenues from the Source Book.
27
<PAGE>
Prior to the launch of our e-commerce marketplace in April 1999, substantially
all of our revenues were derived from advertising on our Web Sites and in the
Source Book. Revenues from e-commerce transactions became a significant source
of our revenues in the third quarter of 1999 and are expected to continue to
increase. For the nine months ended September 30, 1999, one customer, PPD
Development, Inc., accounted for twelve percent of revenues.
We offer various Web-based solutions where potential buyers can cross-search
content from multiple suppliers and build a multiple line item order for
products from various suppliers. When a purchaser places an order through our
marketplace, we purchase that item from the supplier at either a pre-negotiated
price or at a discount from the supplier's list price and arrange for shipment
to the purchaser. We take legal title to the products purchased at the date of
shipment and relinquish title to our customers upon delivery. After the
supplier ships the product, we begin the collection process by presenting a
consolidated invoice to the buyer for the products and vendors represented in
the order. Payment by the buyer to us is then made by credit card/procurement
card or through a more traditional account setup and payment system. For each
transaction, we recognize revenue in the amount of the sales price of the item
to the purchaser and recognize the amount paid to the supplier plus shipping
costs as cost of goods sold. The difference between revenues and cost of goods
sold is our gross profit.
Revenues from sales of scientific products in e-commerce transactions are
recorded as product revenues and are recognized upon notification from our
suppliers that the items ordered have been shipped to the customer.
Advertising revenues on banner contracts are recognized ratably over the
period in which the advertisement is displayed. Revenues from advertising
included in the Source Book are recognized at the date the Source Book is
published and distributed. Advertising on our Web sites is sold by Cahners
Business Information. Cahners will pay us a percentage of the total advertising
revenues which it receives.
Results of Operations
The following table sets forth certain operating data as a percentage of
total revenues for the periods indicated. We did not generate revenues prior to
1996.
<TABLE>
<CAPTION>
Year Ended Nine Months
December 31, Ended September 30
---------------- -------------------
1997 1998 1998 1999
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues.............................. 100.0% 100.0% 100.0% 100.0%
Cost of revenues...................... -- 8.8 -- 66.2
------ ------- -------- ---------
Gross profit.......................... 100.0 91.2 100.0 33.8
------ ------- -------- ---------
Operating expenses:
Product development................. 71.6 249.3 126.4 506.4
Sales and marketing................. 130.7 357.0 268.6 500.0
General and administrative.......... 232.7 231.0 121.9 318.6
Purchased in process-research and
development........................ -- 165.6 256.6 --
------ ------- -------- ---------
Total operating expenses.............. 435.0 1,002.9 773.5 1,325.0
------ ------- -------- ---------
Operating loss........................ (335.0) (911.7) (673.5) (1,291.2)
------ ------- -------- ---------
Net interest income (expense)......... (16.2) 16.7 3.8 60.7
------ ------- -------- ---------
Loss before income taxes.............. (351.2) (895.0) (669.7) (1,230.5)
Income tax benefit.................... -- 11.5 -- 13.2
------ ------- -------- ---------
Net loss.............................. (351.2) (883.5) (669.7) (1,217.3)
Accretion on mandatorily redeemable
preferred stock...................... -- 68.8 36.4 3,750.4
------ ------- -------- ---------
Net loss available to common
stockholders......................... (351.2)% (952.3)% (706.1)% (4,967.7)%
====== ======= ======== =========
</TABLE>
28
<PAGE>
Nine Months Ended September 30, 1999 and 1998
Revenues
Revenues have been derived primarily from advertising revenues from the
Source Book, the sale of scientific products in e-commerce transactions and
banner advertising.
Revenues increased to $1.2 million for the nine months ended September 30,
1999 from $0.3 million for the nine months ended September 30, 1998. This
increase was primarily due to $0.7 million in advertising revenues generated by
BioSupplyNet for the nine months ended September 30, 1999 compared to zero in
the nine months ended September 30, 1998 as we did not acquire BioSupplyNet
until September 29, 1998. Revenues from the sale of scientific products in e-
commerce transactions totaled $0.4 million for the nine months ended September
30, 1999 as compared to zero for the nine months ended September 30, 1998 as
our e-commerce marketplace was not implemented until April 1999. Banner
advertising revenues decreased to $0.1 million for the nine months ended
September 30, 1999 from $0.3 million for the nine months ended September 30,
1998.
Cost of Revenues
Cost of revenues consists of the purchase price of scientific products sold
in e-commerce transactions and related shipping costs for these products,
publishing and distribution costs related to the Source Book, and our Web site
advertising development costs.
Total cost of revenues increased to $0.8 million for the nine months ended
September 30, 1999 from zero for the nine months ended September 30, 1998. Cost
of revenues increased primarily due to $0.4 million in costs incurred related
to BioSupplyNet's advertising revenues and $0.4 million in costs related to the
sale of scientific products in e-commerce transactions during the nine months
ended September 30, 1999.
Gross Profit
Gross profit increased to $0.4 million for the nine months ended September
30, 1999 from $0.3 million for the nine months ended September 30, 1998. Gross
profit increased as product sales began with the launch of the SciQuest.com
marketplace in April 1999 and as a result of advertising revenues generated
from the sale of advertising by BioSupplyNet, which was acquired in September
1998.
Operating Expenses
Product Development Expenses. Product development expenses consist primarily
of personnel and related costs used to develop and maintain our Web sites.
Product development costs increased to $6.3 million for the nine months ended
September 30, 1999 from $0.4 million for the nine months ended September 30,
1998. This increase resulted from additional expenses incurred to develop the
e-commerce functionality of our Web sites, including an increase in the product
development staff and the costs of continuing the development of the e-commerce
technology acquired with BioSupplyNet. We expect that our product development
expenses will continue to increase as we continue to enhance and develop
functionality on our Web sites, complete the development of the BioSupplyNet e-
commerce technology and develop customized private Web sites for major
customers.
Sales and Marketing Expenses. Sales and marketing expenses consist primarily
of salaries and other related costs for sales and marketing personnel, travel
expenses, public relations expenses and marketing materials. Sales and
marketing expenses increased to $6.2 million for the nine months ended
September 30, 1999 from $0.8 million for the nine months ended September 30,
1998. This increase resulted primarily from the hiring of additional sales and
marketing personnel to market our products and services and increased expenses
to advertise and promote our Web sites and to a lesser extent sales and
marketing expenses related to BioSupplyNet. We expect that our sales and
marketing expenses will continue to increase in the next 12
29
<PAGE>
months as we add sales and marketing personnel, and as we continue to incur
expenses to promote the services provided by our Web sites.
General and Administrative Expenses. General and administrative expenses
consist primarily of personnel and related costs for general corporate
functions, including finance, accounting, legal, human resources, facilities
and information systems expenses. General and administrative expenses increased
to $4.0 million for the nine months ended September 30, 1999 from $0.4 million
for the nine months ended September 30, 1998. General and administrative
expenses increased primarily as a result of increased payroll costs due to the
increase in the number of general and administrative personnel, and other
expenses, including professional fees and facilities costs incurred to support
the growth of our business. We expect general and administrative expenses to
continue to increase in the next 12 months as we add administrative personnel
to support the growth of our business.
Interest Income (Expense)
Net interest income (expense) consists of interest income earned on cash
deposited in money market accounts and invested in short and long term U.S.
Government obligations reduced by interest expense incurred on notes payable
and capital lease obligations. Net interest income (expense) increased to net
interest income of $0.8 million for the nine months ended September 30, 1999
from net interest income of $12,000 for the nine months ended September 30,
1998. The increase in net interest income was primarily the result of interest
earned on funds received from the sale of our series B mandatorily redeemable
convertible preferred stock in September 1998 and series D mandatorily
redeemable convertible preferred stock in May and June 1999.
Income Tax Benefit
Income tax benefit increased to $0.2 million the nine months ended September
30, 1999 from zero for the nine months ended September 30, 1998. The increase
in income tax benefit was the result of the reduction in net deferred tax
liabilities during the nine months ended September 30, 1999 due to the
amortization of the goodwill and other intangible assets recorded with our
acquisition of BioSupplyNet in September 1998.
Accretion of Mandatorily Redeemable Convertible Preferred Stock
Accretion of mandatorily redeemable preferred stock increased to $46.6
million in the nine months ended September 30, 1999 from $0.1 million in the
nine months ended September 30, 1998 as a result of the accretion of the series
B mandatorily redeemable convertible preferred stock to its estimated
redemption amount at September 30, 1999 and accretion of the series D
mandatorily redeemable convertible preferred stock to its redemption amount
over the period from the date of issuance to the first redemption date. Our
series B mandatorily redeemable convertible preferred stock has a redemption
price that is variable in amount (See Note 12 to our financial statements), and
its carrying value is required to be adjusted to the estimated redemption
amount at each balance sheet date rather than being accreted to the redemption
amount over the period from date of issuance to the first redemption date. This
resulted in accretion of $45.2 million on the series B mandatorily redeemable
preferred stock being recognized in the nine month period ended September 30,
1999.
Years Ended December 31, 1998 and 1997
Revenues
Revenues increased to $0.5 million for the year ended December 31, 1998 from
$0.2 million for the year ended December 31, 1997. This increase was primarily
a result of hiring additional sales staff responsible for marketing advertising
space on our Web sites and the acquisition of BioSupplyNet in September 1998.
All of our revenues for the year ended December 31, 1998 and substantially all
of our revenues for the year ended December 31, 1997 were generated from the
sale of advertising with the remainder of these revenues being generated from
the creation of Web-based content and development services.
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Cost of Revenues
Cost of revenues increased to $42,000 for the year ended December 31, 1998
from zero for the year ended December 31, 1997. This increase resulted
primarily from costs associated with the development of advertising for display
on our Web sites and cost of revenues of BioSupplyNet, which was acquired in
September 1998.
Gross Profit
Gross profit increased to $0.4 million for the year ended December 31, 1998
from $0.2 million for the year ended December 31, 1997. Gross profit increased
as a result of the increase in advertising revenues from sale of advertising on
our Web sites, which has a relatively low amount of associated costs.
Operating Expenses
Product Development Expenses. Product development expenses increased to $1.2
million for the year ended December 31, 1998 from $0.1 million for the year
ended December 31, 1997. This increase resulted primarily from the development
of the e-commerce functionality of our Web sites, which began during the fourth
quarter of 1998. Product development expenses incurred during the year ended
December 31, 1997 consisted primarily of the costs of developing and
maintaining our Web site, which functions were limited to providing a source
for data about scientific products.
Sales and Marketing Expenses. Sales and marketing expenses increased to $1.7
million for the year ended December 31, 1998 from $0.3 million for the year
ended December 31, 1997. The increased sales and marketing expenses were
primarily due to an increase in the number of sales and marketing personnel
during the year ended December 31, 1998 and sales and marketing expenses of
BioSupplyNet from the date of the acquisition through December 31, 1998.
General and Administrative Expenses. General and administrative expenses
increased to $1.1 million for the year ended December 31, 1998 from $0.5
million for the year ended December 31, 1997. This increase primarily resulted
from hiring additional general and administrative staff to support the rapid
growth of our business, and we incurred $0.3 million of general and
administrative expense in 1998 as a result of the acquisition of BioSupplyNet
in September 1998.
Purchased In Process Research and Development Expense. For the year ended
December 31, 1998, we recognized an in-process research and development charge
of $0.8 million as a result of the acquisition of BioSupplyNet. Based on our
valuation of BioSupplyNet and its assets, we allocated a portion of the
BioSupplyNet purchase price to in-process e-commerce technology being developed
by BioSupplyNet which had not reached technological feasablity and had no
alternative use at the date of the acquisition of BioSupplyNet. We are using
this technology in the development of the e-commerce and scientific products
search capabilities on our Web sites. At the date of the acquisition, the e-
commerce technology being developed by BioSupplyNet was approximately 50%
complete. We estimate that we will incur approximately $1.9 million to complete
the development of this e-commerce technology. We expect to complete
substantially all of the development by March 2000.
Interest Income (Expense)
Net interest income (expense) increased to net interest income of $0.1
million for the year ended December 31, 1998 from net interest expense of
$32,000 for the year ended December 31, 1997. Net interest income increased
primarily as a result of interest earned on funds received from sale of our
series B mandatorily redeemable convertible preferred stock between September
and November 1998.
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Income Tax Benefit
The income tax benefit increased to $55,000 for the year ended December 31,
1998 from zero for the year ended December 31, 1997. The income tax benefit
increased as a result of a reduction in deferred tax liabilities due to the
amortization of the goodwill and other intangible assets recorded as a result
of the acquisition of BioSupplyNet in September 1998.
Accretion of Mandatorily Redeemable Convertible Preferred Stock
Accretion of mandatorily redeemable convertible preferred stock increased to
$0.3 million in the year ended December 31, 1998 from zero in the year ended
December 31, 1997. Prior to September 30, 1998, we did not have any mandatorily
redeemable convertible preferred stock outstanding; therefore, we did not
recognize any accretion in the year ended December 31, 1997. At December 31,
1998, our series B mandatorily redeemable convertible preferred stock was
mandatorily redeemable with a redemption price that was variable in amount and
was therefore required to be stated at its redemption value at December 31,
1998.
Years Ended December 31, 1997 and 1996
Revenue
Revenues increased to $0.2 million for the year ended December 31, 1997
compared to zero for the year ended December 31, 1996. Revenues increased due
to the sale of banner advertisements to be displayed on our Web site during the
year ended December 31, 1997.
Operating Expenses
Product Development Expenses. Product development expenses increased to $0.1
million for the year ended December 31, 1997 from $85,000 for the year ended
December 31, 1996. This increase resulted primarily from expenses incurred
related to the development of our Web sites during the year ended December 31,
1997.
Sales and Marketing Expenses. Sales and marketing expenses increased to $0.3
million for the year ended December 31, 1997 from $0.2 million for the year
ended December 31, 1996. This increase was primarily due to the hiring of
additional sales and marketing personnel during the year ended December 31,
1997.
General and Administrative Expenses. General and administrative expenses
increased to $0.5 million for the year ended December 31, 1997 from $0.3
million for the year ended December 31, 1996. This increase resulted primarily
from the hiring of additional general and administrative staff to manage and
maintain supplier information on the Web site.
Interest Income (Expense)
Net interest expense increased to net interest expense of $32,000 for the
year ended December 31, 1997 from net interest expense of $9,000 for the year
ended December 31, 1996. We obtained additional financing between the years
ended December 31, 1997 and December 31, 1996, and as a result we incurred
additional interest and expenses.
Liquidity and Capital Resources
We have primarily funded our operations through private placements of our
preferred stock. As of September 30, 1999, we had cash and cash equivalents of
$4.9 million, short term investments of $12.6 million and long term investments
of $12.4 million.
Cash used in operating activities during the nine months ended September 30,
1999 was $12.9 million and during the years ended December 31, 1998, 1997 and
1996 was $3.1 million, $0.4 million and $0.3 million,
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respectively. Cash used in operating activities was principally for the
development of our Web sites, the development of our e-commerce marketplace,
the expansion of our sales and marketing force and the expansion of the
administrative and operations staff to support our growth.
Cash used in investing activities during the nine months ended September 30,
1999 was $23.7 million and during the years ended December 31, 1998, 1997 and
1996 was $2.2 million, zero and $27,000, respectively. Cash used in investing
activities has primarily been comprised of purchases of investments in US
government obligations and corporate bonds.
Cash provided by financing activities during the nine months ended September
30, 1999 was $36.1 million and during the years ended December 31, 1998, 1997
and 1996 was $10.4 million, $0.7 million and $0.3 million, respectively.
Between March and September 1997, we received an aggregate of $80,000 in the
form of bridge loans. These bridge loans were converted into 90,702 shares of
series A convertible preferred stock in October 1997. In October 1997, we
raised an aggregate of $617,450 through the issuance of 678,519 shares of our
series A convertible preferred stock at a price of $0.91 per share. Between
March and June 1998, we received $515,000 in the form of bridge loans. These
bridge loans were converted into 187,394 shares of series B mandatory
redeemable convertible preferred stock in July 1998. Between July and November
1998, we raised an aggregate of $10,038,979 through the issuance of 3,590,232
shares of our series B mandatorily redeemable convertible preferred stock at a
price of $2.80 per share. Purchasers of the series B mandatorily redeemable
convertible preferred stock whose shares were issued pursuant to the conversion
of bridge loans also received 57,545 warrants to purchase series B mandatorily
redeemable convertible preferred stock at an exercise price of $2.80. In May
and June 1999, we raised an aggregate of $37,506,616 through the issuance of
3,312,720 shares of our series D mandatorily redeemable convertible preferred
stock at a price of $11.32 per share. Purchasers of the series D mandatorily
redeemable convertible preferred stock also received 1,004,829 warrants to
purchase our common stock at an exercise price of $7.46 per share. In March
1999, we sold 89,408 shares of series C convertible preferred stock to an
executive officer for $250,000, or $2.80 per share.
We believe that our existing liquidity and capital resources, including the
proceeds resulting from the sale of our common stock in this offering, will be
sufficient to satisfy our cash requirements for the next twenty-four months. To
the extent that such amounts are insufficient, we will be required to raise
additional funds through equity or debt financing. There can be no assurance
that we will be able to raise such funds on favorable terms, or at all.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Investments
and Hedging Activities" (SFAS No. 133). SFAS No. 133 establishes a new model
for accounting for derivatives and hedging activities and supercedes a number
of existing standards. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. The adoption of SFAS No. 133, as
amended, is not expected to have a material impact on our consolidated
financial position or results of operations.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants ("AICPA") issued Statements of
Position No. 98-1, "Software for Internal Use" (SOP No. 98-1), which provides
guidance regarding when software developed or obtained for internal use should
be capitalized. SOP No. 98-1 is effective for financial statements for fiscal
years beginning after December 15, 1998. Our adoption of SOP No. 98-1 on
January 1, 1999 had no impact on our consolidated financial position or results
of operations.
In April 1998, the Accounting Standards Executive Committee of the AICPA
issued Statement of Position No. 98-5, "Reporting on the Costs of Start-Up
Activities" (SOP No. 98-5), which is effective for fiscal years beginning after
December 15, 1998. SOP 98-5 requires companies to expense as incurred all pre-
opening,
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startup and organizational costs that are not capitalizable as long-lived
assets. Our adoption of SOP 98-5 on January 1, 1999 had no impact on our
consolidated financial position or results of operations.
Year 2000
Impact of Year 2000 Computer Issues
The year 2000 computer problem refers to the potential for system and
processing failures of date-related data as a result of computer-controlled
systems using two digits rather than four to define the applicable year. For
example, computer programs that have time-sensitive software may recognize a
date represented as "00" as the year 1900 rather than the year 2000. 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 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 our Web sites,
our business could be materially and adversely affected.
We completed an assessment of our information technology systems for year
2000 problems in June 1999. We have not replaced any of our systems based on
the results of our assessment. However, we have made modifications to some
systems based on our assessment, at a cost to us of approximately $175,000.
Testing of Our Online Marketplace Application Software
We have internally reviewed our application software. We have performed
industry-standard procedures to test our internally developed applications for
year 2000 compliance. Based on our testing, we believe that our internally
developed applications and systems are designed to be year 2000 compliant.
Assessment of Third-Party Equipment and Software
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 cause our applications
to malfunction and have a material adverse effect on our earnings. We are
continuing our assessment of the year 2000 risks of our third-party desktop
systems. We have contacted the vendors of most of our third-party software and
equipment to assess the year 2000 risks of our third-party systems. We have
received year 2000 compliance letters from 100% of these vendors. We are also
in the process of contacting the few remaining vendors with whom we have not
yet contacted in order to assess their year 2000 compliance. Based on these
vendors' representations, we believe that there are a number of third-party
hardware and software systems, some of which are material to our operations,
that require some upgrade in order to be year 2000 compliant. The failure of
these vendors to address their year 2000 issues may require us to seek
alternative vendors or, if possible, to develop our own solutions. The time and
resources required to find alternative vendors and to transition our systems
could increase our costs of doing business, require us to allocate our own
resources away from our core business, and delay development of our own
technology and operations. We plan to complete our assessment of the risk posed
by these third-party systems to our operations by the end of 1999. This process
has resulted in an insignificant amount of costs to us through September 30,
1999. We expect any remaining costs to also be insignificant.
Interaction of Our Marketplace with Supplier and Customer Systems
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 our marketplace is
difficult to determine. The availability of products from our suppliers and the
purchasing patterns of our customers or potential customers may be affected by
year 2000 issues.
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Our Contingency Planning Effort
We are engaged in an ongoing year 2000 assessment and are gathering
information for the development of contingency plans. We are in the process of
contacting our strategic partners, major customers and critical suppliers to
gauge their year 2000 compliance and are requesting year 2000 compliance
information and letters. We have received responses from a majority of our
critical suppliers, strategic partners and major customers and expect to
receive responses from the remainder by the middle of November 1999. We are
continuing to develop our contingency plans based on the responses received
from our critical suppliers, strategic partners and major customers.
Reasonably Likely Worst Case Scenario
The failure of our internal systems or of the products or systems including
hardware and software of third parties upon which we rely could result in:
. our inability to effective manage sales leads, which in turn could result
in fewer sales and lower revenue;
. the failure of our systems to function properly, which in turn could
result in our incurring significant costs and diverting significant human
resources in our efforts to comply with obligations under warranty and/or
service agreements;
. our inability to properly process orders from our customers; and
. our inability to properly invoice and process payments from our customers
and errors or omissions in accounting and financial data.
The occurrence of any of these events could have a material adverse effect
on our business.
Quantitative and Qualitative Disclosures About Market Risk
Most of our cash equivalents, short-term and long-term investments and
capital lease obligations are at fixed interest rates, therefore the fair value
of these investments is affected by changes in market interest rates. However,
because our investment portfolio is primarily comprised of investments in U.S.
Government obligations and high grade commercial paper, an immediate 10% change
in market interest rates would not have a material effect on the fair market
value of our portfolio. Therefore, we would not expect our operating results or
cash flows to be affected to any significant degree by the effect of a sudden
change in market interest rates on our investment portfolio.
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BUSINESS
Overview
SciQuest.com is a Web-based, interactive marketplace for scientific and
laboratory products used by pharmaceutical, clinical, biotechnology, chemical,
industrial and educational organizations worldwide. We have used our extensive
industry expertise to design a marketplace that streamlines the traditionally
inefficient scientific products supply chain. Our marketplace solutions allow
buyers of scientific products to cross-search content and purchase products
from multiple suppliers with a single order. Our approach does not give
priority to any particular scientific products distributor, which allows us to
create an open and scalable marketplace that we believe is more attractive to
both buyers and sellers.
Our marketplace benefits three distinct customers: scientists, purchasing
professionals and suppliers. Our solutions reduce the time scientists require
to find, compare, purchase, track and manage critical laboratory items, thus
allowing them to spend more time on research and testing. Our solutions allow
purchasing professionals to reduce procurement costs by automating order
processing, consolidating purchase orders and payments, reducing errors and
providing more control and information to support enterprise purchasing
policies. Our solutions serve as a more efficient sales channel that enables
suppliers to expand their market reach and reduce customer acquisition and
order processing costs.
Since our founding in 1995, we have expended significant resources to
develop our brand and assemble the most comprehensive online database of over
8,000 suppliers. Our easy-to-use, interactive database currently consists of
over 550,000 scientific products. Since July 1996, tens of thousands of
scientists and purchasing professionals from over 60 countries have used this
database to locate supplies and products. In April 1999, we introduced our e-
commerce marketplace solution to this growing community of online scientific
product buyers and suppliers. We intend to capitalize on this existing user
base to accelerate the utilization of our marketplace. In October 1999, we
entered into agreements to be the exclusive third party provider of electronic
marketplace services in the United States for a period of five years for the
following suppliers: Ambion, Inc., Amersham Pharmacia Biotech, Inc.,
BioWhittaker, a Cambrex Company, Endogen, Inc., NEN Life Science Products,
Inc., PerkinElmer, Inc., Pierce Chemical Company and QIAGEN N.V. In October
1999, we also entered into agreements with Dow Chemical Company and DuPont
Pharmaceuticals Company to be their exclusive third party electronic aggregator
for purchases of scientific products in North America for a period of three
years.
The illustration below summarizes the procurement process through our online
marketplace:
[GRAPH]
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Industry Background
The Scientific Products Market
Based upon data from the Laboratory Products Association, a trade
association for laboratory product businesses, and Strategic Directions
International, an international management consulting firm specializing in
analytical instruments, we estimate that the market for scientific products in
1999 will be approximately $11.8 billion in North America and $36.4 billion
worldwide. These expenditures are driven, to a large extent, by increases in
scientific research and development investments, which are expected to continue
to grow. Every year, approximately 200,000 laboratories around the world
purchase scientific products from thousands of different suppliers to
facilitate research and testing activities. As the demand for scientific
products grows, the need for efficient procurement processes becomes more
critical.
The current scientific products market is characterized by:
. complex, information-intensive products;
. a highly fragmented supply chain; and
. a heavy concentration of manual purchasing processes consisting of
printed catalogs, paper requisitions and telephone and fax orders.
There are, generally, three types of scientific products: (1) highly
technical specialty items used for specific research and testing applications,
(2) commodity products that are used in a broad range of scientific
applications, and (3) highly technical instruments and other capital equipment.
Suppliers typically sell specialty scientific products and instruments directly
to customers, whereas commodity products are typically sold through
distributors.
Limitations of the Traditional Supply Chain
The traditional supply chain in the scientific products industry does not
adequately address the needs of scientists, purchasing professionals or
suppliers.
Scientists. Because scientists are continually developing applications and
testing new theories, they are typically unable to forecast many of the
chemicals, supplies and equipment that they will need to conduct their research
and testing. For this reason scientists often:
. have immediate needs for critical items that are highly technical and
have exacting criteria;
. need new products that they have not purchased before; and
. must purchase these items from new and different suppliers.
As a result, it is difficult and time-consuming for scientists to identify,
compare and purchase the scientific products required to meet their needs using
the traditional approach. In fact, we estimate that a typical laboratory spends
up to four hours weekly searching through paper catalogs and product literature
and requesting technical data from various suppliers.
Purchasing Professionals. The product ordering process traditionally has
been a paper-based process that requires manual preparation of purchase orders
and order tracking. Traditionally, scientists requisition supplies through
purchasing professionals within their organizations who place orders with
multiple suppliers by telephone, fax and e-mail. This multi-step manual process
is highly susceptible to errors. Additionally, the traditional process makes it
difficult for purchasing professionals to enforce purchasing policies among
scientists who specify and request products. Buying organizations in a variety
of industries that were surveyed by the Aberdeen Group, a computer and
communications research and consulting organization, reported that it typically
costs $107 per requisition for orders processed manually, compared with $30 on
average to process an order through an Internet automated procurement system.
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Suppliers. Traditionally, suppliers have used two sales channels:
traditional distributors and direct sales. While traditional distributors can
give a supplier access to a broad market, distributors separate suppliers from
the ultimate customer and may lack the ability to provide the technical
assistance required to sell specialty scientific products and instruments. As a
result, traditional distributors normally focus on selling commodity products.
Conversely, direct sales provide suppliers with greater control and contact
with their customers, enabling them to provide the technical assistance
necessary for the sale of specialty scientific products. However, direct sales
are often expensive and inefficient. Many suppliers have Web sites that are
essentially online versions of their catalogs, but these sites do not address
the primary cause of inefficiency for buyers --the inability to find products
and consolidate orders from different suppliers quickly and easily through a
single service.
The Online Market Opportunity
The limitations of the traditional scientific products supply chain and the
significant information needs of scientists make the scientific products market
well-suited to an automated e-commerce solution. Moreover, the scientific
community is already accustomed to using the Internet. According to a recent
study by BioInformatics, Inc., 80% of the 680 scientists surveyed had ordered a
consumer product or service through the Internet and approximately 38% of them
had purchased life science products over the Internet. We believe this
indicates that scientists will be comfortable adopting e-commerce solutions for
purchases of scientific products. The following percentage of scientists
responding to the study rated e-commerce superior to traditional purchasing in
each of the following areas:
.82% of the 650 respondents rated e-commerce superior in reducing
administrative costs;
.73% of the 656 respondents rated e-commerce superior in speed of delivery
to end users; and
.70% of the 663 respondents rated e-commerce superior in fast, accurate
ordering.
Source: BioInformatics, Inc. 319611985. BioInformatics, Inc. is a market
research and consulting firm, specializing in supporting marketing and sales
executives in the life science, medical device and pharmaceutical industries.
For these reasons, we believe that the scientific products market will be an
early adopter of e-commerce solutions and that we are well positioned to take
advantage of this market opportunity.
The SciQuest.com Marketplace Solution
The SciQuest.com marketplace solution provides comprehensive public Web
sites and customized private sites that address the current limitations of the
scientific products supply chain by streamlining the process of buying and
selling of scientific products and reducing associated transaction costs. Our
distributor-neutral approach allows us to create an open and scalable
marketplace that we believe is more attractive to both buyers and sellers.
Our solutions serve three primary and distinct customers:
Scientists. Our solutions offer scientists online tools to streamline the
process of finding, comparing, purchasing, tracking and managing laboratory
supplies. By reducing the time scientists spend on these functions, our
solutions allow them to be more productive and spend more time on research and
testing. Our solutions enable a scientist to:
. search our extensive database, using our industry-leading taxonomies, to
compare products, attributes and technical data across multiple
suppliers;
. locate a specific chemical, equipment or supply item; and
. consolidate, purchase and track orders from multiple suppliers through
the convenience of a single Web site, 24 hours a day, seven days a week.
Purchasing Professionals. Our solutions allow purchasing professionals to
automate order processing, consolidate purchase orders and payments and obtain
purchasing information. This provides purchasing professionals with greater
access to purchasing information to better monitor and control purchasing
patterns
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and to implement and enforce uniform purchasing policies that reduce
procurement costs. Our solutions enable purchasing professionals to:
. consolidate purchases from multiple suppliers onto one order;
. streamline the purchasing process and reduce the likelihood of errors;
. communicate and control purchasing policies and rules; and
. access detailed purchasing information and reports.
In addition, our solutions are designed to be compatible with leading
enterprise software systems and do not require organizations to install
additional enterprise software systems. This compatibility allows organizations
to avoid the expense, time and training typically required to install and
support new enterprise software.
Suppliers. Our solutions offer suppliers a more efficient sales channel that
cost-effectively provides many of the benefits of direct sales and
distribution. As a result, by participating in our marketplace suppliers can
expand their market reach and reduce customer acquisition and order processing
costs. Our solutions enable suppliers to:
. more cost-effectively market and sell products through access to our
global audience of scientists and purchasing professionals;
. access valuable market and customer data;
. leverage our e-commerce functionality without capital investment;
. easily update product information;
. introduce new products to qualified buyers quickly and economically; and
. maintain contact with their customers.
Strategy
Our objective is to be the leading global solution for buying and selling
scientific products. We intend to achieve this objective through the following
strategies:
Leverage and Build Brand Equity. We have invested significant resources over
the past four years to establish a strong brand identity. Our brand recognition
has enabled us to attract a growing user base of qualified scientific buyers
and participating suppliers. We intend to continue to invest heavily in
building the SciQuest.com brand by accelerating our marketing, sales,
advertising and public relations efforts.
Enhance Customer Loyalty to Increase Repeat Purchases. We intend to continue
to emphasize a high level of customer service in order to enhance customer
loyalty and facilitate repeat purchases by our customers. In addition, we will
continue to provide our customers with a comprehensive portfolio of solutions
that delivers a compelling user experience and an efficient fulfillment
process.
Maintain Distributor Neutrality. We intend to maintain our distributor
neutral position to better serve our users and maximize our market opportunity.
We believe that our distributor neutral approach has and will continue to allow
us to provide our users access to broad and unbiased product information. We
believe that this will maximize the attractiveness of our marketplace to all
customer and supplier segments.
Maximize Enterprise Software Compatibility. We will continue to concentrate
our efforts on integrating our marketplace solution with the leading enterprise
software vendors. This integration will allow us to accelerate buyer adoption
of our services, offer suppliers a broader sales channel and maximize our
market opportunity. In addition, our platform independence will allow us to
concentrate our technology spending on
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our core procurement solutions rather than diverting our resources to create
redundant and potentially competitive enterprise software functionality.
Expand Our Product and Service Offerings. We intend to advance our market
leadership by continuing to expand the selection of scientific products offered
on our Web sites, which will allow us to attract additional purchasing
professionals and accelerate adoption by scientists. We are also committed to
growing our portfolio of services to provide the most efficient and
comprehensive buying and selling experience for the scientific community. We
intend to develop additional services and functionality internally as well as
explore acquisitions of complementary service offerings.
Expand Internationally. We believe that the global reach of the Internet and
worldwide demand for scientific products presents a significant opportunity for
us to expand internationally. Our Web sites have to date been accessed by
buyers located in over 60 countries. As we continue to expand our product
offerings, we believe that we will attract a larger base of users globally. We
intend to invest resources and capital to expand our sales and marketing
efforts internationally in order to better address the needs of our customers
worldwide.
Products and Services
SciQuest.com is a Web-based marketplace that serves the needs of scientists
and purchasing professionals by providing an easy to use comprehensive
portfolio of solutions. Leveraging our existing customer base and extensive
industry knowledge, we have built a market-driven portfolio of services. In
addition to our primary offering, an e-commerce marketplace for public and
private buyers, we offer customers extensive online products and services,
including a comprehensive sourcing guide, used equipment auctions, discounted
products and other resources. In addition to these Web-based services, we
publish and distribute a printed Source Book. Our services enable buyers and
suppliers to efficiently gather and update product information, conduct
transactions and facilitate post-order activities. We believe this
comprehensive service offering provides our customers with a unique online
marketplace for scientific products. Set forth below is a detailed description
of our products and services.
SciQuest.com Marketplace Solutions
A primary component of the SciQuest.com marketplace solution is our
electronic purchasing service that allows users to buy over 300,000 chemicals,
supplies, lab equipment and other scientific products from our growing database
of over 235 suppliers. Buyers are able to search our proprietary life science
taxonomy, a hierarchical classification structure for organizing product
content, developed by Cold Spring Harbor Laboratory and our analytical and
basic laboratory supply taxonomy developed by Cahners Business Information.
Buyers can also search across multiple suppliers' products simultaneously,
compare product attributes, order products from multiple suppliers on one
consolidated order form, track order status, receive one invoice and have a
single point of contact for customer service. Buyers can also track order
history and create a customized list of frequently purchased products for easy
repurchase.
Once a buyer submits an order to us, our customer care professionals oversee
the order fulfillment process. We purchase the items from suppliers at either a
pre-negotiated price or at a discount from the suppliers' list price and
arrange for shipment from the suppliers directly to the purchaser. We do not
physically take possession of the products. After the suppliers ship the items,
we present to the buyer a consolidated invoice for the products purchased.
Buyers then pay us by credit card/procurement card or through a more
traditional account setup and payment system.
For customers requiring specific customization, such as pre-negotiated
pricing discounts from preferred suppliers or more advanced integration with
enterprise systems, we offer customized versions of our marketplace that allow
scientists in leading pharmaceutical, clinical, biotechnology, chemical,
industrial and educational organizations to access enterprise-specific pricing
while also facilitating internal approval, workflow routing and financial
system integration.
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Sourcing Guide
In addition to our e-commerce offerings, our proprietary, online Sourcing
Guide provides a broad database of product information from more than 8,000
suppliers and service providers. Given the large number of industry suppliers
and fragmented nature of the scientific products market, having a comprehensive
database of suppliers and products is an important value-added service for our
customers. If a potential buyer is unable to purchase the desired products
through our e-commerce solutions, our Sourcing Guide provides a means of
identifying an alternative source for that product. We believe this unique
service engenders loyalty, repeat usage and customer satisfaction relative to
competitive offerings.
SciQuest.com Auctions
Our Web-based Auctions service enables customers to buy and sell used and
refurbished capital equipment and instrumentation through online auctions.
Auctions allows suppliers and laboratories to easily sell used equipment while
maximizing its value through the auction process. Auctions provides buyers an
economically attractive alternative to buying new products.
SciQuest.com LabDeals
Our Web-based LabDeals service is devoted to the sale of surplus scientific
products at discount prices. LabDeals provides suppliers with an additional
sales outlet for slow moving, obsolete or excess inventory. LabDeals provides
buyers access to an inventory of surplus scientific products at prices
discounted below manufacturers' suggested list price.
SciQuest.com Resources
Our Resources area offers a broad range of information and reference
materials for laboratory scientists. For instance, molecular biologists can
access our proprietary BioToolKit, one of the most comprehensive annotated
listings of databases related to molecular biology research currently available
on the Web. Our Ask Joe service helps customers locate hard-to-find items by
putting them in touch with our staff scientists. Our SciMail allows buyers to
simultaneously broadcast requests for technical data, product information and
price quotations to multiple suppliers. We intend to further expand our
Resources area to offer a broader array of information and reference materials
for laboratory scientists.
Source Book
In addition to our web-based products and services, we also offer the Source
Book, the dominant print product directory for life scientists. The Source Book
utilizes the product taxonomy, a hierarchical classification structure for
organizing product content, developed by Cold Spring Harbor Laboratory and
contains product listings from more than 1,400 suppliers. In 1999, we expect
80,000 copies of the Source Book to be distributed to scientists in
pharmaceutical, clinical, biotechnology, chemical, industrial and educational
organizations. Its corresponding Web site, www.biosupplynet.com, which went
online in 1995, was the first Web-based product directory for the biomedical
research community. The Source Book helps accelerate buyer adoption of our web-
based purchasing solutions.
Sales & Marketing
We market and sell our portfolio of solutions through direct sales,
traditional and Internet marketing initiatives and co-marketing relationships.
Our primary audiences in the pharmaceutical, clinical, biotechnology, chemical,
industrial and educational markets are laboratory scientists, who drive the
decision-making process, and purchasing professionals, who drive the
procurement process.
Our experienced sales force concentrates on selling our enterprise
compatible solutions to larger purchasing organizations. We also sell our
purchasing solutions to medium-sized and smaller buyers. In
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<PAGE>
addition, our sales team assists suppliers in offering their products through
our e-commerce solutions. Our sales professionals average over 17 years of
scientific products industry experience. By leveraging their experience, we
expect to continue to attract and retain scientists, purchasing professionals
and suppliers, thereby growing our installed customer base and increasing
repeat purchases.
We leverage a variety of marketing channels to build our brand equity as
well as promote our solutions to both buyers and suppliers. These channels
include direct marketing, print and online advertising, trade shows and
seminars. We intend to use public relations group to communicate new product
and service offerings and other enhancements to industry analysts and targeted
scientific and business press on a regular basis through a combination of press
releases, phone briefings, in-person meetings and trade show appointments.
As of September 30, 1999, we had 46 people in our sales and marketing group.
Strategic Relationships
We believe that a key element to the successful implementation of our
business strategy is to establish strategic relationships with prominent buyers
and suppliers of scientific products. We believe these relationships will
assist us in accelerating our aggregation of content, increasing the
transaction volume on the SciQuest marketplace, achieving further brand
awareness and building a critical mass of important core customers.
Purchasing Relationships
We have entered into binding letters of intent with Dow Chemical Company,
DuPont Pharmaceuticals Company and Monsanto Company to establish purchasing
relationships. Pursuant to these letters of intent, SciQuest will be the
exclusive third party electronic aggregator for purchases of scientific
products in North America for Dow Chemical Company and DuPont Pharmaceuticals
Company and an approved third party electronic aggregator for purchases of
scientific products in North America for Monsanto Company for a period of three
years. As an exclusive third party electronic aggregator, SciQuest will be the
sole electronic means by which Dow Chemical Company and DuPont Pharmaceuticals
Company purchase scientific products that are not sold primarily through
traditional distributors. As a third party electronic aggregator, SciQuest will
be an electronic means by which Monsanto may purchase scientific products that
are not sold primarily through traditional distributors. Each of these letters
of intent provides that:
. the purchaser will use its reasonable efforts to purchase at least $5
million of scientific products annually through our marketplace but
otherwise there are no minimum purchase commitments; and
. the purchaser will participate in case studies of our marketplace and
otherwise promote our marketplace within the scientific products
industry.
In connection with these relationships, we have agreed to issue warrants to
purchase 113,748 shares of our common stock at an exercise price of $0.01 per
share to Dow Chemical Company, warrants to purchase 75,000 shares of our common
stock at an exercise price of $0.01 per share to DuPont Pharmaceuticals Company
and warrants to purchase 15,166 shares of our common stock at an exercise price
of $0.01 per share to Monsanto Company. These warrants vest in equal annual
installments over three years. In addition, we have agreed to issue to each of
these purchasers additional incentive warrants, the number of which will be
based on that purchaser's volume of purchases through the SciQuest marketplace
during the years 2000, 2001 and 2002. These incentive warrants will be issued
on February 15, 2001, 2002 and 2003, at an exercise price equal to the price to
the public in this offering, and will be exercisable upon issuance for a period
of five years.
We intend to enter into purchasing agreements with Dow Chemical Company,
DuPont Pharmaceuticals Company and Monsanto Company to supplement the terms of
the binding letters of intent. However, under the terms of the binding letters
of intent with Dow Chemical Company and Monsanto Company, either party may
terminate the relationship on or after December 31, 1999 in the event that the
parties have not completed mutually satisfactory definitive agreements.
Furthermore, Monsanto's obligation to enter into the transactions contemplated
by the letter of intent is contingent on the satisfactory completion of a
mutually agreed-upon trial period during which Monsanto will evaluate the
performance of the SciQuest system.
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Supplier Relationships
We have entered into agreements to be the exclusive third party provider of
electronic marketplace services in the United States for a period of five years
for the following suppliers of scientific products:
. Ambion, Inc.
. Amersham Pharmacia Biotech, Inc.
. BioWhittaker, a Cambrex Company
. Endogen, Inc.
. NEN Life Science Products, Inc.
. PerkinElmer, Inc.
. Pierce Chemical Company; and
. QIAGEN N.V.
These agreements provide that:
. SciQuest will be the exclusive third party provider of electronic
marketplace services in the United States for a period of five years;
. the suppliers will promote our marketplace, including participating in
co-marketing and advertising programs;
. these suppliers will have the opportunity to elect four of the seven
members of our Board of Governors, which will consist of various members
of the scientific products industry and will serve as an advisory board
for our management by providing suggestions and feedback and reviewing
potential new services;
. these suppliers will utilize our marketplace for their purchases of
scientific products;
. these suppliers may terminate the exclusive nature of the agreement
after 18 months, subject to forfeiture of outstanding warrants; and
. these agreements may be terminated by either party for material breach
or upon the occurrence of bankruptcy or similar events.
In connection with these agreements, we have agreed to issue warrants to
purchase up to an aggregate of 3,520,392 shares of our common stock at an
exercise price of $0.01 per share. These warrants generally vest in equal
installments over four or five years. A supplier's warrants will terminate
automatically if that supplier terminates the exclusive nature of our
relationship or otherwise terminates the agreement.
In addition, we may issue warrants to purchase up to an additional 1,408,112
shares of our common stock at an exercise price of $0.01 per share in
connection with additional strategic relationships that we may enter into in
the future. Any relationships we enter into may be on substantially different
terms than the relationships described above. We cannot assure you that we will
enter into any additional strategic relationships or issue any additional
warrants.
We believe that these exclusive supplier relationships will provide us with
a competitive advantage by assisting us in accelerating our aggregation of
product content and providing potential buyers with a broader range of
products.
Co-Marketing Relationships
We have entered into co-marketing agreements with several leading Web-based
scientific communities, such as ChemWeb and BioMedNet. Through the
relationships with ChemWeb and BioMedNet, we gain access to their over 550,000
members. Under these agreements, ChemWeb and BioMedNet maintain on their sites
a hyperlink to a co-branded page from which their members can link directly to
our e-commerce marketplace, in the case of ChemWeb, or, in the case of
BioMedNet, to the BioSupplyNet search directory, from which
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members then link to our e-commerce marketplace. Under the agreements with
ChemWeb and BioMedNet, we have agreed to pay usage fees for each month in which
a minimum number of members accesses the co-branded page, plus a per search
charge. ChemWeb and BioMedNet have also agreed to collaborate with us on
certain co-marketing activities and to share certain demographic information.
Both agreements terminate on December 31, 2000.
We also have entered into a Joint Marketing and Cooperation Agreement with
Cold Spring Harbor Laboratory that gives us access to its global audience of
laboratory manual buyers. Under the terms of this agreement, Cold Spring Harbor
Laboratory has agreed to provide marketing support for BioSupplyNet and the
Source Book until September 29, 2003, including distribution of the Source Book
and promotional materials, publication of advertisements in its publications
and the publications of the Cold Spring Harbor Press, creation of links from
its sites, and access to the Cold Spring Harbor Press customer mailing lists.
The Cold Spring Harbor Laboratory Press publishes the leading laboratory
techniques manuals in the life science community. The Source Book is referenced
in the manuals as being the source to turn to when one needs to find suppliers
for needed products. In addition, the Source Book is distributed with every
laboratory manual sold in the United States and at all of the Cold Spring
Harbor Laboratory scientific meetings and courses throughout the year.
In March 1999, we entered into a Collaboration Agreement with Cahners
Business Information, a division of Reed Elsevier, under which we are able to
offer timely new product information to our users for products listed on the
Cahners sites by linking to the new product information contained on certain
Cahners' Web sites. The agreement also provides for the creation of links
between our Web sites and Cahners' Web sites that contain product directories.
Through our relationship with Cahners, we can offer our customers access to
Cahners' analytical and basic laboratory supply taxonomy. Under the agreement,
we have agreed to pay referral fees for all product sales by customers referred
to us from or through Cahners when the aggregate sales exceed a specified
minimum amount in any twelve month period. The agreement also appoints Cahners
as our exclusive sales representative for online advertisements on our public
Web sites and gives us the right to place online or print advertisements on
Cahners' Web sites and in Cahners' publications. The agreement has a two-year
term and is automatically renewed thereafter. Either party may terminate the
agreement upon a material breach by the other party or in the event of
bankruptcy or similar events, or upon 90 days' notice or anytime after August
1, 1999. Under a second agreement with Cahners entered into in August 1999,
Cahners was appointed as our exclusive sales representative for advertisements
for the Source Book for a period of one year. The agreement automatically
renews for one year periods thereafter. The agreement is terminable by us for
breach, by Cahners upon bankruptcy or similar events, at any time by mutual
agreement or by either of us upon 90 days' notice.
Technology
We have integrated a broad array of specialized site management, search and
buyer interaction technologies, content management applications and transaction
processes and fulfillment services. We are using our own proprietary programs
and, where appropriate, commercially available, licensed technologies.
We have developed our e-commerce solutions utilizing development
methodologies and tools that enable rapid development and deployment of
customized versions of our public marketplace. We believe this will allow us to
quickly deliver customer specific solutions while minimizing development time
and costs. Our database is designed to be scalable to accommodate the expected
growth in the number of products offered. We also convert and maintain the
product data provided by suppliers for inclusion in our database.
We own all of our front-office and back-office production servers and Web
site hardware. Our Web sites run off multiple redundant product application
servers. Our production servers are located at a third party network operating
center located in Durham, North Carolina, which provides 24-hour systems
support, as well as connectivity to all major Internet bandwidth via redundant
high speed T-3 connections. The server and network architecture is designed to
provide high speed and reliability for the operation of our Web sites and all
our communications.
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As of September 30, 1999, we had 60 people in our product development and
data management groups. Product development expenses were $85,000 in 1996,
$140,000 in 1997, $1.2 million in 1998 and $6.3 million through September 30,
1999. We intend to continue to invest significantly in enhancing our
technology.
Intellectual Property
We rely on a combination of trade secret, copyright and trademark laws,
license agreements, nondisclosure and other contractual provisions and
technical measures to protect our proprietary rights in our products,
technology and processes. We pursue the registration of our trademarks in the
United States and internationally, however, we may not be able to secure
adequate protection for our trademarks in the United States and other
countries. We have applied for registration of the marks SCIQUEST.COM,
LABDEALS.COM and the SciQuest.com logo in the United States and for SCIQUEST in
the European Union. SCIQUEST, SCIMAIL and BIOSUPPLYNET are our registered
trademarks in the United States. Our software technology is not patented and
existing copyright laws offer only limited practical protection. We cannot
guarantee that the legal protections on which we rely will be adequate to
prevent misappropriation of our technology. Moreover, these protections do not
prevent independent third-party development of competitive products or
services. Furthermore, the validity, enforceability and scope of protection of
intellectual property in Internet-related industries is uncertain and still
evolving. The laws of some foreign countries do not protect intellectual
property to the same extent as do the laws of the United States. We believe our
products, trademarks and other proprietary rights do not infringe upon the
proprietary rights of third parties. However, we cannot provide any guarantees
about the third party products sold on our Web site or that third parties will
not assert infringement claims against us in the future or that any such
assertion will not require us to enter into a license agreement or royalty
agreement with the party asserting a claim. If the products sold on our Web
site infringe the proprietary rights of third parties, we may be deemed to
infringe those rights by selling such products. Even the successful defense of
an infringement claim could result in substantial costs and diversion of our
management's efforts.
We also license, and will continue to license, certain content for our
online services from third parties. Additionally, we intend to license a
significant portion of our transaction fulfillment system from third parties.
These third-party content licenses may not be available to us on favorable
terms in the future. In addition, we must be able to successfully integrate
this content in a timely and cost-effective manner to create an effective
finished product. If we fail to obtain necessary content on favorable terms,
are unable to successfully integrate this content or if we are unable to
continue to license our order fulfillment transaction systems on favorable
terms, it could have a material adverse effect on our business operations.
Competition
The online scientific products market is new, rapidly evolving and intensely
competitive. Our primary competition includes the following:
E-Commerce Providers. A number of e-commerce providers have established
online marketplaces and are attempting to build an online e-commerce brand in
the scientific products market. These competitors include companies such as
Chemdex Corporation.
Online Scientific Communities. There are a number of Web sites that have
created e-communities to serve the information needs of the scientists.
Traditionally, these communities have provided a means of retrieving scientific
information as well as providing discussion groups, bulletin boards and
directories. Increasingly, these communities include an e-commerce function
that may compete with our product offerings. These communities are operated by
companies such as VerticalNet.
Suppliers' E-Commerce Initiatives. Many suppliers have developed their own
e-commerce enabled Web sites. As the online market for scientific products and
services grows, we expect that these and other scientific suppliers will
further develop their own online services.
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We believe that companies in this market compete based on:
. brand recognition;
. number and quality of product offerings;
. price;
. ease of use; and
. customer service and fulfillment capabilities.
Competition is likely to intensify as this market matures. As competitive
conditions intensify, competitors may:
. enter into strategic or commercial relationships with larger, more
established and well-financed companies;
. secure services and products from suppliers on more favorable terms;
. devote greater resources to marketing and promotional campaigns;
. secure exclusive arrangements with buyers that impede our sales; and
. devote substantially more resources to Web site and systems development.
Our current and potential competitors' Web sites may achieve greater market
acceptance than ours. Many of our existing and potential competitors, including
large traditional distributors, have longer operating histories in the
scientific products market, greater name recognition, larger customer bases and
greater financial, technical and market resources than we do.
In addition, new technologies and the expansion of existing technologies may
increase competitive pressures. As a result of increased competition, we may
experience reduced operating margins, as well as loss of market share and brand
recognition. We cannot be certain that we will be able to compete successfully
against current and future competitors and competition could have a material
adverse effect on our revenue growth and earnings.
Government Regulations
We are subject to various laws and regulations relating to our business,
which include numerous laws and regulations generally applicable to the
chemical, pharmaceutical, controlled substances, human and biological reagents,
and nuclear chemical businesses, and environmental spills. Although we take
legal title to the products offered through our marketplace, we do not take
physical possession of a shipment during any part of the transaction. Legal
title generally passes to the buyer at the time of product shipment. As a
result, we have historically relied, and will in the future rely to a
substantial degree, upon our suppliers to meet all packaging, distribution,
labeling, hazard and healthy information notices to purchasers, record keeping
and licensing requirements applicable to transactions conducted through our
system. In addition, we rely upon our carriers to comply with regulations
regarding the shipment of hazardous materials sold through our system. At
times, we may be unable to verify the accuracy of our suppliers' regulatory
staff determinations and regulatory compliance. We could be fined or exposed to
civil or criminal liability, including monetary fines and injunctions, if the
applicable governmental regulatory requirements are not fully met by our
suppliers, carriers or by us directly.
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. It is
also possible that new laws and regulations may be adopted or interpreted by
the United States and foreign governments, to address the sale and distribution
of scientific research products utilizing the Internet. In addition, it is
possible that governments may enact legislation that may be applicable to us in
areas
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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.
We collect sales taxes in the jurisdictions where we are required to do so.
Our failure to properly collect and pay such taxes in all of such jurisdictions
could subject us to penalties that could adversely affect our earnings. Even if
we do collect taxes properly for each of the jurisdictions required, the
collection and payment of such taxes causes us to incur significant
administrative effort and expense.
Facilities
Our headquarters are located in Morrisville, North Carolina, where we
currently sublease approximately 24,000 square feet of office space. This lease
expires in February 2002. We have entered into a five-year lease for an
additional 69,000 square feet of office space at our headquarters location. We
also sublease approximately 5,400 square feet of office space in Durham, North
Carolina through February 2000. We expect these facilities to be sufficient for
the foreseeable future.
We maintain an office in Plainview, New York, where our wholly-owned
subsidiary, BioSupplyNet, is located. This space is shared with Cold Spring
Harbor Laboratory Press and is rented on a month to month basis.
We have also entered into a sublease for approximately 2,300 square feet of
office space extending to December 31, 2002 for the offices of our subsidiary,
Internet Auctioneers International, Inc., located in Mountain View, California.
Employees
As of September 30, 1999, we had 150 full-time employees. None of our
employees are covered by a collective bargaining agreement. We consider our
relations with our employees to be good.
Legal Proceedings
We are not a party to any material legal proceedings.
47
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MANAGEMENT
Directors and Executive Officers
Our directors and executive officers and their ages as of the date of this
Prospectus are as follows:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
M. Scott Andrews................. 34 President, Chief Executive Officer and
Director
Peyton C. Anderson............... 33 Vice President of Business Development and
Director
Lyle A. Brecht................... 52 Chief Business Development Officer
Antony Francis................... 49 Vice President of Operations
Robert M. Fusillo................ 32 Chief Information Officer
Cecil Kost....................... 46 Executive Vice President
James J. Scheuer................. 52 Chief Financial Officer
Bruce J. Boehm................... 45 Director
Noel J. Fenton................... 61 Director
Gautam A. Prakash................ 30 Director
Alan J. Taetle................... 36 Director
Timothy T. Weglicki.............. 48 Director
</TABLE>
M. Scott Andrews co-founded SciQuest.com in November 1995 and serves as our
President and Chief Executive Officer and as a director. From October 1991 to
January 1996, Mr. Andrews was a sales professional for Baxter Healthcare
Corporation, a scientific products company, which was acquired by VWR
Scientific Products Corporation. From May 1987 to October 1991, Mr. Andrews
served in the U.S. Army as an aviation officer. Mr. Andrews received an M.B.A.
from the University of North Carolina at Chapel Hill and a B.S. in business
management from the United States Military Academy at West Point. Mr. Andrews
currently serves as a director of the North Carolina BioScience Fund.
Peyton C. Anderson co-founded SciQuest.com in November 1995 and serves as
our Vice President of Business Development and as a director. From August 1989
to January 1996, Mr. Anderson was a sales manager for Butler Manufacturing
Company, a metal buildings company. Mr. Anderson is a director of the Council
for Entrepreneurial Development, a mentoring organization for the North
Carolina entrepreneurial community. Mr. Anderson received an M.B.A. from the
University of North Carolina at Chapel Hill and a B.A. from the University of
Richmond, Phi Beta Kappa.
Lyle A. Brecht has served as Chief Business Development Officer since August
1999, Vice President of Data Services from December 1998 to August 1999 and
Executive Vice President from October 1998 to December 1998. From October 1996
to December 1998, Mr. Brecht served as President and Chief Operating Officer
and was co-founder of BioSupplyNet, Inc., a life science resource company that
was acquired by SciQuest.com in September 1998. From March 1996 to October
1996, Mr. Brecht served as a consultant for Harris & Harris Group, PC, business
development investment firm. From October 1994 to January 1995, Mr. Brecht
served as President of Applied Research and Technology, Inc., an Internet
commerce company. From July 1991 to December 1994, Mr. Brecht served as
President of Blue Heron Group, Inc., a publishing and data analysis company.
Mr. Brecht received an M.B.A. from Harvard University, and an M.S. in applied
ecology and a B.A. in psychology and mathematics from the University of
Minnesota.
Antony Francis has served as our Vice President of Operations since February
1999. From June 1994 to January 1999, Mr. Francis served as Vice
President/General Manager of the Logistics, E-commerce and Customer Services
Division for the Federal Express Corporation at the European, Middle Eastern
and African headquarters. While at Federal Express, Mr. Francis also worked as
managing director of Financial Controls and Reporting and as managing director
and regional controller for the European headquarters from September, 1988 to
June, 1994. Mr. Francis also served as Finance and Administration Director for
subsidiaries of the Guinness Group and Elf Aquitaine from 1979 to 1988, after
ten years with Ernst & Young. Mr. Francis is a chartered public accountant
(England and Wales certified) and a Fellow of the Institute of Transport &
Logistics (UK).
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Robert M. Fusillo has served as our Chief Information Officer since November
1998. From September 1990 to October 1998, Mr. Fusillo served as Director of
Applications Development in the Information Systems Division of Wal-Mart
Stores, Inc. Prior to his employment with Wal-Mart, Mr. Fusillo was a senior
programmer for the Carrier Access Billing System at Nynex, a telecommunications
service company. Mr. Fusillo received a B.S. in computer science from State
University of New York at Buffalo.
Cecil Kost has served as our Executive Vice President since September 1999.
From March 1996 to December 1998, Mr. Kost served as President and Chief
Operating Officer of Oncor, Inc., a biotechnology company. From June 1976 to
October 1995, Mr. Kost served as Senior Vice President of Curtin Matheson
Scientific, a distributor of scientific products where he was responsible for
their industrial, clinical and international business sectors and clinical
diagnostic manufacturing operations. Mr. Kost is a former Chairman of the
Laboratory Products Association, a trade association of businesses serving
industrial and research laboratories. Mr. Kost received a B.S. in biology from
Tulane University.
James J. Scheuer has served as our Chief Financial Officer since September
1998. From March 1996 to March 1998, Mr. Scheuer served as Chief Operating
Officer and later Chief Financial Officer for Boise Marketing Services, Inc., a
subsidiary of Boise Cascade Office Products Corporation, and its predecessor.
From December 1989 to March 1996, Mr. Scheuer served as Senior Vice President--
Group Executive/Chief Financial Officer of Hickory Farms, Inc., and the
President of Canadian Hickory Farms, Ltd. From 1970 to 1989, Mr. Scheuer was
employed by Deloitte Haskins & Sells and was the partner in charge of its
Jacksonville, Florida office from 1985 to 1989. Mr. Scheuer is a certified
public accountant and received his B.A. in business administration from the
University of Wisconsin--Oshkosh.
Bruce J. Boehm has served as a director of SciQuest.com since October 1997.
Mr. Boehm has been active as an originator of and investor in early stage
technology companies since 1992. Mr. Boehm holds M.B.A. and M.S. degrees from
Stanford University and a B.S. from the Massachusetts Institute of Technology.
Noel J. Fenton has served as a director of SciQuest.com since November 1998.
Mr. Fenton has been a Managing General Partner of Trinity Ventures since 1986.
From 1964 to 1986, he was a co-founder of three venture capital backed start-up
companies, for two of which, Acurex Corporation and Covalent Systems
Corporation, he served as CEO. Mr. Fenton received an M.B.A. from Stanford
University and a B.S. from Cornell University.
Gautam A. Prakash has served as a director of SciQuest.com since October
1998. Mr. Prakash is a partner with Bessemer Venture Partners, which he joined
in 1993. He is a director of a number of privately held electronic commerce and
healthcare companies. Prior to joining Bessemer, Mr. Prakash worked for
McKinsey & Co. Mr. Prakash graduated from Yale University with a B.S. in
molecular biophysics and biochemistry and a B.A. in economics.
Alan J. Taetle has served as a director of SciQuest.com since August 1998.
Mr. Taetle has been a General Partner with Noro-Moseley Partners, a venture
capital firm, since May 1998. From March 1995 to April 1998, Mr. Taetle was
Executive Vice President of Marketing and Business Development for MindSpring
Enterprises, an Internet service provider. From November 1992 to March 1995,
Mr. Taetle served as Director of Operations and Product Management at CogniTech
Corporation, a developer of retail management software. Mr. Taetle received an
M.B.A. from Harvard Business School and a B.A. in Economics from the University
of Michigan.
Timothy T. Weglicki has served as a director of SciQuest.com since May 1999.
Since December 1993, he has been principally employed as a Managing Member of
ABS Partners, L.P., the General Partner of ABS Capital Partners, L.P., a
private equity fund. Prior to that date, he was principally employed as a
Managing Director of Alex. Brown & Sons Incorporated where he established and
headed its Capital Markets Group. Mr. Weglicki holds an M.B.A. from the Wharton
Graduate School of Business and a B.A. from Johns Hopkins University. Mr.
Weglicki is a director of ElderTrust, a healthcare real estate investment
trust, and a number of privately held companies.
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There are no family relationships between any of our directors or executive
officers.
Terms of Directors
Concurrently with the effective date of this offering, the board of
directors will be divided into three classes, with members serving for
staggered three-year terms. The board will be comprised of three Class I
directors (Messrs. Boehm, Prakash and Taetle), two Class II directors (Messrs.
Fenton and Weglicki) and two Class III directors (Messrs. Anderson and
Andrews). At each annual meeting of stockholders, a class of directors will be
elected for a three-year term to succeed the directors of the same class whose
terms are then expiring. The terms of the initial Class I directors, Class II
directors and Class III directors will expire upon the election and
qualification of successor directors at the 2000, 2001 and 2002 annual meetings
of stockholders, respectively.
Committees of the Board of Directors
Messrs. Fenton, Weglicki and Boehm are members of the Audit Committee. The
Audit Committee reviews the scope and timing of our audit services and any
other services our independent auditors are asked to perform, the auditor's
report on our financial statements following completion of their audit and
their policies and procedures with respect to internal accounting and financial
controls. In addition, the Audit Committee makes annual recommendations to the
board of directors for the appointment of independent auditors for the
following year.
Messrs. Prakash, Taetle and Boehm are members of the Compensation Committee.
The Compensation Committee reviews and evaluates the compensation and benefits
of all our officers, reviews general policy matters relating to compensation
and employee benefits and makes recommendations concerning these matters to the
board of directors. The Compensation Committee also administers our stock
option plan.
Compensation of Directors
Our directors do not receive any compensation for services performed in
their capacity as directors. We reimburse each director for reasonable out-of-
pocket expenses incurred in attending meetings of the Board of Directors and
any of its committees.
Compensation Committee Interlocks and Insider Participation
No member of the Compensation Committee is or will be an executive officer
of SciQuest.com.
Executive Compensation
The following table sets forth the total compensation paid by SciQuest.com
during the year ended December 31, 1998 to our Chief Executive Officer. No
executive officer was paid total annual salary and bonuses determined in excess
of $100,000 during 1998.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
-------------------------- ------------
Number of
Securities
All Other Underlying
Name and Principal Position Salary Bonus Compensation Options
<S> <C> <C> <C> <C>
M. Scott Andrews....................... $68,288 -- -- --
President and Chief Executive Officer
</TABLE>
50
<PAGE>
No options were granted to or exercised by Mr. Andrews during the fiscal
year ended December 31, 1998.
Stock Plans
SciQuest.com, Inc. 1999 Stock Incentive Plan. The SciQuest.com Stock
Incentive Plan was adopted by our Board in October 1999 and approved by our
stockholders in November 1999. Upon the consummation of this offering, the
incentive plan will replace our original plan, the Sci.Quest.com, Inc. Stock
Option Plan.
A maximum of 2,854,998 shares is authorized for issuance under the incentive
plan. The incentive plan provides for the grant of incentive and nonqualified
stock options, restricted stock or other stock-based awards to our employees,
including directors who are employees, and for the grant of nonqualified stock
options, restricted stock or other stock-based awards to our non-employee
directors, consultants and advisors.
Our incentive plan is administered by our Compensation Committee. For so
long as our common stock is registered under the Securities Exchange Act of
1934, as amended, a Board-appointed committee of not less than two members,
each of whom qualifies as a non-employee director, is empowered to grant awards
and take other action under the incentive plan with respect to individuals
deemded to be insiders for purposes of Section 16 of the Securities Exchange
Act.
Our incentive plan provides that any option granted to a person who is
subject to the provisions of Section 16 of the Securities Exchange Act will not
become exercisable for a period of at least six months following the date of
grant. Other restrictions on the terms applicable to incentive stock options
are imposed under the incentive plan to ensure compliance with the requirements
for incentive stock options under Section 422 of the Internal Revenue Code.
The incentive plan permits common stock purchased upon the exercise of
options to be paid in cash or by check or through a broker-facilitated cashless
exercise procedure, or, to the extent permitted by applicable law, by delivery
of previously owned shares, a promissory note or other means approved by our
Board of Directors.
Our Board may also grant restricted stock awards under the incentive plan.
These awards entitle recipients to acquire shares of our common stock, subject
to our right to repurchase all or a part of the shares. The other terms
applicable to restricted stock awards are determined by our Board. Any
restricted stock award granted to a participant who is subject to the
provisions of Section 16 of the Securities Exchange Act restricts the release
of the shares subject to the award for a period of at least six months
following the date of grant.
Our Board has the authority to grant other awards based on our common stock
having terms and conditions as determined by our Board. Except as our Board may
otherwise provide in a particular award, no awards granted under the incentive
plan may be transferred or assigned by the holder other than by will or the
laws of descent or distribution.
In the event that:
. we merge with or consolidate into another corporation, which results in
our stockholders owning less than 50% of the voting power of the voting
securities of the surviving or successor corporation following the
transaction;
. we sell all or substantially all of our assets;
. we completely liquidate; or
. someone acquires 50% or more of the voting power of our outstanding
securities, except through a merger, consolidation or an acquisition of
our securities directly from us.
then any options, stock appreciation rights and any restricted stock awards
or other then stock-based awards that would have become vested within the next
twelve months become vested and free of all
51
<PAGE>
restrictions. Our Board may, in its discretion, terminate any unexercised
options or stock appreciation rights, or permit the acquiring or succeeding
corporation to assume or substitute equivalent options or stock appreciation
rights for ours.
Our Board may terminate or amend the incentive plan at any time. Our
stockholders must approve any increase in the total number of shares available
under the incentive plan. No awards may be made under the incentive plan after
October 2009.
SciQuest.com, Inc. 1997 Stock Option Plan. After its adoption and approval
by our Board and our stockholders in September 1997, the SciQuest, Inc. Stock
Option Plan was amended by our Board (and approved by our stockholders) in
September 1998, February 1999 and August 1999 to increase the number of shares
available for issuance thereunder. The option plan was also amended in March
1999 to change the name of the plan to the SciQuest.com, Inc. Stock Option
Plan.
Under the option plan, our Board has the power to grant incentive and
nonqualified stock options to our employees, including directors who are
employees, and nonqualified stock options to our non-employee directors,
consultants and advisors. The option plan is administered by our Board in
conjunction with the Compensation Committee.
The option plan permits common stock purchased upon the exercise of options
to be paid in cash or by check.
In the event that:
. we merge with or consolidate into another corporation, which results in
our stockholders owning less than 50% of the voting power of the voting
securities of the surviving corporation; or
. we sell, lease or otherwise dispose of all or substantially all of our
assets;
then that portion of any outstanding options that would have become vested
within the next twelve months will become vested as of a date prior to the
change of control. Our Board may also, in its discretion, provide that any
other unvested and unexercisable portion of an outstanding option shall become
immediately vested and exercisable. Any accelerated vesting under this
provision is conditioned upon the consummation of the change of control event.
Our Board may, in its discretion, terminate any unexercised options that become
vested and exercisable solely because of this provision.
As of September 30, 1999, we had outstanding 1,577,953 stock options under
the option plan, at a weighted average exercise price of $1.75 per share, and
274,421 options have been exercised. Our Board has determined not to grant any
additional options under the option plan subsequent to this offering, and
amended the plan, in November 1999, to decrease the number of shares authorized
under the plan to 2,056,060.
Provisions Applicable to Both Plans. The exercise price of options granted
under both the incentive plan and the option plan is determined by our Board;
however, the exercise price of incentive stock options granted under the plan
must be equal to at least the fair market value of our common stock on the date
of grant (or 110% of the fair market value if the grant is made to a 10% or
more stockholder). Other restrictions on the terms applicable to incentive
stock options are imposed under the plan to ensure compliance with the
requirements for incentive stock options under Section 422 of the Internal
Revenue Code.
In the event an optionee ceases to be employed by us for any reason other
than death or disability, each outstanding option held by such optionee will
terminate and cease to be exercisable no later than three months after the date
of such cessation of employment. Should the optionee's employment terminate by
reason of death or disability (including death within three months following
cessation of employment), each outstanding option held by such optionee will
terminate and cease to be exercisable no later than twelve months after the
date of such cessation of employment.
52
<PAGE>
401(k) Profit Sharing Plan. We maintain a 401(k) Profit Sharing Plan. In
general, all of our employees who have completed 30 days of service are
eligible to participate. Our 401(k) Plan includes a salary deferral
arrangement pursuant to which participants may contribute, subject to certain
Code limitations, a maximum of 15% of their salary or $10,000 on a pre-tax
basis. We currently do not match any portion of the employee's contribution. A
separate account is maintained for each participant in the 401(k) Plan.
Distributions from our 401(k) Plan may be made in the form of a lump-sum cash
payment or in installment payments.
Employment Agreements
Our principal employees, including executive officers, are required to sign
an agreement prohibiting their disclosure of any of our confidential or
proprietary information and restricting their ability to compete with us
during their employment and for a period of two years thereafter, restricting
solicitation of customers and employees following their employment with us and
providing for ownership and assignment of intellectual property rights to us.
Limitation of Liability and Indemnification of Officers and Directors
Our certificate of incorporation limits personal liability for breach of
the fiduciary duty of our directors to the fullest extent provided by the
Delaware General Corporation Law. Our certificate of incorporation provides
that no director of SciQuest.com shall have personal liability to us or to our
stockholders for monetary damages for breach of fiduciary duty of care or
other duty as a director. However, these provisions do not eliminate or limit
the liability of a director:
. for any breach of a director's duty of loyalty to us or our stockholders;
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. for voting or assenting to unlawful distributions; or
. for any transaction from which the director derived an improper personal
benefit.
Any amendment to or repeal of such provisions will not eliminate or reduce
the effect of such provisions in respect of any act or failure to act, or any
cause of action, suit or claim that would accrue or arise prior to any
amendment, repeal or adoption of such an inconsistent provision. If the
Delaware General Corporation Law is subsequently amended to provide for
further limitations on the personal liability of directors of corporations for
breach of duty of care or other duty as a director, then the personal
liability of our directors will be further limited to the greatest extent
permitted by the Delaware General Corporation Law.
Our certificate of incorporation provides that we will indemnify our
directors and executive officers and may indemnify our other corporate agents
to the fullest extent permitted by law. We believe that indemnification under
our bylaws covers at least negligence and gross negligence on the part of
indemnified parties. Our bylaws also permit us to secure insurance on behalf
of any officer, director, employee or other agent for any liability arising
out of his or her actions in such capacity, regardless of whether the bylaws
would permit indemnification.
We have purchased directors' and officers' liability insurance policies in
the total amount of $15 million.
53
<PAGE>
RELATED PARTY TRANSACTIONS
Equity Transactions
In October 1997, as part of our sale of 711,486 shares of series A
convertible preferred stock at a price of $0.91 per share, we sold 109,890
shares to Bruce Boehm, one of our directors. Mr. Boehm acquired these shares on
the same terms as other purchasers in this transaction.
In July 1998, as part of our sale of 3,777,626 shares of series B
mandatorily redeemable convertible preferred stock at a price of $2.80 per
share and warrants to purchase 57,545 shares of our series B mandatorily
redeemable convertible preferred stock at an exercise price of $2.80 per share,
we sold 21,873 shares and warrants to purchase 6,705 shares of common stock to
Bruce Boehm and 21,447 shares and warrants to purchase 3,910 shares of common
stock to family members of Peyton Anderson, one of our officers and directors.
Mr. Boehm and Mr. Anderson's family members acquired these shares and warrants
on the same terms as other purchasers in this transaction.
On March 1, 1999, we sold 89,408 shares of our series C convertible
preferred stock, at a price of $2.80 per share to Antony Francis, our Vice
President of Operations. The shares vest over a two-year period. Mr. Francis
was granted registration rights with respect to these shares.
In May and June 1999, as part of our sale of 3,312,720 shares of our series
D mandatorily redeemable convertible preferred stock at a price of $11.32 per
share and warrants to purchase 1,004,829 shares of common stock at an exercise
price of $7.46 per share, we sold:
. 662,544 shares of series D mandatorily convertible preferred stock and
warrants to purchase 200,969 shares of common stock to affiliates of
Timothy Weglicki, one of our directors;
. 163,469 shares of series D mandatorily redeemable convertible preferred
stock and warrants to purchase 49,584 shares of common stock to
affiliates of Gautam Prakash, one of our directors;
. 111,561 shares of series D mandatorily redeemable convertible preferred
stock and warrants to purchase 33,839 shares of common stock to
affiliates of Alan Taetle, one of our directors;
. 151,638 shares of series D mandatorily redeemable convertible preferred
stock and warrants to purchase 45,995 shares of common stock to
affiliates of Noel Fenton, one of our directors;
. 15,085 shares of series D mandatorily redeemable convertible preferred
stock and warrants to purchase 4,576 shares of common stock to Dwight
Sawin, who was then one of our directors; and
. 7,371 shares of series D mandatorily redeemable convertible preferred
stock and warrants to purchase 2,236 shares of common stock to family
members of Peyton Anderson, one of our officers and directors.
These individuals acquired these shares and warrants on the same terms as
other purchasers in this transaction.
Other Transactions
In December 1998, we entered into a Content Conversion Services Agreement
with Requisite Technology, Inc. Under this agreement, Requisite converts
product information content received by us from our suppliers to electronic
catalog format for use on our Web sites. The agreement has an initial 12 month
term with automatic renewal thereafter. It may be terminated by either party
for material breach or upon the occurrence of bankruptcy or similar events.
Noel Fenton, one of our directors, also serves as a director of Requisite
Technology, Inc.
54
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of our capital stock as of September 30, 1999 and as adjusted to
reflect our sale of common stock in this offering by:
. all those known by us to be beneficial owners of more than five
percent of the outstanding shares of common stock;
. all executive officers;
. each of our directors; and
. all executive officers and directors as a group.
For purposes of calculating the percentage beneficially owned, the number
of shares of common stock deemed outstanding prior to this offering consists
of 17,165,604 shares outstanding as of September 30, 1999. The number of
shares of common stock deemed outstanding after this offering includes an
additional 7,500,000 shares that are being offered for sale by us in this
offering.
Options that are exercisable within sixty days are deemed to be outstanding
and to be beneficially owned by the stockholder holding the options for the
purpose of computing that stockholder's percentage ownership but are not
treated as outstanding for the purpose of computing the percentage ownership
of any other stockholder. Beneficial ownership is determined in accordance
with the rules of the Securities and Exchange Commission that deem shares to
be beneficially owned by any person or group who has or shares voting or
investment power with respect to such shares. Unless otherwise indicated, the
persons named on this table have sole voting and investment control with
respect to all shares beneficially owned.
<TABLE>
<CAPTION>
Shares Shares
Beneficially Beneficially
Owned Prior to Owned After
Offering Offering
-------------------- --------------------
Name Shares Percent Shares Percent
<S> <C> <C> <C> <C>
Trinity Ventures VI, 2,119,096(2) 12.3% 2,119,096(2) 8.6%
L.P.(1).................
3000 Sand Hill Road
Building 1, Suite 240
Menlo Park, CA 94025
Bessemer Venture Partners 1,653,497(4) 9.6% 1,653,497(4) 6.7%
IV L.P.(3)..............
1400 Old Country Road
Suite 407
Westbury, NY 11590
Noro-Moseley Partners IV, 1,559,028(6) 9.1% 1,559,028(6) 6.3%
L.P.(5).................
9 North Parkway Square
4200 Northside Parkway,
NW
Atlanta, GA 30327
ABS Capital Partners III, 1,205,812(7) 6.9% 1,205,812(7) 4.8%
L.P. ...................
1 South Street, 25th
Floor
Baltimore, MD 21202-3220
M. Scott Andrews......... 840,979 4.9% 840,979 3.4%
5151 McCrimmon Parkway
Suite 208
Morrisville, NC 27560
Peyton C. Anderson....... 853,112 5.0% 853,112 3.5%
5151 McCrimmon Parkway
Suite 208
Morrisville, NC 27560
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
Shares Shares
Beneficially Beneficially
Owned Prior to Owned After
Offering Offering
--------------------- ---------------------
Name Shares Percent Shares Percent
<S> <C> <C> <C> <C>
Wakefield Group II LLC............. 935,417(8) 5.4% 935,417(8) 3.8%
1110 E. Morehead Street
Charlotte, NC 28204
Bruce J. Boehm..................... 210,007(9) 1.2% 210,007(9) 0.9%
Noel J. Fenton..................... 2,119,096(10) 12.3% 2,119,096(10) 8.6%
Gautam A. Prakash.................. 1,653,497(11) 9.6% 1,653,497(11) 6.7%
Alan J. Taetle..................... 1,559,028(12) 9.1% 1,559,028(12) 6.3%
Timothy T. Weglicki................ 1,205,812(13) 6.9% 1,205,812(13) 4.8%
All directors and executive
officers as a group (12 persons)
(9)(10)(11)(12)(13)(14)........... 8,769,832 50% 8,769,832 35.5%
</TABLE>
- --------
(1) Includes shares owned by Trinity VI Side-By-Side Fund, L.P., which is an
affiliate of Trinity Ventures VI, L.P.
(2) Includes 45,995 shares subject to warrants that are currently
exercisable.
(3) Includes shares owned by Bessemer Venture Investors L.P. and Bessec
Ventures IV L.P., which are affiliates of Bessemer Venture Partners IV
L.P.
(4) Includes 49,584 shares subject to warrants that are currently
exercisable.
(5) Includes shares owned by Noro-Moseley Partners IV-B Fund L.P., which is
an affiliate of Noro-Moseley Partners IV, L.P.
(6) Includes 33,840 shares subject to warrants that are currently
exercisable.
(7) Includes 200,969 shares subject to warrants that are currently
exercisable.
(8) Mr. Thomas S. Nelson and Mrs. Anna S. Nelson may be deemed to control the
Wakefield Group II LLC and may be deemed to be the beneficial owners of
these shares. Mr. and Mrs. Nelson disclaim beneficial ownership. Also
includes 20,304 shares subject to a warrant that is currently
exercisable.
(9) Includes 10,169 shares subject to a warrant that is currently
exercisable.
(10) Consists of shares owned by Trinity Ventures VI, L.P. and Trinity VI
Side-By-Side Fund, L.P. Mr. Fenton is managing general partner of these
entities and may be deemed to be a beneficial owner of these shares. Mr.
Fenton disclaims beneficial ownership.
(11) Consists of shares owned by Bessemer Venture Partners IV L.P., Bessemer
Venture Investors L.P. and Bessec Ventures IV L.P. Mr. Prakash is a
principal of these entities and may be deemed to be a beneficial owner of
these shares. Mr. Prakash disclaims beneficial ownership.
(12) Consists of shares owned by Noro-Moseley Partners IV L.P. and Noro-
Moseley Partners IV-B Fund, L.P. Mr. Taetle is a principal of these
entities and may be deemed to be a beneficial owner of these shares.
Mr. Taetle disclaims beneficial ownership.
(13) Mr. Weglicki is Managing Member of ABS Partners III, L.L.C., which is the
general partner of ABS Capital Partners III, L.P., and may be deemed to
be a beneficial owner of these shares. Mr. Weglicki disclaims beneficial
ownership.
(14) Includes 136,767 shares subject to options that are exercisable within 60
days.
56
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
Our authorized capital stock of 100,000,000 shares consists of 90,000,000
shares of common stock, $0.001 par value per share, and 10,000,000 shares of
preferred stock, $0.001 par value per share. As of September 30, 1999, we had
issued and outstanding 17,165,604 shares of common stock.
Common Stock
Upon the closing of this offering, there will be 24,665,604 shares of common
stock outstanding assuming no exercise of the underwriters' over-allotment
option and no exercise of outstanding options or warrants. Our class B common
stock automatically converts into shares of our common stock upon completion of
this offering. Holders of shares of our common stock are entitled to one vote
for each share on all matters to be submitted to a vote of our stockholders and
do not have cumulative voting rights. Subject to the rights of any holders of
preferred stock which may be issued in the future, the holders of shares of our
common stock are entitled to share ratably in such dividends as may be declared
and paid out of funds legally available. In the event of a liquidation or
winding up of SciQuest.com, holders of common stock are entitled to share
ratably in all assets remaining after payment of all liabilities and
liquidation preferences, if any. Holders of common stock have no preemptive,
subscription, redemption or conversion rights. The outstanding shares of common
stock are, and the shares of common stock to be issued in this offering will
be, duly authorized, validly issued, fully paid and nonassessable.
Preferred Stock
Upon completion of this offering, all of our outstanding preferred stock
will automatically convert into common stock. Accordingly, upon completion of
this offering, 10,000,000 shares of preferred stock will be authorized, and no
shares will be outstanding. The board has the authority, without further
stockholder approval, to issue such shares of preferred stock in one or more
series and to fix or alter the designations, preferences, rights and any
qualifications, limitations or restrictions on the shares of each such series,
including the dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption (including sinking fund provisions), redemption
price or prices, liquidation preferences and the number of shares constituting
any series or designations of such series. The issuance of our preferred stock
may have the effect of delaying, deferring or preventing a change of control of
SciQuest.com. There are no outstanding shares of preferred stock and no series
have been designated.
Options and Warrants
As of September 30, 1999, we had outstanding options to purchase an
aggregate of 1,577,953 shares of common stock at a weighted average exercise
price of $1.75 per share and warrants to purchase an aggregate of 1,183,183
shares of common stock at a weighted average exercise price of $6.87 per share.
In addition, we had warrants to purchase an aggregate of 57,545 shares of
series B preferred stock at an exercise price of $2.80 per share, which will
convert upon completion of this offering into warrants to purchase 87,275
shares of our common stock at an exercise price of $1.85 per share. All
outstanding options and warrants provide for antidilution adjustments in the
event of certain mergers, consolidations, reorganizations, recapitalizations,
stock dividends, stock splits or other changes in the corporate structure of
SciQuest.com. An aggregate of 1,004,829 warrants provide for antidilution
adjustment in the event of certain dilutive issuances of securities by us at
less than $7.46 per share.
In addition, we have agreed to issue warrants to acquire up to 3,724,307
shares of common stock at an exercise price of $0.01 per share and may in the
future issue warrants to acquire up to an additional 1,408,112 shares of common
stock at an exercise price of $0.01 per share.
57
<PAGE>
Anti-takeover Effects of Provisions of Certificate of Incorporation and Bylaws
Under Delaware law, all stockholder actions must be effected at a duly
called annual or special meeting. Our bylaws provide that, except as otherwise
required by law, special meetings of the stockholders can only be called by the
board of directors or our Chief Executive Officer or Chairman. In addition, our
bylaws establish an advance notice procedure for stockholder proposals to be
brought before an annual meeting of stockholders, including proposed
nominations of persons for election to the board. Stockholders at an annual
meeting may only consider proposals or nominations specified in the notice of
meeting or brought before the meeting by or at the direction of the board of
directors or by a stockholder of record on the record date for the meeting, who
is entitled to vote at the meeting and who has delivered timely written notice
in proper form to our Secretary of the stockholder's intention to bring such
business before the meeting. The holders of a majority of our outstanding
shares will consist of a quorum for the transaction of business. Each
stockholder has one vote per share of stock. Except as explained below or
provided by Delaware law, approval of a majority of those stockholders who are
present is required to take any action.
Our certificate of incorporation and bylaws provide that a director may be
removed from office only with cause by the affirmative vote of at least 75% of
all shares voting on the removal. Cause is defined as incompetence, mental or
physical incapacity, breach of fiduciary duty involving dishonesty, personal
profit, a failure to perform stated duties or a violation of law. Our board of
directors is classified into the three-year terms. In addition, the provisions
of our certificate of incorporation that relate to the election and removal of
directors and the prohibition on the calling of special meetings by
stockholders and actions by stockholders by written consent may only be amended
by a vote of 75% of our outstanding shares of voting stock. Our bylaws may only
be amended by our board of directors or by a vote of 75% of our outstanding
shares of voting stock.
These provisions of our certificate of incorporation and bylaws are intended
to discourage types of transactions that may involve an actual or threatened
change of control of SciQuest.com. Such provisions are designed to reduce the
vulnerability of SciQuest.com to an unsolicited acquisition proposal and,
accordingly, could discourage potential acquisition proposals and could delay
or prevent a change in control of SciQuest.com. Such provisions are also
intended to discourage tactics that may be used in proxy fights but could,
however, have the effect of discouraging others from making tender offers for
our shares and, consequently, may also inhibit fluctuations in the market price
of our shares that could result from actual or rumored takeover attempts. These
provisions may also have the effect of preventing changes in the management of
SciQuest.com.
Effect of Delaware Anti-takeover Statute
We are subject to Section 203 of the Delaware General Corporation Law, or
the anti-takeover law, which regulates corporate acquisitions. The anti-
takeover law 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 the anti-takeover law, a "business
combination" includes, among other things, a merger or consolidation involving
SciQuest.com, and the interested stockholder and the sale of more than 10% of
SciQuest.com's assets. In general, the anti-takeover law defines an "interested
stockholder" as any entity or person beneficially owning 15% or more the
outstanding voting stock of SciQuest.com and any entity or person affiliated
with or controlling or controlled by such entity or person. A Delaware
corporation may "opt out" of the anti-takeover law 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 the anti-takeover law.
Registration Rights
Upon completion of this offering, holders of 16,840,971 shares of our common
stock and 1,209,755 shares of our common stock issuable upon the exercise of
outstanding warrants will be entitled to certain rights with respect to the
registration of these shares under the Securities Act.
58
<PAGE>
If we register any of our common stock, either for our own account or for
the account of other security holders, the holders are entitled to notice of
the registration and to include their shares of common stock in the
registration. All of these rights to register securities in connection with
this offering have been waived as required by the respective agreements
granting these rights.
On or after July 30, 2000, holders of 5,729,310 shares of common stock,
representing shares issued in conversion of our series B mandatorily redeemable
convertible preferred stock, may require that we register all or part of these
securities for sale under the Securities Act. Beginning 12 months after the
completion of this offering, subject to specified limitations, holders of
6,029,043 shares of common stock, representing shares issued in conversion of
our series D mandatorily redeemable convertible preferred stock and issuable in
exercise of outstanding warrants, may require that we register all or part of
these securities for sale under the Securities Act. Until we are entitled to
register our shares on Form S-3, a short form registration statement, these
holders may only make two such demands. Once we are entitled to use Form S-3,
which may be as early as November, 2000, all of these holders may make such
demands for registrations on Form S-3 on an unlimited number of occasions.
In all cases, a holder's right to include shares in a registration is
subject the ability of the underwriters to limit the number of shares included
in the offering. All fees, costs and expenses of all of these registrations
will be paid by us, and all selling expenses will be paid by the holders of the
securities being registered.
Listing
The Nasdaq National Market has approved our common stock for quotation under
the trading symbol "SQST."
Transfer Agent
The transfer agent for our common stock is SunTrust Bank, Atlanta.
59
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our common stock in the public market after
this offering, or the perception that such sales may occur, could materially
and adversely affect prevailing market prices of our common stock and our
ability to raise equity capital in the future.
Upon completion of this offering, we will have outstanding an aggregate of
24,665,604 shares of our common stock, assuming no exercise of the
underwriters' over-allotment option and no exercise of outstanding options or
warrants. Of these shares, all shares sold in this offering will be freely
tradable without restriction or registration under the Securities Act, unless
such shares are purchased by our "affiliates" as that term is defined in Rule
144 under the Securities Act. The remaining 17,165,604 shares of our common
stock are held by existing stockholders. Such shares, as well as any shares
sold in this offering that are purchased by one of our affiliates, are
restricted securities that may be sold in the public market only if registered
or if they qualify for an exemption from registration under Rule 144, 144(k) or
701 promulgated under the Securities Act, which rules are summarized below.
As a result of the contractual restrictions and the lock-up agreements
described below and the provisions of Rules 144, 144(k) and 701, the restricted
securities will be available for sale in the public market as follows:
. 12,136 shares may be eligible for sale in accordance with the applicable
requirements of Rule 144 beginning 90 days after the date of this
prospectus;
. 16,148,625 shares may be eligible for sale in accordance with the
requirements of Rule 144 upon expiration of the lock-up agreements; and
. 1,004,843 shares may be eligible for sale in accordance with the
requirements of Rule 144 beginning on June 8, 2000, and 174,406 shares
may be eligible for sale in accordance with the requirements of Rule 144
on July 30, 2000.
Lock-up Agreements
All of our officers, directors and substantially all of our stockholders
have signed lock-up agreements under which they have agreed not to offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, lend or otherwise dispose of, other than by operation of law,
directly or indirectly, any shares of our common stock or any securities
convertible into or exercisable or exchangeable for our common stock or enter
into any swap or other arrangement that transfers to another person in whole or
in part, any of the economic consequences of ownership of our common stock for
a period of 180 days after the date of this prospectus, without the prior
written consent of Donaldson, Lufkin & Jenrette Securities Corporation.
Further, the holders of our common stock who have registration rights are
prohibited under the terms of their respective registration rights agreements
from offering, selling or otherwise transferring their shares of common stock
or securities convertible or exchangeable into common stock for a period of 180
days after the date of this prospectus.
Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell within any three-
month period a number of restricted securities that does not exceed the greater
of 1% of the number of shares of our common stock then outstanding, which will
equal approximately 243,656 shares immediately after this offering, or the
average weekly trading volume of our common stock on the Nasdaq National Market
during the four calendar weeks preceding such sale. Sales under Rule 144 are
also subject to specific manner-of-sale provisions and notice requirements and
to the availability of current public information about us.
Rule 144(k)
Under Rule 144(k), a person who is not one of our affiliates at any time
during the 90 days preceding a sale and who has beneficially owned the shares
proposed to be sold for at least two years, including the holding
60
<PAGE>
period of any prior owner other than one of our affiliates, is entitled to sell
such shares without complying with the manner of sale, public information,
volume limitation or notice provisions of Rule 144. Therefore, unless otherwise
restricted, "144(k) shares" may be sold immediately upon completion of this
offering.
Rule 701
In general, under Rule 701 of the Securities Act as currently in effect,
each of our employees, consultants or advisors who purchases shares from us in
connection with a compensatory stock plan or other written agreement is
eligible to resell such shares 90 days after the date of this prospectus in
reliance on Rule 144, but without compliance with various restrictions.
Specifically, shares acquired pursuant to Rule 701 may be sold by nonaffiliates
without regard to the holding period, volume limitations or information or
notice requirements of Rule 144, and by our affiliates without regard to the
holding period requirement.
Registration Rights
Upon completion of this offering, the holders of 16,840,971 shares of common
stock and the holders of 1,209,755 shares of common stock issuable upon the
exercise of outstanding warrants, or their transferees, will be entitled to
rights with respect to the registration of such shares under the Securities
Act. See "Description of Capital Stock--Registration Rights." After such a
registration, these shares become freely tradable without restriction under the
Securities Act.
Stock Options and Warrants
Options to purchase an aggregate of 140,133 shares of our common stock are
fully vested as of September 30, 1999. All of such shares are subject to the
180-day lock-up agreements described above. As of September 30, 1999, options
to purchase an additional 1,437,820 shares of common stock were outstanding but
subject to future vesting and an additional 794,874 shares of common stock were
available for future grants under our stock option plan. As of September 30,
1999, 1,183,183 shares of common stock are subject to currently exercisable
warrants. We also had outstanding warrants to purchase an aggregate of 57,545
shares of series B preferred stock at an exercise price of $2.80 per share,
which will convert upon the consummation of this offering into warrants to
purchase 87,275 shares of our common stock at an exercise price of $1.85 per
share. In addition, we have agreed to issue upon consummation of this offering
warrants to acquire up to 3,724,307 shares of common stock at an exercise price
of $0.01 per share and may in the future issue warrants to acquire up to an
additional 1,408,112 shares of common stock at an exercise price of $0.01 per
share.
Following this offering, we intend to file one or more registration
statements on Form S-8 under the securities Act to register all shares of
common stock subject to outstanding stock options and options issuable pursuant
to our stock option plans. Subject to the lock-up agreements, shares covered by
these registration statements will be eligible for sale in the public markets,
other than shares owned by our affiliates, which may be sold in the public
market if they qualify for an exemption from registration under Rule 144 or
701.
61
<PAGE>
UNDERWRITING
Subject to the terms and conditions of an underwriting agreement, dated
November 19, 1999, the underwriters named below, who are represented by
Donaldson, Lufkin & Jenrette Securities Corporation, Deutsche Banc Securities
Inc., Hambrecht & Quist LLC, DLJdirect Inc. and E*OFFERING Corp. have severally
agreed to purchase from SciQuest.com the respective number of shares of common
stock shown opposite their names below.
<TABLE>
<CAPTION>
Number
Underwriters: of Shares
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.................. 2,693,240
Deutsche Banc Securities Inc......................................... 1,469,040
Hambrecht & Quist LLC................................................ 1,469,040
DLJdirect Inc. ...................................................... 244,840
E*OFFERING Corp. .................................................... 244,840
BancBoston Robertson Stephens Inc.................................... 73,000
Bear, Stearns & Co. Inc.............................................. 73,000
Credit Suisse First Boston Corporation............................... 73,000
A.G. Edwards & Sons, Inc............................................. 73,000
First Union Securities, Inc. ........................................ 73,000
Goldman, Sachs & Co.................................................. 73,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated................... 73,000
Warburg Dillon Read LLC.............................................. 73,000
SoundView Technology Group, Inc. .................................... 73,000
C.E. Unterberg, Towbin............................................... 73,000
Thomas Weisel Partners LLC........................................... 73,000
Advest, Inc.......................................................... 36,000
Robert W. Baird & Co. Incorporated................................... 36,000
Marion Bass Securities Corporation................................... 36,000
William Blair & Company, LLC ........................................ 36,000
J.C. Bradford & Co................................................... 36,000
Fahnestock & Co., Inc. .............................................. 36,000
First Albany Corporation............................................. 36,000
First Analysis Securities Corporation................................ 36,000
Wachovia Securities, Inc............................................. 36,000
C.L. King & Associates, Inc.......................................... 36,000
McDonald Investments Inc., a KeyCorp Company......................... 36,000
Raymond James & Associates, Inc...................................... 36,000
Redwine & Company, Inc............................................... 36,000
Sanders Morris Mundy Inc. ........................................... 36,000
Sands Brothers & Co., Ltd............................................ 36,000
Suntrust Equitable Securities Corporation............................ 36,000
---------
Total............................................................... 7,500,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares of common stock
offered in this offering are subject to approval of certain legal matters and
to certain other conditions. The underwriters must purchase and accept delivery
of all the shares, other than those shares covered by the over-allotment option
described below, if any are purchased.
The underwriters propose to initially offer some of the shares of common
stock directly to the public at the public offering price on the cover page of
this prospectus and some of the shares to dealers at the public offering price
less a concession not in excess of $0.67 per share. The underwriters may allow,
and these dealers
62
<PAGE>
may re-allow a concession not in excess of $0.10 per share on sales to other
dealers. After the initial offering of the shares to the public, the
representatives of the underwriters may change the public offering price and
such concessions. The underwriters do not intend to confirm sales to any
accounts over which they exercise discretionary authority.
The following table shows the underwriting fees to be paid to the
underwriters by us in connection with this offering. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares of our common stock.
<TABLE>
<CAPTION>
No Full
Exercise Exercise
<S> <C> <C>
Per share................................................. $ 1.12 $ 1.12
Total..................................................... $8,400,000 $9,660,000
</TABLE>
We will pay the offering expenses, estimated to be $990,000.
DLJdirect Inc., an affiliate of Donaldson, Lufkin & Jenrette Securities
Corporation and E*OFFERING Corp., are facilitating the distribution of the
shares sold in this offering over the Internet. E*OFFERING Corp. has agreed to
allocate a portion of the shares that it purchases to E*TRADE Securities, Inc.,
for further distribution to E*TRADE Securities, Inc. retail customers.
E*OFFERING Corp. and E*TRADE Securities, Inc. will allocate shares to their
respective customers in accordance with usual and customary industry practices.
An electronic prospectus is available on the Web sites maintained by DLJdirect
and E*OFFERING Corp. Other than the prospectus in electronic format, the
information on these Web sites relating to the offering is not part of this
prospectus and has not been approved or endorsed by us or the underwriters, and
should not be relied on by prospective investors.
We have granted to the underwriters an option, exercisable for 30 days after
the date of the underwriting agreement, to purchase up to 1,125,000 additional
shares of common stock at the initial public offering price less the
underwriting fees. The underwriters may exercise this option solely to cover
over-allotments, if any, made in connection with this offering. To the extent
that the underwriters exercise this option, each underwriter will become
obligated, subject to various conditions, to purchase a number of additional
shares proportionate to such underwriter's initial purchase commitment.
We have agreed to indemnify the underwriters against various civil
liabilities, including liabilities under the Securities Act, or to contribute
the payments that the underwriters may be required to make in respect of these
liabilities.
We and our executive officers and directors, and substantially all of our
stockholders either have agreed, or are contractually bound, for a period of
180 days after the date of this prospectus, not to, without the prior written
consent of Donaldson, Lufkin & Jenrette Securities Corporation:
. offer, pledge, sell, contract to sell, 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; or
. enter into any swap or other arrangement that transfers all or a portion
of the economic consequences associated with the ownership of any common
stock.
Either of the foregoing transfer restrictions will apply regardless of
whether a covered transaction is to be settled by the delivery of common stock
or such other securities, in cash or otherwise. In addition, during this 180-
day period, we have also agreed not to file any registration statement for, and
each of our executive officers, directors and several stockholders have agreed
not to make any demand for, or exercise any right of, the registration of any
shares of common stock or any securities convertible into or exercisable or
exchangeable for common stock without the prior written consent of Donaldson,
Lufkin & Jenrette Securities Corporation.
63
<PAGE>
Prior to the offering, there has been no established trading market for our
common stock. The initial public offering price for the shares of common stock
offered by this prospectus will be determined by negotiations among us and the
representatives of the underwriters. The factors to be considered in
determining the initial public offering price include:
. the history of and the prospects for the industry in which we compete;
. our past and present operations;
. our historical results of operations;
. our prospects for future earnings;
. the recent market prices of securities of generally comparable companies;
and
. the general condition of the securities markets at the time of the
offering.
The Nasdaq National Market has approved our common stock for quotation
under the symbol "SQST."
Other than in the United States, no action has been taken by us or the
underwriters that would permit a public offering of the shares of common stock
included in this offering in any jurisdiction that requires action for that
purpose. The shares included in this offering may not be offered or sold,
directly or indirectly, nor may this prospectus or any other offering material
or advertisements in connection with the offer and sale of any of these shares
be distributed or published in any jurisdiction, except under circumstances
that will result in compliance with the applicable rules and regulations of
that jurisdiction. We advise persons who receive this prospectus to inform
themselves about and to observe any restrictions relating to the offering of
the common stock and the distribution of this prospectus. This prospectus is
not an offer to sell or a solicitation of an offer to buy any shares of our
common stock included in this offering in any jurisdiction where such an offer
or a solicitation would not be permitted or legal.
In connection with this offering, some underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
common stock. Specifically, the underwriters may over-allot this offering,
creating a syndicate short position. The underwriters may bid for and purchase
shares of our common stock in the open market to cover syndicate short
positions or to stabilize the price of the common stock. The underwriting
syndicate may reclaim selling concessions if the syndicate repurchases
previously distributed common stock in syndicate covering transactions, in
stabilization transactions or in some other way or if Donaldson, Lufkin &
Jenrette Securities Corporation receives a report that indicates clients of
such syndicate members have "flipped" the common stock. 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.
At our request, the underwriters have reserved for sale at the initial
public offering price up to 10% of the shares of common stock to be sold in
this offering for sale to our employees, friends and persons having
relationships with us. The number of shares available for sale to the general
public will be reduced to the extent that any reserved shares are purchased.
Any reserved shares not so purchased will be offered by the underwriters on
the same basis as the other shares offered through this prospectus.
Hambrecht & Quist LLC and persons associated with Hambrecht & Quist
beneficially own 31,060 shares of our series D mandatorily redeemable
convertible preferred stock and warrants to purchase 9,421 shares of class A
common stock at an exercise price of $7.46 per share, which warrants expire in
May 2004. Additionally, Access Technology Partners, L.P., a fund of outside
investors that is managed by an affiliate of Hambrecht & Quist, owns 124,235
shares of our series D mandatorily redeemable convertible preferred stock and
warrants to purchase 37,684 shares of class A common stock at an exercise
price of $7.46 per share, which warrants expire in May, 2004.
ABS Capital Partners III, L.P., BT Investment Partners, Inc. and persons
associated with Deutsche Banc Securities, Inc. own 839,222 shares of series D
mandatorily redeemable convertible preferred stock and warrants to purchase
254,561 shares of class A common stock at an exercise price of $7.46 per
share, which warrants expire in May 2004.
64
<PAGE>
Hambrecht & Quist LLC has provided financial advisory services to us in the
past and has received compensation at market rates for these services. In
addition, Donaldson Lufkin & Jenrette has provided and will continue to provide
financial advisory services to us and will receive compensation at market rates
for these services.
LEGAL MATTERS
The validity of the issuance of the shares of the common stock to be sold in
this offering and other legal matters related to this offering will be passed
upon for us by Hutchison & Mason PLLC, Raleigh, North Carolina and other legal
matters relating to this offering will be passed on for us by Morris, Manning &
Martin, L.L.P., Atlanta, Georgia. Legal matters in connection with this
offering will be passed upon for the Underwriters by Brobeck, Phleger &
Harrison LLP, New York, New York.
EXPERTS
The financial statements of SciQuest.com as of December 31, 1998 and 1997
and for each of the three years in the period ended December 31, 1998, and the
financial statements of BioSupplyNet, Inc. as of June 30, 1998 and 1997 and for
the years then ended included in this prospectus have been so included in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
CHANGE IN ACCOUNTANTS
Effective February 8, 1999, we dismissed Hughes, Pittman and Gupton LLP and
engaged PricewaterhouseCoopers LLP as our independent accountants. Our board of
directors approved the decision to change independent accountants. The report
of Hughes, Pittman and Gupton LLP on our financial statements for the year
ended December 31, 1997 did not contain any adverse opinion or disclaimer of
opinion, and was not qualified or modified as to uncertainty, audit scope or
accounting principles. In connection with its audits through December 31, 1997
and through February 8, 1999, there were no disagreements with Hughes, Pittman
and Gupton LLP on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedures, which disagreements, if
not resolved to the satisfaction of Hughes, Pittman and Gupton LLP, would have
caused them to make reference thereto in their report on the financial
statements for the applicable year.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act, and the rules and regulations promulgated thereunder, with
respect to the shares of common stock offered by this prospectus. This
prospectus, which constitutes a part of the registration statement, does not
contain all of the information set forth in the registration statement and the
exhibits thereto. Statements contained in this prospectus as to the contents of
any contract or other document that is filed as an exhibit to the registration
statement are not necessarily complete and each such statement is qualified in
all respects by reference to the full text of such contract or document.
You may read and copy all or any portion of the registration statement and
the exhibits at the SEC's public reference room at 450 Fifth Street N.W.,
Washington, D.C. 20549, and at the regional offices of the SEC located at Seven
World Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You can request
copies of these documents, upon payment of a duplication fee, by writing to the
SEC. Please call the SEC at 1-800-SEC-0330 for further information on the
operation of the SEC's public reference rooms. Also, the SEC maintains a World
Wide Web site on the Internet at http:/www.sec.gov that contains reports, proxy
and information statements and other information regarding registrants that
file electronically with the SEC.
As a result of this offering, we will become subject to the information and
periodic reporting requirements of the Exchange Act and, in accordance
therewith, will file periodic reports, proxy and information statements and
other information with the SEC. These periodic reports, proxy and information
statements and other information will be available for inspection and copying
at the public reference facilities, regional offices and SEC's Web site
referred to above.
65
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
SciQuest.com, Inc.:
Report of Independent Accountants........................................ F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998 and
September 30, 1999...................................................... F-3
Consolidated Statements of Operations for the Years Ended December 31,
1996, 1997 and 1998 and
the Nine Months Ended September 30, 1998 and 1999....................... F-4
Consolidated Statements of Stockholders' Deficit for the Years Ended
December 31, 1996, 1997 and 1998 and the Nine Months Ended September 30,
1999.................................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1996, 1997 and 1998 and the Nine Months Ended September 30, 1998 and
1999.................................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
BioSupplyNet, Inc.:
Report of Independent Accountants........................................ F-27
Balance Sheets as of June 30, 1997 and 1998.............................. F-28
Statements of Operations for the Years Ended June 30, 1997 and 1998...... F-29
Statements of Stockholders' Deficit for the Years Ended June 30, 1997 and
1998.................................................................... F-30
Statements of Cash Flows for the Years ended June 30, 1997 and 1998...... F-31
Notes to Financial Statements............................................ F-32
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
SciQuest.com, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' deficit, and of cash
flows present fairly, in all material respects, the financial position of
SciQuest.com, Inc. and its subsidiary (the "Company") at December 31, 1998 and
1997, and the results of their operations and their cash flows for the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
August 20, 1999 except with respect to Note 16,
for which such date is November 12, 1999
Raleigh, North Carolina
F-2
<PAGE>
SciQuest.com, Inc.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Pro Forma
December 31, December 31, September 30, September 30,
1997 1998 1999 1999
(unaudited) (unaudited)
(note 1)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash
equivalents............ $ 330,836 $ 5,391,462 $ 4,911,440 $ 4,911,440
Short-term investments.. -- 1,886,693 12,600,275 12,600,275
Accounts receivable..... 20,658 104,082 311,229 311,229
Prepaid expenses and
other assets........... 7,227 37,057 906,876 906,876
----------- ----------- ------------ ------------
Total current assets.. 358,721 7,419,294 18,729,820 18,729,820
----------- ----------- ------------ ------------
Restricted cash.......... -- 82,236 -- --
Long-term investments.... -- -- 12,416,587 12,416,587
Property and equipment,
net..................... 19,412 357,460 1,757,310 1,757,310
Other assets............. 7,152 1,314,109 1,857,531 1,857,531
----------- ----------- ------------ ------------
Total assets.......... $ 385,285 $ 9,173,099 $ 34,761,248 $ 34,761,248
=========== =========== ============ ============
Liabilities and
Stockholders' Deficit
Current liabilities:
Accounts payable........ $ 82,926 $ 694,611 $ 1,982,181 $ 1,982,181
Accrued liabilities..... 142,267 280,003 1,682,651 1,682,651
Current maturities of
capital lease
obligations............ 2,758 18,048 19,190 19,190
Current maturities of
notes payable.......... 159,238 14,060 96,000 96,000
----------- ----------- ------------ ------------
Total current
liabilities.......... 387,189 1,006,722 3,780,022 3,780,022
----------- ----------- ------------ ------------
Deferred income taxes.... -- 285,005 120,920 120,920
Capital lease
obligations, less
current maturities...... -- 35,082 1,034,755 1,034,755
Notes payable, less
current maturities...... 79,188 65,128 -- --
Commitments and
contingencies (Note 14). -- -- -- --
Mandatorily redeemable
convertible preferred
stock................... -- 10,882,702 92,664,441 --
Stockholders' deficit:
Series A convertible
preferred stock,
$0.001 par value;
769,231 shares
designated; 769,221
shares issued and
outstanding as of
December 31, 1997 and
1998 and September 30,
1999, no shares
designated, issued or
outstanding pro forma
(unaudited)............ 683,135 683,135 683,135 --
Series C convertible
preferred stock,
$0.001 par value;
700,000 shares
designated; no shares
issued or outstanding
as of December 31,
1997, 546,405 and
635,813 shares issued
and outstanding as of
December 31, 1998 and
September 30, 1999,
respectively, no
shares designated,
issued or outstanding
pro forma (unaudited).. -- 1,524,470 1,774,470 --
Series E convertible
preferred stock,
$0.001 par value;
126,500 shares
designated; no shares
issued or outstanding
as of December 31,
1997 or 1998, 114,995
shares issued and
outstanding as of
September 30, 1999, no
shares designated,
issued or outstanding
pro forma (unaudited).. -- -- 1,255,616 --
Preferred stock,
undesignated,
10,000,000 shares
authorized; none
issued or outstanding
actual or pro forma
(unaudited)............ -- -- -- --
Common stock, $0.001
par value; 90,000,000
shares authorized;
3,412,447 shares
issued and outstanding
as of December 31,
1997 and 1998 and
3,727,548 shares
issued and outstanding
as of September 30,
1999, actual;
17,165,604 shares
issued and outstanding
pro forma (unaudited).. 3,412 3,412 3,728 17,166
Class B common stock,
$0.001 par value,
250,020 shares
authorized, issued and
outstanding as of
December 31, 1997 and
1998 and September 30,
1999, no shares
authorized, issued or
outstanding pro forma
(unaudited)............ 100,000 100,000 100,000 --
Additional paid-in
capital................. 366,588 49,949 -- 96,464,224
Deferred compensation.... -- -- (2,842,490) (2,842,490)
Accumulated other
comprehensive loss...... -- (6,673) -- --
Accumulated deficit...... (1,234,227) (5,455,833) (63,813,349) (63,813,349)
----------- ----------- ------------ ------------
Total stockholders'
equity (deficit)....... (81,092) (3,101,540) (62,838,890) 29,825,551
----------- ----------- ------------ ------------
Total liabilities and
stockholders'
deficit.............. $ 385,285 $ 9,173,099 $ 34,761,248 $ 34,761,248
=========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
SciQuest.com, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
------------------------------------- --------------------------
December September
December 31, December 31, 31, September 30, 30,
1996 1997 1998 1998 1999
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Revenues................ $ -- $ 196,381 $ 477,818 $ 308,365 $ 1,243,787
Cost of revenues........ -- -- 41,880 -- 823,236
--------- --------- ----------- ----------- ------------
Gross profit........ -- 196,381 435,938 308,365 420,551
--------- --------- ----------- ----------- ------------
Operating expenses:
Product development... 85,025 140,520 1,191,135 389,901 6,298,444
Sales and marketing... 149,560 256,699 1,706,033 828,294 6,218,888
General and
administrative....... 300,822 457,058 1,104,010 375,793 3,963,188
Purchased in-process
research and
development.......... -- -- 791,102 791,102 --
--------- --------- ----------- ----------- ------------
Total operating
expenses........... 535,407 854,277 4,792,280 2,385,090 16,480,520
--------- --------- ----------- ----------- ------------
Operating loss...... (535,407) (657,896) (4,356,342) (2,076,725) (16,059,969)
--------- --------- ----------- ----------- ------------
Interest income
(expense):
Interest income....... -- 3,235 110,565 34,259 762,287
Interest expense...... (9,113) (35,028) (30,524) (22,638) (7,026)
--------- --------- ----------- ----------- ------------
Net interest income
(expense).......... (9,113) (31,793) 80,041 11,621 755,261
--------- --------- ----------- ----------- ------------
Loss before income
taxes.............. (544,520) (689,689) (4,276,301) (2,065,104) (15,304,708)
Income tax benefit...... -- -- 54,695 -- 164,086
--------- --------- ----------- ----------- ------------
Net loss................ (544,520) (689,689) (4,221,606) (2,065,104) (15,140,622)
Accretion of mandatorily
redeemable convertible
preferred stock........ -- -- 328,723 112,155 46,646,901
--------- --------- ----------- ----------- ------------
Net loss available to
common stockholders.... $(544,520) $(689,689) $(4,550,329) $(2,177,259) $(61,787,523)
========= ========= =========== =========== ============
Net loss per common
share--basic and
diluted................ $(0.16) $(0.20) $(1.33) $(0.64) $(17.60)
Weighted average common
shares outstanding--
basic and diluted...... 3,412,447 3,412,447 3,412,447 3,412,447 3,511,340
Pro forma net loss per
common share--basic and
diluted (unaudited).... $(0.62) $(1.08)
Pro forma weighted
average shares
outstanding--basic and
diluted (unaudited).... 6,805,787 13,976,390
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
SciQuest.com, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIT
<TABLE>
<CAPTION>
Series A Series C Series E Class B
Preferred Stock Preferred Stock Preferred Stock Common Stock Common Stock Additional
---------------- ------------------ ------------------ ---------------- ---------------- Paid in
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Capital
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1996............. -- $ -- -- $ -- -- $ -- 3,412,447 $3,412 250,020 $100,000 $ 186,588
Noncash
management
compensation
expense......... -- -- -- -- -- -- -- -- -- -- 180,000
Issuance of
Series A
convertible
preferred stock
at $0.91 per
share in
exchange for
cash and
conversion of
promissory note,
net............. 769,221 683,135 -- -- -- -- -- -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- -- -- --
------- -------- ------- ---------- ------- ---------- --------- ------ ------- -------- ----------
Balance at
December 31,
1997............. 769,221 683,135 -- -- -- -- 3,412,447 3,412 250,020 100,000 366,588
Issuance of
Series C
convertible
preferred stock
at $2.80 per
share in
exchange for
shares of
BioSupplyNet,
Inc............. -- -- 546,405 1,524,470 -- -- -- -- -- -- --
Issuance of
stock warrants.. -- -- -- -- -- -- -- -- -- -- 12,084
Accretion of
mandatorily
redeemable
preferred stock. -- -- -- -- -- -- -- -- -- -- (328,723)
Net loss........ -- -- -- -- -- -- -- -- -- -- --
Other
comprehensive
loss--
unrealized loss
on investments.. -- -- -- -- -- -- -- -- -- -- --
------- -------- ------- ---------- ------- ---------- --------- ------ ------- -------- ----------
Balance at
December 31,
1998............. 769,221 683,135 546,405 1,524,470 -- -- 3,412,447 3,412 250,020 100,000 49,949
Issuance of
Series C
convertible
preferred stock
at $2.80 per
share in
exchange for
cash
(unaudited)..... -- -- 89,408 250,000 -- -- -- -- -- -- --
Deferred
compensation
related to grant
of stock options
(unaudited)..... -- -- -- -- -- -- -- -- -- -- 2,547,215
Issuance of
Series E
convertible
preferred stock
at $11.32 per
share in
exchange for
shares of IAI,
Inc.
(unaudited)..... -- -- -- -- 114,995 1,255,616 -- -- -- -- --
Deferred
compensation
related to
acquisition of
IAI, Inc.
(unaudited)..... -- -- -- -- -- -- -- -- -- -- --
Reclassification
of investments
to held-to-
maturity
(unaudited)..... -- -- -- -- -- -- -- -- -- -- --
Accretion of
mandatorily
redeemable
preferred stock
(unaudited)..... -- -- -- -- -- -- -- -- -- -- (3,430,007)
Exercise of
common stock
options
(unaudited)..... -- -- -- -- -- -- 274,422 275 -- -- 31,747
Exercise of
common stock
warrants
(unaudited)..... -- -- -- -- -- -- 40,679 41 -- -- 74,959
Issuance of
common stock
warrants in
connection with
Series D
preferred stock
(unaudited)..... -- -- -- -- -- -- -- -- -- -- 726,137
Amortization of
deferred
compensation
related to stock
options
(unaudited)..... -- -- -- -- -- -- -- -- -- -- --
Amortization of
deferred
compensation
related to
employment
agreement
(unaudited)..... -- -- -- -- -- -- -- -- -- -- --
Net loss
(unaudited)..... -- -- -- -- -- -- -- -- -- -- --
------- -------- ------- ---------- ------- ---------- --------- ------ ------- -------- ----------
Balance at
September 30,
1999 (unaudited). 769,221 $683,135 635,813 $1,774,470 114,995 $1,255,616 3,727,548 $3,728 250,020 $100,000 $ --
======= ======== ======= ========== ======= ========== ========= ====== ======= ======== ==========
<CAPTION>
Other Total
Deferred Compre- Accumu- Stock-
Compen- hensive lated holders'
sation Loss Deficit Deficit
<S> <C> <C> <C> <C>
Balance at
December 31,
1996............. $ -- $ -- $ (544,538) $ (254,538)
Noncash
management
compensation
expense......... -- -- -- 180,000
Issuance of
Series A
convertible
preferred stock
at $0.91 per
share in
exchange for
cash and
conversion of
promissory note,
net............. -- -- -- 683,135
Net loss........ -- -- (689,689) (689,689)
------------ -------- ------------- -------------
Balance at
December 31,
1997............. -- -- (1,234,227) (81,092)
Issuance of
Series C
convertible
preferred stock
at $2.80 per
share in
exchange for
shares of
BioSupplyNet,
Inc............. -- -- -- 1,524,470
Issuance of
stock warrants.. -- -- -- 12,084
Accretion of
mandatorily
redeemable
preferred stock. -- -- -- (328,723)
Net loss........ -- -- (4,221,606) (4,221,606)
Other
comprehensive
loss--
unrealized loss
on investments.. -- (6,673) -- (6,673)
------------ -------- ------------- -------------
Balance at
December 31,
1998............. -- (6,673) (5,455,833) (3,101,540)
Issuance of
Series C
convertible
preferred stock
at $2.80 per
share in
exchange for
cash
(unaudited)..... -- -- -- 250,000
Deferred
compensation
related to grant
of stock options
(unaudited)..... (2,547,215) -- -- --
Issuance of
Series E
convertible
preferred stock
at $11.32 per
share in
exchange for
shares of IAI,
Inc.
(unaudited)..... -- -- -- 1,255,616
Deferred
compensation
related to
acquisition of
IAI, Inc.
(unaudited)..... (400,000) -- -- (400,000)
Reclassification
of investments
to held-to-
maturity
(unaudited)..... -- 6,673 -- 6,673
Accretion of
mandatorily
redeemable
preferred stock
(unaudited)..... -- -- (43,216,894) (46,646,901)
Exercise of
common stock
options
(unaudited)..... -- -- -- 32,022
Exercise of
common stock
warrants
(unaudited)..... -- -- -- 75,000
Issuance of
common stock
warrants in
connection with
Series D
preferred stock
(unaudited)..... -- -- -- 726,137
Amortization of
deferred
compensation
related to stock
options
(unaudited)..... 71,392 -- -- 71,392
Amortization of
deferred
compensation
related to
employment
agreement
(unaudited)..... 33,333 -- -- 33,333
Net loss
(unaudited)..... -- -- (15,140,622) (15,140,622)
------------ -------- ------------- -------------
Balance at
September 30,
1999 (unaudited). $(2,842,490) $ -- $(63,813,349) $(62,838,890)
============ ======== ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
SciQuest.com, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
-------------------------------------- ---------------------------
December 31, December 31, December 31, September 30, September 30,
1996 1997 1998 1998 1999
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities
Net loss.............. $(544,520) $(689,689) $(4,221,606) $(2,065,104) $(15,140,622)
Adjustments to
reconcile net loss to
net cash used in
operating activities
Depreciation and
amortization......... 8,773 12,421 205,122 17,285 803,223
Noncash management
compensation expense. 180,000 180,000 -- -- --
Amortization of debt
discount............. -- -- 12,084 12,084 --
Purchased in process
research and
development.......... -- -- 791,102 791,102 --
Deferred tax benefit.. -- -- (54,695) -- (164,086)
Amortization of
deferred
compensation......... -- -- -- -- 104,725
Realized loss on sale
of investments....... -- -- -- -- 1,447
Changes in operating
assets and
liabilities
Accounts receivable.. (27,118) 6,460 (61,425) (60,240) (189,740)
Prepaid expenses and
other assets........ (2,849) (4,830) (47,535) 5,075 (956,847)
Accounts payable..... 69,801 13,125 469,833 89,173 1,287,572
Accrued liabilities.. 53,111 91,659 (184,467) 50,432 1,338,184
--------- --------- ----------- ----------- ------------
Net cash used in
operating
activities......... (262,802) (390,854) (3,091,587) (1,160,193) (12,916,144)
--------- --------- ----------- ----------- ------------
Cash flows from
investing activities
Purchase of property
and equipment........ (27,208) -- (273,341) (110,499) (1,356,166)
Cash received from
acquisitions......... -- -- 9,173 9,173 4,916
Proceeds from sale of
equipment............ -- -- -- -- 704,522
Maturity of
investments.......... -- -- -- -- 5,473,205
Purchase of
investments,
including restricted
cash................. -- -- (1,975,602) -- (28,515,911)
--------- --------- ----------- ----------- ------------
Net cash used in
investing
activities......... (27,208) -- (2,239,770) (101,326) (23,689,434)
--------- --------- ----------- ----------- ------------
Cash flows from
financing activities
Borrowings under notes
payable.............. 197,714 211,581 562,110 547,108 --
Repayment of notes
payable.............. -- (90,869) (206,348) (188,132) (79,188)
Repayment of capital
lease obligations.... -- (8,322) (2,758) (4,959) (13,253)
Proceeds from exercise
of common stock
warrants............. -- -- -- -- 75,000
Proceeds from exercise
of common stock
options.............. -- -- -- -- 32,022
Proceeds from issuance
of Class B common
stock, net........... 100,000 -- -- -- --
Proceeds from issuance
of Series A
convertible preferred
stock, net........... -- 600,596 -- -- --
Proceeds from issuance
of Series C
convertible preferred
stock, net........... -- -- -- -- 250,000
Proceeds from issuance
of Series B
mandatorily
redeemable
convertible preferred
stock, net........... -- -- 10,038,979 4,033,503 --
Proceeds from issuance
of Series D
mandatorily
redeemable
convertible preferred
stock, net........... -- -- -- -- 35,860,975
--------- --------- ----------- ----------- ------------
Net cash provided by
financing
activities......... 297,714 712,986 10,391,983 4,387,520 36,125,556
--------- --------- ----------- ----------- ------------
Net increase (decrease)
in cash and cash
equivalents........... 7,704 322,132 5,060,626 3,126,001 (480,022)
Cash and cash
equivalents at
beginning of period... 1,000 8,704 330,836 330,836 5,391,462
--------- --------- ----------- ----------- ------------
Cash and cash
equivalents at end of
period................ $ 8,704 $ 330,836 $ 5,391,462 $ 3,456,837 $ 4,911,440
========= ========= =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
SciQuest.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company
SciQuest.com, Inc. ("SciQuest.com" or the "Company"), which began operations
on November 27, 1995, is a Web-based, interactive marketplace for scientific
and laboratory products used by pharmaceutical, clinical, biotechnology,
chemical, industrial and educational organizations worldwide. The Company's
marketplace solutions utilize enabling Internet technologies and leverage its
extensive industry expertise to streamline the traditionally inefficient
scientific products supply chain. The Company's distributor-neutral approach
allows it to create an open and scalable marketplace that it believes is more
attractive to both buyers and sellers. The Company earns revenues from e-
commerce transactions generated by purchases made through the SciQuest.com Web
sites. In addition, SciQuest.com earns revenue for banner advertising on its
Web sites and advertising in the printed catalogue of scientific products (the
"Source Book"), which is prepared and distributed by the Company's subsidiary,
BioSupplyNet, Inc. ("BioSupplyNet"). SciQuest.com's technology allows buyers to
quickly find vendors of the scientific products and services they need and then
order these products directly from the supplier using SciQuest.com's Web sites.
2. Summary of Significant Accounting Policies
Unaudited Interim Financial Statements
The statements of operations and of cash flows for the nine month periods
ended September 30, 1998 and 1999 and consolidated balance sheet at September
30, 1999 are unaudited and reflect all adjustments (consisting of normal
recurring adjustments) which are, in the opinion of the Company's management,
necessary for a fair presentation of the Company's results of operations. All
financial statement disclosures related to the nine month periods ended
September 30, 1998 and 1999 are unaudited.
Unaudited Pro Forma Balance Sheet
The Board of Directors has authorized the Company to file a Registration
Statement with the Securities and Exchange Commission permitting the Company to
sell shares of common stock in an initial public offering ("IPO"). If the IPO
is consummated as presently anticipated, all shares of the Class B common stock
and the Series A, Series B, Series C and Series D preferred stock will
automatically convert into shares of common stock at a 1.516643-for-1
conversion ratio. The unaudited pro forma balance sheet reflects the subsequent
conversion of Class B common stock and the Series A, Series B, Series C, Series
D and Series E preferred shares into common stock as if such conversion had
occurred as of September 30, 1999.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of SciQuest.com,
Inc. and its wholly-owned subsidiary, BioSupplyNet, Inc. All significant
intercompany accounts and transactions have been eliminated.
F-7
<PAGE>
SciQuest.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less at the date of purchase to be cash equivalents.
Investments
The Company considers all investments that are not considered cash
equivalents and with a maturity of less than one year from the balance sheet
date to be short term investments. The Company considers all investments with a
maturity of greater than one year to be long term investments. At December 31,
1998, all investments were considered as available-for-sale and were carried at
fair value with unrealized gains and losses recognized as a component of other
comprehensive income. At September 30, 1999, all investments are considered as
held-to-maturity and are carried at amortized cost, as the Company has both the
positive intent and ability to hold them to maturity. The unrealized holding
loss of $6,673 on the Company's investments at December 31, 1998 was amortized
to interest income over the period from the date of the transfer of the
investments to held-to-maturity to the maturity date of the related
investments. Interest income includes interest, amortization of investment
purchases premiums and discounts, and realized gains and losses on sales of
securities. The cost of securities sold is based on the specific identification
method.
Restricted Cash
Restricted cash was comprised of a certificate of deposit which served as
collateral on the Company's bank loan. This certificate of deposit was to be
maintained until the bank loan was repaid. During the nine month period ended
September 30, 1999, the Company repaid the bank loan, and therefore this
certificate of deposit is no longer restricted.
Accounts Receivable
The Company bears all risk of loss on credit sales of scientific products in
e-commerce transactions. Accounts receivable are presented net of an allowance
for uncollectable accounts which is not significant at December 31, 1997 and
1998 and September 30, 1999.
Property and Equipment
Property and equipment is primarily comprised of furniture and computer
equipment which are recorded at cost and depreciated using the straight-line
method over their estimated useful lives which range from three to five years.
Property and equipment includes certain equipment under capital leases. These
items are depreciated over the shorter of the lease period or the estimated
useful life of the equipment.
Product Development Costs
Product development costs include expenses incurred by the Company to
develop, enhance, manage, monitor and operate the Company's Web sites and costs
of managing and integrating data on this Company's web sites. Prior to January
1, 1999 the software development costs component of product development costs
were accounted for in accordance with Statement of Financial Accounting
Standards No. 86 "Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed" which requires software development costs to be
capitalized beginning when a product's technological feasibility has been
established and ending when a product is available for general release to
customers. Through December 31, 1998, completion of a working model of the
Company's products and the date of general release have substantially
coincided. Costs incurred by the Company between the completion of the working
model and the point at which the product is ready for general release have been
insignificant.
F-8
<PAGE>
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants ("AICPA") issued Statements of
Position No. 98-1 "Accounting for the Costs of Computer Software Developed or
obtained for Internal Use," ("SOP No. 98-1") which provides guidance regarding
when software developed or obtained for internal use should be capitalized. SOP
No. 98-1 is effective for financial standards for fiscal years beginning after
December 15, 1998. The Company adopted SOP No. 98-1 effective January 1, 1999.
With the adoption of SOP No. 98-1, the Company began accounting for the
software development component of product development costs in accordance with
SOP No. 98-1. Capitalized product development cost are amortized over the
estimated life of the related application. The adoption of SOP No. 98-1 did not
have a material impact on the Company's consolidated financial statements.
Capitalized Software Costs
Software development costs are required to be capitalized beginning when a
product's technological feasibility has been established and ending when a
product is available for general release to customers. Capitalized software
costs result from the acquisition of BioSupplyNet (see Note 3) and were
determined by an independent valuation of BioSupplyNet.
These capitalized software costs are primarily associated with a search
engine with e-commerce capabilities and high level electronic taxonomy and
ontological conventions under development by BioSupplyNet at the date of
acquisition. As a result of the rapid changes in technology in the Internet,
these costs are being amortized over a period of 27 months.
Intangible Assets
Intangible assets, which resulted primarily from the acquisition of
BioSupplyNet, were determined by valuations prepared by management and are
primarily associated with the Source Book and contracts with certain Web sites
(the "Web Site Agreements") to provide a link to the SciQuest.com Web site.
Because the Source Book is a printed publication, which must be updated on an
annual basis, capitalized costs related to the Source Book are being amortized
over a period of 15 months. Capitalized costs related to the Web Site
Agreements are being amortized over a 12 month period which is the remaining
term of such agreements.
Goodwill represents the excess of the purchase price of BioSupplyNet and
Internet Auctioneers International, Inc. over the fair value of the assets
acquired. Goodwill is being amortized over a period of five years because of
the rapid changes in technology in the Internet industry.
Purchased In-Process Research and Development
The acquisition cost of in-process technology that at the date of purchase
has not achieved technological feasibility and has no alternative future use is
charged to operations in the period such technology is acquired. Purchased in-
process research and development costs for the year ended December 31, 1998
relate to the acquisition of BioSupplyNet (see Note 3).
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts payable and
accounts receivable at December 31, 1998 and 1999 and September 30, 1999
approximated their fair value due to the short-term nature of these items. The
fair value of the Company's short-term and long-term investments at December
31, 1998 and 1999 and September 30, 1999, based on market quotes, approximated
their carrying values.
Impairment of Long-Lived Assets
The Company evaluates the recoverability of its property and equipment and
intangible assets in accordance with Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of," ("SFAS No. 121"). SFAS No. 121 requires
recognition of impairment of long-lived assets in the event the net book value
of such assets exceeds the future undiscounted cash flows attributable to such
assets or the business to which such assets relate. No impairments were
required to be recognized during the years ended December 31, 1996, 1997 and
1998 or the nine month period ended September 30, 1999.
F-9
<PAGE>
SciQuest.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue Recognition
The Company's revenues have historically been derived from services provided
to customers for development of Internet services, short term contracts for
banner advertising on its Web sites and from the sale of advertising included
in the Source Book. In April 1999, the Company began selling scientific
products through its e-commerce Web sites.
Service revenues are recognized upon completion of the development of
Internet services and approved by the customer. The Company generated an
insignificant amount of service revenues during the year ended December 31,
1998 and had no service revenues during the nine months ended September 30,
1999.
Advertising revenues on banner contracts are recognized ratably over the
period in which the advertisement is displayed, provided that the Company has
no significant remaining obligations to the advertiser and that collection of
the resulting receivable is probable. Revenues from advertising included in the
Source Book are recognized at the date the Source Book is published and
distributed to the purchasers of scientific products as the Company has met all
of its obligations to the advertisers at that date.
Revenues received from e-commerce transactions are recorded as product
revenues and are recognized by the Company upon notification from the suppliers
of scientific products that the items ordered have been shipped to purchasers.
A reserve for returns is recognized for estimated product returns to the
suppliers. Product revenues totaled approximately $432,000 for the nine months
ended September 30, 1999.
Cost of Revenues
Cost of product revenues represents the purchase price to the Company of the
scientific products sold through its e-commerce Web sites and the cost of
maintaining such Web sites. We generally take legal title to the scientific
products purchased at the date of shipment and relinquish title to our
customers upon delivery.
Cost of advertising and subscription revenue includes the cost of preparing
the banner ads for display on the Company's Web sites and the cost of
publishing and distributing the Source Book. Advertising production costs are
recorded as cost of revenues the first time an advertisement appears on the
Company's Web sites.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of costs, including salaries
and sales commissions, of all personnel involved in the sales process. Sales
and marketing expenses also include costs of advertising, trade shows and
certain indirect costs. All costs of advertising the services and products
offered by the Company are expensed as incurred. Advertising expense totaled
$13,000, $15,000 and $181,000 for the years ended December 31, 1996, 1997 and
1998, respectively and was $782,500 for the nine months ended September 30,
1999.
Income Taxes
The Company accounts for income taxes using the liability method which
requires the recognition of deferred tax assets or liabilities for the
temporary differences between financial reporting and tax bases of the
Company's assets and liabilities and for tax carryforwards at enacted statutory
tax rates in effect for the years in which the differences are expected to
reverse. The effect on deferred taxes of a change in tax rates is recognized in
income in the period that includes the enactment date. In addition, valuation
allowances are established when necessary to reduce deferred tax assets to the
amounts expected to be realized.
F-10
<PAGE>
SciQuest.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock Based Compensation
The Company accounts for stock based compensation in accordance with the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees", ("APB No. 25") which states that no compensation expense
is recognized for stock options or other stock-based awards to employees that
are granted with an exercise price equal to or above the estimated fair value
per share of the Company's common stock on the grant date. In the event that
stock options are granted with an exercise price below the estimated fair
market value of the Company's common stock at the grant date, the difference
between the fair market value of the Company's common stock and the exercise
price of the stock option is recorded as deferred compensation. Deferred
compensation is amortized to compensation expense over the vesting period of
the stock option. The Company has adopted the disclosure requirements of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS 123"), which requires compensation expense to be
disclosed based on the fair value of the options granted at the date of the
grant.
Credit Risk, Significant Customers and Concentrations
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and cash equivalents, accounts
receivable and investments. Cash and cash equivalents are deposited with high
credit quality financial institutions which invest primarily in U.S. Government
securities, highly rated commercial paper and certificates of deposit
guaranteed by banks which are members of the FDIC. The counterparties to the
agreements relating to the Company's investments consist primarily of the U.S.
Government and various major corporations with high credit standings.
No single customer accounted for more than 10% of the Company's revenues
during the year ended December 31, 1996 or during the year ended December 31,
1998. In 1997, one customer accounted for 30% of revenues. For the nine month
period ended September 30, 1999, one customer accounted for 12% of revenues.
Concentrations of credit risk with respect to accounts receivable are limited
due to the large number of customers comprising the Company's customer base and
because all customers are located in the United States. There were no
significant individual customer balances as of December 31, 1996. As of
December 31, 1997, two customers comprised 18% and 34% of the accounts
receivable balance. As of December 31, 1998, one customer comprised 30% of the
accounts receivable balance. As of September 30, 1999, two customers comprised
25% and 35% of the accounts receivable balance. All of the Company's revenues
are from sales transactions originating in the United States.
SciQuest.com relies on a number of third party suppliers for various
services, including e-commerce fulfillment services. While SciQuest.com
believes it could obtain these services from other qualified suppliers on
similar terms and conditions, a disruption in supply of these services by the
current suppliers could materially harm the business.
Cash Flows
The Company made cash payments for interest of $8,438, $33,416 and $18,521
during the years ended December 31, 1996, 1997 and 1998, respectively, and
$9,392 during the nine months ended September 30, 1999.
The Company acquired property and equipment through the assumption of
capital lease obligations amounting to $11,080, $0 and $55,130 during the years
ended December 31, 1996, 1997 and 1998, respectively, and $1,014,068 during the
nine months ended September 30, 1999.
F-11
<PAGE>
SciQuest.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Comprehensive Income (Loss)
Effective January 1, 1998, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income,"
("SFAS No. 130"). SFAS No. 130 establishes standards for reporting
comprehensive income and its components in financial statements. Comprehensive
income, as defined, includes all changes in equity during a period from non-
owner sources. The Company's only item of other comprehensive income during
each of the three years in the period ended December 31, 1998 is the unrealized
gain on investments in debt securities considered as available-for-sale. The
Company had no items of other comprehensive income for the nine months ended
September 30, 1998 or 1999.
Segment Reporting
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information," ("SFAS No. 131"). This statement
establishes standards for the way companies report information about operating
segments in annual financial statements. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The disclosures prescribed by SFAS No. 131 are effective for the
year ended December 31, 1998. The Company has determined that it does not have
any separately reportable operating segments as of December 31, 1998 or
September 30, 1999.
Start Up Costs
In April 1998, the Accounting Standards Executive Committee of the AICPA
issued Statement of Position No. 98-5, "Reporting on the Costs of Start-Up
Activities," ("SOP No. 98-5") which is effective for fiscal years beginning
after December 15, 1998. SOP No. 98-5 requires companies to expense as incurred
all preopening, startup and organizational costs that are not capitalizable as
long-lived assets. The Company's adopted SOP No. 98-5 effective January 1,
1999. The adoption of SOP No. 98-5 had no impact on the Company's financial
condition or results of operations.
Net Income (Loss) Per Common Share
Historical
The Company computes net income (loss) per common share in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share,"
("SFAS No. 128") and SEC Staff Accounting Bulletin No. 98 ("SAB No. 98"). Under
the provisions of SFAS No. 128 and SAB No. 98, basic net income (loss) per
common share ("Basic EPS") is computed by dividing net income (loss) available
to common stockholders by the weighted average number of common shares
outstanding. Diluted net income (loss) per common share ("Diluted EPS") is
computed by dividing net income (loss) available to common stockholders by the
weighted average number of common shares and dilutive potential common share
equivalents then outstanding. Potential common shares consist of shares
issuable upon the exercise of stock options and warrants and shares issuable
upon conversion of Class B common stock and convertible preferred stock. The
calculation of the net loss per share available to common stockholders for the
years ended December 1996, 1997 and 1998 and the nine months ended September
30, 1999, does not include zero, 545, 5,325,054 and 17,026,675, respectively,
potential shares of common stock equivalents, as their impact would be anti-
dilutive.
Pro Forma Net Income (Loss) Per Common Share (Unaudited)
Pro forma net income (loss) per common share is calculated assuming the
reclassification of all outstanding shares of Class A common stock to common
stock and the conversion of all outstanding shares of
F-12
<PAGE>
SciQuest.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Class B common stock and all outstanding shares of all series of preferred
stock into common stock upon the effectiveness of the Company's initial public
offering (see Note 11). Therefore, accretion of mandatorily redeemable
preferred stock of $328,723 for the year ended December 31, 1998 and
$46,646,901 for the nine months ended September 30, 1999 is excluded from the
calculation of pro forma net income (loss) per common share.
The calculation of pro forma net loss per common share for the year ended
December 31, 1998 and the nine months ended September 30, 1999 does not include
178,568 and 1,154,930, respectively, potential shares of common stock
equivalents, as their impact would be anti-dilutive.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Investments
and Hedging Activities," ("SFAS No. 133"). SFAS No. 133 establishes a new model
for accounting for derivatives and hedging activities and supercedes several
existing standards. SFAS No. 133, as amended by SFAS No. 137, is effective for
all fiscal quarters of fiscal years beginning after June 15, 2000. The Company
does not expect that the adoption of SFAS No. 133 will have a material impact
on the consolidated financial statements.
3. Acquisitions
On September 29, 1998, the Company purchased all of the outstanding common
and preferred stock of BioSupplyNet in exchange for the issuance of 546,405
shares of the Company's Series C convertible preferred stock and 162,718
warrants to purchase the Company's common stock at an exercise price of $1.85
per share. In addition, the Company issued 192,280 options to purchase the
Company's common stock primarily to former employees of BioSupplyNet who became
employees of the Company. Of those options, 189,297 were issued with an
exercise price of $0.18 per share which was the fair value of the Company's
common stock on the date of the grant. The remaining 2,983 options were
replacement options with an exercise price of $0.002 per share. The Company did
not record any compensation expense related to the 2,983 options issued with an
exercise price of $0.002 per share, as the value of the options as calculated
in accordance with SFAS No. 123 was determined to be de minimis. The
acquisition has been accounted for using the purchase method of accounting and,
accordingly, the purchase price allocated to the assets acquired and
liabilities assumed based on our estimates of fair value at the acquisition
date. The fair value assigned to intangible assets acquired was based on a
valuation prepared by management of the Company of the purchased in-process
research and development, developed technology, the Source Book and the
management of BioSupplyNet. The fair value of the tangible and intangible
assets acquired and purchased in-process research and development was
determined by a valuation prepared by the management of the Company using the
average of a risk-adjusted income approach based on stage of completion and the
estimated cost actually incurred by BioSupplyNet in developing the technology,
for acquired research and development and completed technology, and a risk-
adjusted income approach for the Source Book and the Web Site Agreements. The
excess of the purchase price over the fair values of assets acquired less
liabilities assumed was allocated to goodwill.
The total purchase price of $1,988,524 consisted of 546,405 shares of the
Company's Series C preferred stock with an estimated fair value of $2.80 per
share, based on the per share price of the Company's Series B mandatorily
redeemable convertible preferred stock which was sold between July and November
1998, and the assumption of $464,054 of net liabilities of BioSupplyNet. Of the
total purchase price, $791,102 was allocated to acquired in process research
and development and immediately charged to operations because the in-process
technology acquired had not reached the stage of technological feasibility at
the date of the acquisition and had no alternative future use. In addition,
$364,148 of the purchase price was allocated to capitalized software costs
F-13
<PAGE>
SciQuest.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for completed technology, $378,592 was allocated to the Source Book, $80,766
was allocated to the Web Site Agreements and $79,809 was allocated to the
tangible assets of BioSupplyNet, which were comprised of cash, accounts
receivable and furniture and equipment. The remaining purchase price of
$294,107 was allocated to goodwill.
Of the total purchase price, $791,102 represents purchased in-process
research and development related to an e-commerce product offering being
developed by BioSupplyNet that had not yet reached technological feasibility
and had no alternative future use. The value assigned to in-process research
and development was based on a valuation prepared by management of the Company.
The value assigned to e-commerce technology being developed by BioSupplyNet was
adjusted to reflect the relative value of this e-commerce technology based on
stage of completion, complexity of the work completed at the date of the
acquisition, difficulty of completing the development, the development costs
already incurred by BioSupplyNet and projected costs to complete the
development of the e-commerce technology and resulting projected net cash flows
from the e-commerce technology. The value assigned to purchased in-process
research and development was based on key assumptions, including projected
revenues from the e-commerce product offering, current and expected industry
trends and acceptance of the e-commerce products technology. BioSupplyNet had
projected that it would generate revenues from its e-commerce technology during
its fiscal year ended June 30, 2000 and positive gross margins beginning in its
fiscal year ended June 30, 2002. A risk adjusted discount rate of 45% was used
to discount the projected cash flows from the e-commerce technology from the
fiscal year ended June 30, 2000 through June 30, 2004, which is the date at
which management of BioSupplyNet projected the e-commerce technology would be
obsolete.
BioSupplyNet had incurred approximately $1,000,000 in development costs
related to its e-commerce technology, which was approximately 50% complete,
prior to its acquisition by SciQuest.com. The Company expects to incur
approximately $1,900,000 to complete development of all aspects of
BioSupplyNet's e-commerce technology. This development is projected to be
completed by March 2000.
As the acquisition of BioSupplyNet was a stock for stock transaction which
was structured as a tax free exchange, the purchase price of BioSupplyNet was
in excess of the carryover tax basis of the assets acquired. This resulted in
the immediate recognition of a deferred tax liability of and additional
goodwill of $339,700 as the difference between the recognized fair value of the
acquired assets and their historical tax basis is not deductible for tax
purposes.
The following unaudited pro forma consolidated financial information
reflects the results of operations of the Company for the years ended December
31, 1997 and 1998, and the nine months ended September 30, 1998 as if the
acquisition of BioSupplyNet had occurred on January 1, 1997 and 1998,
respectively, and after giving effect to the purchase accounting adjustments.
These pro forma results are not necessarily indicative of what the Company's
operating results would have been had the acquisition actually taken place on
January 1, 1997 or January 1, 1998, and may not be indicative of future
operating results.
<TABLE>
<CAPTION>
Year Ended
------------------------
December December Nine Months Ended
31, 31, September 30,
1997 1998 1998
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
Revenue......................... $ 558,791 $ 1,098,177 $ 928,724
Operating loss.................. $ (919,308) $(4,427,128) $(2,147,511)
Net loss........................ $(1,158,359) $(4,139,696) $(1,983,194)
Net loss available to common
stockholders................... $(1,158,359) $(4,468,419) $(2,095,349)
Net loss per common share....... $ (0.34) $ (1.31) $ (0.61)
</TABLE>
F-14
<PAGE>
SciQuest.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On July 30, 1999, the Company purchased all of the outstanding common stock
of Internet Auctioneers International, Inc. ("IAI") in exchange for the
issuance of 114,995 shares of the Company's series E convertible preferred
stock. In connection with the purchase of IAI, a former shareholder and officer
of IAI entered into a two year employment agreement with the Company. In the
event that this individual voluntarily terminates his employment prior to the
end of the two year period, this individual would be required to pay an amount
equal to $400,000, reduced by $50,000 upon completion of each 90 day period of
continuous employment, payable either in cash or by surrendering a number of
Series E preferred shares of an equivalent value, as determined in the
individual's employment agreement. The Company also entered into a three year
non-compete agreement with this individual.
The purchase price of $1,416,000 consisted of the 114,995 shares of the
company's Series E preferred, with an estimated fair value of $11.32 per share,
based on the per share price of the Company's Series D preferred that was sold
in May and June 1999, and the assumption of $160,000 of net liabilities of IAI.
The excess of the purchase price over the fair value of assets acquired less
liabilities assumed was allocated to goodwill. Of the total purchase price,
$22,000 was allocated to the tangible assets of IAI, which were comprised of
cash and accounts receivable. In addition, $400,000 was allocated to the
employment agreement with the former shareholder and recorded as deferred
compensation, and $994,000 was allocated to goodwill.
4.Management Services
During the years ended December 31, 1996 and 1997, certain members of the
Company's management provided services to the Company on a full time basis for
no consideration. A charge to general and administrative expenses and an
increase to additional paid in capital for $180,000 in each of 1996 and 1997
were recorded to reflect the value of these services. The amount of this charge
was based on management's estimate of the market rate of compensation for these
individuals in a start-up company environment.
5. Investments
The aggregate fair values of investment securities at December 31, 1998 and
September 30, 1999 along with unrealized gains and losses determined on an
individual security basis are as follows:
December 31, 1998
<TABLE>
<CAPTION>
Gross Market
Description Cost Unrealized Loss Value
<S> <C> <C> <C>
Short-Term Investments:
U.S. Government obligations......... $1,893,366 $ (6,673) $1,886,693
========== ======== ==========
</TABLE>
F-15
<PAGE>
SciQuest.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
September 30, 1999 (unaudited)
<TABLE>
<CAPTION>
Gross Market
Description Cost Unrealized Loss Value
<S> <C> <C> <C>
Short-Term Investments:
U.S. Government obligations........ $12,600,275 -- $12,600,275
----------- ---- -----------
Long-Term Investments:
U.S. Government obligations........ 12,095,390 -- 12,095,390
Corporate Bonds.................... 321,197 -- 321,197
----------- ---- -----------
$12,416,587 $-- $12,416,587
=========== ==== ===========
</TABLE>
The Company had no outstanding investment securities at December 31, 1997.
6. Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------ September 30,
1997 1998 1999
(unaudited)
<S> <C> <C> <C>
Furniture and equipment.................... $ -- $ 42,094 $ 240,579
Computer software and equipment............ 40,606 408,752 1,780,999
Leasehold improvements..................... -- -- 47,689
-------- -------- ----------
Total costs.............................. 40,606 450,846 2,069,267
Less accumulated depreciation.............. (21,194) (93,386) (311,957)
-------- -------- ----------
Net book value........................... $ 19,412 $357,460 $1,757,310
======== ======== ==========
</TABLE>
The Company leases certain equipment under capital lease agreements. The
cost of equipment under capital leases at September 30, 1999 was approximately
$1,080,000. For the years ended December 31, 1997 and 1998 the cost of
equipment under capital leases was approximately $66,000.
7. Other Assets
Other assets are comprised of the following:
<TABLE>
<CAPTION>
December 31,
----------------- September 30,
1997 1998 1999
(unaudited)
<S> <C> <C> <C>
Goodwill.................................... $ -- $ 638,416 $1,627,561
Web site agreements......................... -- 80,766 80,766
Source Book................................. -- 378,592 378,592
Capitalized software costs.................. -- 364,148 364,148
Deposits.................................... -- -- 111,642
Other....................................... 7,152 20,248 1,050
------ ---------- ----------
7,152 1,482,170 2,563,759
Less accumulated amortization............... -- (168,061) (706,228)
------ ---------- ----------
$7,152 $1,314,109 $1,857,531
====== ========== ==========
</TABLE>
F-16
<PAGE>
SciQuest.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Accrued Liabilities
Accrued liabilities are comprised of the following:
<TABLE>
<CAPTION>
December 31,
----------------- September 30,
1997 1998 1999
(unaudited)
<S> <C> <C> <C>
Deferred revenues............................ $ 87,750 $136,024 $ 9,305
Accrued compensation......................... 45,921 139,219 870,031
Professional services........................ -- -- 440,000
Other........................................ 8,596 4,760 363,315
-------- -------- ----------
$142,267 $280,003 $1,682,651
======== ======== ==========
</TABLE>
9. Income Taxes
The components of the Company's income tax benefit for the year ended
December 31, 1997, 1998 and the nine months ended September 30, 1999 consist of
the following:
<TABLE>
<CAPTION>
For the Year Ended For the
December 31, Nine Months Ended
------------------ September 30,
1997 1998 1999
(unaudited)
<S> <C> <C> <C>
Current:
Federal.............................. $ -- $ -- $ --
State................................ -- -- --
------- ---------- ---------
-- -- --
------- ---------- ---------
Deferred:
Federal.............................. -- (44,158) (132,474)
State................................ -- (10,537) (31,612)
------- ---------- ---------
-- (54,695) (164,086)
------- ---------- ---------
Total.............................. $ -- $ (54,695) $(164,086)
======= ========== =========
</TABLE>
The Company recognized a deferred tax benefit of $54,695 and $164,086 for
the year ended December 31, 1998 and the nine months ended September 30, 1999,
respectively, resulting primarily from the reduction of the difference between
the book and tax basis of the assets and liabilities recorded in conjunction
with the acquisitions of BioSupplyNet and IAI.
The Company did not have an income tax provision for the years ended
December 31, 1996 and 1997 due to net operating losses incurred during the
portion of these years that the Company was a taxable entity (see Note 2).
As of December 31, 1997 and 1998 and September 30, 1999 the Company had
federal and state net operating loss carryforwards of approximately $1,800,000,
$4,400,000, and $34,000,000, respectively. The use of these federal net
operating loss carryfowards may be subject to limitation under the rules
regarding a change in stock ownership and separate return limitations years as
determined by the Internal Revenue Code. The federal and state net operating
loss carryforwards will begin to expire in 2012.
F-17
<PAGE>
SciQuest.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Significant components of the Company's deferred tax assets and liabilities
at December 31, 1996, 1997 and 1998 and September 30, 1999 consisted of the
following:
<TABLE>
<CAPTION>
December 31,
---------------------- September 30,
1997 1998 1999
(unaudited)
<S> <C> <C> <C>
Net operating loss carryforwards....... $ 139,094 $ 1,708,406 $ 6,560,967
Accrual to cash adjustment............. 76,852 324,514 1,124,498
Other.................................. 7,786 30,832 56,359
--------- ----------- -----------
Total deferred tax assets............ 223,732 2,063,752 7,741,824
Valuation allowance for deferred..... (223,732) (2,063,752) (7,741,824)
--------- ----------- -----------
Deferred tax assets.................. -- -- --
--------- ----------- -----------
Acquired intangibles................... -- (285,005) (120,920)
--------- ----------- -----------
Total deferred tax liabilities....... -- (285,005) (120,920)
--------- ----------- -----------
Net deferred tax liability........... $ -- $ (285,005) $ (120,920)
========= =========== ===========
</TABLE>
During 1998, the Company recorded deferred tax liabilities of $339,700 in
conjunction with the acquisition of BioSupplyNet.
The Company has provided a valuation allowance against the balance of its
deferred tax assets since realization of these benefits cannot be reasonably
assured. The change in valuation allowance was an increase of $142,374, $81,358
and $1,840,020 in 1996, 1997 and 1998, respectively, and $5,602,531 for the
nine months ended September 30, 1999. The charge primarily relates to
additional operating losses in those years. The 1998 deferred tax asset has
been adjusted to reflect the net operating loss carryforward of BioSupplyNet.
Taxes computed at the statutory federal income tax rate of 34% are
reconciled to the provision (benefit) for income taxes as follows:
<TABLE>
<CAPTION>
Year Ended
--------------------------------------
December 31, December 31, December 31,
1996 1997 1998
<S> <C> <C> <C>
Effective rate.......................... 0% 0% (1%)
--------- --------- -----------
United States Federal tax at statutory
rate................................... $(185,137) $(234,494) $(1,453,942)
State taxes (net of Federal benefit).... (26,954) (34,140) (211,677)
Change in valuation allowance........... 142,374 81,358 1,840,020
Acquired research and development write-
off.................................... -- -- 312,963
Nondeductible compensation.............. 70,110 70,110 --
Acquired net operating losses........... -- -- (583,029)
Other nondeductible expenses............ -- -- 48,688
Other................................... (393) 117,166 (7,718)
--------- --------- -----------
Provision (benefit) for income tax...... $ -- $ -- $ (54,695)
========= ========= ===========
</TABLE>
F-18
<PAGE>
SciQuest.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Notes Payable
The Company's debt consists of the following:
<TABLE>
<CAPTION>
December 31, December 31, September 30,
1997 1998 1999
(unaudited)
<S> <C> <C> <C>
Notes payable to officers and
stockholders.......................... $ 146,851 $ -- $76,000
Bank loan.............................. 91,575 79,188 --
Other.................................. -- -- 20,000
--------- -------- -------
238,426 79,188 96,000
Less current maturities................ (159,238) (14,060) (96,000)
--------- -------- -------
Long-term debt......................... $ 79,188 $ 65,128 $ --
========= ======== =======
</TABLE>
In October 1998, the Company refinanced the remaining outstanding balance on
the bank loan. The bank loan was refinanced at a 7.75% interest rate and was
collateralized by a certificate of deposit held at a bank, which was shown as
restricted cash in the accompanying consolidated balance sheets. During the
nine month period ended September 30, 1999, the bank loan was repaid.
In connection with the acquisition of IAI (See Note 3) the Company assumed
convertible notes payable to stockholders with interest between 7% and 10% per
annum which are due in April, 2000. The Company also acquired other notes
payable of $20,000 with interest rates of 10% per annum, which are due upon
demand. These notes were repaid in October 1999.
The notes payable to officers and stockholders had a stated interest rate of
15% and were payable on demand. These notes were repaid in July 1998.
Annual maturities of long-term debt for the years subsequent to December 31,
1998 are as follows:
<TABLE>
<S> <C>
1999............................................................ $14,060
2000............................................................ 15,189
2001............................................................ 16,409
2002............................................................ 17,727
2003............................................................ 15,803
-------
Total......................................................... $79,188
=======
</TABLE>
11. Capital Stock
In June 1997, the Company issued a common stock dividend of 21 1/2 shares
for each issued and outstanding share of common stock. In September 1997, the
Company converted 250,020 shares of common stock to Class B common stock. All
share and per share amounts in the accompanying financial statements for all
periods presented have been retroactively adjusted to reflect these events.
During the year ended December 31, 1998, the Company's Articles of
Incorporation were amended to authorize 10,000,000 shares of preferred stock
with no par value, of which 769,231 shares were designated as Series A
convertible preferred stock (the "Series A preferred"), 3,835,180 shares were
designated as Series B convertible preferred stock (the "Series B preferred")
which are mandatorily redeemable, 601,046 shares were designated as Series C
convertible preferred stock (the "Series C preferred"), and 4,794,543 shares
were undesignated. The Company authorized 30,203,689 shares of common stock
with no par value, of which
F-19
<PAGE>
SciQuest.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
250,020 shares were designated as Class B common stock and 29,953,669 were
designated as Class A common stock. In February 1999, the Company's Articles of
Incorporation were amended and restated to increase the number of authorized
shares of Series C preferred to 700,000 and to decrease the number of
undesignated preferred shares to 4,695,589. In March 1999, the Company
reincorporated under the laws of the State of Delaware and amended and restated
its Certificate of Incorporation to assign a par value of $0.001 to all classes
of capital stock. In June 1999, the Company's Certificate of Incorporation was
amended whereby 3,312,720 shares of preferred stock were designated as Series D
convertible preferred stock (the "Series D preferred"), which are mandatorily
redeemable, and the number of undesignated preferred shares were decreased to
1,382,869. In July 1999, the Company filed a Certificate of Designation whereby
126,500 shares of preferred stock were designated a Series E convertible
preferred stock (the "Series E preferred"), and which decreased the number of
undesignated preferred shares to 1,256,369. At all times, the Company shall
reserve a number of shares of unissued Class A common stock for the purpose of
effecting the conversion of its issued and outstanding shares of all series of
preferred stock and Class B common stock and the exercise of all outstanding
warrants and options to purchase the Company's Class A common stock.
In July 1996, the Company sold 250,020 shares of Class A common stock to an
investor for $50,000 in cash and the cancellation of convertible debt of
$50,000. These shares were converted to Class B common stock in September 1997.
In October 1997, the Company sold 678,519 shares of Series A preferred in a
private placement transaction in exchange for proceeds of $600,596, net of
issuance costs of $16,854, and issued 90,702 shares of Series A preferred in
exchange for the cancellation of notes payable of $80,000 and accrued interest
of $2,539. The notes payable were issued between March and September 1997, and
bore interest at 10% per annum. Certain notes were issued with a total of
14,583 warrants, which expire in 2000, for the purchase of common stock with
exercise prices of $1.25 per share. The Company did not record any additional
paid in capital related to the value of these warrants because the fair market
value of the warrants at the date of issuance, as calculated using the Black-
Scholes option pricing model, was de minimis.
In September 1998, the Company issued 546,405 shares of Series C preferred
and 192,280 options and 162,718 warrants to purchase the Company's common stock
to the former stockholders, option holders and warrant holders of BioSupplyNet
in exchange for all of the outstanding common and preferred stock, options and
warrants of BioSupplyNet (see Note 3).
In March 1999, the Company sold 89,408 shares of Series C preferred to an
officer of the Company at $2.80 per share, which shares are subject to vesting
over a two year period.
Rights, Preference and Terms of Capital Stock
The following is a summary of the rights, preferences, and terms of the
Company's outstanding series of common and preferred stock:
Dividends
No dividends may be paid with respect to the holders of common stock, Series
A preferred, Series B preferred, Series C preferred or Series E preferred until
equivalent dividends have been declared and paid on all outstanding shares of
the Series D preferred. The Company cannot pay any dividends to the
stockholders of Series A preferred shares until equivalent dividends have been
declared and paid to the holders of Series B preferred shares. The holders of
Series A preferred shall be entitled to receive in any fiscal year, when and if
declared by the board of directors, non-cumulative dividends of at least 5% of
the per share purchase price of the Series A preferred. The Company cannot pay
any dividends to the holders of Series C or Series E preferred shares until
equivalent dividends have been declared and paid to the holders of Series A and
Series B preferred shares. The Company is under no obligation to pay dividends
unless dividends are declared by the board of directors.
F-20
<PAGE>
SciQuest.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Liquidity
In the event of any liquidation, dissolution, or winding up of the Company,
holders of Series D preferred shares shall be entitled to receive an amount
equal to the greater of $11.32 per share, adjusted for any stock splits or
dividends, plus any unpaid or accrued dividends, plus an amount equal to 10%
return per annum when combined with any dividends paid or the amount per share
that would have been received if all shares of Series D preferred had been
converted into common stock immediately prior to the liquidation, dissolution,
or winding up of the Company. After payments have been made to the holders of
Series D preferred shares, holders of Series B preferred shares shall be
entitled to receive, prior to payments to any holders of Class A common stock,
Class B common stock, Series A preferred shares, Series C preferred shares, or
Series E preferred shares an amount equal to $2.80 per share, adjusted for any
stock splits or dividends, plus any accrued but unpaid dividends, plus an
amount equal to a 10% return per annum when combined with any dividends paid or
the amount per share that would have been received if all shares of Series D
and B preferred had been converted into common stock immediately prior to the
liquidation dissolution, or winding up of the Company. After payment has been
made to the holders of Series D and B preferred shares, holders of Series A
preferred shares shall be entitled to receive in liquidation, prior to payments
to any holders of Series C or Series E preferred shares and holders of Class A
common stock and Class B common stock, an amount equal to $0.91 per share,
adjusted for any stock splits or dividends, plus any accrued but unpaid
dividends. After payments have been made to the holders of Series D, Series B
and Series A preferred shares, holders of Series C and Series E preferred shall
be entitled to receive in liquidation, prior to payments to holders of Class A
common stock and Class B common stock, an amount equal to $1.85 and $7.46 per
share, respectively, on a pro rata basis, adjusted for any stock splits or
dividends, plus any accrued but unpaid dividends. After payment has been made
to the holders of Series D, Series B, Series A, Series C, and Series E
preferred shares, the holders of Class B common stock shall be entitled to
receive in liquidation, an amount equal to $0.40 per share plus any accrued and
unpaid dividends. After payments have been made to the holders of Series D,
Series B, Series A, and Series C preferred shares and Class B common shares any
remaining assets of the Company will be distributed to holders of common shares
and no further distributions will be made to the Class B common stockholders or
to the preferred stockholders unless the amount per share distributed to the
holders of common stock would be greater than the amount paid to the holders of
the Class B common stock, in which case an additional amount will be paid to
the holders of Class B common stock.
The following is a summary of the liquidation values for the Series D,
Series B, Series A, Series C, and Series E preferred shares, and Class B common
stock as of December 31, 1998 and September 30, 1999, in the order of
preference:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
(unaudited)
<S> <C> <C>
Series D mandatorily preferred stock.............. $ -- $36,566,695
Series B mandatorily preferred stock.............. 10,882,702 11,719,480
Series A preferred stock.......................... 683,135 683,135
Series C and E preferred stock.................... 1,524,470 3,076,213
Class B common stock.............................. 100,000 100,000
----------- -----------
Total........................................... $13,190,307 $52,145,523
=========== ===========
</TABLE>
Voting
Holders of Series A, Series B, Series C, Series D, and Series E preferred
shares, and Class B common shares have voting rights on an as if converted
basis.
F-21
<PAGE>
SciQuest.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Conversion
Each share of Series A, Series B, Series C, Series D, and Series E preferred
and Class B common stock, at the option of the holder, is convertible into
shares of common stock of the Company at 1.516643-for-1 conversion ratio,
subject to certain adjustments as defined. Conversion is automatic for holders
of Series A preferred shares upon the closing of a firm commitment underwritten
public offering with gross proceeds of at least $5,000,000 at a minimum price
of $1.65 per share. Conversion is automatic for holders of Series B and Series
D preferred shares upon the closing of a qualified initial public offering of
the Company's common stock. Conversion is automatic for holders of Series C and
E preferred shares upon the closing of a firm commitment underwritten public
offering. Class B common stockholders shall have the same conversion rights and
obligations as Series A preferred.
Preemptive Rights
Holders of Series B and D preferred shares have the right of first refusal
to purchase any new securities, as defined in the Certificate of Incorporation,
that the Company may propose to sell and issue. These rights terminate upon
closing of a qualifying initial public offering. Holders of Series A preferred
shares and Class B common shares have contractual rights of first refusal to
purchase certain new securities that the Company may propose to sell and issue.
These rights also terminate upon the closing of a qualified initial public
offering.
12. Mandatorily Redeemable Convertible Preferred Stock
In July 1998, the Company sold 1,442,500 shares of Series B preferred in a
private placement transaction for $2.80 per share which resulted in net
proceeds of $4,033,503 and issued 187,394 shares of Series B preferred in
exchange for the cancellation of notes payable in the aggregate principal
amount of $515,000. The notes payable were issued between March and June 1998
and bore interest at 6% per annum. Attached to the notes were warrants to be
issued upon repayment or conversion of such notes. The number of warrants was
determined based on a formula as set forth in the agreements. When the notes
payable were converted to Series B preferred, the Company issued 57,545
warrants to purchase shares of Series B preferred with exercise prices of $2.80
per share. The Company recorded a debt discount of $12,084 for the value of
these warrants as determined using the Black-Scholes option pricing model. In
October and November of 1998, the Company sold 2,147,732 shares of Series B
preferred in private placement transactions in exchange for proceeds of
$6,005,476.
Upon any request by any holder of Series B preferred shares at any time
after July 30, 2003, the Company must redeem the Series B preferred in three
equal annual installments. The redemption price will be equal to the greater of
the appraised value of the Series B preferred shares at the date of the
redemption request or an amount equal to the invested amount plus interest at a
rate of 10% per annum, less the aggregate amount of all dividends actually paid
since the issuance date.
As the redemption price of the Series B preferred is variable in amount, its
carrying value is required to be adjusted to the estimated redemption amount at
each balance sheet date. The Company recorded charges to stockholders' equity
of $328,723 for the year ended December 31, 1998 and $45,215,043 for the nine
months ended September 30, 1999, to reflect the Series B preferred at its
estimated fair value at each date based on the price of the most recent sales
of the Company's preferred stock and the projected initial public offering
pricing range, respectively.
In May and June, 1999, the Company sold 3,312,720 shares of Series D
preferred in a private placement transaction for $11.32 per share which
resulted in proceeds of $35,860,975, net of issuance costs of $1,645,641. In
addition, the Company issued 1,004,829 warrants to purchase the Company's
common stock at an exercise
F-22
<PAGE>
SciQuest.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
price of $7.46 per share and 41,733 warrants to purchase the Company's common
stock at an exercise price of $9.33 per share. The estimated fair value of the
warrants of $726,137 according to the Black-Scholes pricing model using an
estimated fair value of $3.30 per common share for the Company's common stock
was recorded as a reduction in the carrying value of the Series D preferred and
an increase to additional paid in capital. The Company recorded a charge to
stockholders' equity of $1,431,858 during the nine months ended September 30,
1999 to record the accretion on the Series D Preferred Stock.
Upon any request by any holder of Series D preferred shares at any time
after the Initial Redemption Exercise Date, the Company must redeem the Series
D preferred at the amount invested per share plus a per annum interest charge
for the period the share has been outstanding of 10% compounded annually and
prorated for any partial year less the aggregate amount of all dividends
actually paid since the issuance date.
The following table summarizes the Company's outstanding shares and carrying
value of mandatorily redeemable convertible preferred stock at December 31,
1998 and September 30, 1999:
<TABLE>
<CAPTION>
December 31, 1998 September 30, 1999
----------------------- -----------------------
Shares Carrying Shares Carrying
Outstanding Value Outstanding Value
<S> <C> <C> <C> <C>
Series B preferred.............. 3,777,626 $10,882,702 3,777,626 $56,097,746
Series D preferred.............. -- -- 3,312,720 36,566,695
--------- ----------- --------- -----------
3,777,626 $10,882,702 7,090,346 $92,664,441
========= =========== ========= ===========
</TABLE>
13. Stock Options and Warrants
Stock Options
In September 1997, the Company adopted the SciQuest, Inc. Stock Option Plan
(the "Plan") which provided for the grant of up to 341,245 employee stock
options. In September 1998, the Plan was amended to provide for the grant of up
to 1,272,299 employee stock options. In February 1999, the Plan was amended to
provide for the grant of up to 1,484,820 employee stock options. In August
1999, the Plan was further amended to allow for the grant of up to 2,647,247
employee stock options. Stock options granted under the Plan are for periods
not to exceed ten years. Options granted under the Plan during the years ended
December 31, 1997 and 1998 and the nine months ended September 30, 1999
generally vest in periods between three and five years as determined by the
board of directors, although certain grants have been vested immediately upon
the grant of the option.
The Company did not grant any stock options during the year ended December
31, 1996. The Company continues to apply APB No. 25 and related interpretations
in accounting for the Plan. The Company recognized $71,392 in non-cash
compensation expense related to amortization of deferred compensation during
the nine months ended September 30, 1999. No deferred compensation or
compensation expense was recorded related to stock option grants during the
years ended December 31, 1996, 1997 and 1998. Had compensation expense for the
Plan been determined based on the fair value at the grant dates for awards
under the Plan consistent with the methods of SFAS No. 123, the Company's net
loss for the years ended December 31, 1997 and 1998, and the nine months ended
September 30, 1999 would have been increased to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1998 September 30, 1999
----------------- ----------------- ------------------
<S> <C> <C> <C>
Net loss available to
common stockholders:
As reported........... $689,689 $4,550,329 $61,787,523
Pro Forma............. $691,591 $4,554,641 $61,971,305
</TABLE>
F-23
<PAGE>
SciQuest.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants during the years ended December 31, 1997 and 1998
and the nine months ended September 30, 1999: risk free interest of 5.5%,
6.0%, and 6.0%, respectively; expected lives of five years; dividend yields of
0%; and volatility factors of 0%. The weighted average fair value of options
granted during the years ended December 31, 1997 and 1998, and the nine months
ended September 30, 1999 according to the Black-Scholes pricing model was
$0.05, $0.02, and $3.42, respectively.
A summary of the status of the Plan as of December 31, 1997 and 1998, and
September 30, 1999 and changes during the years then ended is presented below:
<TABLE>
<CAPTION>
Year Ended
---------------------------------------- Nine Months Ended
1997 1998 September 30, 1999
------------------- -------------------- --------------------
Weighted Weighted Weighted
Shares Average Shares Average Shares Average
Underlying Exercise Underlying Exercise Underlying Exercise
Options Price Options Price Options Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ -- $ -- 117,596 $0.06 1,004,310 $0.13
Granted................. 117,596 0.06 887,958 0.15 955,746 2.37
Exercised............... -- -- -- -- (274,421) 0.18
Forfeited............... -- -- (1,244) 0.18 (107,682) 0.12
------- ----- --------- ----- --------- -----
Outstanding at end of
period................. 117,596 $0.06 1,004,310 $0.13 1,577,953 $1.75
======= ===== ========= ===== ========= =====
</TABLE>
All incentive stock options granted during the years ended December 31,
1997 and 1998 were granted with an exercise price equal to the fair value of
the underlying common stock on the grant date, as determined by the board of
directors. The Company recorded $2,547,215 of deferred compensation during the
nine months ended September 30, 1999 to reflect the difference between the
aggregate fair market value and exercise price of all stock options granted
during this period with an exercise price below the fair market value of the
Company's common stock at the date of the grant.
The following table summarizes information about the Company's stock
options at September 30, 1999:
<TABLE>
<CAPTION>
Weighted Weighted
Number Average Average Number of
Range of of Options Contractual Exercise Options
Exercise Prices Outstanding Life Price Exercisable
<S> <C> <C> <C> <C>
$0.002 - 0.07............... 166,223 8.3 $0.03 81,184
$0.18....................... 791,921 9.1 0.18 58,949
$2.08....................... 88,074 9.6 2.08 --
$3.30....................... 374,914 9.9 3.30 --
$7.58....................... 156,821 10 7.58 --
--------- --- ----- -------
1,577,953 9.3 $1.75 140,133
========= === ===== =======
</TABLE>
Stock option grants subsequent to September 30, 1999 (unaudited) are as
follows:
<TABLE>
<CAPTION>
Shares Weighted Average
Month of Grant Underlying Options Exercise Price
<S> <C> <C>
October 1999.......................... 44,438 $7.58
</TABLE>
The Company recorded approximately $346,000 of deferred compensation
related to this grant to reflect the difference between the aggregate fair
market value and exercise price of these options.
F-24
<PAGE>
SciQuest.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Warrants
At December 31, 1997 and 1998, and September 30, 1999, the Company had
14,583, 177,300, and 1,183,183, respectively, warrants outstanding and
exercisable to purchase the Company's Class A common stock at prices ranging
from $0.82 to $9.33. These warrants expire at various dates between 2000 and
2004. At December 31, 1998 and September 30, 1999, the Company had 57,545
warrants outstanding and exercisable to purchase the Company's Series B
preferred at exercise prices of $2.80. These Series B warrants will convert
into warrants to purchase 87,275 shares of the Company's common stock at an
exercise price of $1.85 per share upon an IPO and expire in 2003 if
unexercised.
14. Commitments and Contingencies
The Company leases certain equipment under various noncancellable capital
leases and leases its office space and certain equipment under operating
leases. Future minimum lease payments required under the leases at December 31,
1998 are as follows:
<TABLE>
<CAPTION>
Capital Leases Operating Leases
<S> <C> <C>
1999........................................ $ 22,076 $59,234
2000........................................ 22,076 9,754
2001........................................ 15,672 2,145
-------- -------
Total minimum lease payments.............. 59,824 71,133
=======
Less amount representing interest from 12 to
32%........................................ (6,694)
--------
Present value of net minimum lease payment.. 53,130
Less current maturities..................... (18,048)
--------
Long-term maturities of capital lease
obligations................................ $ 35,082
========
</TABLE>
Rent expense recognized under operating leases totaled zero, $3,400 and
$34,490 for the years ended December 31, 1996, 1997 and 1998, respectively. For
the nine months ended September 30, 1999, rent expense under operating leases
totaled $278,370.
In February 1999, the Company entered into a lease agreement for additional
office space for a period of three years with a monthly rental of $16,771.
During the nine months ended September 30, 1999, the Company entered into a
leasing agreement with a leasing Company. The Company obtained a total
commitment amount of $2,500,000 from the leasing Company which expires in
August 2000. The Company may purchase furniture and equipment and lease the
items over a three and a half year term. Payments are due monthly. Prior to the
end of the lease term, the Company has the option to either purchase the
equipment or renew the lease at a price not to exceed fifteen percent of the
equipment cost.
In connection with this agreement, the Company was entitled to enter into a
sale and leaseback transaction of approximately $700,000 for its existing
furniture and equipment located at the facility in North Carolina. No gain or
loss was recognized on this transaction. For accounting purposes, the Company
has treated the transaction as a financing agreement and has recognized the
resulting liability for future lease payments as a capital lease obligation.
The Company is involved in certain legal proceedings as a part of its normal
course of business. Management does not believe that the ultimate resolution of
these matters will have a material impact on the Company's results of
operations or financial position in any quarterly or annual period.
F-25
<PAGE>
SciQuest.com, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
15. Strategic Partnerships (unaudited)
In late October 1999, the Company entered into strategic relationships with
a number of key suppliers and buyers of scientific products. As a part of these
arrangements, the Company committed to issue to these companies 3,724,307
warrants to purchase the Company's common stock at an exercise price of $0.01
per share upon consummation of the Company's planned initial public offering.
These warrants will be issued concurrent with the effectiveness of this
offering. In addition, the Company has available 1,408,112 warrants with an
exercise price of $0.01 per share to issue as additional strategic
relationships are formed. The Company will record unearned compensation of
approximately $59,600,000 related to these warrants upon the consummation of
the offering. In the event that the Company commits to issue additional
warrants to purchase its common stock as more strategic relationships are
formed, the Company will be required to record additional unearned compensation
equal to the difference between the fair value of the Company's common stock on
the date the warrants are issued and the exercise price of the warrants of
$0.01. The amount of unearned compensation will be adjusted in future reporting
periods based on changes in the fair value of the warrants until such date as
the warrants are fully vested. Unearned compensation balance will be amortized
to operating expense over the term of the related contractual relationship,
which in the case of the buyer agreements is three years and in the case of the
supplier agreements is five years, using a cumulative catch-up method.
These strategic relationships include agreements to be the exclusive third
party provider of electronic marketplace services in the United States for a
period of five years for eight key suppliers. Under the terms of these
agreements, these suppliers are not required to sell a minimum amount of
products through the Company's electronic marketplace. The warrants to purchase
the Company's common stock that will be issued in connection with these
agreements will vest over a four or five year period regardless of the level of
sales by the suppliers through the Company's electronic marketplace.
These strategic relationships also include binding letters of intent with
Dow Chemical Company, DuPont Pharmaceuticals Company and Monsanto Company to be
their exclusive third party electronic aggregator for purchases of scientific
products in North America for a period of three years. Although these buyers
have agreed to use reasonable efforts to purchase at least $5 million of
scientific products annually through the Company's marketplace, there are no
minimum purchase commitments. The warrants to be issued in connection with
these relationships will vest over a period of three years regardless of their
level of purchases through the Company's electronic marketplace. The letters of
intent with Dow Chemical Company and Monsanto Company may be terminated by
either party on or after December 31, 1999 in the event that the parties have
not completed mutually satisfactory definitive agreements.
In addition, the Company has agreed to issue to Dow Chemical, DuPont
Pharmaceuticals Company and Monsanto Company additional incentive warrants, the
number of which will be based on each purchaser's volume of purchases through
the Company's market place during the years 2000, 2001 and 2002. These
incentive warrants will be issued on February 15, 2001, 2002 and 2003, at an
exercise price equal to the price in the Company's initial public offering, and
will be exercisable upon issuance. Unearned compensation recognized in an
amount equal to the difference between the fair market value of the Company's
common shares on the issuance date, less the exercise price for these warrants
and will be amortized over the remaining term of the agreement to operating
expense upon each issuance of the incentive warrants.
16. Stock Split
On October 22, 1999, the Board of Directors approved a 1.516643-for-1 Class
A common stock split which was declared effective on November 12, 1999. The
Company's $0.001 par value Class A common stock will be split and then
reclassified as common stock with a par value of $0.001 per share. All share
and per share information in the financial statements has been retroactively
restated to reflect the effect of this stock split and the reclassification of
the Company's Class A common stock to common stock. In addition, the number of
authorized shares of the Company's common stock was increased to 90,000,000
shares and the Company authorized 10,000,000 shares of preferred stock.
F-26
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
BioSupplyNet, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of stockholders' equity (deficit), and of cash flows present
fairly, in all material respects, the financial position of BioSupplyNet, Inc.
(the "Company") at June 30, 1998 and 1997, and the results of its operations
and its cash flows for the years then ended, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
April 1, 1999
Raleigh, North Carolina
F-27
<PAGE>
BioSupplyNet, Inc.
BALANCE SHEET
<TABLE>
<CAPTION>
June 30, June 30,
1997 1998
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents........................... $ 435,678 $ 14,097
Accounts receivable................................. 52,325 93,911
---------- -----------
Total current assets.............................. 488,003 108,008
---------- -----------
Property and equipment, net........................... 64,240 48,639
Other assets, net..................................... 75,000 15,000
---------- -----------
Total assets...................................... $ 627,243 $ 171,647
========== ===========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable.................................... $ 233,364 $ 121,617
Accrued expenses.................................... 28,715 21,765
Deferred revenue.................................... -- 48,771
Advances from related party......................... -- 235,000
---------- -----------
Total current liabilities......................... 262,079 427,153
---------- -----------
Stockholders' equity (deficit):
Series A convertible preferred stock, $0.001 par
value, 1,200,000 shares authorized, issued and
outstanding........................................ 1,200 1,200
Common stock, $0.001 par value, 3,000,000 shares
authorized, 327,833 shares issued and outstanding.. 328 328
Additional paid-in capital.......................... 1,187,394 1,187,394
Accumulated deficit................................. (823,758) (1,444,428)
---------- -----------
Total stockholders' equity (deficit)................ 365,164 (255,506)
---------- -----------
Total liabilities and stockholders' equity (defi-
cit)............................................. $ 627,243 $ 171,647
========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE>
BioSupplyNet, Inc.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
June 30, June 30,
1997 1998
<S> <C> <C>
Revenues................................................. $ 281,762 $ 627,404
Cost of revenues......................................... 342,417 371,473
--------- ---------
Gross profit (loss).................................. (60,655) 255,931
--------- ---------
Operating expenses:
Product development.................................... 417,196 201,970
Sales and marketing.................................... 243,298 517,470
General and administrative............................. 120,301 155,420
--------- ---------
Total operating expenses............................. 780,795 874,860
--------- ---------
Operating loss....................................... (841,450) (618,929)
--------- ---------
Interest income (expense):
Interest income........................................ 17,692 3,756
Interest expense....................................... -- (5,497)
--------- ---------
Net interest income (expense)........................ 17,692 (1,741)
--------- ---------
Net loss............................................. $(823,758) $(620,670)
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
BioSupplyNet, Inc.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
---------------- -------------- Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
--------- ------ ------- ------ ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30,
1996................... -- $ -- -- $-- $ -- $ -- $ --
Issuance of common
stock in exchange for
assets................ -- -- 327,833 328 119,672 -- 120,000
Issuance of convertible
preferred stock....... 1,200,000 1,200 -- -- 1,067,722 -- 1,068,922
Net loss............... -- -- -- -- -- (823,758) (823,758)
--------- ------ ------- ---- ---------- ----------- ----------
Balance at June 30,
1997................... 1,200,000 1,200 327,833 328 1,187,394 (823,758) 365,164
Net loss................ -- -- -- -- -- (620,670) (620,670)
--------- ------ ------- ---- ---------- ----------- ----------
Balance at June 30,
1998................... 1,200,000 $1,200 327,833 $328 $1,187,394 $(1,444,428) $ (255,506)
========= ====== ======= ==== ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
BioSupplyNet, Inc.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
June 30, June 30,
1997 1998
<S> <C> <C>
Cash flows from operating activities
Net loss............................................... $ (823,758) $(620,670)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization......................... 60,601 75,601
Changes in operating assets and liabilities:
Accounts receivable.................................. (52,325) (41,586)
Accounts payable..................................... 233,364 (111,747)
Deferred revenue..................................... -- 48,771
Accrued expenses..................................... 28,715 (6,950)
---------- ---------
Net cash used in operating activities............... (553,403) (656,581)
---------- ---------
Cash flows from investing activities
Purchase of property and equipment..................... (79,841) --
---------- ---------
Net cash used in investing activities............... (79,841) --
---------- ---------
Cash flows from financing activities
Advances from related party............................ -- 235,000
Proceeds from issuance of preferred stock, net......... 1,068,922 --
---------- ---------
Net cash provided by financing activities........... 1,068,922 235,000
---------- ---------
Net increase (decrease) in cash and cash
equivalents........................................ 435,678 (421,581)
Cash and cash equivalents at beginning of year.......... -- 435,678
---------- ---------
Cash and cash equivalents at end of year................ $ 435,678 $ 14,097
========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
BioSupplyNet, Inc.
NOTES TO FINANCIAL STATEMENTS
1. The Company
BioSupplyNet, Inc. (the "Company") was incorporated in February 1996 and
began operations in October 1996. The Company provided the biomedical research
industry with an annual printed catalogue of vendors of biomedical research
supplies and equipment and of scientific products, "The BioSupplyNet Source
Book" (the "Source Book"). Research scientists, lab technicians, and purchasing
agents use the Source Book to locate companies and supplies and equipment used
in biomedical research. Users were provided the Source Book at no charge. The
Company primarily generated revenues from the sale of advertisements in the
Source Book. In addition, the Company was developing an e-commerce product
offering to allow research scientists, lab technicians and purchasing agents to
quickly identify suppliers of specific scientific products.
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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less at the date of purchase to be cash equivalents.
Property and Equipment
Property and equipment is primarily comprised of furniture and computer
equipment which are recorded at cost and depreciated using the straight-line
method over their estimated useful lives which range from three to seven years.
Intangible Assets
Intangible assets, which resulted from the issuance of common stock in
exchange for the rights to the Source Book in October 1996 (see Note 6) were
recorded at the estimated fair market value of the Source Book and are being
amortized over a two year period. Amortization expense related to intangible
assets was $45,000 and $60,000 during the years ended June 30, 1997 and 1998,
respectively.
Product Development Costs
Product development costs include expenses incurred by the Company to
develop, enhance, manage, monitor and operate the Company's Web sites and the
cost of development of the Company's search engine and electronic taxonomy and
ontology conventions. Product development costs are expensed as incurred.
Product development costs are required to be capitalized beginning when a
product's technological feasibility has been established and ending when a
product is available for general release to customers. To date,
F-32
<PAGE>
BioSupplyNet, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
completion of a working model of the Company's Web sites and major enhancements
to the Web sites and the date of general release of the Web sites have
substantially coincided.
Fair Value of Financial Instruments
The Company's financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable and advances from related party are
carried at cost. The carrying value of cash and cash equivalents, accounts
receivable, accounts payable and advances from related party approximates their
fair value, due to the short term nature of these items.
Impairment of Long-Lived Assets
The Company evaluates the recoverability of its property and equipment and
intangible assets in accordance with Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" ("SFAS No. 121"). SFAS No. 121 requires
recognition of impairment of long-lived assets in the event the net book value
of such assets exceeds the future undiscounted cash flows attributable to such
assets or the business to which such intangible assets relate. No impairments
were required to be recognized during the years ended June 30, 1997 and 1998.
Income Taxes
The Company accounts for income taxes using the liability method which
requires the recognition of deferred tax assets or liabilities for the
temporary differences between financial reporting and tax bases of the
Company's assets and liabilities and for tax carryforwards at enacted statutory
tax rates in effect for the years in which the differences are excepted to
reverse. The effect on deferred taxes of a change in tax rates is recognized in
income in the period that includes the enactment date. In addition, valuation
allowances are established when necessary to reduce tax assets to the amounts
expected to be realized.
Revenue Recognition
The Company's revenues have historically been derived from the sale of
advertising to be included in the Source Book in printed form.
Revenues from advertising included in the Source Book are recognized at the
date the Source Book is published and distributed to the purchasers of
scientific products as the Company has met all of its obligations to the
advertisers at that date.
Cost of Revenue
Cost of revenue is primarily comprised of the costs of publishing and
distributing the Source Book.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of costs, including salaries
and sales commissions, of all personnel involved in the sales process. Sales
and marketing expenses also include costs of advertising, trade shows and
certain indirect costs.
Advertising expense totaled $9,000 for the year ended June 30, 1997. There
was no advertising expense for the year ended June 30, 1998.
F-33
<PAGE>
BioSupplyNet, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Stock Based Compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25"), and complies with
the disclosure provisions of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). Under APB No.
25, compensation expense is based on the difference, if any, on the date of the
grant, between the fair value of the Company's stock and the exercise price of
the stock option. The Company accounts for stock issued to non-employees in
accordance with the provisions of SFAS No. 123. No compensation expense was
recognized related to stock option grants during the years ended June 30, 1997
and 1998.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and cash equivalents and accounts
receivable. Cash and cash equivalents are deposited with high credit quality
financial institutions. Concentrations of credit risk with respect to accounts
receivable are limited due to the large number of customers comprising the
Company's customer base and because all customers are located in the United
States.
3. Property and Equipment
Property and equipment consist of the following at June 30, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
Furniture and fixtures................................... $ 6,426 $ 6,426
Computer hardware........................................ 73,415 73,415
-------- --------
Total costs............................................ 79,841 79,841
Less accumulated depreciation............................ (15,601) (31,202)
-------- --------
Property and equipment, net............................ $ 64,240 $ 48,639
======== ========
</TABLE>
4. Advances from Related Party
On June 30, 1997, the Company entered into a revolving credit agreement,
secured by the Company's advertisement confirmations, with a major shareholder
of the Company. Advances under the revolving credit line may not exceed the
lessor of $450,000 or 80% of the dollar amount of the then outstanding
advertising confirmations.
The revolving credit line expired on June 30, 1998 and amounts outstanding
became due on demand. Interest accrues at 10% per annum on the outstanding
advances under the revolving credit line. In addition, the Company must issue
to the lender warrants to purchase the number of shares of common stock of the
Company equal to the principal amount of all advances provided, however, the
number of shares of common stock subject to warrants shall not exceed 450,000.
The exercise price of any warrants granted will be $1.00 per share. At June 30,
1998, outstanding borrowings under the line of credit totaled $235,000.
Accordingly, the Company granted 235,000 warrants to the lender in fiscal 1999.
The fair value of the warrants of $14,100, as calculated by the Black Scholes
pricing method, was recorded as additional borrowing cost in fiscal 1998. The
warrants are exercisable for ten years from the date of issuance. The
outstanding balance of the advance from related party was paid in fiscal 1999.
F-34
<PAGE>
BioSupplyNet, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
5. Income Taxes
Significant components of the Company's deferred tax assets and liabilities
at June 30, 1997 and 1998, consisted of the following:
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
Domestic net operating loss carryforwards................ $305,466 $522,822
-------- --------
Total deferred tax assets.............................. 305,466 522,822
Valuation allowance for deferred assets.................. (305,466) (519,105)
-------- --------
Net deferred tax assets................................ -- 3,717
-------- --------
Fixed assets............................................. -- (3,717)
-------- --------
Total deferred tax liabilities......................... -- (3,717)
-------- --------
Net deferred tax asset (liability)..................... $ -- $ --
======== ========
</TABLE>
The Company has provided a full valuation allowance against its net deferred
tax assets since realization of these benefits could not be reasonably assured.
The change in valuation allowance was an increase of $305,466 and $213,639 in
1997 and 1998, respectively, and relates to the net operating losses incurred
in these years.
As of June 30, 1997 and 1998 the Company had federal and state net operating
loss carryforwards of approximately $778,000 and $1,331,000, respectively. The
use of the federal net operating loss carryforwards may be subject to
limitation under the rules regarding a change in stock ownership and separate
return limitation years as determined by the Internal Revenue Code. The federal
and state net operating losses will begin to expire in 2012.
6. Capital Stock
On October 16, 1996, the Company issued 327,833 shares of common stock to
Cold Spring Harbor Laboratory in exchange for the rights to the Source Book,
the BioSupplyNet web site and other intangible assets. The Company recorded
this acquisition based on the fair values of the assets acquired as determined
based on the historical gross profit generated by the Source Book rather than
the fair value of the Company's common stock as the fair value of the assets
acquired were more readily determinable than the fair value of the Company's
common stock. This resulted in a value of $120,000 being allocated to the
assets acquired.
On October 16, 1996, the Company sold 1,000,000 shares of its Series A
Convertible Preferred Stock for $1,000,000. In June 1997, the Company sold an
additional 200,000 shares of Series A convertible preferred stock for $200,000.
The combined net proceeds to the Company were $1,068,922, net of related
expenses of $131,078. Each share of Series A convertible preferred stock is
convertible into one share of common stock. Preferred shares have the same
voting rights as common shares.
The holders of Series A convertible preferred stock are entitled to receive
dividends at the rate of $.08 per share per annum, payable out of funds legally
available therefore. Such dividends shall be payable only when, and if declared
by the Board of Directors, but shall accrue and be cumulative (whether or not
declared) from and after the second anniversary of the date of initial issuance
of Series A Preferred Stock.
In the event of any liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, the holders' of the Series A preferred stock
are entitled to receive, prior and in preference to the holders of the common
stock, $1 per share plus all accrued or declared but unpaid dividends.
F-35
<PAGE>
BioSupplyNet, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
7. Stock Options and Warrants
In December 1996, the Company adopted the 1996 Stock Plan (the "1996 Plan")
for which the Company reserved 492,000 common shares for issuance upon exercise
of options. The 1996 Plan provides that options may be granted to employees,
directors and consultants at exercise prices equal to the fair market value of
the Company's common stock on the date of grant for incentive stock options,
and at exercise prices below the fair value of the stock for non-qualified
options. Options are granted for periods up to ten years from the date of the
grant, except for incentive stock options granted to an employee owning more
than ten percent of the outstanding common stock, in which case the maximum
period is five years.
In addition to options granted under the 1996 Plan, 5,500 non-qualified
stock options were granted in fiscal 1997 under a separate agreement. Such
options are exercisable at $.001 per share at any time through October 16,
2001.
Transactions involving the 1996 Plan are summarized as follows:
<TABLE>
<CAPTION>
1997 1998
------------------------- -------------------------
Shares Weighted Shares Weighted
Underlying Average Underlying Average
Options Exercise Price Options Exercise Price
<S> <C> <C> <C> <C>
Outstanding at beginning
of year................ 357,200 $0.10 357,200 $0.10
Granted................. -- -- -- --
Forfeited............... -- -- -- --
------- ----- ------- -----
Outstanding at end of
year................... 357,200 $0.10 357,200 $0.10
======= ===== ======= =====
</TABLE>
The exercise price of all options outstanding under the 1996 Plan at June
30, 1998 was $.10 per share, the fair market value of the Company's common
stock on the date of grant as determined by the Company's Board of Directors.
The options vest over four years, and as of June 30, 1997 and 1998, 49,463 and
93,425 options respectively, were exercisable.
The Company continues to apply APB Opinion No. 25 in accounting for its
stock options grants and, accordingly, no compensation cost has been recognized
in the financial statements for its stock options which have exercise prices
equal to or greater than the fair value of the stock on the date of grant. Had
the Company determined compensation cost based on the fair value at the grant
date for its stock options under SFAS No. 123, the Company's net loss would
have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
Net Loss:
As reported.............................................. $620,670 $823,758
Pro forma................................................ 622,632 825,604
</TABLE>
The per share weighted average fair value of stock options granted during
fiscal 1997 and 1998 was $0.02 on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions for 1997
and 1998: expected dividend yield of 0%; risk free interest rate of 6%; an
expected option life of approximately four years; and a volatility factor of
0%.
8. Subsequent Event
On September 29, 1998, SciQuest.com, Inc. (the "Buyer") purchased all of the
outstanding common and preferred stock, stock options, and warrants of the
Company in exchange for 546,405 shares of the Buyer's Series C preferred,
126,780 options to purchase the Buyer's common stock, of which 124,813 were
granted at an exercise price of $0.28 per share and 1,967 were granted at an
exercise price of $0.003 per share, and 107,288 warrants to purchase the
Buyer's common stock at an exercise price of $2.80 per share.
F-36
<PAGE>
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November 19, 1999
[LOGO OF SCIQUEST.COM]
SciQuest.com, Inc.
7,500,000 Shares of Common Stock
----------------------
PROSPECTUS
----------------------
Donaldson, Lufkin & Jenrette
Deutsche Banc Alex. Brown
Hambrecht & Quist
DLJdirect Inc.
E*OFFERING
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We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as
to matters not stated in the prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where
that would not be permitted or legal. Neither the delivery of this prospectus
nor sales made hereunder after the date of this prospectus should create an
implication that the information contained in this prospectus or the affairs
of SciQuest.com have not changed since the date of this prospectus.
- -------------------------------------------------------------------------------
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Until December 14, 1999 (25 days after the date of this prospectus), all
dealers that effect transactions in these shares of common stock may be
required to deliver a prospectus. This is in addition to the dealer's
obligation to deliver a prospectus when acting as an underwriter and with
respect to their unsold allotments or subscriptions.
- -------------------------------------------------------------------------------
