<PAGE>
As filed with the Securities and Exchange Commission on November 16, 1999
Registration No. 333-88277
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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AMENDMENT NO. 1
TO THE
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
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ORGANICNET, INC.
(Exact name of registrant as specified in its charter)
---------------
Delaware 7372 68-0347739
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification No.)
incorporation ---------------
or organization) 330 Townsend Street, Suite 206
San Francisco, CA 94107-1630
(415) 495-4741
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------
Jack D. Anderson
Chief Executive Officer
OrganicNet, Inc.
330 Townsend Street, Suite 206
San Francisco, CA 94107-1630
(415) 495-4741
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
Patrick A. Pohlen, Esq. Rodd M. Schreiber, Esq.
Cooley Godward LLP Skadden, Arps, Slate, Meagher & Flom (Illinois)
Five Palo Alto Square 333 West Wacker Drive
3000 El Camino Real Chicago, IL 60606
Palo Alto, CA 94306-2155
---------------
Approximate date of commencement of the proposed sale to the public: as
soon as practicable after the effective date of the Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Proposed
Maximum
Aggregate Amount of
Title of Each Class of Offering Price Registration
Securities to be Registered (1) Fee (2)
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<S> <C> <C>
Common Stock, $.001 par value per share............ $31,050,000 $8,631
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</TABLE>
(1) Estimated solely for the purpose of calculating the amount of the
Registration Fee in accordance with Rule 457(o) of the Securities Act of
1933, as amended.
(2) $14,386.50 was paid in connection with the original filing of this
Registration Statement.
---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+The information in this preliminary prospectus is not complete and may be +
+changed. These securities may not be sold until the registration statement +
+filed with the Securities and Exchange Commission becomes effective. This +
+preliminary prospectus is not an offer to sell these securities nor does it +
+seek offers to buy these securities in any jurisdiction where the offer or +
+sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED NOVEMBER , 1999
PRELIMINARY PROSPECTUS
4,500,000 Shares
OrganicNet, Inc.
Common Stock
------------
We are offering 4,500,000 shares of common stock with this prospectus. We
expect the initial public offering price to be between $5.00 and $6.00 per
share. We have applied for quotation of our common stock on the Nasdaq National
Market under the symbol "OGNT."
------------
Investing in the common stock involves risks. See "Risk Factors" beginning on
page 5.
------------
<TABLE>
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<CAPTION>
Per Share Total
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<S> <C> <C>
Initial Public Offering Price....................... $ $
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Underwriting Discount............................... $ $
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Proceeds, before expenses, to OrganicNet, Inc....... $ $
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</TABLE>
The underwriters may also purchase up to an additional 675,000 shares from us
at the public offering price, less the underwriting discount, within 30 days
from the date of this prospectus, to cover over-allotments.
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved of these securities or determined if this
prospectus is truthful or complete. It is illegal for any person to tell you
otherwise.
------------
Needham & Company, Inc. Punk, Ziegel & Company
The date of this Prospectus is , 1999
<PAGE>
Description of Artwork:
1. Front inside cover: Description of artwork. This diagram represents our
ASP architecture. The top box, labeled the Organic Browser, diagrams the client
side of our client server architecture and depicts the user view. It is
connected to the Internet either via a local network or directly through
modems. The Internet feeds the application data from the client side into
OrganicNet's ASP. The OrganicNet ASP (the Server side of the architecture)
resides on our partner Conxion's Internet Service Provider, providing full
outsourced hosting services.
2. Back inside cover. Description: Five overlapping circles. The circles are
labelled Clinic Management, Practice Management, Credentialing, Clinical Drug
Trials and Disease Management. The words The CoreModel appear in the center.
Bullets points above the graphic are as follows:
. Internet Delivery, ASP Delivery Service
. Fully integrated solutions, built on a single model, the CoreModel(TM)
. Manages the entire clinical and business process in a single system
. Multiple users with simultaneous access
. Scalable to accommodate a growing number of users and solutions
. Easily tailored to accommodate user process and practice variations
. Easy to use, easy to change
. Cost effective alternative to legacy applications
The text of the caption below the graphic reads as follows:
Our CoreModel(TM) is a model of the real world components of the healthcare
delivery process. Each of the components is represented by an object. The
CoreModel(TM) is the blueprint to how these objects can be linked to build
applications. The specialized knowledge of healthcare required to build the
CoreModel(TM) originated from the experience of our employees as well as
extensive interviews with our users and other healthcare professionals.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 5
Forward-Looking Statements............................................... 16
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 17
Dilution................................................................. 18
Capitalization and Short-Term Debt....................................... 19
Selected Consolidated Financial Data..................................... 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 22
Business................................................................. 33
Management............................................................... 47
Certain Relationships and Related Transactions........................... 58
Principal Stockholders................................................... 62
Description of Capital Stock............................................. 64
Shares Eligible for Future Sale.......................................... 67
Underwriting............................................................. 69
Legal Matters............................................................ 71
Experts.................................................................. 71
Available Information.................................................... 71
Index to Financial Statements............................................ F-1
</TABLE>
----------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with different information. We are
not making an offer of these securities in any jurisdiction where the offer or
sale is not permitted. You should not assume that the information contained in
this prospectus is accurate as of any date other than the date on the front
cover of this prospectus.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary is not complete and may not contain all of the information that
investors should consider before investing in the common stock of OrganicNet.
Investors should read the entire prospectus carefully.
OrganicNet
We are an application service provider (ASP) that develops software
solutions for healthcare clinics and physician group practices using our
proprietary technology platform. ASPs provide a contractual service offering to
deploy, host, manage and rent access on a subscription basis to, software
applications from remote servers. ASPs are responsible for providing all of the
specific activities and expertise aimed at managing a set of software
applications. Our customers can access and use our solutions over the Internet
or their own private information networks. We currently have developed and
implemented ASP solutions in three areas: disease management, clinical drug
trials recruitment and workers' compensation. Since we first launched an ASP
solution in February of 1999, we have implemented several ASP solutions with
existing and new customers. In addition, we have multiple contracts in place
for ASP solutions to be implemented within the next year which we expect will
result in additional subscription revenue.
Our ASP software solutions are built using our object-oriented technology,
which we refer to as the Organic Architecture. We have created a technology
that represents a major change in the way software is built and deployed. Our
technology allows us to build applications without traditional software code
and therefore avoid many of the limitations associated with traditional
technologies. Our applications are built using data. The data is interpreted by
the architecture and then presented as an application to the user. By being
able to build applications without code we are able to utilize network
resources in a more efficient way due to the smaller amount of communication
resources necessary to transmit data. With a basic connection to the Internet,
our applications run as quickly and efficiently as they would on a private
information network. We have applied for five patents on our technology, three
in 1997 and two in 1998. We have received a Notice of Allowance from the United
States Patent and Trademark Office on each of the first three applications.
Central to the development of our solutions is our CoreModel, which is
comprised of individual sets of data that model a comprehensive representation
of the clinical and business processes in the healthcare industry. We are
developing solutions designed to manage all elements of the business and
clinical processes of our customers within a single integrated system. Our
software solutions can be quickly tailored to meet our customers' specific
needs. To develop our CoreModel and solutions, we selectively acquired
companies with expertise in particular areas of healthcare. These acquisitions
also provided us with traditional code-based legacy software products and
related service capabilities, customers and revenues. We intend to phase out
sales of these legacy products and related services, which historically
represented substantially all of our revenues while simultaneously selling our
ASP solutions as upgrades to our legacy products.
The growth of the managed care, risk sharing and other alternative payment
and reimbursement mechanisms, increased government regulation and the rise of
healthcare delivery networks have increased the need for information technology
products and services. In order to reduce unnecessary spending and manage costs
while delivering quality care, healthcare providers are increasingly demanding
software solutions that enable them to effectively extract and analyze data
located throughout their enterprises, measure clinical results, evaluate
operational efficiency and support process improvement. The Internet has
emerged as an accessible, low-cost and flexible means of accessing and
distributing information, making it particularly well-suited for deploying
software solutions for the healthcare industry. We believe that the ASP model
addresses many of the shortcomings of traditional healthcare information
technology solutions. Customers rent, rather than own the applications they
require, reducing the capital commitment necessary for information technology
and reducing the need for a dedicated staff of information technology
personnel.
1
<PAGE>
Our objective is to become the leading healthcare ASP serving clinics and
group practices by capitalizing on our early market entrance, extending our
technology and continuing to implement a subscription-based business model that
generates recurring revenue. We intend to achieve this objective by:
. leveraging our proprietary technology platform by rapidly developing
additional solutions, functions and features;
. achieving rapid market penetration by focusing on customers within our
target market segments and cross-selling our ASP software solutions to
our existing base of customers; and
. enhancing our capabilities by forming strategic alliances that provide
us with specific expertise and access to new customer channels.
Our ASP software solutions provide the following advantages:
Comprehensive. Our solutions are designed to enable our customers to rely on
us as the single source for their software solutions, whether these solutions
are deployed over the Internet or their own private information network.
Cost-effective. Our solutions eliminate the need for our customers to incur
significant capital expenditures for hardware, operating systems and
application software and significantly reduce the costs for technical support
and training.
Adaptable. Our solutions are built with flexible links between data sets
instead of code, which makes them easier and less expensive to tailor to
accommodate practice variations and workflow of each user.
Integrated. Information and applications are stored on a single remote
database and can be accessed simultaneously by multiple users in geographically
dispersed locations.
In addition, our ASP software solutions are scalable, modular, secure and
easy to use.
As part of our strategy, we have entered into relationships with strategic
partners for distribution, consulting and implementation services, Internet
infrastructure and application hosting. Our initial ASP software solution,
which manages patient-reported health and clinical data, is being distributed
as part of our strategic relationship with Pfizer Health Solutions Inc, with
whom we have had a relationship since 1997. We also have entered into an
alliance with Superior Consultant Holdings Corporation. Under this agreement,
Superior will introduce and outline the advantages of our ASP software
solutions based on client interests, as well as provide systems integration,
process improvement, consulting and implementation services to healthcare
organizations. Superior is a leading provider of business solutions, including
consulting, systems integration, e-Health and outsourcing to the healthcare
industry. Superior serves clients nationally and internationally and has over
1,500 professionals located throughout the United States.
We also have entered into agreements with Conxion Corporation, which
provides us with application hosting, Internet infrastructure and data centers.
We depend on Conxion to provide these services and support the delivery of our
software solutions and do not intend to provide these services ourselves. Our
business relationship with Conxion began in May 1997, and in April 1999 Conxion
purchased $550,000 of our preferred stock.
We were incorporated in California in January 1995 under the name Object
Products, Inc. and reincorporated in Delaware in April 1996. The company
changed its name to OrganicNet, Inc. in May 1999. Our principal executive
offices are located at 330 Townsend Street, Suite 206, San Francisco,
California, 94107-1630. Our telephone number is (415) 495-4741. Our website is
www.organic-net.com. Information contained on our website is not a part of this
prospectus.
--------------
The terms "OrganicNet", "company", "we", "our" and "us" refer to OrganicNet,
Inc. and its subsidiaries unless the context suggests otherwise. The term "you"
refers to a prospective investor.
OrganicNet, the OrganicNet logo, Organic Architecture, Object Products,
CoreModel and Organic Browser are trademarks of OrganicNet, Inc. Each
trademark, trade name or service mark of any other company appearing in this
prospectus belongs to its holder.
2
<PAGE>
The Offering
<TABLE>
<C> <S>
Shares offered by OrganicNet.................. 4,500,000 shares
Total shares outstanding after this offering.. 18,302,514 shares
Use of proceeds............................... To repay short-term debt,
including amounts owed to or
guaranteed by certain of our
directors, officers and
stockholders, to continue
development of our solutions
and architecture, expand our
sales and marketing efforts,
expand our administrative
infrastructure, acquisitions
and for working capital and
other general corporate
purposes.
Proposed Nasdaq National Market symbol........ OGNT
</TABLE>
The common stock to be outstanding after this offering is based on the shares
outstanding as of October 31, 1999 and excludes:
. 1,809,749 shares of common stock issuable as of October 31, 1999 upon
the exercise of outstanding stock options issued at a weighted average
exercise price of $1.70 per share under our stock option plans;
. 621,897 shares of common stock reserved for issuance under our stock
option plans as of October 31, 1999;
Except as otherwise indicated, information in this prospectus assumes the
following:
. the conversion of all outstanding shares of preferred stock into common
stock upon consummation of this offering;
. the filing of our amended and restated certificate of incorporation, the
provisions of which are summarized in "Description of Capital Stock;"
and
. no exercise of the underwriters' over-allotment option.
Risk Factors
You should consider the risk factors before investing in OrganicNet's common
stock and the impact from various events which could adversely affect our
business.
3
<PAGE>
Summary Financial Data
The following table summarizes our consolidated statements of operations for
the years ended December 31, 1996, 1997 and 1998 and the nine months ended
September 30, 1998 and 1999, as well as our unaudited pro forma combined
statements of operations for the year ended December 31, 1998 and the nine
months ended September 30, 1999 that gives effect to our acquisition of PSI-Med
Corporation as if the acquisition occurred at the beginning of the periods
presented. The unaudited pro forma information is not necessarily indicative of
the results that would have occurred had the acquisition taken place as of the
beginning of the periods presented, nor is it necessarily indicative of results
that may occur in the future. The table also includes our consolidated balance
sheet as of September 30, 1999 on an actual and pro forma as adjusted basis.
See the consolidated financial statements and related notes included elsewhere
in this prospectus.
<TABLE>
<CAPTION>
Years Ended December 31, Nine Months Ended September 30,
-------------------------------------- -----------------------------------
Pro Forma Pro Forma
1996 1997 1998 1998 1998 1999 1999
------- ------- ------- ----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
(in thousands, except per share information)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations:
Revenue:
License................ $ -- $ 424 $ 571 $ 1,087 $ 376 $ 778 $ 1,077
Product development.... -- 1,238 565 565 391 340 340
Service................ 371 1,310 3,488 5,182 2,763 3,106 4,245
------- ------- ------- ------- ------- ------- -------
Total revenue.......... 371 2,972 4,624 6,834 3,530 4,224 5,662
------- ------- ------- ------- ------- ------- -------
Cost of revenue:
License................ -- 475 756 756 577 551 596
Product development.... -- 320 209 209 168 61 61
Service................ 238 892 2,314 3,850 1,818 2,068 2,941
------- ------- ------- ------- ------- ------- -------
Total cost of revenue.. 238 1,687 3,279 4,815 2,563 2,680 3,598
------- ------- ------- ------- ------- ------- -------
Gross profit............ 133 1,285 1,345 2,019 967 1,544 2,064
------- ------- ------- ------- ------- ------- -------
Operating expense:
Sales and marketing.... 24 1,395 1,644 1,812 1,249 1,624 1,686
Research and
development........... 724 1,345 1,833 2,070 1,480 1,842 2,068
General and
administrative........ 1,690 3,332 3,768 4,597 2,422 2,859 3,150
------- ------- ------- ------- ------- ------- -------
Total operating
expense............... 2,438 6,072 7,245 8,479 5,151 6,325 6,904
------- ------- ------- ------- ------- ------- -------
Operating loss.......... (2,305) (4,787) (5,900) (6,460) (4,184) (4,781) (4,840)
Interest expense........ (9) (20) (93) (93) (48) (104) (114)
Other income (expense).. 7 14 (9) (95) (5) 10 (15)
------- ------- ------- ------- ------- ------- -------
Loss before income
taxes.................. (2,307) (4,793) (6,002) (6,648) (4,237) (4,875) (4,969)
Provision for income
taxes.................. 4 6 4 5 4 5 6
------- ------- ------- ------- ------- ------- -------
Net loss................ $(2,311) $(4,799) $(6,006) $(6,653) $(4,241) $(4,880) $(4,975)
======= ======= ======= ======= ======= ======= =======
Net loss per share:
Basic and diluted...... $ (0.45) $ (0.88) $ (1.10) $ (1.22) $ (0.78) $ (0.89) $ (0.91)
Weighted average shares
outstanding:
Basic and diluted...... 5,189 5,426 5,448 5,448 5,443 5,490 5,490
</TABLE>
<TABLE>
<CAPTION>
As of September 30, 1999
----------------------------
Pro Forma
Actual As Adjusted
------------ --------------
(unaudited)
(in thousands)
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents......................... $ 895 $ 22,112
Working capital (deficit)......................... (3,289) 18,228
Total assets...................................... 5,013 26,230
Total stockholders' equity (deficit).............. (735) 20,783
</TABLE>
The preceding consolidated balance sheet data is shown on a pro forma as
adjusted basis to give effect to:
. the conversion of all outstanding shares of preferred stock into shares
of common stock upon consummation of this offering,
. the sale of 4,500,000 shares of common stock in this offering at an
assumed initial public offering price of $5.50 per share, after
deducting the underwriting discounts and commissions and estimated
offering expenses and application of the net proceeds therefrom, and
. the use of proceeds of $300,000 to repay notes payable to related
parties.
4
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors, in addition to the
other information set forth in this prospectus, before purchasing shares of
common stock of OrganicNet. Each of these risk factors could adversely affect
our business, operating results and financial condition, as well as adversely
affect the value of an investment in our common stock. This investment involves
a high degree of risk.
Risks Related To Our Business
Our business is difficult to evaluate because we have a limited operating
history.
We were incorporated in January 1995 and have a limited operating history,
which makes an evaluation of our business and prospects difficult. Since our
inception, we have been developing our codeless, object-oriented technology as
the platform for our solutions. We have also been marketing legacy software
products created using traditional software code that were developed by the
companies we acquired. In February 1999, we delivered our first ASP software
solution. As a result, we only have a limited number of ASP software solutions
currently in use. Revenue to date from our ASP software solutions has not been
material. You must consider our business and prospects in light of the risks,
uncertainties and difficulties frequently encountered by companies in their
early stages of development, particularly those in new and rapidly evolving
markets such as ours, which use new and unproven business models. We cannot
assure you that our business strategy will be successful or that we will be
able to complete the development of and sell our ASP software solutions.
Our historical revenue was derived primarily from products and services
that we do not expect to be the focus of our business in the future, which
makes it difficult to evaluate our current and future financial
performance.
We currently derive substantially all of our revenue from the sale of our
legacy software products and services. These software products and related
services are substantially different from the ASP software solutions that will
be our focus. We intend to phase out sales of legacy products and related
services and expect the associated revenue to decline substantially. As a
result, our historical financial information does not reflect the results of
the current and future focus of our business and cannot be used to predict our
future revenue or results of operations.
We expect to continue to incur operating losses and net cash outflow and
may never achieve profitability, which may cause our stock price to
decline.
We have experienced net losses in each quarterly and annual period since
inception. We recorded net operating losses of approximately $4.8 million for
the year ended December 31, 1997, approximately $5.9 million for 1998 and
approximately $4.8 million for the nine months ended September 30, 1999. As of
September 30, 1999, we had an accumulated deficit of approximately $18.2
million. We intend to increase our operating expenses substantially,
particularly expenses related to development of our solutions and architecture,
expansion of our sales and marketing efforts, and expansion of our
administrative infrastructure. Therefore, we expect to incur significant
operating losses and to record significant net cash outflow for the foreseeable
future. We cannot assure you that we will achieve significant revenues from our
solutions or achieve, sustain or improve profitability on a quarterly or annual
basis in the future.
Our quarterly operating results are expected to fluctuate and could cause
our stock price to decline.
Our quarterly operating results have varied in the past and we expect them
to continue to fluctuate in future periods. These fluctuations depend on a
number of factors described below and elsewhere in this "Risk Factors" section
of the prospectus, many of which are outside our control. In particular, the
sale and implementation of our software solutions are subject to delay due to
our potential customers' internal procedures for approving expenditures and
deploying new technologies within their clinics or group practices.
5
<PAGE>
We provide our solutions to customers on a monthly subscription basis. We
cannot predict subscription fees accurately because we have limited experience
selling our solutions. In addition, our customers may decide to stop using our
solutions at any time with very little notice. We may spend substantial time
and resources developing or tailoring solutions for channel partners or
customers prior to the time that we have entered into subscription agreements
with them. If we do not enter into agreements with these channel partners and
customers or if our customers do not subscribe for these solutions for a
sufficient period of time, we will not be able to achieve revenue to recoup our
investment. For these and other reasons, our stock price could decline.
Our business model is unproven and may not effectively address our market.
Providing software solutions over the Internet to the healthcare industry is
a business that has only recently begun to develop. It is difficult to value
our business and evaluate our prospects because our business model and our
revenue and income potential are unproven. Our business model depends on our
ability to generate usage by a large number of clinics and group practices.
Growth in demand for and acceptance of business software applications,
including our ASP offerings, by clinics and group practices is highly
uncertain. This uncertainty is due in part to the possibility that customers
using existing systems may refuse to adopt new systems when they have made
extensive investment in hardware, software, and training for existing systems,
or if they perceive that our ASP solutions will not adequately or cost-
effectively address their requirements.
In order to successfully sell our software solutions, we may need to
convince potential customers that the features and functionality of our
solutions justify their cost, as well as the time and administrative expense
required to switch to our solutions. Achieving market acceptance for our
software solutions will require substantial marketing efforts and expenditure
of significant funds to increase awareness and demand by our target customers.
We cannot assure you that we will be able to succeed in positioning our ASP
offerings as appropriate solutions to address the clinical and business needs
of potential users, or that our ASP model will be economically viable or
acceptable to clinics and group practices. If our strategy does not prove
successful or if the market for our solutions does not grow or grows more
slowly than we currently anticipate, achieving profitability could take longer
than expected or we may never achieve profitability, either of which could harm
our business.
If we cannot develop additional software solutions, we may be unable to
achieve or sustain profitability.
We are unlikely to achieve or sustain profitability unless we offer and
successfully market a broad range of software solutions. Our business strategy
depends on developing solutions to manage the entire clinical and business
process for clinics and group practices. We have only completed development of
solutions for a limited number of applications and have not commenced
development of the full range of applications required to provide such a
solution. We cannot assure you that we will be able to develop the applications
we need to keep our ASP software solutions competitive and to meet our business
plan objectives. If we cannot develop these additional applications, our sales
may suffer and achieving profitability could take longer than expected or we
may never achieve profitability, either of which could cause our stock price to
decline.
We depend on third parties to provide our Internet infrastructure and
application hosting.
We do not intend to develop or maintain Internet infrastructure or
application hosting capabilities to support delivery of our software solutions
over the Internet. Therefore, we are dependent on obtaining those capabilities
from third parties. We currently obtain Internet infrastructure and application
hosting services from Conxion Corporation and include them as part of our ASP
software solutions. The ability to deliver our software solutions over the
Internet is central to our business strategy and depends on the efficient and
uninterrupted operation of the computer and Internet network systems at
Conxion.
Conxion's operations are vulnerable to damage or interruption from fire,
flood, tornado, hurricane, earthquake, power loss, telecommunications or
Internet failure, viruses, physical and electronic break-ins, or
6
<PAGE>
other similar events and they have recently suffered a service disruption at
one of their data centers related to a system upgrade. The ability of Conxion
or any other third party we might use to prevent system failures or manage the
effects of system failures which occur in computer and Internet network systems
is limited. If Conxion or another third party suffers a system failure, it
would prevent us from maintaining our service standards. The occurrence of such
a failure could harm our reputation, business and prospects. If Conxion fails
to perform its obligations under this agreement or if this agreement is
terminated or not renewed and we are unable to obtain comparable services on
favorable financial terms, or at all, our business would be harmed.
Our systems may be vulnerable to security breaches and viruses.
Our success depends on the confidence of our customers in our ability to
securely transmit confidential information over the Internet. Any failure to
provide secure online communication services could harm our business and
reputation. Our systems and those of our hosting services provider rely on
encryption, authentication and other security technology licensed from third
parties to achieve secure transmission of confidential information. Neither we
nor any third party may be able to stop unauthorized attempts to gain access to
or disrupt the transmission of communications by our customers. Anyone who is
able to circumvent our security measures could misappropriate confidential user
information or interrupt our, or our customers', operations. In addition, our
servers at Conxion's data centers may be vulnerable to viruses, physical or
electronic break-ins, and similar disruptions. We depend on Conxion to prevent
these disruptions and its failure to do so could limit use of our solutions and
otherwise harm our business. Computer viruses, break-ins and other disruptions
could lead to interruptions or delays in data transmissions to our customers,
or loss of customer data. In addition to purposeful security breaches, the
inadvertent transmission of computer viruses could impair our ability to
deliver our software solutions to our customers which could expose us to
litigation, damage our reputation or otherwise harm our business.
Although we generally limit warranties and liabilities relating to security
in our customer contracts, our customers may seek to hold us liable for any
losses suffered as a result of unauthorized access to their information. We may
not have adequate insurance to cover these losses. We may be required to expend
significant capital and other resources to protect against these security
breaches or to alleviate the problems they cause and to defend any lawsuits or
claims. Moreover, concerns over the security of transactions conducted on the
Internet and commercial online services, which may be heightened by publicized
compromises of security, may also deter future customers from using our
solutions or cause current customers to terminate their solution subscriptions.
In either case, this could harm our business and prospects. Our security
measures may not be sufficient to prevent security breaches, and failure to
prevent security breaches could harm our reputation, business and prospects.
Errors in our Organic Architecture or software solutions may harm our
reputation and cause us to lose customers.
Our Organic Architecture and software solutions may contain undetected
errors resulting in performance problems. Such errors are most frequently found
during the period immediately following introduction of new software solutions
or enhancements to existing solutions. Despite extensive product testing prior
to introduction, our software has in the past contained errors that were
discovered after commercial introduction. We cannot assure you that errors or
performance problems will not be discovered in the future with respect to any
of our products. Errors and mistakes in the processing of client data may
result in loss of data, inaccurate information and delays. Such errors could
cause us to lose clients and incur liability. Any errors in our Organic
Architecture and software solutions could harm our reputation, business and
prospects.
We plan to expand rapidly and it may be difficult to manage our growth.
We intend to rapidly grow our business. However, we cannot be sure that we
will successfully manage our growth. In order to successfully manage our
growth, we must:
. expand and enhance our administrative infrastructure;
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<PAGE>
. improve our management, financial and information systems and controls;
and
. expand, train and manage our employees effectively.
Continued growth could place a further strain on our management, operational
and financial resources. There will also be additional demands on our sales,
marketing and administrative resources as we increase our solutions offerings
and expand our target markets and customers. We cannot assure you that our
operating and financial control systems, administrative infrastructure,
facilities and personnel will be adequate to support our future operations or
to effectively adapt to future growth. If we cannot manage our growth
effectively, our business may be harmed.
We may undertake additional acquisitions which may pose risks to our
business.
Our strategy contemplates the possibility of completing additional
acquisitions. We may be unable to retain the acquired companies' personnel or
integrate them into our company. In addition, we may be unable to integrate
their operations, services, or technology into our business model. Our
profitability may suffer because of acquisition related costs or amortization
of acquired goodwill and other intangible assets. Similarly, the time and
expense associated with finding suitable and compatible companies to enhance
our object-oriented software technology or grow our ASP delivery model could
disrupt our ongoing business and divert our management's focus.
Others may seize the market opportunity we have identified because we may
not effectively execute our strategy.
If we fail to execute our strategy in a timely or effective manner, our
competitors may be able to seize the marketing opportunities we have
identified. Our strategy is complex and requires that we successfully and
simultaneously complete many tasks, including:
. developing and protecting our technology;
. developing economically attractive solutions for our current and future
customers;
. negotiating and maintaining effective channel partnerships for the
delivery of our solutions;
. selling and marketing our solutions;
. attracting and retaining highly skilled employees; and
. integrating acquired companies into our operations.
We cannot assure you that we will be able to successfully execute any or all
elements of our strategy. If we are unable to do so, our business could be
harmed and our stock price could decline.
We may be unable to attract and retain qualified personnel and we depend on
certain personnel.
We believe that our success depends largely on our ability to attract and
retain highly skilled technical, managerial and marketing personnel to develop
our object-oriented technology and our ASP delivery model. Individuals with the
information technology skills we need to further develop our solutions are in
short supply and competition for qualified personnel is particularly intense.
We may not be able to hire the necessary personnel to implement our business
strategy, or we may need to pay higher compensation for employees than we
currently expect. We cannot assure you that we will succeed in attracting and
retaining the personnel we need to continue to grow and to implement our
business strategy. If we are unable to do so, our business could be harmed.
We depend on the performance of our executive officers and other key
employees. The loss of any member of our senior management or other key
employees could negatively impact our ability to execute our strategy. We do
not maintain "key person" life insurance policies on any of our employees.
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We are dependent upon a third party database management system.
We use a database management system to store our data and software
solutions, which we license from a third party. If we change our database
management system or if the license of our current database management system
is terminated, we would need to secure a license to use another database
management system. If we were to use a different database management system, we
would need to modify the interface with our application server to recognize
that system, which could take several weeks. If modifying that interface took
longer than expected or if there was insufficient time to obtain and implement
the new system before we lost the use of our current system, we would be unable
to provide uninterrupted service to our customers, and our business and
reputation would be harmed.
If we are unable to protect our intellectual property rights from third
party challenges, it may significantly impair our competitive position.
We rely on a combination of patent, copyright, trademark and trade secret
laws and restrictions on disclosure to protect the intellectual property rights
related to our legacy and object-oriented technology. We cannot assure you that
the patent applications we have filed on aspects of our technology will be
successful. We also enter into confidentiality or license agreements with our
employees, consultants and corporate partners, and control access to and
distribution of our software, documentation and other proprietary information.
Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy or otherwise obtain and use our products or technology.
Monitoring use of our products is difficult, and we cannot assure you that the
steps we have taken will prevent unauthorized use of our technology,
particularly in foreign countries where the laws may not protect our
proprietary rights as fully as in the United States.
Intellectual property infringement claims against us could cost a
significant amount of money to defend and could divert management's
attention away from our business.
As the number of software products in our target markets increases and as
the functionality of these products further overlaps, we may become
increasingly subject to the threat of infringement claims. Any infringement
claims alleged against us, even if without merit, can be time consuming and
expensive to defend. Any such claims may divert our management team's attention
and resources, and could also cause delays in the delivery of our solutions to
our customers. Settlement of any infringement claims could also require us to
enter into costly royalty or licensing agreements. If a claim of product
infringement against us was successful and we were unable to license the
infringing or similar technology, our business, financial condition and results
of operations could be harmed and our stock price could decline.
Risks Related To Our Industry
Our success depends on Internet acceptance.
Our success depends, in part, on the adoption of Internet solutions by
commercial users. Our business could suffer dramatically if Internet solutions
are not accepted or are not perceived to be effective. The recent growth in
Internet use has resulted in frequent periods of poor performance. Internet
service providers and other organizations with links to the Internet have
responded by upgrading routers and switches, telecommunications links and other
components forming the Internet infrastructure. Any perceived degradation in
the performance of the Internet as a whole could undermine the value of the
solutions we provide over the Internet. Performance improvements in our
solutions partly depend upon, and are ultimately limited by, the speed and
reliability of networks. In order for the market for our solutions to emerge
and grow, improvements must be made to the entire Internet infrastructure to
ease overloading and congestion.
Several telecommunications carriers are supporting regulation of the
Internet by the Federal Communications Commission (FCC) in the same manner that
the FCC regulates other telecommunications services. If the FCC regulates the
Internet in the manner it regulates other telecommunications services and
imposes fees, it could increase the cost of doing business on or through the
Internet, slow the growth of the Internet and adversely affect the demand for
our products and services or increase our cost of doing business.
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Technology solutions may change faster than we are able to update our
technology.
The healthcare software application market in which we compete is
characterized by rapidly changing technology, evolving industry standards,
emerging competition and the frequent introduction of new services, software
and other products. Our success depends partly on our ability to:
. develop new or enhance existing solutions, software and services to
meet our customers' changing needs in a timely and cost-effective way;
. respond effectively to technological changes and new product offerings
of our competitors; and
. maintain and continue to develop relationships with providers of
Internet infrastructure and application hosting capabilities.
We cannot assure you that we will be able to accomplish any or all of these
goals. Many of our competitors may develop products or technologies that are
better or more attractive than ours or that may render our technology or
solutions obsolete. If we do not succeed in adapting our technology, our
business could be harmed.
Our business may be harmed if our software solutions are not compatible
with other products and services.
Our ability to compete successfully also depends on the continued
compatibility of our software solutions with products, services and
architectures offered by other software vendors, particularly for customers who
have installed other software applications. We cannot assure you that other
products will be compatible with our software solutions. Although we currently
plan to support emerging standards, we cannot anticipate what new industry
standards will develop. In addition, we cannot assure you that we will be able
to conform to these new standards quickly enough to stay competitive. If our
software solutions are not compatible with other products and services, our
business could be harmed and our stock price could decline.
The markets we serve are highly competitive and many of our competitors
have much greater resources.
The business of providing application software and services to clinics and
group practices is extremely competitive. In addition, the market for Internet-
based application service providers is relatively new and evolving, and we
anticipate that competition will continue to intensify as the use of the
Internet grows. Our competitive position in the healthcare software application
market is difficult to evaluate due to the variety of current and potential
competitors and the evolving nature of our market and the ASP model.
Our primary competitors include legacy software vendors, application service
providers, and healthcare e-commerce and portal companies. Each of these types
of companies either competes or in the future can be expected to compete with
us in delivering software solutions to the clinic and group practice markets,
including the delivery of software applications over the Internet. Furthermore,
major software companies and other entities, including those specializing in
the healthcare industry that are not currently offering applications, products
or services that compete with our solutions, may enter our markets. In
addition, our existing and future strategic partners may compete with us from
time to time by selling, consulting on or hosting other software that competes
with our software solutions.
Many of our competitors have substantially greater financial, technical and
marketing resources, larger customer bases, longer operating histories, greater
name recognition and more established relationships in the healthcare
application market than we have. In addition, the lack of barriers to entry in
our market exposes us to a potentially increasing number of competitors. We
cannot assure you that we will have the resources or expertise to compete
successfully in the future. If we are unable to develop and expand our software
solutions or adapt to changing customer needs as well as our current or future
competitors are able to do, we may experience reduced profitability and a loss
of market share, either of which could harm our business.
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The principal competitive factors in our market include:
. features and functionality;
. fit with the user's practice, processes and needs;
. cost;
. ease of implementation and use;
. level of service;
. business and technical expertise;
. integration of applications;
. quality of customer service and support;
. reliability; and
. scalability.
We cannot assure you that we will have the resources or expertise to compete
successfully in the future based on these or any other criteria or that
competitive pressures we face will not harm our business.
Government regulation and legal uncertainties could add additional costs to
doing business on the Internet and could limit our customers' use of the
Internet.
Laws and regulations directly applicable to communications or commerce over
the Internet are becoming more prevalent. Laws and regulations may be adopted
with respect to the Internet or other online services covering issues such as
user privacy, pricing, content, copyrights, distribution and characteristics,
and quality of products and services. The adoption of any additional laws or
regulations may impede the growth of the Internet, which could, in turn,
decrease the demand for our applications and services and increase our cost of
doing business, or otherwise harm our business. Moreover, the applicability to
the Internet of existing laws in various jurisdictions governing issues such as
property ownership, sales and other taxes, libel and personal privacy is
uncertain and may take years to resolve. Any such new legislation or
regulation, the application of laws and regulations from jurisdictions whose
laws do not currently apply to our business, or the application of existing
laws and regulations to the Internet and other online services could harm our
business.
The confidentiality of patient records and the circumstances under which
records may be released for inclusion in our databases are subject to
substantial regulation by state governments. These state laws and regulations
govern both the disclosure and the use of confidential patient medical record
information. Although compliance with these laws and regulations is at present
principally the responsibility of the healthcare provider, regulations
governing patient confidentiality rights are evolving rapidly. Additional
legislation governing the dissemination of medical record information has been
proposed at both the state and federal level. This legislation may require
holders of this information to implement security measures. Such legislation
might require us to make substantial expenditures to implement such measures.
We cannot assure you that changes to state or federal laws will not materially
restrict the ability of healthcare providers to submit information from patient
records using our applications.
Legislation currently being considered at the federal level could impact the
manner in which we conduct our business. The Health Insurance Portability and
Accountability Act of 1996 (HIPAA) mandates the use of standard transactions,
standard identifiers, security and other provisions by the year 2000. We are
designing our solutions to enable compliance with the proposed regulations but
cannot assure you that we will be able to comply with those proposed
regulations in a timely manner or at all. Moreover, until the proposed
regulations become final, they could change, which could require us to expend
additional resources to comply with the revised standards and we may not be
able to comply with the revised standards in a timely manner or at all. Based
on our present business operations, we believe that the HIPAA requirements
related to the maintenance
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and exchange of electronic health information may apply to legacy products sold
by our wholly owned subsidiary, PSI-Med Corporation, but not to our other
products, services or solutions. If any of our products, services or solutions
are subject to those regulations, we may be required to incur additional
expenses in order to comply with these requirements and we may not be able to
comply with them in a timely manner or at all. In addition, the success of our
compliance efforts may also be dependent on the success of healthcare
participants in dealing with the standards. If we are unable to comply with
regulations implementing HIPAA in a timely manner or at all, the sale of our
solutions and business could be harmed.
The United States Food and Drug Administration (FDA) is responsible for
assuring the safety and effectiveness of medical devices under the Federal
Food, Drug and Cosmetic Act. Computer applications and software are considered
medical devices and are subject to regulation by the FDA when they are
indicated, labeled or intended to be used in the diagnosis of disease or other
conditions, or in the cure, mitigation, treatment or prevention of disease, or
are intended to affect the structure or function of the body. We do not believe
that any of our current applications or services are subject to FDA regulation
as medical devices; however, we plan to expand our application and service
offerings into areas that may be subject to FDA regulation. We have no
experience in complying with FDA regulations. Our compliance with such FDA
regulations could prove to be time consuming, burdensome and expensive, which
could adversely affect our ability to introduce new applications or services in
a timely manner.
Changes in the regulatory and economic environment and consolidation in the
healthcare industry could adversely affect our business.
The healthcare industry is highly regulated and is subject to changing
political, economic and regulatory influences. These factors affect the
purchasing practices and operation of healthcare organizations. Changes in
current healthcare financing and reimbursement systems could require us to make
unplanned enhancements of solutions or services, or result in delays or
cancellations of orders or in the revocation of endorsement of our services by
our channel partners and others. Federal and state legislatures have
periodically considered programs to reform or amend the U.S. healthcare system
at both the federal and state level. These programs may contain proposals to
increase governmental involvement in healthcare, lower reimbursement rates or
otherwise change the environment in which healthcare industry participants
operate. Healthcare industry participants may respond by reducing their
investments or postponing investment decisions, including investments in our
solutions and services. We do not know what effect any of these proposals would
have on our business.
Many healthcare industry participants are consolidating to create integrated
healthcare delivery systems with greater market power. As the healthcare
industry consolidates, competition to provide products and services to industry
participants will become more intense and the importance of establishing a
relationship with each industry participant will become greater. These industry
participants may try to use their market power to negotiate price reductions
for our software solutions and services. If we were forced to reduce our
prices, our operating results could suffer.
Failure of computer systems and software products to be Year 2000 compliant
could increase our costs, disrupt our services and reduce demand from our
clients.
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field. These date code fields
will need to accept four-digit entries in order for 20th century dates to be
distinguished from 21st century dates. As a result, before the end of this
year, computer systems and software used by many companies may need to be
upgraded to comply with these "Year 2000" requirements.
We confront the Year 2000 problem in three contexts:
Our Solutions. Because we sell computer-related solutions, our risk of
lawsuits relating to Year 2000 issues is likely to be greater than that of
companies in other industries. Because computer products and services may
incorporate components from different providers, it may be difficult to
determine which component may
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cause a Year 2000 problem. As a result, we may be subjected to Year 2000-
related lawsuits whether or not our software solutions and services are Year
2000 compliant. There can be no assurance as to what the outcomes or impact of
any such lawsuits may be. Our acquired subsidiaries have several contracts
which make Year 2000 warranties. The potential liability arising from these
warranties is not limited. Any Year 2000-related lawsuits or claims may divert
management's attention and resources. If such lawsuits or claims are resolved
against us, our business may be harmed.
Our Suppliers. We rely on third party network infrastructure providers to
gain access to the Internet. If such providers experience business
interruptions as a result of their failure to achieve Year 2000 compliance, our
ability to provide Internet connectivity could be impaired, which could harm
our reputation and our business. We use and license software and hardware from
third parties. If this software or hardware is not Year 2000 compliant, our
business may suffer. We also rely on third parties for other products and
services required to operate our business. If we cannot obtain products or
services that are Year 2000 compliant, or if vendors and service suppliers
cannot deliver their products or services because of Year 2000 compliance
problems, our business may be harmed.
Our Customers. Many of our customers and potential customers maintain their
operations on computer hardware that may be impacted by Year 2000
complications. Healthcare is one of the least prepared major industries in the
United States with respect to Year 2000 related problems. Many of our customers
may not be Year 2000 compliant. Customer difficulties due to Year 2000 issues
could interfere with healthcare transactions or the transmission of
information, which might expose us to significant potential liability. If
customer failures result in the failure of our systems, it could harm our
reputation and our business. Furthermore, Year 2000 issues may affect the
purchasing patterns of these customers or potential customers as companies
expend significant resources to become Year 2000 compliant. The costs of
becoming Year 2000 compliant for current or potential customers may result in
reduced funds being available to purchase and implement our solutions and
services, which would harm our sales and our business.
Risks Related To This Offering
Our management will have broad discretion to allocate the net proceeds of
this offering and the proceeds may not be used appropriately.
Our management will retain broad discretion allocating the proceeds of this
offering. We estimate the net proceeds from this offering to be approximately
$18.0 million, after deducting estimated offering expenses. We plan to use
these proceeds to repay short-term debt, including amounts owed to or
guaranteed by certain of our directors, officers and stockholders, for
development of our solutions and architecture, expansion of our sales and
marketing efforts, and expansion of our administrative infrastructure. We have
no specific allocations for any other net proceeds of this offering.
Consequently, management will retain a significant amount of discretion over
the application of these proceeds. Because of the number and variability of
factors that will determine the use of these proceeds, how we spend the
proceeds may vary substantially from our current intentions.
We may need additional capital to fund our operations and finance our
growth, and we may not be able to obtain it on terms acceptable to us or at
all.
We will require substantial additional capital to finance our future growth
and solutions development activities. We expect that the net proceeds from this
offering, together with our existing assets, anticipated debt and capital lease
financing, and revenue from operations will be sufficient to fund our
operations for at least the next 12 months. The timing and amount of our
capital requirements will depend on many factors, including:
. acceptance and demand for our solutions;
. the costs of developing new solutions or enhancing existing solutions;
. the costs associated with expanding our operations; and
. the number and timing of acquisitions.
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If we issue additional stock to raise capital, your percentage ownership
will be reduced. If funding is insufficient at any time in the future, we may
be unable to develop or enhance our solutions, take advantage of business
opportunities or respond to competitive pressures, any of which could harm our
business.
Our existing principal stockholders, executive officers and directors will
continue to control our company and the outcome of proposals put to a vote
of stockholders after this offering.
When this offering is completed, our executive officers, directors, existing
5% or greater stockholders and their affiliates will, in the aggregate, own
shares representing approximately 38.4% of our outstanding voting capital
stock. As a result, these persons, acting together, will be able to have a
significant influence on all matters submitted to our stockholders for approval
and on our management and affairs.
The market price of our common stock could be affected by the substantial
number of shares that are eligible for future sale.
After this offering is completed, 18,302,514 shares of our common stock will
be issued and outstanding, assuming no exercise of the underwriter's over-
allotment option. There can be no assurance as to what effect, if any, future
sales of shares or the availability of shares for future sale will have on the
market price of the common stock. The market price of our common stock could
drop due to sales of a large number of shares in the market after this offering
or the perception that sales of large numbers of shares could occur. These
factors could also make it more difficult to raise funds through future
offerings of common stock. All of the shares of common stock sold in this
offering will be freely tradable under the Securities Act of 1933, as amended,
unless purchased by our "affiliates," as that term is defined in the Securities
Act. Our officers, directors and stockholders have entered into lock-up
agreements under which they have agreed not to, directly or indirectly, offer,
sell, offer to sell, pledge, grant any option to purchase or otherwise sell or
dispose of any shares of common stock or securities convertible into or
exchange or exerciseable for shares of common stock for a period of 180 days
after the date of this prospectus without the prior written consent of the
underwriters. Upon expiration of this lock-up period and as set forth in the
chart below, the shares owned by these persons prior to completion of this
offering may be sold into the public market without a registration statement
under the Securities Act in compliance with the volume limitations and other
applicable restrictions of Rule 144 under the Securities Act. As these
restrictions on resale end, the market price of our common stock could drop
significantly if the holders of these restricted shares sell them or are
perceived by the market as intending to sell them.
<TABLE>
<CAPTION>
Date of availability for resale
Number of shares into public market
---------------- -------------------------------
<C> <S>
180 days after the date of this prospectus due to a lock-up
agreement our officers, directors and stockholders have with
the underwriters. However, the underwriters can waive this
restriction at any time and without notice.
Between 180 and 365 days after the date of this prospectus
due to the requirements of the federal securities laws.
</TABLE>
After the date of this prospectus, we intend to file one or more
registration statements under the Securities Act to register all shares of
common stock issuable upon the exercise of outstanding stock options or
reserved for issuance under our stock plans, of which 1,234,360 shares will be
immediately exercisable upon the completion of this offering and an additional
13,000 shares will be exercisable within 60 days of October 31, 1999. Those
registration statements are expected to become effective immediately upon
filing, and subject to the vesting requirements and exercise of the related
options as well as the terms of the lock-up agreements, shares covered by those
registrations statements will be eligible for sale in the public markets,
except for any shares held by our "affiliates."
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Our stock price could be volatile.
The trading price of our common stock is likely to be volatile. The stock
market in general, and the market for technology and Internet-related companies
in particular, has experienced extreme volatility. This volatility has often
been unrelated to the operating performance of particular companies. We cannot
assure you that an active public market for our common stock will develop or
continue after this offering. Investors may not be able to sell their common
stock at or above our initial public offering price. Prices for the common
stock will be determined in the marketplace and may be influenced by many
factors, including variations in our financial results, changes in earnings
estimates by industry research analysts, investors' perceptions of us and our
financial prospects, and general economic, industry and market conditions.
We believe that there are relatively few comparable companies that have
publicly-traded equity securities. This may also affect the trading price of
our common stock after this offering. In addition, the stock market has from
time to time experienced extreme price and volume volatility, and this
volatility may adversely affect the market price of our common stock.
We have certain anti-takeover defenses that could delay or prevent a change
of control and that could adversely affect the price of our common stock.
Provisions of our amended and restated certificate of incorporation and
bylaws and the provisions of Delaware law could delay, defer or prevent an
acquisition or change of control of OrganicNet or otherwise adversely affect
the price of our common stock. For example, our board of directors is staggered
in three classes, so that only one-third of the directors could be replaced at
any annual meeting. Additionally, our bylaws limit the ability of stockholders
to call a special meeting or act by written consent. Our certificate of
incorporation also permits our board to issue shares of preferred stock without
stockholder approval. In addition to delaying or preventing an acquisition, the
issuance of a substantial number of preferred shares could adversely affect the
price of the common stock.
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FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. We have based these
forward-looking statements largely on our current expectations and projections
about future events and financial trends affecting the financial condition of
our business. These forward-looking statements are subject to a number of
risks, uncertainties and assumptions about OrganicNet, including, among other
things:
. general economic and business conditions, both nationally and in our
markets;
. our expectations and estimates concerning future financial performance,
financing plans and the impact of competition;
. anticipated trends in our business;
. existing and future regulations affecting our business; and
. other risk factors set forth under "Risk Factors" in this prospectus.
In addition, in this prospectus, the words "believe", "may", "will",
"estimate", "continue", "anticipate", "intend", "expect" and similar
expressions, as they relate to OrganicNet, our business or our management, are
intended to identify forward-looking statements.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks and uncertainties, the forward-looking events and
circumstances discussed in this prospectus may not occur and actual results
could differ materially from those anticipated or implied in the forward-
looking statements.
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USE OF PROCEEDS
Our net proceeds from the sale of the 4,500,000 shares of common stock in
this offering, assuming a public offering price of $5.50 per share, are
estimated to be $21.5 million ($25.0 million if the underwriters' over-
allotment option is exercised in full), after deducting underwriting discounts
and commissions and estimated offering expenses. The primary purposes of this
offering are to take advantage of favorable market conditions, to raise
additional equity capital, to create a public market for our common stock and
to facilitate future access to public markets.
Approximately $300,000 of the proceeds will be used to repay short-term
debt, including amounts owed to or guaranteed by certain of our directors
officers and shareholders. See "Certain Relationships and Related
Transactions." We have no other current specific plans for the remaining net
proceeds from this offering.
We generally intend to use the remaining net proceeds as follows:
. to continue the development of our solutions and architecture;
. to continue the expansion of our sales and marketing efforts;
. to continue the expansion of our administrative infrastructure; and
. for working capital and other general corporate purposes.
In addition, the net proceeds may also be used to fund acquisitions or
acquire complementary products, technologies or businesses; however, we
currently have no commitments or agreements and are not involved in any
negotiations to do so.
Pending these uses, we may invest the net proceeds from this offering
temporarily in short-term, investment-grade, interest bearing securities or
guaranteed obligations of the United States government.
DIVIDEND POLICY
We have not declared or paid, and do not anticipate declaring or paying, any
dividends on our common stock in the near future. We currently intend to retain
future earnings, if any, to fund the expansion and growth of our business. Any
future determination as to the declaration and payment of dividends will be at
the discretion of our board of directors and will depend on then existing
conditions, including our financial condition, results of operations,
contractual restrictions, capital requirements, business prospects and other
factors that our board of directors considers relevant.
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DILUTION
Purchasers of our common stock in this offering will experience immediate
and substantial dilution in the pro forma net tangible book value of their
common stock from the initial public offering price. Pro forma net tangible
book value per share represents the amount of our total tangible assets less
total liabilities, divided by the number of shares of common stock outstanding
on a pro forma basis after giving effect to the conversion of all outstanding
shares of our preferred stock upon the consummation of this offering. The pro
forma net tangible book value of our common stock on September 30, 1999 was
$(2,789,109), or approximately $(0.20) per share. Dilution in pro forma net
tangible book value per share represents the difference between the amount per
share paid by purchasers of shares of our common stock in this offering and the
net tangible book value per share of our common stock immediately afterwards.
After giving effect to the sale of 4,500,000 shares of common stock by us in
this offering at an assumed initial public offering price of $5.50 and after
deducting the underwriting discounts and commissions and estimated offering
expenses and the application of the estimated net proceeds therefrom, our pro
forma net tangible book value would have been $18,728,391 or approximately
$1.02 per share. This represents an immediate increase in pro forma net
tangible book value of $1.22 per share to existing stockholders and an
immediate and substantial dilution of $4.48 per share to new investors. The
following table illustrates this per share dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price........................ $5.50
Pro forma net tangible book value as of September 30,
1999...................................................... $(0.20)
Increase attributable to new investors..................... $ 1.22
Pro forma net tangible book value after this offering........ 1.02
-----
Dilution in pro forma net tangible book value to new
investors................................................... $4.48
=====
</TABLE>
The following table sets forth, as of September 30, 1999, on the same pro
forma basis, the number of shares of common stock purchased from us by existing
stockholders and by the new investors at the assumed initial public offering
price together with the total price and average price per share paid by each of
these groups, before deducting underwriting discounts and commissions and
estimated offering expenses.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ ------------------- Price
Number Percent Amount (1) Percent Per Share
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders....... 13,793,729 75% $17,203,284 41% $1.25
New investors............... 4,500,000 25 24,750,000 59 5.50
---------- --- ----------- ---
Total..................... 18,293,729 100% 41,953,284 100%
========== === =========== ===
</TABLE>
- --------
(1) For existing stockholders, includes $13,685,376 of cash consideration paid,
$2,052,209 of stock issued in connection with acquisitions and $1,465,699
of stock issued for services, compensation and repayment of loans.
Except as noted above, the foregoing discussions and tables assume no
exercise of any outstanding stock options or warrants. As of September 30,
1999, there were options outstanding to purchase 1,817,366 shares of common
stock pursuant to our stock option plans at a weighted average exercise price
of $1.69 per share. To the extent that any of these options are exercised,
there will be further dilution to the new investors.
18
<PAGE>
CAPITALIZATION AND SHORT-TERM DEBT
The following table sets forth as of September 30, 1999:
. our actual capitalization and short-term debt;
. our pro forma capitalization after giving effect to the conversion of
all outstanding shares of our preferred stock into a total of 8,292,200
shares of common stock upon the consummation of this offering, and
. our pro forma as adjusted capitalization after giving effect to the sale
of 4,500,000 shares of common stock sold in this offering at the assumed
initial public offering price of $5.50 per share, after deducting the
underwriting discounts and commissions and the estimated offering
expenses and the application of the estimated net proceeds therefrom.
You should read the following table in conjunction with our consolidated
financial statements and related notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of September 30, 1999
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands)
<S> <C> <C> <C>
Short-term debt, including lines of credit and
note payable to bank, notes payable to related
parties and others, and current portion of
capital leases................................. $ 872 $ 872 $ 572
Capital lease obligations, less current
portion........................................ 53 53 53
Notes payable to employee and others, less
current portion................................ 38 38 38
-------- -------- --------
963 963 663
-------- -------- --------
Stockholders' equity (deficit):
Convertible preferred stock, all $0.01 par
value, none pro forma and pro forma as
adjusted:
Series A, 1,500,000 shares authorized;
1,418,270 shares issued and outstanding
actual....................................... 14 -- --
Series A-II, 115,000 shares authorized; 78,157
shares issued and outstanding actual ........ 1 -- --
Series A-III, 5,416 shares authorized; 5,416
shares issued and outstanding actual ........ -- -- --
Series B, 1,250,000 shares authorized;
1,202,470 shares issued and outstanding
actual....................................... 12 -- --
Series C, 4,000,000 shares authorized;
4,000,000 shares issued and outstanding
actual....................................... 40 -- --
Common stock, $0.001 par value, 29,500,000
shares authorized actual and pro forma,
29,500,000 shares authorized pro forma as
adjusted; 5,501,529 shares issued and
outstanding actual, 13,793,729 shares issued
and outstanding pro forma and 18,184,638
shares issued and outstanding pro forma as
adjusted...................................... 5 14 18
Additional paid-in capital..................... 18,031 18,089 39,603
Receivable for shares purchased................ (550) (550) (550)
Deferred compensation.......................... (80) (80) (80)
Accumulated deficit............................ (18,208) (18,208) (18,208)
-------- -------- --------
Total stockholders' equity (deficit)............ (735) (735) 20,783
-------- -------- --------
Total capitalization............................ $ 228 $ 228 $ 21,446
======== ======== ========
</TABLE>
The shares of common stock outstanding in the actual, pro forma and pro
forma adjusted columns exclude:
. 1,817,366 shares of common stock issuable as of September 30, 1999 upon
the exercise of outstanding stock options issued at a weighted average
exercise price of $1.69 per share under our stock option plans;
. 478,499 shares of common stock reserved for issuance under our stock
option plans as of September 30, 1999; and
.The use of proceeds of $300,000 to repay notes payable to related parties.
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected data presented below under the captions "Consolidated Statement
of Operations" and "Consolidated Balance Sheet Data," as of and for each of the
years in the four years ended December 31, 1995, 1996, 1997 and 1998, are
derived from the consolidated financial statements of OrganicNet, Inc. and
subsidiaries, which consolidated financial statements have been audited by KPMG
LLP, independent certified public accountants. The consolidated financial
statements as of December 31, 1997 and 1998 and for each of the years in the
three-year period ended December 31, 1998, and the independent auditors' report
thereon, are included elsewhere in this prospectus.
The pro forma selected data presented below for the year ended December 31,
1998 and the nine months ended September 30, 1999 are derived from the
unaudited pro forma condensed combined financial statements of OrganicNet, Inc.
and its subsidiaries, including PSI-Med Corporation, included elsewhere in this
prospectus and give effect to our acquisition of PSI-Med Corporation as if such
acquisition had occurred as of the beginning of the periods presented. The
unaudited pro forma information is not necessarily indicative of the combined
results that would have occurred had such acquisition taken place as of the
beginning of the periods presented, nor is it necessarily indicative of results
that may occur in the future.
The selected data presented below for the nine months ended September 30,
1998 and 1999, and as of September 30, 1998 and 1999, are derived from the
unaudited consolidated financial statements of OrganicNet, Inc. and its
subsidiaries included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
---------------------------------------------- -----------------------------------
Pro Forma Pro Forma
1995 1996 1997 1998 1998 1998 1999 1999
------ ------- ------- ------- ----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
(in thousands, except per share information)
Consolidated Statement of
Operations:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
License................ $ -- $ -- $ 424 $ 571 $ 1,087 $ 376 $ 778 $ 1,077
Product development.... -- -- 1,238 565 565 391 340 340
Service................ 525 371 1,310 3,488 5,182 2,763 3,106 4,245
------ ------- ------- ------- ------- ------- ------- -------
Total revenue.......... 525 371 2,972 4,624 6,834 3,530 4,224 5,662
------ ------- ------- ------- ------- ------- ------- -------
Cost of revenue:
License................ -- -- 475 756 756 577 551 596
Product development.... -- -- 320 209 209 168 61 61
Service................ -- 238 892 2,314 3,850 1,818 2,068 2,941
------ ------- ------- ------- ------- ------- ------- -------
Total cost of revenue.. -- 238 1,687 3,279 4,815 2,563 2,680 3,598
------ ------- ------- ------- ------- ------- ------- -------
Gross profit............ 525 133 1,285 1,345 2,019 967 1,544 2,064
------ ------- ------- ------- ------- ------- ------- -------
Operating expense:
Sales and marketing.... 7 24 1,395 1,644 1,812 1,249 1,624 1,686
Research and
development........... 508 724 1,345 1,833 2,070 1,480 1,842 2,068
General and
administrative........ 212 1,690 3,332 3,768 4,597 2,422 2,859 3,150
------ ------- ------- ------- ------- ------- ------- -------
Total operating
expense............... 727 2,438 6,072 7,245 8,479 5,151 6,325 6,904
------ ------- ------- ------- ------- ------- ------- -------
Operating loss.......... (202) (2,305) (4,787) (5,900) (6,460) (4,184) (4,781) (4,840)
Interest expense........ (9) (9) (20) (93) (93) (48) (104) (114)
Other income (expense).. 1 7 14 (9) (95) (5) 10 (15)
------ ------- ------- ------- ------- ------- ------- -------
Loss before income
taxes.................. (210) (2,307) (4,793) (6,002) (6,648) (4,237) (4,875) (4,969)
Provision for income
taxes.................. 1 4 6 4 5 4 5 6
------ ------- ------- ------- ------- ------- ------- -------
Net loss................ $ (211) $(2,311) $(4,799) $(6,006) $(6,653) $(4,241) $(4,880) $(4,975)
====== ======= ======= ======= ======= ======= ======= =======
Net loss per share:
Basic and diluted...... $(0.05) $ (0.45) $ (0.88) $ (1.10) $ (1.22) $ (0.78) $ (0.89) $ (0.91)
Weighted average shares
outstanding:
Basic and diluted...... 4,000 5,189 5,426 5,448 5,448 5,443 5,490 5,490
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
As of December 31, As of September 30,
------------------------------ -----------------------------------
Pro Forma
As Adjusted
1995 1996 1997 1998 1998 1999 1999
----- ----- ------- ------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited)
(in thousands)
Consolidated Balance
Sheet Data:
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash
equivalents........... $ 25 $ -- $ 47 $ 41 $ 14 $ 895 $22,112
Working capital
(deficit)............. 223 (524) (3,149) (6,290) (5,240) (3,289) 18,228
Total assets........... 144 761 2,904 2,215 2,244 5,013 26,230
Total stockholders'
equity (deficit)...... (205) (55) (1,257) (5,047) (3,775) (735) 20,783
</TABLE>
The preceding consolidated balance sheet data is shown on a pro forma as
adjusted basis to give effect to:
. the conversion of all outstanding shares of preferred stock into shares
of common stock upon consummation of this offering,
. the sale of 4,500,000 shares of common stock in this offering at an
assumed initial public offering price of $5.50 per share, after
deducting the underwriting discounts and commissions and estimated
offering expenses and application of the net proceeds therefrom, and
. the use of proceeds of $300,000 to repay notes payable to related
parties.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis should be read in conjunction with the
"Selected Consolidated Financial Data" and the accompanying financial
statements and related notes included elsewhere in this prospectus. The
following discussion contains forward-looking statements that reflect our
plans, estimates and beliefs. Our actual results could differ materially from
those discussed in these forward-looking statements. Factors that could cause
or contribute to such differences include but are not limited to, those
discussed below and elsewhere in this prospectus, particularly in "Risk
Factors."
Overview
We are an application service provider (ASP) that develops software
solutions for clinics and group practices using our proprietary technology
platform. Our customers can access and use our solutions over the Internet or
their own private networks. We charge our customers a monthly subscription fee
for our ASP software solutions. We also market and support legacy software
products that were developed by the companies we acquired, as discussed below.
Our software solutions and acquired legacy products are sold by our own direct
sales force and through third parties. We currently provide the following range
of services principally related to our acquired legacy products: post-contract
customer support, maintenance, technical support, consulting, installation of
simple interfaces, training, credentialing and case management services.
Historically, we derived substantially all of our revenue from the sale of
legacy software products and services. Our legacy products address
credentialing, scheduling, resource management, case management and
disease/outcomes management. From our inception in January 1995, we have been
developing our Organic Architecture, a flexible platform for creating software
applications without code. As a part of our development strategy, we have
acquired companies that provided us with expertise in particular areas of
healthcare, as well as near-term products, customers and revenues. In February
1999, we delivered our first pre-production ASP software solution using our
Organic Architecture to customers, and in April 1999, we deployed our first
pre-production ASP software solution over the Internet. With the introduction
of our ASP software solutions, we are de-emphasizing the sale of legacy systems
and expect sales of these systems and related service revenue to substantially
decline in future periods. We expect to market and sell these ASP software
solutions as an upgrade to our existing legacy products in the future, as we
develop additional ASP software solutions to replace our legacy products. Due
to the anticipated substantial decline in revenue associated with these legacy
systems and the costs associated with the development and commercialization of
our ASP software solutions, as well as the development of sales and marketing
support for these solutions, we expect that our operating losses will increase
substantially in future periods and continue for at least the next several
years. Our ability to achieve profitability will depend on our successful
development and marketing of our solutions. With our strategy, we are subject
to the risks inherent in both the ASP business model and the entry into a new
and uncertain market. Our solutions may not achieve market acceptance.
Accordingly, the extent of future losses and the time required to achieve
profitability, if any, is highly uncertain.
We have generated and will continue to generate revenue from software
license, product development and service fees from our legacy products.
Software license fees are derived from the licensing of acquired legacy
products and are expected to decline substantially in future periods. Product
development fees have been and will continue to be generated from co-
development agreements with Pfizer Health Solutions Inc, but we expect these
revenues and their related costs to substantially decline in the future.
Revenue received under these co-development agreements with Pfizer Health
Solutions Inc represented 46% of total revenue in 1997, 20% of total revenue in
1998 and 20% of total revenue for the nine months ended September 30, 1999.
Service fees are derived from post-contract software support, case management,
credentialing, training, installation and simple interfaces for legacy
products, which we expect to decline substantially as sales of our legacy
systems decline.
In the future, we expect to generate revenue substantially from subscription
and service fees from the sale of our ASP software solutions. Subscription fees
will be derived from our ASP software solutions on a monthly
22
<PAGE>
basis. We began to generate subscription fees for these solutions in the second
quarter of 1999. We cannot predict subscription fees accurately because we have
limited experience selling our solutions. In addition, our customers may decide
to stop using our solutions at any time with very little notice. We may spend
substantial time and resources developing or tailoring solutions for channel
partners or customers prior to the time we have entered into subscription
agreements with them. If we do not enter into agreements with these channel
partners and customers do not subscribe for these solutions for a sufficient
period of time, we will not be able to achieve revenue to recoup our
investment. Service fees related to our solutions will increase as we deploy
them.
License revenue is recognized when the related contract has been executed,
the product has been shipped, collectibility is probable and the software
license fees are fixed and determinable. In the event that the contract
provides for multiple elements (e.g., training, simple interfaces or post-
contract customer support), the total fee is allocated to these elements based
on vendor-specific objective evidence of fair value. If any portion of the
license fee is subject to forfeiture, refund or other contractual
contingencies, we will postpone revenue recognition until these contingencies
have been removed.
Subscription fees for our ASP software solutions will be recognized on a
monthly basis. We recognize product development revenue from our co-development
agreements using a percentage-of-completion method either as services are
performed or based on meeting key milestone events over the term of the
contracts. Service revenue from post-contract customer support and maintenance
is recognized ratably over the term of the maintenance period. Revenue from
case management, credentialing, training and installation services is recorded
as the services are performed.
Historically, cost of revenue consisted of the cost of licenses, product
development and services. In the future, we expect cost of revenue to consist
of the cost of subscription, license and service related to our ASP software
solutions. Cost of subscription revenue will include the charges paid to our
Internet service, application host and data center provider, as well as the
amortization of the costs of third party database licenses and ongoing annual
fees for these licenses. Cost of license revenue consists of personnel
salaries, benefits and related overhead expenses, as well as the amortization
of acquired technologies. Cost of service revenue includes direct costs, such
as salaries and benefits, and related overhead expenses, such as occupancy
charges. As we focus on our ASP solutions, we expect the cost of subscription
revenue and services related to our ASP solutions to increase and the cost of
license revenue and services related to our legacy products to decrease.
Sales and marketing expense consists of salaries, related benefits,
commissions, printing of promotional material, public relations, attendance at
industry trade shows, advertising and other costs associated with our sales and
marketing efforts. We expect to incur substantial expenditures related to sales
and marketing as we build our direct sales force and expand our distribution
channels.
Research and development expense consists primarily of salaries, related
benefits, third party consultant fees and other costs. With respect to software
development, we establish technological feasibility once testing of a working
model has been completed. The time between establishment of a working model and
general release is short. Development costs incurred subsequent to
technological feasibility have not been material. We expect to continue to make
substantial investments in research and development activities as we seek to
advance our technology and broaden our ASP software solutions.
General and administrative expense consists primarily of salaries and
related benefits, amortization of goodwill and workforce-in-place, and fees for
professional services, such as legal and accounting. We expect general and
administrative expense to increase as we add personnel, including select senior
management personnel, and incur additional costs related to the anticipated
growth of our business and operation as a public company.
We were incorporated in January 1995 as a California corporation and
reincorporated in Delaware in 1996. Since our inception, we have incurred
significant losses and as of September 30, 1999, had an accumulated deficit of
approximately $18.2 million.
23
<PAGE>
Acquisitions
As a result of our experience with healthcare information systems, we
concluded that the legacy software applications used by the healthcare industry
could not provide the adaptable, cost-effective solutions needed by clinics and
group practices. To develop solutions that could address these needs, we
decided to pursue a strategy of selectively acquiring companies with healthcare
domain expertise and enabling technologies. In April 1996, we completed our
first acquisition, a company with expertise in and technology tools for the
development of object-oriented software. With our second acquisition, we
acquired a company with expertise in modeling and business process
reengineering methodology. Using this methodology, we created a map of the core
processes involved in managing a clinic or group practice. This map became the
process map of the Organic Clinic and it was used to identify the tasks needed
to deliver a software solution that could manage the entire clinical and
business process. We then targeted and acquired six small software and service
companies, each representing specialized healthcare domains that had been
identified in the process map.
In our first three years of operations, we completed the following
acquisitions:
<TABLE>
<CAPTION>
Company Acquisition date Expertise
- ------- ----------------- ------------------------------
<S> <C> <C>
First Principles, Inc. ...... April 22, 1996 Object Technology
RiteLine Systems, Inc. ...... April 30, 1996 Business Methodology
Comprehensive Provider
Credentialing Services,
Inc. ....................... May 23, 1996 Credentialing Service
Velocity Healthcare
Informatics, Inc. .......... December 20, 1996 Outcomes/Disease Management
Res-Q, Inc., formerly MMS,
Inc. ....................... May 14, 1997 Scheduling/Resource Management
Intedata, Inc. .............. June 4, 1997 Marketing Service
L.I.N.C., Inc. .............. June 23, 1997 Case Management
Healthcheck, Incorporated ... November 14, 1997 Credentialing Service
</TABLE>
Healthcheck, L.I.N.C., Res-Q and Velocity Healthcare Informatics remain
wholly owned operating subsidiaries and function as an integrated part of
OrganicNet. All of our acquisitions were accounted for using the purchase
method of accounting and, accordingly, the results of the acquired companies'
operations are included in our consolidated financial statements from their
respective effective dates forward. Under the terms of the acquisition
agreements, the consideration included preferred shares, notes payable, common
shares and cash. We acquired all of the outstanding common stock for each of
the acquired companies except for Velocity Healthcare Informatics, which was
structured as an asset purchase. Total consideration for our acquisitions,
completed through December 31, 1998, was approximately $1.7 million.
For each of the acquired companies, the purchase price was allocated to the
tangible and identifiable intangible assets acquired and liabilities assumed
based on their fair values on the acquisition date. Amounts allocated to
acquired technology and workforce-in-place are amortized on a straight-line
basis over a three-year period. Amounts allocated to goodwill are amortized on
a straight-line basis over an estimated useful life of three to seven years.
PSI-Med Corporation
On September 20, 1999, we completed our acquisition of PSI-Med Corporation,
which sells and services practice management software and is engaged as a full
service provider of medical insurance billing and accounts receivable
collection services. We acquired all of the outstanding capital stock of PSI-
Med Corporation in exchange for 16,667 shares of preferred stock, which will
convert into 333,340 shares of our common stock upon the closing of this
offering. These shares have been valued at approximately $667,000. Our
acquisition was accounted for using the purchase method of accounting,
resulting in approximately $1.6 million of goodwill to be amortized using the
straight-line method over its estimated useful life of seven years. The results
of PSI-Med's operations are included in our consolidated financial statements
beginning with the effective date of the acquisition which was August 31, 1999.
24
<PAGE>
Results of Operations
Nine Months Ended September 30, 1999 and 1998
License revenue
License revenue includes fees from the licensing of our acquired legacy
products. License revenue increased 107% to approximately $778,000 for the nine
months ended September 30, 1999 from approximately $376,000 for the nine months
ended September 30, 1998. The increase in license revenue was primarily due to
an increase of $436,000 in our scheduling and resource management products
related to increased customer sales offset by a $50,000 decrease in sales of
our case management product related to the timing of installations.
Product development revenue
Product development revenue is primarily generated from co-development
agreements addressing outcomes, credentialing and survey software and services
with Pfizer Health Solutions Inc. Product development revenue decreased 13% to
approximately $340,000 for the nine months ended September 30, 1999 from
approximately $391,000 for the nine months ended September 30, 1998 due to the
timing and size of co-development contracts completed with Pfizer Health
Solutions Inc.
Service revenue
Service revenue is comprised of fees from post-contract software support,
case management services, credentialing services, training and installation of
simple interfaces. Service revenue increased 12% to approximately $3.1 million
for the nine months ended September 30, 1999 from approximately $2.8 million
for the nine months ended September 30, 1998. The increase in service revenue
was primarily due to an increase of $347,000 in sales of credentialing services
and approximately $140,000 of revenues associated with our acquisition of PSI-
Med, offset by a decrease of approximately $230,000 of revenue from our
scheduling and resource management products.
Cost of license revenue
Cost of license revenue consists of personnel salaries, benefits and related
overhead expenses, as well as the amortization of acquired technologies. Cost
of license revenue decreased 5% to approximately $551,000 for the nine months
ended September 30, 1999 from approximately $577,000 for the nine months ended
September 30, 1998 due to the redirection of our resources from our legacy
products to the development of our ASP software solutions.
Cost of product development revenue
Cost of product development includes direct costs, such as personnel
salaries and benefits, and related overhead expenses, such as occupancy
charges. Cost of product development revenue decreased 64% to approximately
$61,000 for the nine months ended September 30, 1999 from approximately
$168,000 for the nine months ended September 30, 1998, due to the decreased
level of development efforts associated with the Pfizer Health Solutions Inc
co-development agreements.
Cost of service revenue
Cost of service revenue includes direct costs, such as personnel salaries
and benefits, and related overhead expenses, such as occupancy charges. Cost of
service revenue increased 14% to approximately $2.1 million in the nine months
ended September 30, 1999 from approximately $1.8 million for the nine months
ended September 30, 1998, primarily due to $243,000 of increased costs
associated with our increased sales of credentialing services.
25
<PAGE>
Sales and marketing expense
Sales and marketing expense consists primarily of salaries, related
benefits, commissions, printing of promotional material, public relations,
attendance at industry trade shows, advertising and other costs associated with
our sales and marketing efforts. Sales and marketing expenses increased 30% to
approximately $1.6 million for the nine months ended September 30, 1999 from
approximately $1.2 million for the nine months ended September 30, 1998. This
increase was due to a one-time expense of approximately $745,000 associated
with the stock options issued to Superior Consultant in September 1999 offset
by decreased spending for trade show and third party marketing activities.
Research and development expense
Research and development expense consists primarily of salaries, related
benefits, third party consultant fees and other costs. Research and development
expense increased 24% to approximately $1.8 million for the nine months ended
September 30, 1999 from approximately $1.5 million for the nine months ended
September 30, 1998, due to increased personnel costs associated with additional
headcount and facilities expense for the development of our Organic
Architecture and ASP software solutions.
General and administrative expense
General and administrative expense consists primarily of salaries and
related benefits, amortization of intangible assets for goodwill and workforce-
in-place, and fees for professional services, such as legal and accounting.
General and administrative expense increased 18% to approximately $2.9 million
for the nine months ended September 30, 1999 from approximately $2.4 million
for the nine months ended September 30, 1998, due to an increase of
approximately $150,000 in salaries and related expenses, an increase in bad
debts of $65,000, and approximately $50,000 associated with the acquisition of
PSI-Med. The remaining increase was due to increases in general corporate
expenses.
Interest expense
Interest expense increased 117% to approximately $104,000 for the nine
months ended September 30, 1999 from approximately $48,000 for the nine months
ended September 30, 1998, primarily due to increased borrowings used to fund
our operations.
Income taxes
Income taxes paid to state taxing authorities consisted of minimum payments
of $4,800 for the nine months ended September 30, 1999 and $4,000 for the nine
months ended September 30, 1998. As a result of operating losses, no provision
or benefit for income taxes has been recorded for either period. Deferred tax
assets associated with net operating losses generated have not been recognized
as there is substantial uncertainty as to the likelihood of the realization of
those net operating losses.
Years Ended December 31, 1998 and 1997
License revenue
License revenue increased 35% to approximately $571,000 in 1998 from
approximately $424,000 in 1997. Of this increase, $136,000 was primarily due to
inclusion in 1998 of a full year of license revenue for our scheduling,
resource management and case management products compared to a partial year of
license revenue in 1997.
Product development revenue
Product development revenue decreased 54% to approximately $565,000 in 1998
from approximately $1.2 million in 1997, due to the timing and size of co-
development contracts completed with Pfizer Health Solutions Inc in 1998 as
compared to 1997.
26
<PAGE>
Service revenue
Service revenue increased 166% to approximately $3.5 million in 1998 from
approximately $1.3 million in 1997. Of this increase, $1.1 million was due to
the inclusion in 1998 of a full year of service revenue for sales of service
and support contracts and $851,000 was due to the increased sales of
credentialing services.
Cost of license revenue
Cost of license revenue increased 59% to approximately $756,000 in 1998 from
approximately $475,000 in 1997. Of this increase, $167,000 was due to 1998
being the first full year of amortization of our acquired technologies and
$114,000 was due to the increased costs from inclusion in 1998 of a full year
of license revenue as compared to a partial year of license revenue in 1997.
Cost of product development revenue
Cost of product development revenue decreased 35% to approximately $209,000
in 1998 from approximately $320,000 in 1997 due to the decreased level of
development under our Pfizer Health Solutions Inc co-development agreements.
Cost of service revenue
Cost of service revenue increased 159% to approximately $2.3 million in 1998
from approximately $892,000 in 1997. Of this increase, $841,000 was due to the
inclusion in 1998 of a full year of costs associated with generating service
revenue for our outcomes surveys, scheduling, resource management and case
management products and $540,000 was due to higher costs associated with our
increased sales of credentialing services.
Sales and marketing expense
Sales and marketing expense increased 18% to approximately $1.6 million in
1998 from approximately $1.4 million in 1997, due to the inclusion of a full
year of salaries and benefits associated with sales and marketing personnel
gained through our acquisitions made in 1997.
Research and development expense
Research and development expense increased 36% to approximately $1.8 million
in 1998 from approximately $1.3 million in 1997, primarily due to an increase
of $469,000 from the growth in personnel costs through additional headcount and
facilities expense for the development of our Organic Architecture and ASP
software solutions.
General and administrative expense
General and administrative expense increased 13% to approximately $3.8
million in 1998 from approximately $3.3 million in 1997, due to increased
personnel and facility costs as a result of a full year of operations from the
businesses we acquired in 1997.
Interest expense
Interest expense increased 365% to approximately $93,000 in 1998 from
approximately $20,000 in 1997, due to increased borrowings used to fund our
operations.
Income taxes
Income taxes paid to state tax authorities consisted of minimum payments of
$4,000 in 1998 and $6,400 in 1997. As a result of operating losses, no
provision or benefit for income taxes has been recorded. Deferred tax assets
associated with net operating losses generated have not been recognized as
there is substantial uncertainty as to the likelihood of the realization of
those net operating losses.
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Years Ended December 31, 1997 and 1996
License revenue
License revenue of approximately $424,000 in 1997 was attributable to the
software products of the companies we acquired in 1997. We had no license
revenue in 1996.
Product development revenue
Product development revenue was approximately $1.2 million in 1997, due to
1997 being the first year of our co-development agreements with Pfizer Health
Solutions Inc.
Service revenue
Service revenue increased 253% to approximately $1.3 million in 1997 from
approximately $371,000 in 1996. Of this increase, $647,000 was due to the
inclusion of service revenue associated with companies we acquired in 1997 and
$291,000 was due to the inclusion in 1997 of a full year of service revenue for
companies we acquired in 1996, including service and support contracts
associated with the legacy software products we acquired in each year. Deferred
revenue increased from 1996 to 1997 due to our acquisitions in 1997 of LINC,
Res-Q, and Healthcheck. Deferred revenue from these businesses resulted from
payments received in advance of rendering services under post customer support
and credentialing service contracts.
Cost of license revenue
Cost of license revenue was approximately $475,000 in 1997. We had no cost
of license revenue in 1996. Of this increase, $281,000 was due to amortization
of our acquired technologies and $194,000 was attributable to the cost of
software products of the companies we acquired in 1997.
Cost of product development revenue
Cost of product development revenue was approximately $320,000 in 1997, due
to the first year of our co-development agreements with Pfizer Health Solutions
Inc.
Cost of service revenue
Cost of service revenue increased 275% to approximately $892,000 in 1997
from approximately $238,000 in 1996. Of this increase, $415,000 was due to the
inclusion of the cost of service revenue associated with companies we acquired
in 1997 and $239,000 was due to the inclusion in 1997 of a full year of the
cost of service revenue for companies we acquired in 1996, including service
and support contracts associated with the legacy software products we acquired
in each year.
Sales and marketing expense
Sales and marketing expense increased to approximately $1.4 million in 1997
from approximately $24,000 in 1996, due to the increase in salaries and
benefits of the sales and marketing personnel acquired through our 1997
acquisitions.
Research and development expense
Research and development expense increased 86% to approximately $1.3 million
in 1997 from approximately $724,000 in 1996. Of this increase, $435,000 was due
to the growth in personnel costs as a result of increased headcount and
facilities expense for the development of Organic Architecture and ASP software
solutions.
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General and administrative expense
General and administrative expense increased 97% to approximately $3.3
million in 1997 from approximately $1.7 million in 1996, due to increased
personnel and facility costs as a result of a full year of operations from the
businesses we acquired in 1996.
Interest expense
Interest expense increased to approximately $20,000 in 1997 from
approximately $9,000 in 1996, due to increased borrowings used to fund our
operations.
Income taxes
Income taxes paid to state tax authorities consisted of minimum payments of
$6,400 in 1997 and $4,000 in 1996. As a result of operating losses, no
provision or benefit for income taxes has been recorded. Deferred tax assets
associated with net operating losses generated have not been recognized as
there is substantial uncertainty as to the likelihood of the realization of
those net operating losses.
Pro Forma Financial Information
The unaudited condensed combined financial statements included elsewhere
herein give effect to our business combination with PSI-Med Corporation. See
"Unaudited Pro Forma Condensed Combined Financial Information, OrganicNet, Inc.
and PSI-Med Corporation."
Pro Forma Nine Months Ended September 30, 1999
On a pro forma basis, our revenue for the nine months ended September 30,
1999 was approximately $5.7 million, compared to actual revenue of
approximately $4.2 million. Pro forma total revenue of PSI-Med includes sales
of medical accounting software and service revenue from post-contract customer
support agreements, accounts receivable management and collection services, and
rental arrangements for medical accounting software on a shared computer system
maintained at PSI-Med.
Our pro forma operating loss for the nine months ended September 30, 1999
was approximately $4.8 million, compared to an actual operating loss of
approximately $4.8 million. The operating loss remained relatively unchanged as
a result of PSI-Med's operating income of $115,000 being offset by the
additional goodwill amortization from the business combination of approximately
$174,900.
Our pro forma net loss for the nine months ended September 30, 1999 was
approximately $5.0 million, which reflects the increase in the operating loss
from the additional goodwill amortization resulting from the business
combination.
Pro Forma Year Ended December 31, 1998
Our pro forma total revenue for 1998 was approximately $6.8 million compared
to our actual revenue of approximately $4.6 million.
Our pro forma operating loss in 1998 was approximately $6.5 million compared
to our actual operating loss of approximately $5.9 million. The increase in our
operating loss on a pro forma basis was primarily the result of the addition of
approximately $317,000 in pro forma PSI-Med operating losses and the additional
goodwill amortization of approximately $241,000 resulting from the business
combination.
Our pro forma net loss for 1998 was approximately $6.7 million compared to
our actual net loss of approximately $6.0 million. The increase in our net loss
was for the same reasons as the increase in our operating loss.
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Liquidity and Capital Resources
Since inception, we have spent approximately $12.7 million primarily for our
operations and the development of our Organic Architecture and ASP software
solutions. We have financed these operating and development activities through
approximately $14.4 million raised from the sale of our capital stock and the
issuance of notes to employees and stockholders. Investing activities included
receipt of an aggregate approximately $234,000 in cash from acquired businesses
offset by an aggregate approximately $465,000 investment in capital assets. As
of September 30, 1999, we have approximately $895,000 in cash reserves and a
working capital deficit of approximately $3.3 million.
Net cash used in operating activities was approximately $5.4 million for the
nine months ended September 30, 1999, approximately $2.5 million in 1998,
approximately $2.7 million in 1997 and approximately $2.1 million in 1996. Cash
used in operating activities for the nine months ended September 30, 1999
resulted primarily from the funding of our operations and our payment of
current liabilities.
Our investing activities used approximately $108,000 for the nine months
ended September 30, 1999, used approximately $32,000 in 1998, provided
approximately $6,000 in 1997 and used approximately $97,000 in 1996. Investing
activities during those periods consisted primarily of aggregate net cash
obtained from acquisitions of approximately $234,000 and capital expenditures
of approximately $151,000 for the nine months ended September 30, 1999,
approximately $32,000 in 1998, approximately $207,000 in 1997 and approximately
$75,000 in 1996. We have no significant capital spending or purchase
commitments other than normal commitments under facilities and equipment
leases.
Financing activities provided cash of approximately $6.4 million during the
nine months ended September 30, 1999, approximately $2.6 million in 1998,
approximately $2.8 million in 1997 and approximately $2.2 million in 1996,
primarily from the aggregate net proceeds from sales of capital stock and the
issuance of notes to employees and stockholders. We used cash from financing
activities to make aggregate payments under notes payable to employees and
stockholders and capital leases of approximately $603,000 during these periods.
As of September 30, 1999, we had net operating loss carryforwards for
federal income tax purposes of approximately $18.6 million expiring in the
years 2013 through 2019. We had net operating loss carryforwards for state
income tax purposes of approximately $10.0 million expiring primarily in 2003.
The difference between federal and state net operating loss carryforwards is
due primarily to a 50% limitation on net operating loss carryforwards for
California income tax purposes. Due to the "change in ownership" provisions of
the Tax Reform Act of 1986, utilization of the net operating loss carryforwards
will be subject to an annual limitation regarding their utilization against
taxable income in future periods.
We expect that the net proceeds from this offering, together with our
existing assets, anticipated debt and capital lease financing, and revenue from
operations will be sufficient to fund our operations for at least the next 18
months. Thereafter, we may seek to raise additional funds through public or
private equity financings or from other sources. If we raise additional funds
by issuing equity securities, dilution to stockholders may result. There can be
no assurance that additional financing will be available on favorable terms or
at all. If funding is insufficient at any time in the future, we may be unable
to develop or enhance our products or services, take advantage of business
opportunities or respond to competitive pressures, any of which could harm our
business.
Year 2000 Preparedness
Many currently installed computer systems and software products are written
using two digits rather than four to define the applicable year. These systems
may recognize a date using "00" as the year 1900 rather than the year 2000.
This could result in systems failures or miscalculations causing disruptions of
operations for any company using such computer systems or software, including,
among other things, a temporary inability to process transactions, send
invoices or engage in normal business activities. As a result, many companies'
computer systems may need to be upgraded or replaced in order to avoid this
"Year 2000" issue.
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The majority of the software and hardware we use to manage our business has
been purchased or developed in the last five years. Generally, hardware and
software design within the current decade and the past several years in
particular have addressed the Year 2000 issue. All of the solutions we have
developed are written with four digits to define the applicable year. Testing
has been completed on our internal information technology systems and based on
that testing, we believe that our information technology systems are Year 2000
compliant.
In addition to our internally developed software, we use and license
software and hardware from third parties. We have obtained certifications from
our key suppliers of hardware and networking equipment for our data centers
that such hardware and networking equipment is Year 2000 compliant. Based upon
an initial evaluation of our broader list of software and hardware providers,
we are aware that all of these providers are in the process of reviewing and
implementing their own Year 2000 compliance programs, and we are working with
these providers to address and remediate any exposure to the Year 2000 issue
and continue to seek assurances from them that their products are Year 2000
compliant.
We also rely on third party network infrastructure providers to gain access
to the Internet. If such providers experience business interruptions as a
result of their failure to achieve Year 2000 compliance, our ability to provide
Internet connectivity and deliver our ASP software solutions could be impaired,
which could harm our reputation and our business.
Many of our customers may not be Year 2000 compliant. Healthcare is one of
the least prepared industries in the United States for Year 2000 related
problems. Customer difficulties due to Year 2000 issues could interfere with
healthcare transactions or the transmission of information, which might expose
us to significant potential liability. If customer failures result in the
failure of our systems, it could harm our reputation and business. Furthermore,
Year 2000 issues may affect the purchasing patterns of customers or potential
customers as companies expend significant resources to become Year 2000
compliant. The costs of becoming Year 2000 compliant for current or potential
customers may result in reduced funds being available to purchase and implement
our software solutions.
We have not incurred any significant costs to date with respect to our Year
2000 compliance efforts, and we do not anticipate that future costs associated
with Year 2000 remediation efforts will be material. However, if our customers,
our providers of hardware and software, our third party network providers or we
fail to remedy any Year 2000 issues, our services and certain transactions
could be interrupted and we could experience a material loss of revenue that
could harm our business, financial condition and operating results. We would
consider such an interruption to be the most reasonably likely unfavorable
result of any failure by us, or failure by the third parties upon which we
rely, to achieve Year 2000 compliance. Presently, we believe we are unable to
reasonably estimate the duration and extent of any such interruption or
quantify the effect it may have on our future revenue.
We have yet to develop a comprehensive contingency plan to address the
issues that could result from Year 2000 issues. We are prepared to develop such
a plan if our ongoing assessment leads us to conclude we have significant
exposure based upon the likelihood of such an event. For more information about
Year 2000 risks, see "Risk Factors--Failure of computer systems and software
products to be Year 2000 compliant could increase our costs, disrupt our
services and reduce demand from our clients."
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133), and in July 1999 issued Financial
Accounting Standard No. 137, "Accounting For Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133, an
Amendment of FASB Statement
No. 133" (SFAS 137). SFAS 137 delayed the effective date for SFAS 133 to fiscal
years beginning after
June 15, 2000. We do not believe that the impact of this statement will have a
material effect on our financial position or results of operations upon the
adoption of this accounting standard.
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Quantitative and Qualitative Disclosure about Market Risk
We have considered the provision of Financial Reporting Release No. 48
"Disclosure of Accounting Policies for Derivative Financial Investments and
Derivative Commodity Instruments, and Disclosure of Quantitative and
Qualitative Information about Market Risk Inherent in Derivative Financial
Instruments, Other Financial Instruments and Derivative Commodity Instruments."
We had no holdings of derivative financial or commodity instruments at
September 30, 1999, nor has the Company had any foreign currency denominated
sales. However, we are exposed to financial market risks associated with
interest rates. This exposure is directly related to our normal operating and
funding activities.
We manage interest rate exposure by investing excess funds in cash
equivalents and short-term investments bearing variable interest rates, which
are tied to various market indices. As a result, we do not believe that near-
term changes in interest rates will result in a material effect on our future
earnings, fair values or cash flows.
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BUSINESS
Overview
We are an application service provider (ASP) that develops proprietary
software solutions for clinics and group practices using our proprietary
technology platform. Our customers can access and use our solutions over the
Internet or their local or private information network. We are developing
integrated solutions designed to manage all elements of the business and
clinical processes of our customers within a single system. We currently have
developed and implemented solutions in three areas: disease management,
clinical drug trials recruitment and workers' compensation. We charge our
customers a monthly subscription fee for our solutions.
Industry Background
According to the Health Care Financing Administration, the healthcare
industry is the largest sector of the United States economy with annual
expenditures reaching approximately $1.3 trillion by the year 2000. Rising
costs have driven employers, insurers and the government sector to attempt to
control expenses through managed care. Rising costs have also led to the
creation of new payment mechanisms, including fixing fees, lowering
reimbursement rates, restricting coverage for services, limiting access to a
select group of providers, negotiating discounts and shifting the economic risk
for the delivery of care through alternative reimbursement modes, such as
capitation and risk pools. As a result, healthcare providers are bearing
greater financial risk and need to contain costs and deliver care efficiently
in order to operate profitably and remain competitive. Pressures to control
costs have also contributed to the movement of care from relatively expensive
inpatient settings to less costly outpatient settings. These outpatient care
providers, particularly clinics and group practices, deliver the majority of
healthcare services and are responsible for a substantial portion of total
healthcare spending.
In order to provide quality and cost-efficient healthcare while managing
costs, hospitals, large healthcare organizations, individual physicians,
physician groups and other outpatient care providers are forming affiliations
with one another to take advantage of economies of scale. Although these
affiliations have enhanced economies of scale, they have generally not
addressed the inefficient delivery of healthcare services. Substantial
resources are wasted in the healthcare industry through the delivery of
unnecessary care, performance of redundant procedures and tests, or excessive
administrative costs. We believe that a portion of this wasteful spending is
attributable to the inefficient collection, management, sharing and storage of
data. To operate efficiently, healthcare delivery networks must be able to
manage patient care and workflow processes which may extend across multiple
locations and member organizations. We anticipate that process and information
management will become even more critical to healthcare organizations as new
governmental regulations requiring greater documentation are adopted. For
example, the Health Insurance Portability and Accountability Act of 1996
(HIPAA) imposes additional regulatory compliance responsibilities on the
healthcare industry relating to the storage, maintenance and transmission of
healthcare information. Proposed regulations implementing HIPAA would impose
new requirements on the healthcare industry to maintain the security of
healthcare information.
Demand for Information Services in Healthcare
The growth of managed care, the increase in government regulation and the
rise of healthcare delivery networks have increased the need for information
technology products and services. Annual healthcare information systems
expenses are expected to reach approximately $18 billion by the year 2000
according to industry sources. Healthcare providers increasingly demand
integrated solutions that offer the core functions required to manage
healthcare clinical and business processes. In addition, geographically
dispersed healthcare delivery networks require central databases and analysis
tools that permit them to effectively extract and analyze data located
throughout the enterprise, measure clinical results, control costs, evaluate
operational efficiency and support process improvement.
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Traditional Healthcare Information Systems
Traditional healthcare information systems, known as legacy systems, were
built with specialized computer languages using "code." The first legacy
systems were introduced in the 1970s. Building systems out of code requires
highly trained technicians and can take anywhere from several months to several
years to complete. Users' needs frequently change before code-based systems are
completed from the initial design to product delivery. Modifying the original
code is a time-consuming and expensive process. As a result, legacy systems
cannot be easily adapted to the changing functional requirements of end-users,
such as the need to address practice variations within clinics and group
practices. These factors contribute to the high cost of legacy systems, which
often requires a significant commitment of capital for the initial acquisition
of hardware and system infrastructure. In addition, healthcare providers may
incur additional capital expenditures in expanding installed systems when
increasing their internal capacity.
Most legacy systems were originally developed to address the financial
aspects of information management, such as capturing charges and generating
bills. Most hospitals and managed care organizations have installed legacy
systems that continue to perform the functions for which they were originally
designed. As end-user information requirements expanded to include the need to
manage clinical information, legacy vendors introduced code-based legacy
applications that were either built by those legacy vendors or acquired from
other software developers. Because these new applications generally were not
included in the design of the original systems, these legacy vendors are
required to develop complex system interfaces that permit the integrated
exchange of information between applications and systems. The time and expense
associated with building interfaces make legacy systems less adaptable to
structural and organizational changes within healthcare organizations.
The Emergence of the Internet and the ASP Model in Healthcare
The Internet has emerged as an important means of accessing and distributing
information, as well as a medium to facilitate the transfer of secure
information between organizations. We believe the Internet's key attributes as
an open, accessible, low-cost and flexible network make it particularly well-
suited for the information technology and communication needs of the healthcare
industry. We believe that the Internet will ultimately become the primary
method of communication and commerce in the healthcare industry.
The increasing acceptance of the Internet as a medium to access and exchange
data has contributed to the development of a new business model for the
delivery of mission-critical healthcare software solutions--the application
service provider model. ASPs offer software applications deployed over the
Internet from a remote facility. This eliminates the need for a customer to
invest in complex and expensive software and hardware, such as installing
network servers. Industry analysts estimate that the total cost of hosted
applications under the ASP model can be significantly less than traditional
licensing and internally managed software.
According to the International Data Corporation (IDC), in 1998 the
enterprise ASP market was $23.1 million. Over the next five years, IDC
estimates the ASP market to grow to $2 billion.
Designing a Comprehensive Information Technology Solution
Healthcare entities' information technology needs vary greatly and are
dependent upon their range of operating activities, which can be impacted by
frequent government and regulatory changes, ongoing margin pressures and Year
2000 challenges. Large, self-contained healthcare entities with significant
information technology budgets have been able to keep up with the changing
requirements. However, smaller healthcare entities, such as clinics and group
practices, need sophisticated information technology solutions that can be
accessed cost-effectively. We believe that a comprehensive information
technology solution for the smaller healthcare provider should:
. manage the entire clinical and business process in a single system;
. expand easily to accommodate more users and applications;
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. enable the creation of fully integrated solutions;
. allow trained users to quickly and easily tailor solutions to
accommodate their different needs;
. offer a cost-effective alternative to currently available software
applications;
. permit Internet delivery or on-site installation;
. provide different users simultaneous access and the ability to modify
data in real time;
. contain the requisite healthcare domain expertise; and
. facilitate easy use.
The OrganicNet Solution
Our proprietary technology provides a platform for the rapid development and
deployment of codeless software solutions designed to manage the entire
clinical and business process for clinics and group practices. These processes
include patient enrollment and patient health assessment, scheduling,
diagnosis, selecting and monitoring treatment plans, billing and contract
management. We design our software solutions to be deployed over the Internet,
the user's intranet, or their local or private information network with our ASP
model. As an ASP, we charge our customers on a monthly subscription basis for
the delivery of our software solutions. We provide integrated solutions that
can be incrementally implemented, easily extended and rapidly tailored for each
user's needs. Our solutions offer the following benefits:
Comprehensive. We provide our customers with a comprehensive solution that
combines our software applications with Internet infrastructure, application
hosting, as well as consulting and implementation services provided by our
strategic partners. Our software applications address a range of business and
clinical processes, such as billing and claims, scheduling, credentialing and
disease management. Our solutions are designed to enable our customers to rely
on us as the single source for their software solutions, whether these
solutions are deployed over the Internet or their local or private information
network.
Cost-effective. We believe that our ASP model allows users to access
sophisticated software solutions for a lower start-up cost and reduced
operating cost. Our technology enables most customers to run our solutions
using their existing computer equipment. Each user needs only a relatively
modest desktop computer and a modem that allows the computer to connect to our
remote servers over standard telephone lines. As a result, our solutions
eliminate the need for the user to incur significant capital expenditures for
hardware, operating systems and application software. In addition, our
solutions are designed to significantly reduce the costs for technical support
and training, thereby reducing the need for in-house information technology
experts.
Adaptable. Our applications are built with data instead of code. As a
result, we can avoid many of the limitations of code-based software systems and
more easily tailor any component of a solution to meet the needs of each user.
Trained clients can quickly modify our software to adapt to practice variation
and practice changes. Our clients do not have to conform their clinical and
business processes to the fixed features and functions of rigidly-coded legacy
systems.
Scalable. Our solutions run on an object-oriented database management system
designed to manage large and complex databases. In addition, we have partnered
with Conxion Corporation to provide application hosting services, Internet
infrastructure and data centers. The combination of our proprietary
architecture and technology, the bandwidth capacity of Conxion's data centers
and the storage capacity of our database management system minimizes the cost
of adding incremental users and applications.
Integrated. Our software solutions are built on a single, integrated
database so that information and applications are stored centrally and shared
simultaneously by all users. As a result, data is entered once and shared
across all applications on the system. We believe the single entry of patient
and other data will increase efficiency and lower costs while reducing the
errors that result from duplicative data entry. Changes to data made by a
single user in one application are immediately shared by all authorized users
across applications.
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Internet accessible. Our solutions can be provided over the Internet.
Multiple users can simultaneously and continuously access the same software
applications and data from geographically dispersed locations. Users access our
software solutions using our Organic Browser, a proprietary, thin client
browser that provides the interface between the user, the applications and the
database.
Easy to use. We design our software solutions in consultation with users to
accommodate their workflow and processes. The appearance of the computer screen
and the information that is displayed can be designed so that users see only
those features that they need. Users are not required to navigate through
features and applications they do not need or use. For example, schedulers will
see only the scheduling tools and information they need on their screens.
Embedded domain expertise. Our solutions incorporate the collective
healthcare knowledge and experience of our personnel. We are highly experienced
in each of the following domains:
. outcomes and disease management;
. clinical drug trials;
. practice management;
. credentialing and provider profiling;
. scheduling and resource management;
. business process reengineering; and
. case management.
We use our expertise in these areas to create comprehensive, integrated
software solutions for our customers and to continually refine those solutions
as the needs of our customers evolve.
Security. To safeguard user data, we have designed our solutions to support
the security options necessary to meet our user's requirements on an
application by application basis. We offer the following security options:
. client authentication: proprietary communication protocols that generate
a public key infrastructure-based key to uniquely identify each client;
. user authentication: standard login ID/password identification and other
more secure means to identify and authenticate users;
. access control: system mechanisms to restrict a user's access to only
the data they have clearance to see;
. channel security: proprietary transmission protocol makes it difficult
to intercept data during transmission;
. database security: data in the database can be encrypted; and
. physical site security: Conxion hosts our data and applications at
government rated Class A data centers. To be rated as a Class A data
center, Conxion must conform to government security requirements and be
able to guarantee 72 hours of independent continuous operations.
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Our Strategy
Our objective is to become the leading ASP serving clinics and group
practices. We believe that we are one of the first ASPs to deliver software
solutions to clinics and group practices over the Internet. Our strategy is to
capitalize upon our early market entrance, extend our technology and implement
a subscription-based business model focused on recurring revenue. Elements of
our strategy include:
Leverage our proprietary technology platform. Our proprietary, object-
oriented technology provides a platform for the rapid, codeless development of
ASP software solutions for clinics and group practices. Our platform combines a
universal set of clinical and business processes with the capability to quickly
create a solution that can be easily tailored to meet the specific needs of
each customer. Using this platform, we have delivered solutions for the disease
management, clinical drug trials and workers' compensation markets. We are
using our platform to complete development of a software solution that manages
the entire clinical and business process for clinics and group practices. The
scalable, adaptable and interactive design of our software solutions enables us
to offer a customer an initial solution targeting a specific business or
clinical need, with the opportunity to easily sell additional functions and
features.
Achieve rapid market penetration. We are using a sales and marketing
strategy that focuses on identifying channels of customers with common needs
and cross-selling our solutions to our existing customer base. We intend to
establish relationships with specialty healthcare industry groups who will
endorse and co-market our solutions to their customers and members in these
channels. In addition, we have an existing base of over 500 customers using the
legacy systems sold by the companies we have acquired. To capitalize on our
customer base, we developed and are developing ASP software solutions that will
be sold as an upgrade to our existing systems. We use our Internet sales team
to quickly reach many customers and increase our market penetration.
Enhance our capabilities by forming strategic alliances. We believe that our
ability to offer a complete, integrated and adaptable software solution to our
customers will be an important element in their selection of us as their
solutions provider. In order to continue to specialize in software solution
development, we have formed and will continue to form strategic alliances with
leading companies that can provide us with specific expertise in areas
important to providing complete solutions, such as Internet infrastructure,
application hosting, consulting and implementation services. Given the
significant time, financial and human resources required to internally develop
our own Internet connectivity and data storage requirements, we believe that we
can offer cost-effective software solutions by partnering with recognized
leaders in these areas. Our strategic alliance with Conxion Corporation, a
leader in network hosting, is an example of such a partnership.
Selectively acquire complementary businesses and technologies. Historically,
we have grown through acquisitions that brought us new personnel with domain
knowledge of the healthcare industry, additional customers, software products
and technology. In the future, we will continue to acquire businesses and
domain knowledge, product lines or technologies that will enhance our solutions
and domain expertise, and increase our customer base.
Protect our intellectual property. We believe that our technology
incorporates a unique approach to the codeless development of software
applications. We believe that our software technology is a significant asset
which we intend to actively protect. We have filed five patent applications
relating to key elements of our architecture and intend to seek appropriate
intellectual property protection for the technologies that we develop in the
future.
Our Technology
Object-oriented technology. Our solutions embody object-oriented technology.
Traditional software applications are built with computer language using
"code." Code essentially instructs the computer how to use pieces of
information, or "data." Most commercial software applications consist of up to
millions of lines of code. Each line is written by a highly trained programmer.
Object-oriented technology breaks up the lines of
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code into specialized programs, or "objects," which perform discrete tasks
within the application. An object can also be simultaneously used by different
applications so that complex systems can be easily built. The self-contained
nature of objects allows them to be tested, modified and maintained
independently from the rest of the system. Therefore, object-oriented
applications can be upgraded and maintained without modifying the entire
application.
After five years of development, we have developed a method of interpreting
data without instructions written in code. Using this method, we can build
applications that are not based on code. Since September 1999, we have received
a Notice of Allowance from the United States Patent and Trademark Office for
three of our inventions including the ability to write applications using data
instead of code and the ability to write queries using data instead of code.
CoreModel. The experience and knowledge of our healthcare industry experts,
and input from clinicians and users, has contributed to the development of our
CoreModel. Our CoreModel is a model of the real-world components of the
healthcare delivery process. Each of the components is represented by an
object. The CoreModel is the blueprint of how these objects can be linked to
build applications. As objects can be shared by different applications, all our
applications can be built using the set of objects contained in our CoreModel.
Therefore, data is not duplicated and applications are integrated. Once a user
has one of our solutions, other solutions can be added incrementally without
needing to be integrated, since integration is organic to all applications.
Organic Browser. The Organic Browser is our application browser that resides
on the user's computer. Applications are delivered to the user by the
interaction between our proprietary application server software and the Organic
Browser. When a user logs on to the system and enters a user name and password,
the Organic Browser requests the data required to display the user's software
solutions from the application server. The application server communicates that
request to our database management system, which retrieves the data required
and delivers it to the application server. The application server then
assembles the user's software solution and delivers it to the Organic Browser
which renders it on the user's screen. Our Organic Browser is able to do this
as quickly as traditional systems with modest computers and an Internet
connection over standard telephone lines.
The Organic Browser and our application server require relatively little
hard disk space on the user's computer regardless of the size of the software
applications they are running because of our data-based and object-oriented
architecture. As a result, most users can run our software solutions on their
existing computers and do not have to invest in additional hardware. The
Organic Browser requires only four megabytes of hard disk space on the user's
computer to run, which is less computing power than general purpose Internet
browsers, which typically require about 80 megabytes. Applications, such as our
browser, that require little disk space and are used to access applications
stored on a server are referred to as "thin clients." Our software solutions
can run on a thin client because they are built using data, which can be stored
in a database on a server instead of on the user's computer. In contrast,
typical software applications built with code must be stored and executed on
the user's computer and therefore cannot be run with a thin client. Because our
CoreModel is stored in the database, we can increase the total number of
software applications and the functionality of any software application running
on our system without changing the Organic Browser or the rest of the user's
system.
Our application server software requires only one megabyte of hard disk
space. Typically, application server software requires at least 10 megabytes of
storage space, but can require up to several hundred megabytes for more complex
applications. Our application server software requires less disk space because
the processes, generally referred to as "server side processes," are written in
data rather than code and stored in the database. Server side processes
generally include:
. queries: used to locate and retrieve data elements from the database;
. triggers: used to activate particular processes upon the occurrence of
another process; and
. constraints: used to limit acceptance of data entry to defined
parameters.
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Our ability to store server side processes as data, instead of code, enables
us to quickly and easily modify the server side processes for increased
adaptability.
Our Software Solutions
We are in the process of developing the Organic Clinic, a software solution
that will manage the entire clinical and business process for clinics and group
practices. We are designing the Organic Clinic to be deployed over the Internet
or the user's intranet or area network using our ASP model. In the interim, we
are providing software solutions for use in specific practice areas, such as
disease management, clinical drug trials recruitment and workers' compensation.
We have targeted these areas to accelerate adoption of our technology based on
our domain knowledge, the strength of our channel partner contacts and the
potential of these markets.
To build our solutions, we begin by spending a few days in a clinic
interviewing users and modeling and mapping the processes of that clinic. We
assemble a solution by using the library of healthcare tasks built by our
domain experts as extensions of the CoreModel. These tasks share the same data
objects and are integrated with all of our solutions. We have built and can
utilize hundreds of healthcare specific tasks such as "enroll a patient,"
"schedule a patient" or "bill a patient." These tasks comprise the templates we
use to tailor a solution for a particular clinic. Providing a tailored solution
generally takes three to six weeks, depending on the complexity of the process
and practice variation.
We are currently delivering the following ASP solutions to customers:
Disease Management. Healthcare providers are increasingly employing disease
management solutions to achieve favorable patient outcomes while controlling
costs. Annually, an aggregate of over $50 billion is spent in the United States
to treat the disease states of asthma, diabetes and congestive heart failure. A
number of specialty healthcare providers have targeted the treatment of these
specific disease states. These providers often contract to treat patients at a
fixed cost and therefore depend on strict patient compliance with treatment
plans to manage their costs and to deliver quality care to their patients. We
have designed effective disease management solutions that have the following
attributes:
. Improved patient selection. Our solutions use patient questionnaires and
clinical data to identify and select patients with specific chronic
conditions who are most at risk for poor clinical outcomes.
. Automated clinical process. Our solutions link all network users,
including doctors, laboratories and pharmacies, track compliance, and
provide real time and updated information.
. Customized care plans. Our solutions allow healthcare providers to
design and monitor care plans that meet the specific needs of individual
at-risk patients using guidelines and predictive outcomes established at
the clinic.
We delivered our first disease management solution in February 1999. As of
October 31, 1999, we have deployed eight of our ASP software solutions for the
disease management market.
As part of our disease management solutions, we developed Outcomes Partner
III, a healthcare outcomes management software solution. This solution was
developed in collaboration with Pfizer Health Solutions Inc, a subsidiary of
Pfizer Inc. that provides information technology solutions to Pfizer Inc.
clients. Outcomes Partner III combines patient-reported health and functional
status with outcomes program administration and reporting tools that evaluate
the effectiveness of disease management. Through our relationship with Pfizer
Inc., we have installed Outcomes Partner III at the American Medical Group
Association's headquarters. The American Medical Group Association is a trade
association representing over 230 medical groups composed of approximately
48,000 physicians. In conjunction with Pfizer Inc., we intend to market
Outcomes Partner III to the American Medical Group Association's member
clinics.
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Clinical Drug Trials Recruitment. We believe there is a significant market
for a software solution that improves the efficiency of clinical drug trials
management based on the level of expenditures spent on clinical trials to
support drug development efforts. We believe there is not an adequate system
for managing patient recruitment and enrollment in the clinical drug trials
process.
A clinic's participation in the clinical drug trial process begins with
patient recruitment and enrollment. Participation in clinical drug trials can
be a significant revenue source for clinics and group practices. Pharmaceutical
companies set compensation for investigators based on the number of patients
enrolled and the time taken to complete recruitment.
Clinical drug trials recruitment is conducted by various types of healthcare
organizations including clinics and group practices. These organizations must
conduct broad searches of their practice management systems to identify
patients who meet general criteria. They then review patients' medical charts
to find individuals who meet the trial's requirements. Manual chart review is a
time consuming and expensive process. Even for simple studies, it can take a
clinic site several months to identify, screen, recruit and enroll its target
number of patients. We believe an effective patient recruitment solution can
significantly reduce the time required to complete these tasks.
Our patient recruitment solution provides a comprehensive set of easy-to-use
tools for efficient patient screening, recruitment and enrollment. Our first
solution was delivered in February 1999. Our solution offers clinics and group
practices several important benefits, such as:
. Simplified data management. Interfaces with a practice management system
to eliminate the need to duplicate data entry.
. Reduced number of chart reviews. Quickly queries system data to
prioritize patients that are most likely to meet the inclusion criteria
for a trial.
. Customized patient screening. Uses adaptable tools to enable customized
follow-up screening interviews and medical history questionnaires with
no additional programming, and provides survey administration over the
Internet.
. Reduced enrollment time. Facilitates quick and efficient enrollment of
patients who meet the inclusion criteria for a trial.
. Integrated patient contact tracking. Includes user-friendly tools to
help track and manage all contacts with patients from initial screening
through the completion of their participation in a clinical drug trial.
. Reduced computer hardware costs. Permits data input using scan forms,
which enables clinic staff to interact with the system without a
computer on their desk.
Workers' Compensation. Annually, approximately $24 billion is spent to treat
workers' compensation claims in the United States. Workers' compensation is a
separate healthcare delivery system for employment-related injury and health
issues. Patient treatment is funded through insurance premiums paid by the
employer. When a job-related injury occurs, the employee is sent to either an
industrial medicine clinic or a network of doctors contracted to treat workers'
compensation injuries. We believe there is currently no clinical management
software solution to handle these claims across a network of clinics and group
practices. Moreover, we believe no reporting system is available to employers
who are funding the system and want to track employee status and compliance
with treatment protocols.
Our clinical management solution links doctors, clinics and group practices
to a single database and to a single and unique patient record. In addition, we
are developing a solution with American Medical Information Systems, Inc. to
integrate the management of clinical and business processes in occupational
medicine. This solution would enable us to track progress and compliance during
the course of a patient's treatment. Our solution will capture patient medical
histories, help physicians determine diagnoses and suggest appropriate
treatment protocols at the point of care. The criteria for diagnosis and
treatment protocols will be established by the physicians at the treatment
clinic.
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The Internet enables different organizations, such as physical therapy
centers, laboratories and pharmacies, to inexpensively link to the same system.
Our solution allows employers to track the treatment of their employees on
their desktop. Employers are linked to the same database the clinic network is
using. The use of standard methods of treatment can then be monitored by all
parties connected to the network, including employers.
We have installed our first workers' compensation solution in a clinic
running on a remote server over the Internet under an agreement with American
Medical Information Systems. We expect that we will have the final version of
this solution installed and that AMIS will accept it by the end of 1999. AMIS
plans to offer employers a network of existing clinics that can treat those of
their employees with workers' compensation claims and allow the employer to
track the treatment of their employees using the Internet. AMIS is in the
process of building this network and as of September 15, 1999, one clinic has
agreed to participate in this network. Under our agreement with AMIS, they have
the exclusive rights for 12 months from acceptance of the system to use and
market the solution in California and in the United States with AMIS clinics
and affiliate clinics so long as AMIS has paid us for a minimum number of AMIS
clinics and affiliate clinics for a period of 12 months. If AMIS has not paid
us for at least half of the minimum number of required users by the end of the
first six months, then we may cancel the exclusive arrangement. Similarly, we
may cancel the exclusive arrangement if AMIS has not paid us for an increased
minimum number of users during each subsequent year.
Our Software Solutions in Development. As part of our strategy of completing
the Organic Clinic and targeting markets in which we have domain knowledge,
channel partners or existing customers, we are currently developing the
following solutions:
. Patient Management. We are developing a patient management solution that
will streamline claims processing by making eligibility information
obtained at a clinic available to the billing service over the Internet.
In September 1999, we entered into a letter of intent with California
Medical Billing Association, an association of billing service bureaus,
to market this solution to its 200 member billing services and their
clinic customers. We cannot assure you that this letter of intent will
result in a definitive agreement.
. Medical Record Management. We are developing a medical record management
solution to expand the process of managing clinical data by making
electronic medical records available over the Internet to the
association's entire network. This solution is covered by our letter of
intent with California Medical Billing Association.
. Practice Management. This solution will provide scheduling, billing and
contract management features. We will initially market this solution as
an upgrade to the traditional legacy products sold by PSI-Med
Corporation, one of our wholly owned subsidiaries.
. Case Management. This solution will provide tracking, management and
analysis of case-specific information required to manage a patient's
treatment. We will initially market this solution as an upgrade to the
traditional application sold through L.I.N.C., Inc., one of our wholly
owned subsidiaries.
. Credentialing. We are developing this solution to provide credentialing
capabilities to healthcare organizations over the Internet. We developed
this solution with and will initially market this solution through
Healthcheck, Incorporated, one of our wholly owned subsidiaries.
. Urology Management. We are developing a clinical management solution for
urology clinics and have a letter of intent with a urology association
to market the solution.
Our Legacy Software Products. We currently market traditional legacy
software products for credentialing, scheduling, resource management, case
management and outcomes management applications. These products were developed
by the companies we have acquired since our inception in 1995. We acquired
these companies primarily for their specific domain expertise and enabling
technologies. Our acquired domain expertise is incorporated into our CoreModel
and has been used to build our current solutions and solutions in development.
We intend to continue to market these legacy products until we have completed
development of a comparable solution that can be delivered using our ASP model.
As each of these solutions is completed, we
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will market it as an upgrade to our existing legacy products. For more
information concerning our acquisitions, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Strategic Relationships and Alliances
We have entered into strategic relationships and alliances with companies to
expand our sales distribution capabilities and improve our ability to deliver
reliable, scalable ASP software solutions. We will continue to consider
strategic relationships and alliances that enable us to leverage our core
competencies in the development of advanced technologies and software
solutions. These strategic relationships and alliances include the following:
Pfizer Health Solutions Inc. We have had a strategic relationship with
Pfizer Health Solutions Inc, a subsidiary of Pfizer Inc., since 1997. We have
entered into agreements with Pfizer Health Solutions Inc that provide it with
non-exclusive distribution rights to the solutions described below. Pursuant to
these agreements, we cannot enter into distribution agreements for the same
solutions with any competitor of Pfizer Inc. Since 1997 through September 30,
1999, we have received over $3.2 million in revenue through this relationship
with Pfizer and its customers. The solutions covered by these agreements
include:
. Outcomes Partner III. We are working to implement this quality
measurement tool in innovative pilot projects, including several
designed to use outcomes in support of disease management. This is a
three-year agreement which expires on May 27, 2000. This agreement may
be renewed by mutual agreement of the parties for additional periods of
12 months.
. Surveys. We also collaborate with Pfizer Health Solutions Inc in
marketing and implementing standard and tailored surveys for managed
care organizations. This is a two-year agreement which expires on June
15, 2000. This agreement may be renewed by mutual agreement of the
parties for additional periods of 12 months.
. Credentialing. Along with Pfizer Health Solutions Inc, we offer
credentialing services and software on a contract basis. This is a
three-year agreement which expires on January 15, 2002, unless testing
of the final version of the software extends beyond January 15, 2000, in
which case the term of the agreement will be extended by the period by
which such testing is extended. This agreement may be renewed by mutual
agreement of the parties for additional periods of 12 months.
Superior Consultant Holdings Corporation. In September 1999, we entered into
a Distribution and Services Agreement, as amended, with Superior Consultant
Holdings Corporation under which Superior agreed to introduce and outline the
advantages of our ASP software solutions based on client interests, as well as
providing systems integration, process improvement, consulting and
implementation services to healthcare organizations. We agreed to market
Superior's healthcare consulting services and business integration services, to
promote Superior as our exclusive alliance partner for the provision of
healthcare consulting services and not to offer distribution rights to our
Organic Architecture and solutions to any direct competitor of Superior without
Superior's prior written approval. Under the agreement, Superior has a non-
exclusive worldwide license to market, use, install and display our Organic
Architecture and solutions. We have also appointed Superior as our
international provider of healthcare consulting services to our clients. The
agreement entitles Superior to appoint a member to our board of directors and
to receive a vested non-statutory stock option grant exercisable for 200,000
shares of our common stock at an exercise price of $6.00 per share. The initial
term of the agreement runs through August 31, 2002 and may be renewed by
Superior for up to two additional two-year terms.
Conxion Corporation. We have entered into several agreements with Conxion
Corporation, under which they supply us with application hosting services and
Internet infrastructure for our ASP software solutions. Conxion houses the
equipment for these services in government rated Class A data centers from
which our ASP software solutions are deployed and run. Our business
relationship with Conxion began in May 1997, and in April 1999 Conxion
purchased $550,000 of our preferred stock. We have been using Conxion's
services to deploy our ASP solutions since May 1999 and have been using them as
our Internet service provider since June 1998. These agreements typically have
terms of one year. Conxion has agreed to enter into extensions of these
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agreements and to enter into supplemental service agreements, as required by us
on terms not less favorable to us as they offer to any of their customers.
Conxion cannot terminate or suspend the services provided under these
agreements even if a bona fide dispute exists so long as undisputed payments
are paid. If we withhold an undisputed payment, Conxion must notify us of the
breach in writing and provide us thirty days to cure the breach. In connection
with these agreements, Conxion purchased $550,000 of our Series C Preferred
Stock.
Sales and Marketing
Our sales and marketing strategy is to increase acceptance of our ASP
solutions in clinics and group practices by (1) entering into partnerships with
specialty industry groups and associations who provide us access to customer
channels and (2) selling our ASP solutions as upgrades to our installed base of
over 500 customers that currently use legacy systems. We believe that our
channel partner relationships will enable us to identify customers with common
needs as a channel for our sales efforts. Our current channel partners,
American Medical Information Systems and Pfizer Health Solutions Inc, endorse
our ASP software solutions and provide for co-marketing to their members and
customers.
Our sales force is divided into Internet, strategic and tactical teams. The
Internet team sells services and products over the Internet and telephone,
which makes more efficient use of their time. The strategic sales team is
focused on selling through our channel partners as well as through our
strategic relationships with Superior and Pfizer Health Solutions Inc. The
tactical sales team focuses on selling our legacy software products and
services. Our tactical sales force is also responsible for selling our ASP
software solutions as upgrades to our installed legacy products. We currently
have nine employees in our sales force, five of which are in the tactical sales
team. We intend to expand the Internet and strategic sales teams significantly
following this offering.
We market our solutions and services through our website, articles in
industry publications, direct mail and participation in trade shows. From our
website, prospective customers can obtain product information, and download and
run demonstration software. We also use our website to identify and qualify
prospective customers who request information. We believe that publication of
relevant articles in key trade journals is an important method of building
industry awareness. Since 1998, we have published 13 articles under the bylines
of our staff.
Research and Development
Our research and development organization is comprised of development
engineers who work on system architecture and solution development teams who
work with our domain experts to build solutions for each domain incorporated in
the CoreModel. As of September 15, 1999, we had 28 professionals dedicated to
architecture and solutions development. We will continue to make substantial
investments in research and development to enhance our proprietary architecture
and support the development of additional solutions.
Competition
The business of providing application software and services to clinics and
group practices is extremely competitive. In addition, the market for Internet-
based ASPs is relatively new and evolving, and we anticipate that competition
will continue to intensify as the use of the Internet grows.
Our competitive position in the healthcare software application market is
difficult to evaluate due to the variety of current and potential competitors
and the evolving nature of our market and the ASP model. Our primary
competitors include:
. Legacy software vendors such as Cerner Corporation, Eclipsys
Corporation, IDX Systems Corporation, McKesson HBOC, Inc. and Medical
Manager Corporation;
. Application service providers such as CareTools, Inc., Confer Software,
Inc., MedicaLogic, Inc., The Trizetto Group, Inc. and U.S.
Internetworking, Inc.; and
. Healthcare e-commerce and portal companies such as CareInsite, Inc. and
Healtheon Corporation.
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Each of these types of companies either is or in the future can be expected
to compete with us in delivering software solutions to the clinic and group
practice markets, including the delivery of software applications over the
Internet. Furthermore, major software companies and other entities, including
those specializing in the healthcare industry that are not currently offering
applications, products or services that compete with our products and services,
may enter our markets. In addition, our existing and future strategic partners
may compete with us from time to time by selling, consulting on or hosting
other software that competes with our software solutions.
We believe the principal differentiating characteristics upon which we
compete are:
. features and functionality--our solutions provide different users
simultaneous access and the ability to modify data in real time;
. fit with the user's practice, processes and needs--our solutions can be
tailored to specific users' needs;
. cost--our solutions are accessed over the Internet eliminating the need
for costly servers and reducing the need for in-house technology
experts;
. ease of implementation and use--our solutions can be designed so that
users do not need to navigate through features they do not use;
. business and technical expertise--our solutions incorporate the
collective healthcare knowledge of our personnel and other healthcare
experts;
. integration of applications--our solutions are designed to allow users
to manage the entire clinical and business process in a single system;
. reliability--our solutions are easy to maintain because they are built
with data instead of code;
. scalability--the scope of our solutions can be expanded or reduced to
easily and quickly accommodate our customers' specific and changing
needs;
Despite these differentiating characteristics, many of our competitors have
greater financial, technical and marketing resources, greater name recognition
and more established relationships in the healthcare market than we have. Low
barriers to entry also expose us to potential new competitors. We cannot assure
you that we will be able to compete successfully now or in the future.
To remain competitive, we must continue to enhance our software solutions,
as well as expand our sales, marketing and distribution channels to respond
promptly and effectively to:
. changing needs of clinics and group practices;
. advances in the delivery of software applications over the Internet;
. technological innovation and change;
. our competitors' new products, services and pricing models; and
. challenges of hiring and retaining qualified information technology
professionals.
For additional information concerning risks associated with competition, see
"Risk Factors--The markets we serve are highly competitive and many of our
competitors have much greater resources."
Intellectual Property Rights
Our success and ability to compete are dependent in part upon our
proprietary technology. We rely upon a combination of copyright, patent,
trademark and trade secret laws and other means to protect our technology.
However, the steps we have taken may not prevent the misappropriation of our
products or technology. In addition, effective proprietary rights protection
may be unavailable or limited in some foreign countries. We have two
U.S. patent applications pending and have received a Notice of Allowance from
the United States Patent and Trademark Office for three of our inventions. In
addition, we have five registered trademarks and have 13 trademark applications
pending.
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We retain ownership of our CoreModel and the software applications we
develop. In addition, we have entered into agreements for the right to use
third party software components, such as our database program, in our products
on a non-exclusive basis. Our breach of these agreements could result in our
loss of these rights and would harm our business. Our success will depend in
part on our ability to continue to license additional third party software and
upgrades to existing third party software in order to enhance our products.
However, we may not be able to license additional rights for this software on
commercially reasonable terms or at all. If we cannot obtain required licenses,
we could encounter delays or unanticipated development expense while we attempt
to internally develop substitute technology.
We may become the target of intellectual property litigation. Although we
have not been notified that any of our products infringe third party
intellectual property rights, we may receive notices of these claims in the
future. Any litigation to determine the validity of such claims, including
claims arising from our contractual indemnification obligations to our
customers, regardless of its merit or resolution, would likely be costly and
may divert management's attention and resources, or cause service
implementation delays. In the event of an adverse ruling in any such
litigation, we could be required to pay substantial damages, cease the sale of
infringing products or obtain a license of the intellectual property rights of
the third party claiming infringement. There can be no assurance that such a
license would be available to us on reasonable terms or at all.
We also seek to protect our trade secrets and proprietary technology through
confidentiality agreements with employees, customers, consultants and other
appropriate parties. However, we may not have an adequate remedy in the event
these agreements are breached or any remedy if our trade secrets are
independently developed by others.
For information concerning risks associated with intellectual property
rights, see "Risk Factors."
Government Regulation
Government Regulation and Healthcare Reform. Laws and regulations directly
applicable to communications or commerce over the Internet are becoming more
prevalent. Laws and regulations may be adopted with respect to the Internet
covering issues such as user privacy, pricing, content, copyrights,
distribution and characteristics and quality of products and services. The
adoption of any additional laws or regulations may impede the growth of the
Internet or other online services, which could, in turn, decrease the demand
for our applications and services and increase our cost of doing business, or
otherwise have an adverse effect on our business, financial condition and
results of operations. Moreover, the applicability to the Internet of existing
laws in various jurisdictions governing issues such as property ownership,
sales and other taxes, libel and personal privacy is uncertain and may take
years to resolve. Any such new legislation or regulation, the application of
laws and regulations from jurisdictions whose laws do not currently apply to
our business, or the application of existing laws and regulations to the
Internet and other online services could harm our business.
The confidentiality of patient records and the circumstances under which
records may be released for inclusion in our databases are subject to
substantial regulation by state governments. These state laws and regulations
govern both the disclosure and the use of confidential patient medical record
information. Although compliance with these laws and regulations is at present
principally the responsibility of the hospital, physician or other healthcare
provider, regulations governing patient confidentiality rights are evolving
rapidly. Additional legislation governing the dissemination of medical record
information has been proposed at both the state and federal level. This
legislation may require holders of this information to implement security
measures. Such legislation might require us to make substantial expenditures to
implement such measures. We cannot assure you that changes to state or federal
laws will not materially restrict the ability of healthcare providers to submit
information from patient records using our applications.
Legislation currently being considered at the federal level could impact the
manner in which we conduct our business. The Health Insurance Portability and
Accountability Act of 1996 (HIPAA) mandates the use of standard transactions,
standard identifiers, security and other provisions by the year 2000. We are
designing our
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applications to enable compliance with the proposed regulations, but cannot
assure you that we will be able to comply with those proposed regulations in a
timely manner or at all. Moreover, until the proposed regulations become final,
they could change, which could require us to expend additional resources to
comply with the revised standards and we may not be able to comply with the
revised standards in a timely manner or at all. Based on our present business
operations, we believe that the HIPAA requirements related to the maintenance
and exchange of electronic health information may apply to legacy products sold
by our wholly owned subsidiary, PSI-Med Corporation, but not to our other
products, services or solutions. If any of our products, services or solutions
are subject to those regulations, we may be required to incur additional
expenses in order to comply with these requirements and we may not be able to
comply with them in a timely manner or at all. In addition, the success of our
compliance efforts may also be dependent on the success of healthcare
participants in dealing with the standards. If we are unable to comply with
regulations implementing HIPAA in a timely manner or at all, the sale of our
solutions and business could be harmed.
The United States Food and Drug Administration is responsible for assuring
the safety and effectiveness of medical devices under the Federal Food, Drug
and Cosmetic Act. Computer applications and software are considered medical
devices and subject to regulation by the FDA when they are indicated, labeled
or intended to be used in the diagnosis of disease or other conditions, or in
the cure, mitigation, treatment or prevention of disease, or are intended to
affect the structure or function of the body. We do not believe that any of our
current applications or services are subject to FDA regulation as medical
devices; however, we plan to expand our application and service offerings into
areas that may subject it to FDA regulation. We have no experience in complying
with FDA regulations. Our compliance with such FDA regulations could prove to
be time consuming, burdensome and expensive, which could have a material
adverse effect on our ability to introduce new applications or services in a
timely manner.
Employees
As of October 31, 1999, we had approximately 125 employees. Our employees
are not subject to any collective bargaining agreements and we generally have
good relationships with our employees.
Facilities
We lease eight facilities, all of which are located within the United
States. Our principal executive and corporate offices are located in San
Francisco, California. In addition, we maintain offices in Berkeley, Santa Ana
and Calabasas, California, Denver, Wheat Ridge and Ft. Collins, Colorado and
Minneapolis, Minnesota. Our leases have expiration dates ranging from January
2000 to August 2002. We believe that our facilities are adequate for our
current operations and that additional leased space can be obtained if needed.
Legal Proceedings
There are no legal proceedings pending to which we are a party and our
management is unaware of any contemplated actions against us.
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MANAGEMENT
Directors and Executive Officers
The following table presents information regarding each of our directors and
executive officers as of October 31, 1999.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Jack D. Anderson...................... 55 Chairman of the Board; Chief
Executive Officer
William W. Shaw, III.................. 42 President, Secretary and
Treasurer
William H. Matthews................... 45 Chief Financial Officer
Robert L. Anderson.................... 54 Director; Senior Vice President
Michael J. Barry...................... 38 Chief Information Officer
David W. McComb....................... 46 Director; Vice President,
Research and Development
Michael E. Meisel..................... 45 Chief Sales Officer; President
and CEO of Res-Q, Inc., a wholly
owned subsidiary of OrganicNet
M. Jan Roughan........................ 53 Director; President and CEO of
L.I.N.C., Inc., a wholly owned
subsidiary of OrganicNet
Robert S. Garvie...................... 50 Director
Gail E. Oldfather..................... 64 Director
Michael A. Wilson..................... 52 Director
</TABLE>
Jack D. Anderson co-founded OrganicNet in January 1995. He has been Chairman
of the Board and Chief Executive Officer since inception. Mr. Anderson has
approximately 28 years of experience in healthcare management and approximately
20 years of experience in healthcare information systems. From 1993 to 1994,
Mr. Anderson served as a Business Development Consultant for Velocity
Healthcare Informatics, Inc., which was purchased by OrganicNet in December
1996. In 1978, he co-founded Cost Containment Systems, Inc., a healthcare
software company, which was subsequently merged with Serving Software, Inc. Mr.
Anderson served as a director of Serving Software from 1992, when it became a
public company, until it was acquired by HBO & Company in 1994.
William W. Shaw, III has been President of OrganicNet since February 1997
and Secretary and Treasurer since July 1996. From July 1996 to June 1999, he
also served as Chief Financial Officer of OrganicNet. Mr. Shaw was a consultant
to the Company from October 1995 to July 1996. Mr. Shaw has approximately 16
years of management experience in the healthcare industry. From February 1993
to July 1995, he was Executive Vice President, Vice President of Marketing and
Research and Development for Aesculap, Inc., a surgical products company and
wholly owned subsidiary of Aesculap AG. From 1983 to February 1993, Mr. Shaw
held several other positions at Aesculap including Chief Operating Officer,
Vice President Finance, Treasurer and Controller. From 1980 to 1983, Mr. Shaw
was an Audit Supervisor with Coopers & Lybrand.
William H. Matthews has been the Chief Financial Officer of OrganicNet since
June 1999. He joined OrganicNet in February 1999 as a financial and accounting
consultant. From October 1994 to February 1999, Mr. Matthews was the Chief
Financial Officer for Imagicast, Inc., formerly Telescan Systems, Inc., a
developer of software and hardware for interactive retail point of sale
applications. From 1993 to 1994, Mr. Matthews served as the controller for
Ravenswood Winery. From 1988 to 1992, Mr. Matthews was the Chief Financial
Officer for Ocean Colony Partners, a real estate development firm. From 1981 to
1987, Mr. Matthews held financial management positions for various companies.
From 1977 to 1981, he was a Senior Auditor for Coopers & Lybrand.
Robert L. Anderson co-founded OrganicNet in January 1995 and has been Senior
Vice President of OrganicNet since January 1996. He has served as a director
since inception. Mr. Anderson has approximately 20 years of experience in the
development of solutions for complex project and program management
engagements. From August 1993 to October 1994, he served as Director of
Practice Development of BSW Advanced Technology, Inc., an object-oriented
project management software company.
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Michael J. Barry joined OrganicNet as Chief Information Officer in January
1996. Mr. Barry has approximately 20 years of software development experience.
From June 1993 to January 1996, he served as Vice President of Research and
Development at Velocity Healthcare Informatics, Inc. From 1991 to 1993, Mr.
Barry served as the Information Systems Manager for the Carlson Companies,
Inc., a relationship marketing company. From 1985 to 1991, he was an
independent software consultant.
David W. McComb co-founded OrganicNet in January 1995. He has been Vice
President of Research and Development and a director since June 1995. Mr.
McComb has approximately 20 years of experience in software project management.
From 1989 to 1994, he was President of First Principles, Inc., which he founded
to develop an object-oriented business application framework. First Principles
was acquired by OrganicNet in April 1996. From June 1993 to January 1995, Mr.
McComb also served as Vice President of Research and Development for BSW
Advanced Technology, where he developed object-oriented project management
systems. From 1976 to 1989, he managed client software projects at Andersen
Consulting. He is a frequent lecturer for systems development groups and has
published numerous articles on the subject of systems development.
Michael E. Meisel was appointed Chief Sales Officer of the Company in
February 1999. Since 1987, Mr. Meisel has served as the President of Res-Q,
Inc., formerly MMS, Inc., which became a wholly owned subsidiary of OrganicNet
in May 1997. Mr. Meisel has approximately 20 years of experience in healthcare
systems product development.
M. Jan Roughan has been a director of OrganicNet since December 1998. She
joined OrganicNet as the President and Chief Executive Officer of L.I.N.C.,
Inc. in connection with OrganicNet's acquisition of L.I.N.C. in June 1997.
Ms. Roughan founded L.I.N.C. in 1987. From 1982 to 1987, she worked for the
Equitable Life Assurance Society in various capacities including Vice President
and Business Manager. Ms. Roughan is a Registered Nurse, a Certified Disability
Management Specialist, a Certified Rehabilitation Registered Nurse, a Certified
Case Manager and a Certified Developmental Disabilities Nurse.
Robert S. Garvie has been a director of OrganicNet since March 1996. Mr.
Garvie has served as a director for various private companies in the medical
device and healthcare industries. In 1993, Mr. Garvie founded ArthroCare, a
medical device company. From 1992 to 1993, Mr. Garvie served as the Vice
President of Sales and Marketing for Citation Caliber, Inc., a diagnostic
medical device company. From 1991 to 1992, Mr. Garvie was a consultant for Shaw
Medical Management Group, an electrosurgical products company. From 1986 to
1991, Mr. Garvie served as Vice President, Surgical Products Division for
Haemonetics, a medical device company. Prior to Haemonetics, Mr. Garvie co-
founded Cost Containment Systems, Inc., a healthcare software company.
Gail E. Oldfather has been a director of OrganicNet since October 1995.
Since 1985, Mr. Oldfather has held various positions for GEO Communications, a
financial consulting company. Mr. Oldfather is currently the President of GEO
Communications.
Michael A. Wilson has been a director of OrganicNet since March 1998. He is
currently an independent healthcare consultant. From September 1997 to July
1999, he was President and Chief Executive Officer of the CHW Medical
Foundation in San Francisco, a division of Catholic Healthcare West. Before
joining CHW in September 1997, Mr. Wilson served for eight years as President
and Chief Administrative Officer of the Dean Medical Clinic in Madison,
Wisconsin. He is also a former president of the Medical Group Management
Association and is a member of the board of directors of Physician Insurance
Company of Wisconsin.
Board Composition
The board of directors currently consists of seven members. OrganicNet's
Amended and Restated Certificate of Incorporation, as in effect immediately
prior to the consummation of this offering, divides the board of directors into
three classes. The members of each class of directors serve for staggered
three-year terms. The board of directors is composed of (1) two Class II
directors, Messrs. Robert S. Garvie and Gail E.
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Oldfather, whose terms expire upon the election and qualification of directors
at the annual meeting of stockholders to be held in 1999; (2) three Class I
directors, Messrs. Jack D. Anderson, Robert L. Anderson and David W. McComb,
whose terms expire upon the election and qualification of directors at the
annual meeting of stockholders to be held in 2000; and (3) two Class III
directors, Mr. Michael A. Wilson and Ms. M. Jan Roughan, whose terms expire
upon the election and qualification of directors at the annual meeting of
stockholders to be held in 2001.
Pursuant to our agreement with Superior Consultant Holdings Corporation,
Superior has the right to appoint a member to our board of directors prior to
this offering.
Our executive officers are appointed by the board of directors and serve
until their successors are qualified and appointed. There are no family
relationships among any of our directors or executive officers.
Director Compensation
Directors who are also executive officers do not receive additional
compensation for serving on the board or any board committee. Directors are
reimbursed for reasonable travel expenses incurred in attending meetings. There
are no formal arrangements for compensating non-employee directors. We have
compensated non-employee directors with stock options for their service on the
board. In December 1996, Robert S. Garvie received an option to purchase 10,000
shares of common stock at an exercise price of $.50 per share and Gail E.
Oldfather received an option to purchase 18,000 shares of common stock at an
exercise price of $.50 per share. In March 1998, Mr. Garvie and Mr. Oldfather
each received options to purchase 4,500 shares of common stock at an exercise
price of $1.50 per share. All of Mr. Garvie's and Mr. Oldfather's options are
fully vested. Michael A. Wilson received an option in March 1998 to purchase
2,500 shares of common stock at an exercise price of $1.50, half of which are
fully vested.
In addition, the following directors received the following options to
purchase common stock in consideration for granting bridge loans to us:
. In October 1998, Robert S. Garvie received an option to purchase 1,000
shares of common stock at an exercise price of $2.00 per share;
. In October 1998, Gail E. Oldfather received an option to purchase 1,200
shares of common stock at an exercise price of $2.00 per share; and
. In December 1998, Gail E. Oldfather received an option to purchase 1,000
shares of common stock at an exercise price of $2.00 per share.
See "Certain Relationships and Related Transactions" for a description of these
bridge loans.
Committees of the Board Of Directors
In September 1999, the board of directors established an audit committee to
review our internal accounting procedures and consult with, and review the
services provided by, our independent auditors. The audit committee currently
consists of Messrs. Oldfather, McComb and Wilson.
In July 1997, the board of directors established a compensation committee.
The compensation committee reviews and recommends to the board the compensation
and benefits of all of our executive officers and establishes and reviews
general policies relating to compensation and benefits of our employees and its
subsidiaries. The compensation committee currently consists of Messrs. Garvie,
Oldfather and Shaw.
Compensation Committee Interlocks and Insider Participation
Prior to July 1997, we did not have a separate compensation committee or
other board committee performing equivalent functions. These functions were
performed by Jack D. Anderson and William W. Shaw, III. No interlocking
relationships exist between our board of directors or compensation committee
and the board of directors or compensation committee of any other company, nor
has any other interlocking relationship existed in the past.
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<PAGE>
Executive Compensation
The following table sets forth the total compensation for services rendered
by our Chief Executive Officer and each of our seven other most highly
compensated executive officers including Ms. Roughan, who is an executive
officer of one of our wholly owned subsidiaries during the fiscal year ended
December 31, 1998. These individuals are referred to as the "named executive
officers." The titles listed below are the titles of the named executive
officers as of September 30, 1999. William H. Matthews joined OrganicNet in
June 1999 and will be compensated at an annual base salary of $125,000 during
the fiscal year ending on December 31, 1999.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
------------------------ ----------------------
Securities
Name and Principal Position Salary Bonus Underlying Options (#)
- --------------------------- ---------- --------- ----------------------
<S> <C> <C> <C>
Jack D. Anderson, Chairman of
the Board and Chief Executive
Officer....................... $ 120,000 (1) $ -- --
William W. Shaw, III,
President, Secretary and
Treasurer..................... 120,000 (1) -- 10,000
William H. Matthews, Chief
Financial Officer............. -- -- --
Robert L. Anderson, Senior Vice
President..................... 120,000 (1) -- --
Michael J. Barry, Chief
Information Officer........... 120,000 (1) -- 10,000
David W. McComb, Vice
President, Research and
Development................... 120,000 (2) -- --
Michael E. Meisel, Chief Sales
Officer; President and CEO of
Res-Q, Inc.................... 150,000 (3) 11,877 5,000
M. Jan Roughan, President and
Chief Executive Officer of
L.I.N.C., Inc................. 175,000 12,472 --
</TABLE>
- --------
(1) Includes $85,000 of salary accrued during fiscal year 1998 but has not yet
been paid.
(2) Includes $40,000 of salary accrued during fiscal year 1998 but has not yet
been paid.
(3) Includes $12,000 of salary accrued during fiscal year 1998 but has not yet
been paid.
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<PAGE>
Option Grants in Last Fiscal Year and the Six Months Ended June 30, 1999
The following table sets forth grants of stock options to each of the named
executive officers during the fiscal year ended December 31, 1998. The
potential realizable value is calculated by assuming that the initial public
offering price appreciates at the indicated rate for the entire term of the
option and that the option is exercised at the exercise price on the last day
at the appreciated price. The 5% and 10% assumed annual rates of stock price
appreciation are mandated by the rules of the Securities and Exchange
Commission and do not represent our estimate or projection of future common
stock prices.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation for
Individual Grants Option Term (2)
---------------------------------------------------- ---------------------
Number of Percent of
Securities Total Options
Underlying Granted to
Options Employees in Expiration
Name Granted Fiscal Year (1) Exercise Price Date 5% 10%
- ---- ---------- --------------- -------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Jack D. Anderson........ -- -- -- -- -- --
William W. Shaw, III.... 5,000 1.26% $1.50 01/13/08 $ 37,294 $ 63,826
5,000 1.26% 2.00 09/25/08 $ 34,794 $ 61,326
William H. Matthews..... -- -- -- -- -- --
Robert L. Anderson...... -- -- -- -- -- --
Michael J. Barry........ 5,000 1.26% 1.50 01/13/08 $ 37,294 $ 63,826
5,000 1.26% 2.00 09/25/08 $ 34,794 $ 61,326
David W. McComb......... -- -- -- -- -- --
Michael E. Meisel....... 5,000 1.26% 1.50 01/13/08 $ 37,294 $ 63,826
M. Jan Roughan.......... -- -- -- -- -- --
</TABLE>
- --------
(1) In 1998, we granted options to purchase an aggregate of 398,183 shares of
common stock.
(2) The potential realizable value is calculated by assuming that the initial
public offering price of $5.50 per share appreciates at the indicated rate
for the entire term of the option and that the option is exercised at the
exercise price and sold on the last day of its term at the appreciated
price. The potential realizable value computation is net of the applicable
exercise price, but does not take into account applicable federal or state
income tax consequences and other expenses of option exercises or sales of
appreciated stock. The values shown do not consider non-transferability or
termination of the options upon termination of such employee's employment
with OrganicNet.
The following table sets forth option grants to the named executive officers
for the time period of January 1, 1999 to June 30, 1999.
<TABLE>
<CAPTION>
Individual Grants
-----------------------------------
Number of Securities
Underlying Options
Name Granted Exercise Price Expiration Date
- ---- -------------------- -------------- ---------------
<S> <C> <C> <C>
Jack D. Anderson............ -- -- --
William W. Shaw, III........ 7,500 $2.00 03/02/09
William H. Matthews......... 4,000 2.50 04/21/09
2,465 2.50 06/22/09
90,000 2.50 06/22/09
Robert L. Anderson.......... -- -- --
Michael J. Barry............ 7,500 2.00 03/02/09
David W. McComb............. -- -- --
Michael E. Meisel........... 4,000 2.00 03/02/09
M. Jan Roughan.............. 3,500 2.00 03/02/09
</TABLE>
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<PAGE>
Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
The following table sets forth summary information with respect to
exercisable and unexercisable stock options held as of December 31, 1998 by
each of the named executive officers and with respect to the fiscal year ended
December 31, 1998. None of the named executive officers exercised options in
the fiscal year ended December 31, 1998.
<TABLE>
<CAPTION>
Number of Securities
Underlying Value of Unexercised
Unexercised Options In-the-Money Options at
at December 31, 1998 December 31, 1998 (2)
----------------------------- -------------------------
Name Exercisable (1) Unexercisable Exercisable Unexercisable
- ---- --------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Jack D. Anderson........ -- -- -- --
William W. Shaw, III.... 171,666 88,334 $850,830 $436,670
William H. Matthews..... -- -- -- --
Robert L. Anderson...... -- -- -- --
Michael J. Barry........ 171,666 88,334 $850,830 $436,670
David W. McComb......... -- -- -- --
Michael E. Meisel....... -- 5,000 -- $ 20,000
M. Jan Roughan.......... -- -- -- --
</TABLE>
- --------
(1) Exercisable refers to those options which will be vested and exercisable
immediately upon completion of this offering, while "unexercisable" refers
to those options which will be unvested at such time.
(2) Value is determined by subtracting the exercise price from the fair market
value of the common stock based on an assumed initial public offering price
of $5.50, multiplied by the number of shares underlying the options.
Employment Agreements and Change of Control Arrangements
Jack D. Anderson entered into an employment agreement with OrganicNet on
January 1, 1996. Mr. Anderson's employment agreement provides that it may be
terminated with or without cause and with or without notice at any time by
either Mr. Anderson or the company. Under the terms of his employment
agreement, Mr. Anderson receives a base salary of $120,000, subject to change
at the sole discretion of the board of directors. In addition, the board of
directors, or a duly appointed committee thereof will, no less than once
annually, determine if the award of a bonus is warranted and the amount of such
bonus, if any. If we terminate Mr. Anderson's employment without cause or if
Mr. Anderson resigns for good reason, upon a change of control or due to
disability or death, he would be entitled to receive his then existing base
salary for a period of 18 months from the date of termination. In addition, Mr.
Anderson would be entitled to his annual bonus, prorated to his date of
termination, and immediate and full vesting of all outstanding stock options
granted through any termination date. The terms of Mr. Anderson's employment
agreement also provide that Mr. Anderson will not, during the course of his
employment and the 18 months following the date of the termination of his
employment with us: (1) engage or otherwise have a financial interest in any
business activity which is in competition with us or (2) solicit our employees.
William W. Shaw, III entered into an employment agreement with OrganicNet on
June 1, 1996. Mr. Shaw's employment agreement provides that it may be
terminated with or without cause and with or without notice at any time by
either Mr. Shaw or the company. Under the terms of his employment agreement,
Mr. Shaw receives a base salary of $120,000, subject to change at the sole
discretion of the board of directors. In addition, the board of directors, or a
duly appointed committee thereof will, no less than once annually, determine if
the award of a bonus is warranted and the amount of such bonus, if any.
Pursuant to his employment agreement, we issued Mr. Shaw options to purchase up
to 250,000 shares of our common stock and he is eligible for future issuances
at the discretion of the board of directors. If we terminate Mr. Shaw's
employment without cause or if Mr. Shaw resigns for good reason, upon a change
of control or due to disability or death, he would be entitled to receive his
then existing base salary for a period of 18 months from the date of
termination. In addition, Mr. Shaw would be entitled to his annual bonus,
including the cash value of shares issued, prorated to his date of termination,
and immediate and full vesting of all outstanding stock
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<PAGE>
options granted through the termination date. The terms of Mr. Shaw's
employment agreement also provide that Mr. Shaw will not, during the course of
his employment and the 18 months following the date of the termination of his
employment with us: (1) engage or otherwise have a financial interest in any
business activity which is in competition with us or (2) solicit our employees.
William H. Matthews entered into an employment agreement with OrganicNet on
June 17, 1999. Mr. Matthew's employment agreement provides that it may be
terminated with or without cause and with or without notice at any time by
either Mr. Matthews or the company. Under the terms of his employment
agreement, Mr. Matthews receives a base salary of $125,000 which will be
adjusted by the compensation committee within 45 days of the closing of this
offering to an amount that represents a market range salary for a public
company of our size and in our industry. Pursuant to his employment agreement,
we issued to Mr. Matthews options to purchase up to 90,000 shares of our common
stock at an option price of $2.50 per share and he is eligible for future
issuances. Upon the occurrence of a change of control before June 20, 2000,
fifty percent of Mr. Matthews' remaining unvested options will vest. Should a
change of control occur after June 20, 2000, all of his remaining options will
vest.
Robert L. Anderson entered into an employment agreement with OrganicNet on
January 1, 1996. Mr. Anderson's employment agreement provides that it may be
terminated with or without cause and with or without notice at any time by
either Mr. Anderson or the company. Under the terms of his employment
agreement, Mr. Anderson receives a base salary of $120,000, subject to change
at the sole discretion of the board of directors. In addition, the board of
directors, or a duly appointed committee thereof will, no less than once
annually, determine if the award of a bonus is warranted and the amount of such
bonus, if any. If we terminate Mr. Anderson's employment without cause or if
Mr. Anderson resigns for good reason, upon a change of control or due to
disability or death, he would be entitled to receive his then existing base
salary for a period of 18 months from the date of termination. In addition, Mr.
Anderson will be entitled to his annual bonus, including the cash value of
shares issued, prorated to his date of termination, and immediate and full
vesting of all outstanding stock options granted through the termination date.
The terms of Mr. Anderson's employment agreement also provide that Mr. Anderson
will not, during the course of his employment and the 18 months following the
date of the termination of his employment with us: (1) engage or otherwise have
a financial interest in any business activity which is in competition with us
or (2) solicit our employees.
Michael J. Barry entered into an employment agreement with OrganicNet on
January 1, 1996. Mr. Barry's employment agreement provides that it may be
terminated with or without cause and with or without notice at any time by
either Mr. Barry or the company. Under the terms of his employment agreement,
Mr. Barry receives a base salary of $120,000, subject to change at the sole
discretion of the board of directors. In addition, the board of directors, or a
duly appointed committee thereof will, no less than once annually, determine if
the award of a bonus is warranted and the amount of such bonus, if any.
Pursuant to his employment agreement, we issued to Mr. Barry options to
purchase up to 250,000 shares of our common stock and he is eligible for future
issuances at the discretion of the board of directors. If we terminate Mr.
Barry's employment without cause or if Mr. Barry resigns for good reason, upon
a change of control or due to disability or death, he would be entitled to
receive his then existing base salary for a period of 18 months from the date
of termination. In addition, Mr. Barry would be entitled to his annual bonus,
including the cash value of shares issued, prorated to his date of termination,
and immediate and full vesting of all outstanding stock options granted through
the termination date. The terms of Mr. Barry's employment agreement also
provide that Mr. Barry will not, during the course of his employment and the 18
months following the date of the termination of his employment with us:
(1) engage or otherwise have a financial interest in any business activity
which is in competition with us or (2) solicit our employees.
M. Jan Roughan entered into an employment agreement with OrganicNet on
January 1, 1997. Ms. Roughan's employment agreement ends on December 31, 1999.
Under the terms of her employment agreement, Ms. Roughan receives a base salary
of $175,000. In addition, incentive bonuses will be awarded to Ms. Roughan
based upon net revenue realized from the sale of L.I.N.C., Inc. software
products during the preceding year. Either OrganicNet or Ms. Roughan may
terminate this agreement by giving written notice to the other party. Pursuant
to the terms of her employment agreement, if Ms. Roughan is terminated for
cause, as
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<PAGE>
specified in the agreement, or upon her death, the company is obligated to pay
her base salary and benefits through the effective date of termination, or the
date of her death, as applicable, plus an additional 12 months of base salary
and benefits. If Ms. Roughan is terminated without cause upon a majority vote
of the board of directors, she is entitled to the greater of her base salary
and benefits through the term of the agreement or 12 months of her then base
salary and benefits. The terms of Ms. Roughan's employment agreement also
provide that she will not, during the course of her employment and the 12
months following the date of the termination of her employment with us: (1)
engage or otherwise have a financial interest in any business activity which
is in competition with us or (2) solicit our employees.
Limitation of Liability and Indemnification Matters
Our bylaws limit the personal liability of our directors to the fullest
extent permitted by Delaware law.
Section 145 of the Delaware General Corporation Law empowers a corporation
to indemnify its directors and officers and to purchase insurance with respect
to liability arising out of their capacity or status as directors and
officers, provided that this provision does not eliminate or limit the
liability of a director for the following:
. any breach of the director's duty of loyalty to us or our stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions;
. any transaction from which the director derived an improper personal
benefit;
. if the officer or director did not act in good faith and in a manner
reasonably believed to be in, or not opposed to, our best interests; or
. with respect to any criminal action or proceeding, if the officer or
director had reasonable cause to believe his conduct was unlawful.
We believe that indemnification provisions under our bylaws covers at least
negligence and gross negligence on the part of indemnified parties.
1997 Stock Option/Stock Issuance Plan
In November 1997, the board of directors adopted, and the stockholders
approved, the 1997 Stock Option/Stock Issuance Plan. An aggregate of 1,478,513
shares of common stock currently are authorized for issuance under the
incentive plan and the share reserve will automatically be increased on the
first business day of each calendar year by an amount equal to 2% of the total
outstanding shares of common stock on the last business day of the immediately
preceding calendar year. No incentive stock option may be granted on the basis
of the annual share increases. When a stock award expires, is terminated
before it is exercised or is cancelled, the shares set aside for that award
are returned to the pool of shares available for future awards. Shares that
are issued when an award is exercised and that are subsequently repurchased by
us will again become available for future awards.
The 1997 Plan permits the grant of options to employees, non-employee
directors, and consultants and other independent advisors to the company.
Options may be either ISOs within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, or nonstatutory stock options. In addition,
the 1997 Plan permits the grant of stock bonuses and rights to purchase
restricted stock.
The 1997 Plan is administered by the board of directors. The board of
directors may delegate its authority to administer the 1997 Plan to a
committee of two or more board members appointed by the board of directors.
The administrator has the authority to select the eligible persons to whom
award grants are to be made, to designate the number of shares to be covered
by each award, to determine whether an option is to be an ISO or nonstatutory
stock option, to establish vesting schedules, to specify the exercise price of
options and the type of consideration to be paid upon exercise and to specify
other terms of awards.
54
<PAGE>
In general, the stock options granted under the 1997 Plan may not exceed 10
years. An optionholder may not transfer a stock option other than by will or
the law of descent or distribution. The exercise price for an ISO cannot be
less than 100% of the fair market value of the common stock on the date of
grant. The exercise price for nonstatutory stock options cannot be less than
85% of the fair market value of the common stock on the date of grant. In the
event the optionholder is a 10% stockholder, then the exercise price per share
shall not be less than 110% of the fair market value of common stock on the
date of grant.
Unless the terms of an optionholder's stock option agreement provide for
earlier termination, in the event an optionholder's service relationship with
us, or any affiliate of ours, ceases due to disability or death, the
optionholder (or his beneficiary) may exercise any vested options up to 12
months after the date such service relationship ends. If an optionholder's
relationship with us, or any affiliate of ours, ceases for any reason other
than disability or death, the optionholder may (unless the terms of the stock
option agreement provide for earlier termination) exercise any vested options
up to three months from cessation of service. Should an optionholder's
relationship with us be terminated for misconduct, then all outstanding options
held by the optionholder will terminate immediately and cease to remain
outstanding.
ISOs may be granted only to our employees. The aggregate fair market value,
determined at the time of grant, of shares of our common stock with respect to
which ISOs are exercisable for the first time by an optionholder during any
calendar year under all of our stock plans may not exceed $100,000. If any ISO
is granted to any employee who at the time of the grant owns or is deemed to
own stock possessing more than 10% of the total combined voting power of the
Company or any of its affiliates, the term of the ISO award may not exceed five
years from the date of grant.
In the event of certain changes in control, all outstanding options under
the incentive plan either may be assumed, continued or substituted for by any
surviving entity. If the surviving entity determines not to assume, continue or
substitute for such awards, the vesting provisions of such stock options will
be accelerated and such stock options will be terminated upon the change in
control if not previously exercised. The portion of any ISO accelerated by a
change in control will remain exercisable as an ISO only to the extent the
$100,000 limitation is not exceeded. To the extent this dollar limitation is
exceeded, the accelerated portion of such option will be exercisable as a
nonstatutory stock option under the Federal tax laws. Even if the surviving
entity does assume or substitute outstanding stock awards, if the holder of an
award is terminated other than for misconduct, or constructively terminated,
within a specified period not more than 18 months following the change in
control, the holder's award will vest in full.
The terms of any stock bonuses or restricted stock purchase awards granted
under the 1997 Plan will be determined by the administrator. However, the
administrator may not impose a vesting schedule which is more restrictive than
20% per year, with initial vesting to occur no later than one year after the
issuance date. Such limitation shall not apply to any common stock issuance
made to officers, non-employee directors or consultants. The administrator may
award stock bonuses in consideration of past services without a purchase
payment. Shares sold or awarded under the 1997 Plan may be subject to
repurchase by us. The purchase price of restricted stock under any restricted
stock purchase agreement will not be less than 85% of the fair market value of
the company's common stock on the date of grant. However, the purchase price
per share of common stock for a 10% stockholder shall not be less then 110% of
the fair market value on the date of grant.
Upon a change in control, all outstanding repurchase rights will terminate
and the shares of common stock subject to those rights will immediately vest in
full, except to the extent the repurchase rights are assigned to the successor
entity or such accelerated vesting is precluded by limitations imposed by the
administrator at the time the repurchase right was issued. In addition, the
administrator will have full and complete discretion with regard to outstanding
shares to provide that repurchase rights will automatically terminate on an
accelerated basis and that the shares shall immediately vest in the event the
participant's relationship with the company should terminate by reason of the
change in control within no more than 18 months following the effective date of
the change in control.
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The board of directors may amend or modify the 1997 Plan at any time.
However, no such amendment or modification shall adversely affect the right and
obligations with respect to options or unvested awards unless the participant
consents to such an amendment or modification. In addition, certain amendments
may require stockholder approval.
As of October 31, 1999, the Company had issued and outstanding under the
1997 Plan options to purchase 989,431 shares of common stock.
1996 Stock Option/Stock Issuance
On April 30, 1996, the board of directors adopted, and the stockholders
approved, the 1996 Stock Option/Stock Issuance Plan. On April 22, 1997, the
board of directors adopted, and on November 21, 1997, the stockholders
approved, an amendment and restatement of the incentive plan. A maximum of
1,000,000 shares are authorized under the 1996 Plan. The authorized share
reserve is comprised of (1) 750,000 shares originally available under the
incentive plan and (2) an additional 250,000 shares of common stock authorized
by the board on April 22, 1997, subject to stockholder approval. When a stock
award expires, is terminated before it is exercised or is cancelled, the shares
set aside for that award are returned to the pool of shares available for
future awards. Awards may be granted in excess of the number of shares of
common stock then available for issuance under the 1996 Plan, provided any
excess shall be held in escrow until stockholder approval is obtained
increasing the number of shares of common stock available for issuance. If
approval is not obtained within 12 months after the issuance of the excess is
made, then (1) any unexercised options granted on the basis of the excess will
terminate and cease to be outstanding and (2) the company will refund the
exercise or purchase price plus interest.
The 1996 Plan permits the grant of options to employees, non-employee
directors and consultants. Options may be either ISOs within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended, or nonstatutory
stock options. In addition, the 1996 Plan permits the grant of stock bonuses
and rights to purchase restricted stock.
The 1996 Plan is administered by the board of directors. The board of
directors may delegate its authority to administer the 1996 Plan to a committee
of two or more board members appointed by the board of directors. The
administrator has the authority to select the eligible persons to whom award
grants are to be made, to designate the number of shares to be covered by each
award, to determine whether an option is to be an ISO or nonstatutory stock
option, to establish vesting schedules, to specify the exercise price of
options and the type of consideration to be paid upon exercise and to specify
other terms of awards.
In general, the stock options granted under the 1996 Plan may not exceed 10
years. An optionholder may not transfer a stock option other than by will or
the law of descent or distribution. However, a nonstatutory option may be
assigned in whole or in part during optionholder's lifetime in accordance with
the terms of a qualified domestic relations order. The exercise price for an
ISO cannot be less than 100% of the fair market value of the common stock on
the date of grant. The exercise price for nonstatutory stock options cannot be
less than 85% of the fair market value of the common stock on the date of
grant. In the event the optionholder is a 10% stockholder, then the exercise
price per share will not be less than 110% of the fair market value of common
stock on the date of grant.
Unless the terms of an optionholder's stock option agreement provide for
earlier termination, in the event an optionholder's service relationship with
us, or any affiliate of ours, ceases due to death, the optionholder's
beneficiary may exercise any vested options up to 12 months after the date such
service relationship ends. In the event an optionholder's service relationship
with us, or any affiliate of ours, ceases due to disability, the optionholder
may exercise any vested option up to six months (12 months for permanent
disability) after the cessation of service. If an optionholder's relationship
with us, or any affiliate of ours, ceases for any reason other than disability
or death, the optionholder may (unless the terms of the stock option agreement
provide for earlier termination) exercise any vested options up to three months
from cessation of service. Should an
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<PAGE>
optionholder's relationship with us be terminated for misconduct, then all
outstanding options held by the optionholder will terminate immediately and
cease to remain outstanding.
ISOs may be granted only to our employees. The aggregate fair market value,
determined at the time of grant, of shares of our common stock with respect to
which incentive stock options are exercisable for the first time by an
optionholder during any calendar year under all of our stock plans may not
exceed $100,000. If any ISO is granted to any employee who at, the time of the
grant, owns or is deemed to own stock possessing more than 10% of the total
combined voting power of the Company or any of its affiliates, the term of the
ISO award may not exceed five years from the date of grant.
In the event of certain changes in control, all outstanding options under
the incentive plan may be assumed by any surviving entity. If the surviving
entity determines not to assume the options, they will terminate and no longer
be outstanding on the effective date of such change in control.
The terms of any stock bonuses or restricted stock purchase awards granted
under the 1996 Plan will be determined by the administrator. However, the
administrator may not impose a vesting schedule which is more restrictive than
20% per year, with initial vesting to occur no later than one year after the
issuance date. Such limitation shall not apply to any common stock issuance
made to officers, non-employee directors or consultants. The administrator may
award stock bonuses in consideration of past services without a purchase
payment. Shares sold or awarded under the 1996 Plan may be subject to
repurchase by the company. The purchase price of restricted stock under any
restricted stock purchase agreement will not be less than 85% of the fair
market value of the company's common stock on the date of grant. However, the
purchase price per share of common stock for a 10% stockholder will not be less
then 110% of the fair market value on the date of grant.
Upon a change in control, all outstanding repurchase rights will terminate
to the extent the surviving entity does not accept the assignment of the
repurchase rights.
The board of directors may amend or modify the 1996 Plan at any time.
However, no such amendment or modification shall adversely affect the right and
obligations with respect to options or unvested awards unless the participant
consents to such an amendment or modification. In addition, the board of
directors will not without the approval of the stockholders (1) increase the
maximum number of shares issuable under the 1996 Plan (except for permissible
adjustments in the event of certain changes in the Company's capitalization),
(2) materially modify the eligibility requirements for participation or (3)
materially increase the benefits accruing to participants.
As of October 31, 1999, the Company had issued and outstanding under the
1996 Plan options to purchase 820,318 shares of common stock.
401(k) Plan
We sponsor a 401(k) plan, a defined contribution plan intended to qualify
under Section 401 of the Internal Revenue Code of 1986, as amended. All
employees who exceed 20 hours per week and 1,000 hours per year and who
complete one month of service are eligible to participate. Participants may
make pre-tax contributions to the 401(k) plan of up to 20% of their eligible
earnings, subject to a statutorily prescribed annual limit ($10,000 in calendar
year 1999). Under the 401(k) plan, each employee is fully vested in his or her
deferred salary contributions. Employee contributions are held and invested by
the 401(k) plan's trustee. The 401(k) plan also permits us to make matching
contributions and profit-sharing contributions, subject to established limits.
Each participant's contributions and the corresponding investment earnings
are generally not taxable to the participants until withdrawn. Individual
participants may direct the trustee to invest their accounts in authorized
investment alternatives.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since January 1, 1998, some of our directors, executive officers and
affiliates have entered into transactions with us as follows:
Purchase Of Capital Stock
<TABLE>
<CAPTION>
Number of
Shares of
Common Stock
Issuable
After
Conversion
Date of Number of of Preferred
Name Purchase Type of Security Price per Share Shares Stock(5)
- ---- -------- ------------------------ --------------- --------- ------------
<S> <C> <C> <C> <C> <C>
Jack D. Anderson (1).... 08/10/99 Series C Preferred Stock $2.75 51,789 51,789
William H. Matthews..... 04/17/98 Series C Preferred Stock 2.75 10,909 10,909
01/06/99 Series C Preferred Stock 2.75 7,143 7,143
06/30/99 Series C Preferred Stock 2.75 5,000 5,000
08/02/99 Series C Preferred Stock 2.75 20,000 20,000
Michael E. Meisel....... 04/01/99 Series C Preferred Stock 2.75 5,000 5,000
Robert S. Garvie (2).... 02/19/99 Series C Preferred Stock 2.75 31,110 31,110
04/05/99 Common Stock (4) 0.50 10,000 --
04/05/99 Common Stock (4) 1.50 4,500 --
04/05/99 Common Stock (4) 2.00 1,000 --
04/05/99 Series C Preferred Stock 2.75 11,581 11,581
08/05/99 Series C Preferred Stock 2.75 36,363 36,363
Gail E. Oldfather (3)... 03/10/98 Series C Preferred Stock 2.75 17,945 17,945
11/25/98 Series C Preferred Stock 2.75 29,753 29,753
12/28/98 Series C Preferred Stock 2.75 1,800 1,800
03/31/99 Series C Preferred Stock 2.75 10,000 10,000
07/20/99 Series C Preferred Stock 2.75 75,000 75,000
</TABLE>
- --------
(1) Includes shares purchased on behalf of Mr. Anderson's spouse.
(2) Includes shares purchased by Omeah Ltd. Partnership. Mr. Garvie is a
General Partner of Omeah Ltd. Partnership.
(3) Includes shares purchased on behalf of Mr. Oldfather's spouse and
relatives.
(4) Shares purchased pursuant to the exercise of stock options.
(5) The shares of the Company's Preferred Stock will convert into shares of
common stock on a one-to-one basis effective upon the closing of this
offering.
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<PAGE>
Since January 1, 1998, we have granted options to purchase common stock to
some of our directors, executive officers and affiliates as follows:
Issuance Of Stock Options
<TABLE>
<CAPTION>
Name Date Granted Exercise Price Options
- ---- ------------ -------------- -------
<S> <C> <C> <C>
William W. Shaw, III........................ 01/13/98 $1.50 5,000
09/25/98 2.00 5,000
03/02/99 2.00 7,500
08/06/99 2.50 10,000
William E. Matthews......................... 04/21/99 2.50 4,000
06/22/99 2.50 2,465
06/22/99 2.50 90,000
Michael J. Barry............................ 01/13/98 1.50 5,000
09/25/98 2.00 5,000
03/02/99 2.00 7,500
08/06/99 2.50 10,000
Michael E. Meisel........................... 01/13/98 1.50 5,000
03/02/99 2.00 4,000
M. Jan Roughan.............................. 03/02/99 2.00 3,500
Robert S. Garvie............................ 03/12/98 1.50 2,500
03/12/98 1.50 2,000
10/29/98 2.00 1,000
Gail E. Oldfather........................... 03/12/98 1.50 2,500
03/12/98 1.50 2,000
10/29/98 2.00 1,200
12/10/98 2.00 1,000
08/06/99 2.50 27,000
Michael A. Wilson........................... 03/12/98 1.50 2,500
</TABLE>
Lock-Up Agreements
Each of the individuals listed above have entered into lock-up agreements
pursuant to which they have agreed not to, directly or indirectly, offer, sell,
offer to sell, contract to sell, pledge, grant any option to purchase or
otherwise sell or dispose of any shares of common stock, preferred stock or any
substantially similar securities or securities convertible into or exchangeable
or exercisable for shares of common stock, preferred stock or any substantially
similar securities for a period of 180 days from the date of this prospectus
without the prior written consent of the underwriter. The underwriter may, at
any time and without notice, waive the terms of these lock-up agreements.
ASP Agreement with Conxion Corporation
We have entered into several agreements with Conxion Corporation under which
Conxion supplies us with application hosting services and Internet
infrastructure for our ASP software solutions. In connection with these
agreements, Conxion invested $550,000 in our Series C preferred stock. See
"Business--Strategic Relationships and Alliances" for a description of these
agreements.
Loan From Jack D. Anderson and Peggy L. Anderson to OrganicNet
On September 30, 1997, Mr. and Mrs. Anderson loaned $60,000 to us at an
interest rate of 6.5% per annum. As of September 30, 1999, the Company has
repaid a total of approximately $56,371 of the loan, approximately $31,453 of
which was repaid in cash and approximately $24,917 of which was repaid in the
form of 9,060 shares of Series C preferred stock. The remaining balance on this
loan is approximately $11,057.
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<PAGE>
Agreement with Superior Consultant Holdings Corporation
We entered into a marketing alliance with Superior Consultant Holdings
Corporation in September 1999, under which Superior will introduce, promote and
demonstrate our ASP software solutions. Pursuant to this agreement, we granted
Superior an option to purchase 200,000 shares of our common stock at an
exercise price of $6.00 per share. See "Business--Strategic Relationships and
Alliances" for a description of this agreement.
Indemnity and Subrogation Agreement between Michael E. Meisel and OrganicNet
On January 1, 1998, Michael E. Meisel entered into an Indemnity and
Subrogation Agreement with us in connection with a line of credit agreement
between our wholly owned subsidiary Res-Q, Inc. (formerly MMS, Inc.) and Wells
Fargo Bank. This line of credit was assigned to and assumed by us upon the
acquisition of MMS, Inc. In connection with this line of credit, Mr. Meisel
provided a personal guaranty. OrganicNet agreed to indemnify Mr. Meisel for a
maximum amount of $200,000, the current amount of Mr. Meisel's guaranty plus
accrued interest, for any deficiency in repayment that he may suffer after
making a claim for reimbursement from the principal borrower.
Promissory Note dated April 1, 1999 between Michael E. Meisel and OrganicNet
In connection with our acquisition of Res-Q, Inc. (formerly MMS, Inc.),
OrganicNet and Mr. Meisel executed two $50,000 promissory notes on April 4,
1997 and December 1, 1997, respectively. These notes were consolidated on April
1, 1999. Under this consolidated promissory note, we are obligated to pay Mr.
Meisel $105,187, plus interest at the rate of 10% per annum, compounded
monthly. This note becomes due and payable on December 31, 1999 and can be
prepaid at any time in whole or in part without premium or penalty. As of
September 30, 1999, the outstanding balance of this note was $104,270. In
August 1999, we repaid $5,000 of this note. We will repay the entire
outstanding balance of this note from the proceeds of this offering.
Line of Credit Agreement between First National Bank and Jack D. Anderson,
David W. McComb and Robert L. Anderson
On October 28, 1997, First National Bank extended a line of credit in the
amount of $100,000 to three of our executive officers and directors, Jack D.
Anderson, David W. McComb and Robert L. Anderson. The terms of the line of
credit are for a term for one year at a variable rate of interest, currently
10%. The line of credit has been extended to September 30, 2000. Messrs.
Anderson, McComb and Anderson have borrowed $100,000 under this line of credit
for our benefit. We have assumed the obligation to repay this loan. Messrs.
Anderson, McComb and Anderson have executed promissory notes with First
National Bank and have personally guaranteed this loan.
Promissory Notes dated June 1, 1997 and December 1, 1997 between M. Jan Roughan
and OrganicNet
In connection with our acquisition of L.I.N.C., Inc. on June 23, 1997,
OrganicNet and Ms. Roughan executed two promissory notes in the amount of
$50,000 each on June 1, 1997 and December 1, 1997. As of September 30, 1999,
the total balance of these notes was $116,610. In August 1999, we repaid a
total of $5,000 of these notes. We will repay the entire outstanding balance of
these notes from the proceeds of this offering.
Promissory Note dated October 2, 1998 between Robert S. Garvie and OrganicNet
On October 2, 1998, Mr. Garvie loaned us $20,000 at an interest rate of 12%
per annum. As consideration for this loan, we granted Mr. Garvie options to
purchase 1,000 shares of common stock at an exercise price of $2.00 per share.
We have repaid this loan.
Promissory Note dated November 25, 1998 between Gail B. Oldfather and
OrganicNet
On November 25, 1998, Mr. Oldfather loaned us $20,000 at an interest rate of
12% per annum. As consideration for this loan, we granted Mr. Oldfather options
to purchase 1,000 shares of common stock at an exercise price of $2.00 per
share. We have repaid this loan.
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<PAGE>
Promissory Note dated October 19, 1998 between Gail B. Oldfather and OrganicNet
On October 19, 1998, Mr. Oldfather loaned us $24,000 at an interest rate of
12% per annum. As consideration for this loan, we granted Mr. Oldfather options
to purchase 1,200 shares of common stock at an exercise price of $2.00 per
share. We have repaid this loan.
Other Related Party Transactions
We have entered into an employment agreement with William H. Matthews, a
named executive officer. See "Management--Employment Agreements and Change of
Control Arrangements."
Indemnification Agreements
We intend to enter into indemnification agreements with our officers and
directors containing provisions that require us, among other things, to
indemnify our officers and directors against certain liabilities that may arise
by reason of their status or service as officers or directors, other than
liabilities arising from willful misconduct of a culpable nature, and to
advance their expenses incurred as a result of any proceeding against them as
to which they could be indemnified.
We believe that all transactions described in this section "Certain
Relationships and Related Transactions" were made on terms no less favorable to
us than would have been obtained from unaffiliated third parties. All future
transactions, if any, with our executive officers, directors and affiliates
will be on terms no less favorable to us than could be obtained from unrelated
third parties and will be approved by a majority of the board of directors and
by a majority of the disinterested members of the board of directors.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to beneficial
ownership of our common stock as of October 31, 1999 and as adjusted to reflect
the sale of common stock offered by us pursuant to this offering. The following
table lists:
. each person known by us to beneficially own more than 5% of our
outstanding common stock;
. each director;
. each named executive officer; and
. all directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power with
respect to the securities. The address for each listed director and officer is
OrganicNet, Inc., 330 Townsend Street, Suite 206, San Francisco, California,
94107-1630. Except as indicated by footnote, and subject to applicable
community property laws, the persons named in the table have sole voting and
investment power with respect to all shares of common stock shown as
beneficially owned by them. The number of shares of common stock outstanding
used in calculating the percentage for each listed person includes the shares
of common stock underlying options that are exercisable within 60 days of
October 31, 1999, but excludes shares of common stock underlying options held
by any other persons. Percentage of beneficial ownership prior to the offering
is based on 13,802,514 shares of common stock outstanding as of October 31,
1999 after giving effect to the conversion of our currently outstanding
preferred stock. Percentage of beneficial ownership after the offering is based
on 18,302,514 shares outstanding after the offering.
<TABLE>
<CAPTION>
Percentage of Shares
Shares Beneficially Owned
Beneficially --------------------------------
Name of Beneficial Owner Owned Prior to Offering After Offering
- ------------------------ ------------ ----------------- --------------
<S> <C> <C> <C>
Jack D. Anderson............ 2,287,813 (1) 16.57% 12.50%
William W. Shaw, III........ 343,889 (2) 2.44% 1.85%
William H. Matthews......... 90,160 (3) * *
Robert L. Anderson.......... 1,353,986 (4) 9.81% 7.40%
Michael J. Barry............ 330,505 (5) 2.35% 1.78%
David W. McComb............. 923,139 (6) 6.69% 5.04%
Michael E. Meisel........... 517,658 (7) 3.75% 2.83%
M. Jan Roughan.............. 260,233 1.88% 1.42%
Robert S. Garvie............ 236,904 (8) 1.72% 1.29%
Gail E. Oldfather........... 701,812 (9) 5.06% 3.82%
Michael A. Wilson........... 2,500 (10) * *
All directors and executive
officers as a group (11
persons)................... 7,048,599 (11) 48.94% 37.30%
</TABLE>
- --------
* Represents beneficial ownership of less than one percent of the common
stock.
(1) Includes 228,170 shares of common stock owned by Mr. Anderson's spouse and
held in trust for the benefit of Mr. Anderson and his spouse.
(2) Includes 266,667 shares of common stock beneficially owned as a result of
options that become exercisable within 60 days of October 31, 1999.
(3) Includes 6,465 shares of common stock beneficially owned as a result of
options that become exercisable within 60 days of October 31, 1999.
(4) Includes 46,000 shares of common stock owned by Mr. Anderson's spouse and
children and held in trust for the benefit of Mr. Anderson's children.
(5) Includes 266,667 shares of common stock beneficially owned as a result of
options that become exercisable within 60 days of October 31, 1999.
(6) Includes 28,652 shares of common stock owned by Mr. McComb's spouse.
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<PAGE>
(7) Includes 213,966 shares of common stock owned by Mr. Meisel's spouse and
held in trusts established for the benefit of Mr. Meisel's children, and
1,667 shares of common stock beneficially owned as a result of options
that become exercisable within 60 days of October 31, 1999.
(8) Includes 3,636 shares of common stock held in trust for the benefit of Mr.
Garvie's family and 233,268 shares owned by Omeah Ltd. Partnership. Mr.
Garvie is a General Partner of Omeah Ltd. Partnership.
(9) Includes 367,112 shares held in trusts established for the benefit of Mr.
Oldfather's family, and 51,700 shares of common stock beneficially owned
as a result of options that become exercisable within 60 days of October
31, 1999.
(10) Includes 2,500 shares of common stock beneficially owned as a result of
options that become exercisable within 60 days of October 31, 1999.
(11) Includes shares described in the notes above, as applicable.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Following the closing of the sale of the shares offered by this prospectus,
our authorized capital stock will consist of shares of common stock, $0.001
par value, and shares of preferred stock, $0.01 par value.
Common Stock
As of October 31, 1999, there were 13,802,514 shares of common stock
outstanding held of record by approximately 460 stockholders, on an as-
converted basis. There will be 18,302,514 shares of common stock outstanding
after giving effect to the sale of the shares of common stock offered in this
prospectus. This number assumes no exercise of the underwriter's over-allotment
option and no exercise of options after October 31, 1999.
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Subject to
preferences that may be applicable to any outstanding shares of preferred
stock, the holders of common stock are entitled to receive ratably such
dividends as may be declared by the board of directors out of legally available
funds. In the event of our liquidation, dissolution or winding up, holders of
the common stock are entitled to share ratably in all assets remaining after
payment of liabilities and the liquidation preferences of any outstanding
shares of preferred stock. Holders of common stock have no preemptive rights or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the common stock. All outstanding shares
of common stock are, and all shares of common stock to be outstanding upon
completion of this offering will be, fully paid and nonassessable.
Preferred Stock
Effective upon the closing of this offering, we will be authorized to issue
shares of undesignated preferred stock. Our board of directors will have
the authority to issue the undesignated preferred stock in one or more series
and to determine the powers, preferences and rights and the qualifications,
limitations or restrictions granted to or imposed upon any wholly unissued
series of undesignated preferred stock and to fix the number of shares
constituting any series and the designation of such series, without any further
vote or action by the stockholders. The issuance of preferred stock may have
the effect of delaying, deferring or preventing any change in control may
adversely affect the voting and other rights of holders of common stock, and
the likelihood that the holders will receive dividend payments and payments
upon liquidation. At present, we have no plans to issue any shares of preferred
stock.
Registration Rights
The Amended and Restated Investor Rights Agreement dated October 31, 1997,
provides holders of the preferred stock rights to register shares of our
capital stock. At any time after the later of six months after the effective
date of the first registration statement that we file under the Securities Act
or December 31, 2001, holders of a majority of the registrable securities, as
defined in the Investor Rights Agreement, may require us to effect registration
under the Securities Act of their Registrable Securities, subject to the board
of directors' right to defer the registration for a period of up to 120 days.
The investors also have the right, upon demand made by 25% of the holders of
registrable securities, to cause us to register their securities on Form S-3
when it becomes available to us if they propose to register securities having a
value of at least $1 million. In addition, if we propose to register securities
under the Securities Act, other than registrations on Form S-4 or Form S-8,
then any of the investors has a right, subject to quantity limitations, as
determined by the underwriter if the offering is underwritten to request that
we register such holder's registrable securities. We will bear all registration
expenses incurred in connection with registrations. We have agreed to indemnify
the investors against liabilities related to the accuracy of the registration
statement used in connection with any registration effected pursuant to the
foregoing.
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<PAGE>
Effect of Selected Provisions of the Certificate of Incorporation and Bylaws,
and the Delaware Anti-takeover Statute
Amended and Restated Certificate of Incorporation and Bylaws
Upon the closing of this offering, our amended and restated certificate of
incorporation will provide that our board of directors be classified into three
classes of directors and all stockholder action must be effected at a duly
called meeting of stockholders and not by a consent in writing. The amended and
restated certificate of incorporation and bylaws provide that only our Chief
Executive Officer, the Chairman of the board of directors or a majority of the
members of the board of directors may call a special meeting of the
stockholders. Directors may not be removed without cause. The amended and
restated bylaws establish procedures including advance notice with regard to
the nomination of directors and stockholder proposals. These provisions of the
amended and restated certificate of incorporation and bylaws could discourage
potential acquisition proposals and could delay or prevent a change in control.
These provisions also may have the effect of preventing changes in our
management.
The board of directors has authority to issue up to shares of preferred
stock and to fix the rights, preferences, privileges and restrictions,
including voting rights, of these shares without any further vote or action by
the stockholders. The rights of the holders of the common stock will be subject
to, and may be harmed by, the rights of the holders of any preferred stock that
may be issued in the future. The issuance of preferred stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire a majority of our outstanding voting stock, thereby
delaying, deferring or preventing a change in control.
Delaware Takeover Statute
We are subject to Section 203 of the Delaware General Corporation Law,
which, subject to certain exceptions, prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that the stockholder became an
interested stockholder, unless:
. prior to that date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
. upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned:
. by persons who are directors and also officers; and
. by employee stock plans in which employee participants do not have
the right to determine confidentially whether shares held subject to
the plan will be tendered in a tender or exchange offer; or
. on or subsequent to that date, the business combination is approved by
the board of directors of the corporation and authorized at an annual or
special meeting of stockholders and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding voting stock
that is not owned by the interested stockholder.
Section 203 defines "business combination" to include the following:
. any merger or consolidation involving the corporation and the interested
stockholder;
. any sale, transfer, plan or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
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<PAGE>
. subject to certain exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the corporation
to the interested stockholder;
. any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series
of the corporation beneficially owned by the interested stockholder; and
. the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by any of these entities or persons.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is LaSalle Bank N.A.
Listing
We have applied for our common stock to be quoted on the Nasdaq National
Market under the trading symbol "OGNT."
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. The market price of our common stock could drop due to sales of a large
number of shares of our common stock or the perception that such sales could
occur. These factors could also make it more difficult to raise funds through
future offerings of common stock.
After this offering, 18,302,514 shares of common stock will be outstanding,
18,977,514 shares if the underwriter exercises its over-allotment options in
full. Of these shares, the 4,500,000 shares sold in this offering, 5,175,000
shares if the underwriter's over-allotment options are exercised in full, will
be freely tradable without restriction under the Securities Act except for
shares purchased by our "affiliates" as defined in Rule 144 under the
Securities Act. The remaining 13,802,514 shares are "restricted securities"
within the meaning of Rule 144 under the Securities Act. The restricted
securities generally may not be sold unless they are registered under the
Securities Act or are sold pursuant to an exemption from registration, such as
the exemption provided by Rule 144 under the Securities Act.
Our officers, directors and stockholders holding shares of common stock
have entered into lock-up agreements under which they have agreed not to,
directly or indirectly, offer, sell, offer to sell, contract to sell, pledge,
grant any option to purchase or otherwise sell or dispose of, any shares of
common stock, preferred stock or any substantially similar securities or
securities convertible into or exchangeable or exercisable for shares of common
stock, preferred stock or any substantially similar securities for a period of
180 days after the date of this prospectus without the prior written consent of
the underwriters. The underwriters do not intend to release any "affiliates" of
the Company from the lock-up agreements. The underwriters will not provide
notice of the release of any stockholder from a lock-up agreement. Following
the lock-up period and as set forth in the chart below, these shares will be
eligible for sale in the public market without registration under the
Securities Act if such sales meet the applicable conditions and restrictions of
Rule 144 as described above. As these restrictions on resale end, the market
price of our common stock could drop significantly if the holders of these
restricted shares sell them, or are perceived by the market as intending to
sell them.
<TABLE>
<CAPTION>
Date of availability for resale
Number of shares into public market
---------------- -------------------------------
<C> <S>
180 days after the date of this prospectus due to a lock-up
agreement our officers, directors and stockholders have with
the underwriters. However, the underwriters can waive this
restriction at any time and without notice.
Between 180 and 365 days after the date of this prospectus
due to the requirements of the federal securities laws.
</TABLE>
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, any person, or persons whose shares are
aggregated, including an affiliate, who has beneficially owned shares for a
period of at least one year is entitled to sell, within any three-month period,
a number of shares that does not exceed the greater of:
. 1% of the then-outstanding shares of common stock; and
. the average weekly trading volume in the common stock during the four
calendar weeks immediately preceding the date on which the notice of
such sale on Form 144 is filed with the Securities and Exchange
Commission.
Sales under Rule 144 are also subject to provisions relating to notice and
manner of sale and the availability of current public information about us. In
addition, a person or persons whose shares are aggregated who has not been an
affiliate of us at any time during the 90 days immediately preceding a sale,
and who has beneficially owned the shares for at least two years, would be
entitled to sell such shares under Rule 144(k) without regard to the volume
limitation and other conditions described above. The above summary of Rule 144
is not intended to be a complete description.
67
<PAGE>
In addition, our employees, directors, officers, advisors or consultants who
were issued shares pursuant to a written compensatory plan or contract may be
entitled to rely on the resale provisions of Rule 701, which permits
nonaffiliates to sell their Rule 701 shares without having to comply with the
public information, holding period, volume limitation or notice provisions of
Rule 144, and permits affiliates to sell their Rule 701 shares without having
to comply with Rule 144's holding period restrictions, in each case commencing
90 days after the date of this prospectus.
As soon as practicable following the closing of this offering, we intend to
file a registration statement under the Securities Act to register shares
of common stock issuable upon the exercise of outstanding stock options or
reserved for issuance under our stock option plans and our stock purchase
plans, of which 1,234,360 shares subject to options under our stock option
plans will be exercisable immediately upon the closing of this offering and an
additional 13,000 shares subject to options under our stock option plans will
be exercisable within 60 days of October 31, 1999. After the effective date of
such registration statement, these shares will be available for sale in the
open market subject to the lock-up agreements described above and, for our
affiliates, to the conditions and restrictions of Rule 144.
68
<PAGE>
UNDERWRITING
We have entered into an underwriting agreement with the underwriters named
below. We are obligated to sell, and the underwriters are obligated to
purchase, all of the shares offered on the cover page of this prospectus, if
any are purchased. Subject to certain conditions of the underwriting agreement,
the underwriter has agreed to purchase the shares indicated opposite its name:
<TABLE>
<CAPTION>
Number
Underwriter of Shares
- ----------- ---------
<S> <C>
Needham & Company, Inc................................................
Punk, Ziegel & Company, L.P...........................................
----
Total...............................................................
====
</TABLE>
The underwriters may sell more shares than the total number of shares
offered on the cover page of this prospectus and it has for a period of 30 days
from the date of this prospectus, an over-allotment option to purchase up to
450,000 additional shares from us. If any additional shares are purchased, the
underwriters will purchase the shares in the same proportion as per the table
above.
The underwriters have advised us that the shares will be offered to the
public at the offering price indicated on the cover page of this prospectus.
The underwriters may allow selected dealers a concession not in excess of $
per share and such dealers may reallow a concession not in excess of $ per
share to certain other dealers. After the shares are released for sale to the
public, the underwriter may change the offering price and the concessions. The
underwriters have informed us that they do not intend to sell shares to any
investor who has granted them discretionary authority.
We have agreed to pay to the underwriters the following fees, assuming both
no exercise and full exercise of the underwriters' over-allotment option to
purchase additional shares:
<TABLE>
<CAPTION>
Total Fees
-------------------------------------------
Fee Without Exercise of Full Exercise of
Per Share Over-Allotment Option Over-Allotment Option
--------- --------------------- ---------------------
<S> <C> <C> <C>
Fees paid by us........... $ $ $
</TABLE>
In addition, we estimate that we will spend approximately $ in expenses
for this offering. We have agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act, or contribute to
payments that the underwriters may be required to make in respect of these
liabilities.
We, our officers and directors, and our stockholders have entered into lock-
up agreements pursuant to which we and they have agreed not to, directly or
indirectly, offer, sell, offer to sell, contract to sell, pledge, grant any
option to purchase or otherwise sell or dispose of any shares of common stock,
preferred stock or any substantially similar securities or securities
convertible into or exchangeable or exercisable for shares of common stock,
preferred stock or any substantially similar securities for a period of 180
days from the date of this prospectus without the prior written consent of the
underwriters. The underwriters may, at any time and without notice, waive the
terms of these lock-up agreements as specified in such agreements.
Prior to this offering, there has been no public market for the common stock
of OrganicNet. The initial public offering price, negotiated between OrganicNet
and the underwriters, will be based upon various
69
<PAGE>
factors such as our financial and operating history and condition, our
prospects, the prospects for our industry and prevailing market conditions.
The underwriters may engage in the following activities in accordance with
applicable securities rules:
. Over-allotments involving sales in excess of the offering size, creating
a short position. The underwriter may elect to reduce this short
position by exercising some or all of the over-allotment option.
. Stabilizing and short covering; stabilizing bids to purchase the shares
are permitted if they do not exceed a specified maximum price. After the
distribution of shares has been completed, short covering purchases in
the open market may also reduce the short position. These activities may
cause the price of the shares to be higher than would otherwise exist in
the open market.
. Penalty bids permitting the underwriters to reclaim concessions from a
syndicate member for the shares purchased in the stabilizing or short-
covering transactions.
Such activities, which may be commenced or discontinued at any time, may be
effected on the Nasdaq National Market, in the over-the-counter market or
otherwise.
In March 1998, certain entities and persons affiliated with Punk, Ziegel &
Company, L.P. purchased an aggregate of 60,227 shares of our Series C
Preferred Stock at a purchase price of $2.75 per share for an aggregate amount
of approximately $165,624. Such shares will convert into 60,227 shares of
common stock upon the closing of this offering.
We have asked the underwriters to reserve shares for sale at the offering
price to our officers, directors, employees and other business affiliates or
related third parties. The number of shares available for sale to the general
public in the offering will be reduced to the extent such persons purchase the
reserved shares.
70
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for us by Cooley Godward LLP, Palo Alto, California. Certain legal matters
will be passed upon for the underwriter by Skadden, Arps, Slate, Meagher & Flom
(Illinois), Chicago, Illinois.
EXPERTS
The consolidated financial statements and the related consolidated financial
statement schedule of OrganicNet, Inc. as of December 31, 1997 and 1998, and
for each of the years in the three-year period ended December 31, 1998, and the
financial statements of PSI-Med Corporation as of May 31, 1998 and 1999, and
for each of the years in the three-year period ended May 31, 1999, have been
included herein and in the registration statement in reliance upon the reports
of KPMG LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
The report of KPMG LLP concerning the May 31, 1999 PSI-Med Corporation
financial statements contains an explanatory paragraph that states that PSI-Med
Corporation's recurring losses from operations and net capital deficiency raise
substantial doubt about PSI-Med Corporation's ability to continue as a going
concern. The PSI-Med Corporation financial statements do not include any
adjustments that might result from the outcome of that uncertainty.
AVAILABLE INFORMATION
We have filed with the Securities and Exchange Commission (the
"Commission"), a registration statement on Form S-1, including the exhibits and
schedules thereto, under the Securities Act of 1933, as amended, with respect
to the common stock offered hereby. This prospectus does not contain all of the
information contained in the registration statement and the exhibits and
schedules to the registration statement. Some items are omitted in accordance
with the rules and regulations of the Commission. For further information about
OrganicNet and the common stock offered under this prospectus, you should
review the registration statement and the exhibits and schedules filed as a
part of the registration statement. Descriptions of contracts or other
documents referred to in this prospectus are not necessarily complete. If the
contract or document is filed as an exhibit to the registration statement, you
should review that contract or document. You should be aware that when we
discuss these contracts or documents in the prospectus we are assuming that you
will read the exhibits to the registration statement for a more complete
understanding of the contract or document. The registration statement and its
exhibits and schedules may be inspected without charge at the public reference
facilities maintained by the Commission in Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C., 20549, and the Commission's regional
offices located at 500 West Madison Street, Suite 1400, Chicago, Illinois,
60661 and Seven World Trade Center, 13th Floor, New York, New York, 10048.
Copies of all or any portion of the registration statement may be obtained from
the Public Reference Section of the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington D.C. 20549, or by calling the Commission at
1-800-SEC-0330, at prescribed rates. The Commission also maintains a website at
www.sec.gov that contains reports, proxy and information statements and other
information regarding registrants, such as OrganicNet, that make electronic
filings with the Commission.
We intend to furnish to our stockholders annual reports containing financial
statements audited by an independent public accounting firm.
71
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Financial Statements, OrganicNet, Inc.
Independent Auditors' Report........................................... F-2
Consolidated Balance Sheets............................................ F-3
Consolidated Statements of Operations.................................. F-4
Consolidated Statements of Stockholders' Deficit....................... F-5
Consolidated Statements of Cash Flows.................................. F-6
Notes to Consolidated Financial Statements............................. F-7
Unaudited Pro Forma Condensed Combined Financial Information, OrganicNet,
Inc. and PSI-Med Corporation
Financial Information.................................................. F-25
Condensed Combined Statement of Operations............................. F-26
Financial Statements, PSI-Med Corporation
Independent Auditors' Report........................................... F-28
Balance Sheets......................................................... F-29
Statements of Operations............................................... F-30
Statements of Stockholders' Deficit.................................... F-31
Statements of Cash Flows............................................... F-32
Notes to Financial Statements.......................................... F-33
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
OrganicNet, Inc.:
We have audited the accompanying consolidated balance sheets of
OrganicNet, Inc. (a Delaware Corporation) and subsidiaries (the Company) as
of December 31, 1997 and 1998, and the related consolidated statements of
operations, stockholders' deficit and cash flows for each of the years in
the three-year period ended December 31, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
OrganicNet, Inc. and subsidiaries as of December 31, 1997 and 1998, and the
results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
San Francisco, California
October 22, 1999,
F-2
<PAGE>
OrganicNet, Inc.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30, 1999
------------------------- ------------------------------
Pro forma
stockholders'
1997 1998 Actual deficit (note 1)
----------- ------------ ------------ ----------------
(unaudited)
ASSETS
------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents.......... $ 46,558 $ 41,104 $ 894,897
Accounts receivable,
net of allowance for
doubtful accounts of
$113,000, $128,800
and $254,714 in 1997,
1998 and 1999,
respectively......... 805,687 732,370 859,901
Prepaids and other
current assets....... 119,340 158,186 68,819
Prepaid offering
costs................ -- -- 544,174
----------- ------------ ------------
Total current
assets.............. 971,585 931,660 2,367,791
Property and equipment,
net of accumulated
depreciation of
$426,475, $615,402 and
$1,164,461 in 1997,
1998 and 1999,
respectively........... 504,867 348,134 412,001
Intangible assets, net
of accumulated
amortization of
$364,110, $928,094 and
$1,391,554 in 1997,
1998 and 1999,
respectively........... 1,392,291 884,970 2,054,320
Other noncurrent
assets................. 35,598 50,284 178,428
----------- ------------ ------------
$ 2,904,341 $ 2,215,048 $ 5,012,540
=========== ============ ============
<CAPTION>
LIABILITIES AND
STOCKHOLDERS' DEFICIT
---------------------
<S> <C> <C> <C> <C>
Current liabilities:
Accounts payable...... $ 1,289,354 $ 2,359,263 $ 1,476,901
Deferred revenue...... 1,589,817 2,372,162 2,231,930
Due to employees...... 516,180 1,162,895 665,628
Notes payable to
employees and
stockholders......... 464,479 918,892 667,617
Lines of credit and
note payable to
bank................. 92,790 163,897 127,200
Current portion of
capital leases....... 39,342 19,506 31,521
Current portion of
note payable......... -- -- 46,000
Other current
liabilities.......... 129,122 224,695 410,024
----------- ------------ ------------
Total current
liabilities......... 4,121,084 7,221,310 5,656,821
Long-term portion of
capital leases......... 40,742 40,742 52,597
Long-term portion of
note payable to
employee............... -- -- 27,490
Long-term portion of
note payable........... -- -- 10,421
----------- ------------ ------------
Total liabilities.... 4,161,826 7,262,052 5,747,329
Commitments and
contingencies
Stockholders' deficit:
Series A, A-II, A-III,
B and C preferred
stock, $0.01 par
value, authorized
14,000,000 shares;
issued and
outstanding
2,904,712, 3,679,446
and 6,704,313 shares
in 1997, 1998 and
1999, respectively;
none pro forma; with
an aggregate
liquidation
preference of
$4,725,880,
$6,856,398 and
$15,128,904 in 1997,
1998 and 1999,
respectively......... 29,047 36,794 67,043 $ --
Common stock, $0.001
par value, 29,500,000
shares authorized;
5,425,672, 5,463,447
and 5,501,529 shares
issued and
outstanding in 1997,
1998 and 1999,
respectively;
13,793,729 shares pro
forma................ 5,426 5,464 5,502 13,794
Additional paid-in
capital.............. 6,030,273 8,238,670 18,030,771 18,089,522
Receivable related to
sale of stock........ -- -- (550,000) (550,000)
Deferred
compensation......... -- -- (80,014) (80,014)
Accumulated deficit... (7,322,231) (13,327,932) (18,208,091) (18,208,091)
----------- ------------ ------------ ------------
Total stockholders'
deficit............. (1,257,485) (5,047,004) (734,789) $ (734,789)
----------- ------------ ------------ ============
$ 2,904,341 $ 2,215,048 $ 5,012,540
=========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
OrganicNet, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
------------------------------------- ------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenue:
License............... $ -- $ 424,340 $ 570,694 $ 376,144 $ 777,486
Product development... -- 1,237,500 564,560 390,517 340,354
Service............... 371,054 1,309,645 3,488,397 2,763,340 3,106,266
----------- ----------- ----------- ----------- -----------
Total revenue....... 371,054 2,971,485 4,623,651 3,530,001 4,224,106
----------- ----------- ----------- ----------- -----------
Cost of revenue:
License............... -- 474,849 756,156 577,040 551,050
Product development... -- 319,974 208,533 168,309 60,813
Service............... 238,431 892,183 2,314,026 1,817,671 2,068,029
----------- ----------- ----------- ----------- -----------
Total cost of
revenue............ 238,431 1,687,006 3,278,715 2,563,020 2,679,892
----------- ----------- ----------- ----------- -----------
Gross profit............ 132,623 1,284,479 1,344,936 966,981 1,544,214
----------- ----------- ----------- ----------- -----------
Operating expense:
Sales and marketing... 24,335 1,394,852 1,643,868 1,249,019 1,624,426
Research and
development.......... 724,231 1,344,640 1,832,783 1,480,236 1,841,604
General and
administrative....... 1,689,723 3,332,443 3,768,388 2,422,076 2,858,705
----------- ----------- ----------- ----------- -----------
Total operating
expense............ 2,438,289 6,071,935 7,245,039 5,151,331 6,324,735
----------- ----------- ----------- ----------- -----------
Operating loss.......... (2,305,666) (4,787,456) (5,900,103) (4,184,350) (4,780,521)
Interest expense........ (2,084) (3,397) (27,543) (13,282) (51,061)
Interest expense to
related parties........ (6,550) (16,355) (65,412) (34,522) (53,367)
Other income (expense).. 6,566 13,596 (8,643) (4,676) 9,590
----------- ----------- ----------- ----------- -----------
Loss before income
taxes.................. (2,307,734) (4,793,612) (6,001,701) (4,236,830) (4,875,359)
Provision for income
taxes.................. 4,000 6,400 4,000 4,000 4,800
----------- ----------- ----------- ----------- -----------
Net loss................ $(2,311,734) $(4,800,012) $(6,005,701) $(4,240,830) $(4,880,159)
=========== =========== =========== =========== ===========
Net loss per share:
Basic and diluted..... $ (0.45) $ (0.88) $ (1.10) $ (0.78) $ (0.89)
=========== =========== =========== =========== ===========
Weighted average shares
outstanding:
Basic and diluted..... 5,188,513 5,425,672 5,447,820 5,442,553 5,490,060
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
OrganicNet, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
Years Ended December 31, 1996, 1997 and 1998 and Nine Months Ended September
30, 1999
(Nine Months Ended September 30, 1999 is Unaudited)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Receivable Total
----------------- ---------------- paid-in Deferred Accumulated related to stockholders'
Shares Amount Shares Amount capital compensation deficit sale of stock deficit
--------- ------- --------- ------ ----------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
December 31,
1995............ -- $ -- 3,789,467 $3,790 $ 6,210 $ -- $ (210,485) $ (5,000) $ (205,485)
Issuance of
Series A
preferred
stock........... 1,333,270 13,333 -- -- 1,319,937 -- -- -- 1,333,270
Issuance of
Series B
preferred
stock........... 401,182 4,012 -- -- 898,648 -- -- -- 902,660
Paydown of notes
receivable...... -- -- -- -- -- -- -- 5,000 5,000
Common stock
issued upon the
acquisition of
FPI............. -- -- 1,596,066 1,596 158,010 -- -- -- 159,606
Series A-II
preferred stock
issued upon the
acquisition of
CPCS ........... 1,783 18 -- -- 3,951 -- -- -- 3,969
Common stock
issued upon the
acquisition of
CPCS............ -- -- 40,139 40 3,974 -- -- -- 4,014
Series A-II and
A-III preferred
stock issued
upon the
acquisition of
Velocity........ 10,832 108 -- -- 48,636 -- -- -- 48,744
Series A-II
preferred stock
issued upon the
acquisition of
RiteLine........ 2,333 23 -- -- 5,109 -- -- -- 5,132
Net loss......... -- -- -- -- -- -- (2,311,734) -- (2,311,734)
--------- ------- --------- ------ ----------- --------- ------------ --------- -----------
Balances at
December 31,
1996............ 1,749,400 17,494 5,425,672 5,426 2,444,475 -- (2,522,219) -- (54,824)
Issuance of
Series A
preferred stock
in lieu of
compensation.... 85,000 850 -- -- 84,150 -- -- -- 85,000
Issuance of
Series B
preferred
stock........... 761,288 7,613 -- -- 1,710,361 -- -- -- 1,717,974
Issuance of
Series B
preferred stock
in lieu of
compensation.... 40,000 400 -- -- 89,600 -- -- -- 90,000
Issuance of
Series C
preferred
stock........... 217,066 2,171 -- -- 594,805 -- -- -- 596,976
Series A-II
preferred stock
issued upon the
acquisition of
Res-Q........... 23,333 233 -- -- 497,227 -- -- -- 497,460
Series A-II
preferred stock
issued upon the
acquisition of
LINC............ 13,333 133 -- -- 284,393 -- -- -- 284,526
Series A-II
preferred stock
issued upon the
acquisition of
Healthcheck..... 8,624 86 -- -- 183,055 -- -- -- 183,141
Series A-II
preferred stock
issued upon the
acquisition of
Intedata........ 6,668 67 -- -- 142,207 -- -- -- 142,274
Net loss......... -- -- -- -- -- -- (4,800,012) -- (4,800,012)
--------- ------- --------- ------ ----------- --------- ------------ --------- -----------
Balances at
December 31,
1997............ 2,904,712 29,047 5,425,672 5,426 6,030,273 -- (7,322,231) -- (1,257,485)
Issuance of
Series C
preferred
stock........... 774,734 7,747 -- -- 2,122,771 -- -- -- 2,130,518
Stock options
granted to non-
employees....... -- -- -- -- 29,001 -- -- -- 29,001
Common shares
issued for
purchase price
adjustment for
CPCS............ -- -- 37,775 38 56,625 -- -- -- 56,663
Net loss......... -- -- -- -- -- -- (6,005,701) -- (6,005,701)
--------- ------- --------- ------ ----------- --------- ------------ --------- -----------
Balances at
December 31,
1998............ 3,679,446 36,794 5,463,447 5,464 8,238,670 -- (13,327,932) -- (5,047,004)
Issuance of
Series C
preferred stock,
net............. 2,538,855 25,388 -- -- 6,867,210 -- -- -- 6,892,598
Issuance of
Series C
preferred stock
to Conxion...... 200,000 2,000 -- -- 548,000 -- -- (550,000) --
Issuance of
Series C
preferred stock
in exchange for
legal services.. 150,000 1,500 -- -- 411,000 -- -- -- 412,500
Issuance of
Series C
preferred stock
in exchange for
other services.. 36,183 362 -- -- 99,141 -- -- -- 99,503
Issuance of
Series C
preferred stock
to repay loans
to related
parties......... 83,162 832 -- -- 227,864 -- -- -- 228,696
Series A-II
preferred stock
issued upon the
acquisition of
PSI-Med ........ 16,667 167 -- -- 666,513 -- -- -- 666,680
Issuance of
common stock
pursuant to
exercise of
stock options... -- -- 38,082 38 36,276 -- -- -- 36,314
Stock options
granted to non-
employees....... -- -- -- -- 67,412 -- -- -- 67,412
Stock options
granted to
Superior
Consultant
Holdings
Corporation..... -- -- -- -- 744,800 -- -- -- 744,800
Deferred
compensation
related to stock
option grants... -- -- -- -- 123,885 (123,885) -- -- --
Amortization of
deferred
compensation.... -- -- -- -- -- 43,871 -- -- 43,871
Net loss......... -- -- -- -- -- -- (4,880,159) -- (4,880,159)
--------- ------- --------- ------ ----------- --------- ------------ --------- -----------
Balances at
September 30,
1999............ 6,704,313 $67,043 5,501,529 $5,502 $18,030,771 $ (80,014) $(18,208,091) $(550,000) $ (734,789)
========= ======= ========= ====== =========== ========= ============ ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
OrganicNet, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
------------------------------------- ------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss............... $(2,311,734) $(4,800,012) $(6,005,701) $(4,240,830) $(4,880,159)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation and
amortization......... 76,535 522,506 752,911 598,941 622,657
Provision for bad
debts................ -- 113,000 15,800 -- 101,684
Noncash compensation
expense.............. -- 175,000 29,001 16,600 856,083
Changes in operating
assets and
liabilities:
Accounts receivable... 154,699 (61,920) 57,517 291,276 (93,209)
Prepaid expenses and
other current and
non-current assets... (16,450) (28,079) (53,532) (96,971) (562,555)
Accounts payable and
other current
liabilities.......... (78,060) 5,645 1,184,988 592,997 (825,342)
Deferred revenue...... 78,030 805,558 782,345 687,505 (213,442)
Due to employees...... -- 516,180 646,716 344,432 (451,386)
Interest on notes from
related parties...... 6,550 16,355 65,412 34,522 53,367
----------- ----------- ----------- ----------- -----------
Net cash used in
operating
activities.......... (2,090,430) (2,735,767) (2,524,543) (1,771,528) (5,392,302)
----------- ----------- ----------- ----------- -----------
Cash flows from
investing activities:
Capital expenditures... (74,752) (206,916) (32,194) (109,195) (150,864)
Cash (paid for)
received from
acquisitions.......... (22,032) 212,822 -- -- 43,111
----------- ----------- ----------- ----------- -----------
Net cash (used in)
provided by
investing
activities.......... (96,784) 5,906 (32,194) (109,195) (107,753)
----------- ----------- ----------- ----------- -----------
Cash flows from
financing activities:
Proceeds from notes
payable to related
parties............... 110,000 448,125 389,000 185,000 --
Repayment of notes
payable to related
parties............... (31,000) (77,168) -- -- (437,313)
Borrowings (payments)
from banks, net....... -- 92,790 71,107 -- (36,697)
Proceeds from preferred
stock issued in
private placements.... 2,078,660 2,314,950 2,130,518 1,650,371 6,892,598
Repayment of note
receivable............ 5,000 -- -- -- --
Repayment of long-term
debt.................. -- -- -- -- (85,286)
Proceeds from exercise
of stock options...... -- -- -- -- 36,314
Repayment of capital
lease obligations..... -- (2,278) (39,342) 12,739 (15,768)
----------- ----------- ----------- ----------- -----------
Net cash provided by
financing
activities.......... 2,162,660 2,776,419 2,551,283 1,848,110 6,353,848
----------- ----------- ----------- ----------- -----------
Net (decrease) increase
in cash and cash
equivalents............ (24,554) 46,558 (5,454) (32,613) 853,793
Cash and cash
equivalents at
beginning of period.... 24,554 -- 46,558 46,558 41,104
----------- ----------- ----------- ----------- -----------
Cash and cash
equivalents at end of
period................. $ -- $ 46,558 $ 41,104 $ 13,945 $ 894,897
=========== =========== =========== =========== ===========
Supplemental disclosure
of cash flow
information:
Cash paid during the
period for income
taxes................ $ 4,000 $ 6,400 $ 4,000 $ 4,000 $ --
Supplemental schedule of
noncash investing and
financing activities:
Summary of the
acquisitions described
in note 2:
Fair value of assets
acquired............. $ 781,900 $ 2,435,357 $ 56,663 $ 56,663 $ 1,861,412
Net cash (paid)
received............. (22,032) 212,822 -- -- 43,111
Stock issued.......... (221,465) (1,107,401) (56,663) (56,663) (666,680)
Notes issued.......... -- (200,000) -- -- --
----------- ----------- ----------- ----------- -----------
Liabilities assumed.. $ 538,403 $ 1,340,778 $ -- $ -- $ 1,237,843
=========== =========== =========== =========== ===========
Receivable related to
sale of stock........ $ -- $ -- $ -- $ -- $ 550,000
Stock and options
issued in exchange
for equity finders
fees................. -- -- -- -- 87,479
Stock issued as
settlement for legal
services rendered in
prior periods ....... -- -- -- -- 412,500
Stock issued as
settlement for other
services rendered in
prior periods ....... -- -- -- -- 99,503
Stock issued to repay
loans to related
parties.............. 157,270 -- -- -- 228,696
Assets acquired under
capital lease
obligations.......... -- 114,524 33,620 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
OrganicNet, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998, and September 30, 1998 and 1999
(Information as of and for the Nine Months Ended September 30, 1998 and 1999 is
unaudited)
(1) Nature of Business and Summary of Significant Accounting Policies
Business of the Company
We are an application service provider (ASP) that develops proprietary
software solutions for healthcare clinics and physician group practices using
our proprietary technology platform. Our customers can access and use our
solutions over the Internet or their local or private information networks. We
are developing integrated solutions designed to manage all elements of the
business and clinical processes of our customers within a single system. Our
software solutions are built using our object-oriented Organic Architecture.
Central to our Organic Architecture is our CoreModel, which is comprised of
objects that represent a universal set of clinical and business processes. To
develop our CoreModel and solutions, we selectively acquired companies with
healthcare domain expertise and enabling technologies. These acquisitions also
provided near term products, customers and revenues. We were incorporated in
January 1995 as a California corporation and reincorporated in Delaware in
April 1996. We changed our name to OrganicNet, Inc. in May 1999. We are
headquartered in San Francisco, California.
Basis of Presentation
Our consolidated financial statements include the accounts of OrganicNet,
Inc. and its wholly owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
Interim Financial Information
The consolidated financial statements and related notes for the nine months
ended September 30, 1998 and 1999 are unaudited, but include all adjustments
(consisting solely of normal recurring adjustments) which are, in our opinion,
necessary for a fair presentation. The results of operations for the nine
months ended September 30, 1998 and 1999 are not necessarily indicative of
operating results to be expected in any future period.
Accounting Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reported period. Actual results could differ from those estimates.
Revenue Recognition
License revenue includes fees from the licensing of our acquired legacy
products. Product development revenue consists of revenue derived from
development of customer requested software or customer satisfaction surveys and
development of the related database. Service revenue is composed of post-
contract software support, case management, credentialing, training, and
installation of simple interfaces for legacy products.
Beginning January 1, 1998, we have recognized revenue in accordance with the
American Institute of Certified Public Accountants' Statement of Position (SOP)
No. 97-2, Software Revenue Recognition, as amended by SOP No. 98-9, Software
Revenue Recognition with Respect to Certain Transactions. Revenue is recognized
from licenses of our software application products when the contract has been
executed, the product has been shipped, collectibility is probable and the
software license fees are fixed and determinable. In the
F-7
<PAGE>
OrganicNet, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
event that the contract provides for multiple elements (e.g., training,
installation of simple interfaces or post-contract customer support), the
total fee is allocated to these elements based on vendor-specific objective
evidence of fair value. If any portion of the license fee is subject to
forfeiture, refund or other contractual contingencies, we will postpone
revenue recognition until these contingencies have been removed. Revenues from
fees paid for access to our applications delivered through the ASP model will
be recorded as subscription revenue earned over the access period. We
recognize product development revenue from co-development contracts using a
percentage-of-completion method either as services are performed or based on
meeting key milestone events over the term of the contracts. Service revenue
from post-contract customer support (PCS) and maintenance is recognized
ratably over the term of the maintenance period. Revenue from case management,
credentialing, training and installation of simple interfaces is recorded as
the services are performed.
Our adoption of SOP 97-2 did not have a material effect on our revenue
recognition or our results of operations. Prior to adoption of SOP 97-2, we
accounted for software and related revenues in accordance with SOP 91-1,
Software Revenue Recognition.
Deferred Revenue
We defer revenues related to annual payments of PCS agreements and
recognize those revenues as the services are performed over the PCS contract
periods. Payments of license fees received prior to fulfilling our obligations
are recorded as deferred revenue until the obligations have been completed.
Advance payments and deposits received on other service contracts are deferred
and recognized as the related services are rendered.
Research and Development
Research and development expenditures are charged to expense in the period
incurred.
Advertising Costs
All costs associated with advertising and promoting products are charged to
expense in the period incurred.
Income Taxes
We account for income taxes in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. Under SFAS
No. 109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Net Loss per Share
We compute net loss per share based upon SFAS No. 128, Earnings per Share.
The basic net loss per share is computed by dividing the net loss available to
common stockholders by the weighted-average number of common shares
outstanding. Potential common shares relating to stock options of 590,333,
860,936, 1,243,769 and 1,817,366 in 1996, 1997 and 1998, and for the nine
months ended September 30, 1999, respectively, are anti-dilutive due to the
net losses sustained by us. Convertible preferred stock of 1,749,400,
2,904,712, 3,679,446 and 6,704,313 shares in 1996, 1997, 1998 and for the nine
months ended September 30, 1999, respectively, has also been excluded from the
calculation of net loss per share as the impact would be anti-dilutive. Thus,
the diluted net loss per share in these years is the same as the basic net
loss per share.
F-8
<PAGE>
OrganicNet, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Unaudited pro forma basic and diluted net loss per share was $(0.69) and
$(0.47) for the year ended December 31, 1998 and the nine months ended
September 30, 1999, respectively, based on pro forma weighted average shares
outstanding of 8,700,043 and 10,370,386 for those respective periods. This
information reflects per share data assuming the conversion of all outstanding
shares of convertible preferred stock at a conversion rate of 20 common shares
for each preferred share of Series A-II and A-III and at a conversion rate of
one common share for each preferred share of Series A, B, and C as if the
conversion of the preferred stock had taken place at the beginning of 1998 or
at the date of issuance, if later.
Stock-Based Compensation
We account for our stock option plans under SFAS No. 123, Accounting for
Stock-Based Compensation. This statement establishes financial accounting and
reporting standards for stock-based compensation, including employee stock
purchase plans and stock option plans. As allowed by SFAS No. 123, we continue
to measure compensation expense for options granted to employees under the
provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations.
We have recorded deferred compensation for the difference between the
exercise price and the deemed fair market value of the common stock for
financial reporting purposes of stock options granted to employees. The
compensation expense related to such grants is amortized over the vesting
period of the related stock options.
Comprehensive Loss
We have no components of other comprehensive loss other than our net loss
and, accordingly, our comprehensive loss is equivalent to our net loss for all
periods presented.
Cash and Cash Equivalents
We consider all highly liquid investments purchased with an original
maturity of three months or less from the date of purchase to be cash
equivalents.
Long-Lived Assets, Including Intangible Assets
We account for long-lived assets under SFAS No. 121, Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of.
SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted net cash
flows expected to be generated by the asset. If such assets are considered to
be impaired, the impairment loss to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying amount or
fair value less costs to sell. We estimate fair value based on the best
information available, making judgments and projections as considered
necessary.
Intangible assets consist of items related to our business
combinations. Goodwill is amortized over a three to seven year period depending
on the acquisition. Acquired technology is being amortized over its estimated
useful life of approximately three years. Workforce-in-place is being amortized
over the lesser of the employment tenure of the employee or the agreement term.
Software Development Costs
Software development costs are accounted for in accordance with SFAS No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed. This statement provides for capitalization of
F-9
<PAGE>
OrganicNet, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
certain software development costs once technological feasibility is
established. We establish technological feasibility once testing of a working
model has been completed. The time between establishment of a working model
and general release is short. Therefore, we believe that software development
costs incurred subsequent to technological feasibility have not been material.
Property and Equipment
Property and equipment is stated at cost. Computer and related equipment is
depreciated over a useful life of three years using the straight-line method.
Office furniture and fixtures are depreciated over useful lives ranging from
three to five years using the straight-line method. Leasehold improvements are
amortized on a straight-line basis over the shorter of the useful life or
remaining lease term.
Concentrations of Credit Risk
Financial instruments, which potentially subject us to concentrations of
credit risk, consist principally of trade receivables. We control credit risk
through credit approvals, credit limits, a reserve for doubtful accounts, and
monitoring procedures.
We have several product development and collaborative agreements with
Pfizer Health Solutions Inc to co-develop, market, license and distribute
various OrganicNet products and services. Co-development and marketing
agreements to date include development of OrganicNet's Outcomes Partner III,
care management and credentialing applications. Additionally, we have co-
developed and marketed several survey products including the National
Committee for Quality Assurance Member Satisfaction Survey, disenrollment and
patient satisfaction surveys. Sales to Pfizer Health Solutions Inc amounted to
approximately $0, $1,375,000, $945,000, $779,000 and $862,000 for the years
ended December 31, 1996, 1997 and 1998, and the nine months ended September
30, 1998 and 1999, respectively. These sales represented approximately 0%,
46%, 20%, 22% and 20%, respectively, of our total revenue for those periods.
Accounts receivable from Pfizer Health Solutions Inc amounted to approximately
$74,000, $253,000, and $37,000 at December 31, 1997 and 1998 and at September
30, 1999, respectively.
A different customer accounted for 14% of total revenue for the nine months
ended September 30, 1999.
Fair Value of Financial Instruments
The carrying amounts of trade receivables, accounts payable, lines of
credit and notes payable and other current liabilities approximate fair value
due to the short maturities of these instruments. The related party
liabilities are not traded on any public market and approximate our best
estimate of fair value.
Pro Forma Stockholders' Deficit (Unaudited)
The unaudited pro forma stockholders' deficit gives effect to the
conversion of 6,704,313 shares of Series A, A-II, A-III, B and C convertible
preferred stock outstanding as of September 30, 1999 into 8,292,200 shares of
common stock, at a conversion rate of 20 common shares for each preferred
share of Series A-II and A-III and at a conversion rate of one common share
for each preferred share of Series A, B and C, upon closing of our initial
public offering.
F-10
<PAGE>
OrganicNet, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(2) Business Combinations
(a) Acquisitions prior to December 31, 1998
During the years ended December 31, 1996 and 1997, we completed the
following acquisitions:
<TABLE>
<CAPTION>
Company Acquisition Date Expertise
- ------- ----------------- ------------------------------
<S> <C> <C>
First Principles, Inc.
(FPI)....................... April 22, 1996 Object Technology
RiteLine Systems, Inc.
(RiteLine).................. April 30, 1996 Business Methodology
Comprehensive Provider
Credentialing Services, Inc.
(CPCS)...................... May 23, 1996 Credentialing Service
Velocity Healthcare
Informatics, Inc.
(Velocity).................. December 20, 1996 Outcomes/Disease Management
Res-Q, Inc., formerly MMS,
Inc. (Res-Q)................ May 14, 1997 Scheduling/Resource Management
Intedata, Inc. (Intedata).... June 4, 1997 Marketing Service
L.I.N.C., Inc. (LINC)........ June 23, 1997 Case Management
Healthcheck, Incorporated
(Healthcheck)............... November 14, 1997 Credentialing Service
</TABLE>
We acquired all of the outstanding stock of each of the above companies,
with the exception of Velocity. We purchased certain assets of Velocity,
including all of its intellectual property. Under terms of the acquisition
agreements, we paid cash and issued notes payable and the following shares of
common, Series A-II preferred and Series A-III preferred stock, valued at the
fair market value of the stock on the respective acquisition dates:
<TABLE>
<CAPTION>
Series A-II Series A-III
Common preferred preferred
Acquired company stock stock stock
---------------- --------- ----------- ------------
<S> <C> <C> <C>
FPI....................................... 1,596,066 -- --
RiteLine.................................. -- 2,333 --
CPCS...................................... 77,914 1,783 --
Velocity.................................. -- 5,416 5,416
Intedata.................................. -- 6,668 --
LINC...................................... -- 13,333 --
Res-Q..................................... -- 23,333 --
Healthcheck............................... -- 8,624 --
</TABLE>
The acquisitions were accounted for using the purchase method of accounting
and, accordingly, the results of the companies' operations are included in our
consolidated financial statements from their respective acquisition dates
forward.
The consideration paid is as follows:
<TABLE>
<S> <C>
Common stock..................................................... $ 220,283
Series A-II preferred stock...................................... 1,140,874
Series A-III preferred stock..................................... 24,372
Cash paid (CPCS)................................................. 74,900
Notes payable (LINC and Res-Q)................................... 200,000
----------
$1,660,429
==========
</TABLE>
F-11
<PAGE>
OrganicNet, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The purchase price was allocated to the assets acquired and liabilities
assumed as follows:
<TABLE>
<S> <C>
Cash............................................................ $ 265,690
Accounts receivable............................................. 874,855
Other current assets............................................ 145,719
Property and equipment.......................................... 440,283
Goodwill........................................................ 492,964
Workforce-in-place.............................................. 142,274
Acquired technology............................................. 1,177,826
Liabilities..................................................... (761,456)
Customer deposits and deferred maintenance...................... (1,117,726)
-----------
$ 1,660,429
===========
</TABLE>
In conjunction with the Intedata acquisition, we entered into two employment
agreements with the former founders of Intedata. As there were no assets to be
acquired or liabilities to be assumed in the Intedata acquisition, the full
purchase price has been allocated to those agreements as workforce-in-place and
is being amortized over the lesser of the employment tenure of the employee or
the agreement term of three years from the acquisition date.
We acquired certain software technology in the LINC and Res-Q acquisitions.
The fair value of this technology was determined using a discounted cash flow
analysis of the revenue stream to be derived from such technology. Acquired
software technology is being amortized on a straight-line basis over its
expected economic life of approximately three years, which is when we expect to
release our ASP software version of the legacy product.
Goodwill, which arose from the FPI, CPCS and Healthcheck acquisitions,
represents the excess of the purchase price over the fair value of the assets
acquired and liabilities assumed, and is amortized using the straight-line
method over their estimated lives of three years for FPI and seven years for
CPCS and Healthcheck.
The above purchase price includes $56,663 of contingent payments to CPCS for
the issuance of 37,775 shares of our common stock valued at $1.50 per share
which was the value of our common stock on the date the contingency was
resolved. This amount has been allocated to goodwill and is being amortized
using the straight-line method over five years, which is the remaining
estimated life of the goodwill.
Effective March 1998, the operations of CPCS were combined with Healthcheck.
Effective December 31, 1996, the operations of FPI and RiteLine were combined
with our Corporate Headquarters.
We issued four $50,000 notes to the former shareholders of LINC and Res-Q in
conjunction with the LINC and Res-Q acquisitions. The notes are due on December
31, 1999 and bear interest at 10% per year.
F-12
<PAGE>
OrganicNet, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The results of operations for all of the acquired entities are included in
the 1998 results of operations of the Company for the full year. The following
table presents unaudited pro forma results of operations as if the acquisitions
had occurred on the first day of the earliest period presented. The unaudited
pro forma information is not necessarily indicative of the combined results
that would have occurred had the acquisitions taken place on the first day of
the period presented, nor is it necessarily indicative of results that may
occur in the future:
<TABLE>
<CAPTION>
Years Ended December
31,
------------------------
1996 1997
----------- -----------
(unaudited)
<S> <C> <C>
Pro forma basis:
Total net revenues.............................. $ 4,480,048 $ 5,040,332
Net loss........................................ $(2,877,036) $(4,980,815)
Net loss per share basic and diluted............ $ (0.53) $ (0.92)
Weighted average shares outstanding:
Basic and diluted............................... 5,425,672 5,425,672
</TABLE>
(b) Acquisition of PSI-Med Corporation
On September 20, 1999, we completed our acquisition of all of the
outstanding stock of PSI-Med Corporation (PSI-Med) in exchange for 16,667
shares of our Series A-II preferred stock. PSI-Med Corporation sells and
services practice management software and is engaged as a full service provider
of medical insurance billing and accounts receivable collection services. The
Series A-II preferred stock has been valued at $666,680. We accounted for the
acquisition under the purchase method of accounting and, accordingly, the
results of PSI-Med's operations are included in our consolidated financial
statements beginning with the effective date of the acquisition which was
August 31, 1999.
The allocation of the purchase price to the assets acquired and liabilities
assumed is as follows:
<TABLE>
<S> <C>
Cash............................................................. $ 43,111
Accounts receivable.............................................. 136,006
Other assets..................................................... 20,396
Property and equipment........................................... 72,199
Goodwill......................................................... 1,632,811
Accounts payable ................................................ (240,512)
Notes payable ................................................... (380,724)
Capital lease obligations ....................................... (39,638)
Other accrued expenses .......................................... (362,052)
Long-term debt .................................................. (141,707)
Customer deposits and deferred maintenance....................... (73,210)
----------
$ 666,680
==========
</TABLE>
Goodwill represents the excess of the purchase price over the fair value of
the assets acquired and liabilities assumed, and is amortized using the
straight-line method over its estimated useful life of seven years.
F-13
<PAGE>
OrganicNet, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table shows unaudited pro forma results of operations assuming
the acquisition of PSI-Med had been consummated at the beginning of 1998. The
unaudited pro forma information is not necessarily indicative of the combined
results that would have occurred had the acquisition taken place as of the
beginning of the periods presented, nor is it necessarily indicative of results
that may occur in the future:
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, September 30,
1998 1999
------------ -----------------
(unaudited)
<S> <C> <C>
Pro forma basis:
Total net revenues........................ $ 6,834,242 $ 5,662,151
Net loss.................................. $(6,651,008) $(4,974,096)
Net loss per share: Basic and diluted..... $ (1.22) $ (0.91)
Weighted average shares outstanding:
Basic and diluted....................... 5,447,820 5,490,060
</TABLE>
(3) Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
------------------------ September 30,
1997 1998 1999
----------- ----------- -------------
<S> <C> <C> <C>
Computers and related equipment.... $ 746,195 $ 752,400 $ 1,241,506
Furniture and fixtures............. 176,114 201,076 303,016
Leasehold improvements............. 9,033 10,060 31,940
----------- ----------- -----------
931,342 963,536 1,576,462
Less accumulated depreciation and
amortization...................... (426,475) (615,402) (1,164,461)
----------- ----------- -----------
$ 504,867 $ 348,134 $ 412,001
=========== =========== ===========
</TABLE>
Depreciation and amortization expense on property and equipment was
approximately $60,000, $175,000, $189,000, $121,000 and $159,000 for the years
ended December 31, 1996, 1997 and 1998, and for the nine months ended September
30, 1998 and 1999, respectively.
(4) Intangible Assets
Intangible assets consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------------ September 30,
1997 1998 1999
----------- ----------- -------------
<S> <C> <C> <C>
Goodwill........................... $ 436,301 $ 492,964 $ 2,125,774
Acquired technology................ 1,177,826 1,177,826 1,177,826
Workforce-in-place................. 142,274 142,274 142,274
----------- ----------- -----------
1,756,401 1,813,064 3,445,874
Less accumulated amortization...... (364,110) (928,094) (1,391,554)
----------- ----------- -----------
$ 1,392,291 $ 884,970 $ 2,054,320
=========== =========== ===========
</TABLE>
F-14
<PAGE>
OrganicNet, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(5) Other Current Liabilities
The following items are included in other current liabilities:
<TABLE>
<CAPTION>
December 31,
----------------- September 30,
1997 1998 1999
-------- -------- -------------
<S> <C> <C> <C>
Accounts payable, non-trade.................. $ -- $ 15,000 $ 15,000
Bank overdraft............................... 119,596 62,025 --
Franchise taxes payable...................... -- -- 4,800
Other accrued expenses....................... 9,526 147,670 390,224
-------- -------- --------
$129,122 $224,695 $410,024
======== ======== ========
</TABLE>
(6) Notes Payable to Employees and Stockholders
The notes payable to employees and stockholders consist of notes with
interest rates generally ranging from 9% to 12%. All notes are due on December
31, 1999. Certain of the notes to stockholders provided for the lender to
receive options for shares of the Company's common stock at a rate of 10% times
the principal loaned divided by $2.00, which was the fair market value of our
common stock when the notes were issued. Options to purchase 10,400 shares of
the Company's common stock were granted in conjunction with this provision. A
portion of the proceeds of the notes was allocated to the value of the options
based on the Black-Scholes option pricing model and was amortized into the
statement of operations during the year ended December 31, 1998 (note 9). All
of these notes payable to stockholders were repaid during the nine months ended
September 30, 1999.
We acquired certain notes payable to stockholders from our PSI-Med
acquisition in September 1999. The interest rates range from 10%-12% on those
notes. One note is due on February 1, 2002. The current and long-term portions
of this note at September 30, 1999 were $20,000 and $27,490, respectively. As
of September 30, 1999, a second note due on June 1, 2000 had a balance
outstanding of $41,502 and the balance of the remaining notes of $205,474 was
due on demand.
(7) Commitments, Contingencies and Borrowings
Leases
We lease office facilities and equipment under noncancelable operating and
capital leases. The leases provide for us to pay property taxes, insurance and
other operating costs of the leased property and generally contain renewal
provisions.
F-15
<PAGE>
OrganicNet, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Future minimum lease payments under all noncancelable capital and operating
leases as of September 30, 1999 are as follows:
<TABLE>
<CAPTION>
Capital Operating
leases leases
------- ----------
<S> <C> <C>
Year ending December 31:
1999.................................................... $33,771 $ 280,486
2000.................................................... 53,306 470,354
2001.................................................... 34,715 328,049
2002.................................................... 6,100 251,806
2003 and thereafter..................................... -- 72,360
------- ----------
Total minimum payments................................... 127,892 $1,403,055
==========
Less amount representing interest........................ 43,774
-------
Present value of capital lease obligations............... 84,118
Less current portion..................................... 31,521
-------
Lease obligations, long term............................. $52,597
=======
</TABLE>
Equipment recorded under capital leases is included in property and
equipment as follows:
<TABLE>
<CAPTION>
December 31,
----------------- September 30,
1997 1998 1999
-------- ------- -------------
<S> <C> <C> <C>
Computers and related equipment............. $114,524 $62,968 $ 530,896
Accumulated depreciation.................... (32,991) (31,540) (443,512)
-------- ------- ---------
$ 81,533 $31,428 $ 87,384
======== ======= =========
</TABLE>
Rent expense for operating leases totaled approximately $33,000, $248,000,
$428,000, $283,000 and $340,000 for the years ended December 31, 1996, 1997 and
1998, and for the nine months ended September 30, 1998 and 1999, respectively.
Lines of Credit
We have a $200,000 revolving line of credit with Wells Fargo Bank, which
bears interest at a rate of 1.0% above the prime rate. The weighted average
interest rate was approximately 9.50%, 8.75% and 8.81% for the years ended
December 31, 1997 and 1998, and for the nine months ended September 30, 1999,
respectively. We are required to make regular monthly payments of accrued
interest. The line of credit is collateralized by all accounts receivable,
inventory and furniture and equipment of Res-Q. In addition, an officer of Res-
Q has provided a guaranty in connection with this line of credit. We agreed to
indemnify the officer for a maximum amount of $200,000 (the amount of the
officer's guaranty plus accrued interest) for any deficiency that may be
suffered after making a claim for reimbursement from the principal borrower.
On July 8, 1999 we entered into a $25,000 line of credit with Foothills Bank
which bears interest at a rate of 2.25% above the prime rate. The weighted
average interest rate was approximately 10.5% for the nine months ended
September 30, 1999. We make monthly payments of accrued interest. The line of
credit matures on January 8, 2000 and is secured by accounts receivable of
Healthcheck.
The balance outstanding under lines of credit was $92,790, $163,897 and
$92,356 at December 31, 1997 and 1998 and at September 30, 1999, respectively.
F-16
<PAGE>
OrganicNet, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Notes Payable
We acquired a note payable to a bank from our PSI-Med acquisition that is
secured by PSI-Med's assets and a personal guarantee by an officer of PSI-Med.
The note bears interest at a rate of prime plus 6.25% (14.50% at September 30,
1999). Principal and interest are due monthly and the note matures on June 15,
2000. The balance due on the note was $34,844 at September 30, 1999.
We have an unsecured non-interest bearing note payable to the prior owners
of a company acquired by PSI-Med. Principal is payable monthly based on a
percentage of gross billings collected related to the acquired customer base.
The note is due January 15, 2001. The current and long-term portions due were
$46,000 and $10,421 at September 30, 1999.
(8) Capital Stock
We are authorized to issue 14,000,000 shares of preferred stock. The
preferred shares are automatically convertible into common shares upon an
initial public offering of our common stock. A summary of preferred stock
follows:
<TABLE>
<CAPTION>
December 31,
--------------------- September 30,
1997 1998 1999
---------- ---------- -------------
<S> <C> <C> <C>
Series A, 1,500,000 shares designated,
$.01 par value per share, 1,418,270
shares issued and outstanding,
liquidation preference of $1,418,270
in 1997, 1998 and 1999................ $1,418,270 $1,418,270 $ 1,418,270
Series A-I, 1,500,000 shares
designated, $.01 par value per share,
none issued and outstanding........... -- -- --
Series A-II, 115,000 shares designated,
$.01 par value per share, 61,490
shares issued and outstanding in 1997
and 1998 and 78,157 issued and
outstanding in 1999................... 1,140,874 1,140,874 1,807,554
Series A-III, 5,416 shares designated,
$.01 par value per share, 5,416 shares
issued and outstanding in 1997, 1998
and 1999.............................. 24,372 24,372 24,372
Series B, 1,250,000 shares designated,
$.01 par value per share, 1,202,470
shares issued and outstanding,
liquidation preference of $2,710,634
in 1997, 1998 and 1999................ 2,710,634 2,710,634 2,710,634
Series B-I, 1,250,000 shares
designated, $.01 par value per share,
none issued and outstanding........... -- -- --
Series C, 4,000,000 shares designated,
$.01 par value per share, 217,066,
991,800 and 4,000,000 shares issued
and outstanding in 1997, 1998 and
1999, respectively, liquidation
preference of $596,976, $2,727,494 and
$11,000,000 in 1997, 1998 and 1999,
respectively, net of cash transaction
costs of $65,066 in 1999.............. 596,976 2,727,494 10,934,934
Series C-I, 4,000,000 shares
designated, $.01 par value per share,
none issued and outstanding........... -- -- --
---------- ---------- -----------
$5,891,126 $8,021,644 $16,895,764
========== ========== ===========
</TABLE>
F-17
<PAGE>
OrganicNet, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Series A-II and Series A-III preferred shares have been issued in
conjunction with our acquisitions as discussed in note 2. Series A shares were
issued at $1.00 per share, Series B shares were issued at $2.25 per share, and
Series C shares were issued at $2.75 per share. In addition to Series C
transaction costs paid, we issued 8,769 shares of Series C stock valued at
$2.75 and issued options to purchase 40,569 shares of common stock valued at
$63,364 (note 9) as Series C finders fees.
The rights, preferences, and privileges of preferred stockholders are as
follows:
. Series A, B and C stockholders are entitled to cumulative dividends, if
declared by the Board of Directors, of $.08 per share per annum, payable
in preference to the payment of any dividends on the common stock (other
than a common stock dividend). No such dividends have been declared.
Series A-II and A-III stockholders are not entitled to receive dividends.
. Series, A, B and C stockholders have a liquidation preference of an
amount equal to the original price of the preferred stock plus any
declared but unpaid dividends. Any remaining liquidation proceeds are
distributed pro rata to the common, Series A-II and Series A-III
stockholders.
. Each share of Series A, A-II, B and C votes equally with shares of common
stock. Series A-III shares have no voting rights.
. Each share of Series A, A-II, A-III, B and C is convertible at any time
into common stock at the original issue price, with automatic conversion
upon an initial public offering, upon the consolidation or merger of the
Company, or upon the sale of substantially all of the assets of the
Company. The conversion rate is one for one for Series A, B and C shares
and 20 shares of common stock for each share of Series A-II and A-III.
The conversion price will be equal to the issue price of the shares.
(9) Stock Option Plans
We have been authorized to issue options to purchase up to 1,000,000 and
1,478,513 shares of our common stock in connection with our 1996 and 1997 stock
option plans (the Plans) to employees, directors, and consultants. The number
of shares of common stock available for issuance under the 1997 stock option
plan automatically increases on the first business day of each calendar year
during the term of the 1997 stock option plan, beginning with the 1999 calendar
year, by an amount equal to two percent (2%) of the shares of common stock
outstanding on the last business day of the immediately preceding calendar
year. The Plans provide for the issuance of stock purchase rights, incentive
stock options, or nonstatutory stock options.
Under the Plans, the exercise price for incentive stock options is at least
100% of the stock's fair market value on the date of the grant for employees
owning less than 10% of the voting power of all classes of stock, and at least
110% of the fair market value on the date of grant for employees owning more
than 10% of the voting power of all classes of stock. For nonqualified stock
options, the exercise price is also at least 110% of the fair market value on
the date of grant for employees owning more than 10% of the voting power of all
classes of stock and no less than 85% for employees owning less than 10% of the
voting power of all classes of stock.
Options granted under the Plans generally expire in 10 years. However, the
term of the options may be limited to 5 years if the optionee owns stock
representing more than 10% of the voting power of all classes of stock. Vesting
periods are determined by the Board of Directors and generally provide for
shares to vest at a rate of 1/3 of the shares at the end of each subsequent
anniversary of the initial vesting date, subject to continued service as an
employee.
As of September 30, 1999, options to purchase 825,936 and 991,430 shares of
our common stock were outstanding under the 1996 and 1997 stock option plans,
respectively. As of September 30, 1999, 478,499 shares were available for grant
under the 1997 stock option plan. With the creation of the 1997 stock option
plan, no further issuance of options under the 1996 stock option plan are
allowed.
F-18
<PAGE>
OrganicNet, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock-Based Compensation
We continue to apply APB Opinion No. 25 in accounting for our employee
stock-based compensation plans and use the intrinsic-value method in accounting
for options granted to employees. Accordingly, compensation cost has only been
recognized in the accompanying consolidated statements of operations for any
stock options granted to employees where the exercise price of the option was
less than the fair value of the underlying common stock as of the grant date.
Had we determined compensation cost based on the fair value at the grant date
for stock options under SFAS No. 123 for our stock-based compensation plans,
net loss and basic and diluted net loss per share would have been as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------- Nine Months Ended
1996 1997 1998 September 30, 1999
------- ------- ------- ------------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net loss:
As reported................... $(2,312) $(4,800) $(6,006) $(4,880)
Pro forma..................... (2,319) (4,837) (6,116) (5,042)
Basic and diluted net loss per
share:
As reported................... $ (0.45) $ (0.88) $ (1.10) $ (0.89)
Pro forma..................... (0.45) (0.89) (1.12) (0.92)
</TABLE>
These pro forma results assume that we began recording compensation expense
for option grants to employees subsequent to January 1, 1995 and may not be
indicative of pro forma results to be expected in future periods. The fair
value of each option was estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted average assumptions:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------- Nine Months Ended
1996 1997 1998 September 30, 1999
------- ------- ------- ------------------
<S> <C> <C> <C> <C>
Expected volatility.................. 40% 40% 40% 40%
Average life......................... 5 years 5 years 5 years 5 years
Risk-free interest rate.............. 6.82% 6.89% 5.64% 6.24%
Dividends............................ -- -- -- --
</TABLE>
Compensation cost recognized in the accompanying consolidated statements of
operations for stock options granted to employees at less than the fair market
value of the underlying common stock was approximately $44,000 for the nine
months ended September 30, 1999.
The value of each option granted to non-employees was estimated on the date
of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions:
<TABLE>
<CAPTION>
Nine Months
Year ended Ended
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Expected volatility.................................. 40% 40%
Average life......................................... 10 years 10 years
Risk-free interest rate.............................. 5.32% 5.94%
Dividends............................................ -- --
</TABLE>
The weighted-average fair value of options granted to non-employees was
$1.05 and $3.09 for the year ended December 31, 1998 and for the nine months
ended September 30, 1999, respectively. No options were granted to non-
employees during the years ended December 31, 1996 and 1997.
F-19
<PAGE>
OrganicNet, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
We granted options to purchase 17,133 and 42,942 shares of common stock to
non-employees for the twelve and nine months ended December 31, 1998 and
September 30, 1999, respectively, in exchange for contract accounting and
consulting services that had been previously rendered. Compensation cost
recognized in the accompanying consolidated statements of operations related to
these option grants was $16,597 and $67,384 for the twelve and nine months
ended December 31, 1998 and September, 30, 1999, respectively.
We granted options to purchase 10,400 shares of common stock to stockholders
for the twelve months ended December 31, 1998 in accordance with the terms of
note agreements with those stockholders. Compensation cost recognized in the
accompanying consolidated statements of operations related to these option
grants was $12,404 for the twelve months ended December 31, 1998.
We granted options to purchase 40,569 shares of common stock to non-
employees as finders fees for our Series C financing for the nine months ended
September 30, 1999. The value of these options of $63,364 has been credited
against additional paid-in capital as a cost of the financing. In addition, we
granted options to purchase 200,000 shares of common stock to Superior in
conjunction with our strategic relationship with Superior in September 1999.
Compensation cost recognized in the accompanying consolidated statements of
operations related to this option grant was $744,800 for the nine months ended
September 30, 1999 (note 12).
A summary of the activity within our stock option plans is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------- Nine Months Ended
1996 1997 1998 September 30, 1999
----------------- ------------------ -------------------- --------------------
Weighted- Weighted- Weighted- Weighted-
average average average average
exercise exercise exercise exercise
Shares price Shares price Shares price Shares price
------- --------- ------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period.............. -- $ -- 590,333 $0.15 860,936 $0.42 1,243,769 $0.78
Granted................. 590,333 0.15 286,256 1.00 398,183 1.56 655,281 3.39
Exercised............... -- -- -- -- -- -- (38,082) 0.95
Canceled................ -- -- (15,653) 0.69 (15,350) 1.24 (43,602) 1.69
------- ----- ------- ----- --------- ----- --------- -----
Outstanding at end of
period................. 590,333 $0.15 860,936 $0.42 1,243,769 $0.78 1,817,366 $1.69
======= ===== ======= ===== ========= ===== ========= =====
Options exercisable at
end of period.......... 67,333 $0.50 234,602 $0.24 539,466 $0.46 1,194,179 $1.68
======= ===== ======= ===== ========= ===== ========= =====
Weighted average fair
value of options
granted at fair value
during the period...... $0.06 $0.46 $0.68 $2.15
===== ===== ===== =====
Weighted average fair
value of options
granted below fair
value during the
period................. $ -- $ -- $ -- $0.95
===== ===== ===== =====
</TABLE>
F-20
<PAGE>
OrganicNet, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about stock options outstanding
as of September 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-----------------------------------------------------------------------
Weighted- Weighted-
average Weighted-average average
exercise remaining exercise
Option price Shares price contractual life Shares price
------------ --------- --------- ---------------- --------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.10 520,000 $0.10 6.6 505,000 $0.10
0.50 43,062 0.50 7.2 43,062 0.50
1.00 263,374 1.00 7.5 174,036 1.00
1.50 301,549 1.50 8.4 82,570 1.50
2.00 274,370 2.00 9.3 86,000 2.00
2.50 215,011 2.50 9.7 103,511 2.50
6.00 200,000 6.00 9.9 200,000 6.00
---------- --------- ----- --- --------- -----
$0.10-6.00 1,817,366 $1.69 8.2 1,194,179 $1.68
========= ===== === ========= =====
</TABLE>
(10) Employee Retirement and Savings Plan
We sponsor an employee savings plan (the Plan) pursuant to Section 401(k)
of the Internal Revenue Code. All employees who work at least 20 hours per
week with one month of service may defer a portion of their salary. The Plan
allows us to make discretionary contributions. However, we have not made any
discretionary contributions for the periods presented.
(11) Internet Hosting Agreements
In fiscal year 1999, we have entered into several agreements with Conxion
Corporation under which it will supply us with application hosting services
and Internet infrastructure for our ASP software solutions. These agreements
typically have terms of one year. Conxion has agreed to enter into extensions
of these agreements and to enter into supplemental service agreements, as
required by us on terms not less favorable to us as they offer to any of their
customers. In addition, they have agreed not to terminate or suspend the
services provided under these agreements in the event of a bona fide dispute
so long as undisputed payments are not withheld. In connection with these
agreements, Conxion invested $550,000 in exchange for 200,000 shares of our
Series C preferred stock which was recorded as a $550,000 receivable at
September 30, 1999. This receivable was paid in full in October 1999. At
September 30, 1999, the Company had an accrual for approximately $41,500 in
accrued expenses for hosting services incurred during the nine months ended
September 30, 1999.
(12) Superior Consultant Holdings Corporation
In September 1999, we entered into a Distribution and Services Agreement,
as amended, with Superior Consultant Holdings Corporation under which Superior
agreed to market our product as a preferred ASP solution for healthcare
organizations. We agreed to market Superior's healthcare consulting services
and business integration services. In conjunction with this agreement we
granted a fully vested, nonforfeitable, non-statutory stock option grant
exercisable for 200,000 shares of our common stock at an exercise price of
$6.00 per share. The option was valued at $3.72 per share using the Black-
Scholes option pricing model and $744,800 has been recognized as expense in
the accompanying statement of operations for the nine months ended September
30, 1999. The initial term of the agreement runs through August 31, 2002 and
may be renewed by Superior for up to two additional two-year terms.
F-21
<PAGE>
OrganicNet, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(13) Income Taxes
The provision for income taxes consists of the following components:
<TABLE>
<CAPTION>
Years Ended December
31,
-------------------- Nine Months Ended
1996 1997 1998 September 30, 1999
------ ------ ------ ------------------
<S> <C> <C> <C> <C>
Current portion:
Federal............................ $ -- $ -- $ -- $ --
State.............................. 4,000 6,400 4,000 4,800
Deferred portion..................... -- -- -- --
------ ------ ------ ------
$4,000 $6,400 $4,000 $4,800
====== ====== ====== ======
</TABLE>
A reconciliation from the federal tax assuming the statutory rate to the
total provision for the income taxes is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------- Nine Months Ended
1996 1997 1998 September 30, 1999
--------- ----------- ----------- ------------------
<S> <C> <C> <C> <C>
Tax at statutory rate... $(784,629) $(1,629,828) $(2,040,578) $(1,657,622)
State income taxes, net
of federal taxes....... 2,640 4,224 2,640 3,168
Permanent differences,
including goodwill..... 5,327 35,449 59,310 59,964
Net operating losses not
benefited.............. 780,662 1,596,555 1,982,628 1,599,290
--------- ----------- ----------- -----------
$ 4,000 $ 6,400 $ 4,000 $ 4,800
========= =========== =========== ===========
</TABLE>
The components of our net deferred tax asset are as follows:
<TABLE>
<CAPTION>
December 31,
------------------------ September 30,
1997 1998 1999
----------- ----------- -------------
<S> <C> <C> <C>
Deferred tax liabilities:
Property and equipment............... $ 58,460 $ 26,617 $ 40,289
Intangibles.......................... 172,819 48,982 --
State taxes.......................... 139,074 253,107 339,966
----------- ----------- ----------
Total deferred tax liabilities..... 370,353 328,706 380,255
----------- ----------- ----------
Deferred tax assets:
Various accruals and reserves not
deductible for tax purposes......... 222,032 790,659 543,748
Intangibles.......................... -- -- 41,077
Net operating loss carryforwards..... 3,101,362 4,696,158 7,228,471
Tax credit carryforwards............. 16,073 16,073 16,073
----------- ----------- ----------
Total deferred tax assets.......... 3,339,467 5,502,890 7,829,369
----------- ----------- ----------
Net deferred tax assets.............. 2,969,114 5,174,184 7,449,114
Valuation allowance.................. (2,969,114) (5,174,184) (7,449,114)
----------- ----------- ----------
Net deferred tax assets after
valuation allowance............... $ -- $ -- $ --
=========== =========== ==========
</TABLE>
The net changes in the valuation allowance for the years ended December 31,
1997 and 1998 and for the nine months ended September 30, 1999 were increases
of $1,950,719, $2,205,070 and $2,274,930, respectively. We believe sufficient
uncertainty exists regarding our ability to realize our deferred tax assets
and, accordingly, a valuation allowance has been established against the net
deferred tax assets.
F-22
<PAGE>
OrganicNet, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of September 30, 1999, we had approximately $18,600,000 and $10,000,000
of net operating loss carryforwards for federal and state purposes,
respectively. The federal net operating loss carryforwards expire between 2013
and 2019 and the state net operating loss carryforwards expire primarily in
2004. The difference between the federal and state net operating loss
carryforwards is due primarily to a 50% limitation on net operating loss
carryforwards for California income tax purposes.
Federal and state laws impose substantial restrictions on the utilization of
net operating loss carryforwards in the event of an "ownership change," as
defined in Section 382 of the Internal Revenue Code. We have not yet determined
whether an ownership change occurred due to significant stock transactions in
each of the reported years. If an ownership change has occurred, utilization of
the net operating loss carryforwards could be significantly reduced.
Additionally, the utilization of the net operating loss carryforwards of
approximately $2.4 million acquired in the acquisition of Healthcheck and PSI-
Med is limited to the taxable income generated by the operations of the two
entities.
(14) Segment Information
We have adopted the provisions of SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information. SFAS No. 131 establishes standards
for the reporting by public business enterprises of information about operating
segments, products and services, geographic areas and major customers.
Our chief operating decision maker is considered to be the Company's
President. The President reviews discrete financial information regarding
profitability of our six segments: Corporate Headquarters, Healthcheck,
Velocity, PSI-Med LINC, and Res-Q. The corporate headquarters manages the
corporate business, oversees all of the segments and performs research and
development for our organic product. Healthcheck specializes in a service that
researches the history and credentials of healthcare professionals. LINC offers
software used by hospitals to monitor costs of patient care and offers expert
testimony services related to management of medical cases. Velocity provides
services that survey and track the effectiveness of medical procedures as well
as services related to development of customized software and patient
satisfaction surveys. Res-Q offers scheduling software to hospitals. We do
substantially all of our business in the United States.
F-23
<PAGE>
OrganicNet, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies in the accompany notes to the
consolidated financial statements. Information about our segments as of and for
the years ended December 31, 1996, 1997, and 1998, and as of and for the nine
months ended September 30, 1999 are as follows:
<TABLE>
<CAPTION>
Corporate
Headquarters Velocity Healthcheck PSI-MED Res-Q LINC Consolidated
------------ ---------- ----------- --------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1996
Revenue from external
customers:
Service............... $ -- $ 3,755 $ 367,299 $ -- $ -- $ -- $ 371,054
Depreciation and
amortization........... 33,218 1,392 41,925 -- -- -- 76,535
Interest expense........ 8,583 -- 51 -- -- -- 8,634
Income tax expense...... 4,000 -- -- -- -- -- 4,000
Net loss................ (1,994,958) (41,851) (274,925) -- -- -- (2,311,734)
Total assets............ 307,725 319,706 133,585 -- -- -- 761,016
1997
Revenue from external
customers:
License............... $ -- $ 15,693 $ -- $ -- $ 347,166 $ 61,481 $ 424,340
Product development... -- 1,237,500 -- -- -- -- 1,237,500
Service............... -- 491,018 171,721 -- 497,597 149,309 1,309,645
Depreciation and
amortization........... 133,161 60,159 40,326 -- 135,797 153,063 522,506
Interest expense........ 18,605 -- 1,147 -- -- -- 19,752
Income tax expense...... 6,400 -- -- -- -- -- 6,400
Net loss................ (4,037,950) 289,569 (308,826) -- (284,200) (458,605) (4,800,012)
Total assets............ 673,289 354,953 649,612 -- 736,730 489,757 2,904,341
1998
Revenue from external
customers:
License............... $ -- $ 25,460 $ -- $ -- $ 421,395 $ 123,839 $ 570,694
Product development... -- 564,560 -- -- -- -- 564,560
Service............... 73,000 637,067 1,022,937 -- 1,024,324 731,069 3,488,397
Depreciation and
amortization........... 219,489 65,453 17,155 -- 216,176 234,638 752,911
Interest expense........ 90,344 -- -- -- 2,611 -- 92,955
Income tax expense...... 4,000 -- -- -- -- -- 4,000
Net loss................ (4,674,652) (443,703) (113,242) -- (372,191) (401,913) (6,005,701)
Total assets............ 380,061 450,414 558,704 -- 465,208 360,661 2,215,048
1999
Revenue from external
customers:
License............... $ -- $ 41,113 $ -- $ -- $ 633,739 $ 102,634 $ 777,486
Product development... 29,765 310,589 -- -- -- -- 340,354
Service............... 13,735 718,161 1,150,313 146,111 525,379 552,567 3,106,266
Depreciation and
amortization........... 183,571 58,772 24,727 5,875 174,813 174,899 622,657
Interest expense........ 93,103 -- 7,605 3,720 -- -- 104,428
Income tax expense...... 4,800 -- -- -- -- -- 4,800
Net (loss) income....... (4,335,695) (72,988) 101,188 (45,287) (274,997) (252,380) (4,880,159)
Total assets............ 1,525,766 218,433 537,750 1,895,609 711,119 123,863 5,012,540
</TABLE>
In 1996, we had not acquired LINC and Res-Q and the information for
Healthcheck reflects CPCS only as Healthcheck was not acquired until 1997. The
information for Healthcheck reflects the combined operations of Healthcheck and
CPCS in 1997 and 1998 as those operations were combined in early 1998. CPCS was
also in the business of providing credentialing services.
F-24
<PAGE>
OrganicNet, Inc. and PSI-Med Corporation
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined statements of
operations have been prepared to illustrate the effect of our acquisition of
PSI-Med Corporation and included in this prospectus an Unaudited Pro Forma
Condensed Combined Statements of Operations for the nine months ended September
30, 1999 and the year ended December 31, 1998. The pro forma condensed combined
statements of operations are based on the historical consolidated financial
statements of OrganicNet, Inc. and the historical financial statements of PSI-
Med Corporation.
The Unaudited Pro Forma Condensed Combined Statement of Operations for the
nine months ended September 30, 1999 assume that the acquisition had been
consummated as of the first day of the earliest period presented.
F-25
<PAGE>
OrganicNet, Inc. and PSI-Med Corporation
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Pro forma Pro forma
OrganicNet PSI-Med adjustments combined
----------- ---------- ----------- -----------
(A)
<S> <C> <C> <C> <C>
Revenue:
License................ $ 777,486 $ 299,262 $ -- $ 1,076,748
Product development.... 340,354 -- -- 340,354
Service................ 3,106,266 1,138,783 -- 4,245,049
----------- ---------- --------- -----------
Total revenue........ 4,224,106 1,438,045 -- 5,662,151
----------- ---------- --------- -----------
Cost of revenue:
License................ 551,050 44,777 -- 595,827
Product development.... 60,813 -- -- 60,813
Service................ 2,068,029 873,232 -- 2,941,261
----------- ---------- --------- -----------
Total cost of
revenue............. 2,679,892 918,009 -- 3,597,901
----------- ---------- --------- -----------
Gross profit ............ 1,544,214 520,036 -- 2,064,250
----------- ---------- --------- -----------
Operating Expense:
Sales and marketing.... 1,624,426 61,996 -- 1,686,422
Research and
development........... 1,841,604 226,095 -- 2,067,699
General and
administrative........ 2,858,705 116,631 174,944 (B) 3,150,280
----------- ---------- --------- -----------
Total operating
expense............. 6,324,735 404,722 174,944 6,904,401
----------- ---------- --------- -----------
Operating loss........... (4,780,521) 115,314 (174,944) (4,840,151)
Interest (expense)....... (104,428) (9,259) -- (113,687)
Other income (expense)... 9,590 (24,248) -- (14,658)
----------- ---------- --------- -----------
Net (loss) income before
income taxes............ (4,875,359) 81,807 (174,944) (4,968,496)
Provision for income
taxes................... 4,800 800 -- 5,600
----------- ---------- --------- -----------
Net loss................. $(4,880,159) $ 81,007 $(174,944) $(4,974,096)
=========== ========== ========= ===========
Net loss per share:
Basic and diluted...... $ (0.89) $ (0.91)
=========== ===========
Weighted average shares
outstanding:
Basic and diluted...... 5,490,060 5,490,060
=========== ===========
</TABLE>
(A) Reflects the operations of PSI-Med for the eight months ended August
31, 1999 as the operations of PSI-Med are included in our statement of
operations from September 1, 1999.
(B) To reflect the expense due to the amortization of goodwill on a
straight-line basis over seven years.
F-26
<PAGE>
OrganicNet, Inc. and PSI-Med Corporation
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Pro forma Pro forma
OrganicNet PSI-Med adjustments combined
----------- ---------- ----------- -----------
Revenue:
<S> <C> <C> <C> <C>
License................ $ 570,694 $ 516,559 $ -- $ 1,087,253
Product development.... 564,560 -- -- 564,560
Service................ 3,488,397 1,694,032 -- 5,182,429
----------- ---------- --------- -----------
Total revenue........ 4,623,651 2,210,591 -- 6,834,242
----------- ---------- --------- -----------
Cost of revenue:
License................ 756,156 -- -- 756,156
Product development.... 208,533 -- -- 208,533
Service................ 2,314,026 1,535,514 -- 3,849,540
----------- ---------- --------- -----------
Total cost of
revenue............. 3,278,715 1,535,514 -- 4,814,229
----------- ---------- --------- -----------
Gross profit............. 1,344,936 675,077 -- 2,020,013
----------- ---------- --------- -----------
Operating expense:
Sales and marketing.... 1,643,868 168,135 -- 1,812,003
Research and
development........... 1,832,783 237,105 -- 2,069,888
General and
administrative........ 3,768,388 587,077 241,225 (C) 4,596,690
----------- ---------- --------- -----------
Total operating
expense............. 7,245,039 992,317 241,225 8,478,581
----------- ---------- --------- -----------
Operating loss........... (5,900,103) (317,240) (241,225) (6,458,568)
Interest expense......... (92,955) -- -- (92,955)
Other expense............ (8,643) (86,042) -- (94,685)
----------- ---------- --------- -----------
Loss before income
taxes................... (6,001,701) (403,282) (241,225) (6,646,208)
Provision for income
taxes................... 4,000 800 -- 4,800
----------- ---------- --------- -----------
Net loss................. $(6,005,701) $ (404,082) $(241,225) $(6,651,008)
=========== ========== ========= ===========
Net loss per share:
Basic and diluted...... $ (1.10) $ (1.22)
=========== ===========
Weighted average share
outstanding:
Basic and diluted...... 5,447,820 5,447,820
=========== ===========
</TABLE>
(C) To reflect the amortization expense due to the amortization of goodwill
on a straight-line basis over seven years.
F-27
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
PSI-Med Corporation:
We have audited the accompanying balance sheets of PSI-Med Corporation as
of May 31, 1998 and 1999 and the related statements of operations,
stockholders' deficit and cash flows for each of the years in the three-year
period ended May 31, 1999. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of PSI-Med Corporation as of
May 31, 1998 and 1999 and the results of its operations and its cash flows for
each of the years in the three-year period ended May 31, 1999, in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 8 to the
financial statements, the Company has suffered significant losses from
operations and has a net capital deficiency which have raised substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regards to these matters are also described in Note 8. The financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.
KPMG LLP
Orange County, California
August 4, 1999, except
as to notes 8 and 10, which
are as of November 11, 1999
and September 7, 1999,
respectively
F-28
<PAGE>
PSI-Med Corporation
BALANCE SHEETS
May 31, 1998 and 1999
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 17,158 $ 38,850
Accounts receivable, net of allowances for doubtful
accounts of $182,518 and $56,607 for 1998 and 1999,
respectively....................................... 112,417 126,720
Prepaid expenses.................................... 2,145 10,801
----------- -----------
Total current assets............................. 131,720 176,371
Furniture, fixtures and equipment, net............... 102,902 85,214
Goodwill, net of accumulated amortization of $12,413
as of May 31, 1999.................................. -- 53,713
Other assets......................................... 11,588 9,738
----------- -----------
$ 246,210 $ 325,036
=========== ===========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT
<S> <C> <C>
Current liabilities:
Accounts payable.................................... $ 491,142 $ 395,762
Accrued liabilities................................. 141,851 140,680
Advances from affiliate............................. 8,000 22,000
Current portion of notes payable to related
parties............................................ 353,057 576,673
Notes payable....................................... 67,639 46,459
Deferred compensation payable to related parties.... 300,000 300,000
Unearned revenue.................................... 68,487 66,807
Sales taxes payable................................. 133,926 130,988
Current portion of capital lease obligations........ 15,673 17,021
----------- -----------
Total current liabilities........................ 1,579,775 1,696,390
Capital lease obligations, excluding current
portion............................................. 44,110 28,880
Notes payable to related parties, less current
maturities.......................................... 299,329 123,408
----------- -----------
Total liabilities................................ 1,923,214 1,848,678
----------- -----------
Commitments and subsequent events
Stockholders' deficit:
Common stock, no par value, 200,000 shares
authorized; 84,693 shares issued and outstanding as
of May 31, 1998 and 1999........................... 367,204 367,204
Additional paid-in capital.......................... -- 90,000
Accumulated deficit................................. (2,044,208) (1,980,846)
----------- -----------
Total stockholders' deficit...................... (1,677,004) (1,523,642)
----------- -----------
$ 246,210 $ 325,036
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-29
<PAGE>
PSI-Med Corporation
STATEMENTS OF OPERATIONS
Years Ended May 31, 1997, 1998 and 1999
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Revenue:
Software................................ $ 651,119 $ 122,199 $ 102,500
Service and support..................... 1,939,766 2,128,828 2,151,167
---------- ---------- ----------
Total revenue......................... 2,590,885 2,251,027 2,253,667
---------- ---------- ----------
Cost of revenue:
Software................................ 162,465 118,812 179,721
Service and support..................... 1,602,554 1,188,153 1,241,428
---------- ---------- ----------
Total cost of revenue................. 1,765,019 1,306,965 1,421,149
---------- ---------- ----------
Gross profit.............................. 825,866 944,062 832,518
Operating expense--selling, general and
administrative........................... 1,676,594 1,459,107 743,457
---------- ---------- ----------
Operating income (loss)................... (850,728) (515,045) 89,061
Other income (expense), net............... (61,106) 63,604 (24,899)
---------- ---------- ----------
Earnings (loss) before income taxes....... (911,834) (451,441) 64,162
Income tax expense........................ 800 800 800
---------- ---------- ----------
Net earnings (loss)....................... $ (912,634) $ (452,241) $ 63,362
========== ========== ==========
Basic net earnings (loss) per share....... $ (11.88) $ (5.34) $ 0.75
========== ========== ==========
Weighted average number of shares
outstanding.............................. 76,813 84,693 84,693
========== ========== ==========
Diluted net earnings (loss) per share..... $ (11.88) $ (5.34) $ 0.70
========== ========== ==========
Weighted average number of shares
outstanding.............................. 76,813 84,693 90,884
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-30
<PAGE>
PSI-Med Corporation
STATEMENTS OF STOCKHOLDERS' DEFICIT
Years Ended May 31, 1997, 1998 and 1999
<TABLE>
<CAPTION>
Common stock Additional
--------------- paid-in Accumulated
Shares Amount capital deficit Total
------ -------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balances at May 31,
1996.................... 54,118 $ 5,086 $ -- $ (679,333) $ (674,247)
Issuance of common
stock................... 30,575 362,118 -- -- 362,118
Net loss................. -- -- -- (912,634) (912,634)
------ -------- ------- ----------- -----------
Balances at May 31,
1997.................... 84,693 367,204 -- (1,591,967) (1,224,763)
Net loss................. -- -- -- (452,241) (452,241)
------ -------- ------- ----------- -----------
Balances at May 31,
1998.................... 84,693 367,204 -- (2,044,208) (1,677,004)
Contribution of executive
compensation ........... -- -- 90,000 -- 90,000
Net earnings............. -- -- -- 63,362 63,362
------ -------- ------- ----------- -----------
Balances at May 31,
1999.................... 84,693 $367,204 $90,000 $(1,980,846) $(1,523,642)
====== ======== ======= =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-31
<PAGE>
PSI-Med Corporation
STATEMENTS OF CASH FLOWS
Years Ended May 31, 1997, 1998 and 1999
<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)........................... $(912,634) $(452,241) $ 63,362
Adjustments to reconcile net earnings (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization................ 47,871 45,677 59,414
Contribution of executive compensation....... -- -- 90,000
Provision for deferred employee
compensation................................ 45,756 -- --
Changes in operating assets and liabilities:
Accounts receivable......................... (23,016) 67,943 (14,303)
Other assets................................ (7,621) 3,118 (6,806)
Accounts payable............................ 347,015 39,118 (95,380)
Accrued liabilities......................... 230,655 (88,804) (1,171)
Advance from affiliates..................... -- 8,000 14,000
Unearned revenue............................ 58,702 9,785 (1,680)
Sales taxes payable......................... 168,182 (160,529) (2,938)
--------- --------- --------
Net cash (used in) provided by operating
activities................................ (45,090) (527,933) 104,498
--------- --------- --------
Cash flows from investing activities:
Purchase of furniture, fixtures and
equipment.................................... (134,483) (30,371) (29,313)
Acquisition of Physicians Management Services,
Inc.......................................... -- -- (6,000)
--------- --------- --------
Net cash used in investing activities...... (134,483) (30,371) (35,313)
--------- --------- --------
Cash flows from financing activities:
Proceeds from issuance of capital stock....... 362,118 -- --
Increase in borrowings from related parties... (48,306) 320,264 (12,431)
Net increase in borrowings.................... 60,050 (31,911) (21,180)
Principal payments on lease obligations....... 10,077 47,493 (13,882)
--------- --------- --------
Net cash provided by (used in) financing
activities................................ 383,939 335,846 (47,493)
--------- --------- --------
Increase (decrease) in cash and cash
equivalents............................... 204,366 (222,458) 21,692
--------- --------- --------
Cash and cash equivalents at beginning of
year.......................................... 35,250 239,616 17,158
--------- --------- --------
Cash and cash equivalents at end of year....... $ 239,616 $ 17,158 $ 38,850
========= ========= ========
Supplemental disclosure of cash flow
information:
Cash paid for income taxes.................... $ 800 $ 800 $ 800
Cash paid for interest........................ 29,952 24,286 37,234
========= ========= ========
Supplemental disclosure of noncash investing
activities:
Promissory note issued in exchange for the
acquisition of Physical Management Services,
Inc.......................................... $ -- $ -- $ 77,116
========= ========= ========
</TABLE>
See accompanying notes to financial statements.
F-32
<PAGE>
PSI-Med Corporation
NOTES TO FINANCIAL STATEMENTS
May 31, 1997, 1998 and 1999
(1) Organization and Summary of Significant Accounting Policies
Business Description
We are a California corporation which develops and distributes medical
accounting software for medical facilities such as health maintenance
organizations, independent physicians associations, medical groups, and
medical accounting service bureaus located throughout the United States. The
software has been sold as stand alone systems with customers maintaining the
HP3000 hardware required to run the software at their site.
We also maintain our own computer system at our corporate offices in order
to service physicians requiring complete accounts receivable management and
collection services. Additionally, we offer local clients the use of our
medical accounting software through our computer system in a time share mode.
These models have been the prevailing methods because of the high cost of
communication lines and equipment.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires us to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on deposit with banks with original
maturities of three months or less.
Furniture, Fixtures and Equipment
Furniture, fixtures and equipment are stated at cost. Depreciation of
furniture, fixtures and equipment is provided using the straight-line method
over the estimated useful lives of the assets of three to five years.
Revenue Recognition
The Company recognizes revenue in accordance with the American Institute of
Certified Public Accountants (AICPA) Statement of Position (SOP) 97-2,
"Software Revenue Recognition." Under SOP 97-2, if a software sales
arrangement does not require significant modification or customization of the
software, revenue from the sale of the software is recognized when evidence of
an arrangement exists, the fee is fixed and determinable, the license
agreement has been delivered and collection of any resulting receivable is
probable.
As a result of certain issues raised in applying SOP 97-2, in March 1998,
the AICPA issued an SOP which delayed for one year the effective date of
certain provisions of SOP 97-2 with respect to what constitutes vendor-
specific objective evidence of fair value of the delivered software element in
certain multiple-element arrangements that include service elements entered
into by entities that never sell the software elements separately. In December
1998, the AICPA issued SOP 98-9, which amended certain paragraphs of SOP 97-2
to require recognition of revenue using the residual method under certain
circumstances, and is effective for fiscal years beginning after March 15,
1999. We do not expect the adoption of this SOP to have a material impact on
our financial statements.
Revenue from the sales of software is recognized when delivery has
occurred, the fee is fixed and determinable and collection of any resulting
receivable is probable. Revenue from servicing and support is recognized as
the related services are performed.
F-33
<PAGE>
PSI-Med Corporation
NOTES TO FINANCIAL STATEMENTS--(Continued)
Adoption of Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards (SFAS) No. 130 and SFAS No. 131, "Reporting
Comprehensive Income" and "Disclosures about Segments of an Enterprise and
Related Information," respectively (collectively, the Statements). The
Statements are effective for fiscal years beginning after December 15, 1997.
SFAS No. 130 establishes standards for reporting of comprehensive income and
its components in annual financial statements. SFAS No. 131 establishes
standards for reporting financial and descriptive information about an
enterprise's operating segments in its annual financial statements and selected
segment information in interim financial reports. Reclassification or
restatement of comparative financial statements or financial information for
earlier periods is required upon adoption of SFAS No. 130 and SFAS No. 131,
respectively. For the years ended May 31, 1997, 1998 and 1999, comprehensive
income (loss) is equal to our net earnings (loss). The Company operates in one
segment and all operations and customers are within the United States.
Application of the Statements' requirements did not have a material impact on
our financial position or results of operations.
In 1998, the American Institute of Certified Public Accountants' Accounting
Standards Executive Committee ("AcSEC) issued SOP No. 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1
requires certain costs incurred in connection with developing or obtaining
internal-use software to be capitalized and other costs to be expensed.
Application of this SOP's requirements did not have a material impact on our
financial position or results of operations.
Stock-Based Compensation
We adopted SFAS No. 123, "Accounting for Stock-Based Compensation," which
permits entities to recognize as expense over the service period the fair value
of all stock-based awards on the date of grant. Alternatively, SFAS No. 123
also allows entities to continue to apply the provisions of Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations, and provide pro forma net income
(loss) disclosures for employee stock option grants made in 1995 and future
years as if the fair-value-based method defined in SFAS No. 123 had been
applied. We have elected to continue to apply the provisions of APB Opinion No.
25 and provide the pro forma disclosure provisions of SFAS No. 123.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments," defines the fair value of a financial
instrument as the amount at which the instrument could be exchanged in a
current transaction between willing parties. The carrying amounts of cash and
cash equivalents, accounts receivable, unbilled accounts receivable, other
assets, notes payable, notes payable to related parties, advances from
affiliate, accounts payable and accrued expenses, approximate fair value
because of the short maturity of these instruments. We use market prices, when
available, or discounted cash flows to calculate these fair values. The fair
value of our notes payable is estimated based on the current rates offered to
us for notes payable of the same remaining maturities and approximates its
carrying value.
Year 2000
We recognize the need to ensure our operations will not be adversely
impacted by Year 2000 software failures. Software failures due to processing
errors potentially arising from calculations using the Year 2000 date are a
known risk. We are addressing this risk to the availability and integrity of
financial systems and products and the reliability of operational systems. We
have tested our Integrated Provider Network System and have completed the Year
2000 conversion of this system. We are in the process of assessing the system's
F-34
<PAGE>
PSI-Med Corporation
NOTES TO FINANCIAL STATEMENTS--(Continued)
Year 2000 compliance identifying Year 2000 remaining compliance issues in its
other systems, equipment and processes. In addition to a review of internal
systems, we have initiated formal communications with third parties with which
we do business in order to determine whether or not they are Year 2000
compliant and the extent to which we may be vulnerable to third parties'
failure to become Year 2000 compliant. Additionally, we are making changes to
such systems, updating or replacing such equipment and modifying such processes
to make them Year 2000 compliant. The total cost of compliance and its effect
on our future results of operations are not expected to be material. However,
due to the complexities of estimating the cost of modifying applications to
become Year 2000 compliant and the difficulties in assessing third parties'
ability to become Year 2000 compliant, estimates may be subject to change.
We have not developed a Year 2000 contingency plan and believe that our
information systems will be Year 2000 compliant; however, there can be no
assurance that all of our systems will be Year 2000 compliant, that the costs
to be Year 2000 compliant will not exceed our current expectations, or that the
failure of such systems to be Year 2000 compliant will not have a material
adverse effect on our business.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
Long-lived assets and certain identifiable intangibles (including goodwill)
are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future undiscounted net cash flows expected to
be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell.
Capitalized Software Development Costs
Software development costs incurred after the establishment of technological
feasibility are capitalized and later amortized using the greater of the
straight-line method or based on the estimated revenue distribution over the
remaining estimated economic life of the products. Such policy results in our
amortizing our capitalized software development costs over an estimated
economic life of three to seven years. Software development costs were fully
amortized as of May 31, 1996.
Goodwill
Goodwill is the excess of the purchase price paid over the fair value of the
net assets of the acquired company at the date of acquisition. Goodwill is
amortized on a straight-line basis over two years. The Company periodically
assesses the recoverability of goodwill based on an analysis of the cash flows
generated by the underlying assets. In the opinion of management, no impairment
of goodwill has occurred as of May 31, 1999.
Income Taxes
We account for income taxes in accordance with SFAS No. 109, "Accounting for
Income Taxes." SFAS No. 109 provides that deferred tax assets and liabilities
be recognized for temporary differences between the financial reporting basis
and the tax basis of our assets and liabilities and expected benefits of
utilizing net operating loss and credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The impact on deferred taxes of changes in tax rates and
laws, if any, are applied to the years during which temporary differences are
expected to be settled and reflected in the financial statements in the period
enacted.
F-35
<PAGE>
PSI-Med Corporation
NOTES TO FINANCIAL STATEMENTS--(Continued)
Concentration of Credit Risk
Financial instruments that potentially subject us to concentrations of
credit risk consist principally of accounts receivable. Revenue from one
customer accounted for 19% and 13% of total revenues for the year ended May 31,
1998 and 1999, respectively.
Net Earnings (loss) Per Share
We compute net earnings (loss) per share based upon SFAS No. 128, "Earnings
per Share." The basic net earnings (loss) per share is computed by dividing the
net earnings (loss) available to common stockholders by the weighted-average
number of common shares outstanding. Potential common shares relating to stock
options have been included in the calculation of diluted net earnings per share
in the year ended May 31, 1999. Potential common shares relating to stock
options in each of the years ended May 31, 1997 and 1998 are anti-dilutive,
thus the diluted net earnings (loss) per share in these years is the same as
the basic net earnings (loss) per share.
(2) Acquisition of Physician Management Services, Inc.
On January 15, 1999, we acquired the fixed assets and customer base of
Physician Management Services, Inc. (PMS). The PMS purchase price totaled
$83,116, payable in $6,000 in cash and $77,116 evidenced by an unsecured
promissory note. The acquisition was accounted for as a purchase. PMS is an
accounts receivable management company which performs the total collection
process for doctors and medical groups. The primary client's of PMS are the
University of California, Irvine (UCI) departments and doctors affiliated with
UCI. The purchase price of $83,116 will be reduced if 12% of the collections
for 24 months, related to the acquired customer base, are less than $83,116.
The goodwill recorded in conjunction with the purchase is being amortized over
two years, the life of the purchase contract.
Select unaudited pro forma financial data for the years ended May 31, 1998
and 1999, assuming the PMS acquisition occurred on June 1, 1997, are presented
as follows:
<TABLE>
<CAPTION>
Unaudited
------------------------
1998 1999
----------- -----------
<S> <C> <C>
Revenue............................................ $ 2,761,306 $ 2,564,768
=========== ===========
Net earnings (loss)................................ $ (392,102) $ 159,785
=========== ===========
Stockholders' deficit.............................. $(1,634,516) $(1,474,832)
=========== ===========
</TABLE>
These pro forma results of operations and equity have been prepared for
comparative purposes only and do not purport to be indicative of the results of
operations and equity which actually would have resulted had the acquisition
occurred on the date indicated, or which may result in the future.
(3) Furniture, Fixtures and Equipment
Furniture, fixtures and equipment consist of the following:
<TABLE>
<CAPTION>
1998 1999
--------- ---------
<S> <C> <C>
Furniture and fixtures................................. $ 70,004 $ 78,320
Computer equipment..................................... 375,489 393,911
Office equipment....................................... 1,177 3,752
--------- ---------
446,670 475,983
Accumulated depreciation............................... (343,768) (390,769)
--------- ---------
$ 102,902 $ 85,214
========= =========
</TABLE>
F-36
<PAGE>
PSI-Med Corporation
NOTES TO FINANCIAL STATEMENTS--(Continued)
(4) Commitments
We lease office space and equipment under noncancelable operating and
capital leases with various expiration dates through the year 2002.
Future minimum lease payments under noncancelable leases are as follows:
<TABLE>
<CAPTION>
Capital Operating
leases leases
-------- ---------
<S> <C> <C>
Period ending May 31:
2000................................................. $ 26,834 $117,877
2001................................................. 20,460 4,009
2002................................................. 7,994 --
-------- --------
Total minimum lease payments....................... 55,288 $121,886
========
Less amounts representing interest..................... (9,387)
--------
Present value of minimum lease payments............ 45,901
Less current portion of obligations under capital
leases................................................ (17,021)
--------
Obligations under capital leases, excluding current
portion............................................... $ 28,880
========
</TABLE>
Rent expense for the years ended May 31, 1997, 1998 and 1999 was $169,196,
$143,487 and $130,967, respectively.
F-37
<PAGE>
PSI-Med Corporation
NOTES TO FINANCIAL STATEMENTS--(Continued)
(5) Notes Payable
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Notes payable to related parties consist of the
following (see note 10):
Note payable to stockholder for $25,000; bearing fixed
interest rate of 12%; principal and interest payable
at maturity; due on demand........................... $ 29,166 $ 32,864
Note payable to affiliate for $14,000; bearing fixed
interest rate of 12%; principal and interest payable
at maturity; due on demand........................... 14,317 16,014
Note payable to affiliate for $32,000; bearing fixed
interest rate of 12%; principal and interest payable
at maturity; due on demand........................... 32,483 36,240
Notes payable to related party for $90,000; bearing
interest rate of 8% until December 31, 1997 and 12%
thereafter; principal and interest payable at
maturity; due on demand.............................. 106,155 119,618
Note payable to related party for $30,000; bearing
fixed interest rate of 12%; interest payable monthly;
due on demand........................................ 30,000 30,000
Note payable to majority stockholder for $147,284;
bearing fixed interest rate of 11%; interest payable
quarterly; due June 1, 2000.......................... 85,629 60,506
Note payable to related party for $162,996; bearing
fixed interest rate of 10%; principal and interest
due monthly; due February 16, 2004................... 159,699 138,725
Unsecured note payable to PMS for $77,116; bearing no
interest rate; principal payable monthly calculated
as 12% of gross billings collected; due January 15,
2001................................................. -- 66,684
Note payable to related party for $150,000; bearing no
interest; due October 11, 1999....................... 150,000 150,000
-------- --------
Note payable to stockholder for $15,000; bearing fixed
interest rate of 10%; interest and principal payable
at maturity; due on demand........................... 44,937 49,430
Note payable to a bank secured by the Company's assets
and a personal guarantee by an officer of the Company;
bearing interest rate of prime plus 6.25% (14% at May
31, 1999); principal and interest due monthly; due
June 15, 2000......................................... 67,639 46,459
-------- --------
720,025 746,540
Less current portion................................... (420,696) (623,132)
-------- --------
Total notes payable, less current maturities......... $299,329 $123,408
======== ========
</TABLE>
Total notes payable to related parties............. 652,386 700,081
Principal maturities of the notes payable at May 31, 1999 are as follows:
<TABLE>
<S> <C>
1999.............................................................. $623,132
2000.............................................................. 56,684
2001.............................................................. 36,000
2002.............................................................. 30,724
--------
$746,540
========
</TABLE>
F-38
<PAGE>
PSI-Med Corporation
NOTES TO FINANCIAL STATEMENTS--(Continued)
(6) Related Party Transactions
Accounts Payable to Related Parties
At May 31, 1998 and 1999, we had the following accounts payable to related
parties recorded within accounts payable in the accompanying balance sheet:
<TABLE>
<CAPTION>
1998 1999
-------- -------
<S> <C> <C>
Accounts payable to related parties...................... $116,595 $73,129
======== =======
</TABLE>
Deferred Compensation Payable to Related Parties
At May 31, 1998 and 1999, we had the following deferred compensation payable
to related parties:
<TABLE>
<S> <C> <C>
Deferred compensation payable to related parties........ $300,000 $300,000
======== ========
</TABLE>
Executive Compensation
Since June 7, 1998, OrganicNet, Inc. has committed to fund the salary of
PSI-Med's President and majority shareholder. The portion of the President's
salary attributable to the Company's business totals $90,000 and has been
charged to expense in the accompanying 1999 financial statements and credited
to additional paid-in capital.
(7) Income Taxes
Income tax expense for the years ended May 31, 1997, 1998 and 1999,
respectively, consists of the following:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Current:
Federal..................................................... $-- $-- $--
State and local............................................. 800 800 800
Deferred:
Federal..................................................... -- -- --
State and local............................................. -- -- --
---- ---- ----
$800 $800 $800
==== ==== ====
</TABLE>
F-39
<PAGE>
PSI-Med Corporation
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table summarizes the tax effects of temporary differences
which give rise to significant portions of the deferred tax assets and
liabilities as of May 31, 1998 and 1999, respectively:
<TABLE>
<CAPTION>
1998 1999
--------- ---------
<S> <C> <C>
Deferred tax assets:
Current assets:
Accrued liabilities and other deferred tax
assets.......................................... $ 331,645 $ 283,768
--------- ---------
Total.......................................... 331,645 283,768
Less valuation allowance for current deferred tax
assets.......................................... (331,645) (283,768)
--------- ---------
Net current deferred tax assets................ -- --
--------- ---------
Noncurrent assets:
Net operating loss carryforward.................. 402,286 386,458
Depreciation and amortization.................... 7,422 16,722
--------- ---------
Total.......................................... 409,708 403,180
Less valuation allowance for non-current deferred
tax assets........................................ (409,708) (403,180)
--------- ---------
Net noncurrent deferred tax assets................. -- --
--------- ---------
Net deferred tax assets............................ $ -- $ --
========= =========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, as well as operating
loss carryforward.
Realization of the deferred tax assets is dependent on generating future
taxable income. For financial reporting purposes, a valuation allowance was
recorded at May 31, 1998 and 1999 to reflect the uncertainty of generating
taxable income sufficient to utilize the gross deferred tax asset. In addition,
the utilization of the net operating loss carryforwards may be limited due to
restrictions imposed under applicable Federal and state tax law due to a change
in ownership. The valuation allowance decreased by $239,809 and increased by
$54,405 for the years ended May 31, 1998 and 1999, respectively.
As of May 31, 1999, we have net operating loss carryforwards for federal and
state income tax purposes of approximately $1,038,000 and $470,000,
respectively, which are available to offset future taxable income, if any,
through 2019.
Due to the uncertainty surrounding the realization of the benefits of our
favorable tax attributes in future tax returns, we have fully reserved our
deferred tax assets as of May 31, 1998 and 1999, respectively. In assessing the
potential realization of deferred tax assets, we considered whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
differences become deductible.
(8) Liquidity
We have incurred significant losses resulting in a net capital deficiency
through May 31, 1999. As of May 31, 1999, we have reached maximum borrowing
capacity on our notes payable and we have no commitments to raise additional
capital. On August 31, 1999, we were acquired by OrganicNet, Inc. Management of
OrganicNet is developing plans to provide additional future sources of capital.
F-40
<PAGE>
PSI-Med Corporation
NOTES TO FINANCIAL STATEMENTS--(Continued)
(9) Stock Options
A summary of the activity of our stock options are as follows:
<TABLE>
<CAPTION>
Weighted-
average
Shares of exercise price
options per option
--------- --------------
<S> <C> <C>
Outstanding as of May 31, 1996...................... 3,000 $20.00
Granted during the year ended May 31, 1997.......... 5,278 44.47
-----
Outstanding at May 31, 1997......................... 8,278 35.60
Granted during the year ended May 31, 1998.......... -- --
-----
Outstanding at May 31, 1998......................... 8,278 35.60
Granted during the year ended May 31, 1999.......... -- --
-----
Outstanding at May 31, 1999......................... 8,278 35.60
-----
</TABLE>
The following table summarizes information about stock options exercisable
at May 31, 1999:
<TABLE>
<CAPTION>
Number of Options Weighted-average Weighted-average
Range of Exercisable at exercise price remaining
exercise prices May 31, 1999 at date of grant contractual life
--------------- ----------------- ---------------- ----------------
<S> <C> <C> <C>
$ 20.00 3,000 $20.00 9 yrs.
39.71 1,939 39.71 4 yrs.
47.23 3,339 47.23 4.75 yrs.
-----
8,278
=====
</TABLE>
The Company applies APB No. 25 in accounting for its employee stock based
compensation plan and uses the intrinsic value method in accounting for options
granted to employees. Accordingly, no compensation costs have been recognized
in the accompanying statements of operations for any of its stock options
granted to employees because the exercise price of each option equaled or
exceeded the fair value of the underlying common stock. Had we determined
compensation costs based on the fair value at the grant date for our stock
options under SFAS No. 123, pro forma net earnings (loss) would have been as
follows:
<TABLE>
<CAPTION>
1997 1998 1999
----------- --------- -------
<S> <C> <C> <C>
Net earnings (loss):
As reported............................... $ (912,634) $(452,241) $63,362
Assumed stock compensation cost........... 119,252 -- --
----------- --------- -------
Pro forma, adjusted..................... $(1,031,886) $(452,241) $63,362
=========== ========= =======
Basic net earnings (loss) per share:
As reported............................... $ (11.88) $ (5.34) $ 0.75
----------- --------- -------
Pro forma, adjusted..................... $ (13.43) $ (5.34) $ 0.75
----------- --------- -------
Diluted net earnings (loss) per share:
As reported............................... $ (11.88) $ (5.34) $ 0.70
----------- --------- -------
Pro forma, adjusted..................... $ (13.43) $ (5.34) $ 0.70
=========== ========= =======
</TABLE>
The above pro forma results assume we began recording compensation expense
for options granted to employees subsequent to June 1, 1996 and may not be
indicative of pro forma results to be expected in future
F-41
<PAGE>
PSI-Med Corporation
NOTES TO FINANCIAL STATEMENTS--(Continued)
periods. The fair value of each option was estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Expected volatility......................................... 40% -- --
Average life................................................ 7 yrs. -- --
Weighted-average risk-free rate............................. 6.80% -- --
Dividends................................................... -- -- --
</TABLE>
The weighted-average fair value of options granted for the year ended May
31, 1997 was $22.59.
(10) Subsequent Events
As part of our plans to replace our debt obligations, agreements were signed
to convert obligations to common stock at $30 per share:
<TABLE>
<CAPTION>
Debt to
Contract be Shares
Date Converted of stock
-------- --------- ------------
<S> <C> <C> <C>
Accounts payable to stockholder............. 06/16/99 $ 25,000 833 shares
Note payable to stockholders................ 06/28/99 32,864 1,095 shares
Deferred compensation to related party...... 06/16/99 200,000 6,666 shares
Note payable to related party............... 08/05/99 150,000 5,000 shares
Deferred compensation to related party...... 08/16/99 50,000 1,667 shares
</TABLE>
Additionally, management negotiated the following settlements to reduce the
Company's obligations:
<TABLE>
<CAPTION>
Final
amount
paid by
Date Total the
settled obligation Company
-------- ---------- --------
<S> <C> <C> <C>
Accounts payable to vendors.................... 08/10/99 $ 66,674 $ 39,474
Accounts payable to employees.................. 08/25/99 52,083 27,415
Note payable to related party.................. 09/13/99 133,147 70,151
-------- --------
$251,904 $137,040
======== ========
</TABLE>
Effective August 31, 1999, our shareholders exchanged all of their shares of
our common stock for 16,667 shares of Series A-II preferred stock of
OrganicNet, Inc.
F-42
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Through and including , 1999 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to the dealer's obligation to deliver a prospectus when
acting as underwriter and with respect to its unsold allotments or
subscriptions.
4,500,000 Shares
[ORGANICNET LOGO]
Common Stock
-----------------------------
Preliminary Prospectus
-----------------------------
Needham & Company, Inc Punk,.Ziegel & Company
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in
connection with the sale of Common Stock being registered. All amounts are
estimates except the registration fee and the NASD filing fee.
<TABLE>
<S> <C>
Registration fee.................................................. $ 14,387
NASD filing fee................................................... 5,675
Nasdaq National Market listing fee................................ 94,000
Printing and engraving............................................ 200,000
Legal fees and expenses........................................... 300,000
Accounting fees and expenses...................................... 850,000
Transfer agent fees............................................... 10,000
Blue sky fees and expenses........................................ 10,000
Miscellaneous..................................................... *
---------
Total........................................................... 1,484,062
=========
</TABLE>
- --------
* To be filed by amendment.
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended (the
"Securities Act"). Article VI of the Registrant's Amended and Restated
Certificate of Incorporation provides for indemnification of its directors to
the maximum extent permitted by the Delaware General Corporation Law and
Section 43 of Article XI of the Registrant's Bylaws provides for
indemnification of its directors, officers, employees and other agents to the
maximum extent permitted by the Delaware General Corporation Law. In addition,
the Registrant intends to enter into Indemnification Agreements with each
director and certain officers containing provisions which are in some respects
broader than the specific indemnification provisions contained in the Delaware
General Corporation Law. The indemnification agreements may require the
Company, among other things, to indemnify its directors against certain
liabilities that may arise by reason of their status or service as directors
(other than liabilities arising from willful misconduct of culpable nature),
to advance their expenses incurred as a result of any proceeding against them
as to which they could be indemnified, and to obtain directors' insurance if
available on reasonable terms. Reference is also made to indemnifying officers
and directors of the Company against certain liabilities. Reference is made to
the following documents filed as exhibits to this Registration Statement
regarding relevant indemnification provisions described above and elsewhere
herein: (1) the form of Underwriting Agreement, filed as Exhibit 1.1; (2) the
Amended and Restated Certificate of Incorporation, filed as Exhibit 3.1; (3)
the Bylaws of the Registrant, filed as Exhibit 3.2; (4) the form of
Indemnification Agreement entered into by the Registrant with each of its
directors and executive officers, filed as Exhibit 10.25; and (5) the
Indemnity and Subrogation Agreement, filed as Exhibit 10.7.
Item 15. Recent Sales of Unregistered Securities
Since August 1996, the Registrant issued and sold the following
unregistered securities:
(1) During the period, the Registrant granted stock options covering an
aggregate of 1,413,553 shares of common stock, at a weighted average exercise
price of $2.25 per share. The Registrant sold an aggregate of 46,867 shares of
its common stock for consideration in the aggregate amount of $47,434 pursuant
to the exercise of stock options granted under the Registrant's stock option
plans.
II-1
<PAGE>
(2) From August 1996 to August 1999, the Registrant issued and sold an
aggregate of 1,202,470 shares of Series B Preferred Stock at a price of $2.25
per share to a group of investors for an aggregate purchase price of
approximately $2,705,558. Such shares of Series B preferred stock will convert
into shares of common stock of the Registrant upon completion of this
offering.
(3) On December 20, 1996, the Registrant issued 5,416 shares of Series A-
II preferred stock and 5,416 shares of Series A-III preferred stock to
Velocity Healthcare Informatics, Inc. in exchange for substantially all of the
assets of Velocity Healthcare Informatics, Inc. Such shares of Series A-II and
Series A-III preferred stock will convert into 216,640 shares of common stock
of the Registrant upon the closing of this offering.
(4) On June 4, 1997, the Registrant issued 6,668 shares of Series A-II
preferred stock to the shareholders of Intedata, Inc. for the acquisition of
100% of the voting securities of Intedata, Inc. Such shares of Series A-II
preferred stock will convert into 133,360 shares of common stock of the
Registrant upon the closing of this offering.
(5) On June 23, 1997, the Registrant issued 13,333 shares of Series A-II
preferred stock to the sole shareholder of L.I.N.C., Inc. For the acquisition
of 100% of the voting securities of L.I.N.C., Inc. Such shares of Series A-II
preferred stock will convert into 266,660 shares of common stock of the
Registrant upon the closing of this offering.
(6) On May 14, 1997, the Registrant issued 23,333 shares of Series A-II
preferred stock to the shareholders of MMS, Inc. for the acquisition of 100%
of the voting securities of MMS, Inc. Such shares of Series A-II preferred
stock will convert into 466,660 shares of common stock of the Registrant upon
the closing of this offering.
(7) From October 1997 to August 1999, the Registrant issued and sold an
aggregate of 4,000,000 shares of Series C preferred stock at a price of $2.75
per share to a group of investors for an aggregate purchase price of
$11,000,000. Such shares of Series C preferred stock will convert into
4,000,000 shares of common stock of the Registrant upon completion of this
offering.
(8) On November 14, 1997, the Registrant issued 8,624 shares of Series A-
II preferred stock to the shareholders of Healthcheck, Inc. for the
acquisition of 100% of the voting securities of Healthcheck, Inc. Such shares
of Series A-II preferred stock will convert into 172,480 shares of common
stock of the Registrant upon the closing of this offering.
(9) On September 9, 1998, the Registrant issued 37,775 shares of common
stock to the former shareholders of Comprehensive Providers Credentialing
Services, Inc. pursuant to an adjustment provision contained in the merger
agreement by and between such shareholders and the Registrant, dated May 23,
1996.
(10) On September 20, 1999, the Registrant issued 16,667 shares of Series
A-II preferred stock to the shareholders of PSI-Med Corporation for the
acquisition of 100% of the voting securities of PSI-Med. Such shares of Series
A-II preferred stock will convert into 333,340 shares of common stock of the
Registration upon completion of this offering.
The issuances described in Items 2 through 9 were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act as transactions by an issuer not involving a public offering.
In addition, the issuances described in Item 1 were deemed exempt from
registration under the Securities Act in reliance on Rule 701 promulgated
thereunder as transactions pursuant to compensatory benefit plans and
contracts relating to compensation. The recipients of securities in each such
transaction represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the share
certificates and other instruments issued in such transactions. All recipients
either received adequate information about the Company or had access, through
employment or other relationships, to such information.
II-2
<PAGE>
INDEPENDENT AUDITORS' REPORT ON THE CONSOLIDATED
FINANCIAL STATEMENT SCHEDULE
The Board of Directors
OrganicNet, Inc.:
The audits referred to in our report dated October 22, 1999, included the
related consolidated financial statement schedule for each of the years in the
three-year period ended December 31, 1998 included in the registration
statement. This consolidated financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion on this consolidated financial statement schedule based on our
audits. In our opinion, such consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
/s/ KPMG LLP
San Francisco, California
October 22, 1999
II-3
<PAGE>
OrganicNet, Inc.
SCHEDULE II-VALUATION & QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charged to Balance at
Beginning of Costs and End of
Description Period Expenses Deductions Other(1) Period
----------- ------------ ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
Year Ended 1996:
Allowance for Doubtful
Accounts............. $ -- $ -- $ -- $ -- $ --
Year Ended 1997:
Allowance for Doubtful
Accounts............. $ -- $113,000 $ -- $ -- $113,000
Year Ended 1998:
Allowance for Doubtful
Accounts............. $113,000 $ 15,800 $ -- $ -- $128,800
Nine Months Ended
September 30, 1999
(unaudited):
Allowance for Doubtful
Accounts ............ $128,800 $101,684 $(32,377) $56,607 $254,714
</TABLE>
- --------
(1) Reflects PSI-Med reserves acquired
II-4
<PAGE>
Item 16. Exhibit and Financial Statement Schedule
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
1.1* Form of Underwriting Agreement
3.1(1)* Amended and Restated Certificate of Incorporation of Registrant
3.2(1)* Bylaws of Registrant
4.1* Specimen Certificate for shares of Common Stock, $.001 par value, of
the Registrant
5.1* Legal Opinion of Cooley Godward LLP
10.1** Amended and Restated Investor Rights Agreement, dated October 31,
1997, between Registrant and the Series A, B and C Investors
10.2** Indemnity and Subrogation Agreement, dated January 1, 1998, between
the registrant and Michael Meisel
10.3** 1996 Stock Option/Stock Issuance Plan
10.4** 1997 Stock Option/Stock Issuance Plan
10.5** Employment Agreement with Jack D. Anderson dated January 1, 1996
10.6** Employment Agreement with Robert L. Anderson dated January 1, 1996
10.7** Employment Agreement with William W. Shaw, III dated June 1, 1996
10.8** Employment Letter Agreement with William H. Matthews dated June 17,
1999
10.9** Employment Agreement with M. Jan Roughan dated January 1, 1997
10.10** Employment Agreement with Michael J. Barry dated January 1, 1996
10.11 Form of Indemnification Agreement
10.12** Promissory Note, dated April 1, 1999, between Michael E. Meisel and
the Registrant
10.13 Promissory Note, dated June 1, 1997 between M. Jan Roughan and the
Registrant
10.14 Promissory Note, dated December 1, 1997 between M. Jan Roughan and
the Registrant
10.15** Lease Agreement, dated January 5, 1999 between 1301 Evans Street
Associates, LLC and the Registrant
10.16+** Dedicated Server Agreement between Conxion and the Registrant dated
April 8, 1999
10.17+** Dedicated Server Agreement between Conxion and the Registrant dated
May 3, 1999
10.18+** T1 Service Agreement between Conxion and the Registrant dated May 23,
1999
10.19+** Dedicated Server Agreement between Conxion and the Registrant dated
June 1, 1999
10.20+** T1 Service Agreement between Conxion and the Registrant dated
September 1, 1999
10.21 Application Service Provider Agreement between Conxion and the
Registrant dated September 17, 1999
10.22 Distribution and Services Agreement between Superior Consultant
Holdings Corporation and the Registrant dated September 20, 1999
21.1** Subsidiaries of Registrant
23.1 Consent of KPMG LLP, independent auditors
23.2 Consent of KPMG LLP, independent auditors
24.1** Power of Attorney (see signature page)
27.1 Financial Data Schedule
</TABLE>
- --------
(1) As proposed to be filed with the Secretary of State of the State of
Delaware prior to the effectiveness of this offering.
* To be filed by amendment.
** Previously filed.
+ Confidential treatment requested on portions of this exhibit. Unredacted
versions of this exhibit have been filed separately wih the Commission.
II-5
<PAGE>
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions referenced in Item 14 of this
Registration Statement or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered hereunder, the Registrant will, unless in the opinion of its
counsel the matters have been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes for the purpose of determining
any liability under the Securities Act, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new Registration
Statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 479(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
The undersigned Registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriter or
permit prompt delivery to each purchaser.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of San
Francisco, State of California, on November 16, 1999.
ORGANICNET, INC.
/s/ Jack D. Anderson,
*By: ________________________________
Jack D. Anderson
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Jack D. Anderson Chairman of the Board and November 16, 1999
______________________________________ Chief Executive Officer
Jack D. Anderson (Principal Executive
Officer)
/s/ William W. Shaw, III President November 16, 1999
______________________________________
William W. Shaw, III
* Chief Financial Officer November 16, 1999
______________________________________ (Principal Financial
William H. Matthews Officer)
* Director November 16, 1999
______________________________________
Gail E. Oldfather
* Director November 16, 1999
______________________________________
Michael A. Wilson
* Director November 16, 1999
______________________________________
Robert S. Garvie
* Director November 16, 1999
______________________________________
Robert L. Anderson
* Director November 16, 1999
______________________________________
M. Jan Roughan
* Director November 16, 1999
______________________________________
David W. McComb
</TABLE>
/s/ William W. Shaw, III
*By: ___________________________
William W. Shaw, III
Attorney-in-fact
II-7
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document Page
------- ----------------------- ----
<C> <S> <C>
1.1* Form of Underwriting Agreement
3.1(1)* Amended and Restated Certificate of Incorporation of
Registrant
3.2(1)* Bylaws of Registrant
4.1* Specimen Certificate for shares of Common Stock, $.001 par
value, of the Registrant
5.1* Legal Opinion of Cooley Godward LLP
10.1** Amended and Restated Investor Rights Agreement, dated October
31, 1997, between Registrant and the Series A, B and C
Investors
10.2** Indemnity and Subrogation Agreement, dated January 1, 1998,
between the registrant and Michael Meisel
10.3** 1996 Stock Option/Stock Issuance Plan
10.4** 1997 Stock Option/Stock Issuance Plan
10.5** Employment Agreement with Jack D. Anderson dated January 1,
1996
10.6** Employment Agreement with Robert L. Anderson dated January 1,
1996
10.7** Employment Agreement with William W. Shaw, III dated June 1,
1996
10.8** Employment Letter Agreement with William H. Matthews dated
June 17, 1999
10.9** Employment Agreement with M. Jan Roughan dated January 1, 1997
10.10** Employment Agreement with Michael J. Barry dated January 1,
1996
10.11 Form of Indemnification Agreement
10.12** Promissory Note, dated April 1, 1999, between Michael E.
Meisel and the Registrant
10.13 Promissory Note, dated June 1, 1997 between M. Jan Roughan and
the Registrant
10.14 Promissory Note, dated December 1, 1997 between M. Jan Roughan
and the Registrant
10.15** Lease Agreement, dated January 5, 1999 between 1301 Evans
Street Associates, LLC and the Registrant
10.16+** Dedicated Server Agreement between Conxion and the Registrant
dated April 8, 1999
10.17+** Dedicated Server Agreement between Conxion and the Registrant
dated May 3, 1999
10.18+** T1 Service Agreement between Conxion and the Registrant dated
May 23, 1999
10.19+** Dedicated Server Agreement between Conxion and the Registrant
dated June 1, 1999
10.20+** T1 Service Agreement between Conxion and the Registrant dated
September 1, 1999
10.21 Application Service Provider Agreement between Conxion and the
Registrant dated September 17, 1999
10.22 Distribution and Services Agreement between Superior
Consultant Holdings Corporation and the Registrant dated
September 20, 1999
21.1** Subsidiaries of Registrant
23.1 Consent of KPMG LLP, independent auditors
23.2 Consent of KPMG LLP, independent auditors
24.1** Power of Attorney (see signature page)
27.1 Financial Data Schedule
</TABLE>
- --------
(1) As proposed to be filed with the Secretary of State of the State of
Delaware prior to the effectiveness of this offering.
* To be filed by amendment.
** Previously filed.
+ Confidential treatment requested on portions of this exhibit. Unredacted
versions of this exhibit have been filed separately with the Commission.
<PAGE>
Exhibit 10.11
INDEMNIFICATION AGREEMENT
This Agreement is made and entered into this ____ day of _________, 1999 by
and between OrganicNet, Inc. a Delaware corporation (the "Corporation"), and
_________ ("Agent").
Recitals
Whereas, Agent performs a valuable service to the Corporation in his/her
capacity as ________ of the Corporation;
Whereas, the stockholders of the Corporation have adopted bylaws (the
"Bylaws") providing for the indemnification of the directors, officers,
employees and other agents of the Corporation, including persons serving at the
request of the Corporation in such capacities with other corporations or
enterprises, as authorized by the Delaware General Corporation Law, as amended
(the "Code");
Whereas, the Bylaws and the Code, by their non-exclusive nature, permit
contracts between the Corporation and its agents, officers, employees and other
agents with respect to indemnification of such persons; and
Whereas, in order to induce Agent to continue to serve as __________ of the
Corporation, the Corporation has determined and agreed to enter into this
Agreement with Agent;
Now, Therefore, in consideration of Agent's continued service as
____________ after the date hereof, the parties hereto agree as follows:
Agreement
1. Services to the Corporation. Agent will serve, at the will of the
Corporation or under separate contract, if any such contract exists, as
____________ of the Corporation or as a director, officer or other fiduciary of
an affiliate of the Corporation (including any employee benefit plan of the
Corporation) faithfully and to the best of his ability so long as he is duly
elected and qualified in accordance with the provisions of the Bylaws or other
applicable charter documents of the Corporation or such affiliate; provided,
however, that Agent may at any time and for any reason resign from such position
(subject to any contractual obligation that Agent may have assumed apart from
this Agreement) and that the Corporation or any affiliate shall have no
obligation under this Agreement to continue Agent in any such position.
2. Indemnity of Agent. The Corporation hereby agrees to hold harmless and
indemnify Agent to the fullest extent authorized or permitted by the provisions
of the Bylaws and the Code, as the same may be amended from time to time (but,
only to the extent that such
1.
<PAGE>
amendment permits the Corporation to provide broader indemnification rights than
the Bylaws or the Code permitted prior to adoption of such amendment).
3. Additional Indemnity. In addition to and not in limitation of the
indemnification otherwise provided for herein, and subject only to the
exclusions set forth in Section 4 hereof, the Corporation hereby further agrees
to hold harmless and indemnify Agent:
(a) against any and all expenses (including attorneys' fees), witness
fees, damages, judgments, fines and amounts paid in settlement and any other
amounts that Agent becomes legally obligated to pay because of any claim or
claims made against or by him in connection with any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, arbitrational,
administrative or investigative (including an action by or in the right of the
Corporation) to which Agent is, was or at any time becomes a party, or is
threatened to be made a party, by reason of the fact that Agent is, was or at
any time becomes a director, officer, employee or other agent of Corporation, or
is or was serving or at any time serves at the request of the Corporation as a
director, officer, employee or other agent of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise; and
(b) otherwise to the fullest extent as may be provided to Agent by the
Corporation under the non-exclusivity provisions of the Code and Section 43 of
the Bylaws.
4. Limitations on Additional Indemnity. No indemnity pursuant to Section 3
hereof shall be paid by the Corporation:
(a) on account of any claim against Agent for an accounting of profits
made from the purchase or sale by Agent of securities of the Corporation
pursuant to the provisions of Section 16(b) of the Securities Exchange Act of
1934 and amendments thereto or similar provisions of any federal, state or local
statutory law;
(b) on account of Agent's conduct that was knowingly fraudulent or
deliberately dishonest or that constituted willful misconduct;
(c) on account of Agent's conduct that constituted a breach of Agent's
duty of loyalty to the Corporation or resulted in any personal profit or
advantage to which Agent was not legally entitled;
(d) for which payment is actually made to Agent under a valid and
collectible insurance policy or under a valid and enforceable indemnity clause,
bylaw or agreement, except in respect of any excess beyond payment under such
insurance, clause, bylaw or agreement;
(e) if indemnification is not lawful (and, in this respect, both the
Corporation and Agent have been advised that the Securities and Exchange
Commission believes that indemnification for liabilities arising under the
federal securities laws is against public policy and is, therefore,
unenforceable and that claims for indemnification should be submitted to
appropriate courts for adjudication); or
(f) in connection with any proceeding (or part thereof) initiated by
Agent, or any proceeding by Agent against the Corporation or its directors,
officers, employees or other
2.
<PAGE>
agents, unless (i) such indemnification is expressly required to be made by law,
(ii) the proceeding was authorized by the Board of Directors of the Corporation,
(iii) such indemnification is provided by the Corporation, in its sole
discretion, pursuant to the powers vested in the Corporation under the Code, or
(iv) the proceeding is initiated pursuant to Section 9 hereof.
5. Continuation of Indemnity. All agreements and obligations of the
Corporation contained herein shall continue during the period Agent is a
director, officer, employee or other agent of the Corporation (or is or was
serving at the request of the Corporation as a director, officer, employee or
other agent of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise) and shall continue thereafter so long as Agent
shall be subject to any possible claim or threatened, pending or completed
action, suit or proceeding, whether civil, criminal, arbitrational,
administrative or investigative, by reason of the fact that Agent was serving in
the capacity referred to herein.
6. Partial Indemnification. Agent shall be entitled under this Agreement
to indemnification by the Corporation for a portion of the expenses (including
attorneys' fees), witness fees, damages, judgments, fines and amounts paid in
settlement and any other amounts that Agent becomes legally obligated to pay in
connection with any action, suit or proceeding referred to in Section 3 hereof
even if not entitled hereunder to indemnification for the total amount thereof,
and the Corporation shall indemnify Agent for the portion thereof to which Agent
is entitled.
7. Notification and Defense of Claim. Not later than thirty (30) days
after receipt by Agent of notice of the commencement of any action, suit or
proceeding, Agent will, if a claim in respect thereof is to be made against the
Corporation under this Agreement, notify the Corporation of the commencement
thereof; but the omission so to notify the Corporation will not relieve it from
any liability which it may have to Agent otherwise than under this Agreement.
With respect to any such action, suit or proceeding as to which Agent notifies
the Corporation of the commencement thereof:
(a) the Corporation will be entitled to participate therein at its own
expense;
(b) except as otherwise provided below, the Corporation may, at its
option and jointly with any other indemnifying party similarly notified and
electing to assume such defense, assume the defense thereof, with counsel
reasonably satisfactory to Agent. After notice from the Corporation to Agent of
its election to assume the defense thereof, the Corporation will not be liable
to Agent under this Agreement for any legal or other expenses subsequently
incurred by Agent in connection with the defense thereof except for reasonable
costs of investigation or otherwise as provided below. Agent shall have the
right to employ separate counsel in such action, suit or proceeding but the fees
and expenses of such counsel incurred after notice from the Corporation of its
assumption of the defense thereof shall be at the expense of Agent unless (i)
the employment of counsel by Agent has been authorized by the Corporation, (ii)
Agent shall have reasonably concluded that there may be a conflict of interest
between the Corporation and Agent in the conduct of the defense of such action
or (iii) the Corporation shall not in fact have employed counsel to assume the
defense of such action, in each of which cases the fees and expenses of Agent's
separate counsel shall be at the expense of the Corporation.
3.
<PAGE>
The Corporation shall not be entitled to assume the defense of any action, suit
or proceeding brought by or on behalf of the Corporation or as to which Agent
shall have made the conclusion provided for in clause (ii) above; and
(c) the Corporation shall not be liable to indemnify Agent under this
Agreement for any amounts paid in settlement of any action or claim effected
without its written consent, which shall not be unreasonably withheld. The
Corporation shall be permitted to settle any action except that it shall not
settle any action or claim in any manner which would impose any penalty or
limitation on Agent without Agent's written consent, which may be given or
withheld in Agent's sole discretion.
8. Expenses. The Corporation shall advance, prior to the final disposition
of any proceeding, promptly following request therefor, all expenses incurred by
Agent in connection with such proceeding upon receipt of an undertaking by or on
behalf of Agent to repay said amounts if it shall be determined ultimately that
Agent is not entitled to be indemnified under the provisions of this Agreement,
the Bylaws, the Code or otherwise.
9. Enforcement. Any right to indemnification or advances granted by this
Agreement to Agent shall be enforceable by or on behalf of Agent in any court of
competent jurisdiction if (i) the claim for indemnification or advances is
denied, in whole or in part, or (ii) no disposition of such claim is made within
ninety (90) days of request therefor. Agent, in such enforcement action, if
successful in whole or in part, shall be entitled to be paid also the expense of
prosecuting his claim. It shall be a defense to any action for which a claim for
indemnification is made under Section 3 hereof (other than an action brought to
enforce a claim for expenses pursuant to Section 8 hereof, provided that the
required undertaking has been tendered to the Corporation) that Agent is not
entitled to indemnification because of the limitations set forth in Section 4
hereof. Neither the failure of the Corporation (including its Board of Directors
or its stockholders) to have made a determination prior to the commencement of
such enforcement action that indemnification of Agent is proper in the
circumstances, nor an actual determination by the Corporation (including its
Board of Directors or its stockholders) that such indemnification is improper
shall be a defense to the action or create a presumption that Agent is not
entitled to indemnification under this Agreement or otherwise.
10. Subrogation. In the event of payment under this Agreement, the
Corporation shall be subrogated to the extent of such payment to all of the
rights of recovery of Agent, who shall execute all documents required and shall
do all acts that may be necessary to secure such rights and to enable the
Corporation effectively to bring suit to enforce such rights.
11. Non-Exclusivity of Rights. The rights conferred on Agent by this
Agreement shall not be exclusive of any other right which Agent may have or
hereafter acquire under any statute, provision of the Corporation's Certificate
of Incorporation or Bylaws, agreement, vote of stockholders or directors, or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding office.
4.
<PAGE>
12. Survival of Rights.
(a) The rights conferred on Agent by this Agreement shall continue
after Agent has ceased to be a director, officer, employee or other agent of the
Corporation or to serve at the request of the Corporation as a director,
officer, employee or other agent of another corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise and shall inure to the
benefit of Agent's heirs, executors and administrators.
(b) The Corporation shall require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Corporation, expressly to
assume and agree to perform this Agreement in the same manner and to the same
extent that the Corporation would be required to perform if no such succession
had taken place.
13. Separability. Each of the provisions of this Agreement is a separate
and distinct agreement and independent of the others, so that if any provision
hereof shall be held to be invalid for any reason, such invalidity or
unenforceability shall not affect the validity or enforceability of the other
provisions hereof. Furthermore, if this Agreement shall be invalidated in its
entirety on any ground, then the Corporation shall nevertheless indemnify Agent
to the fullest extent provided by the Bylaws, the Code or any other applicable
law.
14. Governing Law. This Agreement shall be interpreted and enforced in
accordance with the laws of the State of Delaware.
15. Amendment and Termination. No amendment, modification, termination or
cancellation of this Agreement shall be effective unless in writing signed by
both parties hereto.
16. Identical Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall for all purposes be deemed to be an original
but all of which together shall constitute but one and the same Agreement. Only
one such counterpart need be produced to evidence the existence of this
Agreement.
17. Headings. The headings of the sections of this Agreement are inserted
for convenience only and shall not be deemed to constitute part of this
Agreement or to affect the construction hereof.
18. Notices. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given (i)
upon delivery if delivered by hand to the party to whom such communication was
directed or (ii) upon the third business day after the date on which such
communication was mailed if mailed by certified or registered mail with postage
prepaid:
(a) If to Agent, at the address indicated on the signature page
hereof.
5.
<PAGE>
(b) If to the Corporation, to
OrganicNet, Inc.
330 Townsend Street, Suite 206
San Francisco, CA 94107
or to such other address as may have been furnished to Agent by the Corporation.
In Witness Whereof, the parties hereto have executed this Agreement on and
as of the day and year first above written.
OrganicNet, Inc.
By:
------------------------
Title:
---------------------
Agent
---------------------------
6.
<PAGE>
Exhibit 10.13
PROMISSORY NOTE
$ 50,000.00 Amount Date: June 1, 1997
San Francisco, California
For Value Received, Object Products, Inc., a Delaware corporation
("Obligor"), hereby promises to pay to the order of Mary Jan Roughen, a
California resident ("Payee"), in lawful money of the United States, at the
address of Payee set forth below, the principal sum of fifty thousand Dollars
($50,000.00). This Promissory Note (the "Note") shall be due and payable May
15, 1998 (the "Maturity Date") and shall be subject to an interest rate of ten
percent (1.0%) per annum, compounded monthly. This Note may be prepaid at any
time in whole or in part without premium or penalty. Interest may be paid at
any time prior to maturity at the option of the Obligor.
Obligor waives presentment, demand for performance, notice of
nonperformance, protest, notice of protest, and notice of dishonor. No delay on
the part of Payee in exercising any right hereunder shall operate as a waiver of
such right under this Note. This Note is being delivered in and shall be
construed in accordance with the laws of the State of California.
If the indebtedness represented by this Note or any part thereof is
collected at law or in equity or in bankruptcy, receivership or other judicial
proceedings, or if this Note is placed in the hands of attorneys for collection
after default, Obligor agrees to pay, in addition to the principal and interest
payable hereon, reasonable attorneys' fees and costs incurred by Payee.
This Note may be amended only with the written consent of the Obligor and
the Payee. Any amendment effected in accordance with this paragraph shall be
binding upon the Payee and the Obligor.
Obligor and Payee agree that if any legal action is necessary to enforce or
collect this Note or my other obligations for nonpayment at maturity, the
prevailing party shall be entitled to reasonable attorney's fees in addition to
costs and any other relief to which that party may be entitled.
Any notice or other communication (except payment) required or permitted
hereunder shall be in writing and shall, be deemed to have been given upon
delivery if personally delivered or upon deposit if deposited in the United
States mail for mailing by certified mail, postage prepaid, and addressed as
follows:
If to Obligor: Object Products, Inc.
Attention: William W. Shaw
330 Townsend Street, Suite 206
San Francisco, CA 94107-1630
If to Payee: Mary Jan Roughen
910 Victoria
Arcadia, CA 91006
Each of the above addressees may change its address for purposes of this
paragraph by giving to the other addressee notice in conformance with this
paragraph of such new address. Any payment shall be deemed made upon receipt by
Payee.
In Witness Whereof, the parties hereto have executed this Note as of the
date first written above.
Obligor: /s/ William W. Shaw, III
------------------------
Object Products, Inc.
William W. Shaw, III
President
Payee: /s/ Mary Jan Roughan
--------------------
Mary Jan Roughan
<PAGE>
Exhibit 10.14
PROMISSORY NOTE
$ 50,000.00 Amount Date: December 1, 1997
San Francisco, California
For Value Received, Object Products, Inc., a Delaware corporation
("Obligor"), hereby promises to pay to the order of Mary Jan Roughen, a
California resident ("Payee"), in lawful money of the United States, at the
address of Payee set forth below, the principal sum of fifty thousand Dollars
($50,000.00). This Promissory Note (the "Note") shall be due and payable May 15,
1998 (the "Maturity Date") and shall be subject to an interest rate of ten
percent (10%) per annum, compounded monthly. This Note may be prepaid at any
time in whole or in part without premium or penalty. Interest may be paid at any
time prior to maturity at the option of the Obligor.
Obligor waives presentment, demand for performance, notice of
nonperformance, protest, notice of protest, and notice of dishonor. No delay on
the part of Payee in exercising any right hereunder shall operate as a waiver of
such right under this Note. This Note is being delivered in and shall be
construed in accordance with the laws of the State of California.
If the indebtedness represented by this Note or any part thereof is
collected at law or in equity or in bankruptcy, receivership or other judicial
proceedings, or if this Note is placed in the hands of attorneys for collection
after default, Obligor agrees to pay, in addition to the principal and interest
payable hereon, reasonable attorneys' fees and costs incurred by Payee.
This Note may be amended only with the written consent of the Obligor and
the Payee. Any amendment effected in accordance with this paragraph shall be
binding upon the Payee and the Obligor.
Obligor and Payee agree that if any legal action is necessary to enforce or
collect this Note or my other obligations for nonpayment at maturity, the
prevailing party shall be entitled to reasonable attorney's fees in addition to
costs and any other relief to which that party may be entitled.
Any notice or other communication (except payment) required or permitted
hereunder shall be in writing and shall be deemed to have been given upon
delivery if personally delivered or upon deposit if deposited in the United
States mail for mailing by certified mail, postage prepaid, and addressed as
follows:
If to Obligor: Object Products, Inc.
Attention: William W. Shaw
330 Townsend Street, Suite 206
San Francisco, CA 94107-1630
If to Payee: Mary Jan Roughen
910 Victoria
Arcadia, CA 91006
Each of the above addressees may change its address for purposes of this
paragraph by giving to the other addressee notice in conformance with this
paragraph of such new address. Any payment shall be deemed made upon receipt by
Payee.
In Witness Whereof, the parties hereto have executed this Note as of the
date first written above.
Obligor: /s/ William W. Shaw, III
------------------------
Object Products, Inc.
William W. Shaw, III
President
Payee: /s/ Mary Jan Roughan
--------------------
Mary Jan Roughan
<PAGE>
EXHIBIT 10.21
Application Service Provider Agreement
This Application Service Provider Agreement (the "Agreement") is entered
into as of September 17th, 1999 (the "Effective Date") by and between
OrganicNet, Inc., a Delaware corporation with offices at 330 Townsend Street,
Suite 206, San Francisco, California 94107 ("OrganicNet") and Conxion
Corporation, a California corporation with offices at 4201 Burton Drive, Santa
Clara, California 95054 ("Conxion") (collectively, the "Parties").
OrganicNet is expanding its software distribution strategy to include an
Internet Application Service Provider ("ASP") model whereby OrganicNet customers
can access OrganicNet's software through the Internet on equipment hosted for
OrganicNet by third parties.
The Parties have previously entered into three Dedicated Server Agreements,
dated as of April 8, May 3, and June 1, 1999, and two T1 Service Agreements,
dated as of May 23 and September 1, 1999 (collectively, the "Service
Agreements"), a copy of each of which is attached hereto as Exhibit A, pursuant
to which Conxion will continue to provide the services described therein
("Services") for OrganicNet.
In consideration for entering into this Agreement, Conxion has purchased
$550,000 of OrganicNet Series C preferred stock.
The Parties wish to modify the terms of the Service Agreements to accommodate
the ASP software distribution model. In consideration of the terms and
conditions and mutual obligations contained in this Agreement, the parties agree
as follows:
Agreement
1. Governance. In the event that the terms of this Agreement are inconsistent
with the terms of any Service Agreement entered into by the Parties now or in
the future, the terms of this Agreement shall govern, notwithstanding any terms
to the contrary in any such Service Agreement.
2. ASP Model. Conxion acknowledges and agrees that OrganicNet may use the
services provided pursuant to the Service Agreements in fulfillment of the ASP
software distribution model and, in particular, that end users of OrganicNet
software shall be entitled to access such services.
3. Service Standards. Conxion agrees to supply the Services in a manner
described in the Service Agreements (including attached proposals).
4. Maintenance And Upgrade Windows. Conxion agrees not perform maintenance or
upgrades that would materially and adversely affect the Services except (i) when
maintenance or upgrades are performed during the hours of 10:00 p.m. to 3:00
a.m., Pacific Time (the "Routine Window"), (ii) when the deferral of such
maintenance or upgrades to a Routine Window would materially and adversely
affect the security or performance of a Conxion data center. Conxion shall
perform maintenance or upgrades in such a manner as to utilize the redundancy of
any Services, to minimize the adverse impact on the Services and notify
OrganicNet as far in advance as practicable of any maintenance or upgrades.
5. Enhanced Service Level Guarantee. In addition to the "Service and
Performance Guarantees" set forth in the Service Agreements, Conxion shall
provide the following enhanced service and performance guarantees to OrganicNet:
5.1 In the event of an Outage (as defined below) under an existing Service
Agreement during any business day, Conxion shall provide OrganicNet with a free
day of service under such Service Agreement;
5.2 In the event of five (5) Outages under an existing Service Agreement
during any thirty (30) day period, Conxion shall provide OrganicNet with a free
month of service under such Service Agreement;
1.
<PAGE>
5.3 In the event of two (2) consecutive months of free services under an
existing Service Agreement, Conxion shall allow OrganicNet to cancel the
applicable Service Contract without penalty.
As used herein, an "Outage" related to any Service Agreement shall mean a
service degradation on Conxion's network adversely affecting the Services under
such Service Agreement that is greater than an average of 50% over any 12 minute
period (excluding Routine Upgrade Windows) or circuit bandwidth utilization of
greater than an average of 70% (Seventy Percent) for the circuit relating to
such Services.
6. Service Rate Changes. Conxion reserves the right to change the service
rates upon sixty (60) days prior written notice to OrganicNet; provided,
however, that the new service rates charged to OrganicNet will be at least as
favorable to OrganicNet as Conxion offers at such time to any customer. In the
event any service rate change is greater than 10% (Ten Percent), Conxion may
allow OrganicNet to cancel the applicable Service Contract with 60 days written
notice without penalty.
7. Term and Termination.
7.1 Term and Additional Service Agreements. Notwithstanding anything
contained in the Service Agreements, (i) Conxion may not terminate or suspend
Services under any Service Agreements in the event of a bona fide dispute
between the parties so long as undisputed payments are not withheld, and (ii)
Conxion shall enter into extensions of existing Service Agreements upon the end
of the applicable contract term, as required by OrganicNet, or into supplemental
Service Agreements, as required by OrganicNet, on terms no less favorable to
OrganicNet than Conxion offers at such time to any customer. Any subsequent
Service Agreement shall be deemed to be a Service Agreement hereunder and shall
be attached as an exhibit hereto and added to Exhibit A.
7.2 Termination; Cure. In addition to the limitations on termination
contained in Section 7.1, Conxion may not terminate any of this Agreement or the
Services Agreements except in the event of a material breach of such agreement
by OrganicNet; provided, however, that in the event of such a breach, Conxion
may not terminate the applicable agreement until it shall have provided written
notice of such breach to OrganicNet and OrganicNet shall have not have cured
such breach within thirty (30) days of such notice.
7.3 Survival. This Agreement shall survive termination of any Service
Agreement.
8. General.
8.1 Notices. All notices, consents and approvals under this Agreement must
be delivered in writing by courier, or by certified or registered mail, (postage
prepaid and return receipt requested) to the other party at the address set
forth beneath such party's signature, and will be effective upon receipt. Either
party may change its address by giving notice of the new address to the other
party.
If to OrganicNet: If to Conxion:
330 Townsend Street, Suite 206 4201 Burton Drive
San Francisco, CA 94107 Santa Clara, CA 95054
Attn: William W. Shaw, III Attn: Antonio Salerno
8.2 Governing Law. This Agreement will be governed by the laws of the
State of California as such laws apply to contracts between California residents
performed entirely within California.
8.3 Waivers. All waivers must be in writing. Any waiver or failure to
enforce any provision of this Agreement on one occasion will not be deemed a
waiver of any other provision or of such provision on any other occasion.
8.4 Counterparts. This Agreement may be executed in counterparts, each of
which will be considered an original, but all of which together will constitute
the same instrument.
2.
<PAGE>
8.5 Entire Agreement. This Agreement constitutes the entire agreement
between the parties regarding the subject hereof and supersedes all prior or
contemporaneous agreements, understandings, and communication, whether written
or oral. This Agreement may be amended only by a written document signed the
Parties.
In Witness Whereof, the Parties have executed this Application Service
Provider Agreement as of the Effective Date.
OrganicNet, Inc. Conxion Corporation
By: /s/ William W. Shaw, III By: /s/ James C. Hunt
----------------------------------- -------------------------------
Name: William W. Shaw, III Name: James C. Hunt
--------------------------------- -----------------------------
Title: President Title: CFO
-------------------------------- ----------------------------
Date: 9/17/99 Date: 9/17/99
--------------------------------- -----------------------------
3.
<PAGE>
Exhibit A
Service Agreements
TYPE OF CONTRACT DATE
Dedicated Server Agreements April 8, 1999
Dedicated Server Agreements May 3, 1999
T1 Service Agreement May 23, 1999
Dedicated Server Agreements June 1, 1999
T1 Service Agreement September 1, 1999
<PAGE>
Exhibit 10.22
DISTRIBUTION AND SERVICES AGREEMENT
This Distribution and Services Agreement ("Agreement") is entered this
20th day of September, 1999 ("Effective Date") by and between OrganicNet, Inc.,
a corporation organized under the laws of Delaware, with its principal office at
330 Townsend Street, Suite 206, San Francisco, California 94107 (hereinafter
referred to as "OrganicNet"), and Superior Consultant Company, a corporation
organized under the laws of Michigan, with its principal office at 4000 Town
Center, Suite 1100, Southfield, Michigan 48075 (hereinafter referred to as
"SUPC" or "Superior").
Whereas, OrganicNet owns rights in certain software and methodologies (the
"OrganicNet Software"); and,
Whereas, SUPC is a healthcare consulting firm providing Health Care
Consulting Services, including Business Integration Services, as defined below.
Whereas, SUPC desires to promote the OrganicNet Software as a preferred
Application Services Provider ("ASP") solution for healthcare organizations, to
obtain a license to facilitate SUPC's integration and implementation services
and to be identified by OrganicNet as its services partner for the OrganicNet
Software and OrganicNet's adaptable object oriented architecture ("OrganicWare")
in healthcare; and,
Whereas, OrganicNet desires to grant certain rights and licenses to SUPC,
to market and provide services related to the OrganicNet Software, as provided
herein;
Now Therefore, in consideration of the promises and covenants contained
herein, and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties do mutually agree as follows:
SECTION 1 - DEFINITIONS
The following defined terms used in this Agreement shall have the meanings
specified in this Section 1.
1.1 "Affiliate" means, as to either party, an entity in which the party
has an ownership percentage of greater than 55%, or which has an ownership
percentage of greater than 55% in the party.
1.2 "Business Integration Services" means the implementation by SUPC of
modifications, extensions and interfaces to software systems, identification of
operational strategies and business changes required to take advantage of a
software product, integration and implementation and conversion assistance, and
organization design and conversion training, and as a general matter may include
strategic systems planning, productivity improvement/work simplification, change
management and training, and systems management and outsourcing.
1.3 "Healthcare Consulting Services" means integrated management,
information systems, and e-commerce related consulting services to all segments
of the healthcare industry, including but not limited to information systems
planning, information-systems audits, information systems outsourcing,
management outsourcing, systems integration and interfaces, product design,
development and implementation, management consulting, process refinement and
reengineering, physician services, patient accounting and financial management
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consulting, nursing management consulting and reengineering, nursing informatics
and total quality management (TQM/CQI) assistance. Healthcare Consulting
Services includes Business Integration Services.
1.4 "Client" means any third party that has licensed or may license the
OrganicNet Software or has engaged or may engage SUPC's Healthcare Consulting
Services as a result of the parties' joint marketing efforts in connection with
this Agreement.
1.5 "Direct Competitor" means any person or entity that offers products
or services that are similar in nature to, with respect to OrganicNet,
OrganicNet Software, and with respect to SUPC, Healthcare Consulting Services.
1.6 "Documentation" means all functional documentation, user and system
operating manuals, training materials, program descriptions, system guides,
specifications, instructions and explanatory materials regarding and related to
the OrganicNet Software.
1.7 "SUPC" means SUPC and its Affiliates.
1.8 "OrganicNet" means OrganicNet and its Affiliates.
1.9 "OrganicNet Software" means OrganicNet's OrganicWare, including,
modules, programs, configuration files, reference data files, and help files,
and Evolution(TM), OrganicNet's proprietary methodology, including but not
limited to OrganicNet's processes for business process reengineering, semantic
modeling, use case and quality functional deployment and which are further
described in Exhibit A. The OrganicNet Software includes any Third Party
Software. OrganicNet Software also includes all future versions, enhancements,
modifications and/or derivatives of any of the above during the term of this
Agreement.
1.10 "OrganicWare" means OrganicNet's proprietary OrganicNet oriented
architecture.
1.11 "Third Party Software" means any computer code, modules, programs,
data files, or Documentation that is proprietary to or licensed by a third party
to OrganicNet and that is embedded or that is inseparable from the OrganicNet
Software.
SECTION 2 - GRANT OF SPECIFIC LICENSE
2.1 OrganicNet hereby grants to SUPC a non-transferable (except as
provided in Section 12.2 hereof) non-exclusive royalty free worldwide license to
market, use, install, and display the OrganicNet Software during the term of
this Agreement and strictly in accordance with its terms solely for the
following purposes: (i) marketing, promoting and demonstrating the OrganicNet
Software in exhibits, as appropriate in present and future SUPC facilities, and
to potential Clients; (ii) developing and demonstrating implementation
methodology utilizing the OrganicNet Software; (iii) developing client solutions
utilizing OrganicNet Software; (iv) and training SUPC personnel.
2.2 Unless otherwise agreed by the parties in writing, SUPC shall not
sub-license the OrganicNet Software.
2.3 OrganicNet shall make available to SUPC, at no charge, copies of the
OrganicNet Software, as well as available Documentation. Further, within thirty
(30) days following commercial release of any version of the OrganicNet
Software, OrganicNet shall make available to SUPC, at no charge, copies of the
latest version of the OrganicNet Software, as well as available Documentation
and reasonable support for SUPC's use for any and all purposes set forth in this
Agreement. OrganicNet will specify the hardware required to run the OrganicNet
Software. SUPC will be responsible for procuring and maintaining the hardware.
Throughout the term of this Agreement, OrganicNet shall provide to SUPC updates
to all such versions as they are made generally available by OrganicNet. SUPC
may make copies of the OrganicNet Software as necessary solely for backup, and
archival purposes, or for the uses described in Section 2.1. SUPC shall include
all of OrganicNet's copyright and other proprietary rights notices contained in
the OrganicNet Software as provided by OrganicNet on all such copies.
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Additionally, each SUPC facility shall be entitled to receive only a single copy
of the OrganicNet Software hereunder, and SUPC shall remain fully responsible,
under Section 5, for such copies. SUPC shall have the right to inform its
clients and prospective Clients of its relationship with OrganicNet as a
marketer of the OrganicNet Software as set forth in this Agreement.
2.4 SUPC will receive no payments of any kind from OrganicNet in
connection with licenses of the OrganicNet Software, except as may be provided
in a separate written agreement.
2.5 The OrganicNet Software shall be and remain the exclusive property of
OrganicNet or its third party suppliers, and SUPC shall have no rights or
interest in the OrganicNet Software other than the rights expressly granted to
SUPC under this Agreement. Except as otherwise expressly permitted herein, SUPC
shall not (a) transfer, sublicense, lease or distribute the OrganicNet Software
to any third party; (b) reverse engineer, reverse assemble, reverse compile or
otherwise engage in similar manipulation of the OrganicNet Software; and (c)
export or re-export the OrganicNet Software in violation of the export
administration regulations of the U.S. Department of Commerce or any other
applicable export law or regulation of the United States.
SECTION 3 - MARKETING AND SERVICES ARRANGEMENTS
3.1 In conjunction with the rights granted in Section 2.1 above, SUPC
will promote the OrganicNet Software as a preferred ASP solution for healthcare
organizations. OrganicNet will promote SUPC as their exclusive alliance partner
for the provision of Healthcare Consulting Services ("Exclusive Alliance
Partner") and OrganicNet will not offer distribution rights to any Direct
Competitor of SUPC during the term of this Agreement, without SUPC's prior
written approval.
3.2 OrganicNet appoints Superior as its exclusive international provider
of Healthcare Consulting Services and Business Integration Services to
OrganicNet clients ("Exclusive Provider"). As OrganicNet's Exclusive Provider,
Superior will be the sole provider of Healthcare Consulting Services to
OrganicNet clients (whether as a sub-contractor with OrganicNet, or as a direct
contractor with the OrganicNet client), unless: (1) Superior (or its
subsidiaries and Affiliates) does not have competence with respect to the
services; (2) Superior (or its subsidiaries and Affiliates) does not have
experienced staff available on a timely basis; (3) OrganicNet's client has
rejected Superior, demanded that OrganicNet contract with a third-party, or has
an existing contractual obligation with a third-party; or (4) Superior declines
an opportunity to provide the services.
3.3 SUPC will use reasonable commercial efforts to promote the OrganicNet
Software as a preferred ASP solution for healthcare organizations. However,
OrganicNet understands that Superior may also promote and provide services
relating to Direct Competitors of the OrganicNet Software. OrganicNet further
understands that Superior is not obligated to promote the OrganicNet Software to
any particular Client, and will do so only when Superior determines, in its sole
discretion, that the OrganicNet Software is the correct solution for a
particular Client.
3.4 Notwithstanding anything to the contrary herein, OrganicNet will not
be restricted from: (i) marketing its products and services to any entity that
is not a Direct Competitor of Superior; or (ii) entering into alliance or
marketing arrangements with any third party which is not a Direct Competitor
with Superior. Notwithstanding anything to the contrary herein, SUPC will not be
restricted from promoting or providing any product or service or entering into
any agreement, alliance or marketing arrangement with any person, including
Clients and Direct Competitor of OrganicNet.
3.5 If SUPC provides Healthcare Consulting Services to OrganicNet clients
as a sub-contractor to OrganicNet, it shall do so pursuant to the Master Service
Agreement (MSA) incorporated into this Agreement as Exhibit B and Work Order(s)
in the form attached as Exhibit C.
3.6 SUPC will have the right, but not the obligation, to provide Business
Integration Services and Healthcare Consulting Services and applications
software related to OrganicNet's Software.
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3.7 It is anticipated that in most instances SUPC will provide its
Business Integration Services, and OrganicNet will provide the OrganicNet
Software, directly to the Client, and not as a subcontractor of the other. Each
party will determine the terms of its contracts with the Client in its sole
discretion. The parties may, subject to each party's written agreement, act in a
prime-sub or co-prime relationship if appropriate to a particular Client
opportunity. Except as provided in Section 3.5, the terms of any sub-contract or
co-prime agreement shall be consistent with this Agreement, but shall otherwise
be negotiated by the parties in the future.
3.8 It is anticipated that SUPC will provide to OrganicNet or Clients
on-line subscription based Healthcare Consulting Services and other such
services that the parties determine are valuable to Clients, including without
limitation remote application/help desk support, remote sourcing of value-added
offerings, etc.
3.9 Each party will retain 100% of the fees payable to it under any
agreement with a Client.
3.10 SUPC and OrganicNet will, within 60 days of the execution of this
Agreement, jointly develop and implement a marketing and sales plan for the
OrganicNet Software and transaction services and the relevant SUPC Healthcare
Consulting Services and Business Integration Services offerings, which plan
shall, in all material respects, be intended to further the purposes of this
Agreement as expressed herein. The developed marketing and sales plan shall be
Confidential Information for the purposes of Section 5 of this Agreement. The
promotional plan shall be revised from time-to-time as the parties deem
appropriate.
3.11 Each party will be responsible for its own costs associated with the
activities performed under this Agreement.
3.12 SUPC and OrganicNet shall use reasonable commercial efforts to market
the other party's offering through its normal marketing and distribution
channels (the OrganicNet Software being OrganicNet's offering and Healthcare
Consulting Services and Business Integration Services being SUPC's offering).
However, neither party will have any obligation to establish or maintain a
formal sales or marketing organization under this Agreement or otherwise.
Neither party shall make any binding commitments to third parties relating to
the offering of the other.
3.13 SUPC and OrganicNet will share leads related to potential sales of
the OrganicNet Software and OrganicNet's transaction services as well as SUPC's
Business Integration Services and Healthcare Consulting Services.
3.14 SUPC shall be entitled to elect or have elected, to OrganicNet's
Board of Directors, one nominee designated by SUPC. OrganicNet further shall
cause the foregoing provisions to be included in an agreement among holders of
OrganicNet voting securities having not less than the minimum number of votes
necessary to cause the foregoing conditions to be satisfied and the foregoing
actions to be taken. SUPC and OrganicNet further agree that upon the Effective
Date, two SUPC nominees to the Advisory Council of OrganicNet shall be appointed
and shall serve a term running from the Effective Date to December 31, 2001.
3.15 Nothing in this Agreement shall be deemed a commitment or obligation
of OrganicNet to affect any level of revenue for SUPC's Business Integration
Services.
3.16 OrganicNet will provide initial product training to SUPC personnel,
pursuant to a mutually-agreed upon training plan for the purpose of such
personnel becoming knowledgeable in the features and capabilities of
OrganicNet's Software. OrganicNet will provide such training to SUPC at no
cost. SUPC will incur travel expenses for training of SUPC consultant staff.
3.17 Optionally, OrganicNet may elect, at its sole discretion to provide
additional training at no cost based on the opportunities that the two
organizations may jointly enjoy. Such additional no charge training must be
approved by OrganicNet in writing prior to the training event. SUPC will make
its training facilities, including all necessary hardware available to
OrganicNet at no charge for the purposes of carrying out product training. Each
party shall be responsible for its direct expenses incurred to carry out all
Training. At no charge to SUPC OrganicNet will provide to SUPC a reasonable
number of copies of its available marketing materials (developed by OrganicNet),
training and end-user documentation to allow SUPC to effectively market the
OrganicNet Software and provide Business Integration Services and Healthcare
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Consulting Services to Clients. Throughout the term of this Agreement,
OrganicNet shall provide to SUPC any updates to all such marketing materials as
OrganicNet makes such marketing materials generally available to Clients. In
order for SUPC to promote the OrganicNet Software as provided for in this
Agreement, such marketing materials (excluding OrganicNet's training materials
and technical documentation, which may only be distributed with OrganicNet's
written consent) provided by OrganicNet to SUPC can be used and distributed by
SUPC to third parties without restrictions or limitations on disclosure,
provided that any materials that contain any of OrganicNet's Confidential
Information may be disclosed only pursuant to OrganicNet's prior written consent
and an executed non-disclosure agreement copied to OrganicNet that contains
provisions at least as restrictive as the provisions of Section 5.
3.18 OrganicNet agrees to periodically brief SUPC personnel (subject to
the obligations of Section 5 hereof) regarding planned or prospective
technological innovations being undertaken by OrganicNet relating to the
OrganicNet Software. SUPC agrees to periodically apprise OrganicNet personnel
regarding planned or prospective technological innovations being undertaken by
SUPC relating to its Business Integration Services, its use of the OrganicNet
Software, Client feedback on the OrganicNet Software, and its views on
marketplace trends and developing business needs.
3.19 OrganicNet shall permit SUPC personnel and SUPC clients to
participate in OrganicNet modeling and product development planning meetings.
3.20 In connection with each party's marketing and promotional activities
herein, OrganicNet and SUPC hereby further grant to the other during the term of
this Agreement a limited non-exclusive, nontransferable, royalty-free, license
to use, under the terms and conditions of this Section, each party's company
name and trademarks used by each party and any name used by each party in
connection with the marketing of the OrganicNet Software (with respect to
OrganicNet) and the Healthcare Consulting Services and Business Integration
Services (with respect to SUPC) (the "Marks"). Written approval must be
obtained prior to the use of the other party's Marks for each desired use of the
Mark. Such uses of SUPC's Marks will be in accordance with SUPC's policies and
guidelines for its Marks. Such uses will include approved descriptions of the
alliance in press releases and marketing collateral. Any press release related
to this Agreement must be approved by both parties in writing in advance, not to
be unreasonably withheld.
SECTION 4 - PAYMENTS
4.1 Structure of Fees. The fees charged by OrganicNet to SUPC for
services rendered on SUPC's Client projects shall be at least as favorable as
the fees charged by OrganicNet to any third party for developing comparable
projects, except for those fees charged to state or federal governments or
agencies thereof. Payment terms shall be agreed upon, in writing, for each
client project.
SECTION 5 - CONFIDENTIALITY
5.1 During the course of this Agreement, SUPC and OrganicNet may be given
access to Confidential Information. "Confidential Information" means
information that (i) relates to the other's past, present, and future research,
development, business activities, products, services, and technical knowledge,
and (ii) has been either marked or otherwise identified in writing as
confidential ("Confidential Information"). Notwithstanding the above, the
OrganicNet Software and OrganicWare (including any source code (if any)
furnished to SUPC hereunder) shall be considered OrganicNet's Confidential
information. In connection therewith the following shall apply to all
Confidential Information disclosed by either party under this Agreement:
5.1.1 The Confidential Information of the other party may be
used by the recipient only in connection with the performance of its obligations
under this Agreement;
5.1.2 Each party agrees to protect the confidentiality of the
Confidential Information of the other in the same manner that it protects the
confidentiality of its own proprietary and confidential information of like
kind, which in no event shall be less than commercially reasonable efforts.
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5.1.3 The Confidential Information may not be copied or
reproduced without the discloser's prior written consent.
5.1.4 The Confidential Information may not be disclosed to
anyone other than the recipient's employees who have a need to know such
information for the purposes of this Agreement.
5.2 All Confidential Information made available hereunder, including
copies thereof, shall, upon written request, be returned or destroyed upon
termination of this Agreement.
5.3 Notwithstanding anything in this Agreement to the contrary,
Confidential Information does not include information: (i) previously known to
it without obligation of confidence, (ii) independently developed by it, without
any use of or reference to the information disclosed, (ii) acquired by it from a
third party which is not under an obligation of confidence with respect to such
information, or (iv) which is or becomes publicly available through no breach of
this Agreement.
5.4 In the event either party receives a subpoena or other validly issued
administrative or judicial process requesting Confidential Information of the
other party, it shall provide prompt notice to the other of such receipt and
cooperate with such other party in seeking appropriate protection of such
Confidential Information. The party receiving the subpoena shall thereafter be
entitled to comply with such subpoena or other process to the minimal extent
necessary to comply therewith, acting on reasonable advice of counsel.
5.5 During the course of this Agreement, SUPC and OrganicNet may each be
given access to information of Clients of the other which is protected as
confidential information under the terms of an agreement with the Client. Each
party agrees to treat such Client confidential information in accordance with
the terms of the applicable Client confidentiality agreement.
5.6 Except as necessary to fulfill its obligations in relation to the
activities contemplated by this Agreement, both parties agree to keep the terms
of this Agreement confidential, except that either party may disclose the terms
of this agreement to a third party in connection with a potential financing or a
merger or acquisition involving a party, provided that such disclosure shall be
pursuant to a non-disclosure agreement containing provisions at least as
restrictive as the provisions of this Section 5.
SECTION 6 - WARRANTIES TO CLIENTS
6.1 OrganicNet shall extend to each Client the standard warranties and
indemnification for the OrganicNet Software and services that it extends to
licensees or purchasers of the applicable product or service.
6.2 As between the parties, SUPC shall remain solely responsible to
Clients for the performance of the Business Integration Services or Healthcare
Consulting Services. As between the parties, OrganicNet shall remain solely
responsible to Clients for the performance and good working order of the
OrganicNet Software and the performance of its services.
6.3 Neither party shall make any representation or warranty to any Client
with respect to the products or services provided to such Client by the other
party.
6.4 NEITHER PARTY MAKES ANY WARRANTY TO THE OTHER, EITHER EXPRESS OR
IMPLIED, WITH RESPECT TO THE PRODUCTS OR SERVICES IT PROVIDES TO CLIENTS, AND
BOTH PARTIES SPECIFICALLY DISCLAIM ANY WARRANTY OF MERCHANTABILITY OR FITNESS
FOR A PARTICULAR PURPOSE WITH RESPECT THERETO.
SECTION 7 - OWNERSHIP & PROPRIETARY RIGHTS; NON-COMPETITION
7.1 Each party will retain ownership of all of its proprietary software
or materials used in the performance of this Agreement, including but not
limited to software, designs, knowledge capital and methodology and all other
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Confidential Information of such party. Unless otherwise agreed to in writing,
the parties will each license their own materials to the Client.
7.2 During joint marketing activities and/or the Client engagement
process materials may be developed such as certain software, products,
configuration templates, presentations, software documentation, marketing
collateral, methodology, work plans and training materials (collectively,
"Materials"). As between the parties, the ownership and intellectual property
rights to the Materials will fall into the following three categories:
(a) OrganicNet Developed and Owned: All Materials developed by
OrganicNet and any software related products (training, documentation, marketing
collateral) upon which OrganicNet contributes substantially to the development
of will be considered to be owned by OrganicNet.
(b) SUPC Developed and Owned: Any Materials developed by SUPC
with less than substantial involvement from OrganicNet personnel will be
exclusively owned by SUPC; provided, however, that with respect to any extension
or improvement of the OrganicNet Software developed by SUPC, which OrganicNet
deems to be of general use to Clients (an "Improvement"), SUPC grants OrganicNet
a royalty-free paid up, perpetual, exclusive, license to market, use, offer for
sale, any such Improvement.
(c) Jointly Developed: Ownership rights to Materials jointly
developed by OrganicNet and SUPC will be agreed to in writing in advance. Unless
specifically agreed to by the parties in writing, ownership of such jointly
owned Materials will be determined by product type, as follows:
(i) Configurations, product demonstrations and training
materials relating to the OrganicNet Software will be owned by OrganicNet.
However, SUPC will have non-exclusive use of the Materials for the benefit of
Clients for the term of this Agreement. OrganicNet will not provide support for
such Materials, unless it incorporates such Materials in a supported release of
the OrganicNet Software.
(ii) Other marketing material, including, presentations and
marketing collateral will be jointly owned and copyrighted and may be used
without restriction for the term of this Agreement subject to Section 5 hereof.
(iii) Methodologies, procedures, skills, technicians and
know-how relating to the performance of business Integration Services and
Healthcare Consulting Services will be solely owned by Superior.
7.3 If any Materials (whether or not jointly owned by the parties)
contain Confidential Information of either party, the applicable portions of
such Materials will be designated as such and will be distributed only pursuant
to a non-disclosure agreement containing provisions at least as restrictive as
the provisions of Section 5 hereof.
7.4 The parties will cooperate with each other and execute such other
documents as may be appropriate to achieve the objectives of this Section 7.
Notwithstanding the provisions of this Section 7 regarding ownership, SUPC shall
have a royalty free, non-exclusive and non-transferable license to use Materials
jointly developed, pursuant to Section 7.2 (c)(i) to support SUPC's marketing
activities and services to Clients during the term of this Agreement.
SECTION 8 - REPRESENTATIONS
SUPC warrants and represents that it has the right to grant to OrganicNet
the rights purported to be granted by or pursuant to this Agreement, and has all
other rights necessary for the performance of its obligations under this
Agreement, without violating any rights of any other party. OrganicNet warrants
and represents that it has the right to grant to SUPC the rights purported to be
granted by or pursuant to this Agreement and has all other rights necessary for
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the performance of its obligations under this Agreement, without violating any
rights of any other party.
SECTION 9 - INDEMNIFICATION
9.1 OrganicNet will defend, at its expense, any action brought against
SUPC, to the extent that such action is based on a claim that the OrganicNet
Software infringes any issued United States patent, copyright or trade secret
right of any third party resulting from the supply to SUPC by OrganicNet, or the
use by SUPC or a Client, of the OrganicNet Software as delivered by OrganicNet.
OrganicNet shall pay all damages and costs finally awarded against SUPC that are
attributable to such claim, subject to the provisions of Section 9.4 hereof.
9.2 SUPC will defend, at its expense, any action brought against
OrganicNet, to the extent that such action is based on a claim that any of its
work product infringes any issued United States patent, copyright or trade
secret right of any third party resulting from the use by OrganicNet or a Client
of any such work product. SUPC shall pay all damages and costs finally awarded
against OrganicNet that are attributable to such claim, subject to the
provisions of Section 9.4 hereof.
9.3 SUPC and OrganicNet shall each be solely responsible for its
respective products and services and any claims from Clients with respect to
such products or services. SUPC and OrganicNet shall each not be responsible for
the performance of the other party's products or services or any warranty claims
relating to the other party's products or services. In furtherance of this
obligation:
9.3.1 OrganicNet will defend, at its expense, any action
brought against SUPC, to the extent that such action is based on a claim that
the OrganicNet Software or other OrganicNet product or service is defective,
breaches any warranty or other contractual obligation of OrganicNet, or
otherwise fails to satisfy any statutory or common-law obligation of OrganicNet.
9.3.2 SUPC will defend, at its expense, any action brought
against OrganicNet, to the extent that such action is based on a claim that a
Business Integration Service is defective, breaches any warranty or other
contractual obligation of SUPC, or otherwise fails to satisfy any statutory or
common-law obligation of SUPC.
9.4 The party to be indemnified under this Section 9 agrees to:
9.4.1 promptly notify the indemnifying party of any such claim
or suit by a third party and furnish the indemnifying party with a copy of each
communication, notice or other action relating to such claim or suit; and
9.4.2 permit the indemnifying party to assume sole authority to
conduct the trial or settlement of such claim or suit or any negotiations
related thereto at the indemnifying party's own expense; and
9.4.3 provide information and assistance at its own expense
reasonably requested by the indemnifying party in connection with such claim or
suit.
If either party fails to comply with any obligation under Section 9.4, the
other party shall be relieved if its indemnity obligation under this Section 9
only if and to the extent such failure materially prejudices the indemnifying
party.
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9.5 Should any software subject to the provisions of Sections 9.1 or 9.2
hereunder (an "Infringing Program") become, or in the indemnifying party's
opinion be likely to become the subject of a claim, then the indemnifying party
may, at its option and expense, (i) procure for the indemnified party (or a
Client, as the case may be) the right to use the Infringing Program free of any
liability for infringement; (ii) replace or modify the Infringing Program with a
non-infringing substitute otherwise complying with all the functionality for the
replaced system. If either remedy (i) or (ii) is not reasonably available to the
indemnifying party, this Agreement shall be terminable at the option of the
indemnified party, and the indemnifying party shall have no additional liability
with respect to the Infringing Program except as provided in Section 9.1, 9.2
and 9.3, above.
9.6 Neither party shall be obligated to defend, or be liable for costs and
damages, if the claim arises out of (a) a modification of the Infringing Program
other than by the indemnifying party, (b) the compliance with the specifications
of the indemnified party (or a Client who is making a claim), to the extent the
same go beyond specifications of software previously developed by the
indemnifying party; or (c) use of the Infringing Program after the indemnified
party has notice of an actual or potential claim, if such claim involves use of
an Infringing Program in a form which does not include the most recent releases
provided by the indemnified party under this Agreement or the distribution of
which has been discontinued by the indemnified party.
9.7 Sections 9.1, 9.2 and 9.4-9.6 sets forth both party's sole and
exclusive liability, and each party's sole and exclusive remedies, with respect
to any claims of infringement.
9.8 The indemnity obligations under this Section 9 shall extend to any
claims brought against an officer, director, or agent of the party entitled to
indemnification.
SECTION 10 - LIMITATION OF LIABILITY
Except in relation to each party's indemnification obligations specified in
Section 9 hereof and confidentiality obligations under Section 5 hereof, neither
party will be liable to the other for any indirect, special, incidental,
consequential, exemplary or punitive loss, damages or expenses (including lost
profits or savings) regardless if whether a party has been advised of the
likelihood thereof. Except in relation to each party's indemnification
obligations specified in Section 9 hereof, the scope of license rights under
Section 2 hereof, and confidentiality obligations under Section 5 hereof, the
limitation on each party's direct damages under this Agreement shall be one
million dollars ($1,000,000.00).
SECTION 11 - TERM AND TERMINATION
11.1 The initial period of this Agreement shall run through August 31,
2002. Thereafter, Superior may at its option, renew the Agreement for two
additional consecutive two (2) year periods by written notice not less than
sixty (60) days before the expiration of the period.
11.2 In the event either party defaults in the performance of any material
obligation hereunder, the non-defaulting party may terminate this Agreement by
written notice specifying the default, which notice shall become effective
thirty (30) days after the delivery of notice to the defaulting party, unless
during such thirty (30) day period the default shall have been corrected by the
defaulting party to the non-defaulting party's reasonable satisfaction.
11.3 Either party may terminate this Agreement immediately upon giving
notice to the other party if the other party is adjudicated as bankrupt, becomes
insolvent, suffers permanent or temporary court-appointed receivership of
substantially all of its property, makes a general assignment for the benefit of
creditors, or suffers the filing of a voluntary or involuntary bankruptcy
petition that is not dismissed within forty-five (45) days after filing.
Termination under this provision will not release either party from financial
obligations for services or products already completed and delivered.
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11.4 Upon termination or expiration of this Agreement, for any reason,
each party shall, subject to Section 11.5, immediately:
11.4.1 Cease holding itself out, in any manner, as affiliated with
the other party, except as may be provided in any surviving separate agreement;
and
11.4.2 Discontinue any and all use of trade names and/or trademarks
authorized for use under this Agreement, except as necessary for either party to
fulfill its obligations to a Client existing prior to the date of termination;
and
11.4.3 Return to the other party or destroy the other party's
Confidential Information in its possession unless this Agreement provides
otherwise; and
11.4.4 Reimburse the other party for any amounts due for services
provided or products delivered.
11.5 Termination of this Agreement shall not release either party from
obligations to resell, sub-license or license OrganicNet Software made prior to
the receipt of any notice of termination, and shall not affect existing licenses
for the OrganicNet Software. Notwithstanding the provisions of this Section,
each party may continue to exercise the rights and licenses granted hereunder to
the extent necessary to allow such party to fulfill its obligations under
agreements with Clients or included in any binding proposal to a Client
outstanding at the time of termination. SUPC specifically shall retain the right
to use the OrganicNet Software for as long as necessary to meet any binding
obligations that SUPC has undertaken prior to the receipt of any notice of
termination. SUPC shall also continue to have the right to use and access the
OrganicNet Software to allow SUPC to fulfill its obligations to Clients to whom
a proposal has been submitted prior to the receipt of any notice of termination.
SECTION 12 - ADDITIONAL CONSIDERATION
12.1 As further consideration for Superior's agreement to promote the
OrganicNet Software as a preferred ASP solution for healthcare organizations,
OrganicNet agrees to issue to SUPC an option in the form attached as Exhibit B
(the "Option"), to purchase 200,000 shares of OrganicNet common stock at a price
of $6.00 per share, subject to approval by OrganicNet's Board of Directors. If
such approval is not granted within 30 days within the Effective Date, SUPC may
terminate this Agreement pursuant to Section 11.2. The Option shall be
exercisable immediately upon execution of this Agreement and shall expire ten
(10) years from the date of this Agreement.
SECTION 13 - MISCELLANEOUS
13.1 The parties agree that in the event of any dispute or alleged breach
under this Agreement, they will work together in good faith first to resolve
this matter internally by escalating it to higher levels of management and then,
if necessary, to submit to binding arbitration. This Agreement shall be governed
by and construed in accordance with the laws of the State of California without
regard to the conflicts of law provisions thereof. The parties agree that all
disputes arising under this Agreement and its interpretation, and not resolved
in good faith first, shall be decided by binding arbitration, to be conducted
before a single arbitrator in accordance with the then in-effect commercial
roles of the American Arbitration Association in Southfield, Michigan. Both
parties agree to accept the decision of such an arbitrator as final, and
explicitly waive all rights to appeal such decision save for such grounds as are
provided in the Federal Arbitration Act 9U-S-C-(S)1, in any court of the United
States, its several states, or in any jurisdiction abroad. In any action or
proceeding to enforce rights under this Agreement the prevailing party will be
entitled to recover reasonable costs and reasonable attorneys' fees.
13.2 Neither party may assign any of its rights or obligations under this
Agreement without the prior written consent of the other, which shall not be
unreasonably withheld. However, either party may assign this Agreement to an
Affiliate.
13.3 Neither party shall be liable for any delays or failures in
performance due to circumstances beyond its reasonable control, including
failures of computers, computer-related equipment, hardware or software.
<PAGE>
13.4 If any provision of this Agreement is found to be prohibited by or
invalid under applicable law, such provision shall be ineffective only to the
extent of such prohibition or invalidity, without invalidating the remainder of
such provision or the remaining provisions of the Agreement.
13.5 Sections 4, 5, 6, 7, 8, 9, 10, 11 and 13 extend beyond the expiration
or termination of this Agreement and shall survive and remain in effect beyond
any expiration or termination.
13.6 This Agreement may be executed in one or more counterparts, each of
which shall be considered an original counterpart, and shall become a binding
agreement when each party shall have executed one counterpart.
13.7 Captions appearing in this Agreement are for convenience only and
shall not be deemed to explain, limit or amplify the provisions hereof.
13.8 Any notice or other communication given shall be in writing and shall
be deemed to have been received either when delivered personally to the party
for whom intended by United States mail certified mail, return receipt
requested, or by a national courier service (e.g., Federal Express, or UPS),
addressed to such party at the address set forth below:
<PAGE>
For OrganicNet:
ORGANICNET, INC.
330 Townsend Street, Suite 206
San Francisco, CA 94107
Attention: Mr. William W. Shaw, III
For SUPC:
SUPERIOR CONSULTANT COMPANY, INC.
4000 Town Center, Suite 1100
Southfield, MI 48075
Attention: General Counsel
Either party may designate a different address by notice to the other given
in accordance herewith.
13.9 Nothing contained in this Agreement shall be deemed or construed as
creating a joint venture or partnership between OrganicNet and SUPC. Except as
specifically set forth herein, neither party shall have the power to control the
activities and operations of, or contractually bind or commit, the other party,
and their status with respect to one another is that of independent contractors.
13.10 Without the prior written consent of the other party, OrganicNet and
SUPC each agree to refrain from conducting employment discussions with, or
hiring, directly or indirectly, the other party's employees, agents, and
subcontractors who have worked on any matter under or arising out of this
Agreement until twelve (12) months after the date the agent, employee, or
subcontractor of the other party was last involved in any activity under or
arising out of this Agreement.
13.11 This Agreement contains the entire understanding of the parties with
regard to the subject matter contained herein. OrganicNet and SUPC may, by
mutual agreement in writing, amend, modify and supplement this Agreement. The
failure of any party hereto to enforce at any time any provision of this
Agreement shall not be construed to be a waiver of such provision, nor in any
way to affect the validity of this Agreement or any part hereof or the right of
such party thereafter to enforce each and every such provision. No waiver of any
breach of this Agreement shall be held to constitute a waiver of any other or
subsequent breach.
<PAGE>
Both parties represent that they have read this Agreement, understand it,
and agree to be bound by the terms and conditions stated herein.
ORGANICNET, INC. SUPERIOR CONSULTANT COMPANY, INC.
By: /s/ William W. Shaw III By: /s/ Joel F. French
-------------------------------- ---------------------------------
Name: William W. Shaw III Name: Joel F. French
------------------------------ -------------------------------
Title: President Title: Corporate Vice President,
----------------------------- ------------------------------
Strategic Development
Date: 9/20/99 Date: 9/20/99
------------------------------ -------------------------------
<PAGE>
EXHIBIT A
Methodology:
Evolution(TM)
OrganicWare(TM) (including):
Organic Clinic(TM)
Outcomes Partner(TM) III
Care Partner (tentative name)
Disease Partner (tentative name)
Patient Recruiter (tentative name)
OrganicNet(TM)
Tactical Products:
Res-Q OR(TM)
Res-Q RN(TM)
LINC CMA(TM)
PSI-MED
Surveys and Assessments -
HEDIS
Patient Satisfaction
Member Satisfaction
Disenrollment
<PAGE>
EXHIBIT B
Option Agreement
<PAGE>
OBJECT PRODUCTS, INC.
NOTICE OF GRANT OF STOCK OPTION
Notice is hereby given of the following option grant (the "Option") to
purchase shares of the Common Stock of Object Products, Inc. (the
"Corporation"):
Optionee: Richard D. Helppie
---------
Grant Date: September 17, 1999
-----------
Vesting Commencement Date: Not Applicable.
--------------------------
Exercise Price: $6.00 per share
---------------
Number of Option Shares: 200,000 shares of Common Stock
------------------------
Expiration Date: September 16, 2009
----------------
Type of Option: ____ Incentive Stock Option
---------------
X Non-Statutory Stock Option
----
Date Exercisable: Immediately Exercisable
-----------------
Vesting Schedule: Not Applicable. The Option Shares shall
----------------- be fully vested.
Optionee understands and agrees that the Option is granted subject to and
in accordance with the terms of the Object Products, Inc. 1997 Stock
Option/Stock Issuance Plan (the "Plan"). Optionee further agrees to be bound by
the terms of the Plan and the terms of the Option as set forth in the Stock
Option Agreement attached hereto as Exhibit A.
Optionee understands that any Option Shares purchased under the Option will
be subject to the terms set forth in the Stock Purchase Agreement attached
hereto as Exhibit B, with the exception of First Right of Refusal which is
waived. Optionee further acknowledges receipt of a copy of the Plan in the form
attached hereto as Exhibit C.
In regards to language between this Notice of Grant of Stock Option and the
Plan or the Stock Purchase Agreement, this Notice of Grant of Stock Option shall
role.
No Employment or Service Contract. Nothing in this Notice or in the
attached Stock Option Agreement or Plan shall confer upon Optionee any right to
continue its Service for any period of specific duration or interfere with or
otherwise restrict in any way the rights of the Corporation (or any Parent or
Subsidiary employing or retaining Optionee) or of Optionee, which rights are
hereby expressly reserved by each, to terminate Optionee's Service at any time
for any reason, with or without cause.
<PAGE>
Definitions. All capitalized terms in this Notice shall have the meaning
-----------
assigned to them in this Notice or in the attached Stock Option Agreement.
DATED: September 17, 1999
ORGANICNET, INC.
By: /s/ William W. Shaw III
------------------------------------
Title: Secretary
OPTIONEE
/s/ Joel F. French
---------------------------------------
Superior Consulting Company, Inc.
Its Corporate Vice President, Strategic
Development
Address: 4000 Town, Suite 1100
-------------------------------
Southfield, MI 48075
-------------------------------
ATTACHMENTS:
Exhibit A - Stock Option Agreement
Exhibit B - Stock Purchase Agreement
Exhibit C - 1997 Stock Option/Stock Issuance Plan
<PAGE>
EXHIBIT A
STOCK OPTION AGREEMENT
<PAGE>
ORGANICNET, INC.
STOCK OPTION AGREEMENT
RECITALS
I. The Board has adopted the Plan for the purpose of retaining the services of
selected Employees, non-employee members of the Board or the board of
directors of any Parent or Subsidiary and consultants and other independent
advisors in the service of the Corporation (or any Parent or Subsidiary).
A. Optionee is to render valuable services to the Corporation (or a Parent
or Subsidiary), and this Agreement is executed pursuant to, and is intended to
carry out the purposes of, the Plan in connection with the Corporation's grant
of an option to Optionee.
B. All capitalized terms in this Agreement shall have the meaning
assigned to them in the attached Appendix.
NOW, THEREFORE, it is hereby agreed as follows:
1. Grant of Option. The Corporation hereby grants to Optionee, as of
the Grant Date, an option to purchase up to the number of Option Shares
specified in the Grant Notice. The Option Shares shall be purchasable from time
to time during the option term specified in Paragraph 2 at the Exercise Price.
2. Option Term. This option shall have a term of ten (10) years
measured from the Grant Date and shall accordingly expire at the close of
business on the Expiration Date, unless sooner terminated in accordance with
Paragraph 5 or 6.
3. Limited Transferability. This option shall be exercisable only by
Optionee and shall not be assignable or transferable.
4. Dates of Exercise. This option shall become exercisable for the
Option Shares in one or more installments as specified in the Grant Notice. As
the option becomes exercisable for such installments, those installments shall
accumulate, and the option shall remain exercisable for the accumulated
installments until the Expiration Date or sooner termination of the option term
under Paragraph 5 or 6.
5. Cessation of Service. The option term specified in Paragraph 2
shall terminate (and this option shall cease to be outstanding) prior to the
Expiration Date should any of the following provisions become applicable:
(a) Should Optionee cease to remain in Service for any
reason (other than death, Disability or Misconduct) while this option is
outstanding, then Optionee shall have a period of three (3) months (commencing
with the date of such cessation of Service) during which to exercise this
<PAGE>
option, but in no event shall this option be exercisable at any time after the
Expiration Date.
(b) During the limited period of post-Service
exercisability, this option may not be exercised in the aggregate for more than
the number of Option Shares in which Optionee is, at the time of Optionee's
cessation of Service, vested pursuant to the Vesting Schedule specified in the
Grant Notice or the special vesting acceleration provisions of Paragraph 6. Upon
the expiration of such limited exercise period or (if earlier) upon the
Expiration Date, this option shall terminate and cease to be outstanding for any
vested Option Shares for which the option has not been exercised. To the extent
Optionee is not vested in the Option Shares at the time of Optionee's cessation
of Service, this option shall immediately terminate and cease to be outstanding
with respect to those shares.
(c) Should Optionee's Service be terminated for Misconduct,
then this option shall terminate immediately and cease to remain outstanding.
6. Accelerated Vesting.
(a) In the event of any Corporate Transaction, the Option Shares
at the time subject to this option but not otherwise vested shall automatically
vest in full so that this option shall, immediately prior to the effective date
of the Corporate Transaction, become fully exercisable for all of those Option
Shares and may be exercised for any or all of those Option Shares as fully-
vested shares of Common Stock. However, the Option Shares shall not vest on such
an accelerated basis if and to the extent: (i) this option is assumed by the
successor corporation (or parent thereof) in the Corporate Transaction and the
Corporation's repurchase rights with respect to the unvested Option Shares are
assigned to such successor corporation (or parent thereof) or (ii) this option
is to be replaced with a cash incentive program of the successor corporation
which preserves the spread existing on the unvested Option Shares at the time of
the Corporate Transaction (the excess of the Fair Market Value of those Option
Shares over the Exercise Price payable for such shares) and provides for
subsequent payout in accordance with the same Vesting Schedule applicable to
those unvested Option Shares as set forth in the Grant Notice.
(b) Immediately following the Corporate Transaction, this option
shall terminate and cease to be outstanding, except to the extent assumed by the
successor corporation (or parent thereof) in connection with the Corporate
Transaction.
(c) If this option is assumed in connection with a Corporate
Transaction, then this option shall be appropriately adjusted, immediately after
such Corporate Transaction, to apply to the number and class of securities which
would have been issuable to Optionee in consummation of such Corporate
Transaction had the option been exercised immediately prior to such Corporate
Transaction, and appropriate adjustments shall also be made to the Exercise
Price, provided the aggregate Exercise Price shall remain the same.
(d) The Option Shares may also vest upon an accelerated basis in
accordance with the terms and conditions of any special addendum attached to
this Agreement.
<PAGE>
(e) This Agreement shall not in any way affect the right of the
Corporation to adjust, reclassify, reorganize or otherwise change its capital or
business structure or to merge, consolidate, dissolve, liquidate or sell or
transfer all or any part of its business or assets.
7. Adjustment in Option Shares. Should any change be made to the
Common Stock by reason of any stock split, stock dividend, recapitalization,
combination of shares, exchange of shares or other change affecting the
outstanding Common Stock as a class without the Corporation's receipt of
consideration, appropriate adjustments shall be made to (i) the total number
and/or class of securities subject to this option and (ii) the Exercise Price in
order to reflect such change and thereby preclude a dilution or enlargement of
benefits hereunder.
8. Stockholder Rights. The holder of this option shall not have any
stockholder rights with respect to the Option Shares until such person shall
have exercised the option, paid the Exercise Price and become the holder of
record of the purchased shares.
9. Manner of Exercising Option.
(a) In order to exercise this option with respect to all or any
part of the Option Shares for which this option is at the time exercisable,
Optionee (or any other person or persons exercising the option) must take the
following actions:
(i) Execute and deliver to the Corporation a Purchase
Agreement for the Option Shares for which the option is exercised, and
(ii) Pay the aggregate Exercise Price for the purchased
shares in cash or check made payable to the Corporation.
Should the Common Stock be registered under Section 12 of the
1934 Act at the time the option is exercised, then the Exercise Price
may also be paid as follows:
(A) in shares of Common Stock held by Optionee (or any
other person or persons exercising the option) for the requisite
period necessary to avoid a charge to the Corporation's earnings for
financial reporting purposes and valued at Fair Market Value on the
Exercise Date; or
(B) to the extent the option is exercised for vested
Option Shares, through a special sale and remittance procedure
pursuant to which Optionee (or any other person or persons exercising
the option) shall concurrently provide irrevocable instructions (a) to
a Corporation-designated brokerage firm to effect the immediate sale
of the purchased shares and remit to the Corporation, out of the sale
proceeds available on the settlement date, sufficient funds to cover
the aggregate Exercise Price payable for the purchased shares plus all
applicable Federal, state, and local income and employment taxes
required to be withheld by the Corporation by reason of such exercise
and (b) to the Corporation to deliver the certificates for the
<PAGE>
purchased shares directly to such brokerage firm in order to complete
the sale.
Except to the extent the sale and remittance procedure is
utilized in connection with the option exercise, payment of the
Exercise Price must accompany the Purchase Agreement delivered to the
Corporation in connection with the option exercise.
(iii) Furnish to the Corporation appropriate
documentation that the person or persons exercising the option (if other than
Optionee) have the right to exercise this option.
(iv) Execute and deliver to the Corporation such
written representations as may be requested by the Corporation in order for it
to comply with the applicable requirements of Federal and state securities laws.
(v) Make appropriate arrangements with the
Corporation (or Parent or Subsidiary employing or retaining Optionee) for the
satisfaction of all Federal, state and local income and employment tax
withholding requirements applicable to the option exercise.
(b.) As soon as practical after the Exercise Date, the
Corporation shall issue to or on behalf of Optionee (or any other person or
persons exercising this option) a certificate for the purchased Option Shares,
with the appropriate legends affixed thereto.
(c.) In no event may this option be exercised for any
fractional shares.
10. Compliance with Laws and Regulations.
(a.) The exercise of this option and the issuance of the
Option Shares upon such exercise shall be subject to compliance by the
Corporation and Optionee with all applicable requirements of law relating
thereto and with all applicable regulations of any stock exchange (or the Nasdaq
National Market, if applicable) on which the Common Stock may be listed for
trading at the time of such exercise and issuance.
(b.) The inability of the Corporation to obtain approval
from any regulatory body having authority deemed by the Corporation to be
necessary to the lawful issuance and sale of any Common Stock pursuant to this
option shall relieve the Corporation of any liability with respect to the non-
issuance or sale of the Common Stock as to which such approval shall not have
been obtained. The Corporation, however, shall use its best efforts to obtain
all such approvals.
11. Successors and Assigns. Except to the extent otherwise
provided in Paragraphs 3 and 6, the provisions of this Agreement shall inure to
the benefit of, and be binding upon, the Corporation and its successors and
assigns and Optionee, Optionee's assigns and the legal representatives, heirs
and legatees of Optionee's estate.
<PAGE>
12. Notices. Any notice required to be given or delivered to the
Corporation under the terms of this Agreement shall be in writing and addressed
to the Corporation at its principal corporate offices. Any notice required to be
given or delivered to Optionee shall be in writing and addressed to Optionee at
the address indicated below Optionee's signature line on the Grant Notice. All
notices shall be deemed effective upon personal delivery or upon deposit in the
U.S. mail, postage prepaid and properly addressed to the party to be notified.
13. Construction. This Agreement and the option evidenced hereby
are made and granted pursuant to the Plan and are in all respects limited by and
subject to the terms of the Plan. All decisions of the Plan Administrator with
respect to any question or issue arising under the Plan or this Agreement shall
be conclusive and binding on all persons having an interest in this option.
14. Governing Law. The interpretation, performance and
enforcement of this Agreement shall be governed by the laws of the State of
California without resort to that State's conflict-of-laws rules.
15. Stockholder Approval. If the Option Shares covered by this
Agreement exceed, as of the Grant Date, the number of shares of Common Stock
which may be issued under the Plan as last approved by the stockholders, then
this option shall be void with respect to such excess shares, unless stockholder
approval of an amendment sufficiently increasing the number of shares of Common
Stock issuable under the Plan is obtained in accordance with the provisions of
the Plan.
16. Additional Terms Applicable to an Incentive Option. In the
event this option is designated an Incentive Option in the Grant Notice, the
following terms and conditions shall also apply to the grant:
(a.) This option shall cease to qualify for favorable tax
treatment as an Incentive Option if (and to the extent) this option is exercised
for one or more Option Shares: (i) more than three (3) months after the date
Optionee ceases to be an Employee for any reason other than death or Permanent
Disability or (ii) more than twelve (12) months after the date Optionee ceases
to be an Employee by reason of Permanent Disability.
(b.) This option shall not become exercisable in the
calendar year in which granted if (and to the extent) the aggregate Fair Market
Value (determined at the Grant Date) of the Common Stock for which this option
would otherwise first become exercisable in such calendar year would, when added
to the aggregate value (determined as of the respective date or dates of grant)
of the Common Stock and any other securities for which one or more other
Incentive Options granted to Optionee prior to the Grant Date (whether under the
Plan or any other option plan of the Corporation or any Parent or Subsidiary)
first become exercisable during the same calendar year, exceed One Hundred
Thousand Dollars ($100,000) in the aggregate. To the extent the exercisability
of this option is deferred by reason of the foregoing limitation, the deferred
portion shall become exercisable in the first calendar year or years thereafter
in which the One Hundred Thousand Dollar ($100,000) limitation of this Paragraph
17(b) would not be contravened, but such deferral shall in all events end
immediately prior to the effective date of a Corporate Transaction in which this
option is not to be assumed, whereupon the option shall become immediately
exercisable as
<PAGE>
as a Non-Statutory Option for the deferred portion of the Option Shares.
(c.) Should Optionee hold, in addition to this option, one or
more other options to purchase Common Stock which become exercisable for the
first time in the same calendar year as this option, then the foregoing
limitations on the exercisability of such options as Incentive Options shall be
applied on the basis of the order in which such options are granted.
<PAGE>
APPENDIX
The following definitions shall be in effect under the Agreement:
A. Agreement shall mean this Stock Option Agreement.
B. Board shall mean the Corporation's Board of Directors.
C. Code shall mean the Internal Revenue Code of 1986, as amended.
D. Common Stock shall mean the Corporation's common stock.
E. Corporate Transaction shall mean either of the following stockholder-
approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities
possessing more than fifty percent (50%) of the total combined voting
power of the Corporation's outstanding securities are transferred to a
person or persons different from the persons holding those securities
immediately prior to such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation
or dissolution of the Corporation.
F. Corporation shall mean Object Products, Inc., a Delaware corporation.
G. Disability shall mean the inability of Optionee to engage in any
substantial gainful activity by reason of any medically determinable physical or
mental impairment and shall be determined by the Plan Administrator on the basis
of such medical evidence as the Plan Administrator deems warranted under the
circumstances. Disability shall be deemed to constitute Permanent Disability in
the event that such Disability is expected to result in death or has lasted or
can be expected to last for a continuous period of twelve (12) months or more.
H. Employee shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
I. Exercise Date shall mean the date on which the option shall have been
exercised in accordance with Paragraph 9 of the Agreement.
J. Exercise Price shall mean the exercise price payable per Option Share
as specified in the Grant Notice.
K. Expiration Date shall mean the date on which the option expires as
specified in the Grant Notice.
<PAGE>
L. Fair Market Value per share of Common Stock on any relevant date shall
be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the
Nasdaq National Market, then the Fair Market Value shall be the
closing selling price per share of Common Stock on the date in
question, as the price is reported by the National Association of
Securities Dealers on the Nasdaq National Market. If there is no
closing selling price for the Common Stock on the date in question,
then the Fair Market Value shall be the closing selling price on the
last preceding date for which such quotation exists.
(ii) If the Common Stock is at the time listed on any
Stock Exchange, then the Fair Market Value shall be the closing
selling price per share of Common Stock on the date in question on the
Stock Exchange determined by the Plan Administrator to be the primary
market for the Common Stock, as such price is officially quoted in the
composite tape of transactions on such exchange. If there is no
closing selling price for the Common Stock on the date in question,
then the Fair Market Value shall be the closing selling price on the
last preceding date for which such quotation exists.
(iii) If the Common Stock is at the time neither
listed on any Stock Exchange nor traded on the Nasdaq National Market,
then the Fair Market Value shall be determined by the Plan
Administrator after taking into account such factors as the Plan
Administrator shall deem appropriate.
M. Grant Date shall mean the date of grant of the option as specified in
the Grant Notice.
N. Grant Notice shall mean the Notice of Grant of Stock Option
accompanying the Agreement, pursuant to which Optionee has been informed of the
basic terms of the option evidenced hereby.
O. Incentive Option shall mean an option which satisfies the requirements
of Code Section 422.
P. Misconduct shall mean the commission of any act of fraud, embezzlement
or dishonesty by Optionee, any unauthorized use or disclosure by Optionee of
confidential information or trade secrets of the Corporation (or any Parent or
Subsidiary), or any other intentional misconduct by Optionee adversely affecting
the business or affairs of the Corporation (or any Parent or Subsidiary) in a
material manner. The foregoing definition shall not be deemed to be inclusive of
all the acts or omissions which the Corporation (or any Parent or Subsidiary)
may consider as grounds for the dismissal or discharge of Optionee or any other
individual in the Service of the Corporation (or any Parent or Subsidiary).
Q. 1934 Act shall mean the Securities Exchange Act of 1934, as amended.
R. Non-Statutory Option shall mean an option not intended to satisfy the
requirements of Code Section 422.
<PAGE>
S. Option Shares shall mean the number of shares of Common Stock subject
to the option.
T. Optionee shall mean the person to whom the option is granted as
specified in the Grant Notice.
U. Parent shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
V. Plan shall mean the Corporation's 1997 Stock Option/Stock Issuance
Plan.
W. Plan Administrator shall mean either the Board or a committee of the
Board acting in its capacity as administrator of the Plan.
X. Purchase Agreement shall mean the stock purchase agreement in
substantially the form of Exhibit B to the Grant Notice.
Y. Service shall mean the Optionee's performance of services for the
Corporation (or any Parent or Subsidiary) in the capacity of an Employee, a non-
employee member of the board of directors or an independent consultant.
Z. Stock Exchange shall mean the American Stock Exchange or the New York
Stock Exchange.
AA. Subsidiary shall mean any corporation (other than the Corporation) in
an unbroken chain of corporations beginning with the Corporation, provided each
corporation (other than the last corporation) in the unbroken chain owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
BB. Vesting Schedule shall mean the vesting schedule specified in the
Grant Notice pursuant to which the Optionee is to vest in the Option Shares in a
series of installments over his or her period of Service.
<PAGE>
EXHIBIT C
Master Service Agreement
<PAGE>
Master Service Agreement (MSA)
Superior Consultant Company, Inc.
for OrganicNet, Inc.
- --------------------------------------------------------------------------------
This Master Service Agreement ("MSA") is entered into this 20/th/ day
of September, 1999, (the "Effective Date") between OrganicNet, Inc., a Delaware
corporation, 330 Townsend Street, Suite 206, San Francisco, California 94107,
("Client") and Superior Consultant Company, Inc., 4000 Town Center Drive, Suite
1100, Southfield, Michigan 48075, as Seller ("Superior").
1. Service Description
Superior will provide its consultants, managers, technical personnel,
and other personnel to furnish healthcare information technology, strategic and
operations management consulting services, and computer program development
services ("Superior's Services") in accordance with the terms and conditions
stated in this MSA. All services shall be provided pursuant to Work Orders that
are agreed to between the parties. The services to be provided by Superior
pursuant to the Work Orders and this MSA are sometimes referred to as the
"Project."
2. Term of Master Service Agreement
(a) This MSA will begin on the Effective Date and terminate at the same time as
the Distribution and Services Agreement to which the MSA is attached. The
MSA may be terminated earlier pursuant to Sections 2(b)-2(c), below. The
MSA may be extended by a written agreement signed by Client and Superior.
The period from commencement until termination will sometimes be referred
to as the Term. At the end of the Term, any Work Orders already executed by
the parties shall remain in effect and this MSA shall continue in effect as
to such Work Orders.
(b) Either party may terminate the MSA or any Work Order without cause on sixty
(60) days' prior written notice to the other.
(c) Either party may terminate this MSA or any Work Order for material breach
by the other party, in accordance with the following procedure: The party
claiming material breach shall provide the other party with a written
notice of breach, specifying in detail the act or omission claimed to
constitute the material breach. The other party shall then have thirty (30)
days to cure the claimed breach. If the breaching party does not cure the
breach within the cure period, then the other party shall be entitled to
terminate this MSA immediately upon written notice to the other party.
(d) Superior shall be compensated for all services provided prior to the date
of termination of the Work Order at Superior's hourly rate in effect at the
time the Work Order was executed, provided that in the case of fixed-fee
Work Orders such hourly rate compensation shall not exceed the total fixed-
fee amount that would have been due upon acceptance.
3. Work Orders
(a) All Superor's Services shall be rendered pursuant to Work Orders. To the
extent of any conflict or inconsistency between the terms and conditions of
a Work Order and the terms and conditions of this MSA, the terms and
conditions of the Work Order will control. A Sample Work Order is attached
as Schedule A.
(b) Each Work Order shall be in writing and signed by both parties, refer
specifically to this MSA, and include the following information: (i) the
commencement date of the Work Order and, if applicable, the termination
date and other dates pertinent to Superior's performance; (ii) the scope of
work (i.e., the assistance to be rendered and/or the services to be
performed, and/or resources to be provided, and/or applicable deliverables,
and/or obligations to be discharged by Superior); (iii) any additional
obligations of Client and Superior related to the Work Order, including any
<PAGE>
Master Service Agreement (MSA)
Superior Consultant Company, INC.
for OrganicNet, Inc.
- --------------------------------------------------------------------------------
any facilities, equipment, personnel, and tasks or other support to be
provided or performed; (iv) any other terms and conditions appropriate to
the services to be performed and the obligations of the parties; (v) the
basis (e.g., hourly rate or fixed fee) and procedure for computation,
billing, and payment of professional fees and expenses. The following
additional information may be included in Work Orders, as appropriate: (i)
for hourly rate Work Orders, the Superior personnel or personnel
classifications who will render the services, their respective hourly
rates, and the starting and closing dates for performance of services; (ii)
for fixed-fee Work Orders, a list of tasks to be completed, a set of
milestones specifying the date by which each portion of the work specified
in the Work Order will be completed, payment schedule, and acceptance
criteria; (iii) for Work Orders involving computer program development, a
functional specification, an operational narrative and matrix of conditions
to be tested; and (iv) for Work Orders that include deliverables, the
testing procedures and/or acceptance criteria, if any, to be applied to the
deliverable(s).
(c) Both parties recognize that certain Work Orders may require periodic
amendments, including adjustments to either party's staffing and/or fees.
If such adjustments are necessary, both parties will use their best efforts
to accommodate such adjustments as they arise. Any amendments must be in
writing and signed by both parties.
4. Project Organization
(a) Superior shall be responsible for organizing and staffing each Project,
subject to the terms of the applicable Work Order.
(b) Superior's Engagement Manager shall have responsibility for managing
Superior's performance of its obligations under the Work Order(s) and for
communicating with Client regarding Project status and issues.
(c) Client shall designate an employee of sufficient management rank as
Client's Project Liaison, who shall represent Client and have
responsibility for ensuring that Client performs its obligations under this
MSA and the Work Orders and for communicating with Superior regarding
Project status and issues.
(d) Superior will advice Client of Project status on an ongoing basis through
periodic written status reports, meetings, and other communications.
Status reports will generally be prepared on a biweekly basis and upon the
completion of the engagement, or on such other schedule as the Engagement
Manager and Client's Project Liaison agree is appropriate for the Project.
Status meetings and other communications shall be held as the Engagement
Manager and Client's Project Liaison agree is appropriate for the Project.
(e) In addition to its Project staff, Superior shall assign a Client Services
Executive, who shall have overall responsibility for guiding and
supervising Superior's Services under this MSA, and for monitoring client's
satisfaction with Superior's Services.
5. Client Support
(a) The Client will, to the extent reasonably necessary for the Project(s),
provide the following support to Superior:
(i) Access to Client staff for interviews.
(ii) Technical support, including orientation to data processing shop
standards; reasonable training on system and program development
software; appropriate technical manuals, computer terminals and
other reasonably necessary equipment and information; and
documentation in Client's possession of procedures, system
instruction manuals, and internal documentation.
<PAGE>
Master Service Agreement (MSA)
Superior Consultant Company, INC.
for OrganicNet, Inc.
- --------------------------------------------------------------------------------
(iii) When service is performed at the Client, a reasonable work
environment and secretarial assistance.
(iv) Access to computer facilities on a 24-hour per-day, seven-day-
per-week basis, with the exception of normal system downtime for
system maintenance and file backup. Access may be by physical
entry to the facility or via telecommunications, as dictated by
the needs of the Project.
(v) Computer operations and system software staffing.
(b) Client shall be solely responsible for protection of electronically stored
data in its electronic data processing systems, by means of data backup,
security devices, and procedures designed to prevent unauthorized access or
damage to databases.
(c) If Superior is impeded or delayed in its performance of services under this
MSA (or any Work Order hereunder) by: (i) failure of Client to meet its
support obligations, (ii) unavailability of Client's computer operations
and/or Client's system software staffing, or (iii) unsatisfactory
performance of Client personnel assigned to Project team(s) then Superior
shall be entitled to charge Client, commencing after notice to the Clients
Project Liaison, at its hourly rates in effect at the time the Work Order
was executed for hours lost due to such impedance or delay, or, at Clients
request, and upon written notice to Superior's Engagement Manager,
performance by Superior of such support functions or alternative
assignments specified by the Client which shall be commensurate with the
nature of the work Superior is normally engaged in, at its hourly rates in
effect at the time the Work Order was executed.
6. Non Disclosure
(a) Superior shall treat Client's Proprietary Information as confidential and
will exercise reasonable care to protect it, using not less than the degree
of care taken by Superior in the protection of its own confidential
information. Without Client's permission, Proprietary Information will not
be (i) disclosed to anyone, (ii) used for Superior's personal benefit, or
(iii) copied or removed from Client's promises.
(b) Proprietary Information of Client shall mean and include all software
programs belonging to Client, its affiliates, and licensors and license,
whether in written or on magnetic media, and all design documentation,
procedures manuals, program listings, source code, working papers and other
documentation, methodologies reduced to writing, written strategic business
plans or financial information of Client and information related to the
foregoing that has been reduced to writing. Proprietary Information shall
also include (i) personal or financial information regarding Client's
employees, and, if Client is a healthcare provider, (ii) personal,
financial, and/or medical information regarding Client's patients and
staff.
(c) Client agrees that it will, at the time of disclosure to Superior, identify
Proprietary Information in writing. This requirement does not apply to
strategic business plans or financial Information of Client, nor to (i)
personal or financial information regarding Client's employees, and, if
Client is a healthcare provider, (ii) personal, financial, and/or medical
information regarding Client's patients and staff.
(d) Unless otherwise specifically agreed in writing, Proprietary Information of
Client does not include the following: (i) any ideas, innovations,
information, techniques, procedures or methodologies developed by Superior,
either prior to or in the course of this engagement with Client; (ii) any
Information previously known to Superior without obligation of
confidentiality; (iii) any Information that is or becomes available to or
known by persons in the healthcare information management Industry through
no fault or wrongdoing of Superior; or (iv) any information developed
<PAGE>
Master Service Agreement (MSA)
Superior Consultant Company, INC.
for OrganicNet, Inc.
- --------------------------------------------------------------------------------
independently by Superior without reference to Proprietary Information.
(e) Client shall treat and shall obligate its personnel to treat, as
confidential and proprietary to Superior, all Innovations (as defined in
(S)7(b)), the content of this MSA and any Work Orders, the business and
financial relationship of Client and Superior, and any other Proprietary
Information of Superior identified by Superior in writing as confidential
or proprietary.
(f) Superior does not wish to have access to proprietary or confidential
material owned by any third party, except as herein expressly provided.
Client agrees not to disclose any confidential or Proprietary Information
of any third party to Superior in any way that is not consistent with the
terms of any licensing agreement or other legal rights of the third party.
7. Ownership.
(a) Client shall have exclusive ownership of all work product, documentation,
computer programs, source code, software products, reports, or other work
product reduced to written, magnetic, or other tangible form ("Work
Product") that are developed, discovered, conceived, or introduced by
Superior in the course of providing services under this MSA.
(b) Superior shall have exclusive ownership of all ideas, techniques,
methodologies, procedures, skills, innovations, or know-how ("Innovations")
developed or introduced by Superior in the course of performing services
under this MSA.
(i) Superior grants to Client a non-exclusive, non-transferable,
limited, perpetual, and royalty-free license to use such
Innovations solely in the normal course of Client's business as a
healthcare services provider. This license also extends to any
entity that directly, or indirectly through one or more
intermediaries, controls or is controlled by, or is under common
control with, Client.
8. Professional Fees.
Professional fees shall be paid on an hourly rate basis, unless specified
differently in a Work Order.
8.1 Hourly Rate Fees.
Hourly rate fees will be computed based upon actual time devoted to
servicing the Client, including travel time. Travel time is measured from
the time Superior's personnel leave Superior's office or their home until
arrival at the work site or hotel, and vice versa.
Rates for hourly professional fees will adhere to the Fee Schedule,
attached as Schedule B, during the first twelve (12) months of this MSA.
Rates thereafter may be adjusted subject to a maximum 10% annual increase,
or the annual rise in the national consumer price index, whichever is
greater.
Each biweekly billing for hourly rate assignments shall include a list of
each hourly rate Work Order worked on and, for each such Work Order, a list
of the personnel performing services, the job classifications, and the
hourly rate charged for each.
Superior shall maintain time records for all Superior personnel assigned to
the Project that shall indicate the name of the individual, job title,
date, number of hours worked, and the task worked on. Such records shall be
made available to the Client upon the Client's request.
8.2 Fixed-Fee Assignments
Professional fees on fixed-fee Work Orders shall be paid as described in
the Work Order.
9. Reimbursable Expenses
In addition to, and distinct from, professional fees as described above, the
Client will also reimburse Superior for all reasonable travel and project
expenses according to the Reimbursable Expense Schedule attached as Schedule C.
<PAGE>
Master Service Agreement (MSA)
Superior Consultant Company, INC.
for OrganicNet, Inc.
- --------------------------------------------------------------------------------
Superior will use commercially reasonable efforts to minimize reimbursable
expenses.
10. Invoicing and Payment Schedule
Superior will render invoices biweekly for (i) for professional fees on hourly
rate Work Orders, and (ii) reimbursable expenses. Biweekly billing periods
begin on Sundays and end on the second Saturday following.
Superior will render invoices for fixed-fee Work Orders in accordance with the
terms of this MSA and the payment and milestone schedule set forth in the
applicable Work Order.
Payment is due in full upon rendering of invoice. If payment is not received by
Superior within thirty (30) days after payment is due, interest on the amount
owing will accrue at the rate of 1-1/2% per month, or the maximum interest rate
allowed by law, whichever is less, until the amount owing is paid in full. If
collection efforts are required, the Client agrees to pay Superior the
reasonable cost and expenses of collection, including attorneys' fees.
11. Acceptance Testing
This section applies only to fixed-fee Work Orders that provide for acceptance
testing. Following written notification by Superior that a deliverable is
complete and ready for acceptance testing, Client shall, within the schedule
provided in the Work Order, fully complete all acceptance tests set forth in
Work Order. Upon completion of acceptance testing, Client shall notify
Superior, in writing, that (i) the deliverable is accepted, or (ii) the
deliverable has failed acceptance testing. If Client contends that a that a
deliverable has failed acceptance testing, then Client shall describe in detail
the claimed failure, including specifying for each applicable testing step or
criterion, that (i) the deliverable has passed, or (ii) it has failed, or (iii)
it could not be tested due to the failure of a dependent component. Thereafter,
for each failed deliverable, Superior shall, within the schedule specified in
the Work Order, cure the claimed failure and re-submit the assignment for
acceptance, provided that, if Superior disputes Client's contention that the
deliverable has failed acceptance testing, then Superior shall not be obligated
to continue working on the assignment. Deliverables will be deemed to have been
accepted if (i) the Client accepts the deliverable in writing, or (ii) Client
fails to timely and properly test the deliverable, or (iii) the Client, at any
time, places the deliverable into production.
12. Omitted
13. Omitted
14. Superior's Personnel
(a) It is expressly understood that personnel provided by Superior for the
purpose of performing services under this MSA are the employees or
subcontractors of Superior, and under no circumstances will be considered
employees of the Client. Superior will be responsible for any and all
applicable payroll and employment taxes and employee insurance, and the
Client will have no liability therefore.
(b) Upon the request of the Client and for good cause, Superior shall
immediately remove from the project any Superior personnel. Superior shall
thereafter have a reasonable time to replace such person so removed.
(c) Services performed under the terms of this MSA will be performed at the
Client's offices, Superior's offices, or at other locations.
(d) Superior's assigned consultant will be entitled to Superior's standard
time-off benefits, including holidays, vacations, sick days and education.
Schedule time-off will be subject to Client's review and approval. This
time-off will not affect the rates for Superior's services under this
Agreement.
15. Bilateral No-Hire Agreement
Without the prior written consent of the other party. Client and Superior each
agree to refrain from conducting employment discussions with, or hiring,
directly or indirectly, the other party's employees, agents, and subcontractors
("Personnel") who have worked on the Project, until twelve (12) months after the
date the Personnel were last involved in any activity related to the Project.
<PAGE>
Master Service Agreement (MSA)
Superior Consultant Company, INC.
for OrganicNet, Inc.
- --------------------------------------------------------------------------------
16. Warranty and Limitation of Liability
(a) Superior warrants that the Project will be performed in a workmanlike and
professional manner consistent with the level of care and skill ordinarily
exercised by the healthcare management and information systems consulting
profession providing similar services under similar conditions.
(b) Except as expressly provided in the preceding subpart, ALL SERVICES
PERFORMED UNDER THIS MSA ARE PROVIDED WITHOUT WARRANTY, AND THERE IS NO
WARRANTY OF MERCHANT ABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
(c) SUPERIOR WILL NOT BE LIABLE UNDER ANY CAUSE OF ACTION OR THEORY OF RECOVERY
WHATEVER FOR:
(i) Punitive, exemplary, special, incidental, or consequential
damages for loss, damage, or expense, including but not limited
to lost profits or goodwill, and costs of recovering,
reprogramming, or reproducing any program or data, even if
Superior has been advised of the likelihood of the same.
(ii) Loss, claim, or damages of any kind or nature, in any amount in
excess of the professional fees actually paid to Superior under
the Scope of Work in connection with which the claim arises.
(iii) Loss, claim, or damages arising out of any Year 2000 Failure.
For purposes of this MSA, "Year 2000 Failure" means the failure
of any hardware, software, information system, microprocessor,
or other computer system to accurately process date/time data
(including, but not limited to, calculating, comparing, and
sequencing) from, into, and between the twentieth and twenty-
first centuries and the years 1999 and 2000 and leap-year
calculations.
17. Indemnification
(a) Superior and Client shall each indemnify, defend, and hold harmless the
other from and against any third-party claims for loss, damage, expense
(including attorneys' fees) liability, and claims for death or personal
injury or physical damage to property caused by the negligent acts or
omissions of the indemnifying party, its employees, agents, or
subcontractors; provided, however, that any loss or destruction of
electronically or magnetically stored information or any Year 2000 Failure
shall not be deemed an injury to any person or physical damage to property.
(b) Each party shall promptly, and in writing, notify the other party of any
such claim made against it by any third party, and shall take action as may
be necessary to avoid default or other adverse consequences until such time
as the other party has a reasonable opportunity to assume the defense of
the claim.
(c) The party obligated to defend under this Section shall have the right to
select counsel and to control such defense. The other party and its
personnel shall cooperate and participate as required for such defense.
18. Superior's Business
Client recognizes that Superior is in the business of providing services,
including, but not limited to, strategic and operational consulting; the design,
development, installation, implementation, enhancement, maintenance,
administration, operation, training, and support of information management and
telecommunication systems; and software and application development solutions.
Client further recognizes that some of Superior's clients may compete with or be
customers of Client. Except as expressly provided herein, Superior retains the
right to continue to provide the same type of services, and any other services,
to any other client, including competitors and customers of Client,
<PAGE>
Master Service Agreement (MSA)
Superior Consultant Company, Inc.
for OrganicNet, Inc.
- --------------------------------------------------------------------------------
provided that Superior maintains its obligations of nondisclosure of Proprietary
Information under this MSA. Client acknowledges that Superior retains the right
to exercise its skills and expertise and to form and express opinions to its
clients that may be based upon experience gained under this MSA.
19. Assignment
Neither party may assign its obligations under this MSA, except to its
subsidiaries and affiliates, without the other party's prior written consent,
which may not be unreasonably withheld. Any purported assignment without prior
consent shall be voidable by the other party.
20. Compliance with Law
If Client is a healthcare entity subject to Medicare Regulation 42 C.F.R.
Section 420.302 and Section 1861 (V)(1)(l) of the Social Security Act, Superior
agrees to grant access to the Controller General of the United States, the
Department of Health and Human Services, and their duly authorized
representatives, to Superior's and its subcontractors' and related
organizations' contracts, books, documents, and records pertaining to work
performed under this MSA until the expiration of four (4) years after the
services are furnished under this MSA or subcontract.
21. Notices
Any notices under this MSA shall be given in writing to Superior's Engagement
Manager or the Client's Project Liaison, respectively. Any notices of
termination or of breach must also be given in writing, as follows:
If to Superior:
Superior Consultant Company, Inc.
4000 Town Center Drive, Suite 1100
Southfield, Michigan 48075
Attention: General Counsel
If to Client:
OrganicNet, Inc.
330 Townsend Street, Suite 206
San Francisco, CA 94107
Attention: William W. Shaw, III
Notice shall be transmitted by personal delivery or by overnight delivery
service (e.g., Federal Express). Notice by either party of a change in its
address for purposes of this section shall be in writing.
22. Additional Terms
(a) This MSA, including its attachments, sets forth the full and complete
agreement of the parties, and both parties warrant that there have been no
other promises, obligations, or undertakings, oral or written. This MSA
can be modified only by a written document signed by both parties.
(b) The captions and headings throughout this MSA are for convenience and
reference only, and do not affect the meaning or intent of this MSA.
(c) If any section or clause contained in this MSA is found to be invalid by a
court of competent jurisdiction, the remaining sections and clauses shall
remain in full force and effect.
(d) Neither party shall be responsible for any delay or failure in performance,
at any time during the term of this MSA, caused by flood, riot,
insurrection, fire, earthquake, strike, explosion, war, act of God, Year
2000 Failure, or any other force or cause beyond the control of the party
claiming the protection of this section.
(e) This MSA shall be interpreted and applied in accordance with the
substantive law of the State of Michigan, and without regard to any choice
of law provisions that would cause the law of another state to control.
The following provisions of the MSA shall survive its termination:
Bilateral No-Hire MSA, Non Disclosure, Ownership, Warranty and Limitation of
Liability, Indemnification, Superior's Business, and Choice of Law.
(f) This MSA may be executed in counterpart.
<PAGE>
Master Service Agreement (MSA)
Superior Consultant Company, Inc.
for OrganicNet, Inc.
- --------------------------------------------------------------------------------
23. Authorized Signatures
Acknowledged and accepted for OrganicNet, Inc.:
By: /s/ William W. Shaw III
----------------------------------------------
Signature
President 9/20/99
- --------------------- ----------------------
Title Date
Acknowledged and accepted for Superior consultant
Company, Inc.:
By: /s/ Joel F. French
----------------------------------------------
Signature
Corporate VP,
Strategy Development 9/20/99
- ------------------------- ----------------------
Title Date
Please return an executed copy of this MSA,
including all applicable Schedules, to Consultant
Company, Inc., Attention Contract Processing, 4000
Town Center Drive, Suite 1100, Southfield,
Michigan 48075.
<PAGE>
Schedule A
Work Order #______
{Title Of Work Order}
for Organicnet, Inc.
--------------------
This Work Order ("WO") is being entered into pursuant to the terms and
conditions of that certain Master Service Agreement, dated {DATE}, between
Superior Consultant Company, Inc., ("Superior") and {CLIENT NAME} ("Client").
Term This WO shall commence on the Effective Date, and, unless
earlier terminated as provided in the Master Service
Agreement, shall continue until {INSERT DATE}.
______________________________________________________________
Scope of Work Superior shall:
{INSERT OR ATTACH}
______________________________________________________________
Additional {Required if obligations are different or in addition to MSA}
Superior
Obligations ______________________________________________________________
Client {Required If obligations are different or in addition to MSA}
Obligations ______________________________________________________________
Fees {Required if not specified in, or if different from, MSA}
______________________________________________________________
Change of Scope This fixed-fee is based upon the above Scope of Work. If the
{Required if Scope of Work change the professional fees shall be revised
fixed fee} accordingly. Any changes in the Scope of Work shall be
reflected in a written change order signed by each of the
parties.
Invoicing and {Required if not specified in, or if different from, MSA}
Billing
Acknowledged and accepted for {ADD CLIENT NAME}:
By:______________________________ _________________ _________________
Signature Title Date
Acknowledged and accepted for Superior Consultant Company, Inc.:
By:______________________________ _________________ _________________
Signature Title Date
Please return the countersigned Work Order to: Superior Consultant Company,
Inc., Attention Contract Processing, 4000 Town Center Drive, Suite 1100,
Southfield, Michigan 48075.
<PAGE>
Amendment No. 1 to Distribution and Services Agreement
This Amendment No. 1 to Distribution and Services Agreement ("Amendment")
is entered into as of September 21, 1999, by and between OrganicNet, Inc., a
Delaware corporation with a place of business located at 330 Townsend Street,
Suite 206, San Francisco, California 94107 ("OrganicNet'), and Superior
Consultant Company, Inc. a Michigan corporation with a place of business located
at 4000 Town Center, Suite 1100, Southfield, Michigan 48075 ("Superior"), and
amends that certain Distribution and Services Agreement (the "Agreement") dated
as of September 20, 1999,. The parties hereto hereby agree as follows:
1. Amendment. Section 3.14 of the Agreement is amended and restated to read
in its entirety as follows:
"3.14 SUPC shall be entitled to have one nominee of SUPC
appointed to the board of directors of OrganicNet until
the effective date of the initial public offering of the
common stock of OrganicNet. SUPC and OrganicNet further
agree that two SUPC nominees to the Advisory Council of
OrganicNet shall be appointed and shall serve a term
running from the date of the formation of the Advisory
Council until December 31, 2001. OrganicNet shall act to
effect the foregoing as soon as reasonably practicable
following the Effective Date."
2. Entire Agreement. Except as expressly amended herein, the Agreement shall
remain in place and continue to bind the Parties according to its terms.
This Amendment contains the entire agreement between the Parties respecting
the matters contained herein, and supersedes all prior discussions,
negotiations, and agreements with respect thereto. As used in this
Amendment, all capitalized terms used by not defined herein shall have the
meanings defined in the Agreement.
3. Governing law. This Agreement will be governed by the laws of the State of
California without giving effect to the principles of conflict of laws.
In Witness Whereof, the parties have executed this Amendment as of the day and
year first above written.
OrganicNet, Inc. Superior Consultant Company, Inc.
By: /s/ William W. Shaw III By: /s/ Joel F. French
------------------------------- --------------------------------------
William W. Shaw, III, President Joel F. French, Corporate Vice President,
Strategic Development
Dated: __________________________ Dated: _________________________________
<PAGE>
Exhibit 23.1
The Board of Directors
OrganicNet, Inc.
We consent to the use of our reports on the consolidated balance sheets of
OrganicNet, Inc. and subsidiaries as of December 31, 1997 and 1998, and the
related consolidated statements of operations, stockholders' deficit and cash
flows for each of the years in the three-year period ended December 31, 1998,
and the related consolidated financial statement schedule, included herein and
to the reference to our firm under the headings "Experts" and "Selected
Consolidated Financial Data" in the Prospectus.
/s/ KPMG LLP
San Francisco, California
November 12, 1999
<PAGE>
Exhibit 23.2
The Board of Directors
PSI-Med Corporation
We consent to the use of our report on the balance sheets of PSI-Med
Corporation as of May 31, 1998 and 1999, and the related statements of
operations, stockholders' deficit and cash flows for each of the years in the
three-year period ended May 31, 1999, included herein and to the reference to
our firm under the heading "Experts" in the Prospectus.
Our report dated August 4, 1999, except as to notes 8 and 10, which are as
of November 11, 1999 and September 7, 1999, respectively, contains an
explanatory paragraph that states that the Company has suffered recurring
losses from operations and has a net capital deficiency, which raise
substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of that uncertainty.
/s/ KPMG LLP
Orange County, California
November 12, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 6-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> SEP-30-1999 DEC-31-1998
<CASH> 894,897 41,104
<SECURITIES> 0 0
<RECEIVABLES> 859,901 732,370
<ALLOWANCES> 254,714 128,800
<INVENTORY> 0 0
<CURRENT-ASSETS> 2,367,791 931,660
<PP&E> 412,001 348,134
<DEPRECIATION> 1,164,461 615,402
<TOTAL-ASSETS> 5,012,540 2,215,048
<CURRENT-LIABILITIES> 5,656,821 7,221,310
<BONDS> 0 0
0 0
67,043 36,794
<COMMON> 5,502 5,464
<OTHER-SE> (18,288,105) (5,089,262)
<TOTAL-LIABILITY-AND-EQUITY> 5,012,540 2,215,048
<SALES> 777,486 570,694
<TOTAL-REVENUES> 4,224,106 4,623,651
<CGS> 2,679,892 3,278,715
<TOTAL-COSTS> 6,324,735 7,245,039
<OTHER-EXPENSES> 9,590 8,643
<LOSS-PROVISION> 101,684 15,800
<INTEREST-EXPENSE> 51,061 92,955
<INCOME-PRETAX> 4,875,359 (6,001,701)
<INCOME-TAX> 4,800 4,000
<INCOME-CONTINUING> (4,880,159) (6,005,701)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,880,159) (6,005,701)
<EPS-BASIC> (.89) (1.10)
<EPS-DILUTED> (.89) (1.10)
</TABLE>
