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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-26811
VENTRO CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Delaware 77-0465496
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
1500 Plymouth Street, Mountain View, CA 94043
(Address of principal executive offices)
Registrant's telephone number, including area code: (650) 567-8900
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, $.0002 par value Nasdaq
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
At February 10, 2000, the aggregate market value of the Common Stock held
by non-affiliates of the registrant was approximately $2,239,536,000.
At March 2, 2000, the number of shares of Common Stock outstanding was
44,730,089.
DOCUMENTS INCORPORATED BY REFERENCE
Definitive Proxy Statement for the Company's 2000 Annual Meeting of
Stockholders--Part III of this Form 10-K.
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Ventro Corporation
Form 10-K Annual Report
For the Fiscal Year ended December 31, 1999
Page
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PART I
Item 1. Business...................................................... 3
Item 2. Properties.................................................... 24
Item 3. Legal Proceedings............................................. 24
Item 4. Submission of Matters to a Vote of Security Holders........... 24
PART II
Market for the Registrant's Common Equity and Related
Item 5. Stockholder Matters........................................... 25
Item 6. Selected Consolidated Financial Data.......................... 26
Management's Discussion and Analysis of Financial Condition
Item 7. and Result of Operations...................................... 26
Item 7A. Quantitative and Qualitative Disclosure About Market Risk..... 36
Item 8. Financial Statements and Supplementary Data................... 37
Changes in and Disagreements with Accountants on Accounting
Item 9. and Financial Disclosure...................................... 58
PART III
Item 10. Directors and Executive Officers of the Registrant............ 58
Item 11. Executive Compensation........................................ 58
Security Ownership of Certain Beneficial owners and
Item 12. Management.................................................... 58
Item 13. Certain Relationships and Related Transactions................ 58
PART IV
Exhibits, Financial Statements Schedules and Reports on Form
Item 14. 8-K........................................................... 59
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PART I
ITEM 1. BUSINESS
Overview
We are a leading builder and operator of vertical business-to-business e-
commerce marketplace companies. Our platform of enabling technologies and
operating capabilities allows us to rapidly enter new markets while realizing
economies of scale. Our solutions benefit suppliers by permitting them to
lower sales and marketing costs as well as to improve inventory management and
product delivery. Customers enjoy a significantly enhanced purchasing system
that provides access to a broad range of basic and specialized products,
increased flexibility and a reduction in the cost of the procurement process.
We created Ventro in February 2000 to expand the scope of our marketplace
companies by leveraging the assets and experience that we gained in building
and operating Chemdex, our marketplace for life sciences research products. In
addition to Chemdex, we currently operate or are developing three additional
Ventro marketplaces: Promedix, for the specialty medical products market;
Broadlane, for the high-volume, hospital and medical supplies market; and
Industria Solutions, for the fluid processing market. Prior to December 31,
1999, we operated solely in one industry and geographic segment; domestic life
science research product sales.
We provide a secure, Internet-based solution that enables us to buy
products from suppliers and resell them to customers while streamlining
business processes, increasing productivity and reducing costs throughout the
supply chain. Our platform employs a robust database architecture, advanced
search engines and transaction software that enable users to easily identify,
locate and purchase the products they need. We have entered into agreements
with leading companies in each of the Ventro marketplaces, including VWR,
Tenet Healthcare and DuPont. With our strategic relationships with Ariba,
Commerce One, Concur Technologies and IBM, we offer customers and suppliers
the ability to directly connect their enterprise software to our marketplace.
We believe this extensive system integration provides a key competitive
advantage for Ventro companies, as customers and suppliers can directly link
their front and back offices to the Ventro marketplace and increase the
automation of their procurement and order fulfilment processes. We also
provide professional and implementation services to enable market participants
to take full advantage of our operating capabilities.
Growth Strategy
We intend to build and operate leading vertical business-to-business e-
commerce marketplace companies. In order to achieve this objective, our
strategy includes of the following:
Leverage Our Platform. We intend to leverage our technology architecture,
operating capabilities and marketplace experience from our Chemdex Marketplace
to create vertical markets in a variety of industries. We have created a
scalable and adaptable technology architecture and established a substantial
operating capability, including transaction processing and customer service.
We believe this platform allows us to rapidly enter targeted vertical markets
and provides customers and suppliers with substantial benefits over
traditional procurement methods. In order to optimize our technology
architecture and operating capability, and to promote widespread adoption of
our solution, we currently have, and intend to continue to pursue, strategic
relationships with industry leaders.
Be the Market Leader in the Most Attractive Markets. We target marketplaces
where we believe we can be the market leader. In addition, we have a
disciplined approach for identifying and entering the markets that we believe
are most attractive. Generally we target large, fragmented markets where we
believe the aggregation enabled by our vertical marketplace will provide
significant value to customers and suppliers. The purchasing decision for
products within these markets will also typically require a high level of
information, which our solution is specifically designed to provide.
Scale Operations Rapidly. We intend to rapidly grow our market share in
each new vertical marketplace that we develop. Because of the fixed cost of
technology and other infrastructure, we believe this expansion will
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provide us economies of scale and help us quickly build a leadership position.
We intend to accelerate our entry into new markets by partnering with the
leading companies in the sector. We may initially enter a new vertical market
by acquiring companies with the necessary industry-specific expertise or by
establishing new companies that may be funded by us and by our industry,
strategic and financial partners. In all markets that we choose to enter, we
will seek to establish the leading brand.
Expand Internationally. We believe the international scope of the Internet,
the global reach of many of our customers and suppliers and the worldwide
demand for the products in markets we serve presents us with opportunities to
grow our marketplaces internationally. We intend to leverage our platform,
existing supplier relationships and marketplace expertise to expand first in
Europe, and later to other international markets where we believe there are
significant opportunities.
Markets
We continually evaluate opportunities in many vertical markets and are
currently pursuing opportunities in the following markets:
Life Sciences Research Products
According to the Laboratory Products Association, the North American life
sciences research products market was estimated to be approximately $9.4
billion in 1998. We believe there is also a significant opportunity in the
life sciences research products market outside of North America, particularly
in Europe and Japan. The growth in these markets is driven by increasing
research and development expenditures by pharmaceutical and biotechnology
companies as well as an increase in the level of research funding available
for grant by the National Institutes of Health, similar international
government agencies and private foundations. Research and development budgets
have been increasing as new discovery tools, such as genomics, combinatorial
chemistry and high-throughput screening are developed and utilized. These new
technologies allow researchers to experiment with thousands of chemical
compounds simultaneously, which requires extensive use of reagents and other
life sciences research products.
The life sciences research products market is highly fragmented. We believe
there are over 5,000 suppliers offering more than one million products, many
of which are highly specialized. Life sciences research products include
reagents, chemical compounds, specialty chemicals, consumables, research
instruments and other equipment. The primary purchasers and users of life
sciences research products are research scientists working in pharmaceutical
and biotechnology companies, and academic and research institutions.
Specialty and High Volume Medical Products
The global market for medical products exceeded $140 billion in 1998, with
a projected 6% to 7% annual growth rate. The U.S. accounts for approximately
40% of the total, or roughly $55 billion, according to the Medical &
Healthcare Marketplace Guide published by IDD Enterprises, 1998-1999.
Promedix focuses on the market for specialty medical products, which
represents approximately one-third of all healthcare purchases and which we
believe is not as well served by existing hospital group purchasing
organizations and industry distributors. Examples of specialty medical
products include surgical and laparoscopic instruments, blood and intravenous
filters, vascular access devices and cardiac stents and catheters. Specialty
medical products are currently sold by a fragmented group of approximately
22,000 manufacturers and distributors, usually by telephone and fax, to
approximately 6,000 hospitals. Margins for these products vary significantly,
and we believe logistics are handled inefficiently.
Broadlane focuses on the high-volume, contracted products segment of the
market for healthcare products. This represents approximately two-thirds of
the $140 billion global market for medical products. These products
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are generally purchased through group purchasing organizations in high volume
under contracts with one of five major distributors, usually in an electronic
fashion. Examples of these products include pharmaceuticals, X-ray film and
single-use surgical supplies.
Fluid Processing
The fluid processing market totals approximately $75 billion worldwide, and
includes companies from a broad range of industries, such as the chemical, oil
and gas, pulp and paper, power generation and pharmaceutical industries. This
market is highly fragmented, with over 2,000 manufacturers. Products used in
this market include pipes, valves, pumps, motors, compressors and other
materials and equipment required for processing fluids for industrial use.
These materials require detailed product information in order for buyers to
make informed purchasing decisions. Procurement of these products generally
falls into two categories: time sensitive purchases of products in connection
with an operating plant, often as a replacement for a key component that has
broken; and volume purchases in connection with construction or expansion of
an existing facility.
Ventro Marketplaces
We are currently operating or developing four Ventro marketplace companies
that we either wholly own or created through collaborations with leading
companies in specific industries. Chemdex is a leading provider of e-commerce
solutions to the life sciences research products market. Promedix was aquired
by us in February 2000, and will address the specialty medical products
marketplace. We have entered into a joint venture with Tenet Healthcare, the
second largest U.S. for-profit hospital chain, to form a new company called
Broadlane, which will provide e-commerce solutions for the healthcare industry
initially focused on high volume, hospital and medical supplies. Industria
Solutions is a joint venture with DuPont to provide e-commerce solutions for
the fluid processing industry. The Promedix Marketplace is operational but has
not had any significant revenues to date and Broadlane and Industria Solutions
are currently in the development stage.
The four marketplaces are described below in chronological order of their
creation. The description of the Chemdex Marketplace is the most detailed
since it accounts for substantially all of our revenue to date. Its
functionality and features are representative of those we expect to develop in
the other marketplaces.
Chemdex
Chemdex was the first Ventro marketplace company and is owned and operated
by us. The Chemdex Marketplace utilizes a database of approximately 910,000
life sciences research stock keeping units, or SKUs, from over 2,200
suppliers. Chemdex has agreements with an additional 182 suppliers for
approximately 570,000 additional SKUs. As of February 29, 2000, Chemdex had
agreements to provide its purchasing solution to 95 enterprise customers and
had over 24,000 registered users.
To date, substantially all of our revenues have been derived from the
Chemdex Marketplace. The Chemdex Marketplace consists of a database of
approximately 1.5 million loaded and unloaded life sciences research SKU's and
advanced search engine and transaction software that enable users to easily
identify, locate and purchase the products they need. Chemdex also provides
applications that enable its customers and suppliers to interface and automate
their information exchange with the Chemdex Marketplace. Chemdex also provides
professional and implementation services to enable its customers to take full
advantage of the capabilities of the Chemdex Marketplace. We believe that the
Chemdex business model, which is based on its buying products from suppliers
at a price discount negotiated with individual suppliers and reselling
products to customers, will further drive usage of the Chemdex Marketplace.
Moreover, our customer support and sales group helps customers understand both
the business and technical benefits of the Chemdex Marketplace and provides
customer education and training to increase user adoption.
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The following chart summarizes the key services supported by the Chemdex
Marketplace and the features of these services.
Services Supported Chemdex Features
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Enterprise . Purchasing system management . Interface to existing enterprise network
Customer and
ERP software
. Approval and purchase of life . Automated order approval process
sciences
research products . Summary invoicing and reporting
. Enforcement of business rules
. Enterprise specific pricing
. Comparative price/product shopping
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User . Identification, comparison and . One-stop shopping
purchase
of life sciences research products . Search engine to identify, locate and
compare products
. Current, detailed product information
. Automated order submission and status
. Recurring order form
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Supplier . Sale of life sciences research . Support integration with supplier sales
products order
flow
. Automated order submission and tracking
. Automated process for updating and adding
product/price information
. Customer support services
How it Works for the Enterprise Customer. The enterprise's interface with
the Chemdex Marketplace varies based upon the customer's existing information
technology systems. Our applications and services can be implemented as a
fully hosted stand-alone solution or can be integrated with existing systems
or other commercially available purchasing solutions. Our applications are
designed to be easily customized to match the workflow requirements and
business rules of the enterprise. We also provide access to the Chemdex
Marketplace through our website.
Our solution offers paperless automation, consolidation and monitoring of
the approval and invoicing process as well as the order placement and delivery
information for the enterprise. In addition to reducing the cost of
purchasing, our solution allows our enterprise customers to enforce their
particular business rules and aggregate purchases. Purchasing limits are most
often applied on an individual user or project basis, and the Chemdex
Marketplace interfaces with the enterprise's system to ensure compliance. The
Chemdex solution can be integrated with enterprise financial accounting
systems to further automate specific product purchase information and can
reflect enterprise specific pricing arrangements between the enterprise and
their underlying suppliers. We believe our purchasing solution requires
minimal investment of time and capital by our enterprise customers to install,
maintain and use. It has few support requirements beyond the initial
installation since the Chemdex Marketplace is entirely hosted on our servers,
and is accessible by standard browsers with all recurring product upgrades
managed and installed by us.
How it Works for the User. Users within enterprises benefit from the
Chemdex Marketplace because it offers them convenient and easy one-stop
shopping. The typical user within a life science enterprise most often
interfaces with the Chemdex Marketplace by ordering specific products for
research experiments. If the user needs the same items on a regular basis, our
solution allows a user to personalize a list of "favorites" to facilitate
product selection and recurring orders. The Chemdex Marketplace also provides
robust product search capabilities that help users identify new products
needed to meet the specifications required for an experiment. Users access the
system with a password, and can easily process their recurring orders, as well
as orders for new
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products. The system allows the user to identify the incremental shipping
costs for expedited processing, and provides for automated paperless
processing of an order once the product selection is complete. The user can
also track the status of individual orders within the system.
How it Works for the Supplier. We offer suppliers a cost-effective
opportunity to reach new customers by establishing or enhancing their Internet
presence and providing links to existing online or electronic catalogs.
Suppliers provide us with electronic versions of product catalogs, which we
convert into searchable data. This data is loaded into the Chemdex Marketplace
using a number of product loading algorithms. Our content engineering staff
then reviews the data to ensure proper classification for purposes of product
searches. The ability to process large volumes of complex catalog information
is an important core competency, which allows us to afford maximum flexibility
to our suppliers in loading data and updating information. We also provide
suppliers with the ability to readily update their product information to
include new product introductions or additional product details without being
limited by specific catalog publication cycles.
In many cases, the Chemdex Marketplace will appeal to suppliers as being
less costly than traditional distribution or representation arrangements. We
plan to provide tools to our suppliers that enable the online update and
modification of their product databases hosted on our servers, or to integrate
the Chemdex Marketplace directly with their systems. The Chemdex Marketplace
is neutral in that its search capability identifies products that meet the
researchers' search criteria, and provides an unbiased comparison of product
characteristics and pricing to allow the researcher to make a reasoned choice
based upon the information provided by suppliers.
Future Services. We anticipate that aggregated product purchasing and sales
information will ultimately be valuable to both suppliers and customers. After
accumulating significant historical data regarding buying patterns, we intend
to make non-confidential, aggregated information available to both suppliers
and customers as an additional service.
Promedix
We acquired Promedix in February 2000. The Promedix Marketplace provides
customers with the ability to purchase products from multiple specialty
medical product manufacturers with a single purchase order and offers
integration capability with most of the major legacy systems currently in use
by healthcare institutions. We anticipate that the broad launch of the
Promedix Marketplace will occur in the second half of 2000. Promedix has also
entered into an eight-year agreement with Tenet under which Promedix will be
the exclusive business-to-business e-commerce supplier of specialty medical
products for entities where Tenet acts as a purchasing agent.
Broadlane
In December 1999, we and Tenet announced the formation of Broadlane to
provide business-to-business e-commerce solutions to the healthcare industry.
Broadlane will be an independent entity, with its own management team and
board of directors. Tenet, through its subsidiaries, owns and operates acute
care hospitals and provides numerous related health care services. Tenet will
provide Broadlane access to the existing buyer and supplier network of its
BuyPower group purchasing organization, which Tenet has advised us purchases
products for approximately 500 Tenet owned or affiliated hospitals. We are
licensing our technology to Broadlane for use within the healthcare industry
and will provide service and support functions at cost. Broadlane will offer
its e-commerce technology to other group purchasing organizations and their
members to support their own proprietary contracts. While Broadlane will
initially focus on the hospital market, it eventually plans to expand to the
long-term care and outpatient markets as well. Broadlane recently announced
the hiring of two key members of its management team, who were formerly
officers of Tenet. We have a minority equity interest in Broadlane.
Industria Solutions
In January 2000, we and DuPont announced the formation of Industria
Solutions, which focuses on the fluid processing market. Industria Solutions
will be an independent entity, with its own management team and board
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of directors. We believe that DuPont will shift procurement of maintenance and
engineering materials to Industria Solutions over time. We are licensing our
technology to Industria Solutions for use within the fluid processing industry
and are providing service and support functions at cost. Industria Solutions
has also received funding from @Ventures, an affiliate of CMGI, along with
financial investments from DuPont, ourselves and IBM. We have a minority
equity interest in Industria Solutions.
Customers
Chemdex
Chemdex's target customers are pharmaceutical and biotechnology companies
and academic and research institutions. As of February 29, 2000, Chemdex had
entered into agreements to provide its purchasing solution to 95 enterprise
customers and had approximately 24,000 registered users. Sales to our top four
enterprise customers accounted for approximately 27%, 13%, 12% and 11%,
respectively, of our net revenue for 1999.
The following is a list of our largest customers as measured by net
revenues in 1999:
3M AHP
Biogen Bristol Meyer Squibb
DuPont Elan Pharmaceuticals
EOS Biotechnology Genentech
Genome Therapeutics Genzyme
Johnson & Johnson Maxygen
Monsanto Parke-Davis
Pharmacia Upjohn Proctor and Gamble
Rhone Poulenc Rorer Scios
Strominger Lab University of Rochester
Chemdex also sells life sciences research products to registered users who
are not affiliated with enterprise customers through the Chemdex Marketplace.
Because of the nature of some of the products we sell, we register
unaffiliated users of the Chemdex Marketplace to ensure that they are
associated with pharmaceutical or biotechnology companies or academic or
research institutions.
Although we intend to increase our sales and marketing efforts for our
other marketplaces, we expect that we will continue to generate a substantial
majority of our revenue from the Chemdex Marketplace. We also expect that we
will continue to generate a significant portion of our revenue from a limited
number of Chemdex customers for the foreseeable future. If we do not increase
the number of our customers, or if we lose any of our current customers or do
not generate as much revenue from them as we expect, our business would be
significantly harmed.
Promedix
Promedix has been testing the Promedix Marketplace in a controlled release
since August 1999, with five acute care hospitals. Promedix has not achieved
significant revenue to date.
Suppliers
Chemdex
We believe the value and benefit to our customers of our purchasing
solution is directly related to the breadth, depth and quality of products we
sell through our marketplaces. Through the Chemdex Marketplace, we currently
offer approximately 910,000 SKUs from approximately 2,200 suppliers. We have
agreements with an additional 182 suppliers for approximately 570,000
additional SKUs which we plan to add to the Chemdex
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Marketplace. The following is a list of our most significant suppliers who
have entered into agreements with us as of February 29, 2000:
Amersham Pharmicia Bachem
Beckman Coulter BioWhittaker
Biotech CHEMICON International
Calbiochem Cole-Parmer
Clontech Laboratories Genome Systems
Eppendorf Scientific Greiner America
Forma Scientific HyClone
Hitachi Genetic Systems Molecular Probes
ICN Biomedicals Pierce Chemicals
Incyte Pharmaceuticals Savant E-C
PharMingen Thomas Scientific
Quidel Corporation United States Biologicals
We currently have 13 employees who are responsible for maintaining existing
relationships and establishing new relationships with suppliers.
Promedix
Promedix currently has relationships with approximately 500 specialty
medical product suppliers, representing over 325,000 SKUs.
Strategic Relationships
Through our relationships with industry leaders, we seek to optimize our
technology architecture and operating capabilities, promote the widespread
adoption of our system and enable our marketplace companies to increase their
industry expertise and to reduce their time-to-market. The following is a
description of our key strategic relationships.
Ventro
IBM. In November 1999, we entered into a strategic relationship with IBM to
provide Internet-based supply chain solutions to the pharmaceutical and
healthcare industries in the U.S. Under the terms of our alliance agreement,
we and IBM will collaborate and define an offering of products and services to
enable efficient supply chains for these industries. The alliance is intended
to accelerate the deployment of e-business applications by combining our
marketplace expertise with IBM's strengths in professional services and e-
business implementation and technology. The agreement also provides that we
will engage in joint sales and marketing activities for the combined offering.
This agreement is non-exclusive and has a term of two years, although it may
be terminated by either party at any time upon 30 days' prior notice.
MarketLink Programs. In November 1999, we introduced our MarketLink
Program, which is designed to provide a fully-configurable solution for large
enterprises that integrates online marketplaces with third-party business-to-
business e-commerce and ERP systems. We work with the industry's leading e-
commerce companies to provide the necessary integration between their systems
and the marketplaces of each of our companies. The program enables our vendors
of enterprise procurement applications and ERP systems to integrate with the
various Ventro marketplaces and provide enterprises with a complete e-commerce
solution. The current participants in the MarketLink Program are Ariba,
Commerce One, Concur Technologies and Sun Microsystems.
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Chemdex
VWR. In April 1999, we entered into a strategic relationship agreement with
VWR Scientific Products Corporation to jointly market VWR laboratory products
using the Chemdex Marketplace. VWR is one of the laboratory supply industry's
largest distributors. The agreement gives us the right to sell approximately
350,000 VWR-distributed SKUs to our customers through the Chemdex Marketplace
and Labpoint, a hosted, co-branded Internet purchasing solution for VWR's
existing and future customers that provides access to three categories of
products:
. products distributed by VWR (VWR core products),
. products distributed by Chemdex (Chemdex core products), and
. products that are not distributed by either VWR or Chemdex but are
purchased from third parties (third-party products).
With respect to sales of VWR core products, we act as an intermediary and
forward orders received through the Chemdex Marketplace to VWR for fulfillment
and customer service. We receive no fee for orders for VWR core products from
VWR's 40 largest customers and we receive a minimal fee for all other orders
for VWR core products forwarded to VWR. We are responsible for fulfillment and
customer service for all Chemdex core products and orders for third-party
products received from VWR customers through Labpoint. Under the terms of the
agreement, VWR provides support for the purchase of third-party products in
return for a fee which approximates VWR's costs incurred.
VWR and Chemdex jointly market VWR core products and Chemdex core products
to VWR's existing and new customers and jointly solicit several key existing
VWR suppliers to distribute, market and sell their products through Labpoint.
We believe the VWR strategic relationship will continue to enhance and broaden
the Chemdex Marketplace, and the availability of third-party products will
enable us to offer complete fulfillment capability to current and future VWR
customers through Labpoint. We believe the VWR strategic relationship will
facilitate adoption of the Chemdex Marketplace and Labpoint by VWR customers,
which include major U.S. pharmaceutical and biotechnology companies, and will
enable us to establish relationships with additional key suppliers and
customers.
Paul Nowak, the Chief Executive Officer of VWR, serves on our board of
directors. In addition, VWR received 2,538,405 shares of our common stock. VWR
is subject to contractual limits on their percentage ownership of our stock,
except in connection with the acquisition of our stock by specified companies.
BIO. In May 1999, we and Biotechnology Industry Organization, or BIO,
entered into a five-year, exclusive joint marketing agreement. As part of the
joint marketing agreement, we agreed to discount the fees we charge to BIO
members and contribute cash payments to a joint marketing fund, to be used in
connection with both parties' obligations under the joint marketing agreement.
In addition, we sold 187,500 shares of our common stock to BIO for a nominal
amount in consideration for BIO's participation in these joint marketing
activities.
Promedix and Broadlane
Tenet. Our strategic relationship with Tenet encompasses two Ventro
marketplaces. In December 1999, we and Tenet announced the formation of
Broadlane. Tenet will provide Broadlane access to the benefits of its existing
buyer and supplier contracts of its BuyPower organization, which serves as a
group purchasing organization for Tenet's hospitals and other members.
BuyPower, according to Tenet, manages over 400 vendor contracts that generate
more than $3 billion in annual purchases of total supplies, which are used by
Tenet as well as non-Tenet institutions, including 10 acute care hospitals,
531 non-acute facilities and approximately 45,000 physicians. Two key members
of Broadlane's management team were formerly officers of Tenet.
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Concurrent with the formation of Broadlane, Tenet and Promedix entered into
an arrangement under which Promedix will be the exclusive supplier to entities
for which Tenet acts as a purchasing agent of business-to-business e-commerce
solutions for the purchase of specialty medical products for an eight-year
term.
We believe Tenet's network of customers and its purchasing power with
suppliers provide Broadlane and Promedix with an advantage in obtaining
critical mass within their respective marketplaces.
Industria Solutions
DuPont. In January 2000, we and DuPont announced the formation of Industria
Solutions. DuPont is one of the largest purchasers of maintenance and
engineering materials in the United States, and we believe that DuPont will
shift procurement of materials to Industria Solutions over time. We believe
this purchasing power can provide Industria Solutions with the ability to
achieve scale rapidly. Industria Solutions will also benefit from DuPont's
industry expertise.
Technology
We have developed a purchasing solution that resides on our servers and is
accessible by standard browsers, requiring minimal software installation at
the customer site, and enabling rapid deployment of applications, enhancements
and updates. We call this a "marketplace" for each applicable vertical market.
For example, we refer to our solution for the life sciences industry as the
"Chemdex Marketplace." Our production data center is hosted at Exodus
Communication in Sunnyvale, California. This data center provides us with
conditioned space and high bandwidth Internet connectivity.
System Architecture. Our marketplaces include three layers of technology:
. Process and Communication Layer. This layer integrates our system with
our customers' client applications using Internet technology protocols
that can pass through an enterprise's network security wall, such as
http, ftp and EDI, to provide a seamless operation of the marketplace
and purchasing solution. This layer is implemented using standard web
servers, and supports standard Internet protocols such as http, ftp and
XML.
. Electronic Services Layer. This layer delivers all of our system's
functionality. The marketplace and purchasing solution uses existing and
proprietary software to deliver proprietary services including Internet
catalog development and maintenance tools, search functionality,
workflow integration, product pricing and estimated shipping, handling
and freight charges.
. Enterprise Services Layer. This layer delivers some of the services
required to run our system, including financial services, development
and maintenance of the product master database, customer service systems
and the data warehouse. To meet our unique scale requirements for
product information management, we developed a proprietary data
warehouse system.
Customer Integration. Our purchasing solution can be configured and
integrated to meet an enterprise customer's needs, including:
. Customer View. The purchasing solution graphical user interface may be
tailored for each enterprise customer, allowing an enterprise customer
to select specific suppliers from our supplier list, and to customize
the user's view in accordance with business rules and policies
implemented by the purchasing department.
. Login and Authentication. For enterprises that do not have a single
authoritative directory services system enabling single login
functionality across the enterprise, our purchasing solution provides an
authoritative enterprise authentication and authorization list along
with the user roles, credit limits and approval workflow. For
enterprises that have a single authoritative directory services system,
our purchasing solution directly integrates with the enterprise's
authoritative data source to maintain the current permitted user list,
and provides seamless access by the user and simple management for the
enterprise.
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. Purchasing Application Integration. Our purchasing solution integrates
with commercial purchasing applications, such as Ariba, as well as
internally developed purchasing applications, through industry standard
protocols for Internet purchasing.
. Enterprise Specific Pricing. We have developed algorithms to support
enterprise-specific pricing. This pricing can be implemented either by
(1) pricing contract tables that list specific prices or (2) direct
integration with the supplier systems to extract real time pricing and
availability information.
Search Services. Our search software leverages a combination of full text
search and relational technology to deliver a unique search tool customized to
a particular industry. For example, the search engine for the Chemdex
Marketplace is customized to 11 levels of specific search categories
associated with life sciences research products such as antibodies, enzymes or
other compounds. Each of the product specific search levels also includes
parametric searching capabilities to search for products with specific
attributes, or ranges of attributes. Our acquisition of SpecialtyMD enhanced
our search capabilities by providing us with technology that more easily ties
specialized content to searches. This allows us to enable users to more
readily access relevant content, and to provide faster searches based upon the
parameters defined and the content accessed in prior searches.
Product Pricing Estimation. We have developed algorithms to estimate
shipping, handling and freight charges associated with any customer order.
These algorithms integrate customer requirements for shipping delivery time,
product weight and product type, including requirements for hazardous
materials and product packaging such as blue ice. These algorithms provide
users of our marketplaces with estimated shipping, handling and freight cost,
and make appropriate decisions given their delivery timing requirements.
Workflow. We have developed simple workflow technology to implement each
enterprise customer's business rules and processes. These workflow rules
include credit limit checks, multilevel approval and e-mail based notification
of any order changes. This system streamlines the purchasing process by
automating approval routing, and enables real time customer service through
direct customer notification.
Technical Support. We offer technical support to respond to any customer
service disruption. In addition to off-the-shelf site instrumentation and
monitoring software, we have developed custom monitoring agents that measure
key application parameters. This software enables us to provide high quality
technical support.
Marketing, Sales and Support
Ventro
Our marketing efforts for Ventro focus on building Ventro's brand identity.
We believe this will enhance our ability to enter into new vertical
marketplaces and partner with industry leaders. The goal of our marketing
efforts is to establish Ventro as the leading builder and operator of vertical
marketplace companies and as a technology leader.
Our marketing efforts address the attractiveness of business-to-business e-
commerce as an alternative to traditional methods, and the advantages in
particular of our solution. This educational process includes speaking
engagements and relationships with business press and industry analysts. We
believe the establishment of the Ventro brand will increase our ability to
enter into strategic relationships with industry leaders in attractive
vertical markets.
The Ventro marketing team supports our business development efforts with
respect to potential new vertical marketplaces, identifies key industry
participants, evaluates the strengths of the target market, establishes a
brand for the new marketplace and launches marketing of the new Ventro
marketplace company. We anticipate that each of our marketplace companies will
ultimately have its own marketing teams.
Ventro Marketplace Companies
Chemdex and Promedix have their own dedicated marketing efforts. We market
and sell the Chemdex Marketplace and the Promedix Marketplace and purchasing
solutions through a combination of our direct sales
12
force, internal telemarketing sales and strategic relationships with partners
such as VWR, Tenet and BIO. Since our potential customers and users fall
within a defined market segment, we are able to identify and target the
purchasing decision makers and potential users who will influence the decision
to adopt a purchasing solution.
Our sales and marketing approach is designed to help customers and
suppliers understand both the business and technical benefits of these
marketplaces and purchasing solutions, and to promote user adoption through
one-on-one education and training. Our field sales force focuses on large
pharmaceutical and biotechnology companies, large academic and research
institutions for Chemdex, and hospitals, acute care facilities and healthcare
professionals for Promedix. Our telephone sales group focuses on small
biotechnology companies, smaller research institutions and smaller healthcare
facilities. We are building an experienced professional services organization
to facilitate the successful deployment of our purchasing solution, including
integration with any ERP software and customization with the enterprise's
business rules. We intend to expand our direct sales force and professional
services organization and to establish additional sales offices domestically
and internationally. Competition for sales personnel is intense, and we may
not be able to attract, assimilate or retain additional qualified personnel in
the future.
We conduct a variety of marketing programs to educate our target market,
create awareness and attract customers to our marketplaces. To achieve these
goals, we leverage our existing customer base and engage in marketing
activities such as seminars, direct mailings, trade shows, speaking
engagements and website marketing. We also conduct comprehensive public
relations programs that include establishing and maintaining relationships
with key trade press, business press and industry analysts. In addition, we
engage in marketing programs within our enterprise customers to educate,
convert and train users and purchasing agents to use our marketplaces for
their product orders.
We believe that we can establish and maintain long-term relationships with
our customers and suppliers, and encourage repeat visits and purchases by our
customers if, among other things, we have good account management, customer
support and service. Our customer support and service personnel handle general
customer inquiries and basic technical questions, answer customer questions
about the ordering process and investigate the status of orders, shipments and
payments. We have automated some of the tools used by our customer support and
service staff, such as tracking screens that let our support staff track a
transaction by any of a variety of information sources. At any time in the
purchasing process, a customer can access our support staff by fax or e-mail
by following prompts located throughout our website or by calling our call
center through our toll-free telephone line.
As of February 15, 2000, we employed 123 individuals in our worldwide sales
and marketing group. These individuals are located at Chemdex headquarters,
Promedix headquarters, new customer sites, and in six regional offices, five
in the U.S. and one in the United Kingdom.
Research and Development
Our development organization is focused on developing and enhancing our
enterprise purchasing solution, developing applications for and supporting our
marketplaces, and maintaining and improving our technology, infrastructure and
database. The development group is supported by our quality assurance group.
As February 29, 2000, our research and development group was comprised of 134
employees responsible for software and system development and quality
assurance. We anticipate that we will be expanding our research and
development group to further develop our technology architecture and to
support new Ventro marketplace companies. Our agreements with Broadlane and
Industria Solutions provide that we will support their development and
enhancement of their respective purchasing solutions. In return, these
companies will reimburse us for our fully-burdened cost in providing this
support.
Research and development expenses were $197,000 in the period from
inception through December 31, 1997, $3.4 million in 1998 and $17.7 million in
1999. To date, substantially all software development costs have been expensed
as incurred. We believe that continued significant investments in research and
development are required to remain competitive.
13
Proprietary Rights and Licensing
Our success and ability to compete depends on our ability to develop and
maintain the proprietary aspects of our technology. We rely on a combination
of copyright, trademark and trade secret laws and contractual restrictions to
establish and protect the proprietary aspects of our technology. We seek to
protect our source code for our software, documentation and other written
materials under trade secret and copyright laws. Finally, we seek to avoid
disclosure of our intellectual property by requiring employees and consultants
with access to our proprietary information to execute confidentiality
agreements with us and by restricting access to our source code.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Litigation may be necessary in the future to
enforce our intellectual property rights, to protect our trade secrets, and to
determine the validity and scope of the proprietary rights of others. Any
resulting litigation could result in substantial costs and diversion of
resources and could have a material adverse effect on our business operating
results.
Our success and ability to compete also depends on our ability to operate
without infringing upon the proprietary rights of others. In the event of a
successful claim of infringement against us and our failure or inability to
license the infringed technology, our business and operating results would be
significantly harmed.
Competition
The market for business-to-business e-commerce and Internet ordering and
purchasing is new and rapidly evolving, and competition is intense and is
expected to increase significantly in the future. Barriers to entry are
relatively insubstantial. We believe that the critical success factors for
companies seeking to create Internet business-to-business e-commerce solutions
include the following:
. quality and reliability of the Internet purchasing solution;
. breadth and depth of product offerings;
. brand recognition;
. installed base of customers; and
. ease of use and convenience.
We face competition from four main areas: other companies with e-commerce
offerings, traditional suppliers and distributors in vertical marketplaces,
companies that have developed their own purchasing solutions and enterprise
software companies that offer, or may develop, alternative purchasing
solutions. We could face further competition in the future from traditional
suppliers and distributors that enter into business-to-business e-commerce
over the Internet either on their own or by partnering with other companies.
Traditional enterprise software companies, such as IBM and Oracle, could in
the future develop and offer a competitive purchasing solution that our
customers could customize to link to their suppliers. Additionally, emerging
enterprise software companies such as Ariba and Commerce One offer purchasing
solutions that could be customized to link to suppliers within particular
industries. E-commerce sites such as VerticalNet, ProcureNet and Industry.Net
may also indirectly compete with us in any individual vertical marketplace.
Companies primarily focused on creating Internet purchasing solutions for
the life sciences industry include SciQuest.com and Anderson Unicom Group,
Inc. Traditional suppliers and distributors including Sigma Aldrich, Fisher
Scientific International, Merck and VWR currently sell life sciences research
products through paper catalogs and web sites.
Within the healthcare products industry, Promedix's principal competitors
are large regional distributors such as Tri-anim and Primesource Surgical,
which represent products in several sub-specialities. Many manufacturers who
sell directly also have rudimentary e-commerce sites for their own products.
Indirect competitors of Promedix are large commodity distributors and group
purchasing organizations or GPOs. The
14
largest medical distributor--Allegiance Healthcare--has released an e-commerce
site called ASAP E-Comm, designed to sell the commodity products that
Allegiance represents. Premier, the largest group purchasing organization, has
released Premier Select, a site targeted to the physician and long-term care
market, that contains only those products that Premier has contracted with
manufacturers to sell. Our principal Internet competitors are Neoforma.com,
Medibuy, MedAssets and to a lesser extent Cimtek Medical and mrn.com.
Specialty medical products are also sold in limited quantities by smaller
Internet companies, like Surgical911.com, and by consumer-oriented sites, like
Medsite.
Our current and potential competitors may develop superior Internet
purchasing solutions that achieve greater market acceptance than our solution.
Many of our existing and potential competitors, including large traditional
distributors, have longer operating histories in the life sciences research
products market, greater name recognition, larger customer bases and
significantly greater financial, technical and marketing resources than we do.
Such competitors can undertake more extensive marketing campaigns for their
brands, products and services, adopt more aggressive pricing policies and make
more attractive offers to customers, potential employees, distribution
partners, commerce companies and third-party suppliers.
In addition, substantially all of our prospective customers have
established long-standing relationships with some of our competitors or
potential competitors. Accordingly, we cannot be certain that we will be able
to expand our customer list and user base, or retain our current customers. We
may not be able to compete successfully against our current or future
competitors and competition could have a material adverse effect on our
business, results of operations and financial condition.
Government Regulation
In addition to regulations applicable to businesses generally, we are or
may be subject to direct regulation by governmental agencies, including those
listed in the bullet points below, which includes numerous laws and
regulations generally applicable to the chemical, pharmaceutical, controlled
substances, human and biological reagents, medical and in vitro devices,
nuclear chemical businesses and environmental spills, as well as U.S. import
and export controls and import controls of other countries. We receive orders
from purchasers for our products that we then electronically transmit to the
appropriate suppliers. The suppliers then package, label and ship products
directly to these purchasers. We take legal title to the products, but do not
take physical possession of a shipment during any part of the transaction.
Legal title generally passes to the purchaser at the time of product shipment;
however, if the chemicals or other products are returned, we also have legal
title during the shipment of the returned products.
We have been and intend to continue relying upon our suppliers to
appropriately package and label and maintain all records on the products, as
required in accordance with local, state and federal laws. We have been, and
intend to continue, relying upon suppliers and purchasers, if necessary, to
acquire and maintain all appropriate licenses and approvals, as well as
maintain all required records. Our various legal arrangements with suppliers
may not have successfully transferred all liabilities concerning these
responsibilities, but those legal arrangements are under continuing review and
are being revised. We rely on the suppliers' regulatory staff to confirm that
the purchasers also have all appropriate governmental licenses and permits and
expertise needed to order, receive and use any regulated products they have
purchased. We are unable to verify the accuracy of our suppliers' regulatory
staff determinations and their decisions whether or not to ship a product to a
purchaser.
Our reliance on suppliers to perform adequate regulatory due diligence
assessments of purchasers and the compliance by suppliers and purchasers with
applicable governmental regulations may not be sufficient if we are held to
need our own licenses or otherwise separately comply on our own with
governmental regulatory requirements. For example, if we are held by
governmental agencies to be a seller or a distributor of regulated products
because we did take legal title, we may have inadvertently violated
governmental regulations by not having the appropriate license or permit, not
maintaining appropriate records required by regulations or otherwise not
complying with governmental requirements, and we may be subject to potentially
severe civil or criminal penalties and fines for each offense or violation. A
review of these sales in May through July 1999, excluding sales relating to
Promedix and SpecialtyMD, which were acquired later and are discussed
separately below, found
15
that sales through our Chemdex Marketplace were generally made to academic or
commercial purchasers and not to individuals. As described below, those
suppliers indicated to us that they regularly perform due diligence by
checking whether purchasers have the requisite licenses and qualifications.
These facts could minimize the potential severity of any civil or criminal
penalties and fines that could be imposed on us for each of these sales.
We intend to continue to investigate our sales of regulated products and
have discussed with some governmental regulatory agencies whether these sales
required us, in addition to our suppliers, to obtain a license or permit and
maintain government-mandated records. We intend to continue to pursue these
discussions. We may also seek clarification of whether our prior sales of
these products will subject us to any governmental, civil or criminal
penalties, including monetary fines and injunctions or other enforcement
actions. We cannot assure you that any civil or criminal penalties or fines
will not seriously harm our business, results of operations or financial
condition. In addition, we may discover that we inadvertently sold other
regulated products without a requisite license or permit or failed to fully
comply with other local, state or federal laws governing these sales.
In addition to reviewing our past sales, during the period from May through
July 1999, we conducted interviews with those suppliers that accounted for
approximately 75% of prior sales. We chose to interview these suppliers
because they are a representative cross-section of our suppliers that we
believe may sell regulated products. Beginning in February of this year, we
updated and expanded those interviews by conducting additional discussions
with our six suppliers in Canada. In both the domestic and foreign supplier
interviews, we asked if they verify that the purchasers have the necessary
federal licenses before making shipments and if they comply with applicable
labeling and packaging requirements. We also asked the suppliers whether they
were aware of any diversions or chemical spills, or of any past, pending or
threatened fines, violations, penalties, litigation, complaints or
investigations regarding their shipment of products to our customers. In the
course of these discussions, the suppliers informed us that they have all of
the appropriate governmental licenses and permits, and they routinely, as a
matter of practice, verify whether the purchasers have the relevant licenses
or permits, and comply with the labeling, packaging and intended use
requirements. The suppliers also indicated that they are not aware of any
diversions or past, pending or threatened fines, violations, penalties,
litigation, complaints, proceedings or investigations regarding their shipment
of products to our customers. However, some suppliers have had small spills
and been subject to fines for these spills and for failure to provide
information on hazards or health risks presented by products, but they could
not identify whether orders to our customers were involved. Furthermore, we
are unable to verify the accuracy of suppliers' statements that they have in
the past complied, or will in the future comply, with laws applicable to these
sales. In addition, we did not conduct investigations of all suppliers in the
Chemdex database, and we do not have any current plans to do so. We could be
significantly fined or exposed to significant civil or criminal liability, or
suffer negative publicity, if these licensing, packaging, due diligence,
labeling, informational and other regulatory requirements have not been fully
met by our suppliers or by us.
During the period from May through July 1999, we also reviewed the list of
products in our current database to identify any products for which we may
need a license or permit to sell. We identified approximately 14,000 of those
products that may be regulated, and we have evaluated their status. They have
either been removed from our database, or been flagged so that we will not in
the future sell them, but instead will refer the purchasers of these flagged
products directly to suppliers. In some instances, we have sought, or may in
the future seek, appropriate licenses or registrations enabling us to return
certain products to the database. We cannot be sure that all regulated
products requiring us to have a license to sell have been removed from, or
flagged in, the database. In addition, new products that require us to obtain
governmental licenses or permits may be inadvertently added to our database.
However, we have instituted new quality control procedures to routinely screen
our growing database, as well as increase the scrutiny of new products
proposed to be added to the database to eliminate those products for which we
are required to have licenses or permits in order to sell or distribute the
products. Alternatively, we will continue to apply for appropriate licenses,
registrations and, in some instances, exemptions, so certain products may be
returned to the database. A regulatory compliance officer was hired in 1999 to
oversee these matters, as well as the overall compliance of our Chemdex
Marketplace.
16
In February 2000, we acquired Promedix, which was not involved in the
earlier reviews discussed above. Regarding sales by Promedix, we currently
rely on suppliers to meet the various regulatory requirements applicable to
the sale of these products, including specialty medical products regulated by
the FDA. It is noteworthy that Promedix has only conducted limited sales and
that those sales have all been to large hospitals or medical centers, which
are qualified and knowledgeable with regard to the regulatory requirements and
the use of the products. We seek to rely upon our suppliers by passing all
regulatory responsibilities to them, and to obtain indemnification from
suppliers in our agreements with them. However, the transfer of the applicable
regulatory liabilities may be inadequate, unclear or incomplete, the scope of
the indemnification is limited and some suppliers may be unable or unwilling
to indemnify or defend us in the future. Our existing legal arrangements with
suppliers are being reviewed and will be improved on a continuing and regular
basis. We have not verified whether those suppliers have met all applicable
regulatory requirements or that their compliance is adequate or sufficient to
comply with all governmental requirements. We have, however, conducted limited
interviews with three of Promedix's suppliers. While this survey is not
exhaustive, it did indicate that the suppliers interviewed were knowledgeable
about the relevant FDA and other regulatory requirements, and did, for
example, file adverse event reports, maintain appropriate complaint reports,
consistent with current Good Manufacturing Practice (GMP) regulations, as well
as maintain other required records relating to sale and use of devices and
products purchased through Promedix. If their compliance or ours is found by
the FDA not to be sufficient to cover our sales activities, we could be
subject to significant penalties or fines, significant civil or criminal
liability as well as potential negative publicity. We could also be subjected
to regulatory enforcement actions, fines and other liabilities, as well as
product and revenue loss and recall costs, if the products are improperly
manufactured, described, advertised on our website, represented, labeled, used
or otherwise do not perform as expected. The events described above could
seriously harm our business, revenues, results of operations and financial
condition.
The packaging, labeling, supply, sale and distribution of medical devices
for clinical use are subject to direct governmental agency regulation, which
includes FDA laws and regulations generally applicable to medical supplies and
healthcare businesses, as well as U.S. export controls and import controls of
other countries, and including controls on the use and distribution of some
specialty medical products. FDA laws and regulations include requirements that
distributors of medical devices establish and maintain device complaint
records and adverse event or incident reports for any written, electronic or
oral complaint received pertaining to distributed medical devices, and that
those reports are investigated pursuant to a documented protocol. FDA laws and
regulations also include the requirement that distributors maintain records of
distribution of certain medical devices and provide reports to device
manufacturers for the purpose of tracking device distribution. Promedix
continues to rely on suppliers to meet all of these FDA requirements, but it
may also be required to do so itself. Promedix continues to rely on its
suppliers to perform adequate due diligence to confirm that purchasers hold
all appropriate licenses needed to order, receive and use medical devices and
also that purchasers are complying with product labeling requirements and they
are not otherwise diverting or misusing medical devices for purposes other
than those set forth in any FDA-approved product labeling.
Any failure to comply with applicable FDA laws and regulations could
subject us to civil and/or criminal liability, regardless of whether our
suppliers are maintaining FDA-required records. Regarding compliance with the
various statutory and regulatory requirements that relate to our involvement
in the sale of specialty medical products, there are, to our knowledge,
currently no investigations, inquiries, citations, fines or allegations of
violations, diversions or inappropriate use or noncompliance pending by
government agencies or by third parties against us. It is possible that there
may be investigations or allegations in the future. We are currently reviewing
applicable FDA requirements with regard to present and continuing compliance,
particularly concerning various licensing and sales issues. There is a risk
that the FDA may not accept our reliance on Promedix's suppliers to satisfy
any or all of the FDA's requirements for device distributors, and the risk
that any noncompliance may occur in the future is currently unknown. As we
expand our offering to other products, we may be subject to additional
government regulation. Although any potential impact on us for noncompliance
cannot be established, it could seriously harm our business, financial
condition and results of operations, result in adverse publicity and could
result in civil or criminal penalties and liabilities. We intend to carefully
review the regulatory consequences and impacts of these additional product
offerings before they are implemented.
17
On December 28, 1999, President Clinton announced that he will ask Congress
in 2000 for new legislation to regulate the sale of pharmaceuticals on the
Internet. These new laws will give the FDA authority to inspect and assess
whether Internet pharmacies are in compliance with FDA regulations. Although
the focus of the announcement was on prescription pharmaceuticals, it is
possible that the scope of the new legislation may also include prescription
medical devices, such as those sold by us through the Promedix Marketplace. At
this time it is difficult, in the absence of specific legislative proposals,
to assess the potential impact of any new legislation on us, as to whether it
will have a significant adverse effect in terms of increasing regulatory
requirements and the attendant costs, as well as preclude our continuing
reliance on the activities of our suppliers to satisfactorily comply with
applicable federal regulations.
In February 2000, we acquired SpecialtyMD. The activities of SpecialtyMD
were not a part of the earlier reviews discussed above. It is important to
note that SpecialtyMD sells no pharmaceuticals, medical devices, chemicals or
substances triggering any FDA or other governmental regulation. Instead,
SpecialtyMD provides a portfolio of medical specialty websites for specialist
physicians. There is no litigation or past, pending, threatened or any alleged
violation, fine, citation, inquiry, notice or regulatory diversion involving
SpecialtyMD. SpecialtyMD relies upon third parties and pharmaceutical or
medical device companies, that provide the information on medical practices
and product descriptions that it publishes on its website for accuracy and to
avoid violating any regulatory requirements. SpecialtyMD seeks to clarify
responsibilities and liabilities in both existing and future legal
arrangements with providers and companies advertising their products on its
website. SpecialtyMD also seeks to accompany the information it provides with
appropriate disclaimers regarding its responsibility for the accuracy and
content of third party information. However, these disclaimers and legal
arrangements may not be effective in transferring all liability for any
misstatements, errors, defamation, libel, slander or other legal or regulatory
liabilities that may arise from or be embedded in the information published by
SpecialtyMD. We will be conducting a thorough review of these legal
arrangements, and will revise them where appropriate. However, it is possible
that all legal and regulatory responsibilities cannot be transferred.
Accordingly, it is possible that significant fines, penalties or judgments
could result from the information provided and the activities of SpecialtyMD.
Under the terms of our agreement with VWR, VWR provides support for the
purchase of third-party, off-catalogue products, where purchasers may order
products not listed in our database. A review of products previously sold
under this arrangement is underway, but has not yet been completed. The type
and nature of these products cannot be anticipated. To help avoid inadvertent
future sales of products for which we would be required to hold governmental
licenses or permits, we are in the process of putting limitations on VWR off-
catalogue sales by removing certain regulated categories of compounds and
implementing a screening process to prevent ordering of regulated products for
which appropriate licenses and permits are not available. For purchases of
those products, we intend to refer the purchaser directly to the suppliers, so
that we are not involved in their sale. We cannot be sure that we may not
inadvertently sell or cause to be sold and shipped products for which we
should have the required governmental licenses or permits.
We have also relied on our suppliers to comply with applicable local, state
and federal laws regarding the labeling and the dissemination of information
on any products sold that may be hazardous or present a health threat to the
user. If these suppliers have failed, or we have failed to maintain the
requisite records irrespective of the actions of its suppliers, or if either
of us fails, in the future, to adequately comply with labeling and information
dispensing requirements of local, state or federal laws, then we may be held
legally responsible, since we briefly held title to these products, and could
be subject to governmental penalties or fines, as well as private lawsuits to
enforce these laws.
Finally, we have relied upon our suppliers to obtain appropriate approvals
for products regulated by the FDA and to comply with the requirements relating
to those approvals and products. The failure of suppliers to obtain or comply
with those approvals, or the failure of the product advertising or labeling to
be consistent with the FDA approval for the products, or other failures by the
products themselves, or our failure to keep regulatory records required by the
FDA, such as complaint files, could result in costly product recalls,
significant fines and judgments, civil and criminal liabilities and negative
publicity.
18
We intend to offer for sale products only to qualified purchasers. Unless
we have the necessary licenses, permits, authorizations and approvals, or an
exemption or exclusion applies, we do not intend to offer for sale or cause to
be sold products that are, for example:
. prescription or over-the-counter human or animal drugs that are
regulated by the FDA;
. radioactive materials that are regulated by the Nuclear Regulatory
Commission or state and local governmental authorities unless we have
appropriate licenses or permits;
. biological products intended for the treatment of humans or animals, and
that are regulated respectively by the FDA and U.S. Department of
Agriculture (USDA);
. pathogenic bacteria or viruses that may introduce any contagious or
infectious disease of man or animal and which are regulated by the
Centers for Disease Control and Prevention and USDA as Select Agents;
. controlled substances that are regulated by the Drug Enforcement Agency
and whose distribution requires a registration;
. products to be imported or exported (no products are currently exported)
that are regulated by the U.S. Department of Commerce or other
regulatory agencies;
. explosive materials for which a license, permit or authorization is
required under Bureau of Alcohol, Tobacco and Firearms regulations;
. ozone-depleting substances that are subject to production and
importation bans under the Federal Clean Air Act and the Montreal
protocol; and
. certain polychlorinated biphenyls and asbestos-containing materials.
We intend to continue to sell products for which we do not need a
governmental license, permit, authorization or approval, or for which an
exemption or exclusion applies, and will seek to comply, either directly or
through our suppliers, with applicable local, state and federal laws and
regulations governing the sale, packaging and labeling of these products,
dispensing of information on health risks and hazards about a chemical and
recordkeeping concerning these products. However, our suppliers and we may
inadvertently fail to comply with applicable laws in the future. Noncompliance
could seriously harm our business, results of operations and financial
condition because of civil or criminal penalties and fines and negative
publicity.
For sales of VWR core products under our agreement with VWR and under
agreements with a limited number of other suppliers, we act as a sales agent.
In these situations, we do not take title to, or have possession of, these
suppliers' products. We rely on VWR and these other suppliers to comply with
all applicable local, state and federal laws. Although we are acting as a
sales agent for these suppliers and do not, in this situation, take legal
title to, or possession of, these products, we may still be held liable if we
cause to be sold regulated products to purchasers who lack required licenses
to use, store and receive these products and if the suppliers of these
products have failed to adequately comply with local, state or federal laws.
Researchers and others who are not affiliated with an enterprise customer
may register to purchase through our Chemdex Marketplace. Although we require
unaffiliated users to provide information about themselves, we do not
independently verify the accuracy of this information. Because we do not
generally meet unaffiliated users in person or visit their work sites, we are
even less able to gauge whether they have appropriate storage facilities,
permits or licenses compared to enterprise customers with which we generally
have some direct contact or knowledge of their reputations. Therefore, we
cannot be sure that we will not inadvertently sell, or cause to be sold or
delivered, products for which the purchasers lack appropriate local, state or
federal licenses or permits or expertise or experience to handle or use these
products. We may also be subject to significant civil or criminal penalties,
fines or monetary judgments as well as negative publicity, if purchasers
misuse or spill, or injure themselves or third parties with, the products
purchased from us.
19
We are unaware of any current investigations, inquiries, citations, fines
or allegations of violations or noncompliance pending by government agencies
or by third parties against us. It is possible that there may be
investigations or allegations we are not aware of or future investigations or
allegations. We are continually reviewing applicable requirements with regard
to past, present and continuing compliance, particularly concerning various
licensing and sales issues. The risk that any noncompliance may be discovered
in the future is currently unknown. Although any potential impact on us for
noncompliance cannot currently be established, it could result in significant
civil or criminal penalties, including monetary fines and injunctions, for
noncompliance and negative publicity, and seriously harm our business,
revenues, results of operations and financial condition.
Due to the increasing popularity and use of the Internet, it is possible
that a number of laws and regulations may be adopted or interpreted in the
United States and abroad with particular applicability to the Internet. It is
also possible, in addition to the above-listed examples of existing laws and
regulations, as well as new tax laws and regulations, that new laws and
regulations may be adopted or interpreted by the United States and foreign
governments, to address the sale and distribution of products utilizing the
Internet. In addition, it is possible that governments will enact legislation
that may be applicable to us in areas such as content, product distribution,
network security, encryption and the use of key escrow, data and privacy
protection, electronic authentication or "digital" signatures, illegal and
harmful content, access charges and re-transmission activities.
Irrespective of President Clinton's announcement that he will ask Congress
to enact legislation extending the FDA's inspection authority over drugs and
possibly other medical products sold over the Internet, 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 the existing laws and regulations 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, may seriously harm us by increasing our cost of doing
business or increase our legal exposure. Any of these factors could have a
negative effect on our business, revenues, results of operations and financial
condition.
Employees
As of February 15, 2000, we had 354 full-time employees, including 134 in
research and development, 123 in supplier relations, sales and marketing, 25
in professional services and customer support and 72 in general and
administrative functions. We also employ independent contractors to support
our engineering, marketing, sales and support, and administrative
organizations.
20
Directors and Executive Officers of the Registrant
Set forth below is information regarding our directors and executive
officers of Ventro as of March 1, 2000.
Name Age Position
- ---- --- --------
David P. Perry............ 31 President, Chief Executive Officer and Director
Pierre V. Samec........... 36 Chief Information Officer
Robin A. Abrams........... 48 Chief Operating Officer
James G. Stewart.......... 47 Chief Financial Officer and Assistant Secretary
Neil E. de Crescenzo...... 38 President and General Manager, Chemdex
John Thorpe............... 50 President and General Manager, Ventro Europe
J. Barrie Keiser.......... 38 President and General Manager, Promedix
James S. Wambach.......... 46 Vice President, Worldwide Sales
David A. Weber............ 46 Vice President, Supplier Relations
Martha D. Greer........... 46 Vice President, Marketing
Brook H. Byers............ 54 Chairman of the Board
William C. Klintworth,
Jr. ..................... 48 Director
Charles R. Burke.......... 57 Director
Jonathan D. Callaghan..... 31 Director
Paul J. Nowak............. 45 Director
John A. Pritzker.......... 46 Director
Naomi O. Seligman......... 66 Director
L. John Wilkerson......... 56 Director
David P. Perry co-founded us in September 1997 and has served as our
President, Chief Executive Officer and a director since September 1997. From
December 1995 to April 1997, he co-founded and served in various positions,
including Chief Executive Officer, of Virogen, Inc., a biotechnology company.
Mr. Perry has also held various positions at Exxon Corporation, including as a
Refinery Operations Supervisor from January 1994 to May 1995, a financial
analyst from March 1993 to January 1994, a project manager from September 1992
to March 1993 and an engineer from September 1990 to March 1992. Mr. Perry
holds an M.B.A. from Harvard University and a B.S. in chemical engineering
from the University of Tulsa.
Pierre V. Samec joined us in July 1998 as our Chief Information Officer.
Prior to joining us, Dr. Samec held various positions at Charles Schwab and
Co., Inc., a financial services company, including as its Senior Vice
President, Retail Technology from February 1998 to July 1998, its Vice
President, Software Engineering from July 1996 to January 1998 and its Vice
President and Architect from January 1996 to June 1996. From August 1993 to
December 1995 Dr. Samec also served as the Vice President, Software
Engineering of Quintus Corporation, a software company, Dr. Samec holds an
engineering degree from Ecole des Mines de Paris and an M.S. and Ph.D. in
geophysics from Stanford University.
Robin A. Abrams joined us in June 1999 as our Chief Operating Officer.
Prior to joining us, Ms. Abrams served as the President of Palm Computing Inc.
and the Senior Vice President of 3Com Corporation from February 1999 to June
1999. Ms. Abrams served as the President of VeriFone Inc., a secure payment
systems company and a subsidiary of Hewlett-Packard, from March 1998 to
February 1999, and as the Vice President of the Americas of VeriFone from
February 1997 to March 1998. From June 1996 to February 1997, Ms. Abrams was
the Senior Vice President of Apple Computer, Inc. and the President of Apple
Americas, and from December 1994 to June 1996, Ms. Abrams served as the Vice
President and General Manager of Apple Asia. Ms. Abrams holds a B.S. in
political science and history and a J.D. from the University of Nebraska.
James G. Stewart joined us in February 1999 as our Chief Financial Officer.
Previously, Mr. Stewart served as the Chief Financial Officer of CN
Biosciences, Inc., a chemical manufacturing and distribution company, from
June 1995 to March 1999, and the President of CN Corporation, the principal
operating division of CN Biosciences, Inc., from March 1998 to March 1999.
From April 1994 to April 1995, Mr. Stewart served as the Chief Financial
Officer of Fightertown Entertainment, Inc., a virtual reality entertainment
company. From
21
November 1988 to April 1994, Mr. Stewart held various positions at Verteq,
Inc., a semiconductor equipment company, including most recently as its Chief
Financial Officer. Mr. Stewart was formerly an Audit Partner of Arthur Young &
Co. Mr. Stewart holds a B.S. in business from the University of Southern
California.
Neil E. de Crescenzo joined us in January 2000 as our President and General
Manager, Chemdex. Prior to joining us, Mr. de Crescenzo served as Global
Services Executive for IBM Global Services from August 1999 to December 1999.
Mr. de Crescenzo served as Director of Global Strategy for IBM Corporation's
Public Sector business unit from January 1999 until August 1999, and as
Director of Global Marketing and Business Development for IBM Corporation's
Global Healthcare business unit from October 1996 until January 1999. From
October 1994 to October 1996, Mr. de Crescenzo was a principal with New Health
Ventures, an operating unit of Blue Cross Blue Shield of Massachusetts. Mr. de
Crescenzo holds a B.A. in political science from Yale University.
John Thorpe joined us in March 2000 as the President and General Manager,
Ventro Europe. Prior to joining us, Mr. Thorpe held various positions at GE
Information Systems and was the Corporate Vice President and President of
Europe, the Middle East and Africa from 1997 to 1999, where he sat on the GE
Chief Executives Council for Europe. Mr. Thorpe served as the Managing
Director of International Network Services, a provider of solutions for
complex enterprise networks, from 1994 to 1995. Mr. Thorpe holds a B.A in
business studies from Portsmouth University, England.
J. Barrie Keiser joined us in February 2000 as the President of Promedix.
Prior to joining us, Mr. Keiser served as the President and General Manager of
Promedix from August 1999 to February 2000. Prior to joining Promedix, Mr.
Keiser served as the Corporate Vice President of Allegiance Healthcare, a
provider of health-care products and cost-management services from July 1996
to August 1999. Mr. Keiser served as the Vice President, Integrated
Distributions Services of Baxter International from October 1994 to July 1996.
From April 1991 to October 1994, Mr. Keiser served as the Vice President,
General Manager of ValueLink Business Center. Mr. Keiser holds a B.S. from
Indiana University.
James S. Wambach joined us in September 1998 as our Vice President,
Worldwide Sales. Prior to joining us, Mr. Wambach served as the Senior Vice
President of North American Sales Operations of Forte Software, Inc., a
software company from January 1997 to June 1998. From January 1990 to December
1996, Mr. Wambach served in various positions at Sybase, Inc., a software
products and services company, including most recently as its Vice President
and General Manager from October 1995 to December 1996. Prior to that time,
Mr. Wambach has served in various positions at Oracle Corporation, a database
management and business applications company. Mr. Wambach holds a B.S. in
business administration from Ohio State University.
David A. Weber joined us in February 1999 as our Vice President, Supplier
Relations. Prior to joining us, Mr. Weber served as the Vice President,
Marketing at Amersham Pharmacia Biotech, a scientific services and tools
company, from October 1997 to February 1999. He also served as the Vice
President, Direct Marketing from May 1995 to October 1997 and as Area Director
from 1990 to 1995, of Pharmacia Biotech, a division of Pharmacia & Upjohn,
Inc. Mr. Weber holds a B.S. in biochemistry from Rutgers University.
Martha D. Greer joined us in January 1999 as our Vice President, Marketing
in January 1999. Prior to joining us, Dr. Greer served as Vice President,
Merchandise Management of Egghead, Inc., an online seller of computers and
computer-related products, from January 1997 to November 1998. Dr. Greer was
employed as an independent consultant from January to December 1996. From
November 1992 to January 1996, Dr. Greer served in various positions at PC
Connection, a computer direct marketing company, including as its Vice
President, Product Management from September 1994 to January 1996, as its Vice
President, Marketing from September 1993 to September 1994, as its Director,
Marketing from May 1993 to September 1993 and as its Director, Business
Development from November 1992 to May 1993. Dr. Greer holds a B.A. in
linguistics from Macalester College and a Ph.D. in experimental psychology
from Harvard University.
Brook H. Byers has served as one of our directors of Ventro since May 1998
and as Chairman of the Board since March 1999. Mr. Byers is a general partner
of Kleiner Perkins Caufield & Byers, a venture capital firm which he joined in
1977. He was the founding president and chairman of four lifesciences
companies: Hybritech Inc., IDEC Pharmaceuticals Corporation, InSite Vision
Inc. and Ligand Pharmaceuticals Inc. Mr. Byers currently
22
serves as a director of drugstore.com and a number of privately-held
technology companies. Mr. Byers serves on the Board of Directors of the
University of California, San Francisco Foundation and the California
Healthcare Institute. Mr. Byers holds a B.S. in electrical engineering from
Georgia Institute of Technology and an M.B.A. from the Stanford Graduate
School of Business.
Charles R. Burke has served as one of our directors since January 1998. Dr.
Burke has served as the President of Monument Partners, Inc., a consulting
firm, since January 1998. From January 1994 to December 1997, he served as the
Chief Executive Officer of Research Biochemicals Incorporated, a research
reagent supply company. Dr. Burke is also a director of Endogen, Inc. Dr.
Burke holds an A.B. in Chemistry from Cornell University, a M.A. with honors
in biology from Colgate University and a Ph.D. in biochemistry from the
University of Illinois.
Jonathan D. Callaghan has served as one of our directors since September
1997. Mr. Callaghan has been a general partner of CMG@Ventures, a venture
capital firm, since September 1997. Previously, from June 1991 to June 1995,
Mr. Callaghan was an associate of Summit Partners, a venture capital firm. Mr.
Callaghan also serves as a director of Vicinity Corporation. Mr. Callaghan
holds a B.A. in government from Dartmouth College and an M.B.A. with
distinction from Harvard University.
William C. Klintworth, Jr. has served as one of our directors since
February 2000. Mr. Klintworth served as Chairman and director of Promedix and
its Chief Executive Officer since January 1999. Prior to that, from May to
October 1998, he served as the Chief Development and Acquisition Officer of
HTD Corporation, a national medical specialty distribution company. From April
1997 to May 1998, he served as Chief Executive Officer of Triad Medical, a
medical products distributor. He served as Chief Executive Officer of Medical
Companies Alliance, a medical products distributor until March 1997. Mr.
Klintworth holds a B.S. in business administration from Southern Methodist
University.
Paul J. Nowak has served as one of our directors since November 1999. Mr.
Nowak has served as the President and Chief Executive Officer of VWR
Scientific Products since August 1999. He also serves as a director of VWR.
Mr. Nowak has worked at VWR in various capacities for over 22 years, most
recently as Executive Vice President of Sales and Marketing from January 1998
to August 1999, as Senior Vice President of Sales from July 1995 to January
1998, and as Senior Vice President of Operations from January 1995 to July
1995.
John A. Pritzker has served as one of our directors since March 1998. Since
1988, Mr. Pritzker has served as President of the Red Sail Companies, sports,
retail and entertainment companies which he founded, Mandara Spa LLC, a spa
company which he founded, and Hyatt Ventures, Inc., a venture capital firm.
Mr. Pritzker served as a Divisional Vice President of Hyatt Hotels and Resorts
from 1984 to 1988. Mr. Pritzker served as director of Ticketmaster Group, Inc.
for five years. He holds an A.A. from Menlo College.
Naomi O. Seligman has served as one of our directors since June 1999. Ms.
Seligman is a co-founder and has served as a senior partner of the Research
Board, Inc., an information technology research group, since 1975. Ms.
Seligman currently serves as a director of The Dun and Bradstreet Corporation.
Ms. Seligman holds a B.A. in economics with high honors from Vassar College
and an M.B.A. from the London School of Economics.
L. John Wilkerson has served as one of our directors since March 1999. Dr.
Wilkerson is a co-founder and has been a general partner of Galen Associates,
a venture capital firm, since May 1990, and has been a consultant to The
Wilkerson Group, a health care products consulting firm, since May 1996.
Previously, Dr. Wilkerson served as a Vice President of Smith Barney. He is
currently a director of British Biotech Plc, Stericycle, Inc. and TheraTX,
Incorporated. Dr. Wilkerson holds a B.S. in plant science from Utah State
University and an M.S. and Ph.D. in economics from Cornell University.
23
ITEM 2. PROPERTIES
Our executive, administrative and operating offices are located in
approximately 67,000 square feet of leased office space located in Mountain
View, California under a lease expiring in February, 2005. We also have
approximately 34,000 square feet in Palo Alto, California pursuant to a lease
that expires in December 2003. In November 1999, the Company entered into a
sublease agreement for the Palo Alto facilities which commenced on December 1,
1999 and will end on December 31, 2003. The Company also maintains sales
offices in Ann Arbor, Michigan, Princeton, New Jersey, and the United Kingdom.
Upon the closing of our acquisition of Promedix and SpecialtyMD on February
10, 2000, we added approximately 63,000 square feet in Salt Lake City, Utah,
under two leases expiring in November 2000 and October, 2005. In February
2000, we leased an additional 27,000 square feet at our headquarters in
Mountain View, California pursuant to a lease expiring in February, 2005.
ITEM 3. LEGAL PROCEEDINGS
On March 3, 2000, Chemidex, Inc. filed a complaint in the United States
District Court, District of Kansas (File No. 00-2107) alleging infringement of
its service mark registration, unfair competition and false designation of
origin and false representation. Chemidex is seeking, among other relief, a
preliminary and permanent injunction from us using the Chemdex and Chemdex.com
marks, including the Chemdex website domain name, and compensatory damages.
Based on our preliminary investigation, we believe that we have meritorious
defenses to Chemidex's claims and intend to vigorously defend ourselves in any
litigation that may arise from these claims. We are unable at this time to
predict the outcome of this litigation. If any litigation were to be decided
adversely to us, we could be enjoined from future use of the names Chemdex and
Chemdex.com and we might be required to pay substantial damages.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
24
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Price Range of Common Stock
Our common stock was traded on the Nasdaq National Market under the symbol
"CMDX" starting on July 27, 1999 and has been traded under the current symbol
"VNTR" since March 1, 2000. Prior to that time, there was no public market for
our common stock. The following table shows the high and low sale prices of
the Company's common stock as reported by the Nasdaq National Market for the
periods indicated.
Common
Stock
Price
-------------
High Low
----- ----
Year Ended December 31, 1999
Third Quarter (from July 27, 1999).......................... $ 34 7/8 $15 1/8
Fourth Quarter.............................................. 143 29 7/16
On March 2, 2000, the last reported sales price of our common stock on the
Nasdaq National Market was $218.31 per share. As of March 2, 2000, there were
approximately 12,000 stockholders of record of our common stock.
Dividend Policy
We have not declared or paid any cash dividends on our capital stock since
our inception and do not expect to pay any cash dividends in the foreseeable
future. We currently intend to retain future earnings, if any, to finance the
expansion of our business.
Use of Proceeds
On July 27, 1999, Ventro completed the initial public offering of its
common stock. The managing underwriters in the offering were Morgan Stanley
Dean Witter, BancBoston Robertson Stephens and Volpe Brown Whelan and Company.
The shares of common stock sold in the offering were registered under the
Securities Act of 1933, as amended, on a Registration Statement on Form S-1.
(No. 333-78505). The Securities and Exchange Commission declared the
Registration Statement effective on July 26, 1999.
The offering commenced on July 27, 1999. The total number of shares sold
was 8,625,000 (including the underwriters' over-allotment option). The initial
public offering price was $15.00 per share for an aggregate initial public
offering of $129.4 million.
We paid a total of $9.1 million in underwriting discounts and commissions
and approximately $2.9 million has been or will be paid for costs and expenses
related to the offering. None of the costs and expenses related to the
offering were paid directly or indirectly to any director, officer, general
partner of Ventro or their associates, persons owning 10 percent or more of
any class of equity securities of Ventro or an affiliate of Ventro.
After deducting the underwriting discounts and commissions and the offering
expenses the estimated net proceeds to Ventro from the offering were
approximately $117.4 million. The net offering proceeds have been used for
general corporate purposes, to provide working capital to develop products and
to expand the Company's operations. Funds that have not been used have been
invested in money market funds, and other investment grade securities. We also
may use a portion of the net proceeds to acquire or invest in businesses,
technologies, products or services.
25
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Period from
September 4,
1997
Year Ended (Inception)
December 31, Through
----------------- December 31,
1999 1998 1997
-------- ------- ------------
(in thousands, except per
share data)
Consolidated Statement of Operations Data:
Net revenues.................................. $ 30,840 $ 29 $ --
Cost of revenues.............................. 29,306 22 --
-------- ------- ------
Gross profit.................................. 1,534 7 --
Operating expenses:
Research and development.................... 17,734 3,439 197
Sales and marketing......................... 23,024 3,247 86
General and administrative.................. 10,352 1,745 121
Amortization of deferred stock-based
compensation............................... 1,992 372 --
-------- ------- ------
Total operating expenses...................... 53,102 8,803 404
-------- ------- ------
Operating loss................................ (51,568) (8,796) (404)
Interest expense.............................. (168) (2) --
Interest and other income..................... 3,163 310 --
-------- ------- ------
Net loss...................................... $(48,573) $(8,488) $ (404)
======== ======= ======
Basic and diluted net loss per share.......... $ (3.17) $ (4.79) $ (.24)
======== ======= ======
Weighted average common shares outstanding--
basic and diluted............................ 15,322 1,772 1,704
======== ======= ======
As of December 31,
-------------------------------
1999 1998 1997
-------- ------- ------------
(in thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term
investments.................................. $103,095 $ 5,990 $1,346
Working capital............................... 82,130 4,489 1,116
Total assets.................................. 163,933 8,168 1,728
Long-term debt and capital lease obligations,
net of current portion....................... 494 -- 6
Total liabilities............................. 38,914 1,820 280
Total stockholders' equity.................... 125,019 6,348 1,448
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report contains or incorporates by reference forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995. Where any such forward-looking statement includes a statement of the
assumptions or bases underlying such forward-looking statement, we caution
that, while such assumptions or bases are believed to be reasonable and are
made in good faith, assumed facts or bases almost always vary from the actual
results, and the differences between assumed facts or bases and actual results
can be material, depending upon the circumstances. Where in any forward-
looking statement, we or our management express an expectation or belief as to
future results, such expectation or belief is expressed in good faith and is
believed to have a reasonable basis, but there can be no assurance that the
statement of expectation or belief will result or be achieved or accomplished.
The words "believe," "estimate," "anticipate" and similar expressions may
identify forward-looking statements.
26
Overview
Ventro Corporation, formerly known as Chemdex Corporation, is a leading
builder and operator of vertical marketplace companies that enter into
transactions with enterprises, buyers and suppliers, enabling them to
streamline business processes, enhance productivity and reduce costs. Ventro
marketplace companies offer e-commerce solutions consisting of extensive
online marketplaces, electronic procurement, the systems integration needed to
interface with third party and back office systems and comprehensive services
and support.
We are currently operating or developing four Ventro marketplace companies
that are either wholly-owned by us or in which we own a minority interest.
Chemdex is a division of ours and is a leading provider of e-commerce
solutions to the life sciences research products market. Promedix, a wholly-
owned subsidiary of ours, will address the specialty medical products
marketplace. We have a joint venture with Tenet to form a new company called
Broadlane, which will provide e-commerce solutions for the high-volume,
hospital and medical supplies market, initially focusing on commodity hospital
supplies. Finally, we and DuPont formed Industria Solutions to provide e-
commerce solutions for the fluid processing industry. Broadlane and Industria
Solutions are currently in the development stage. We are a minority
shareholder in each of Broadlane and Industria Solutions.
We acquired Promedix and SpecialtyMD on February 10, 2000. The acquisitions
will be accounted for under the purchase method of accounting. The acquisition
costs of Promedix and SpecialtyMD are estimated to be $325.3 million and
$107.7 million, respectively. The intangible assets acquired in the Promedix
and SpecialtyMD acquisitions are estimated at $323.8 million and $107.9
million, respectively. In addition, we expect to record $13.1 million of
compensation expense based on the 15 month vesting schedule of restricted
stock issued as part of the SpecialtyMD acquisition. The intangible assets
will be amortized over two to three years and the amortization expense is
estimated to be approximately $144.4 million per year, beginning February 10,
2000. Promedix had no revenue and a loss from continuing operations of $12.1
million for 1999. SpecialtyMD had $31,000 of revenue and a net loss of $4.3
million for 1999.
Net revenues consist primarily of product sales to customers and charges to
customers for outbound freight. Under most of our supplier agreements we are
acting as a principal in purchasing products from our suppliers and reselling
them to our customers so that we recognize net revenues equal to the amount
paid by our customers and cost of revenues equal to the amount we pay to our
suppliers for these products. Under our principal-based agreements, we are
responsible for selling the products, collecting payment from customers,
ensuring that the shipment reaches customers and processing returns. In
addition, we take title to products upon shipment and bear the risk of loss
for collection, delivery and merchandise returns from customers. Some of our
agreements with our suppliers treat us as an agent of the supplier, in which
case we receive a percentage fee on product sales. We recognize revenue from
product sales, net of any discounts, and from fees under agency-based supplier
agreements, when the products are shipped to customers. Products are shipped
directly to customers by suppliers based on customer delivery date
specifications.
27
Results of Operations
The following table sets forth, for 1999, items from our consolidated
statement of operations expressed as a percentage of net revenues:
Year Ended
December 31,
1999
------------
Net revenues....................................................... 100 %
Cost of revenues................................................... 95
----
Gross profit....................................................... 5
Operating expenses:
Research and development......................................... 58
Sales and marketing.............................................. 75
General and administration....................................... 33
Amortization of deferred stock-based compensation................ 6
----
Total operating expenses........................................ 172
----
Operating loss..................................................... (167)
Interest expense................................................... (1)
Interest income and other.......................................... 10
----
Net loss........................................................... (158)%
====
Comparison of the Years Ended December 31, 1999 and 1998
Net Revenues. Net revenues increased to $30.8 million for 1999 from $29,000
for 1998. The increase in sales volume is primarily due to the increase in our
customer base and increased market acceptance of our procurement solution.
In the future, the level of our net revenues will depend on a number of
factors including, but not limited to, the:
. number of customers we are able to obtain;
. frequency of our customer's purchases;
. quantity and mix of products our customers purchase;
. quantity of the types of products we are able to offer for sale;
. price we charge for our products;
. amount we charge for shipping;
. extent of sales incentives we offer;
. level of customer returns we experience;
. seasonality that we may experience; and
. number of vertical marketplaces we enter.
Cost of Revenues. Cost of revenues increased to $29.3 million for 1999 from
$22,000 for 1998. Cost of revenues consists primarily of the costs of
acquiring products from our suppliers for sale to our customers and shipping
costs related to product purchased. During 1999, cost of revenues in absolute
dollars, increased consistent with the significant increases in revenues. Our
gross margin for 1999 was approximately 5%. Cost of revenues as a percentage
of net revenues will fluctuate based on a number of factors, including, but
not limited to, the following:
. the cost of our products and purchase discounts that we negotiate with
individual suppliers;
. our pricing strategy relative to the cost of our products;
. the mix of products our customers purchase; and
. our price strategy for shipping relative to the cost of shipping.
28
Operating Expenses
Research and Development. Research and development expenses increased by
$14.3 million to $17.7 million for 1999 from $3.4 million for 1998. Research
and development expenses consist of personnel and other expenses associated
with developing, updating and enhancing the software used for the Chemdex
Marketplace. Our research and development expenses have increased each quarter
since inception, primarily due to increased staffing and associated costs
related to the design, development and maintenance of the Chemdex Marketplace,
as well as content and design expenses.
We expect that research and development expenses will increase in absolute
dollars in the future as we:
. continue to enhance and improve our Internet-based purchasing solution;
. add increasing amounts of supplier data to our databases;
. develop and introduce new solutions and services; and
. integrate our Internet-based purchasing system with our customers' and
suppliers' systems.
Sales and Marketing. Sales and marketing expenses increased by $19.8
million to $23.0 million for 1999 from $3.2 million for 1998. Sales and
marketing expenses consist primarily of advertising and promotion in support
of the development of our marketing strategy, payroll and related expenses for
personnel engaged in supplier relations, enterprise sales activities,
enterprise account management and amortization expenses related to our VWR and
BIO agreements. Sales and marketing expenses have increased since inception as
we have continued to expand our sales and marketing efforts primarily relating
to our corporate marketing and branding strategy associated with our name
change. We expect sales and marketing expenses to increase in absolute dollars
as we continue to pursue our vertical market strategy and promote our brands.
In connection with our strategic relationship with VWR, we issued 2,538,405
shares of common stock valued at $13.9 million. The fair value of the stock is
being amortized, on a straight-line basis, into sales and marketing expense
over four years, the estimated useful life of this intangible asset.
General and Administrative. General and administrative expenses increased
to $10.4 million for 1999 from $1.8 million for 1998. General and
administrative expenses consist primarily of administrative personnel
salaries, fees for professional services, travel and corporate facility
expenses. General and administrative expenses have increased primarily as a
result of the addition of finance and administrative personnel, costs of
leasing additional office space to support our growth and expenses related to
increased professional service fees. We expect our general and administrative
expenses to increase in absolute dollars as we expand our staff and incur
additional costs related to the anticipated growth of our business.
Amortization of Deferred Stock-Based Compensation. We have recorded
aggregate deferred stock-based compensation of $8.7 million in connection with
some of the stock options we granted through December 31, 1999. For 1998 and
1999, we expensed $372,000 and $2.0 million, respectively, related to the
amortization of deferred stock-based compensation. The deferred stock-based
compensation amounts are being amortized over the vesting period of the stock
options which is generally four years.
Interest Expense. Interest expense increased to $168,000 for 1999 from
$2,000 for 1998. Interest expense consists primarily of interest related to
financed equipment and other financing arrangements.
Interest Income and Other. Interest income and other, net increased to
$3.2 million for 1999 from $310,000 for 1998. Interest income and other, net
has been derived primarily from earnings on investments in cash equivalents
and short-term investments. Interest during the second half of 1999 increased
significantly due to increased cash, cash equivalents and short-term
investments resulting from the net proceeds of our initial public offering on
July 27, 1999.
Provision for Income Taxes. We incurred net losses and accordingly did not
record a provision for income taxes for any of the periods presented. At
December 31, 1999, we had federal and state net operating loss
29
carryforwards of approximately $54.0 million and $54.0 million, respectively.
These net operating loss carryforwards will expire at various dates beginning
in 2002 through 2019 if not utilized. Certain future changes in our share
ownership, as defined in the Tax Reform Act of 1986 and similar state
provisions, may restrict the utilization of carryforwards. A valuation
allowance has been recorded for the entire deferred tax asset as a result of
uncertainties regarding the realization of the asset due to our lack of
earnings history.
Comparison of the Period from September 4, 1997 (Inception) Through December
31, 1997 to the Year Ended December 31, 1998
From September 4, 1997, the date of our inception, through November 1998,
we were in the development stage and had only nominal net revenues, cost of
revenues and operating expenses. As a result, our results of operations for
the period from September 4, 1997 to December 31, 1997 were immaterial.
Therefore, we believe that a comparison of the period from September 4, 1997
to December 31, 1997 to any period of 1998 is not meaningful.
Liquidity and Capital Resources
Prior to our initial public offering in July 1999, we funded our operations
primarily by the private sale of our equity securities, through which we
raised approximately $45.0 million. In July 1999, we completed the initial
public offering of our common stock and realized net proceeds from the
offering of approximately $117.4 million. As of December 31, 1999, our
principal sources of liquidity included approximately $103.1 million of cash,
cash equivalents and short-term investments and $4.1 million in equipment
financing arrangements.
Net cash used in operating activities totaled $41.3 million and $6.8
million for the year ended December 31, 1999 and 1998, respectively. The net
cash used in operating activities during these periods was primarily due to
our net losses, which were partially offset by non-cash charges of
depreciation and amortization of deferred compensation, amortization of
intangible assets, and increases in accounts payable, accrued expenses and
accrued compensation.
Net cash used in investing activities totaled $90.5 million for 1999. We
had cash purchases of $9.3 million of computer equipment, computer software,
office furniture and leasehold improvements during 1999. In addition, during
1999 we had net purchases of $81.2 million of short-term investments. Net cash
used in investing activities for 1998 was $1.6 million and primarily related
to purchases of computer equipment, and office furniture.
Net cash provided by financing activities was $147.7 million for 1999 and
$13.0 million for 1998. Net cash from financing activities during 1998
resulted primarily from the sale of preferred stock. Net cash provided by
financing activities during 1999 resulted primarily from the sale of preferred
stock and proceeds from our initial public offering.
We currently anticipate that cash, cash equivalents and short-term
investments at December 31, 1999, together with our equipment lease lines,
will be sufficient to meet our anticipated cash needs for working capital and
capital expenditures for at least the next 12 months. However, we may need to
raise additional funds in future periods through public or private financing,
or other arrangements to fund our operations and potential acquisitions, if
any, over a long-term basis until we achieve profitability, if ever. Any
additional financing, if needed, might not be available on reasonable terms or
at all. Failure to raise capital when needed could seriously harm our business
and results of operations. If additional funds are raised through the issuance
of equity securities, the percentage of ownership of our stockholders would be
reduced. Furthermore, these equity securities might have rights, preferences
or privileges senior to our common stock.
Year 2000
To date, we have not experienced any year 2000 related problems with our
internally developed software or our third-party supplied software and
computer systems, and we are not aware of any failure of our systems or of our
third-party suppliers to be year 2000 compliant that could impact our business
or operations.
30
Recent Accounting Pronouncements
In June 1998, the FASB issued FAS 133, Accounting for Derivative
Instruments and Hedging Activities, which we will be required to adopt for the
year ending December 31, 2001. This statement establishes a new model for
accounting for derivatives and hedging activities. FAS 133 establishes methods
of accounting for derivative financial instruments and hedging activities
related to those instruments as well as other hedging activities. Because we
currently hold no derivative financial instruments and do not currently engage
in hedging activities, adoption of FAS 133 is expected to have no material
impact on our financial condition or results of operations.
Based on generally accepted accounting principles, we include in our net
revenues the gross revenues from sales of products and related shipping fees,
net of discounts and provisions for sales returns and other allowances, as we
are acting as a principal in purchasing products from our suppliers and
reselling them to our customers. In December 1999, the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 101--Revenue Recognition in
Financial Statements, which summarizes the staff's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
In addition, the Emerging Issues Task Force may prepare new guidance in this
area. If any guidance is proposed and subsequently implemented, these
initiatives may limit the ability of Internet businesses to include in
revenues the gross value of product sales between buyers and sellers. We
cannot predict at this time whether any initiatives will be proposed or
adopted or whether they will require us to change our method of recognizing
revenues for financial reporting purposes. If we are required to change our
accounting policies, we may in the future report substantially lower revenues,
and we may be required to restate the results from earlier periods. This could
cause the market price of our common stock to fall significantly.
Special Investment Considerations
An investment in our securities involves significant risks, including those
described below. These risks relate to our business model, our need to manage
rapid growth, our financial results and low gross margins, possible changes in
accounting rules, our level of debt and credit risk, the need to respond to
rapid technological change, possible exposure to product liability claims and
our need to continuously raise new capital expand.
Our actual results may differ materially from those expressed in any
forward-looking statement as a result of certain factors, including but not
limited to those set forth under and included in other portions of the
document.
Our business model is not proven and may not be successful
Our business-to-business e-commerce model is based on our expansion into a
number of vertical marketplaces. This business model is new and not proven and
depends upon our ability, among other things, to:
. sell our purchasing solution to pharmaceutical and biotechnology
companies, hospitals and other healthcare providers and academic and
research institutions;
. achieve high rates of adoption by users within life sciences and
healthcare customers;
. successfully identify and enter attractive vertical markets;
. maintain our current suppliers and enter into agreements with additional
suppliers;
. leverage our operational and technical expertise and our electronic
commerce platform;
. rapidly scale our operations;
. generate significant revenues from our vertical marketplaces; and
. obtain higher website traffic and transaction volumes and increase our
productivity.
We cannot be certain that our business model will be successful or that we
can achieve or sustain revenue growth or generate any profits. The success of
this business model will require, among other things, that we develop and
market solutions that achieve broad market acceptance by our customers,
suppliers, users and
31
strategic partners. We cannot be certain that business-to-business electronic
commerce generally, or our purchasing and product information solution,
services and brand in particular, will achieve broad market acceptance. For
example, purchasers may continue obtaining product information and purchasing
products through their existing methods and may not adopt an Internet-based
purchasing solution because of their comfort with existing information
gathering and purchasing habits and direct supplier relationships, the costs
and resources required to switch purchasing methods, the need for products and
product information not offered through our vertical marketplaces, security
and privacy concerns, general reticence about technology or the Internet or
the failure of the market to develop the necessary infrastructure for
Internet-based communications, such as wide-spread Internet access, high-speed
modems, high-speed communication lines and computer availability.
We have focused on the life sciences industry and our efforts to expand to
other industries may not succeed
To date, we have focused our business on providing an online marketplace
for the life sciences industry and our primary offering has been the Chemdex
Marketplace. However, we intend to develop marketplaces for other vertical
markets, including the healthcare industry, through Promedix and Broadlane, as
well as to the fluid processing industry, through Industria Solutions.
Businesses may be less likely to use our marketplaces in industries outside of
the life sciences industry. Even if they do, we may need to develop additional
expertise or industry-specific knowledge which we may not be able to do in a
timely manner. Therefore, we may not succeed in establishing successful
marketplaces for industries outside of the life sciences industry. We may also
experience difficulties that could delay or prevent the successful
development, introduction or marketing of new or enhanced marketplaces for
other industries in the future. In addition, those marketplaces may not meet
the requirements of the particular vertical market and therefore, may not
achieve market acceptance.
We will need to manage our growth, and to a certain extent the growth of
our joint ventures, and may also need to manage additional integration
challenges
Since inception, we have experienced expansion of our operations that has
placed significant demands on our administrative, operational and financial
resources. We expect the demands on our resources to intensify as a result of
our recent acquisitions and joint ventures and our strategy to pursue
additional acquisitions and joint ventures in the future. As of February 15,
2000, we had grown to 354 employees. We are seeking to hire a significant
number of new employees to support our business.
To manage future growth, we must improve our financial and management
controls, reporting systems and procedures on a timely basis and expand, train
and manage our work force. We cannot assure you that we will be able to
perform these actions successfully. We intend to continue to invest in
improving our financial systems and controls in connection with higher levels
of operations. Managing acquired businesses and joint ventures entails
numerous operational and financial risks, including difficulties in
assimilating acquired operations, diversion of management's attention to other
business concerns, amortization of acquired intangible assets and potential
loss of key employees or customers of acquired operations. We cannot assure
you that we will be able to effectively achieve growth, or manage any growth,
and failure to do so could seriously harm our operating results.
We have a history of losses and anticipate continued losses for the
foreseeable future
We, as well as our recently acquired companies, have had substantial losses
since inception. We incurred net losses of approximately $48.6 million in
1999, Promedix incurred net losses of approximately $16.2 million in 1999 and
SpecialtyMD incurred net losses of approximately $4.3 million in 1999. We
expect our losses to increase in the future and we cannot assure you that we
will ever achieve or sustain profitability. The extent of these losses in the
future will be contingent, in part, on our gross margins and the amount of
growth in our revenue. The extent of these losses in the future will also be
contingent, in part, on the amount of growth in our operating expenses, which
we plan to increase as we continue to enter new vertical markets. As of
December 31, 1999, we had an accumulated deficit of approximately $57.5
million. If our revenues fail to grow at anticipated rates, our gross margins
decline or operating expenses increase without a commensurate increase in
revenues, or
32
we fail to adjust operating expense levels accordingly, the imbalance between
revenues, cost of revenues and operating expenses will negatively affect our
business, revenues, results of operations and financial condition. Our
historical financial information is of limited value in projecting future
operating results because of the lack of our operating history as a combined
organization and the emerging nature of our markets.
To date, we have derived revenues primarily from product sales through our
Chemdex Marketplace. Promedix has had minimal revenues, and neither Industria
Solutions nor Broadlane has had any revenues. In order to increase our
revenues, we must, among other things:
. attract new enterprise customers to and retain existing enterprise
customers in each of our vertical marketplaces;
. encourage users employed by our enterprise customers to adopt our
Internet-based purchasing solution and to use it frequently;
. increase the breadth of our product offering by adding and maintaining
supplier and content partner relationships; and
. develop new sources of revenues and expand into other vertical markets
beyond our existing revenue sources and vertical markets.
If we are unable to accomplish one or more of these objectives, our
revenues may not grow and our business, revenues, financial condition and
results of operations will be negatively affected. We may not be able to build
on our current sources of revenues by adding additional products or services
or expanding into additional vertical markets. Even if we do add additional
products or services or expand into additional vertical markets, there are
economic, legal, regulatory and other risks associated with adding these new
revenue sources. For example, we may post advertisements on our website to
generate advertising revenue. However, our supplier relationships may be
harmed if our suppliers associate advertisements posted on our website with a
bias in our offering of life sciences research products or specialty
healthcare products.
Our gross margins are low and we will have to increase productivity in our
business to be profitable
Our gross margin for 1999 was approximately 5.0%. We negotiate the price
discounts we receive from our suppliers, and thus we are vulnerable to any
decrease in these discount rates. Any decrease would have a significant
negative impact on our financial results. Our gross margins on sales of life
sciences research products are small relative to the margins earned by
traditional distributors of life sciences research products. We expect that
our gross margins in our other vertical marketplaces will be similar to those
in the Chemdex Marketplace. If we do not increase the discounts that we
negotiate from suppliers, substantially increase our revenues and scale our
business in a manner that generates increased productivity, including further
automation of our purchasing solution, we may never achieve profitability.
In addition, due to our low gross margins, unexpected costs or expenses we
incur would substantially affect our ability to achieve or maintain operating
profits. For example, we generally bear the risks of the loss of products upon
shipment by our suppliers to our customers, of product returns and refunds to
our customers and of non-collection of accounts receivable. Although we
maintain insurance for claims for damages to our customers or others caused by
our products, we do not have insurance coverage for product returns or
uncollectible accounts receivable or have adequate insurance coverage for the
costs of products lost during shipment.
New accounting rules could be proposed that might require us to report
substantially lower revenues
Based on generally accepted accounting principles, we include in our net
revenues the gross revenues from sales of products and related shipping fees,
net of discounts and provisions for sales returns and other allowances as we
are acting as a principal in purchasing products from our suppliers and
reselling them to our customers. In December 1999, the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 101--Revenue Recognition in
Financial Statements, which summarizes the staff's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
In addition, the Emerging Issues Task Force
33
may prepare new guidance in this area. If any guidance is proposed and
subsequently implemented, these initiatives may limit the ability of Internet
businesses to include in revenues the gross value of product sales between
buyers and sellers. We cannot predict at this time whether any initiatives
will be proposed or adopted or whether they will require us to change our
method of recognizing revenues for financial reporting purposes. If we are
required to change our accounting policies, we may in the future report
substantially lower revenues, and we may be required to restate the results
from earlier periods. This could cause the market price of our common stock to
fall significantly.
Significant credit card fraud could harm our net revenues
If we are unable to adequately prevent or detect fraudulent credit card
transactions, our net sales results of operations would be harmed. Under
current credit card practices, we are liable for fraudulent credit card
transactions because we do not obtain a cardholder's signature.
Our solution and services are new and face rapid technological changes and
if we do not respond appropriately, we may lose customers
The markets for our solution are characterized by rapid technological
advances, evolving standards in the Internet and software markets, changes in
customer requirements and frequent new product and service introductions and
enhancements. As a result, our future success depends upon our ability to
enhance our current Internet-based purchasing solution and services, to
develop and introduce new solutions and services that will achieve market
acceptance and, where necessary to integrate our Internet-based purchasing
solution with our customers' enterprise resource planning systems. If we do
not adequately respond to the need to develop and introduce new solutions or
services, or to integrate with our customers' enterprise resource planning
systems, then our business, revenues, results of operations and financial
condition will be negatively affected. For example, we may lose market share
and ultimately revenue as our customers switch to our competitors' offerings
if:
. we are unable to develop technology that is a success in a particular
marketplace;
. our technology does not integrate with our customers' and suppliers'
systems; and
. our technology is surpassed by the superior technology of a competitor.
Further, we may incur significant expense to integrate our purchasing
solution with our customers' enterprise resource planning systems and business
rules, and to maintain this integration as our customers' enterprise resource
planning systems evolve. Failure to provide this integration may delay or
altogether dissuade the market or a particular customer from adopting our
Internet-based purchasing solution, which could negatively affect our revenues
and therefore have a material adverse effect on our business, results of
operations and financial condition.
We must devote significant resources toward attracting users in order to
grow our business
Recognition and positive perception of the Chemdex and Promedix brand names
in the life sciences and specialty medical products industries and the Ventro
brand name in general are important to our success. We have only recently
changed our name to Ventro and begun pursuing our vertical market strategy. We
intend to significantly expand our advertising and publicity efforts in the
near future. However, we may not achieve our desired goal of increasing the
awareness of our brand names. Even if recognition of our brand names
increases, it may not lead to an increase in the number of visitors to our
online marketplaces or increase the number of users of our services. In
addition, as part of our brand building efforts, we intend to undertake a
number of promotional programs that will result in increased marketing expense
and these programs may not be successful.
We may be exposed to product liability claims
We face potential liability for claims based on the type and adequacy of
the information and data that we obtain from suppliers and make available, and
the nature of the products that we sell and distribute utilizing the Internet,
including claims for breach of warranty, product liability, misrepresentation,
violation of governmental
34
regulations, defamation, libel, slander or publishing otherwise inaccurate,
biased, incomplete or misleading information, or information that invades or
violates privacy, confidentiality, patents, copyrights or other rights, and
other commercial and tortious claims. We also bear the risk of liability for
product loss, spill or release, and resulting damages to persons and property
during delivery by the supplier to the customer and return by the customer to
the supplier. We do not pass through the manufacturers' warranties on the
products we distribute. However, we bear the risk of loss of revenue from the
product sale if a purchaser does not pay for a defective product. We also bear
some risk if our suppliers have not obtained appropriate approvals for
products regulated by the FDA and other governmental agencies, or do not
comply with the requirements relating to those products or approvals. The
failure to obtain or comply with those requirements or approvals, or other
failures by these products themselves, could result in costly product recalls,
significant fines and judgments, civil and criminal liabilities and negative
publicity. Although we maintain general liability insurance, our insurance may
not cover some claims, penalties or spills, is subject to policy limits and
exclusions and may not be adequate to fully indemnify us or our employees for
any civil, governmental or criminal liability that may be imposed.
Furthermore, this insurance may not be available at commercially reasonable
rates in the future. Any liability not covered by our insurance or in excess
of our insurance coverage could have a negative effect on our business,
results of operations and financial condition. Our liability is potentially
greater with respect to sales to users and others that are not affiliated with
an enterprise customer.
Because we facilitate the sale of many different life sciences and
specialty medical products by suppliers, and publish information about medical
products and procedures, we may become subject to legal proceedings regarding
defects in these products or the information provided. In addition, we take
title to certain products between the period of time after the supplier has
delivered the product but before the product has been accepted by the
customer. Any claims, with or without merit, could be time-consuming to
defend, result in costly litigation, or divert management's attention and
resources and result in significant liability.
We also seek to rely upon our suppliers, pass on all regulatory
responsibilities and obtain indemnification from our suppliers against some of
these claims. However, the transfer of liabilities and indemnification may be
inadequate, unclear or incomplete, the scope of the indemnification is
limited, a few of our suppliers have not agreed to indemnify us and some
suppliers may be unable or unwilling to indemnify us in the future. In
addition, we are not in a position to monitor our suppliers' activities or the
accuracy of the information they provide to us. Therefore, we are exposed to
liability and risk for these claims.
We may require additional capital for our operations, which could have a
negative effect on your investment
We currently anticipate that our existing borrowing arrangements and
available funds will be sufficient to meet our anticipated needs for working
capital and capital expenditures for at least the next 12 months. However, we
may need to raise additional funds in the future in order to fund rapid
expansion, to pursue customer sales and implementation, to develop new or
enhanced solutions and services, to respond to competitive pressures or to
acquire complementary businesses, technologies or services. Our joint
ventures, in particular, may require us to raise additional funds because we
may be responsible, at our own expense, for building and growing the
infrastructure that will be required to support the joint ventures.
If we raise additional funds through the issuance of equity or convertible
debt securities, the percentage ownership of our stockholders will be reduced,
stockholders may experience additional dilution and these securities may have
powers, preferences and rights that are senior to those of the rights of our
common stock. We cannot be certain that additional financing will be available
on terms favorable to us, if at all. If adequate funds are not available or
not available on acceptable terms, we may be unable to fund our expansion,
promote our brand identity, take advantage of unanticipated acquisition
opportunities, develop or enhance services or respond to competitive
pressures. Any inability to do so could have a negative effect on our
business, revenues, financial condition and results of operations.
35
System failure may cause interruption of our services
The performance of our server and networking hardware and software
infrastructure is critical to our business and reputation and our ability to
process transactions, provide high quality customer service and attract and
retain customers, suppliers, users and strategic partners. Currently our
infrastructure and systems are located at one site at Exodus Communications in
Sunnyvale, California. We anticipate adding a mirror site at a different,
distant location. Until then, we depend on our single-site infrastructure and
any disruption to this infrastructure resulting from a natural disaster or
other event could result in an interruption in our service, fewer transactions
and, if sustained or repeated, could impair our reputation and the
attractiveness of our services.
Our systems and operations are vulnerable to damage or interruption from
human error, natural disasters, power loss, telecommunications failures,
break-ins, sabotage, computer viruses, intentional acts of vandalism and
similar events. We do not have a formal disaster recovery plan or alternative
provider of hosting services. In addition, we do not carry sufficient business
interruption insurance to compensate us for losses that could occur. Any
failure on our part to expand our system or Internet infrastructure to keep up
with the demands of our customers and users, or any system failure that causes
an interruption in service or a decrease in responsiveness of our Internet-
based purchasing solution or website, could result in fewer transactions and,
if sustained or repeated, could impair our reputation and the attractiveness
of our brand names, which would harm our business, revenues, financial
condition and results of operations.
Regulation or taxation of the Internet or transacting business over the
Internet may inhibit the growth of our Internet-based purchasing solution
Due to the increasing popularity and use of the Internet and of e-commerce,
it is possible that a number of taxes, laws and regulations may be adopted in
the U.S. and abroad with particular applicability to the Internet and e-
commerce transactions. It is possible that governments will adopt taxes and
enact legislation that may be applicable to us in areas such as content,
product distribution, network security, encryption and the use of key escrow,
data and privacy protection, electronic authentication or "digital"
signatures, illegal and harmful content, access charges and re-transmission
activities. Moreover, the applicability to the Internet of existing laws
governing issues such as property ownership, content, taxation, defamation and
personal privacy is uncertain. Taxes, laws or regulations may limit the growth
of the Internet, dampen e-commerce and reduce the number of transactions,
increase our cost of doing business or increase our legal exposure. Any of
these factors could have a negative effect on our business, revenues, results
of operations and financial condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Disclosures
The following discussion about the Company's market risk disclosures
involves forward-looking statements. Actual results could differ materially
from those projected in the forward-looking statements. The Company is exposed
to market risk related to changes in interest rates. The Company does not have
derivative financial instruments for speculative or trading purposes.
Interest Rate Sensitivity
The Company maintains a short-term investment portfolio consisting of
mainly income securities with maturities of less than one year. These
available-for-sale securities are subject to interest rate risk and will fall
in value if market interest rates increase. We place our investments in
instruments that meet high credit quality standards, as specified in our
investment policy. We do not expect any material loss with respect to our
investment portfolio.
Foreign Currency Risk
Our sales from inception to date have been made to U.S. Customers and, as a
result, we have not had any exposure to factors such as changes in foreign
currency exchange rates or weak economic conditions in foreign markets.
However, in future periods, we expect to sell in foreign markets. As our sales
are made in U.S. dollars, a strengthening of the U.S. dollar could make our
products less competitive in foreign markets.
36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index To Financial Statements and Schedule
The following financial statements of Ventro Corporation are filed as part
of this Report on Form 10-K:
Page
----
Ventro Corporation Consolidated Financial Statements:
Independent Auditors' Report............................................. 38
Consolidated Balance Sheets at December 31, 1999 and 1998................ 39
Consolidated Statements of Operations for fiscal years ended December 31,
1999, 1998 and period from inception (September 4, 1997) through
December 31, 1997....................................................... 40
Consolidated Statements of Stockholders' Equity for fiscal years ended
December 31, 1999, 1998 and period from inception (September 4, 1997)
through December 31, 1997 .............................................. 41
Consolidated Statements of Cash Flows for fiscal years ended December 31,
1999, 1998 and period from inception (September 4, 1997) through
December 31, 1997....................................................... 42
Notes to Consolidated Financial Statements............................... 43
Financial Statement Schedules:
Valuation and Qualifying Accounts........................................ 57
37
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Ventro Corporation
We have audited the accompanying consolidated balance sheets of Ventro
Corporation (formerly "Chemdex Corporation") as of December 31, 1999 and 1998,
and the related consolidated statements of operations, stockholders' equity,
and cash flows for the years ended December 31, 1999 and 1998 and for the
period from inception (September 4, 1997) through December 31, 1997. Our
audits also included the financial schedule listed in Item 14(a). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Ventro
Corporation at December 31, 1999 and 1998, and the results of its operations
and its cash flows for the years ended December 31, 1999 and 1998 and for the
period from inception (September 4, 1997) through December 31, 1997, in
conformity with accounting principles generally accepted in the United States.
Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ Ernst & Young
LLP
San Jose, California
February 7, 2000, except for
Note 18, as to which the date is
February 10, 2000 and
Note 19, as to which the date is March 6, 2000
38
VENTRO CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
December 31,
-----------------
1999 1998
-------- -------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 21,934 $ 5,990
Short-term investments.................................... 81,161 --
Accounts receivable, net of allowances for doubtful
accounts of $664 and $2 in 1999 and 1998, respectively... 12,414 32
Other current assets...................................... 5,041 287
-------- -------
Total current assets.................................... 120,550 6,309
Property and equipment, net................................. 10,264 1,558
Intangible and other assets, net............................ 33,119 301
-------- -------
Total assets............................................ $163,933 $ 8,168
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 8,373 $ 543
Accrued compensation...................................... 3,958 512
Accrued expenses.......................................... 25,720 760
Current obligations under capital lease................... -- 5
Current portion of notes payable.......................... 369 --
-------- -------
Total current liabilities............................... 38,420 1,820
Notes payable, less current portion......................... 494 --
Commitments and contingencies
Stockholders' equity:
Preferred stock, 2,500 authorized; none outstanding....... -- --
Convertible preferred stock, $.0002 par value; 34,075
shares authorized; none and 11,446 shares issued and
outstanding as of December 31, 1999 and 1998............. -- 2
Common stock, $.0002 par value; 175,000 shares authorized;
32,763 and 3,922 shares issued and outstanding as of
December 31, 1999 and 1998............................... 7 1
Additional paid-in capital................................ 189,842 18,379
Deferred compensation..................................... (6,380) (2,992)
Notes receivable from stockholders........................ (985) (150)
Accumulated deficit....................................... (57,465) (8,892)
-------- -------
Total stockholders' equity.............................. 125,019 6,348
-------- -------
Total liabilities and stockholders' equity............ $163,933 $ 8,168
======== =======
See accompanying notes to the financial statements.
39
VENTRO CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Period from
Inception
(September 4,
December 31, 1997) through
----------------- December 31,
1999 1998 1997
-------- ------- -------------
Net revenues.................................. $ 30,840 $ 29 $ --
Cost of revenues.............................. 29,306 22 --
-------- ------- ------
Gross profit................................ 1,534 7 --
Operating expenses:
Research and development(1)................. 17,734 3,439 197
Sales and marketing(2)...................... 23,024 3,247 86
General and administrative(3)............... 10,352 1,745 121
Amortization of deferred stock based
compensation............................... 1,992 372 --
-------- ------- ------
Total operating expenses.................. 53,102 8,803 404
-------- ------- ------
Operating loss................................ (51,568) (8,796) (404)
Interest expense.............................. (168) (2) --
Interest income and other, net................ 3,163 310 --
-------- ------- ------
Net loss...................................... $(48,573) $(8,488) $ (404)
======== ======= ======
Basic and diluted net loss per share.......... $ (3.17) $ (4.79) $(0.24)
======== ======= ======
Weighted average shares of common stock used
in computing basic and diluted net loss per
share........................................ 15,322 1,772 1,704
======== ======= ======
- --------
(1) Excluding $737 and $138 in amortization of deferred stock based
compensation in 1999 and 1998, respectively.
(2) Excluding $916 and $171 in amortization of deferred stock based
compensation in 1999 and 1998, respectively.
(3) Excluding $339 and $63 in amortization of deferred stock based compensation
in 1999 and 1998, respectively.
See accompanying notes to the financial statements.
40
VENTRO CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except per share data)
Convertible
Preferred
Stock Common Stock Additional Total
--------------- ------------- Paid-In Deferred Notes Accumulated Stockholders'
Shares Amount Shares Amount Capital Compensation Receivable Deficit Equity
------- ------ ------ ------ ---------- ------------ ---------- ----------- -------------
Issuance of Series A
preferred stock at
$0.6994 per share, net
of issuance costs...... 2,696 $ 1 -- $ -- $ 1,850 $ -- $ -- $ -- $ 1,851
Issuance of common stock
to founders on
incorporation.......... -- -- 2,570 1 -- -- -- -- 1
Net loss................ -- -- -- -- -- -- -- (404) (404)
------- ---- ------ ---- -------- ------- ----- -------- --------
Balance at December 31,
1997................... 2,696 1 2,570 1 1,850 -- -- (404) 1,448
Issuance of Series A
preferred stock at
$0.6994 per share, net
of issuance costs...... 100 -- -- -- 45 -- -- -- 45
Issuance of Series B
preferred stock at
$1.50 per share, net of
issuance costs......... 8,650 1 -- -- 12,929 -- -- -- 12,930
Exercise of stock
options, net of
repurchases............ -- -- 1,352 -- 191 -- (150) -- 41
Deferred compensation
relating to stock
options................ -- -- -- -- 3,364 (3,364) -- -- --
Amortization of deferred
compensation relating
to stock options....... -- -- -- -- -- 372 -- -- 372
Net loss................ -- -- -- -- -- -- -- (8,488) (8,488)
------- ---- ------ ---- -------- ------- ----- -------- --------
Balance at December 31,
1998................... 11,446 2 3,922 1 18,379 (2,992) (150) (8,892) 6,348
Issuance of Series C
preferred stock at
$5.716 per share, net
of issuance costs...... 5,300 1 -- -- 30,197 -- -- -- 30,198
Conversion of preferred
shares into common
stock upon Initial
Public Offering........ (16,746) (3) 16,746 3 -- ---- -- -- --
Issuance of shares upon
Initial Public
Offering, net of
issuance costs......... -- -- 8,625 2 117,403 -- -- -- 117,405
Issuance of common
stock.................. -- -- 2,726 1 15,691 -- -- -- 15,692
Exercise of stock
options, net of
repurchases............ -- -- 744 -- 1,856 -- (844) -- 1,012
Deferred compensation
relating to stock
options................ -- -- -- -- 5,380 (5,380) -- -- --
Amortization of deferred
compensation........... -- -- -- -- -- 1,992 -- -- 1,992
Issuance of warrants.... -- -- -- -- 936 -- -- -- 936
Payment on notes
receivable............. -- -- -- -- -- -- 9 -- 9
Net loss................ -- -- -- -- -- -- -- (48,573) (48,573)
------- ---- ------ ---- -------- ------- ----- -------- --------
Balance at December 31,
1999................... -- $ -- 32,763 $ 7 $189,842 $(6,380) $(985) $(57,465) $125,019
======= ==== ====== ==== ======== ======= ===== ======== ========
See accompanying notes to financial statements.
41
VENTRO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Period from
Inception
Year Ended (September 4,
December 31, 1997) through
------------------ December 31,
1999 1998 1997
--------- ------- -------------
Operating activities:
Net loss..................................... $ (48,573) $(8,488) $ (404)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization............... 1,749 301 7
Amortization of deferred compensation and
fair value of warrants..................... 4,884 372 --
Loss on disposition of property and
equipment.................................. -- 8 --
Issuance of common stock for services....... 637 -- --
Changes in operating assets and liabilities:
Accounts receivable........................ (12,382) (32) --
Other current assets....................... (4,124) (244) (43)
Other assets............................... (19,712) (240) (67)
Accounts payable........................... 7,830 361 182
Accrued compensation....................... 3,446 480 32
Accrued expenses........................... 24,960 706 54
--------- ------- ------
Net cash used in operating activities...... (41,285) (6,776) (239)
--------- ------- ------
Investing activities:
Sales of short-term investments.............. 20,410 6,593 --
Purchases of short-term investments.......... (101,571) (6,593) --
Purchases of property and equipment.......... (9,323) (1,614) (256)
Proceeds on sale of property and equipment... -- 25 --
Purchase of other assets..................... -- -- (10)
--------- ------- ------
Net cash used in investing activities...... (90,484) (1,589) (266)
--------- ------- ------
Financing activities:
Principal payments on capital lease
obligations................................. (5) (7) (1)
Principal payments on notes payable.......... (269) -- --
Net proceeds from issuance of preferred
stock....................................... 30,198 12,975 1,851
Issuance of common stock..................... 117,405 41 1
Payments of stockholders' notes receivable... 9 -- --
Proceeds from exercise of options............ 375 -- --
--------- ------- ------
Net cash provided by financing activities.. 147,713 13,009 1,851
--------- ------- ------
Net increase in cash and cash equivalents.... 15,944 4,644 1,346
Cash and cash equivalents at beginning of
period...................................... 5,990 1,346 --
--------- ------- ------
Cash and cash equivalents at end of period... $ 21,934 $ 5,990 $1,346
========= ======= ======
Supplemental disclosures of noncash
activities:
Issuance of shares in exchange for
stockholders' notes receivable, net......... $ 844 $ 150 $ --
========= ======= ======
Equipment purchased under capital lease or
note payable................................ $ 1,132 $ -- $ 13
========= ======= ======
Issuance of common stock for intangible
assets...................................... $ 15,692 $ -- $ --
========= ======= ======
Issuance of warrants......................... $ 936 $ -- $ --
========= ======= ======
Supplemental disclosures of cash flow
information:
Cash paid for interest....................... $ 117 $ 3 $ --
========= ======= ======
Cash paid for taxes.......................... $ -- $ 2 $ --
========= ======= ======
See accompanying notes to financial statements.
42
VENTRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
1. Description of Business
Ventro Corporation ("the Company," "Ventro" or "we"), formerly known as
Chemdex Corporation, is a leading builder and operator of vertical marketplace
companies that transact with enterprises, buyers and suppliers to enable them
to streamline business processes, enhance productivity and reduce costs.
Ventro marketplace companies offer complete e-commerce solutions consisting of
extensive online marketplaces, electronic procurement, the systems integration
needed to interface with third party and back office systems, and
comprehensive services and support. Ventro was incorporated as Chemdex
Corporation in Delaware on September 4, 1997. Ventro was created in February
2000 to leverage the corporate assets originally developed in our Chemdex life
sciences business.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include all the accounts of the
Company and those of its wholly-owned subsidiaries. All significant inter-
company accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Revenue Recognition
Net revenues includes gross revenues from sales of products and related
shipping fees, net of discounts and provisions for sales returns and other
allowances. We generally refund all or a portion of the selling price,
including related shipping fees, if applicable, in the event the customer is
not satisfied with the product purchased Sales returns and allowances have not
been significant to date.
Ventro generally acts as a principal when we purchase products from
suppliers and resell them to customers. Our products are shipped directly to
customers using third party carriers. Under principal based agreements, we
obtain and validate a customers order, purchase the product from a
manufacturer or supplier at a negotiated price, arrange for shipment of
products, establish the total purchase price of our products and shipping
fees, collect payment from customers, ensure that products reach customers,
and process returns. In addition, we contractually take title to products upon
shipment and bear the risk of loss for collection, delivery and product
returns from customers.
To date, an insignificant amount of our revenue is derived from agreements
with supplies for which we act as an agent and simply facilitate a customer's
order. Under agency based agreements with suppliers and distributors, we
recognize a percentage share of revenues generated when products are shipped
to customers.
For 1999 sales to four significant customers accounted for approximately
27%, 13%, 12% and 11%, respectively. There were no sales to customers outside
the United States since inception through December 31, 1999.
Cash, Cash Equivalents and Investments
The Company considers all highly liquid investment securities with original
maturities of three months or less to be cash equivalents. Management
determines the appropriate classification of debt and equity securities at the
43
VENTRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
time of purchase and re-evaluates such designation as of each balance sheet
date. Marketable securities are classified as available-for-sale and are
carried at fair value with material unrealized gains and losses, if any,
included in stockholders' equity. Realized gains and losses on available-for-
sale securities are included in interest income.
Capitalized Software
The Company expenses costs related to the research and development of new
software products and enhancements to existing software products as incurred
until technological feasibility (in the form of a working model) of the
product has been established, at which time such costs are capitalized,
subject to expected recoverability. To date, Ventro has not capitalized any
development costs related to software products since the time period between
technological feasibility and general release of a product has not been
significant and related costs incurred during that time period have not been
material.
Internal Use Software
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued SOP 98-1, Accounting for Costs of Computer Software Developed
or Obtained for Internal Use, ("SOP 98-1"). SOP 98-1 is effective for
financial statements for years beginning after December 15, 1998. SOP 98-1
provides guidance over accounting for computer software developed or obtained
for internal use, including the requirements to capitalize specified costs and
amortization of these costs. The Company adopted SOP 98-1 on January 1, 1999.
Property and Equipment
Ventro records property and equipment at cost and calculates depreciation
using the straight-line method over estimated useful lives of three to five
years. Property under capital leases is depreciated over the lesser of the
useful lives of the assets or lease term.
Stock-Based Compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees," and complies with the
disclosure provisions of Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation." Under APB 25, compensation
expense is recognized over the vesting period based on the difference, if any,
on the date of grant between the deemed fair value for accounting purposes of
the Company's stock and the exercise price on the date of grant. The Company
accounts for stock issued to non-employees in accordance with the provisions
of SFAS No. 123 and Emerging Issues Task Force ("EITF") 96-18.
Advertising Costs
Advertising costs are charged to expense when incurred. Advertising expense
was $5,465,000 and $787,000 for the years ended December 31, 1999 and 1998,
respectively. No advertising expense was incurred for the period from
September 4, 1997 (inception) through December 31, 1997.
Accumulated Other Comprehensive Income
SFAS No. 130 Reporting Comprehensive Income, establishes standards of
reporting and display of comprehensive income and its components of net income
(loss) and "Other Comprehensive Income" in a full
44
VENTRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
set of general purpose financial statements. "Other Comprehensive Income"
refers to revenues, expenses, gains and losses that are not included in net
income (loss) but rather are recorded directly in stockholders' equity.
Comprehensive loss is the same as net loss.
Segment Information
During the year ended December 31, 1998 we adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("FAS 131"). FAS 131 changes the way companies report
selected segment information in annual financial statements and requires
companies to report selected segment information in interim financial reports
to stockholders.
Ventro operates solely in one operating segment, the development and
marketing of an online marketplace for the purchase and sale of products and,
therefore there is no impact to Ventro's financial statements of adopting FAS
131.
Net Loss Per Share
Net loss per share is presented in accordance with the requirements of
Statement of Financial Accounting Standards No. 128 "Earnings Per Share" (FAS
128) which requires dual presentation of basic earnings per share ("EPS") and
diluted EPS.
Basic earnings per share is computed using the weighted average number of
common shares outstanding during the period. Diluted earnings per share is
computed using the weighted average number of common shares and potentially
dilutive shares outstanding during the period. If Ventro had reported net
income, diluted earnings per share would have included the shares used in the
computation of basic net loss per share as well as an additional 2.1 million,
0.5 million and no common share equivalent related to the outstanding options
and warrants (determined using the treasury stock method) for the period ended
December 31, 1999 and 1998, and the period from inception (September 4, 1997)
through December 31, 1997, respectively. These options and warrants could
potentially dilute basic earnings per share in the future but have not been
included in the computation of diluted net loss per share as the impact would
have been antidilutive for the periods presented.
The following table presents the calculation of basic and diluted net loss
per common share as of December 31 (in thousands, except per share data):
1999 1998 1997
-------- ------- ------
Net loss............................................ $(48,573) $(8,488) $ (404)
======== ======= ======
Basic and diluted:
Weighted-average shares of common stock
outstanding...................................... 17,446 3,243 2,570
Less: weighted-average common shares subject to
repurchase....................................... (2,124) (1,471) (866)
-------- ------- ------
Weighted-average shares used in computing basic and
diluted net loss per common share.................. 15,322 1,772 1,704
======== ======= ======
Basic and diluted net loss per common share......... $ (3.17) $ (4.79) $(0.24)
======== ======= ======
Recent Accounting Pronouncement
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative financial instruments and
45
VENTRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
hedging activities related to those instruments, as well as other hedging
activities. Because the Company does not currently hold any derivative
instruments and does not engage in hedging activities, the Company expects the
adoption of SFAS No. 133 will not have a material impact on its financial
position, results of operations or cash flows. The Company will be required to
adopt SFAS No. 133 in 2001 in accordance with SFAS No. 137, which delayed the
required implementation of SFAS No. 133 for one year.
3. Concentration of Credit Risk and Other Risks
Financial instruments that potentially subject Ventro to credit risk
consist primarily of uninsured cash and cash equivalents. Cash and cash
equivalents are deposited with a federally insured commercial bank in the
United States.
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral. Ventro analyzes the need for reserves
for potential credit losses and records reserves when necessary. These losses
have been within management's expectations. To date, the Company has not had
significant write-offs of bad debt.
4. Investments
The following is a summary of available for sale securities as of December
31, 1999 (in thousands):
Commercial paper.................................................. $52,441
Corporate notes................................................... 28,720
-------
Total short-term investments.................................... $81,161
=======
5. Property and Equipment
Property and equipment consisted of the following as of December 31, (in
thousands):
1999 1998
------- ------
Computer equipment and purchased software................. $ 6,751 $1,042
Furniture and equipment................................... 951 299
Purchased software........................................ 2,746 456
Leased equipment and software............................. 1,145 13
Leasehold improvements.................................... 706 34
------- ------
12,299 1,844
Less accumulated depreciation and amortization............ (2,035) (286)
------- ------
$10,264 $1,558
======= ======
6. Intangible and Other Assets
Intangible and other assets were comprised of the following as of December
31, (in thousands):
1999 1998
------- ----
Deposits and other.......................................... $ 512 $301
VWR related intangible, net of accumulated amortization of
$2,318 in 1999............................................. 11,592 --
BIO related intangible, , net of accumulated amortization of
$267 in 1999............................................... 1,515 --
Notes receivable from Promedix and Specialty MD............. 5,000 --
Deferred acquisition costs.................................. 14,500 --
------- ----
Total intangible and other assets......................... $33,119 $301
======= ====
46
VENTRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
7. Accrued Expenses
Accrued expenses were comprised of the following as of December 31, (in
thousands):
1999 1998
------- ----
Accrued acquisition costs.................................... $14,500 $ --
Accrued marketing expenses................................... 2,630 200
Other accrued liabilities.................................... 8,590 560
------- ----
Total accrued expenses..................................... $25,720 $760
======= ====
8. Commitments and Contingencies
Ventro leases its office facilities under non-cancelable operating leases
expiring through 2005. Minimum annual operating lease commitments as of
December 31, 1999 are as follows (in thousands):
2000.............................................................. $ 4,607
2001.............................................................. 4,910
2002.............................................................. 5,048
2003.............................................................. 5,199
2004.............................................................. 4,123
Thereafter........................................................ 703
-------
Total minimum lease payments.................................... $24,590
=======
In November 1999, the Company entered in a new facilities sublease
agreement for its former headquarters. The sublease term commenced on December
1, 1999 and will end on December 31, 2003. Sublease receipts for the Company
will be received on an escalating basis with the total future minimum sublease
receipts amounting to approximately $4,580,000 over the lease term. The
sublease receipts are not included in the above table.
Rental expense for the years ended December 31, 1999 and 1998 and for the
period from inception through December 31, 1997, was $1,488,000, $343,000 and
$14,000, respectively.
In August 1999, the Company established three letters of credit to secure
our facility rental agreement with a lending company for $160,000, $625,000,
and $1,875,000. The $160,000 letter of credit expires on August 16, 2000. The
$625,000 and $1,875,000 letters of credit are automatically renewed each July
31 until they expire on July 31, 2004.
The Company was and continues to be involved in certain legal matters.
Although litigation is subject to inherent uncertainties and the ultimate
outcome of these proceedings cannot be determined at this time, management,
including internal counsel, does not believe that the ultimate outcome will
have a material adverse effect on Ventro's financial position or overall
trends in results of operations.
9. Financing Arrangements
In January 1999, Ventro entered into a $3,000,000 equipment lease line
agreement with a financial institution for a term of 48 months, with interest
imputed at 13.02% per year. At December 31, 1998 and 1999, Ventro had no
outstanding borrowings under the equipment lease line.
47
VENTRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
In February 1999, Ventro entered into a financing arrangement in the amount
of $1,132,000 for the purchase of certain computer software and related
support. This arrangement provides for 12 equal quarterly payments of the
financed amount commencing May 1, 1999, with interest imputed at 13.24% per
year.
As of December 31, 1999, aggregate future minimum payments under the one
financing agreement which has been drawn upon are (in thousands):
2000................................................................ $ 369
2001................................................................ 369
2002................................................................ 125
-----
Total Payments.................................................... 863
Less Current portion................................................ (369)
-----
Long-term portion................................................... $ 494
=====
10. Stockholders' Equity
Preferred Stock
The Board of Directors has the authority, within the limitations and
restrictions in the amended and restated certificate of incorporation, to
issue 2,500,000 shares of preferred stock in one or more series and to fix the
rights, preferences, privileges and restrictions thereof, including dividend
rights, dividend rates, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares
constituting any series or the designation of any series, without further vote
or action by the stockholders.
Warrants
In January 1999, in connection with an equipment lease line, Ventro issued
a fully vested warrant that entitles the holder to purchase 105,000 shares of
the Ventro's Series B preferred stock at an exercise price of $1.50 per share.
This warrant is exercisable through January 2006. The fair value of this
warrant, approximately $353,000 is being expensed as a cost of financing over
the four year period of the lease line. The fair value of this warrant was
calculated using the Black-Scholes option pricing model.
In March 1999, Ventro issued a fully vested, non-forfeitable warrant in
exchange for consulting services. The warrant entitles the holder to purchase
49,999 shares of Ventro's common stock at an exercise price of $5.20 per
share. This warrant is exercisable through July 27, 2001. The fair value of
this warrant, approximately $208,000, was expensed over the six month period
of the consulting agreement. The fair value of this warrant was calculated
using the Black-Scholes option pricing model.
In July 1999, the Company issued a fully-vested, non-forfeitable warrant
that entitles the holder to purchase 25,000 shares of Ventro's common stock at
an exercise price of $15.00 per share, in connection with a lease agreement.
This warrant is exercisable until July 2004. The fair value of this warrant,
approximately, $375,000, is being expensed over the term of the lease. The
fair value of this warrant was calculated using the Black-Scholes option
pricing model.
Common Stock
As of December 31, 1999 and 1998, 1,514,000 and 1,943,000 shares,
respectively, were subject to repurchase. The stock vests over a period of
four years.
48
VENTRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
On July 27, 1999 the Company completed an initial public offering in which
it sold 7,500,000 shares of common stock, at $15.00 per share. On August 17,
1999, the underwriters' exercised their over-allotment option to purchase an
additional 1,125,000 shares. The Company received $117.4 million in proceeds,
net of underwriting discounts, commissions and other offering costs. Upon the
closing of the offering, all of the Company's preferred stock, par value
$.0002 per share, automatically converted into an aggregate of 16,745,593
shares of Common Stock.
Stock Option Plans
1998 Stock Plan
General. Our 1998 Stock Plan provides for the granting of stock options and
stock purchase rights to eligible employees, officers, directors, including
non-employee directors, and consultants of Ventro. Stock options granted under
the 1998 Stock Plan may be either "incentive stock options" within the meaning
of Section 422 of the Internal Revenue Code of 1986, as amended, or non-
statutory stock options, which are options not intended to qualify as
incentive stock options. Stock purchase rights granted under the 1998 Stock
Plan allow a recipient to purchase shares of common stock directly from
Ventro. Incentive stock options may be granted to employees, officers and
employee directors of Ventro and nonstatutory stock options and stock purchase
rights may be granted to employees, officers, directors and consultants.
As of December 31, 1999, 2,693,000 shares of common stock were issuable
upon the exercise of outstanding options granted under the 1998 Stock Plan at
a weighted average exercise price of $17.30. For the fiscal year ended
December 31, 1999, 839,000 shares of common stock have been issued upon
exercise of options or pursuant to stock purchase rights at exercise or
purchase prices ranging between $1.50 and $66.50, net of repurchases, and
1,241,766 shares of common stock remained available for future issuance under
the 1998 Stock Plan. The 1998 Stock Plan was originally adopted by the Board
of Directors in January 1998 and approved by the stockholders in March 1998.
In May 1999 the Board of Directors authorized an automatic annual increase on
the first day of each of our fiscal years beginning in 2000, 2001, 2002, 2003,
and 2004 equal to the lesser of 1,250,000 shares, 3% of our outstanding common
stock on the last day of the preceding fiscal year or a lesser number
determined by our Board of Directors. Unless terminated earlier by our Board
of Directors, the 1998 Stock Plan will terminate in January 2008.
1999 Directors' Stock Plan
Our 1999 Directors' Stock Plan was adopted by the Board of Directors in May
1999 and was approved by the stockholders in July 1999. The directors' Plan
provides for the grant of nonstatutory stock options to non-employee directors
of Ventro.
The Directors' Plan provides that each person who is or becomes a non-
employee director of Ventro will be granted a non-statutory stock option to
purchase 12,500 shares of common stock on the later of the date on which the
optionee first becomes a non-employee director of Ventro or the effective date
of the registration statement for this offering. Thereafter, on the date of
Ventro's Annual Stockholders Meeting each year, each non-employee director of
Ventro will be granted an additional option to purchase 5,000 shares of common
stock if, on that date, he or she has served on Ventro's Board of Directors
for at least six months.
The Directors' Plan provides that each option granted under the directors'
Plan shall vest and become exercisable in full immediately upon grant of the
option. The exercise price of all stock options granted under the Directors'
Plan shall be equal to the fair market value of a share of Ventro's common
stock on the date of grant of the option. Options granted under the Directors'
Plan have a term of ten years.
49
VENTRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
The Board of Directors may amend or terminate the Directors' Plan;
provided, however, that none of these actions may not adversely affect any
outstanding option. The Company will obtain stockholder approval for any
amendment to the extent required by applicable law. If not terminated earlier,
the Directors' Plan will have a term of ten years.
As of December 31, 1999 100,000 shares of common stock were issuable upon
the exercise of outstanding options granted under the 1999 Stock Plan at a
weighted average exercise price of $20.19 per share. During 1999 25,000 shares
of common stock were exercised at a weighted average exercise price of $15.00
per share. As of December 31, 1999, 125,000 shares of common stock remained
available for future issuance under the 1999 Directors' Stock Plan.
1999 Employee Stock Purchase Plan
Ventro's 1999 Employee Stock Purchase Plan was adopted by the Board of
Directors in May 1999 and was approved by the stockholders in July 1999. A
total of 750,000 shares of common stock was initially reserved for issuance
under the purchase plan, as well as an automatic annual increase on the first
day of each of Ventro's fiscal years beginning in 2000, 2001, 2002, 2003 and
2004 equal to the lesser of 200,000 shares, or 1/2% of Ventro's outstanding
common stock on the last day of the immediately preceding fiscal year. No
shares have been issued under the 1999 Employee Stock Purchase Plan as of
December 31, 1999.
The Purchase Plan permits eligible employees to purchase common stock
through payroll deductions. Employees may end their participation in the
offering at any time during the offering period, and participation end
automatically on termination of employment. If not terminated earlier, the
Purchase Plan will have a term of 20 years.
Accounting for Stock-Based Compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees," and complies with the
disclosure provisions of Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation."
For purposes of the SFAS No. 123 disclosure, the fair value of all grants
made prior to the Company's initial public offering in July 1999, the fair
value of these options was determined using the minimum value method, which
assumes no volatility. The fair value for the options granted subsequent to
the Company's initial public offering was estimated at the date of grant using
a Black-Scholes option pricing model. The fair value of the Company's stock
based awards was estimated assuming no expected dividends and the following
weighted-average assumptions: expected life of four years, risk-free interest
rate of 6.66% and volatility of 1.0.
50
VENTRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
If SFAS No.123 were used to account for the Company's stock based
compensation programs, the pro forma net loss per share would be as follows
(in thousands, except per share data):
Period from
Inception
Years Ended (September 4,
December 31, 1997) through
----------------- December 31,
1999 1998 1997
-------- ------- -------------
Net loss:
As reported............................. $(48,573) $(8,488) $(404)
Pro forma............................... $(52,114) $(8,495) $(404)
Basic and diluted net loss per share:
As reported............................. $ (3.17) $ (.85) $ --
Pro forma............................... $ (3.40) $ (.85) $ --
Stock option activity for all our stock plans was as follows (in thousands,
except per share data):
Years Ended December 31,
-----------------------------------
1999 1998
----------------- -----------------
Weighted- Weighted-
average average
exercise exercise
Shares price Shares price
------ --------- ------ ---------
Outstanding at beginning of period.......... 509 --
Granted................................... 3,579 $14.28 1,979 $0.16
Exercised................................. (1,142) $ 1.40 (1,419) $0.12
Canceled.................................. (153) $ 6.40 (51) $0.12
------ ------
Outstanding at end of period................ 2,793 $17.40 509 $0.14
====== ======
Exercisable at end of period................ 119 509
====== ======
The following table summarizes information about stock options outstanding
as of December 31, 1999 (in thousands, except per share data):
Outstanding Exercisable
-------------------------------------- ----------------------
Weighted-
Average
Remaining Weighted- Weighted-
Range of Number Contractual Average Number Average
Exercise of Life Exercise of Exercise
Prices Shares (years) Price Shares Price
------------- ------ ----------- --------- ------ ---------
$ 1.50-5.00 925 9.24 $ 3.43 16 $ 2.13
$10.00 904 9.45 $10.00 3 $10.00
$15.00-33.875 736 9.75 $28.79 88 $15.00
$56.50 12 9.86 $56.50 12 $56.50
$66.50 216 9.92 $66.50 -- --
----- ---
2,793 9.50 $17.40 119 $17.47
===== ===
51
VENTRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
11. Deferred Stock-based Compensation
The Company recorded deferred compensation for options granted in fiscal
year ended December 31, 1998 and 1999, for the difference at the option grant
date between the exercise price and the fair value of the common stock
underlying the options in accordance with FASB Interpretation No. 28. As of
December 31, 1999 the Company had recorded aggregate deferred stock
compensation of $ 8.7 million. The deferred stock compensation is being
amortized over the vesting periods of the stock options. The Company
recognized a total of $ 2.0 million and $400,000 in stock compensation expense
during the year ended December 31, 1999 and 1998, respectively. The total
charges to be recognized in future periods from amortization of deferred stock
compensation as of December 31, 1999 are anticipated to be approximately (in
millions), $2.2, $2.2, $1.8 and $0.2, for 2000, 2001, 2002 and 2003,
respectively.
12. Employee Savings and Retirement Plan
Ventro has a 401(k) Plan that allows eligible employees to contribute up to
15% of their salary, subject to annual limits. Under the plan, eligible
employees may defer a portion of their pretax salaries but not more than
statutory limits. Ventro may make discretionary contributions to the plan
based on profitability as determined by the Board of Directors. Ventro did not
make any contributions to the plan during the years ended December 31, 1999
and 1998.
13. Income Taxes
The difference between the amount of income tax benefit recorded and the
amount of income tax benefit calculated using the federal statutory rate of
35% is due to net operating losses having a valuation allowance, due to past
operating results and uncertainties regarding Ventro's future results of
operations. Accordingly, there is no provision for income taxes for the years
ended December 31, 1999 and December 31, 1998 and for the period from
September 4, 1997 (inception) through December 31, 1997.
As of December 31, 1999, Ventro had federal and state net operating loss
carryforwards of approximately $54.0 million and $54.0 million, respectively.
Ventro also had federal and state research credit carryforwards of
approximately $0.7 million and $0.6 million, respectively. The net operating
loss and research credit carryforwards will expire at various dates beginning
in 2002 through 2019, if not utilized. The net operating loss carryforwards
differ from the accumulated deficit primarily as a result of certain reserves
and accruals not currently deductible for tax purposes. Utilization of the net
operating losses and credits may be subject to a substantial annual limitation
due to the ownership change limitations provided by the Internal Revenue Code
of 1986, as amended, and similar state provisions. The annual limitation may
result in the expiration of net operating losses and credits before
utilization. Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Ventro's deferred tax assets are as follows (in
thousands):
As of December
31,
-----------------
1999 1998
-------- -------
Deferred tax assets:
Net operating loss carryforwards...................... $ 21,500 $ 3,000
Research credit carryforwards......................... 1,100 200
Reserves and accruals................................. 300 300
-------- -------
Total deferred tax assets........................... 22,900 3,500
Valuation allowance..................................... (22,900) (3,500)
-------- -------
Net deferred tax assets............................. $ -- $ --
======== =======
52
VENTRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
Under FAS 109, Accounting for Income Taxes, deferred tax assets and
liabilities are determined based on differences between financial reporting
and tax bases of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse. Based upon the weight of available evidence, which includes Ventro's
historical operating performance, the reported net losses for the period from
inception through December 31, 1997 and for the years ended December 31, 1998
and December 31, 1999, and the uncertainties regarding Ventro's future results
of operations, a full valuation allowance has been provided against its net
deferred tax assets. It is not more likely than not that the deferred tax
assets will be realized. The valuation allowance increased by $19,400,000
during 1999 and $3,327,000 during 1998.
14. Agreement with VWR
In March 1999, Ventro entered into a strategic relationship agreement with
VWR, which was consummated in April 1999, pursuant to which Ventro and VWR
agreed to market jointly VWR laboratory products using the Chemdex
Marketplace. The term of the agreement is four years.
The agreement gives Ventro the right to offer approximately 350,000 VWR-
distributed products to Ventro customers and both parties agreed to jointly
develop an online purchasing solution for VWR's existing customers. In
connection with the strategic relationship agreement, VWR transferred to
Ventro information concerning VWR customers who purchased products from third
party suppliers outside VWR's primary product offering and Ventro issued
2,538,405 shares of common stock valued at $13.9 million to VWR. The Company
intends to use this information to expand sales of its purchasing solution to
these customers and facilitate adoption of the Chemdex Marketplace by these
customers and suppliers. The fair value of the common stock of $13.9 million
was allocated to the customer list and is being amortized into sales and
marketing expense over four years, the estimated useful life of the intangible
asset.
15. Agreement with Biotechnology Industry Organization ("BIO")
In May 1999, the Biotechnology Industry Organization selected Ventro as its
preferred supplier of e-commerce purchasing solutions. As a result, the
Company entered into a five-year, exclusive joint marketing agreement with
BIO. As part of the joint marketing agreement, Ventro will discount the fees
it charges to BIO members for its solution and will contribute cash payments
to a joint marketing fund, to be used in conjunction with both parties'
obligations under the joint marketing agreement. In addition, the Company sold
188,000 shares of its common stock to BIO for a nominal amount in
consideration for BIO's participation in these marketing activities. BIO has
the right to use a portion of the cash payments and any proceeds it receives
from the sale of the common stock for the benefit of its members and the
biotechnology industry. The charge for BIO marketing activities will be
expensed to sales and marketing as incurred. The Company recorded the
difference between the nominal amount per share price paid by BIO for the
purchase of our common stock and the fair value as of May 11, 1999, which is
approximately $1.8 million as an intangible asset, which is being amortized
ratably over the five-year term of the joint agreement.
16. Investment in Broadlane with Tenet Healthcare Corporation
On December 13, 1999, Ventro and Tenet Healthcare Corporation ("Tenet")
announced the formation of Broadlane, to provide business-to-business e-
commerce solutions to the healthcare industry. Broadlane is an independent
entity, with its own management team and board of directors. Tenet, through
its subsidiaries, owns and operates acute care hospitals and numerous related
health care services. In exchange for 76% ownership of Broadlane's capital
stock Tenet will provide Broadlane access to the benefits of its existing
buyer and supplier contracts of its BuyPower organization, which serves as a
group purchasing organization for Tenet's hospitals
53
VENTRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
and other members. In exchange for 24% ownership of Broadlane's capital stock,
Ventro will license its technology to Broadlane for use within the healthcare
industry and provide service and support functions at cost. As the licensed
technology has no recorded value on Ventro's financial statements, it
initially will have no recorded value on Broadlane's financial statements. In
addition, IBM has entered into a strategic alliance with Broadlane in which
IBM Global Services will provide implementation, integration and e-commerce
services to Broadlane's customers and suppliers.
Broadlane will offer its e-commerce technology to other group purchasing
organizations and their members to support their own proprietary contracts.
While Broadlane will initially focus on the hospital market, Broadlane
eventually plans to expand its e-commerce solution to the long-term care and
outpatient markets as well.
In December, 1999 Promedix.com ("Promedix") (see Note 18) and Tenet
Healthcare Corporation agreed to enter into an agreement whereby, Promedix
will be the exclusive provider to Tenet of e-commerce solutions for the
purchase of specialty medical products.
17. Related Party Transactions
VWR's former president and Chief Executive Officer is a director of the
Company. In addition, VWR owns 2,538,405 shares of common stock of the
Company. VWR and Ventro jointly market VWR core products and Ventro core
products to VWR's existing and new customers and jointly solicit several key
existing VWR suppliers. VWR currently performs some of the billing and cash
collection functions for the sale of jointly marketed products until these
functions can be transitioned to Ventro. With respect to sales of VWR core
products, Ventro act's as an intermediary and forward orders received through
the Chemdex Marketplace to VWR for fulfillment and customer service. The
Company receives no fee for orders for VWR core products from VWR's 40 largest
customers and the Company receives a minimal fee for all other orders for VWR
core products forwarded to VWR. Ventro is responsible for fulfillment and
customer service for all Ventro core product and orders for third party
products received from VWR customers through the Chemdex Marketplace. Under
the terms of the agreement, VWR provides support for the purchase of third
party products in return for a fee which approximates VWR's costs incurred. As
of December 31, 1999 the Company had accounts payable of $7.6 million owed to
VWR.
CMGI and/or its affiliates beneficially own 2,740,857 shares of Ventro
common stock, representing approximately 8.4% of the outstanding Ventro common
stock, and 3,997,000 shares of Promedix (see Note 18) preferred stock,
representing approximately 23.7% of the outstanding Promedix capital stock.
Following consummation of the merger with Promedix, CMGI and its affiliates
will beneficially own approximately 17.5% of the outstanding Ventro common
stock. Jonathon D. Callaghan is a general partner of CMG @ Ventures, a CMGI
affiliate, and is a member of both the Ventro board of directors and the
Promedix Board of Directors.
18. Business Combinations
Promedix
On September 22, 1999 the Company entered into a definitive agreement to
acquire Promedix, a provider of e-commerce solutions for healthcare purchasing
professionals. Promedix is a privately held Company based in Salt Lake City,
Utah. Promedix links buyers and suppliers of specialty medical products,
providing healthcare professionals with a one-stop shop for product research,
purchase and order fulfillment through relationships with distributors and
manufacturers. Under the terms of the agreement, Ventro issued 12.1 million
shares of its common stock for all of the outstanding preferred and common
stock of Promedix based on an exchange ratio of
54
VENTRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
1.2647 shares of Promedix for 1.0000 shares of Ventro. The transaction will be
accounted for as a purchase. The purchase was executed on February 10, 2000.
Under the transaction, Ventro recorded approximately $2.0 million for
assembled workforce, $1.9 million for customer relationships, $2.1 million for
supplier relationships, with the remaining $319.3 million of the purchase
price allocated to goodwill, net tangible and intangible assets. A valuation
specialist used the Company's management estimates to establish the amount of
assembled workforce, customer relationships, and supplier relationships
recorded. Intangible assets of $323.8 million will be amortized ratably over a
two to three year period.
SpecialtyMD
On December 10, 1999 the Company entered into a definitive agreement to
acquire SpecialtyMD, a provider of a range of comprehensive search and content
functions which will add an interactive component to Ventro's e-commerce
procurement solutions. Under the terms of the agreement, Ventro will issue 1.1
million shares of its common stock for all of the outstanding common stock of
SpecialtyMD based on an exchange ratio of 0.1033 shares of SpecialtyMD for
1.0000 shares of Ventro. The transaction will be accounted for as a purchase.
The purchase was executed on February 10, 2000. Under the transaction, Ventro
recorded approximately $0.9 million for assembled workforce, $2.7 million for
developed technology, $15.0 million related to non-compete agreements, with
the remaining $89.1 million of the purchase price allocated to goodwill, net
tangible and intangible assets. A valuation specialist used the Company's
management estimates to establish the amount of assembled workforce, developed
technology, and non-compete agreements recorded. Intangible assets of
$107.9 million will be amortized ratably over a two to three year period.
Pro Forma. The following unaudited pro forma results of operations for
fiscal 1999 are as if the acquisition of Promedix and SpecialtyMD had occurred
at the beginning of fiscal 1999. The pro forma information has been prepared
for comparative purposes only and is not indicative of what operating results
would have been if the acquisition had taken place at the beginning of fiscal
1999 or of future operating results.
1999
--------------
(In thousands,
except per
share data,
unaudited)
Net revenues............ $ 30,871
Loss from continuing
operations............. $(219,827)
Basic and diluted loss
per share from
continuing operations.. $ (10.96)
19. Subsequent events
Formation of Industria
On January 24, 2000, Ventro, DuPont, IBM and @ Ventures, the venture
capital arm of CMGI, Inc., announced the formation of Industria Solutions, Inc
(Industria)., a new business-to-business e-commerce company in the worldwide
fluid processing market. For a cash investment of $5.0 million, as well as the
contribution of technology, Ventro will own 49% of Industria. The investment
will be accounted for using the equity method.
Formation of Ventro
On February 22, 2000, Chemdex announced the formation of Ventro as a
leading builder and operator of business-to-business vertical marketplace
companies. Ventro became a publicly traded company that incorporated
55
VENTRO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
Chemdex, Promedix and SpecialtyMD's assets, with a new stock symbol, VNTR,
which became effective on March 1, 2000. Ventro was created to leverage the
corporate assets originally developed by Chemdex across multiple vertical
marketplaces.
Stock Option Plans
On February 10, 2000, the shareholders approved a 4,250,000 share increase
to the 1998 Employee Stock Plan and a 300,000 share increase to the 1999
Employee Stock Purchase Plan.
Filing of Form S-1
On March 6, 2000, Ventro filed a registration statement on Form S-1 (File
No. 333-31772) to register the offering of 1,370,000 shares of common stock
and the selling stockholders' offering of 455,000 shares of common stock.
Ventro has also granted the underwriters the right to purchase up to an
additional 273,750 shares to cover over-allotments. Concurrent with the equity
offering, Ventro is also offering convertible subordinated notes (File No.
333-31774) with an aggregate principal amount of $300.0 million. Ventro has
also granted the underwriters the right to purchase up to an additional $45.0
million principal amount of the notes to cover over-allotments. On March 14,
2000, both S-1 statements were amended.
56
VENTRO CORPORATION
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
for the years ended December 31, 1999, 1998 and the period from
inception(September 4, 1997) to December 31, 1997
(in thousands)
Amounts
Charged to
Balance at Revenue, Write-offs Balance
Beginning Costs or and at End
Description of Year Expenses Recoveries of Year
----------- ---------- ---------- ---------- -------
Allowance for Doubtful Accounts:
Year ended December 31, 1999...... $ 2 $ 663 $ 1 $ 664
Year ended December 31, 1998...... $ -- $ 2 $ -- $ 2
Period ended December 31, 1997.... $ -- $ -- $ -- $ --
Sales Returns Reserve:
Year ended December 31, 1999...... $ -- $3,055 $ 117 $2,938
Year ended December 31, 1998...... $ -- $ -- $ -- $ --
Period ended December 31, 1997.... $ -- $ -- $ -- $ --
57
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item with respect to the Company's
executive officers is incorporated herein by reference from the information
contained in Item 1 of Part I of this Report under the caption "Directors and
Executive Officers of the Registrant." The information required by Item 405 of
Regulation S-K is incorporated herein by reference from the information
provided under the heading "Section 16(a) Beneficial Ownership Reporting
Compliance" of the Company's Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference
from the information provided under the heading "Executive Compensation
Information" of the Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference
from the information provided under the heading "Stock Ownership of Certain
Beneficial Owners" of the Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference
from the information provided under the heading "Certain Relationships and
Related Transactions" of the Company's Proxy Statement.
58
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Consolidated Financial Statements: (see index on page 36 this report)
-- Independent Auditors' Report
-- Consolidated Balance Sheets
-- Consolidated Statements of Operations
-- Consolidated Statements of Stockholders' Equity
-- Consolidated Statements of Cash Flows
-- Notes to the Consolidated Financial Statements
(2) Consolidated Financial Statement Schedule
The following financial statement schedule of the Registrant for fiscal
years 1999, 1998 and the period from September 4, 1997 (inception)
through December 31, 1997, is filed as a part of this report and should
be read in conjunction with the Consolidated Financial Statements of
the Registrant.
Schedule
--------
II Valuation and Qualifying Accounts
All other schedules are omitted because of the absence of conditions under
which they are required or because the required information is given in the
financial statements or the notes thereto.
(3) Exhibits
Exhibit
Number Description
------- -----------
2.1 Agreement and Plan of Merger dated September 21, 1999 by and among
Ventro Corporation, Popcorn Acquisitions Corp. and Promedix.com,
Inc.(4)
2.2 Form of Certificate of Merger between Popcorn Acquisitions Corp. and
Promedix.com, Inc.(4)
2.3 Escrow Agreement for Ventro/Promedix(4)
2.4 Agreement and Plan of Merger dated December 10, 1999 by and among
Ventro Corporation, Spinach Acquisitions Corp. and SpecialtyMD.com
Corporation(4)
2.5 Form of Certificate of Merger between Spinach Acquisitions Corp. and
SpecialtyMD.com Corporation(4)
2.6 First Amendment to Agreement and Plan of Merger dated as of December
21, 1999 by and among Ventro Corporation, Popcorn Acquisitions Corp.
and Promedix.com, Inc.(4)
2.7 Escrow Agreement for Ventro/SpecialtyMD(4)
2.8 Form of Certificate of Merger between Chemdex Corporation and Ventro
Corporation(5)
3.1 Amended and Restated Certificate of Incorporation of Ventro(1)
3.2 Amended and Restated Bylaws of Ventro(1)
4.1 Specimen of Ventro Common Stock Certificate(5)
4.2 Third Amended and Restated Investors' Rights Agreement dated March 24,
1999(1)
59
Exhibit
Number Description
------- -----------
4.3 Amendment dated May 12, 1999 to Third Amended and Restated Investors'
Rights Agreement(1)
10.1 Form of Indemnification Agreement between Ventro and each of its
officers and directors(1)
10.2 Form of Change of Control Agreement between Ventro, each of its
officers and certain employees(1)
10.3 Change of Control Agreement between Ventro and Robert A. Swanson(1)
10.4 Change of Control Agreement between Ventro and Charles R. Burke(1)
10.5 1998 Stock Plan, as amended, and form of option agreement(4)
10.6 1999 Employee Stock Purchase Plan and form of subscription
agreement(4)
10.7 1999 Directors' Stock Plan(1)
10.8 Standard Office Lease dated June 11, 1998 between Ventro and Fabian
Partners II, a California General Partnership, as amended(1)
10.9 Master Lease Agreement dated January 20, 1999, as amended, between
Ventro and Comdisco, Inc.(1)
10.10 Starter Kit Loan and Security Agreement dated February 18, 1998
between Ventro and Imperial Bank(1)
10.11 Warrant Agreement to Purchase Shares of Series B Preferred Stock of
Ventro dated January 20, 1999 between Ventro and Comdisco, Inc.(1)
10.12 Warrant to Purchase Shares of Common Stock of Ventro dated March 24,
1999 between Ventro and Galen Partners III, L.P.(1)
10.13 Warrant to Purchase Shares of Common Stock of Ventro dated March 24,
1999 between Ventro and Galen Partners International III, L.P.(1)
10.14 Warrant to Purchase Shares of Common Stock of Ventro dated March 24,
1999 between Ventro and Galen Employee Fund III, L.P.(1)
10.15 Electronic Commerce Agreement dated January 5, 1998 between Ventro and
Genentech, Inc.(1)
10.16 Standstill Agreement dated April 23, 1999 between Ventro and VWR
Scientific Products Corporation(1)
10.17 Strategic Relationship Agreement dated April 30, 1999 between Ventro
and VWR Scientific Products Corporation(1)
10.18 Joint Marketing Agreement dated May 11, 1999 between Ventro and
Biotechnology Industry Organization(1)
10.19 Payment Plan Agreement dated February 22, 1999 and related agreements
between Ventro and Oracle Credit Corporation(1)
10.20 Warrant Purchase Agreement dated July 27, 1999 between Ventro and Alza
Corporation(2)
10.21 Office Lease dated August 13, 1999 between Ventro and Alza Corporation
for space located at 1000 Joaquin Road, Mountain View, California.(4)
10.22 Office Lease dated August 13, 1999 between Ventro and Alza Corporation
for space located at 1500 and 15550 Plymouth Street, Mountain View,
California.(4)
10.23 Voting Agreement dated September 21, 1999 between Ventro and certain
stockholders of Promedix.com, Inc.(4)
60
Exhibit
Number Description
------- -----------
10.24 Employment Agreement dated September 21, 1999 between Ventro and
William Klintworth(4)
10.25 Change of Control Agreement dated September 21, 1999 between Ventro
and William Klintworth(4)
10.26 Affiliates Agreement dated September 21, 1999 between Ventro and
certain directors of Promedix.com, Inc.(4)
10.27 Secured Promissory Note and Agreement dated October 1, 1999 from
Promedix.com, Inc. to Ventro and related Security Agreement.(4)
10.28 Noncompetition Agreement dated September 21, 1999 between Ventro and
William Klintworth(4)
10.29 Employment Agreement dated December 10, 1999 between Ventro and Ashfaq
Munshi(4)
10.30 Employee Confidentiality and Inventions Agreement dated December 10,
1999 between Ventro and Ashfaq Munshi(4)
10.31 Change of Control Agreement dated December 10, 1999 between Ventro and
Ashfaq Munshi(4)
10.32 Noncompetition Agreement dated December 10, 1999 between Ventro and
Ashfaq Munshi(4)
10.33 Stock Restriction Agreement dated December 10, 1999 between Ventro and
Ashfaq Munshi(4)
10.34 Joint Venture Agreement dated as of December 10, 1999 by and between
Tenet Health System Medical, Inc. and Ventro Corporation(3)
10.35 Form of Tenet/Newco Agreement by and among Tenet Health System
Medical, Inc., Tendex, Inc., Promedix.com, Inc. and Ventro
Corporation(3)
10.36 Form of Ventro License and Services Agreement by and among Ventro
Corporation, Promedix.com, Inc., Tendex, Inc. and Tenet Health System
Medical, Inc.(3)
10.37 Form of warrant to purchase common stock of Healthcare Transaction
Systems, Inc.(5)
21.1 Subsidiaries of Ventro(5)
23.1* Consent of Ernst & Young, Independent Auditors
27.1* Financial Data Schedule for the fiscal year ended December 31, 1999
(EDGAR filing only)
- --------
(1) Incorporated by reference to the corresponding Exhibit previously filed as
an Exhibit to Registrant's Registration Statement on Form S-1 (File No.
333-78505) filed with the Commission on May 14, 1999, as amended, which
Registration Statement was declared effective July 26, 1999.
(2) Incorporated by reference to the corresponding Exhibit previously filed as
an Exhibit to Registrant's Form 10-Q filed with the Commission on August
16, 1999.
(3) Incorporated by reference to the corresponding Exhibit previously filed as
an Exhibit to Registrant's Form 8-K dated December 10, 1999, as filed with
the Commission on January 4, 2000.
(4) Incorporated by reference to the corresponding Exhibit previously filed as
an Exhibit to Registrant's Registration Statement on Form S-4 (File No.
333-90727) filed with the Commission on January 4, 2000, as amended, which
Registration Statement was declared effective January 5, 2000.
(5) Incorporated by reference to the corresponding Exhibit previously filed as
an Exhibit to Registrant's Registration Statement on Form S-1 filed with
the Commission on March 6, 2000.
* Filed herewith
(b) Reports on Form 8-K.
None.
61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized on March 15, 2000.
Ventro Corporation
/s/ David P. Perry
By: _________________________________
David P. Perry
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated:
Signature Title Date
--------- ----- ----
/s/ David P. Perry President, Chief Executive March 15, 2000
______________________________________ Officer and Director
David P. Perry (Principal Executive
Officer)
/s/ James G. Stewart Chief Financial Officer March 15, 2000
______________________________________ and Assistant Secretary
James G. Stewart (Principal Financial
Officer)
/s/ Charles R. Burke Director March 15, 2000
______________________________________
Charles R. Burke
/s/ Brook H. Byers Director March 15, 2000
______________________________________
Brook H. Byers
/s/ Jonathan D. Callaghan Director March 15, 2000
______________________________________
Jonathan D. Callaghan
/s/ Paul J. Nowak Director March 15, 2000
______________________________________
Paul J. Nowak
/s/ John A. Pritzker Director March 15, 2000
______________________________________
John A. Pritzker
/s/ Naomi O. Seligman Director March 15, 2000
______________________________________
Naomi O. Seligman
/s/ L. John Wilkerson Director March 15, 2000
______________________________________
L. John Wilkerson
62