<PAGE> 1
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-91627
5,500,000 Shares
[ORGANIC LOGO] ORGANIC, INC.
Common Stock
----------------------
This is an initial public offering of shares of common stock of Organic,
Inc. All of the 5,500,000 shares of common stock are being sold by Organic.
Prior to this offering, there has been no public market for the common
stock. The common stock has been approved for quotation on the Nasdaq National
Market under the symbol "OGNC". After the offering, affiliates will own 83.6% of
our common stock, of which Organic Holdings, Inc. will own 64.9% and Omnicom
Group Inc. will own 18.7%.
See "Risk Factors" beginning on page 8 to read about risks you should
consider before buying shares of the common stock.
----------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
----------------------
<TABLE>
<CAPTION>
Per Share Total
--------- ------------
<S> <C> <C>
Initial public offering price............................... $20.00 $110,000,000
Underwriting discount....................................... $ 1.40 $ 7,700,000
Proceeds, before expenses, to Organic....................... $18.60 $102,300,000
</TABLE>
To the extent that the underwriters sell more than 5,500,000 shares of
common stock, the underwriters have the option to purchase up to an additional
825,000 shares from Organic at the initial public offering price, less the
underwriting discount.
----------------------
The underwriters expect to deliver the shares in New York, New York on
February 15, 2000.
GOLDMAN, SACHS & CO. DONALDSON, LUFKIN & JENRETTE
THOMAS WEISEL PARTNERS LLC
----------------------
Prospectus dated February 9, 2000.
<PAGE> 2
INSIDE FRONT COVER:
ORGANIC LOGO
INSIDE GATEFOLD:
ORGANIC LOGO
HEADLINE: Connecting Customers to Businesses Through Our Service Lines
SUB HEAD: Services for Online Business Needs
COPY: ORGANIC
SERVICES FOR ONLINE BUSINESS NEEDS
We believe there has been a fundamental shift in the relationship between
businesses and their customers. Customers now determine the final information
and products delivered, requiring businesses to provide increasingly
sophisticated choices and interactions. Our services are focused on solving the
various issues that a business encounters with customers.
Services:
- iBusiness: consulting, Web site design and software engineering
services through which we develop online business plans and create
Web sites;
- Media: we plan and manage online advertising campaigns including
electronic mail promotions and affiliate program management;
- Communications: public relations services through which we plan and
manage our clients' press and publication relationships as well as
product and company launches; and
- Logistics: customer service and fulfillment consulting services through
which we evaluate, assist and manage for our clients warehouse and
customer call center facilities.
We help our clients build online businessesfrom national and international
offices.
IMAGE1: map of Organic office locations
COPY: none
detroit
chicago
london
new york
san francisco
singapore
sao paulo
toronto
THE DIAGRAM
DIAGRAM:
(each of the four services shown below are integrated, but responsible for
specific specializations)
SERVICE: Media;
SERVICE: Communications;
SERVICE: iBusiness;
SERVICE: Logistics;
<PAGE> 3
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. This summary may not contain all of the information that you should
consider before investing in the common stock. You should read the entire
prospectus carefully, including "Risk Factors" and our consolidated financial
statements before making an investment decision.
OUR BUSINESS
Organic is an international Internet professional services firm. We provide
our clients various services to build and operate online businesses. These
services include iBusiness, media, communications and logistics.
- iBusiness refers to our consulting, Web site design and software
engineering services through which we develop online business plans and
create Web sites;
- Media refers to our services through which we plan and manage online
advertising campaigns including electronic mail promotions and
affiliate program management;
- Communications refers to our public relations services through which we
plan and manage our clients' press and publication relationships as
well as product and company launches; and
- Logistics refers to our customer service and fulfillment consulting and
transaction management services through which we evaluate, assist and
manage for our clients' warehouse and customer call center facilities.
We believe that the Internet has shifted the balance of power from
businesses to customers and has created the first truly global marketplace. We
also believe the ultimate customer, whether a business or consumer, is the
central and most influential participant in a commercial relationship. We
believe the key to our business is our complete focus on our clients'
customers -- the customer-to-business market. We designed our services in
recognition of the challenges our clients face due to this shift.
Founded in 1993 as a sole proprietorship and incorporated in January 1995,
we have a history as an innovator in the Internet professional services
industry. We have designed and developed a number of Web sites that were the
first in their industry category. We have performed work for over 250 clients
and have gained significant experience by working with both major offline and
emerging Internet companies. We have organically grown our business, creating
one of the largest independent Internet professional services organizations with
nearly 700 employees in eight offices worldwide including Asia, Europe and Latin
America.
Through September 30, 1999, we have experienced significant losses, with a
total loss of $20.5 million since inception largely due to a cumulative stock
compensation charge of $12.3 million. We expect to continue to have operating
losses in the future, mostly due to increased operating expenses from stock
compensation and other stock-based charges and increased capital expenses
incurred to create a leadership position in the highly competitive market in
which we operate. In addition, we derive a significant portion of our revenues
from a limited number of clients. For example, DaimlerChrysler and Blockbuster
accounted for approximately 12% and 10% of our total revenues during the nine
months ended September 30, 1999.
OUR MARKET OPPORTUNITY
Few businesses have the internal capabilities to address the opportunities
and challenges of the Internet. The complexity of conducting business online,
the rapidly changing technological environment, the need to improve
time-to-market and the limited supply of technically proficient internal
personnel creates significant demand for Internet professional services.
According to a 1998 Dataquest survey, 83% of Fortune 1000 companies currently
purchase, or plan to purchase, Internet professional services solutions such as
those we provide. Furthermore, International Data Corporation estimates the
worldwide market for
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Internet professional services will grow from $7.8 billion in 1998 to $78.6
billion in 2003, which represents a compound annual growth rate of more than
58%.
OUR OFFICES
Our headquarters are located at 510 Third Street, San Francisco, California
94107 and our telephone number is (415) 365-5500. Our Web site is
www.organic.com. This reference to our Web site does not constitute
incorporation by reference of the information contained at our site.
CONTROL OF OUR COMPANY BY INSIDERS
Immediately following the offering, Organic Holdings, Inc. will own 64.9%
of our outstanding common stock, and Omnicom Group will own 18.7% of our
outstanding common stock. Jonathan Nelson, through his ownership in Organic
Holdings, Inc., after the offering will beneficially own 64.9% of our common
stock. Jonathan Nelson, through his ownership in Organic Holdings, Inc., will
have the power to control the election of our directors, the appointment of new
management and the approval of any other action requiring the approval of our
stockholders, including any amendments to our certificate of incorporation and
mergers or sales of any or all of our assets.
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<PAGE> 5
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by Organic................... 5,500,000 shares
Common stock to be outstanding after
this offering................................... 78,857,200 shares
Use of proceeds................................... To expand our corporate infrastructure, reduce
outstanding debt of $4 million to Omnicom Group,
which will own 18.7% of our common stock after the
offering, and for general corporate purposes,
including working capital, and capital
expenditures.
Nasdaq National Market symbol..................... "OGNC"
</TABLE>
------------------------
The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of September 30, 1999 and does
not include the following:
- 15,712,932 shares of common stock issuable upon exercise of stock
options outstanding at a weighted average exercise price of $0.72 per
share granted under our 1997 stock option plan and 5,392,953 shares
available for future issuance under our 1997 stock option plan;
- 10,500,000 shares of common stock reserved for future issuance under
our 1999 long-term stock incentive plan; or
- 10,000,000 shares of common stock reserved for future issuance under
our 2000 employee stock purchase plan.
Please see "Capitalization" for a more complete description regarding the
outstanding shares of our common stock and options to purchase our common stock
and other related matters.
------------------------
Unless otherwise noted, all information in this prospectus:
- assumes the underwriters will not exercise their option to purchase
additional shares of common stock to cover over-allotments, if any;
- reflects the conversion of each outstanding share of our preferred
stock into three shares of common stock automatically upon the closing
of this offering;
- reflects the exercise of our outstanding warrant issued to Omnicom
Group for 2,249,076 shares of common stock at $0.0033 per share; and
- reflects a 3-for-1 split of our common stock before our preferred stock
converts into common stock.
5
<PAGE> 6
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
The following table is a summary of our consolidated statement of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations". The financial results for the nine months ended
September 30, 1998 are unaudited.
<TABLE>
<CAPTION>
JANUARY 31, FOR THE
1995 NINE MONTHS ENDED
(INCEPTION) TO YEARS ENDED DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ----------------------------------- -------------------------
1995 1996 1997 1998 1998 1999
-------------- ----------- ------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues..................................... $ 1,895 $ 4,294 $ 6,780 $ 27,734 $ 20,744 $ 51,781
Operating expenses:
Professional services (exclusive of $0, $0,
$0, $183, $57 and $3,355 reported below
of stock-based compensation for the years
ended 1995, 1996, 1997 and 1998 and for
the nine months ended September 30, 1998
and 1999, respectively).................. 530 1,889 4,285 16,801 11,191 29,929
Selling, general and administrative
(exclusive of $14, $53, $87, $511, $234
and $8,102 reported below of stock-based
compensation for the years ended 1995,
1996, 1997 and 1998 and for the nine
months ended September 30, 1998 and 1999,
respectively)............................ 655 2,104 5,473 12,068 7,276 26,018
Stock compensation and other stock-based
charges.................................. 14 53 87 694 291 11,457
Total operating expenses................. 1,199 4,046 9,845 29,563 18,758 67,404
Operating income (loss)...................... 696 248 (3,065) (1,829) 1,986 (15,623)
Net income (loss)............................ $ 412 $ 237 $(1,785) $ (2,766) $ 1,146 $ (15,737)
Net income (loss) per share:(1)
Basic...................................... $ 45,768 $ 26,286 $ (668) $ (10.81) $ 8.41 $ (13.01)
Diluted.................................... $ 0.01 $ 0.00 $ (668) $ (10.81) $ 0.02 $ (13.01)
Weighted average common shares
outstanding:(1)
Basic...................................... 9 9 2,671 255,888 136,259 1,209,591
Diluted.................................... 65,025,009 65,025,009 2,671 255,888 65,424,719 1,209,591
Unaudited pro forma basic and diluted net
loss per share(2).......................... $ (0.04) $ (0.22)
Unaudited pro forma weighted average common
shares outstanding(2)...................... 65,280,888 70,389,036
</TABLE>
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the determination of the number of weighted average shares used in
computing per share data.
(2) Unaudited pro forma net loss per share has been computed by dividing net
loss by the pro forma weighted average number of shares outstanding. The pro
forma weighted average number of common shares outstanding includes the pro
forma effects of the automatic conversion on a weighted average basis of our
preferred stock, and the exercise of a warrant for 2,249,076 shares of
common stock as if such conversion had occurred on January 1, 1998 for the
year ended December 31, 1998 and on January 1, 1999 for the nine months
ended September 30, 1999, or at the date of original issuance, if later.
The following table provides a summary of our consolidated balance sheet as
of September 30, 1999. The pro forma column gives effect to the conversion of
all outstanding preferred stock and the exercise of a warrant for 2,249,076
shares of common stock upon the closing of the offering. The pro forma as
adjusted column reflects the receipt of the net proceeds from the sale in this
offering of 5,500,000 shares of common stock at an initial public offering price
of $20.00 per share, after deducting the estimated
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<PAGE> 7
underwriting discounts and commissions and estimated offering expenses. See "Use
of Proceeds" and "Capitalization".
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- ----------- --------------
(UNAUDITED)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 3,204 $ 3,211 $104,445
Working capital............................................. 3,108 3,115 104,349
Total assets................................................ 60,077 60,084 161,318
Long-term obligations, less current portion................. 538 538 538
Total stockholders' equity.................................. 31,342 31,349 132,583
</TABLE>
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RISK FACTORS
This offering involves a high degree of risk. You should carefully consider
the risks described below and the other information in this prospectus,
including our consolidated financial statements and the related notes, before
you purchase any shares of our common stock.
The information in this prospectus includes forward-looking statements
which involve risks and uncertainties. Our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of factors including those set forth under the "Risk Factors",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" sections and elsewhere in this prospectus.
RISKS RELATED TO ORGANIC
WE MAY BE UNABLE TO RECRUIT AND RETAIN THE TALENTED PERSONNEL WHO ARE ESSENTIAL
FOR COMPLETING CLIENT PROJECTS, WHICH COULD HARM OUR PERFORMANCE ON EXISTING
PROJECTS AND REDUCE OUR ABILITY TO OBTAIN NEW PROJECTS, AND THEREFORE REDUCE OUR
REVENUES AND PROFITS
Our business is labor intensive, and our success depends on identifying,
hiring, training and retaining professionals. All of our current employees and
senior managers are employed on an at-will basis. If a significant number of our
current employees, contractors or any of our senior managers leave, we may be
unable to complete or retain existing projects or bid for new projects of
similar scope and revenues.
Even if we retain our current employees and contractors, our management
must continually recruit talented professionals for our business to grow.
Competition for these employees is intense, particularly in the Internet and
high technology industries. As a result, we may be unable to successfully
attract, assimilate or retain qualified personnel. As of September 30, 1999, we
had 681 employees. We believe that we need to hire additional personnel to
support our business. The failure to retain or attract the necessary personnel
would reduce our capacity to handle new client engagements and therefore our
revenue growth, which would seriously harm our business, financial condition and
results of operations.
WE MAY BE UNABLE TO EFFECTIVELY MANAGE OUR RAPID GROWTH, WHICH COULD RESULT IN
OUR BEING UNABLE TO EFFECTIVELY CONTROL OUR COSTS AND IMPLEMENT OUR BUSINESS
STRATEGIES
We began expanding our operations both in the U.S. and internationally in
the past year. We believe further expansion will be required to address the
anticipated growth in our client base and market opportunities. We also believe
expansion into new geographic areas is important because we believe we can
better serve clients with resources and professionals located near the client.
Our current expansion has placed, and any future expansion may continue to
place, a significant strain on our managerial, operational, financial and other
resources.
If we are unable to manage growth effectively or if we experience
disruptions during our expansion, our expenses could increase more quickly than
revenues or our revenues might be reduced as a result of failure to adequately
service new client engagements, either of which would seriously harm our
business, financial condition and results of operations.
OUR REVENUES COULD BE SIGNIFICANTLY REDUCED BY THE LOSS OF A MAJOR CLIENT
We derive a significant portion of our revenues from a limited number of
clients. The loss of any major client, if not replaced, could dramatically
reduce our revenues. For example, for the nine months ended September 30, 1999,
our five largest clients accounted for 41% of our revenues. During this period,
DaimlerChrysler accounted for approximately 12% of our revenues and Blockbuster
accounted for approximately 10% of our revenues.
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OUR LACK OF LONG-TERM CONTRACTS WITH OUR CLIENTS REDUCES THE PREDICTABILITY OF
OUR REVENUES
We generally do not have long-term contracts with our clients and are
generally retained on an engagement-by-engagement basis. These engagements vary
in size and scope and cause our revenues to be difficult to predict. In
addition, generally our contract provides for termination by either party after
notice and a transition period of up to 180 days. Our operating expenses are
relatively fixed and cannot be reduced on short notice to compensate for
unanticipated variations in the number or size of engagements in progress.
Because we incur costs based on our expectations of revenue from future
engagements, our failure to predict our revenues accurately may cause the
increase in our expenses to substantially outpace our revenue growth, which
would seriously harm our financial condition and results of operations.
IF WE FAIL TO ACCURATELY PREDICT COSTS RELATED TO OUR FIXED-PRICE PROJECTS, WE
MAY LOSE MONEY
Most of our current projects are on a fixed-price, fixed-timeframe basis,
rather than on a time and materials basis. For the nine month period ended
September 30, 1999, management estimates revenues from fixed price projects were
approximately 75% of total revenues. Often, we fix the price or timeframe before
we finalize the design specifications. If we miscalculate the resources or time
necessary to complete these projects, to meet client expectations about the
services to be performed or to complete projects within budget, we could have
cost overruns and we could lose money on these projects, which could seriously
harm our operating results. The risk of miscalculations in pricing is high
because we work with complex technologies in compressed timeframes, and
therefore it can be difficult to judge the time and resources necessary to
complete a project.
WE MAY HAVE DIFFICULTY IN MANAGING OUR INTERNATIONAL EXPANSION AND OPERATIONS,
WHICH COULD HARM OUR BUSINESS AND FINANCIAL CONDITION
A key element of our strategy is to expand our business into international
markets. In addition to our U.S. operations, we have operations in Sao Paulo,
Brazil which opened in February 1999; London, England which opened in April
1999; Singapore which opened in September 1999; and Toronto, Canada which opened
in January 2000. Our international offices provide the same or similar services
as our U.S. offices, sometimes in conjunction with our U.S. offices. Our
management may have difficulty in managing our international operations because
of distance, as well as language and cultural differences. Our management cannot
assure you that they will be able to market and deliver our services
successfully in foreign markets.
Other risks related to our international operations include:
- success in finding and acquiring suitable strategic acquisition
candidates;
- difficulties arising from staffing and managing foreign operations;
- legal and regulatory requirements of different countries, including
different tax or labor laws;
- difficulties in using equity incentives for employees;
- international currency issues, including fluctuations in currency
exchange rates;
- restrictions on the import and export of sensitive technologies,
including data security and encryption technologies that we may wish to
use in solutions we develop for clients; and
- potential political or economic instability.
If any of these risks should materialize, our international and U.S.
businesses, financial conditions and results of operations could be harmed. Our
revenues derived from international operations were 4.6% of our total revenues
for the nine months ended September 30, 1999.
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OUR BILLABLE EMPLOYEES MAY BE UNDERUTILIZED IF CLIENTS DO NOT RETAIN OUR
SERVICES, WHICH COULD REDUCE OUR REVENUES AND MARGINS AND DAMAGE OUR POTENTIAL
PROFITABILITY
Many of our current or potential clients that are in the early stages of
development may be unable to continue to retain our services because of
financial constraints. In addition, some of our large clients who utilize our
services for multiple engagements or in stages may choose not to retain our
services for additional stages of a project or may choose to cancel or delay
additionally planned projects. Such cancellations or delays could result from
factors unrelated to our work product or the progress of the project, but could
be related to general business or financial condition of the client. If a client
defers, modifies or cancels an engagement or chooses not to retain our services
for additional phases of a project, we may be unable to rapidly redeploy
billable employees to other engagements, to minimize underutilization of those
employees. This underutilization could reduce our revenues and gross margins and
damage our potential profitability.
For example, if DaimlerChrysler, the sole client of our Detroit, Michigan
office at the present time, chooses not to retain our services, the billable
employees in our Detroit office could be underutilized.
HISTORICALLY WE HAVE GRANTED OPTIONS TO PURCHASE COMMON STOCK AT LOW EXERCISE
PRICES, WHICH WILL RESULT IN ADDITIONAL COMPENSATION EXPENSE IN THE FUTURE AND
REDUCE OUR REPORTED EARNINGS
Historically we have granted employees options to purchase our common stock
at exercise prices less than the offering price. During the nine months ended
September 30, 1999, we granted options to purchase 9,528,150 shares of common
stock to employees and non-employee directors with exercise prices ranging from
$1.1667 to $2.00 per share. We recognized stock-based compensation expense of
$11.0 million for the nine months ended September 30, 1999 relating to the
difference between the exercise price of the options and the offering price of
our common stock. Based on grants made through December 31, 1999, we will
recognize in the aggregate additional stock-based compensation expense of $99.8
million as the options vest over the next four years which will dilute any
future earnings that we may achieve.
WE ARE LIKELY TO EXPERIENCE SIGNIFICANT FLUCTUATIONS IN OUR QUARTERLY OPERATING
RESULTS WHICH MAY MAKE THE PRICE OF OUR COMMON STOCK DIFFICULT TO PREDICT
Our quarterly operating results have varied in the past and we expect that
our revenues and operating results will continue to fluctuate significantly from
quarter to quarter due to a variety of factors, many of which are outside of our
control. Some important factors affecting our revenues and operating results
from quarter to quarter, in order of their relative magnitude are:
- changes in our operating expenses as we expand operations;
- timing and execution of major client engagements;
- the timing and cost of advertising and related media;
- timing of employee hiring and utilization rates;
- increases in the number of independent contractors we must hire to meet
client needs, which would result in increased costs versus an
equivalent number of employees;
- our ability to develop, market and introduce new and significant online
business solutions on a timely basis;
- our success in obtaining suitable locations for expansion;
- client budgetary cycles;
- pricing changes in the industry;
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- demand for our Internet professional services;
- economic conditions in the Internet professional services market; and
- legal or regulatory developments regarding the Internet.
Our quarterly revenues and operating results are volatile and difficult to
predict. Our revenues for the first, second, third and fourth quarters of 1998
were 18.2%, 29.3%, 27.3% and 25.2%, respectively, of our total revenues for the
year ended December 31, 1998. Our revenues for the first, second and third
quarters of 1999 were 19.5%, 33.3% and 47.2%, respectively, of our total
revenues for the nine months ended September 30, 1999. It is likely that in some
future quarter or quarters our operating results will be below the expectations
of public market analysts or investors. In such event, the market price of our
common stock may decline significantly.
THE SEASONALITY OF OUR REVENUES COULD CAUSE OUR QUARTERLY OPERATING RESULTS TO
FALL BELOW THE EXPECTATIONS OF MARKET ANALYSTS AND INVESTORS, WHICH COULD HAVE A
NEGATIVE EFFECT ON THE MARKET PRICE OF OUR COMMON STOCK
In general, our clients concentrate their expenditures on our services in
the second and third quarters of the calendar year. We expect this concentration
of expenditures to result in fluctuations in our revenues between these quarters
and the first and fourth quarters of the calendar year. It is also possible that
in the future our revenues will decline from one quarter to the next as a result
of this concentration. If these fluctuations or declines are greater than market
analysts or investors expect, our stock price could decline.
WE HAVE A HISTORY OF LOSSES AND WE MAY EXPERIENCE LOSSES IN THE FUTURE, WHICH
COULD RESULT IN THE MARKET PRICE OF OUR COMMON STOCK DECLINING
We have experienced operating losses as well as net losses during fiscal
1997 and 1998 and the nine months ended September 30, 1999. For the fiscal years
1997, 1998 and the nine months ended September 30, 1999, our net losses were
$1.8 million, $2.8 million, and $15.7 million, respectively. For the fiscal
years 1997, 1998 and the nine months ended September 30, 1999, our net losses
were 26.3%, 10.0%, and 30.4% of total revenues, respectively. We may not be able
to sustain the revenue growth we have experienced or the levels of revenues
obtained previously. In addition, we intend to continue to invest heavily in
development of our infrastructure and recruiting. As a result, we will need to
generate significant revenues to achieve profitability. We cannot assure you
that we will achieve profitability in the future or, if we achieve
profitability, that we will be able to sustain it. If we do not achieve and
maintain profitability, the market price for our common stock may decline,
perhaps substantially.
WE RELY ON THE SERVICES OF OUR SENIOR MANAGEMENT AND OTHER KEY PERSONNEL, AND
THOSE PERSONS' KNOWLEDGE OF OUR BUSINESS AND TECHNICAL EXPERIENCE WOULD BE
DIFFICULT TO REPLACE
We believe that our success will depend on the continued employment of our
senior management team and other key personnel. Any of our officers or employees
can terminate his or her employment relationship at any time. Currently, our key
executives are Jonathan Nelson, our Chief Executive Officer and Chairman of the
Board, and Michael Hudes, our President. The loss of either of these key
employees or our inability to attract or retain other qualified employees could
harm our business, financial condition and results of operations. While we
currently maintain a key person life insurance policy for Jonathan Nelson, the
amount of this insurance may be inadequate to compensate us for his loss.
IF WE ARE NOT SUCCESSFUL IN OPENING AND GROWING NEW OFFICES, OUR FINANCIAL
RESULTS MAY SUFFER
An important component of our growth strategy is to open offices in new
geographic locations. Once we select a new location, we typically devote
substantial financial and
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management resources to properly launch and grow that office. We cannot assure
you that we will select appropriate markets to enter, open new offices
efficiently or manage new offices profitably. Our failure to accurately assess
these issues could negatively affect our business.
IF NEW SERVICES WE DEVELOP ARE NOT SUCCESSFUL, OUR BUSINESS COULD BE HARMED
Clients may not favorably receive any new services that we launch, which
could damage our reputation and brand name. We also cannot be certain that we
will generate satisfactory revenues from any expanded services to offset the
costs we incur to expand those services. Any expansion of our operations also
would require significant additional expenses, and these efforts may strain our
management, financial and operational resources.
WE WILL LIKELY CONTINUE TO FACE INTENSE COMPETITION WHICH COULD HARM OUR
OPERATING RESULTS
The market for Internet professional services is relatively new, intensely
competitive, quickly evolving and subject to rapid technological change. In
addition, our industry is experiencing rapid consolidation. Our current national
and international competitors include the following:
- other providers of Internet professional services, including
AGENCY.COM, iXL, Proxicom, Razorfish, Scient, USWeb/CKS and Viant;
- large information technology consulting services providers, including
Andersen Consulting, Cambridge Technology Partners, Cap Gemini, CSC,
EDS, IBM and Sapient;
- strategic consulting firms, including Bain & Company, Booz Allen &
Hamilton and Boston Consulting Group; and
- internal information technology, marketing and other departments of
current and potential clients.
We also anticipate facing additional competition from new entrants into our
markets due to the low barriers of entry.
Moreover, many of our competitors have longer operating histories, larger
client bases, greater brand recognition, greater financial, marketing, service,
support, technical, intellectual property and other resources than we do. As a
result, our competitors may be able to devote greater resources to marketing
campaigns, adopt more aggressive pricing policies or devote substantially more
resources to client and business development than us. This increased competition
may result in reduced operating margins, loss of market share and a diminished
brand. In addition, we may from time to time make pricing, service or marketing
decisions or acquisitions as a strategic response to changes in the competitive
environment. These actions could reduce our profits and harm our financial
condition and results of operation.
OUR INVESTMENTS IN CLIENT COMPANIES INVOLVE RISK, INCLUDING LOSING SOME OR ALL
OF OUR INVESTMENT, WHICH COULD HARM OUR OPERATING RESULTS
In exchange for our services we have from time to time made investments in
some of our clients. As of September 30, 1999, we have $1.2 million of such
investments accounted for in our balance sheet. We may continue to invest in our
clients as opportunities arise. In general, these equity investments are
structured so our clients pay for all of the costs related to their engagement
in cash and use equity incentives to compensate us for a portion of our profit
margin. The businesses of the clients in which we invest, however, are generally
unproven and involve substantial risk. If these clients' businesses do not
succeed, we could lose some or all of our investment, which would harm our
operating results and cause our profitability to be lower than it would have
been if we had taken payment for our entire engagement in cash.
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OUR BUSINESS OPPORTUNITIES MAY BE RESTRAINED BY CONFLICTS BETWEEN POTENTIAL
CLIENTS, WHICH COULD REDUCE OUR POTENTIAL PROFITABILITY
Conflicts between potential clients are inherent in aspects of our
business. We have in the past, and will likely in the future, be unable to
pursue potential opportunities because they would result in offering similar
services to direct competitors of existing clients. Additionally, we risk
alienating existing clients if we provide services to even indirect competitors.
Because these potential conflicts may jeopardize revenues generated from
existing clients and preclude access to business prospects, these conflicts
could cause our operating results to suffer. Furthermore, in limited
circumstances, we have agreed not to reuse some software code developed by us
for a client for competitors of the client and, in the case of DaimlerChrysler,
not to perform work for some competitors. These agreements reduce the number of
our prospective clients and the number of potential sources of revenues. In
addition, these agreements increase the significance of our client selection
process because many of our clients compete in markets where only a limited
number of players gain meaningful market share. If we agree not to perform
services for a particular client's competitors and our client fails to capture a
significant portion of its market, we are unlikely to receive future revenues in
that particular market.
WE FACE POTENTIAL LIABILITY FOR DEFECTS OR ERRORS IN THE SOLUTIONS WE DEVELOP,
THE OCCURRENCE OF WHICH COULD REDUCE OUR REVENUES
Many of the solutions we develop are critical to the operations of our
clients' businesses. Any defects or errors in these solutions could result in:
- delayed or lost client revenues;
- adverse client reaction to us;
- negative publicity;
- additional expenditures to correct the problem; or
- claims against us for negligence in performing our services or errors
in the software code provided by us.
Our standard contracts limit our damages arising from our negligent conduct
and for other potential liabilities in rendering our services. However, these
contractual provisions may not protect us from liability for damages. In
addition, large claims may not be adequately covered by insurance and may raise
our insurance costs.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS ADEQUATELY, OUR
REPUTATION COULD BE DAMAGED AND OUR COMPETITIVE POSITION COULD BE HARMED
We believe our trademarks, trade secrets and other proprietary rights in
our intellectual property, including our trademark name, Organic, software code
and Internet business processes we have developed, are important to our success
and competitive position. In particular, our trademarks help establish our brand
identity and, we believe, enhance the marketability of our services. Our trade
secrets, including the Internet business processes we have developed, are a
significant aspect of the services we provide. If we are unable to protect our
trademarks, trade secrets and other intellectual property against unauthorized
use by others, our reputation among existing and potential clients could be
damaged and our competitive position could be harmed. We generally enter into
confidentiality or license agreements with our employees and consultants, and
generally control access to and distribution of our documentation and other
proprietary intellectual property. Despite these precautions, our management
cannot ensure that these strategies will be adequate to deter misappropriation
of our proprietary intellectual property.
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<PAGE> 14
Despite efforts to protect our intellectual property, we also face the
following risks:
- non-recognition or inadequate protection of proprietary rights;
- undetected misappropriation of proprietary intellectual property or
materials;
- development of similar technologies by competitors;
- unenforceability of non-competition agreements entered into by our
employees; and
- infringement claims, even if not meritorious, against us.
If any of these risks materialize, we could be required to pay significant
amounts to defend our rights and in some cases to indemnify our customers and as
a result the time of our senior management could be diverted.
WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS AND MAY REQUIRE
ADDITIONAL FINANCINGS
Our future liquidity and capital requirements will depend on numerous
factors, including:
- timing and amount of funds required for, or generated by, operations;
- success and duration of our expansion program, both domestically and
internationally; and
- unanticipated opportunities or difficulties.
We anticipate that the net proceeds of this proposed initial public
offering, together with our existing resources and expected cash flow from
operations, will be sufficient to meet our present growth strategies and capital
expenditure requirements for at least the next 12 months. If the offering is not
completed, or 12 months from the date of the offering have passed, and our cash
flows from operations and existing liquidity resources are insufficient to fund
our operations, we may need to obtain additional equity or debt financing. In
both of these cases, we may seek to raise additional funds through public or
private financings, strategic relationships or other arrangements. This
additional funding may not be available on terms acceptable to us, or at all. We
may have to sell stock at prices lower than those paid by existing stockholders,
which would result in dilution, or we may have to sell stock or bonds with
rights superior to rights of holders of common stock. Also, any debt financing
might involve restrictive covenants that would limit our operating flexibility.
Moreover, strategic arrangements may require us to relinquish our rights to
certain of our intellectual property. Finally, if adequate funds are not
available on acceptable terms, we may be unable to develop or enhance our
services, take advantage of future opportunities or respond to competitive
pressures.
RISKS RELATED TO OUR INDUSTRY
OUR SUCCESS DEPENDS ON OUR CLIENTS' WILLINGNESS TO ADOPT AN INTERNET BUSINESS
MODEL AND OUTSOURCE THEIR INTERNET NEEDS TO INTERNET PROFESSIONAL SERVICE
PROVIDERS
The market for our services will depend upon the adoption of Internet
professional services by companies. Critical issues concerning the use of the
Internet remain unresolved and may affect the use of these technologies to solve
business problems. Critical issues which influence a client to adopt an Internet
business model or expand its business on the Internet include:
- security of Internet technologies and client information;
- reliability of the technology and services;
- cost of development of an electronic business Web site; and
- administration and bandwidth of the Internet itself.
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<PAGE> 15
The process of implementing or expanding a business on the Internet can be
difficult. The difficulty expected or experienced by clients in utilizing the
Internet and the expected costs of outsourcing compared to the expected costs of
internal development will affect their decisions on hiring and retaining
Internet professional services providers. Many entities may choose not to
outsource their Internet needs.
Additionally, some entities would have to make significant changes in their
current business practice to adapt to the Internet. Thus, even if the above
listed issues were resolved, businesses may choose not to adopt an Internet
business model.
IF WE ARE UNABLE TO KEEP UP WITH RAPID TECHNOLOGICAL AND OTHER CHANGES IN THE
INTERNET AND THE ELECTRONIC COMMERCE INDUSTRY, OUR BUSINESS WILL BE HARMED
To remain competitive, we must continue to enhance and improve the
responsiveness, functionality and features of our online business solutions. The
Internet and the electronic commerce industry are characterized by rapid
technological change, changes in user and client requirements and preferences,
frequent new product and service introductions embodying new technologies, and
the emergence of new industry standards and practices. The evolving nature of
the Internet could render our existing proprietary technology, as well as the
skills of our employees, obsolete. Our success will depend, in part, on our
ability to:
- effectively use leading technologies critical to our business;
- enhance our existing solutions;
- continue to develop new solutions and technology that address the
increasingly sophisticated and varied needs of our current and
prospective clients and their customers; and
- influence and respond to technological advances, emerging industry and
regulatory standards and practices and competitive service offerings.
Our ability to remain technologically competitive may require substantial
expenditures and lead-time. If we are unable to adapt in a timely manner to
changing market conditions or customer requirements, our business, financial
condition and results of operations could be seriously harmed.
OUR REVENUES COULD BE HARMED IF GROWTH IN THE USE OF THE INTERNET OR GROWTH OF
ELECTRONIC COMMERCE DOES NOT OCCUR
Our future success is substantially dependent upon continued growth in the
use of the Internet, particularly growth in commerce over the Internet. However,
consumer use of the Internet for commerce may not grow as quickly as projected.
If the number of users on the Internet does not increase or commerce over the
Internet does not become more accepted and widespread, demand for our services
may decrease and, as a result, our revenues would decline. Capacity constraints
caused by growth in Internet usage may, unless resolved, impede further growth
in Internet use. Other factors that may affect Internet usage or electronic
commerce adoption include:
- actual or perceived lack of security of information;
- lack of access and ease of use;
- congestion of Internet traffic;
- inconsistent quality or availability of Internet or customer service;
- possible outages due to difficulties or other damage to the Internet;
- excessive governmental regulation;
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<PAGE> 16
- uncertainty regarding intellectual property ownership;
- costs associated with the obsolescence of existing infrastructure; and
- level of consumer satisfaction with electronic commerce experiences.
Further, the adoption of the Internet for commerce and communications,
particularly by those individuals and companies that have historically relied
upon alternative means of commerce and communications, generally requires the
understanding and acceptance of a new way of conducting business and exchanging
information. In particular, companies that have already invested substantial
resources in other means of conducting commerce and exchanging information may
be particularly reluctant or slow to adopt a new Internet-based strategy that
may make their existing personnel and infrastructure obsolete. If the necessary
infrastructure, products, services or facilities are not developed, or if the
Internet does not become a viable commercial medium, our business, results of
operations and financial condition could be harmed.
THE APPLICATION OR ADOPTION OF GOVERNMENT REGULATIONS AND THE EXISTENCE OF LEGAL
UNCERTAINTIES MAY HARM OUR BUSINESS
We, and our clients, are subject to regulations applicable to businesses
generally, and laws and regulations directly applicable to electronic commerce.
However, laws and regulations may be modified or adopted with respect to the
Internet relating to user privacy, pricing, content, copyrights, distribution
and characteristics and quality of products and services. The modification or
adoption of any additional laws or regulations may decrease the expansion of the
Internet, which could increase our cost of doing business or decrease demand for
our online business solutions.
In addition, the applicability of existing laws to the Internet remains
uncertain with regard to many issues including property ownership, export of
encryption technology, sales tax, libel and personal privacy. Any new
legislation or regulation in these areas could seriously harm our business,
financial condition and results of operations.
Finally, the application of laws and regulations of jurisdictions where we
plan to offer our Internet services could also harm our business. Other states
or foreign countries may:
- require us to qualify to do business as a foreign corporation in each
state or foreign country, or otherwise subject us to taxes and
penalties;
- attempt to regulate our Internet solutions;
- prosecute us for unintentional violations of their laws; or
- modify or enact new laws in the near future.
YEAR 2000 RISKS MAY HARM OUR BUSINESS BECAUSE OF DAMAGE TO OUR INTERNAL SYSTEMS
OR LIABILITY ARISING FROM NON-YEAR 2000 COMPLIANT SOLUTIONS THAT WE PROVIDE
Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field. As a result, many of
these systems could fail or malfunction because they may not be able to
distinguish between 20th century dates and 21st century dates. Accordingly, many
companies, including our clients, potential customers, vendors and strategic
partners, may need to upgrade their systems or change their software to comply
with applicable year 2000 requirements. We currently rely on the following
computer systems to conduct our business:
- programming software;
- graphics design software;
- accounting and billing software;
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<PAGE> 17
- word processing, spreadsheet, project management and presentation
software;
- communications software; and
- network, server and personal computing hardware.
Because we and our clients are extremely dependent upon the proper
functioning of our and their computer systems, a failure of our or their systems
to correctly recognize dates beyond December 31, 1999 could materially disrupt
our operations, which could harm our business, financial condition and results
of operations.
We monitored our internal systems and the work that we have done for
clients during December 1999 and through the first days of January 2000. The few
issues noted were dealt with at the time they arose. We believe there were no
significant disruptions of either client or internal operations. We continue to
monitor both our internal systems and client work.
We have warranted in the past, and expect to continue to warrant, to
clients that our work will be year 2000 compliant. In these cases, we do not
warrant the compliance of third party software; rather, we warrant only that
software created by us will be year 2000 compliant. However, even absent a
specific year 2000 warranty, there is a risk that clients for whom we have
created or implemented software will attempt to hold us liable for any damages
that result in connection with year 2000 problems. Furthermore, if the clients
change or update their software, then their change or upgrade may not interact
properly with our previously established services.
Additionally, our failure to make our online business solutions year 2000
compliant could result in a decrease in sales of our services, or an increase in
the allocation of resources to address year 2000 problems of our clients without
additional revenue for such invested resources. Also, year 2000 issues may
affect purchasing patterns of our clients or potential clients as they may
expend significant resources to correct their current systems. These
expenditures may result in reduced funds available to use our services, which
could harm our business, operating results and financial condition.
RISKS RELATED TO THIS OFFERING
BECAUSE THERE IS NO PRIOR MARKET FOR OUR COMMON STOCK, THE PRICE OF OUR COMMON
STOCK MAY BE VOLATILE, WHICH MAY LEAD TO LOSSES BY INVESTORS AND SECURITIES
LITIGATION
There is currently no public market for our common stock. The initial
public offering price of our stock was determined through negotiations between
us and representatives of the underwriters, and may not be representative of the
price that will prevail in the open market. You may not be able to resell your
shares at or above the initial public offering price. See "Underwriting" for a
description of factors evaluated in determining the initial public offering
price and of the arrangement between us and the underwriters.
Our common stock has been approved for quotation on the Nasdaq National
Market. We do not know the extent to which investor interest will lead to the
development of a trading market or how liquid it may be. The market price for
the common stock could be highly volatile and could be subject to wide
fluctuations in response to the following factors:
- quarterly variations in our operating results;
- investor perception about us and the Internet professional services
market in general;
- announcements of technological innovations that affect the demand for
our services;
- announcements of new products or services by us or our competitors; and
- changes in financial estimates for us or our industry by securities
analysts.
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<PAGE> 18
The common stock of many Internet professional services companies has
experienced significant fluctuations in trading price and volume. It is possible
that our common stock will experience similar fluctuations. Often these
fluctuations have been unrelated to operating performance. In the past,
following periods of market volatility, security holders of these companies have
instituted class action litigation. If we were involved in such litigation, we
could incur substantial costs and diversion of management's attention, which
could harm our business, results of operations and financial condition. Declines
in the trading price of our common stock could also harm employee morale and
retention, our access to capital and other aspects of our business.
ORGANIC HOLDINGS AND OMNICOM GROUP OWN ENOUGH OF OUR SHARES TO CONTROL US WHICH
WILL LIMIT YOUR ABILITY TO INFLUENCE CORPORATE MATTERS, AND COULD PREVENT
MERGERS OR OTHER BUSINESS COMBINATIONS THAT YOU MAY BELIEVE ARE DESIRABLE
Immediately following the offering, the stockholders set forth below
collectively will own approximately 83.6% of the outstanding shares of our
common stock and will own individually the percentage set forth opposite their
respective names:
<TABLE>
<S> <C>
Organic Holdings, Inc. ..................................... 64.9%
Omnicom Group Inc. ......................................... 18.7%
</TABLE>
Jonathan Nelson, through his majority ownership in Organic Holdings, Inc.,
after the offering will beneficially own 64.9% of our common stock.
Jonathan Nelson, through his majority ownership in Organic Holdings, Inc.,
will have the power to control the election of our directors, the appointment of
new management and the approval of any other action requiring the approval of
our stockholders, including any amendments to our certificate of incorporation
and mergers or sales of any or all of our assets. In addition, without the
consent of Organic Holdings, Inc., we could be prevented from entering into
transactions that could be beneficial to us. Conversely, third parties could be
discouraged from making a tender offer or bid to acquire us at a price per share
that is above the price at which the common stock will trade on the Nasdaq
National Market.
THE SUBSTANTIAL NUMBER OF SHARES THAT WILL BE ELIGIBLE FOR SALE IN THE NEAR
FUTURE MAY ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK
Sales of a substantial number of shares of common stock in the public
market following this offering could cause the market price for our common stock
to decline. Upon completion of the offering, there will be 78,857,200
outstanding shares of common stock, of which 5,500,000 shares sold in the
offering plus any shares issued upon exercise of the underwriters' over-
allotment option, if any, will be immediately available for sale. The remaining
73,357,200 shares will be available for sale 180 days after the date of this
prospectus, as a result of the expiration of lock-up agreements with the
underwriters that prohibit the sale of these shares, subject to restrictions set
forth in Rules 144 and 701 under the Securities Act of 1933. However, the
underwriters might waive these lock-up restrictions prior to the end of the 180
day period. In addition, the underwriters could waive lock-up restrictions on
the sale of newly issued shares by us. The waiver of restrictions is solely at
the discretion of the underwriters and no specific criteria determine the timing
of a waiver or the number of shares released from lock-up. The shares subject to
lock-up may therefore be available for sale at any time.
OUR RECENT INCREASE IN THE NUMBER OF EMPLOYEES MAY DECREASE FUTURE EARNINGS
For the nine months ended September 30, 1999, we paid to our employees a
significant amount of compensation, which included stock-based compensation
expense of $11.0 million. This increase in employee compensation resulted from
our efforts to rapidly expand our
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operations. Based on grants made through December 31, 1999, we will recognize in
aggregate additional stock-based compensation expense of $99.8 million as the
options vest over the next four years. This substantial investment in our
employees will dilute any future earnings that we may achieve.
WE HAVE BROAD DISCRETION IN HOW WE USE THE PROCEEDS OF THIS OFFERING AND WE MAY
NOT USE THE PROCEEDS EFFECTIVELY
Our management could spend most of the proceeds from this offering in ways
with which you may not agree or that do not yield a favorable return. Our
primary purpose in conducting this offering is to create a public market for our
common stock. As of the date of this prospectus, we intend to use a majority of
the proceeds from this offering for working capital and general corporate
purposes. Because of the number and variability of factors that determine our
use of the net proceeds from this offering, we cannot assure you that you will
agree with our use of the proceeds. Pending their use, we intend to invest the
net proceeds of this offering in short-term, investment-grade, interest-bearing
investments or accounts.
INVESTORS IN THIS OFFERING WILL SUFFER IMMEDIATE DILUTION AND DISPARITY IN STOCK
PURCHASE PRICE
The initial public offering price is substantially higher than the pro
forma net tangible book value per share of the outstanding common stock
immediately after the offering. Accordingly, purchasers of common stock in this
offering will experience immediate and substantial dilution of approximately
$18.54 in net tangible book value per share, or approximately 92.7% of the
initial public offering price of $20.00 per share. In contrast, stockholders as
of September 30, 1999 paid an average price of $0.28 per share. Investors will
incur additional dilution upon the exercise of outstanding stock options.
Furthermore, any additional equity financing may be dilutive to stockholders and
debt financing, if available, may involve restrictive covenants, which may limit
our operating flexibility with respect to business matters. If additional funds
are raised through the issuance of equity securities, the percentage ownership
of our stockholders will be reduced. Stockholders may experience additional
dilution in net book value per share and newly-issued equity securities may have
rights, preferences and privileges senior to those of the holders of our common
stock.
PROVISIONS OF OUR CERTIFICATE OF INCORPORATION, BYLAWS AND SOME OF OUR CONTRACTS
COULD DETER POTENTIAL ACQUISITION BIDS THAT A STOCKHOLDER MAY BELIEVE ARE
DESIRABLE, AND THE MARKET PRICE OF OUR COMMON STOCK MAY BE LOWER AS A RESULT
Upon completion of this offering, our board of directors will have the
authority to issue up to 25,000,000 shares of preferred stock. The board of
directors can fix the price, rights, preferences, privileges and restrictions of
the preferred stock without any further vote or action by our stockholders. The
issuance of shares of preferred stock may delay or prevent a change in control
transaction. As a result, the market price of our common stock and the voting
and other rights of our stockholders may be adversely affected. The issuance of
preferred stock may result in the loss of voting control to other stockholders.
We have no current plans to issue any shares of preferred stock.
Other provisions of our certificate of incorporation and bylaws may
discourage, delay or prevent a merger or acquisition that a stockholder may
consider favorable. These provisions include:
- authorizing our board of directors to issue additional preferred stock;
- limiting the persons who can call special meetings of stockholders;
- prohibiting stockholder actions by written consent;
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- creating a classified board of directors under which our directors will
serve staggered three-year terms;
- establishing advance notice requirements for nominations for election
to the board of directors or for proposing matters that can be acted on
by stockholders at stockholder meetings;
- limiting the ability of stockholders to remove directors without cause;
and
- adopting a stockholder rights plan, which would cause substantial
dilution to any person or group that attempts to acquire our company on
terms not approved in advance by our board of directors.
Further, some of our existing contracts may require a notice of assignment.
Since our contracts generally provide for termination by either party after
notice and a transition period of up to 180 days, a client may choose to
terminate our contract if the client does not like the assignment.
OUR STOCKHOLDER RIGHTS PLAN MAY DISCOURAGE ACQUISITION BIDS
Our board of directors has adopted a stockholder rights plan. Under this
plan, we have issued Series C preferred stock purchase rights as a dividend on
our outstanding common stock and on any other common stock issued after adoption
of the plan. This will include the shares issued by us in this offering. These
rights are not currently exercisable. They would become exercisable, however, if
someone acquired or offered to acquire specified amounts of common stock, in
which case holders of our common stock other than such acquiror or offeror would
have the right to acquire our common stock, or the common stock of a surviving
company, at one half the market price of the stock. Exercise of this right would
substantially dilute a person or group seeking to acquire us without approval of
our board of directors, making such an acquisition prohibitively expensive.
DELAWARE LAW MAY INHIBIT POTENTIAL ACQUISITION BIDS; THIS MAY ADVERSELY AFFECT
THE MARKET PRICE OF OUR COMMON STOCK, DISCOURAGE MERGER OFFERS AND PREVENT
CHANGES IN OUR MANAGEMENT
Section 203 of the Delaware General Corporation Law may inhibit potential
acquisition bids for our company. Upon completion of this offering, we will be
subject to the antitakeover provision of the Delaware General Corporation Law,
which regulates corporate acquisitions. See "Description of Capital Stock" for a
discussion of how Section 203 operates. Under Delaware law, a corporation may
opt out of the antitakeover provisions. We do not intend to opt out of the
antitakeover provisions of Delaware Law.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that are subject to a
number of risks and uncertainties, many of which are beyond our control, which
may include statements about our:
- plans for and ability to hire additional personnel;
- business strategy;
- expectations for future expansion both in the U.S. and internationally;
- anticipated growth in revenue from our various service offerings;
- uncertainty regarding our future operating results;
- anticipated sources of funds, including the proceeds from this
offering, to fund our operations for the 12 months following the date
of this prospectus; and
- plans, objectives, expectations and intentions contained in this
prospectus that are not historical facts.
All statements, other than statements of historical facts included in this
prospectus, regarding our strategy, future operations, financial position,
estimated revenues or losses, projected costs, prospects, plans and objectives
of management are forward-looking statements. When used in this prospectus, the
words "will", "believe", "anticipate", "intend", "estimate", "expect", "project"
and similar expressions are intended to identify forward-looking statements,
although not all forward-looking statements contain such identifying words. All
forward-looking statements speak only as of the date of this prospectus. You
should not place undue reliance on these forward-looking statements. Although we
believe that our plans, intentions and expectations reflected in or suggested by
the forward-looking statements we make in this prospectus are reasonable, we can
give no assurance that these plans, intentions or expectations will be achieved.
We disclose important factors that could cause our actual results to differ
materially from our expectations under "Risk Factors" and elsewhere in this
prospectus. These cautionary statements qualify all forward-looking statements
attributable to us or persons acting on our behalf.
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USE OF PROCEEDS
We estimate that we will receive net proceeds of approximately $101.2
million from the sale of the shares of common stock in this offering
(approximately $116.6 million if the underwriters' over-allotment option is
exercised in full), at the initial public offering price of $20.00 per share and
after deducting the estimated underwriting discounts and offering expenses.
While we cannot predict with certainty how the proceeds of this offering
will be used, we currently intend to use them as follows:
- to expand our corporate infrastructure, using approximately $30
million;
- to repay $4.0 million of outstanding debt as of September 30, 1999
under our revolving credit facility with Omnicom Group, which will own
24.7% of our common stock after the offering; and
- for general corporate purposes, including capital expenditures of
approximately $25.0 million and working capital of approximately $42.2
million.
We may also use a portion of the net proceeds to acquire or invest in
complementary businesses or obtain the right to use complementary technologies.
However, we have no current commitments or agreements with respect to any of
these types of investments. Pending these uses, the net proceeds of this
offering will be invested in short-term, investment-grade, interest-bearing
investments or accounts.
Our revolving credit facility with Omnicom Group bears interest at a rate
equal to the lender's commercial paper rate, based on the published 30 day
commercial lending rate in The Wall Street Journal at the last day of the month,
plus 3.0% on borrowings up to $30.0 million until the closing of this offering.
After the offering, we may borrow up to $15.0 million at the lender's commercial
paper rate plus 1.25% through September 30, 2002. The interest rate on our
borrowings under this facility as of September 30, 1999 was 6.4%.
The amounts we actually spend for the above purposes may vary significantly
and will depend on a number of factors, including our future revenues and cash
generated by operations and the other factors described under "Risk Factors".
Therefore, we will have broad discretion in the way we use the net proceeds. See
"Risk Factors -- We have broad discretion in how we use the proceeds of this
offering and we may not use the proceeds effectively" for more information.
DIVIDEND POLICY
We have never declared or paid any cash dividends on shares of our common
stock. We intend to retain any future earnings for future growth and do not
anticipate paying any cash dividends in the foreseeable future.
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CAPITALIZATION
The following table sets forth our:
- actual capitalization at September 30, 1999;
- pro forma capitalization after giving effect to the conversion of all
outstanding shares of preferred stock into 69,489,000 shares of common
stock and the exercise of a warrant for 2,249,076 shares of common
stock immediately prior to the completion of this offering; and
- pro forma as adjusted capitalization, which gives effect to the sale in
this offering of 5,500,000 shares of common stock at the initial public
offering price of $20.00 per share and after deducting the estimated
underwriting discounts and commissions and estimated offering expenses.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
--------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Long-term obligations, less current
portion................................... $ 538 $ 538 $ 538
-------- -------- --------
Stockholders' equity:
Convertible Preferred stock, $.0001 par
value; 25,000,000 shares authorized,
23,163,000 shares issued and outstanding,
actual; no shares issued or outstanding,
pro forma and pro forma as adjusted....... 2 -- --
Common stock, $.0001 par value; 200,000,000
shares authorized, 1,619,124 shares issued
and outstanding, actual; 73,357,200 shares
issued and outstanding, pro forma;
78,857,200 shares issued and outstanding,
pro forma as adjusted..................... -- 7 8
Additional paid-in capital.................. 89,816 89,818 191,051
Deferred compensation....................... (37,993) (37,993) (37,993)
Accumulated deficit......................... (20,469) (20,469) (20,469)
Accumulated other comprehensive income...... (14) (14) (14)
-------- -------- --------
Total stockholders' equity............. 31,342 31,349 132,583
-------- -------- --------
Total capitalization................. $ 31,880 $ 31,887 $133,121
======== ======== ========
</TABLE>
This table excludes the following shares:
- 15,712,932 shares of common stock issuable upon exercise of stock
options outstanding as of September 30, 1999 at a weighted average
exercise price of $0.72 per share;
- 5,392,953 shares of common stock available for future grant or issuance
under our 1997 stock option plan as of September 30, 1999;
- 10,500,000 shares of common stock available for future grant or
issuance under our 1999 long-term stock incentive plan; and
- 10,000,000 shares of common stock available for future issuance under
our 2000 employee stock purchase plan.
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DILUTION
Our pro forma net tangible book value as of September 30, 1999, giving
effect to the conversion of all shares of preferred stock outstanding as of
September 30, 1999 into common stock and the exercise of a warrant for 2,249,076
shares of common stock upon completion of this offering, was approximately $13.7
million, or approximately $0.19 per share of common stock. Pro forma net
tangible book value per share represents the amount of tangible assets less
total liabilities, divided by 73,357,200 shares of common stock.
Dilution in 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 pro forma net tangible book value per share of our common
stock immediately after the offering. After giving effect to our sale of
5,500,000 shares of common stock in this offering at the initial public offering
price of $20.00 per share and after deduction of the estimated underwriting
discounts and commissions and estimated offering expenses payable by us, our pro
forma net tangible book value as of September 30, 1999 would have been
approximately $114.9 million, or $1.46 per share. This represents an immediate
increase in pro forma net tangible book value of $1.27 per share to existing
stockholders and an immediate dilution in pro forma net tangible book value of
$18.54 per share to purchasers of common stock in this offering.
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $20.00
Pro forma net tangible book value per share before
offering............................................... $0.19
Increase per share attributable to new investors.......... 1.27
-----
Pro forma net tangible book value per share after the
offering.................................................. 1.46
------
Net tangible book value dilution per share to new
investors................................................. $18.54
======
</TABLE>
The following table sets forth on a pro forma basis as of September 30,
1999, after giving effect to the conversion of all outstanding shares of
preferred stock into common stock and the exercise of a warrant for 2,249,076
shares of common stock upon completion of this offering, the total consideration
paid and the average price per share paid by our existing stockholders and by
new investors, before deducting estimated underwriting discounts and commissions
and estimated offering expenses payable by us, at the initial public offering
price of $20.00 per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- ---------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders............. 73,357,200 93.0% $ 20,849,281 15.9% $ 0.28
New investors..................... 5,500,000 7.0 110,000,000 84.1 20.00
---------- ----- ------------ -----
Total................... 78,857,200 100.0% $130,849,281 100.0%
========== ===== ============ =====
</TABLE>
This table assumes that no options were exercised after September 30, 1999.
As of September 30, 1999, there were outstanding options to purchase a total of
15,712,932 shares of common stock at a weighted average exercise price of
approximately $0.72 per share; 5,392,953 shares of common stock reserved for
issuance under our 1997 stock option plan; 10,500,000 shares of common stock
available for issuance under our 1999 long-term stock incentive plan; and
10,000,000 shares of common stock available for issuance under our 2000 employee
stock purchase plan.
24
<PAGE> 25
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and the
notes to the consolidated financial statements, appearing elsewhere in this
prospectus. The selected balance sheet data as of December 31, 1997 and 1998 and
September 30, 1999 and the statement of operations data for the years ended
December 31, 1996, 1997 and 1998 and for the nine months ended September 30,
1999 are derived from our consolidated financial statements included elsewhere
in this prospectus, which have been audited by PricewaterhouseCoopers LLP,
independent accountants. The selected balance sheet data as of December 31, 1995
and 1996 and the statement of operations data for the period ended December 31,
1995 are derived from our consolidated financial statements that are not
included in this prospectus, which have been audited by PricewaterhouseCoopers
LLP. The statement of operations data for the nine months ended September 30,
1998 are derived from our unaudited consolidated financial statements included
elsewhere in this prospectus, which, in the opinion of our management, include
all adjustments necessary to fairly present the results of our operations for
such interim period. The historical results presented below are not necessarily
indicative of future results.
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 31, 1995 FOR THE NINE MONTHS
(INCEPTION) YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
THROUGH ----------------------------------- -------------------------
DECEMBER 31, 1995 1996 1997 1998 1998 1999
----------------- ----------- ------- ----------- ----------- -----------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues............................... $ 1,895 $ 4,294 $ 6,780 $ 27,734 $ 20,744 $ 51,781
Operating expenses:
Professional services (exclusive of
$0, $0, $0, $183, $57, and $3,355
reported below of stock-based
compensation for the years ended
1995, 1996, 1997, 1998 and for the
nine months ended September 30,
1998 and 1999, respectively)....... 530 1,889 4,285 16,801 11,191 29,929
Selling, general and administrative
(exclusive of $14, $53, $87, $511,
$234, and $8,102 reported below of
stock-based compensation for the
years ended 1995, 1996, 1997, 1998
and for the nine months ended
September 30, 1998 and 1999,
respectively)...................... 655 2,104 5,473 12,068 7,276 26,018
Stock compensation and other stock-
based charges...................... 14 53 87 694 291 11,457
----------- ----------- ------- ----------- ----------- -----------
Total operating expenses........... 1,199 4,046 9,845 29,563 18,758 67,404
----------- ----------- ------- ----------- ----------- -----------
Operating income (loss)................ 696 248 (3,065) (1,829) 1,986 (15,623)
Minority interest in operations of
consolidated subsidiary.............. -- (106) -- -- -- (39)
Interest and other income, net......... -- 4 283 73 73 (11)
----------- ----------- ------- ----------- ----------- -----------
Net income (loss) before taxes..... 696 146 (2,782) (1,756) 2,059 (15,673)
Income tax expense (benefit)........... 284 (91) (997) 1,010 913 64
----------- ----------- ------- ----------- ----------- -----------
Net income (loss).................. $ 412 $ 237 $(1,785) $ (2,766) $ 1,146 $ (15,737)
=========== =========== ======= =========== =========== ===========
Net income (loss) per share:
Basic................................ $ 45,768 $ 26,286 $ (668) $ (10.81) $ 8.41 $ (13.01)
=========== =========== ======= =========== =========== ===========
Diluted.............................. $ 0.01 $ 0.00 $ (668) $ (10.81) $ 0.02 $ (13.01)
=========== =========== ======= =========== =========== ===========
Weighted average common shares
outstanding:
Basic................................ 9 9 2,671 255,888 136,259 1,209,591
=========== =========== ======= =========== =========== ===========
Diluted.............................. 65,025,009 65,025,009 2,671 255,888 65,424,719 1,209,591
=========== =========== ======= =========== =========== ===========
Unaudited pro forma basic and diluted
net loss per share................... $ (0.04) $ (0.22)
=========== ===========
Weighted average common shares
outstanding -- unaudited pro forma
basic and diluted.................... 65,280,888 70,389,036
=========== ===========
</TABLE>
25
<PAGE> 26
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------ SEPTEMBER 30,
1995 1996 1997 1998 1999
---- ------ ------- ------- -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $ 66 $ 243 $ 6,135 $ 2,067 $ 3,204
Working capital............................................. 36 307 8,290 339 3,108
Total assets................................................ 979 1,677 11,426 17,605 60,077
Long-term obligations, less current portion................. -- -- 604 661 538
Total stockholders' equity.................................. 338 923 9,225 7,190 31,342
</TABLE>
Unaudited pro forma basic and diluted net loss per share for the year ended
December 31, 1998 and nine months ended September 30, 1999 has been computed
using the weighted average number of common shares outstanding, adjusted to
include the pro forma effects of the conversion of Series A and Series B
convertible preferred stock and the exercise of a warrant for shares of common
stock as if such conversion had occurred on January 1, 1998 for the year ended
December 31, 1998 and on January 1, 1999 for the nine months ended September 30,
1999, or at the date of original issuance, if later.
26
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our consolidated
financial position and the results of our operations in conjunction with
"Selected Consolidated Financial Data" and our consolidated financial statements
and the notes to those financial statements appearing elsewhere in this
prospectus. This discussion and analysis contains forward-looking statements
that involve risks, uncertainties and assumptions. Our actual results may differ
materially from those anticipated in these forward-looking statements as a
result of factors including, but not limited to, those set forth under "Risk
Factors" and elsewhere in this prospectus.
OVERVIEW
Since our founding in 1993 as a sole proprietorship and incorporation in
January 1995, we have been an innovator in the Internet professional services
industry. We focus on providing services to our clients including consulting,
Web site design and software engineering implementation services; media
services; communication public relations services; and logistics customer
service and fulfillment consulting services. These services provide our clients
with various opportunities to manage and grow their customer and business
relationships as the Internet continues to evolve. We have performed work for
over 250 major offline and online companies to establish or enhance brands and
have introduced several new service lines to serve particular client needs.
We expect that our revenues will be driven primarily by the number, size
and scope of our client engagements and by our professional services headcount,
all of which have been increasing. For the nine months ended September 30, 1999,
five clients accounted for approximately 41% of our revenues, with
DaimlerChrysler and Blockbuster accounting for approximately 12% and 10%,
respectively, of our revenues. Revenues from any given client will vary from
period to period; however, we expect that significant customer concentration
will continue for the foreseeable future as we have had customer concentration
in the past. To the extent that any significant client reduces its use of our
services or terminates its relationship with us, our revenues could decline
substantially. As a result, the loss of any significant client could negatively
impact our business and results of operations.
Substantially all of our revenues are derived from providing professional
services on a fixed-fee, retainer or time and materials basis. For the nine
month period ended September 30, 1999 we estimate revenues from fixed-fee,
retainer or time and materials basis engagements were approximately 75%, 20% and
5%, respectively, of total revenues. Media and public relations services are
typically provided under long-term relationships. Customer service and
fulfillment consulting services are typically provided under contracts that
range from a few months to over a year. We generally enter into a service
agreement with our clients, which establishes the legal and general business
terms of our relationship. Our engagements vary depending on what type of
services we provide and they range from a few months to more than a year.
Generally our client relationships span several years. Revenues from fixed-fee
contracts are generally recognized as services are rendered using the
percentage-of-completion method of accounting in accordance with Statement of
Position ("SOP") 81-1 based on the percentage of costs incurred to date to total
estimated project costs. We periodically evaluate the actual status of each
project to ensure that the estimated cost to complete each contract and
provisions for estimated losses, if necessary, are made in the period in which
such losses are determined. To date, such losses have not been significant.
Revenues pursuant to retainer contracts are generally recognized over the life
of the contract on a straight-line basis. Revenues pursuant to time and
materials contracts are generally recognized as services are provided. Revenues
exclude reimbursable expenses charged to clients.
27
<PAGE> 28
Our professional services expenses include the direct costs associated with
employees and contractors in billable departments. These expenses include
salaries, bonuses, benefits, vacation, travel and entertainment expenses.
Historically our professional services expenses have increased and we expect
these expenses to continue to increase in the foreseeable future.
Our selling, general and administrative expenses primarily consist of our
investment in our corporate support services, our employee recruitment, training
and retention programs and our research and development and knowledge management
initiatives. Our selling, general and administrative expenses also include the
direct costs associated with employees and contractors in non-billable
departments, real estate costs and other investments in our corporate support
services.
Our net losses primarily consist of the increase in operating expenses
mostly due to stock compensation and other stock-based charges. Management
foresees future net losses mostly due to increased operating expenses from stock
compensation and other stock-based charges and increased capital expenses
incurred to create a leadership position in the highly competitive market in
which we operate.
Our clients tend to spend proportionally more during the second and third
quarters. We expect this seasonality to continue in the near term future.
Therefore, our financial results may fluctuate from quarter to quarter.
Fluctuations also can result from such factors as the number, size and scope of
our engagements, the efficiency with which we utilize our employees and the
ability to complete our projects within the estimated timeframe.
We are rapidly growing to accommodate the increasing need for Internet
professional service offerings and to better serve our existing clients in their
various domestic and international locations. For the nine months ended
September 30, 1999, we opened permanent offices in Detroit, Sao Paulo, London
and Singapore. Our international operations collectively accounted for 4.6% of
total revenues for the nine months ended September 30, 1999. Our headcount
increased from 278 as of December 31, 1998 to 681 as of September 30, 1999. We
intend to open additional offices in the U.S. and internationally during 2000
and accordingly, we expect associated headcount and infrastructure costs to
continue to increase. Personnel-related compensation represents a high
percentage of our operating expenses and accordingly, if revenues do not
increase at a rate proportionally equal to expenses, our business, consolidated
financial position or results of operations could be harmed.
On January 29, 1997, Organic Online, Inc., an S corporation that contained
our operating assets and liabilities at the time, was renamed Organic Holdings,
Inc. and we were formed as a subsidiary C corporation under the name Organic
Online, Inc. This reorganization was performed in connection with an investment
by Omnicom Group in our business, which, if made directly in Organic Holdings
Inc., would have resulted in the termination of its S corporation status because
S corporations may not have owners that are corporate entities. The stockholders
of Organic Holdings, Inc. consist of a group of individuals including Jonathan
Nelson, the majority owner. We exchanged 18,323,712 shares of Series A
convertible preferred stock and nine shares of common stock for substantially
all of the assets and liabilities of Organic Holdings, Inc., having a book value
of approximately $0.7 million. Certain non-operating assets and liabilities
(approximately $0.3 million, net) were retained by Organic Holdings, Inc. and
have been excluded from the accompanying financial statements. We also issued a
total of 3,351,288 shares of our Series A preferred stock to Omnicom Group for
an aggregate purchase price of approximately $10.0 million. Because this
reorganization did not result in a change in control, there was no change in the
basis of accounting at the time of the reorganization. We changed our name from
Organic Online, Inc. to Organic, Inc. on January 28, 1999.
28
<PAGE> 29
RESULTS OF OPERATIONS
The following table presents our consolidated statement of operations as a
percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- -------------------
1996 1997 1998 1998 1999
----- ----- ----- ----------- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Professional services.................... 44.0 63.2 60.6 53.9 57.8
Selling, general and administrative...... 49.0 80.7 43.5 35.1 50.3
Stock compensation and other stock-based
charges............................... 1.2 1.3 2.5 1.4 22.1
----- ----- ----- ----- -----
Total operating expenses.............. 94.2 145.2 106.6 90.4 130.2
----- ----- ----- ----- -----
Operating income (loss).................... 5.8 (45.2) (6.6) 9.6 (30.2)
Minority interest in operations of
consolidated subsidiary.................. (2.5) 0.0 0.0 0.0 (0.1)
Interest and other income, net............. 0.1 4.2 0.3 0.3 0.0
----- ----- ----- ----- -----
Net income (loss) before taxes........ 3.4 (41.0) (6.3) 9.9 (30.3)
Income tax expense (benefit)............... (2.1) (14.7) 3.7 4.4 0.1
----- ----- ----- ----- -----
Net income (loss)..................... 5.5% (26.3)% (10.0)% 5.5% (30.4)%
===== ===== ===== ===== =====
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
REVENUES
Our revenues were $20.7 million for the nine months ended September 30,
1998, compared to $51.8 million for the nine months ended September 30, 1999.
This increase of 150% was primarily due to increases in the number of clients
and size of our engagements. Our increased sales and marketing efforts resulted
in the addition of several large accounts such as DaimlerChrysler and
Blockbuster, which represented 12% and 10% of our total revenues, respectively,
for the nine months ended September 30, 1999. Our revenues from international
operations for the nine months ended September 30, 1999 was 4.6% of total
revenues. To a lesser extent, existing clients also increased the breadth and
scope of their engagements with us, attributable, in part, to the additions of
marketing and public relations services and customer service and fulfillment
consulting and transaction management services to our service offerings.
PROFESSIONAL SERVICES
Our professional services expenses were $11.2 million for the nine months
ended September 30, 1998, compared to $29.9 million for the nine months ended
September 30, 1999. This increase of 167% was primarily attributable to an
increase of 324 in professional services personnel, increased costs associated
with contractors and employee-related benefit accruals in 1999. The increase in
professional services headcount resulted from opening new offices in Detroit,
London, Sao Paulo and Singapore and continued growth in our San Francisco,
Chicago and New York offices and an increase in the size and number of our
projects. As a percentage of revenues, professional services expenses were 54%
and 58% for the nine months ended September 30, 1998 and 1999, respectively.
This increase was primarily due to increased costs in San Francisco engineering
contractors.
29
<PAGE> 30
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $7.3 million for the nine
months ended September 30, 1998, compared to $26.0 million for the nine months
ended September 30, 1999. This increase of 258% was primarily due to the
increase of 116 in non-billable personnel to support our growth, increased costs
associated with the addition of new offices and improvements in our office
infrastructure and increased consulting fees associated with several internal
software implementations. As a percentage of revenues, selling, general and
administrative expenses were 35% and 50% for the nine months ended September 30,
1998 and 1999, respectively. This increase reflects costs associated with hiring
of executive management and personnel to fill open positions within the
corporate services departments. We anticipate significant additional investment
throughout 2000.
STOCK COMPENSATION AND OTHER STOCK-BASED CHARGES
Stock compensation and other stock-based charges consist of non-cash
compensation expenses arising from stock option grants and the issuance of
detachable warrants to Omnicom Group. For the nine months ended September 30,
1998 and 1999, we recorded aggregate deferred stock-based compensation of $1.1
million and $49.0 million, respectively. This increase was primarily due to an
increase in the number of option grants associated with increased hiring of
personnel. Additional deferred stock-based compensation will be recorded for
future grants made prior to our initial public offering. Stock-based
compensation expense is being amortized over the vesting period of the related
options, generally four years, and is expected to be significant through 2004.
For the nine months ended September 30, 1998 and 1999, we recognized stock-based
compensation expense of $0.3 million and $11.0 million, respectively. See Note 7
of Notes to Financial Statements.
In connection with the $30.0 million revolving credit facility obtained on
August 27, 1999, we issued a warrant that entitles Omnicom Group to purchase
2,249,076 shares of common stock, and recorded a deferred bank facility charge
of approximately $18.2 million. This amount is being amortized on a
straight-line basis over 36 months, the term of the credit facility. For the
nine months ended September 30, 1999, we recognized bank facility expense of
$0.5 million. We expect to terminate the revolving credit facility in the first
quarter of year 2000, which will result in the recognition of a one-time bank
facility expense charge of $16.1 million.
INCOME TAX EXPENSE
Income tax expense for the nine months ended September 30, 1998 reflects
the establishment of a valuation allowance against our net deferred tax asset
recorded in the year ended December 31, 1997.
NET INCOME (LOSS)
Net income was $1.1 million for the nine months ended September 30, 1998,
compared to the net loss of $15.7 million for the nine months ended September
30, 1999. The decrease of $16.9 million was primarily due to the increase in
operating expenses of $48.6 million from the 1998 period to the 1999 period. In
particular, stock compensation and other stock-based charges increased $11.2
million during this period.
COMPARISON OF FISCAL YEARS 1996, 1997 AND 1998
REVENUES
Our revenues increased 58% from $4.3 million for the year ended December
31, 1996 to $6.8 million for the year ended December 31, 1997. This increase was
primarily due to increases in the number of new clients in New York. Our
revenues increased 309% from $6.8 million for the
30
<PAGE> 31
year ended December 31, 1997 to $27.7 million for the year ended December 31,
1998. This increase was primarily due to increases in the number of clients and
the average size of our engagements as a result of increased sales and marketing
efforts. This increase also was attributable, in part, to additional revenues
generated from our new office in Chicago and from our new marketing and public
relations service lines.
PROFESSIONAL SERVICES
Our professional services expenses increased 127% from $1.9 million for the
year ended December 31, 1996 to $4.3 million for the year ended December 31,
1997. As a percentage of revenues, professional services expenses were 44%, 63%
and 61% for the years ended December 31, 1996, 1997 and 1998, respectively. The
increase from 1996 to 1997 was attributable to an increase of 36 in professional
services personnel resulting from opening our New York office and continued
growth in our San Francisco office to accommodate revenue growth. Our
professional services expenses increased 292% from $4.3 million for the year
ended December 31, 1997 to $16.8 million for the year ended December 31, 1998,
primarily due to an increase of 132 in our professional services personnel
resulting from opening our Chicago office and continued growth in our San
Francisco and New York locations in order to accommodate the increase in the
volume of our projects.
SELLING, GENERAL AND ADMINISTRATIVE
Our selling, general and administrative expenses increased 160% from $2.1
million for the year ended December 31, 1996 to $5.5 million for the year ended
December 31, 1997. As a percentage of revenues, selling, general and
administrative expenses were 49%, 81% and 44% for the years ended December 31,
1996, 1997 and 1998, respectively. This increase from 1996 to 1997 reflected an
increase of 15 in non-billable personnel and increased costs associated with
opening our New York office and improving our office infrastructure to
accommodate growth. Our selling, general and administrative expenses increased
121% from $5.5 million for the year ended December 31, 1997 to $12.1 million for
the year ended December 31, 1998. This increase reflected the increase of 39 in
non-billable personnel, costs associated with opening our Chicago office and
improving our office infrastructure to accommodate growth, and consulting fees
associated with several internal software implementations.
STOCK COMPENSATION AND OTHER STOCK-BASED CHARGES
Stock compensation and other stock-based charges consist of non-cash
compensation expenses arising from stock option grants. For the years ended
December 31, 1996, 1997 and 1998, we recorded aggregate deferred stock-based
compensation of $0.4 million, $0, and $2.3 million, respectively. This increase
was primarily due to an increase in the number of option grants associated with
increased hiring of personnel. During the years ended December 31, 1996, 1997
and 1998, we recognized stock-based compensation expense of $0.1 million, $0.1
million and $0.7 million, respectively.
NET INCOME (LOSS)
Net income was $0.2 million for the year ended December 31, 1996, compared
to the net loss of $1.8 million for the year ended December 31, 1997. The
decrease of $2.0 million was due to a $5.8 million increase in operating
expenses, partially offset by a $2.5 million increase in revenues and the
establishment of a valuation allowance in 1997 against our deferred tax asset.
Our net loss increased from $1.8 million for the year ended December 31, 1997 to
$2.8 million for the year ended December 31, 1998. The increase in the net loss
of $1.0 million from 1997 to 1998 is primarily due to the establishment of a
valuation allowance against our net deferred tax asset recorded in 1997.
31
<PAGE> 32
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth a summary of our unaudited quarterly
financial information for the periods indicated. We derived this data from our
unaudited interim financial statements and, in our opinion, included all
adjustments necessary to fairly present the results of operations for the
periods shown. These unaudited quarterly results should be read in conjunction
with our consolidated financial statements and notes to those financial
statements included elsewhere in this prospectus. The operating results in any
quarter are not necessarily indicative of the results that may be expected for
any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1998 1998 1998 1998 1999 1999 1999
--------- -------- --------- -------- --------- -------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................... $5,051 $8,114 $ 7,579 $ 6,990 $10,087 $17,267 $ 24,427
Operating expenses:
Professional
services(1)........... 2,172 3,562 5,457 5,610 5,568 8,263 16,098
Selling, general and
administrative(1)..... 1,677 2,688 2,911 4,792 4,649 8,325 13,044
Stock compensation and
other stock-based
charges............... 16 79 196 403 723 2,176 8,558
------ ------ ------- ------- ------- ------- --------
Total operating
expenses............ 3,865 6,329 8,564 10,805 10,940 18,764 37,700
------ ------ ------- ------- ------- ------- --------
Operating income (loss).... 1,186 1,785 (985) (3,815) (853) (1,497) (13,273)
Minority interest in
operations of
consolidated
subsidiary............... -- -- -- -- 23 4 (66)
Other income (expense),
net...................... 44 35 (6) -- (21) 36 (26)
------ ------ ------- ------- ------- ------- --------
Net income (loss)
before taxes........ 1,230 1,820 (991) (3,815) (851) (1,457) (13,365)
Income tax expense
(benefit)................ 12 100 801 97 15 23 26
------ ------ ------- ------- ------- ------- --------
Net income (loss)..... $1,218 $1,720 $(1,792) $(3,912) $ (866) $(1,480) $(13,391)
====== ====== ======= ======= ======= ======= ========
</TABLE>
- -------------------------
(1) Amounts are exclusive of reported below stock-based compensation for the
quarters ended:
<TABLE>
<CAPTION>
PROFESSIONAL SELLING, GENERAL AND
SERVICES ADMINISTRATIVE
------------ --------------------
<S> <C> <C>
March 31, 1998...................................... $ 8 $ 8
June 30, 1998....................................... 19 60
Sept. 30, 1998...................................... 30 166
Dec. 31, 1998....................................... 126 277
March 31, 1999...................................... 301 422
June 30, 1999....................................... 800 1,376
Sept. 30, 1999...................................... 2,254 6,304
</TABLE>
COMPARISON OF QUARTERS ENDED JUNE 30, 1998, SEPTEMBER 30, 1998 AND DECEMBER
31, 1998
Revenues decreased 7% from $8.1 million in the second quarter of 1998 to
$7.6 million in the third quarter of 1998 due to a $1.3 million decrease in
revenues from our San Francisco office related to reduced work on Formica, Nike
and Nortel. This decrease was partially offset by
32
<PAGE> 33
an increase in revenues from our New York office during the third quarter.
Revenues decreased 8% from $7.6 million in the third quarter of 1998 to $7.0
million in the fourth quarter of 1998 due to most projects in the San Francisco
office being completed by early fourth quarter that was partially offset by
continued revenue growth from our New York office during the fourth quarter.
Selling, general and administrative expenses increased 8% from $2.7 million
in the second quarter of 1998 to $2.9 million in the third quarter of 1998 due
to the opening of our Chicago office and increased infrastructure costs incurred
to support our New York office. Selling, general and administrative expenses
increased 65% from $2.9 million in the third quarter of 1998 to $4.8 million in
the fourth quarter of 1998 due to hiring of non-billable personnel, especially
middle level managers, to support our growth.
COMPARISON OF QUARTERS ENDED MARCH 31, 1999, JUNE 30, 1999 AND SEPTEMBER 30,
1999
Revenues increased 71% from $10.1 million in the first quarter of 1999 to
$17.3 million in the second quarter of 1999 due to the addition of the
DaimlerChrysler account and the opening of our Detroit office. In addition, we
recognized revenues from several of our large clients, including Blockbuster,
Global Sports Interactive and Tommy Hilfiger. Revenues increased 41% from $17.3
million in the second quarter of 1999 to $24.4 million in the third quarter of
1999 as a result of the addition of our London office as well as the seasonality
of our business.
Selling, general and administrative expenses increased 79% from $4.6
million in the first quarter of 1999 to $8.3 million in the second quarter of
1999 due to continued hiring of corporate support services personnel and the
hiring of our Chief Information Officer and the promotion of our Chief
Technology Officer. Selling, general and administrative expenses increased 57%
from $8.3 million in the second quarter of 1999 to $13.0 million in the third
quarter of 1999 as we hired a Chief Financial Officer, Chief Legal and
Administrative Officer, Chief Operating Officer and Vice President of Human
Resources. We hired additional corporate personnel for a number of our support
services including human resources, finance, information services and legal.
INCOME TAX EXPENSE
Income tax expense in the year ended December 31, 1998 reflect the
establishment of a valuation allowance against our net deferred tax asset
recorded in the year ended December 31, 1997 due to projections that the Company
would incur a net operating loss for 1998 and the foreseeable future. In 1999,
taxes reflect actual payments made for state, local and foreign taxes.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through
operating cash flows, the issuance of Series A and Series B convertible
preferred stock and bank borrowings.
OPERATING CASH FLOWS
Cash and cash equivalents increased from $1.7 million as of December 31,
1998 to $3.2 million as of September 30, 1999. Net cash used in operating
activities of $0.2 million and net cash used in investing activities of $4.0
million for the year ended December 31, 1998 was offset with borrowings of $1.9
million during 1998 from the second credit agreement for the purchase of
equipment and the $10.0 million investment by Omnicom Group in 1997 as described
below. Net cash used in operating activities of $4.7 million and net cash used
in investing activities of $5.8 million for the nine months ended September 30,
1999 was more than offset by the issuance of Series B convertible preferred
stock and borrowings under the revolving credit facility as described below.
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Capital expenditures were as follows (in millions):
<TABLE>
<S> <C>
For the years ended December 31,
1996...................................................... $0.5
1997...................................................... 1.1
1998...................................................... 5.6
Nine months ended September 30, 1999........................ 6.2
</TABLE>
Capital expenditures were used primarily for computer equipment, computer
software, other internal software implementations and leasehold improvements.
PREFERRED STOCK FINANCING
We raised $10.0 million through the issuance of 3,351,288 shares of Series
A convertible preferred stock to Omnicom Group in January 1997. In February
1999, we issued 1,488,000 shares of Series B convertible preferred stock to
Omnicom Group for net cash proceeds of $7.7 million plus the settlement of a
$3.0 million short-term bridge loan that was obtained in January 1999. For the
nine months ended September 30, 1999, we paid $38,000 in interest on this loan.
BANK AND OTHER BORROWINGS
In 1996, we had two credit agreements with a commercial lending
institution, Silicon Valley Bank, that allowed us to borrow against the purchase
of equipment and against our accounts receivable. As of September 30, 1999 we
had no amounts outstanding against these agreements. On August 27, 1999, we
entered into a revolving credit facility with Omnicom Group to be used for
working capital purposes. This credit facility allows us to borrow up to $30.0
million at the lender's commercial paper rate, based on the published 30 day
commercial lending rate in The Wall Street Journal at the last day of the month,
plus 3.0% until the closing of our proposed initial public offering. Thereafter,
we may borrow up to $15.0 million at the lender's commercial paper rate plus
1.25% through September 30, 2002. The revolving credit facility expires on
September 30, 2002. This credit facility contains some restrictions and any
borrowings pursuant to this agreement require us to comply with financial
covenants and are collateralized by some of our investments. These financial
covenants include minimum revenue targets and limitations on capital equipment
purchases. As of September 30, 1999, we had approximately $4.7 million in
outstanding debt, of which $4.0 million relates to this revolving credit
facility. For the nine months ended September 30, 1999, we accrued $12,000 in
interest on this loan. See Note 5 of Notes to Financial Statements.
We anticipate that the net proceeds of this proposed initial public
offering, together with our existing liquidity sources and expected cash flows
from operations, if any, will be sufficient to meet our present growth
strategies and related working capital and capital expenditure requirements for
at least the next 12 months. If the offering is not completed, or 12 months from
the date of the offering have passed, and our cash flows from operations and
existing liquidity resources are insufficient to fund our operations, we may
need to obtain additional equity or debt financing. We cannot be certain that
such additional financing will be readily available or can be obtained, if at
all, on terms, which are favorable to us. In the near term, we do not have any
current plans for further equity offerings, including a follow-on public
offering in the event of an increase in our share price.
RECENT OPERATING RESULTS
We recently completed our 1999 fiscal year. Based on information that we
have to date we have our preliminary unaudited consolidated operating results.
Our revenues increased by 272% from $7.0 million for the quarter ended December
31, 1998 to $26.0 million for the quarter ended
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December 31, 1999. Our net loss for the quarter ended December 31, 1998 was $3.9
million compared to $23.1 million for the quarter ended December 31, 1999. The
increase in net loss of $19.2 million or 491% was primarily due to an increase
in stock compensation and other stock-based charges from $0.4 million for the
quarter ended December 31, 1998 to $17.9 million for the same period in 1999.
Our revenues increased by 181% from $27.7 million for the year ended
December 31, 1998 to $77.8 million for the year ended December 31, 1999. Our net
loss for the year ended December 31, 1998 was $2.8 million compared to $38.9
million for the year ended December 31, 1999. The increase in net loss of $36.1
million or 1,305% was primarily due to an increase in stock compensation and
other stock-based charges from $0.7 million for the year ended December 31, 1998
to $29.4 million for the year ended December 31, 1999.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
To date, we have not utilized derivative financial instruments or
derivative commodity instruments. We invest our cash in money market funds,
which are subject to minimal credit and market risk. We believe the market risks
associated with these financial instruments are immaterial.
FOREIGN CURRENCY RISK
We face foreign currency risks primarily as a result of the revenues we
receive from services delivered through our foreign subsidiaries. These
subsidiaries incur most of their expenses in the local currency. Accordingly,
our foreign subsidiaries use the local currency as their functional currency.
We are also exposed to foreign exchange rate fluctuations, primarily with
respect to the British Pound and the Euro, as the financial results of foreign
subsidiaries are translated into United States dollars for consolidation. As
exchange rates vary, these results, when translated, may vary from expectations
and adversely impact net income (loss) and overall profitability. The effect of
foreign exchange rate fluctuation for the nine months ended September 30, 1999
was not material.
YEAR 2000 READINESS
The year 2000 problem exists because many computer systems and software
products use only the last two digits to refer to a year. This convention could
affect date-sensitive calculations that treat "00" as the year 1900, rather than
as the year 2000. As a result, computer systems and software used by many
companies, including us, our vendors, our clients and our potential clients, may
need to be upgraded to comply with such year 2000 requirements.
We have identified all of the major systems and software products and have
sought external and internal resources to renovate and test the systems and
products. Although we believe that our principal internal systems are year 2000
compliant, some of our systems are not yet certified. We have received year 2000
compliance statements from the suppliers of some of our principal internal
systems, and have sought similar statements from other vendors. In particular,
we have received a compliance statement from Peoplesoft, the supplier of our
enterprise resource planning software. Our review of our year 2000 readiness
programs, including our assessment of our internal systems as well as those of
third parties with whom we have material interactions, has been completed.
The year 2000 problem may also affect software or code that we develop or
third party software products that are incorporated into the services that we
provide for our clients. Although our clients license software directly from
third parties, we generally discuss year 2000
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issues with these suppliers and sometimes perform internal testing on their
products, but we do not guarantee that the software licensed by these suppliers
is year 2000 compliant. Any failure on our part to provide year 2000 compliant
services to our clients could result in a re-deployment of internal resources to
remediate these problems and, as a result, hamper our ability to work or take on
additional projects. This may result in financial loss, harm to our reputation
and potential liability to others and could harm our business, financial
condition and results of operations. In addition, our current or potential
clients may incur significant expenses to achieve year 2000 compliance. If our
clients are not year 2000 compliant, they may experience material costs to
remedy problems, or they may face litigation costs. In either case, year 2000
issues could reduce or eliminate the budgets that current or potential clients
could have for purchases of our services. As a result, our business, financial
condition and results of operations could be materially affected.
We have funded our year 2000 plan from operating cash flows and have not
separately accounted for these costs in the past. At this time, we cannot
estimate the costs associated with remediating the year 2000 problem. However,
we may experience unexpected problems associated with year 2000 compliance that
may adversely affect our costs and as a result, our results of operations. In
addition, we expect that additional costs will be incurred for personnel to
monitor the results of the year 2000 project to ensure client satisfaction. For
example, we may experience material problems and costs with year 2000 compliance
that could seriously harm our business, financial condition and results of
operations, including:
- operational disruptions and inefficiencies for us, our clients and
vendors that provide us with internal systems that will divert
management's time and attention and financial and human resources from
ordinary business activities;
- business disputes and claims for pricing adjustments by our clients,
some of which could result in litigation or contract termination; and
- harm to our reputation to the extent that our client deliverables
experience errors or interruptions of service.
The principal risks associated with the year 2000 problem can be grouped
into three categories:
- failure to successfully ready our operations for the next century;
- disruption of our operations due to operational failures of our
significant vendors; and
- inability of our customers to adequately prepare their operations for
the next century.
The only risk largely under our control is preparing our internal
operations for the year 2000.
Operational failures among our significant vendors could jeopardize our
operations, but the seriousness of this risk depends on the nature and duration
of the failures. Despite our continuing assessment, we are unable, however, to
estimate the likelihood of significant disruptions during the year 2000 among
our basic infrastructure suppliers.
We monitored our internal systems and the work that we have done for
clients during December 1999 and through the first days of January 2000. The few
issues noted were dealt with at the time they arose. We believe there were no
significant disruptions of either client or internal operations. We continue to
monitor both our internal systems and client work.
Operational failures during the year 2000 among our current or potential
clients could result in losses of expected or potential revenue streams. If our
clients are not year 2000 compliant, they may experience material costs to
remedy problems, or they may face litigation costs. In either case, year 2000
issues could reduce or eliminate the budgets that current or potential clients
could have for purchases of our services. The year 2000 problem may also affect
software or code that we have developed or third party software products that
are incorporated
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into the services that we provide for our clients. Any failure on our part to
provide year 2000 compliant services to our clients could result in a
re-deployment of internal resources to remediate these problems and, as a
result, hamper our ability to work or take on additional projects. As a result,
these failures could have a material adverse effect on our business, financial
condition and results of operations.
In view of this unknown probability of occurrence and impact on operations,
we consider the need to cease normal operations for an indefinite period of time
while we attempt to respond to our significant vendors' year 2000 problems to be
our worst case scenario.
We have developed year 2000 contingency plans to address situations that
did or may continue to result if we were unable to successfully ready our
operations for the next century. We cannot, however, guarantee that our
contingency plans will shield operations from potential failures that may occur.
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BUSINESS
OVERVIEW
Organic is an international Internet professional services firm. We believe
that the Internet has shifted the balance of power from businesses to customers
and has created the first truly global market. We believe that the ultimate
customer, whether a business or consumer, is the central and most influential
participant in a commercial relationship. We believe that the key to our
business, is our complete focus on our clients' customers -- the
customer-to-business market. We designed our services in recognition of the
challenges our clients face due to this shift. Our services are:
- iBusiness refers to our consulting, Web site design and software
engineering services through which we develop online business plans and
create Web sites;
- Media refers to our services through which we plan and manage online
advertising campaigns including electronic mail promotions and
affiliate program management;
- Communications refers to our public relations services through which we
plan and manage our clients' press and publication relationships as
well as product and company launches; and
- Logistics refers to our customer service and fulfillment consulting
services through which we evaluate, assist and manage for our clients'
warehouse and customer call center facilities.
Clients that use our services tend to spend proportionally more during the
second and third quarters due to their requirements that their projects be
completed in time for commercial holidays.
Founded in 1993 as a sole proprietorship and incorporated in January 1995,
we have a history as an innovator in the Internet professional services
industry. We have designed and developed a number of Web sites that were the
first in their industry category. We have performed work for over 250 clients
and have gained significant experience by working with both major offline and
emerging Internet companies. We have organically grown our business, creating
one of the largest independent Internet professional services organizations with
nearly 700 employees in eight offices worldwide. By expanding our business into
Asia, Europe, Latin America, and Canada, we believe we have established the
presence to deliver our services globally.
INDUSTRY BACKGROUND
CUSTOMER EMPOWERMENT
The Internet has created an environment for businesses where the
competition is only "one click away". Online customers can reach a large number
of vendors and can compare pricing and product information in order to obtain
higher levels of service and lower prices. These factors have increased the
importance of customer satisfaction and loyalty as well as the quality of the
online experience, forcing many businesses to redefine the way they build and
maintain relationships with their customers.
As the number of Internet users and the value of transactions over the
Internet grow, businesses are becoming increasingly aware of the importance of
focusing their online strategies on attracting, servicing and retaining
customers. International Data Corporation estimates that the number of Internet
users worldwide will grow from 142 million in 1998 to 502 million by 2003.
International Data Corporation also estimates that electronic commerce, which
totaled approximately $50 billion in 1998, is expected to increase to
approximately $1.3 trillion by 2003.
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This growth in both the number of users and the value of electronic commerce
creates significant opportunities and challenges for businesses on the Internet.
BUSINESSES FACE SIGNIFICANT OPPORTUNITIES AND CHALLENGES ONLINE
Increased competition for customers forces both traditional and online
businesses to create or redefine themselves as the global reach of the Internet
removes traditional geographic boundaries. Companies that have never had direct
relationships with their end customers can establish them, in some cases
bypassing traditional intermediaries. In addition, companies now have the
opportunity to form lasting relationships directly with new customers. Some
companies must also integrate their online and offline business strategies. In
addressing these changes, businesses face significant opportunities and
challenges including:
CREATING STRATEGIES TO ADDRESS ONLINE OPPORTUNITIES. Developing strategies
that can be quickly evaluated and implemented is a critical factor in improving
the time-to-market for online businesses. Companies that can quickly identify
opportunities, target and service diverse groups of customers, define and
develop sustainable online business models, and evaluate their online success
may improve their performance.
CREATING A POSITIVE CUSTOMER EXPERIENCE. Companies must create online
businesses that deliver consistent, engaging and responsive customer
experiences. If done effectively, the foundation for a long-term relationship
between the business and the customer is formed.
CONNECTING WITH POTENTIAL CUSTOMERS ONLINE. Understanding how to
communicate with online customers requires businesses to develop new knowledge
and skill sets. These skill sets include identifying, targeting, attracting and
retaining customers.
MANAGING INTERNET TECHNOLOGY. Internet technology differs from traditional
information technology. Therefore, many businesses do not possess the technical
skills required to design, build and maintain a functional and reliable online
business. Internet technology requires the expertise to select and build
platforms that can handle high volumes of transactions.
EFFECTIVELY UTILIZING CUSTOMER DATA. Businesses can collect, store and
analyze significant quantities of customer information. This information if
properly analyzed can be used to improve the total customer experience and
increase loyalty.
MEETING CUSTOMER SERVICE AND FULFILLMENT EXPECTATIONS. Often overlooked,
customer service and fulfillment services can create long-lasting, positive or
negative, impressions with customers. Businesses that can distinguish themselves
by offering quality customer service and fulfillment will maximize the value of
their customer relationships.
To capitalize on these opportunities and overcome these challenges, online
businesses need to focus on delivering a positive customer experience.
Increasingly, this requires the ability to draw upon significant experience in a
variety of disciplines, manage large multi-disciplinary teams and successfully
deliver an integrated solution worldwide.
DEMAND FOR INTERNET PROFESSIONAL SERVICES
Few businesses have the internal capabilities to address the opportunities
and challenges of the Internet. The complexity of conducting business online,
the rapidly changing technological environment, the need to improve
time-to-market and the limited supply of technically proficient internal
personnel creates significant demand for Internet professional services.
According to a 1998 Dataquest survey, 83% of Fortune 1000 companies currently
purchase, or plan to purchase, Internet professional services solutions such as
those we provide. Furthermore, International Data Corporation estimates the
worldwide market for Internet professional services will grow from $7.8 billion
in 1998 to $78.6 billion in 2003, which represents a compound annual growth rate
of more than 58%.
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We believe that companies seek Internet professional services firms that
deliver complete and integrated global services with a focus on establishing,
maintaining and enhancing customer relationships with the appropriate
technology. We believe that such firms must have the capabilities to design and
build online businesses, use technology as a strategic tool, employ effective
marketing strategies and improve customer service and fulfillment to enhance the
customer experience.
THE ORGANIC SOLUTION
We have developed an integrated solution to address the evolving needs of
the customer and our clients. The key elements of the Organic solution are:
CUSTOMER-TO-BUSINESS MARKET FOCUS
We are exclusively focused on, and have built our reputation in, the large
and growing customer-to-business market. The customer-to-business market
encompasses both the traditional business-to-consumer and business-to-business
markets, but views the ultimate customer as the central and most influential
participant in a commercial relationship.
We recognize that a complete focus on the customer has become important to
our clients as the Internet allows every customer to demand positive online
experiences. We help our clients transform their businesses by building them
from the customer's perspective, enhancing their ability to create and maintain
a direct relationship with their customers and effectively incorporate customer
feedback into their business. We believe that we provide a unique value
proposition to our clients because we approach our solutions as potential
drivers of growth in overall customer satisfaction rather than as isolated
assignments. This approach requires a comprehensive and integrated skill set.
Therefore, our projects are typically of substantial size. For the nine months
ended September 30, 1999, 66% of our revenues were generated from engagements
with a value of more than $1.0 million.
COMPREHENSIVE AND INTEGRATED SERVICE OFFERING
We deliver value to our clients and their ultimate customers by addressing
all of the points of contact in the customer experience. These contact points
include advertising and communicating with customers as well as selling and
delivering goods or services to them. Since our inception, we have sought to
provide an integrated solution by expanding our service offering to meet our
clients' evolving needs, including:
- iBusiness refers to our consulting, Web site design and software
engineering services through which we develop online business plans and
create Web sites;
- Media refers to our services through which we plan and manage online
advertising campaigns including electronic mail promotions and
affiliate program management;
- Communications refers to our public relations services through which we
plan and manage our clients' press and publication relationships as
well as product and company launches; and
- Logistics refers to our customer service and fulfillment consulting
services through which we evaluate, assist and manage for our clients'
warehouse and customer call center facilities.
We believe that these disciplines are highly dependent and must be
integrated to create a positive customer experience. Our approach helps us
maintain long-term relationships with our clients. This also encourages our
clients to use more than one of our service offerings and enables us to assist
our clients with the implementation of their online businesses and the
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refinement of their strategies. Furthermore, the opportunity to have an ongoing
role in our clients' online businesses provides us with a recurring revenue
base.
GLOBAL PRESENCE
The Internet has removed geographic barriers. Many of our multi-national
clients demand a consistent brand image and tailored customer experience, which
often requires localized content and specific knowledge about local practices
and customs. We believe that establishing a global presence is critical to our
clients' and ultimately to our success. Therefore, we will continue to expand
internationally, as well as in the U.S. We currently have offices in four
international locations including London, Sao Paulo, Singapore and Toronto.
Currently we serve 23 clients internationally. We believe that our global
presence allows us to establish and deepen relationships with multi-national
clients and grow with them by effectively meeting the needs of their customers
on a global basis.
TECHNOLOGY AS A STRATEGIC TOOL
Technology is a critical element in our service offerings and influences
our solutions. We combine custom software with third party software and
integrate them into the existing technical infrastructure of our clients. Using
this approach, we create systems that can handle a high volume of transactions
from the Internet as well as the changing demands of customers over time. For
example, we obtain information from clients about their potential business and
customer needs, and recommend various hardware and software.
In addition to managing the implementation of Internet solutions, we also
introduce new technology to our clients.
Examples include:
- We provide rich media online, including Web audio and video;
- We develop online, transaction-enabled advertising banners, which allow
an entire electronic commerce transaction to occur through the banner;
and
- We develop customer service and fulfillment solutions, which use
transaction management software to connect our clients' Web sites
seamlessly to fulfillment centers.
These innovations use technology as a strategic tool to deliver a unique
and positive customer experience.
COLLABORATIVE AND BALANCED TEAM APPROACH
Our client teams work together to design, build and maintain online
businesses. Client teams contain individuals from each discipline required by
the engagement and are managed by a multidisciplinary group of team leaders
including a client service representative, known as a client partner, an
interactive strategist, a creative leader, a technical leader and a project
manager that work in close coordination to ensure successful execution of an
engagement. Marketing and public relations and customer service and fulfillment
leaders round out each team depending on the scope of the engagement. These team
leaders work together as peers to actively manage and monitor each client
engagement through the use of milestones, planning and implementation processes
and regular feedback mechanisms.
From planning to design to problem-solving the expertise of every
discipline is involved and team members share knowledge and ideas. This ensures
that the strategy we design can be implemented and the technology we recommend
meets customer needs. Our corporate culture promotes the open discussion of
strategic, design, creative and technical challenges. We believe
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that this culture allows us to solve problems efficiently and effectively,
helping us to deliver on the high expectations of our clients and their
customers.
OUR GROWTH STRATEGY
Our objective is to be the leading Internet professional services firm
focused on the customer-to-business market. To achieve this objective, the key
elements of our growth strategy include:
HIRE AND RETAIN THE BEST PEOPLE
We view our culture and commitment to professional development to be an
asset in attracting and retaining our professionals. We have a group of
recruiters that identify and hire outstanding professionals, an extensive
training and development program to foster employee satisfaction and competitive
compensation and benefits programs. Given our growth we also provide our
employees with the opportunity for professional mobility and focus on developing
our managers from within the organization. We have invested in local human
resources teams for our offices that monitor employee morale and daily human
resources operations.
LEVERAGE OUR BUSINESS PROCESSES AND INFRASTRUCTURE
We have developed a business model that can accommodate our growth and
serve our expanding client base. To support this model, we continue to improve
our internal processes by which we manage our business and corporate knowledge
including our proprietary workflow methods, the reuse of common programming
elements and our use of prototypes. We will continue to invest in our
infrastructure including our management information systems, our financial
planning processes and controls and our Intranet. Our strategy for office
expansion, known as office-in-a-box, is designed to provide both a systematic
approach and the processes necessary to efficiently and effectively implement
critical business functions in a new office on a global basis. We believe that
the development and evolution of these processes and infrastructure will allow
us to continue to effectively manage our growing business operations.
CONTINUE OUR TRACK RECORD OF INNOVATION
Our ability to innovate will continue to be an important factor to our
business. We have demonstrated a track record of innovation. We led the
development of the Apache Web server. In addition, we continue to identify and
address the changing needs of our clients and their customers through the
creation of new service offerings. Our logistics customer service and
fulfillment consulting services and our practice known as Value Optimization
through Improved Customer Engagements, or VOICE, an offering that helps
businesses incorporate the needs of the customer into online business
operations, are two more such examples. We will continue to develop additional
service offerings as we anticipate new customer needs.
EXPAND OUR RELATIONSHIPS WITH OUR EXISTING CLIENT BASE
We intend to use our service offerings to expand relationships with our
existing clients as their needs change. The Internet has proven to be a highly
dynamic and powerful medium and the extent of its global impact on traditional
businesses and the creation of new commercial opportunities is not fully known.
This gives us the opportunity to sell additional services to our existing
clients as their needs change or the scope of our engagement grows. By expanding
relationships with our existing clients, we can reduce the cost of acquiring
additional revenues, strengthen our partnership with our current clients and
increase recurring revenues.
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EFFECTIVELY TARGET AND SOLICIT NEW CLIENTS
We believe that by targeting new clients we will improve our long-term
prospect for success. We will target new clients that understand the Internet
and that will benefit from using more than one of our service offerings,
however, they may use just one of our services. We also pursue engagements that
enhance our overall franchise in the Internet professional services industry by
allowing us to implement Internet solutions for new industries, technologies and
business models. By effectively targeting new clients, we believe that we can
build mutually beneficial long-term client relationships and gain valuable
experience.
CONTINUE OUR GLOBAL EXPANSION
To be a global business, we believe that we need to expand into non-U.S.
markets that we anticipate will have an increasing number of Internet customers.
To meet our global growth objectives we intend to open new offices, both in the
U.S. and internationally, to expand our base of clients and to deepen our
relationships with our existing clients. In addition to organic growth, we may
make small strategic acquisitions in selected international markets to acquire
local talent and experience as appropriate.
To effectively manage and achieve our planned global growth, we anticipate
the need to open a number of new offices over the next several years. To manage
our office expansion program we have assembled and trained an experienced
corporate development team, which has successfully opened four offices since
1998. The corporate development team led the design of our office-in-a-box
program to provide a systematic set of procedures and tools to open new offices,
including workflow, project management, recruiting, training and budgeting. We
currently have U.S. offices in San Francisco, New York, Chicago and Detroit, and
international offices in London, Sao Paulo, Singapore and Toronto.
ORGANIC SERVICES
We provide services focused on the total customer experience. We developed
our service offerings to meet the changing needs of our clients and their
customers and we anticipate that these offerings will continue to evolve and
expand. Each of our services is implemented through a team, which consists of
interdisciplinary team members. Our current service offerings include:
IBUSINESS CONSULTING SERVICES
The value of our iBusiness consulting offering lies in our ability to
understand our clients' business objectives, collaborate with our creative and
engineering teams and make recommendations that clients can use to create online
businesses. Our ability to deliver prototypes provides our clients with the
opportunity to have a time-to-market advantage.
SERVICES PROVIDED. Our iBusiness consulting teams provide Internet-focused
business strategy expertise, strategic marketing, branding and research
services, and customer service and technology consulting. Our team helps clients
identify online market opportunities, define and develop sustainable online
business models, understand competitive differentiation, identify, analyze and
segment online target markets, develop compelling online brand strategies and
evaluate their online efforts.
Our research services focus on five key areas including audience profiling,
concept testing, site development and usability, brand strategy and market
positioning and messaging. Our researchers use surveys, usability testing,
one-on-one interviews and focus groups during the development of online
businesses.
IMPLEMENTATION. Our iBusiness consulting teams work with our clients and
other specialists within Organic. These teams create a plan, test multiple
scenarios and refine that plan based on
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the rapid prototyping of potential strategies. In addition, our teams share
ideas and best practices through education and brainstorming sessions, summits
and workshops.
IBUSINESS WEB SITE DESIGN SERVICES
Our Web site design teams design a user experience that enhances the
interaction and communication between our clients and their customers consistent
with our clients' strategic goals and the needs of their customers.
SERVICES PROVIDED. Our Web site design services involve the creation or
extension of a client's online brand identity, defining the theme or unifying
concept for the business or media campaign and creating an experience and
message to attract and retain customers. At the simplest level, our services
involve Web site design, but they also include the design and implementation of
the other creative elements of a customer interface, such as online banner
advertisements. Our creative team works closely with our strategy and
engineering teams to ensure that the technical architecture and the user
interface of a client's online business work together to create a consistent,
engaging and responsive customer experience.
IMPLEMENTATION. We implement our Web site design services through experts
in four key areas, including:
- visual design, which focuses on the visual appearance of a Web site to
the customer;
- editorial, which focuses on making interesting text-based content;
- information architecture, which focuses on site navigation; and
- interactive art production, which focuses on transforming visual images
into an electronic format.
Our Web site design staff has expertise and training as animators,
cinematographers, editors and sound, multi-media and game designers. Our use of
prototypes to evaluate interface design, content and customer behavior improves
our ability to quickly test multiple scenarios and incorporate feedback into the
design and implementation of a solution. The prototyping process also allows us
to investigate new uses for applications, technologies and platforms including
broadband and interactive television.
IBUSINESS SOFTWARE ENGINEERING SERVICES
Our software engineering teams combine traditional software engineering and
new technologies to implement technical infrastructure recommendations and
software that can be adapted for the growth of our clients' businesses.
SERVICES PROVIDED. We combine custom software with third party software and
integrate them into the existing technical infrastructure of our clients. Our
Internet expertise includes all aspects of technical design, development and
integration related to electronic commerce; Web-based applications development;
database systems; content and transaction management tools; and Internet
features including community, personalization and customization. We also
incorporate the ability to measure site performance and track customer behavior
information allowing our clients to calculate their return on investment.
IMPLEMENTATION. Our software engineering teams analyze a problem and
recommend, design and deploy a solution. Our software engineering teams
implement interface designs developed in conjunction with our creative teams
using interactive technologies including dynamic hypertext markup language, or
DHTML, Shockwave and Flash. These technologies allow us to create Web sites that
include interactive content, audio and video versus traditional text-based Web
sites. Throughout all phases of development, a group of quality assurance
specialists work in conjunction with our development teams to ensure that our
solutions meet our client's needs.
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MEDIA SERVICES
Our media services build brands, generate awareness and drive traffic and
transactions for our clients' online businesses. We believe we are a significant
buyer and manager of online media, and that our accumulated purchasing power and
analysis of customer behavior data delivers measurable results for our clients
through lower customer acquisition costs, higher customer retention rates and
increased revenues.
SERVICES PROVIDED. Our media teams use their knowledge of customer behavior
to design online marketing campaigns and also offer services including direct
response, electronic mail promotion, sampling, sponsorships, brand development
and affiliate program management. In collaboration with our engineering teams,
we have created new "beyond the banner" advertising vehicles using DHTML
technology. These advertisements allow entire transactions to be completed
within the banner, facilitating commerce by reducing the time and effort
required to complete a transaction. This innovation also delivers a consistent
branding message and effectively shares information between the Web site and the
advertisement. As appropriate, we also extend our media expertise offline either
directly or through arrangements with offline agencies.
IMPLEMENTATION. Creating an online advertising program begins with research
and strategic planning from a team that provides overall direction consistent
with our client's strategy. The team generally includes an art director, a
writer, a technical lead, a performance analyst and a media planner and buyer.
The team collaborates to develop advertising designs, promotional or sponsorship
ideas, media recommendations and test scenarios and metrics for each campaign.
After a marketing program launches, our team analyzes the success of the
campaign by reviewing response rates, traffic and transaction volumes and then
uses this feedback to refine the campaign or future campaigns.
COMMUNICATIONS PUBLIC RELATIONS SERVICES
Our communications public relations services assist our clients with the
management of their ongoing press and publication relationships.
SERVICES PROVIDED. Our communications public relations services include:
- strategic message and identity development, which helps clients
position themselves in their markets and differentiate themselves from
their competitors in the eyes of current and potential customers;
- product and company launch or relaunch services, which aim to create
awareness of and position a product or company with customers; and
- broadcast, online and print media and analyst relations services, which
help clients enhance their brand recognition.
IMPLEMENTATION. We work with our clients to assess their public
communication objectives, formulate short-term and long-term public relations
plans and utilize our industry knowledge and expertise to implement these plans.
LOGISTICS CUSTOMER SERVICE AND FULFILLMENT CONSULTING SERVICES
Our logistics customer service and fulfillment consulting offering includes
both consulting and transaction management services. We deliver a complete
electronic commerce experience to our clients' customers. We provide advice on
best practices based on facility visits and audits of 20 electronic commerce
fulfillment and customer service providers as well as our proprietary database
which contains the logistical features of 500 leading Web sites and profiles of
current relevant Web-based applications, including live chat, electronic mail
and collaborative filtering.
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SERVICES PROVIDED. Our logistics consulting services include a needs and
capabilities assessment, consulting services, technology assessment services,
third party vendor selection and negotiation, development of performance
monitoring procedures and the integration of customer service and fulfillment
functions into our clients' Web operations.
Our logistics transaction management services provide a complete outsourced
solution, including customer service, fulfillment and transportation management
services. Our fulfillment specialists monitor the performance of third party
fulfillment houses, identify and implement service enhancements and can manage
all of the vendors used by our clients. In addition to fulfillment services we
also help our clients improve their customer service experience by designing,
and managing highly automated third party call centers. Our staff incorporates
telephone, electronic mail and live chat services that extend beyond traditional
order taking and tracking functions in ways that help our clients improve and
extend their relationship with their customers and potentially increase
satisfaction and loyalty.
IMPLEMENTATION. Our customer service and fulfillment professionals are
experts in electronic commerce distribution and focus on integrating order
management, transportation management, customer fulfillment, distribution,
payment processing, call center and data management activities.
INNOVATIVE SERVICE OFFERINGS
Driven by the needs of our clients and their customers we continue to
develop innovative service offerings. We are developing a service offering
called Value Optimization through Improved Customer Engagements, or VOICE. We
believe that if a company can effectively collect, analyze and use customer
information it will improve its business. We developed our VOICE service to
gather information from customers, understand customer behavior and generate
useful recommendations for our clients. We believe that VOICE's innovation is
based on its use of both behavioral psychology and statistical modeling. We
continue to develop innovative service offerings as we anticipate new customer
needs.
CLIENTS
We believe that to succeed we need to maintain a broad client base of both
large, established companies and emerging Internet companies. For the nine
months ended September 30, 1999, approximately 75% of our revenues were derived
from established, offline companies either extending their businesses or
creating a new presence or identity online. Since our founding in 1993, we have
performed work for over 250 clients. Consistent with our strategy, we have
derived approximately one-third of our revenues for the nine months ended
September 30, 1999 from clients who have used more than one of our service
offerings.
The following is a list of our clients that generated over $100,000 in
revenues for us during the nine months ended September 30, 1999, which we
believe is representative of our overall client base:
ESTABLISHED COMPANIES
American Century
Avis
Barnes & Noble
Blockbuster
Brahma Beer
British Telecom
Chase Manhattan Bank
Compaq
DaimlerChrysler
Day Timers
Gap
Garnet Hill
Global Sport Interactive
Hambrecht & Quist
Hewlett-Packard
Home Depot
Iomega
Knowledge Universe
Lucent
Nature Conservancy
Nickelodeon
Payless Shoe Source
Prodigy
RCN Corp.
Seagate
Starbucks
Tommy Hilfiger
United Missouri Bank
Washington Mutual
Waterhouse Securities
Zagat
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EMERGING INTERNET COMPANIES
Adauction
Awards.com
Accent Health
Boo.com
CDNOW
Career Mosaic
CTC
Deja.com
Digital River
E-Negatives
E/Town
eToys
Fragrance Counter
FTD.com
Haystock Toys
Guild.com
iWare
JPKids
Lucy.com
Next Planet Over.com
Seagate
Starbucks
Stan Lee Media
Party Host.com
Pseudo
Rx.com
Textbooks.com
Tomorrow Lab
Worldly Information
Networks
Zip.Net
We currently derive a significant portion of our revenues from a limited
number of clients. For the nine months ended September 30, 1999, our five
largest clients accounted for approximately 41% of our revenues. During this
period DaimlerChrysler and Blockbuster accounted for approximately 12% and 10%
of our total revenues, respectively. The termination dates for both
DaimlerChrysler and Blockbuster contracts are December 31, 2000, unless earlier
terminated by the parties under the contract provisions.
In exchange for our services we have from time to time made investments in
some of our Internet clients. Our venture catalyst investment strategy has been
focused on select early stage clients with attractive business models seeking
alternative forms of payment and/or who are interested in more closely aligning
our goals through equity-based compensation. In general, these equity
investments are structured so our clients pay for all of the costs related to
their engagement in cash and use equity incentives to compensate us for a
portion of our profit margin. As of September 30, 1999, we made equity
investments in the following clients: Stan Lee Media, HomeGrocer.com, Worldly
Information Networks and Next Planet Over.com.
CLIENT CASE STUDIES
Each of the case studies that follow demonstrate our ability to deliver
global, integrated solutions with complex technologies. Tommy Hilfiger,
DaimlerChrysler and Compaq accounted for approximately 4%, 12% and 6% of our
total revenues for the nine months ended September 30, 1999.
TOMMY.COM
The work that we are performing for Tommy.com, Inc., a subsidiary of Tommy
Hilfiger Corporation, illustrates the value that our service offerings can
deliver to our customers. Our services include design, content creation,
branding, site construction and establishing a framework for broadband
technologies. We are also managing the call centers that customers who visit
Tommy.com are directed to contact. We believe that all of these services are
critical to delivering a customer experience that fulfills the promise regarding
brand and product that are presented on the Tommy.com Web site.
CLIENT CHALLENGE. In launching its online efforts, Tommy.com faced the
challenge of building an online presence that would further define and extend
its brand through a deeper interaction with customers. We were asked to help
Tommy.com convey the meaning and extend the consistent message of the existing
brand onto the Internet.
ORGANIC SOLUTION. We are delivering a solution that uses a number of our
service offerings in order to ensure the success of Tommy.com's online
initiative. We are building Tommy.com's new online presence on a solid
technological foundation consisting of custom developed software that is
integrated with Tommy.com's existing systems creating a unified platform. Using
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this architecture, we are creating a rich media interface to communicate the
Tommy Hilfiger brand to customers through audio, video, text and other visuals.
We are also assisting Tommy.com to create original audio, video and editorial
online content to augment existing content and to build an interactive forum.
The platform we are building is able to handle a high volume of transactions and
allows for broadband delivery in the future.
DAIMLERCHRYSLER
The work that we are performing for DaimlerChrysler demonstrates our
ability to create a successful strategic relationship and to deliver services on
a global basis to large international clients.
CLIENT CHALLENGE. In creating its online initiative, DaimlerChrysler needed
to broaden its mission to include interactive strategies and to address its
growing technical needs in the global marketplace. It had a variety of Web sites
in different countries that were controlled locally. To implement its global
strategy, DaimlerChrysler needed to create a unifying image for all of its
Internet properties. This required a global team approach to interact and build
consensus with both local and corporate constituencies within DaimlerChrysler.
ORGANIC SOLUTION. We have begun to deliver a solution that is designed to
create a unified Web strategy that presents DaimlerChrysler brands consistently
worldwide in a way that appeals to local customers. We focused our initial
efforts on Europe. A team comprised of personnel from our London, New York and
Detroit offices collaborated to:
- conduct audits of the Web sites in each local market to develop a
cohesive long-term European strategy;
- develop Web sites to incorporate both the corporate and local market
customer messages; and
- leverage technology and information across the organization.
We developed the content and copy for branded Web sites and implemented
multi-lingual functionality for global audiences, a process commonly referred to
as localization.
To transition from locally to centrally controlled Web sites, we developed
a phased approach to conform all Web sites with our recommended global
architecture, while allowing local design input. The first phase included
transforming the content of each local Web site from 10 pages with limited
functionality and product information to 300 pages using a template with
multiple car information and expanded functionality that could be easily
replicated to add other countries. We leveraged technologies created in the
U.S., including electronic mail fulfillment and user data capture for use across
Europe. In the second phase, we plan to redesign the application infrastructure
to create a dynamic, personalized experience and extensively use Shockwave and
Flash technology to enable rich media experiences for new vehicle introductions.
Recently the scope of our efforts for DaimlerChrysler has expanded to include
the Asia-Pacific region, South America and the Middle East.
COMPAQ
The work we performed for Compaq Computer Corporation illustrates our
skills with cutting-edge Internet technology. In working with Compaq, we
developed a dynamic, highly technical Web site, to connect Compaq, a Fortune 500
company, with consumers in the online world.
CLIENT CHALLENGE. Compaq wanted to build a Web site to showcase the Sting
World Tour and enhance Compaq's position as an Internet savvy company. Compaq
wanted to create a Web site that would have a life span of 18 months, the length
of the tour, and would be able to take advantage of broadband technologies as
they become more available.
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ORGANIC SOLUTION. Our solution was to create a dynamic Web site featuring
tour information, information about Sting and a behind the scenes section to
showcase the Compaq technology supporting the Web site. We performed the systems
integration and database design using Compaq ProLiant servers and Microsoft
software technology. Repeat visits to the Web site are enhanced through the use
of the community tools and the Songline Engine -- a real time tool to create and
compose original audio, video and text based on rich media available throughout
the Web site. It encourages word of mouth marketing by giving users the ability
to invite others to view a Songline creation on the site. In addition to the
Songline Engine, we developed a rich media interface using Flash and other
technologies and also created a registration engine to capture potential
customer information, allowing for targeted marketing efforts.
Our solution makes use of some of the latest Internet technologies. We
employed Flash extensively to enable the user to experience a true next
generation Web site sponsored by Compaq. We also designed the Web site's
architecture to allow for a long life span and eventual integration of materials
for broadband delivery. In addition, we developed custom publishing and content
management tools to allow geographically diverse teams to manage the Web site
and update rich media portions of the system through a Web-based interface.
These tools reduce the overall operating costs and resources necessary to
maintain the Web site.
SALES AND MARKETING
Our local business development professionals and client partners market and
sell our services. Opportunities are prioritized by client engagement type,
vertical industry and the opportunity to innovate. Our marketing efforts are
focused on assignments which may use more than one service offering and/or
include large, multi-national clients. Extended engagements, defined as
multi-year and recurring revenue opportunities with the potential to evolve into
relationships that use all of our service offerings are also prioritized. We
also pursue basic engagements, which tend to be smaller in size or shorter in
duration, when new vertical markets or innovation opportunities exist.
We target vertical industries based on the size of the market opportunity
and the influence of the Internet. Current industry verticals include apparel,
automotive, consumer electronics, education, entertainment and content,
financial services, healthcare, travel and home categories.
In addition to new clients, a key component of our growth strategy is the
ability to penetrate existing client accounts through the cross selling of
additional services. We currently manage opportunities with existing clients
through our account management process. In this process, a client partner is
responsible for understanding the client's needs and how other Organic services
could be beneficial. All members of the client team meet on a monthly basis to
review business development plans with respect to each client and evaluate our
progress on earlier initiatives.
Our business development group is complemented by a variety of marketing
programs designed to generate demand and strengthen our brand. We have built our
reputation through client references, industry conferences, trade publications
and our Web site. To promote our brand, we will continue to pursue a marketing
strategy through both Internet and traditional media-based channels to increase
our visibility with potential clients and prospective employees. In addition to
these formal marketing efforts we have historically established a number of new
client relationships based on referrals from previous engagements.
MAINTAINING THE ORGANIC CULTURE
OUR CULTURE AND EMPLOYEES
We view the Organic culture as one of our most strategic assets. We have
built a creative and adaptive environment that inspires individuals to excel.
The influence of our culture extends to the design of our office space, which
has an open plan with few offices or cubicles to promote
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a barrier-free environment. Our organization is centered on people, and espouses
the core values of collaboration, innovation and learning. We are committed to
recruiting outstanding professionals, providing ongoing, role specific and
general management training and development and offering competitive
compensation and benefits packages. Our learning transfer occurs both through
structured, moderated sessions and informal employee gatherings. Examples of
structured sessions include our specialized summits, new hire orientation
seminars and local all hands meetings. Unstructured employee gatherings include
Wednesday bagel mornings and Friday afternoon socials during which employees
from all disciplines and functions within an Organic office can come together in
a supportive setting to share and generate ideas, or just to relax and have fun.
As of September 30, 1999, we had 681 full-time employees. Of these,
approximately 30 were strategy consultants, 41 were media and communications
specialists, 117 were Web site design specialists and 152 were software
engineers and technical professionals. Experts in other functional groups
included 11 in business development, 58 in client services and 79 in project
management. None of our employees is represented by a labor union. We have not
experienced any work stoppages and believe our relationship with our employees
is good.
RECRUITING
Given our historical and anticipated growth, identifying and hiring
outstanding professionals that fit within the Organic culture is one of the most
important functions within Organic. Our recruiting department consists of 15
professionals domestically and internationally, and includes 10 full-time
recruiters. The recruiting department is organized along geographic lines so
that we can develop an in-depth knowledge of the local market and scale in
accordance with our expansion strategy. As we open and expand new offices, they
will usually be supported by the recruiting department of an existing office
until the new office reaches sufficient size, at which point a dedicated
recruiting professional is assigned.
We recruit through a broad array of channels, including:
- general and job specific advertising;
- internal hires;
- job fairs;
- open houses; and
- trade shows.
We are currently implementing a number of key recruiting initiatives
including:
- an enterprise-wide, Web-based hiring automation system with a
PeopleSoft interface;
- an internal sourcing team focused on proactive identification of key
talent; and
- a college relations program to target highly qualified students and
promote our image at colleges and universities around the world.
Our new recruiting system is designed to enhance our ability to maintain
detailed performance metrics to monitor and control open positions, time to fill
open positions, cost per hire, source of hire and quality of hire.
TRAINING AND DEVELOPMENT
We have an extensive training and development program, which is designed to
increase employee productivity, complement our recruiting and retention efforts
by enhancing employee job satisfaction and promote knowledge sharing. Our
training and development initiatives include
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new hire orientation, ongoing management and professional skills training and
annual summits for a number of functions including:
- Web site design;
- project management;
- software engineering;
- media;
- business development;
- strategy; and
- client services personnel.
Training and development also complements our office expansion strategy by
promoting consistency across all of our offices, service lines and departments.
As we continue to open new offices and expand existing offices, we can deploy
existing employees who have mastered the skills required and understand the
Organic culture.
RESEARCH AND DEVELOPMENT
Our research and development, or R&D team, is focused on assisting local
teams with solving problems. Our R&D team also maintains relationships with
companies that provide knowledge and recommendations on software, hardware and
training that will speed team problem solving.
We focus on three service lines: engineering, creative and strategy. Our
engineering R&D efforts involve investigating new technologies, products and
standards. We also develop platforms that allow for rapid solution delivery.
While developing core skill sets, our engineering team has taken a
technology-agnostic stance, allowing our clients to benefit from objective
recommendations. Our engineering R&D supports our teams with the knowledge to
quickly select the best technology solution, and if necessary, provide the
support to implement it.
Our creative R&D focuses on both extending and enabling our engineering
team efforts. Three areas of particular emphasis are exploratory prototypes,
re-use strategies for information design and strategic creative partnerships.
Our creative R&D team also collaborates with local creative teams, as well as
our strategic consulting and VOICE teams to increase our understanding of the
patterns and interfaces that allow our solutions to connect with their intended
audience. Behavioral knowledge and communication expertise are intrinsic to
success on any interactive platform; therefore, creative research, analysis and
invention are all methodically gathered and shared with our teams.
Our R&D team also works closely with our strategy teams throughout the
organization to create new and enhanced business models, revenue streams and
cost savings opportunities for our clients. The end result is faster, more
robust, more efficient solutions for developing our client's businesses. For the
years ended December 31, 1997 and 1998 and for the nine months ended September
30, 1999, we estimate that we spent $0.1 million, $0.2 million and $0.5 million
on R&D, respectively.
KNOWLEDGE MANAGEMENT
We capture and share knowledge through our Intranet, training and
development classes, discipline summits, off-site management meetings and our
office-in-a-box tools and processes. We re-use technology when appropriate
through the development of standard software platforms, centrally-managed
software licensing, software re-use and strategic technology partnerships. We
also share best practice creative design solutions across our teams for use with
our clients.
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INTRANET
The mission of our Intranet is to create a sense of community, enhance
communication and simplify processes. Our workflow processes are accessible
through the Intranet, and teams are expected to follow them as standard
procedure on client engagements. We encourage constant improvement in these
processes, which are discussed at our various discipline summits. Although every
solution created for a client is unique, many of the underlying functional
elements can either be re-used for a period of time or share common building
blocks that serve as a base for other engagements.
LEARNING AND SUMMITS
In recognition of the need to create and maintain relationships with our
employees, we have a number of initiatives that focus on participatory learning,
culture sharing and knowledge transfer. We provide general training and
development classes through our human resources department to both new hires and
current employees. In addition, each of the discipline heads is responsible for
the development and communication of best practices and tools throughout the
organization. We share ideas at various summits that are held each year within
the strategic consulting, creative, project management, engineering, media and
business development disciplines. Our senior executives also participate twice a
year in off-site management sessions.
OFFICE-IN-A-BOX
The corporate development team has created our office-in-a-box program to
systematize the process of opening new offices. The program provides a plan for
new office initiation, including process documents, monitoring and control tools
and training plans. The office-in-a-box information exists in centralized
hardcopy form as well as electronically on our Intranet. It includes manuals on
departmental descriptions, organization charts, job descriptions, roles and
responsibilities, contact lists, workflows, policies and procedures and
templates, formats and example documents.
COMPETITION
The market for Internet professional services is relatively new, intensely
competitive, quickly evolving and subject to rapid technological change.
Further, our industry is experiencing rapid consolidation. Our principal current
national and international competitors include the following:
- other providers of Internet professional services, including
AGENCY.COM, iXL, Proxicom, Razorfish, Scient, USWeb/CKS and Viant;
- large information technology consulting services providers, including
Andersen Consulting, Cambridge Technology Partners, Cap Gemini, CSC,
EDS, IBM and Sapient;
- strategic consulting firms, including Bain & Company, Booz Allen &
Hamilton and Boston Consulting Group; and
- internal information technology, marketing and other departments of
current and potential clients.
We anticipate facing additional competition from new entrants into our
markets due to low barriers to entry.
We believe that the principal factors upon which we compete are the ability
to offer a comprehensive suite of services, the ability to handle large, complex
projects, the ability to attract and retain the best professionals through our
culture, the blending of strategy, creative and engineering expertise, brand
recognition and reputation, client service and price. Although we believe that
few of our competitors currently offer as comprehensive a suite of services as
we offer, many competitors have announced an intention to expand their service
offerings. Many of our competitors have longer operating histories, larger
client bases, longer relationships with
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clients, greater brand or name recognition and significantly greater financial,
technical, marketing and public relations resources than we have. These
competitors, as well as new competitors, could develop or offer services that
are comparable to or superior to ours, or are less expensive. The entry of new
competitors or changes in the service offerings of existing competitors would
harm our business, financial condition and results of operations.
INTELLECTUAL PROPERTY
We rely on a combination of nondisclosure and other contractual
arrangements with our employees and third parties, copyright, trademark, service
mark and trade secret laws to protect our intellectual property. We are pursuing
the protection of our trademarks in the United States and internationally,
including filing for trademark registration on foreign registries and enforcing
our rights against potential infringement. We have obtained trademark
registrations in the U.S. for the "Organic" and "Organic Online" marks and have
applied for registration of the "Organic Media" mark and some of our other
trademarks and service marks. We are pursuing expanded international trademark
and service mark protection. In addition, although we do not currently pursue
patent protection for our intellectual property, we may do so in the future, as
appropriate.
If we fail to adequately protect our intellectual property rights and
proprietary information or if we become involved in litigation relating to our
intellectual property rights and proprietary technology, our business could be
harmed. Any actions we take may not be adequate to protect our proprietary
rights and other companies may develop technologies that are similar or superior
to our proprietary technology. In addition, the legal status of intellectual
property on the Internet is currently subject to various uncertainties.
Although we believe that our products and services do not infringe on the
intellectual property rights of others and that we have all rights needed to use
the intellectual property employed in our business, it is possible that we could
in the future become subject to claims alleging infringement of third party
intellectual property rights. Any claims could subject us to costly litigation,
and may require us to pay damages and develop non-infringing intellectual
property or acquire licenses to the intellectual property that is the subject of
the alleged infringement.
FACILITIES
Our headquarters are located in two leased facilities in San Francisco,
California consisting of an aggregate of approximately 82,000 square feet of
office space. The primary lease consisting of approximately 52,000 square feet
expires in September 2002. The secondary lease consisting of approximately
30,000 square feet expires in December 2000. We also have entered into a lease
for a new headquarters location in San Francisco consisting of approximately
210,000 square feet of office space, commencing September 2000 and expiring in
September 2010. We also lease office space in Chicago, Detroit, New York,
London, Sao Paulo and Singapore. We are currently exploring real estate options
consistent with our future growth plans. We do not anticipate acquiring property
or buildings in the foreseeable future.
LEGAL PROCEEDINGS
From time to time, we may be involved in litigation incidental to the
conduct of our business. We are not currently party to any material legal
proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information regarding our executive officers
and directors as of December 31, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Jonathan Nelson.................. 32 Chief Executive Officer and Chairman of the Board
Michael Hudes.................... 38 President and Director
Susan L. Field................... 40 Executive Vice President and Chief Financial Officer
Larry K. Geisel.................. 58 Executive Vice President and Chief Operating Officer
Arthur I. Williams............... 32 Executive Vice President, Global Operations
Daniel J. Lynch.................. 34 President, Logistics
Margaret Maxwell Zagel........... 50 Vice President, Chief Legal and Administrative
Officer and Secretary
Matthew Bernardini............... 26 Vice President, Chief Technology Officer
Marita C. Scarfi................. 33 Vice President, Finance
Shelly A. Saunders............... 38 Vice President, Corporate Controller and Treasurer
Janis M. Nakano Spivack.......... 36 Vice President, Chief Creative Officer
Lynda Ward Pierce................ 36 Vice President, Human Resources
Gary F. Hromadko................. 47 Director
Gerald Bruce Redditt............. 48 Director
</TABLE>
Biographies of our executive officers and directors are as follows:
JONATHAN NELSON co-founded our company in 1993 and has served as our Chief
Executive Officer and Chairman of the Board since January 1995. From February
1996 to May 1996, Mr. Nelson served as President and Chief Executive Officer of
Accrue Software, a developer of network based tools for measuring Web site
performance. Mr. Nelson also served as Chairman of the Board of Accrue from
February 1996 to November 1999.
MICHAEL HUDES has served as our President and as a member of our board of
directors since October 1995 and until August 1999 he also served as our Chief
Operating Officer. From October 1993 to September 1995, Mr. Hudes was the
Director of Marketing for daVinci Time & Space, an interactive media company.
SUSAN L. FIELD has served as our Executive Vice President and Chief
Financial Officer since June 1999. From June 1997 to April 1999, Ms. Field was
employed at Sears, Roebuck and Co., a multi-line retailer providing merchandise
and services, most recently as the Senior Vice President -- Strategy, Planning
and Corporate Development. From August 1985 to June 1997, Ms. Field served in
various capacities at Merrill Lynch & Co., a global investment bank, most
recently as a Managing Director.
LARRY K. GEISEL has served as our Executive Vice President and Chief
Operating Officer since September 1999. From April 1998 to September 1999, Mr.
Geisel served as the Executive Vice President, Chief Technical Officer of
Knowledge Universe, Inc., a holding company focused on educational products and
services. From February 1996 to April 1998, Mr. Geisel was the Senior Vice
President, Chief Information Officer of Netscape Communications, Inc., a
provider of client and server software, development tools and commercial
applications. From February 1994 to February 1996, Mr. Geisel was an Executive
Vice President of Xerox Corporation, a provider of various document services.
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ARTHUR I. WILLIAMS has served as our Executive Vice President, Global
Operations since December 1999. From June 1998 to December 1999, Mr. Williams
was the Executive Vice President North America Operations of AGENCY.COM, Ltd.,
an online marketing and advertising agency, specializing in the development of
Web sites. From June 1994 to June 1998, Mr. Williams was the Chief Executive
Officer and President of Spiral Media, Inc., a designer of digital media and
developer of original content.
DANIEL J. LYNCH has served as President, Logistics since May 1999. From
February 1993 to March 1999, Mr. Lynch served as the Senior Vice President,
Marketing and Sales of Technicolor Entertainment, a film processing and
distribution company.
MARGARET MAXWELL ZAGEL has served as our Vice President, Chief Legal and
Administrative Officer and Secretary since August 1999. From March 1998 to March
1999, Ms. Zagel served as the Vice President, General Counsel and Secretary of
Tellabs Operations, Inc., a manufacturer of telecommunications equipment
solutions. From September 1984 to January 1998, Ms. Zagel served as General
Counsel of Grant Thornton LLP, an accounting and management consulting firm.
MATTHEW BERNARDINI has served as our Vice President, Chief Technology
Officer since July 1999, and prior to that, from October 1997 to July 1999, he
served as our Director of Engineering. From January 1996 to August 1997, Mr.
Bernardini was Vice President, Technology of Meta4Digital Design, an interactive
marketing company. From May 1995 to January 1996, Mr. Bernardini was an
independent consultant, working as a programmer and developer.
MARITA C. SCARFI has served as our Vice President, Finance since January
1998. She served as our Director of Finance from January 1997 to January 1998
and as our Controller from July 1996 to July 1997. From August 1988 to July
1996, Ms. Scarfi served as a Manager of Business Assurance for Coopers &
Lybrand, an accounting firm.
SHELLY A. SAUNDERS has served as our Vice President, Corporate Controller
and Treasurer since January 2000. From December 1998 to October 1999, Ms.
Saunders was the Corporate Controller at Thoratec Laboratories Corporation, a
developer, manufacturer and marketer of medical devices. From July 1998 to
December 1998, Ms. Saunders was the Life Science Group Controller at Bio-Rad
Laboratories, Inc., a multinational manufacturer and distributor of life science
research products. From July 1994 to July 1998, Ms. Saunders was the Corporate
Controller at American Protective Services, Inc., a provider of security guard
and patrol services.
JANIS M. NAKANO SPIVACK has served as our Vice President, Chief Creative
Officer since November 1996. From October 1993 to October 1996, Ms. Spivack was
a partner of leftBrain-rightBrain, a provider of consulting, technical and
design production expertise to both Web site builders and individual companies.
From October 1993 to January 1997, Ms. Spivack was also the President of
GoFISH!, a private interactive, online directory of production companies.
LYNDA WARD PIERCE has served as our Vice President, Human Resources since
July 1999. From August 1998 to July 1999, Ms. Pierce served as the Director of
Human Resources of The Metzler Group, Inc., a provider of consulting services to
the utilities industry. From April 1997 to August 1998, Ms. Pierce served as the
Director of Human Resources for LECG, Inc., a provider of expert analysis,
litigation support and management consulting. From October 1996 to March 1997,
Ms. Pierce served as the Director of Human Resources for Party America, Inc., a
party merchandise retailer. From April 1991 to October 1996, Ms. Pierce served
as the Manager of Human Resources of Mervyn's, a department store.
GARY F. HROMADKO has served as one of our directors since January 1997 and
has served as a director of Organic United Kingdom, one of our wholly-owned
subsidiaries, since February 1999. Since 1993, Mr. Hromadko has been a private
venture investor in early stage technology companies.
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GERALD BRUCE REDDITT has served as a member of our board of directors since
October 1998. Since May 1998, Mr. Redditt has served as an Executive Vice
President of Omnicom Group Inc., a strategic and financial holding company. From
July 1995 to May 1998, Mr. Redditt served as an Executive Vice President of Sony
Pictures Entertainment, a creator and distributor of entertainment products,
services and technology. From March 1991 to July 1995, Mr. Redditt served as a
Corporate Vice President of GTE Corporation, a telecommunications company. Since
January 1999, Mr. Redditt has served as a director of AGENCY.COM, Ltd.
BOARD COMPOSITION
Our bylaws authorize the number of directors to be not less than five nor
more than nine. The number of directors on the Board is currently fixed at six.
Our bylaws provide that following the completion of this offering our board of
directors will be divided into three classes of directors designated Class I,
Class II and Class III. Each class will have a three-year term. Initially, two
directors will serve in Class I, two directors will serve in Class II and two
directors will serve in Class III. The initial directors in each class will hold
office for terms of one year, two years or three years. Thereafter each class
will serve a three-year term. Executive officers are elected by and serve at the
direction of the board of directors.
BOARD COMMITTEES
The board of directors has established a compensation committee and an
audit committee. The compensation committee, consisting of Mr. Hromadko and Mr.
Redditt, reviews and approves the salaries, bonuses and other compensation
payable to our executive officers and administers and makes recommendations
concerning our employee benefit plans.
The audit committee, currently consisting of Mr. Hromadko, Mr. Redditt and
Mr. Hudes, recommends the selection of independent public accountants to the
board of directors, reviews the scope and results of the audit and other
services provided by our independent accounts, and reviews our accounting
practices and systems of internal accounting controls.
DIRECTOR COMPENSATION
Our directors currently are not compensated for their services. However, in
the future we intend to compensate our non-employee directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of our compensation committee serves as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving as a member of our board of directors or compensation
committee.
There are no family relationships among any of our directors or executive
officers other than between Michael Hudes and Daniel Lynch, who are
brothers-in-law.
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EXECUTIVE COMPENSATION
SUMMARY COMPENSATION INFORMATION
The following table contains information in summary form concerning the
compensation paid to our chief executive officer and each of our four most
highly compensated executive officers whose total salary, bonus and other
compensation exceeded $100,000 during the fiscal year ended December 31, 1999.
In accordance with the rules of the SEC, the compensation described in this
table does not include perquisites and other personal benefits received by the
executive officers named in the table below which do not exceed the lesser of
$50,000 or 10% of the total salary and bonus reported for these officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ALL OTHER 1999
1999 ANNUAL COMPENSATION
COMPENSATION --------------
------------------- TOTAL HEALTH
NAME AND PRINCIPAL POSITION SALARY BONUS INSURANCE
- --------------------------- -------- -------- --------------
<S> <C> <C> <C>
Jonathan Nelson
Chief Executive Officer and Chairman of the Board.... $180,000 $ 54,922 $3,072
Michael Hudes
President and Director............................... 212,755 75,000 5,792
Janis Nakano Spivack
Vice President, Chief Creative Officer............... 171,250 47,500 --
Susan Field
Executive Vice President, Chief Financial Officer.... 130,773 150,000 --
Matthew Bernardini
Vice President, Chief Technology Officer............. 166,967 45,000 --
</TABLE>
OPTION GRANTS DURING FISCAL 1999
The following table sets forth information concerning grants of stock
options to each of the executive officers named in the table above during the
fiscal year ended December 31, 1999. All options granted to these executive
officers in the last fiscal year were granted under our 1997 stock option plan.
Each option vests and becomes exercisable over a period of four years. The
percentage of total options set forth below is based on an aggregate of
15,294,525 options granted to employees in fiscal 1999. All options were granted
at a fair market value as determined by the board of directors on the date of
grant. The board of directors determined the fair market value based on our
financial results and prospects and the share price in arms-length transactions.
The exercise price may in some cases be paid by delivery of other shares or by
offset of the shares subject to options. The deemed value for the date of grant
has been adjusted solely for financial accounting purposes. Potential realizable
values are net of exercise price, but before taxes associated with exercise.
Amounts represent hypothetical gains that could be achieved for the options if
exercised at the end of the option term. The assumed 5% and 10% rates of stock
price appreciation are based on the exercise price of the options and are
provided
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in accordance with the rules of the SEC and do not represent our estimate or
projection of the future common stock price.
OPTIONS GRANTED IN FISCAL YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
NUMBER OF TOTAL OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES IN EXERCISE OPTION TERM
OPTIONS FISCAL YEAR PRICE PER EXPIRATION ----------------------
NAME GRANTED 1999 SHARE DATE 5% 10%
---- ---------- ------------- --------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Jonathan Nelson........... -- -- -- -- -- --
Michael Hudes............. -- -- -- -- -- --
Janis Nakano Spivack...... 67,500 0.4% $2.6667 11/22/09 $113,202 $ 286,877
Susan Field............... 1,755,000 11.5% $0.8333 6/23/09 $919,722 $2,330,755
Matthew Bernardini........ 382,500 2.5% $1.3333 7/13/09 $320,736 $ 812,809
</TABLE>
OPTION EXERCISES
The following table sets forth information concerning exercisable and
unexercisable stock options held by each of the executive officers named in the
summary compensation table at December 31, 1999. The value of unexercised
in-the-money options represents the positive spread between the exercise price
of the stock options and the deemed fair market value of our common stock as of
December 31, 1999, which our board of directors determined was $2.6667 per
share. All options were granted under our 1997 stock option plan. These options
vest over four years and otherwise generally conform to the terms of our 1997
stock option plan.
AGGREGATE OPTION EXERCISES IN FISCAL YEAR ENDED DECEMBER 31, 1999
AND OPTION VALUES AT DECEMBER 31, 1999
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FISCAL YEAR END AT FISCAL YEAR END
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jonathan Nelson...... -- -- -- -- -- --
Michael Hudes........ -- 553,500 922,500 $1,421,880 $2,369,800
Janis Nakano
Spivack............ 183,282 $409,737 15,937 250,781 $ 40,940 $ 470,829
Susan Field.......... -- -- -- 1,755,000 -- $3,217,500
Matthew Bernardini... -- -- 60,938 456,562 $ 152,994 $ 690,706
</TABLE>
EMPLOYMENT AGREEMENTS
JONATHAN NELSON
On January 29, 1997, Jonathan Nelson entered into an employment agreement
with us to serve as our Chief Executive Officer. Mr. Nelson currently serves as
our Chief Executive Officer and as a member of our board of directors. As
amended on February 24, 1997, the employment agreement provides Mr. Nelson with
an annual base salary of $90,000. In addition, Mr. Nelson is eligible to receive
discretionary bonus compensation in an amount determined by the board of
directors.
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Under the terms of his agreement, Mr. Nelson's employment shall continue
until either party gives the other party 90 days advance written notice of the
expiration of the employment agreement. Should we terminate Mr. Nelson's
employment for cause, we must pay Mr. Nelson all compensation due on the date of
termination. Cause is defined as:
- repeated failure or refusal by Mr. Nelson to materially perform his
duties and responsibilities, or his failure to devote substantially all
of his business time and attention exclusively to our business and
affairs;
- willful misappropriation of our funds or property;
- use of alcohol or illegal drugs, which interferes with his performance
and which continues after written warning;
- conviction in a court of law of, or entering a plea of guilty or no
contest to, any felony or any crime involving moral turpitude,
dishonesty or theft;
- any commission in bad faith of any act which injures or could
reasonably injure our reputation, business or business relationships;
or
- any material breach of his employment agreement, which is not cured
within 30 days of our written notice.
Should we terminate Mr. Nelson's employment without cause and without 90
days advance written notice, Mr. Nelson is entitled to receive from us, so long
as Mr. Nelson is not in breach of the non-competition and protection of
confidential information provisions of his employment agreement,
- his applicable salary compensation less any income earned from
subsequent employment, limited to 90 days once written notice is given,
and
- any unpaid reimbursable expenses outstanding, and any unused accrued
vacation, as of the date of termination.
Under the terms of his employment agreement, Mr. Nelson agrees that while
he is employed by us and for a period of two years after the date of his
termination, he shall not, except on our behalf:
- solicit any client business;
- solicit any of our employees or exclusive consultants; or
- render to or for any client any services that we provide.
Additionally, Mr. Nelson also agrees that he will not at any time
- disclose any confidential information or trade secret of ours or our
clients; or
- use any confidential information or trade secret for his own benefit,
or for the benefit of third parties.
MICHAEL HUDES
On January 29, 1997, Michael Hudes entered into an employment agreement
with us to serve as our President. Mr. Hudes currently serves as our President
and a member of our board of directors. As amended on February 24, 1997, the
employment agreement provides Mr. Hudes with an annual base salary of $140,000.
In addition, Mr. Hudes is eligible to receive discretionary bonus compensation
in an amount determined by the board of directors.
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Under the terms of his agreement, Mr. Hudes' employment shall continue
until either party gives the other party 90 days advance written notice of the
expiration of the employment agreement. Should we terminate Mr. Hudes'
employment for cause, we must pay Mr. Hudes all compensation due on the date of
termination. Cause is defined as:
- repeated failure or refusal by Mr. Hudes to materially perform his
duties and responsibilities, or his failure to devote substantially all
of his business time and attention exclusively to our business and
affairs;
- willful misappropriation of our funds or property;
- use of alcohol or illegal drugs, which interferes with his performance
and which continues after written warning;
- conviction in a court of law of, or entering a plea of guilty or no
contest to, any felony or any crime involving moral turpitude,
dishonesty or theft;
- any commission in bad faith of any act which injures or could
reasonably injure our reputation, business or business relationships;
or
- any material breach of his employment agreement, which is not cured
within 30 days of our written notice.
Should we terminate Mr. Hudes' employment without cause and without 90 days
advance written notice, Mr. Hudes is entitled to receive from us, so long as Mr.
Hudes is not in breach of the non-competition and protection of confidential
information provisions of his employment agreement,
- his applicable salary compensation less any income earned from
subsequent employment, limited to 90 days once written notice is given,
and
- any unpaid reimbursable expenses outstanding, and any unused accrued
vacation, as of the date of termination.
Under the terms of his employment agreement, Mr. Hudes agrees that while he
is employed by us and for a period of two years after the date of his
termination, he shall not, except on our behalf:
- solicit any client business;
- solicit any of our employees or exclusive consultants; or
- render to or for any client any services that we provide.
Additionally, Mr. Hudes also agrees that he will not at any time
- disclose any confidential information or trade secret of ours or our
clients; or
- use any confidential information or trade secret for his own benefit,
or for the benefit of third parties.
SUSAN L. FIELD
On June 22, 1999, Susan L. Field entered into an employment agreement with
us to serve as our Executive Vice President and Chief Financial Officer. The
employment agreement provides Ms. Field with an annual base salary of $250,000
and a bonus of up to 40% of her base salary upon achievement of specific goals
and objectives. Additionally, Ms. Field was paid a signing bonus of $50,000 in
connection with her entering the employment agreement.
Ms. Field's employment agreement also provides her with an incentive stock
option for the purchase of 480,000 shares of our common stock pursuant to our
1997 stock option plan at an exercise price of $0.8333 per share, and a
nonstatutory stock option for the purchase of
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1,125,000 shares of our common stock pursuant to our 1997 stock option plan, at
an exercise price of $0.8333 per share. These options contain a four year
vesting period, with 25% vesting after the first continuous year of employment
and the remaining option shares vesting in equal monthly portions through the
fourth year. Also, Ms. Field is entitled to an additional nonstatutory stock
option grant of 150,000 shares of common stock pursuant to our 1997 stock option
plan, at an exercise price of $0.8333 per share. Of these shares, 75,000 will
vest upon the closing of this offering and 75,000 of the shares will vest upon
our hiring employees to fill at least two key management positions and our
retaining these employees for nine continuous months of employment.
Under the terms of her agreement, Ms. Field's employment may be terminated
by either party at any time with or without cause and with or without notice.
Should we terminate Ms. Field's employment for cause or should she voluntarily
resign, she will not be entitled to severance pay, pay in lieu of notice, or any
other compensation or benefits, other than payment of accrued salary and
vacation. Cause is defined as:
- conviction of any felony or of any crime against us;
- participation of any fraud against us;
- willful breach of any duties to us, including persistent unsatisfactory
job performance;
- breach of provisions in the employment agreement or of her proprietary
information and invention agreement; or
- engagement of conduct determined by our board of directors to
demonstrate gross unfitness to serve.
In the event Ms. Field's employment is terminated without cause, we will
provide her with
- a payment equal to three months of her salary, less standard
withholdings and deductions and
- a one-year acceleration of vesting of the common stock subject to
purchase pursuant to the options granted to her as of the date of the
employment agreement.
Under the terms of her employment agreement, Ms. Field agrees that while
she is employed by us, she will not in any capacity whatsoever engage in, become
financially interested in, be employed by or have any business connection with
any of our competitors.
In connection with her employment agreement, Ms. Field entered into a
proprietary information and invention agreement, which provides that she:
- will not use any of our proprietary information without our prior
written authorization;
- will assign to us in the future her interest in any and all inventions,
subject to a limited exclusion; and
- will not, for a period of one year after the termination of her
employment, solicit any of our employees or clients.
BENEFIT PLANS
1997 STOCK OPTION PLAN
Our 1997 stock option plan was approved by our board of directors and our
stockholders in April 1997 and was amended in November 1998, February 1999,
September 1999 and November 1999. Our 1997 stock option plan provides for the
grant to our employees, including officers and employee directors, of incentive
stock options within the meaning of Section 422 of the Internal Revenue Code and
for the grant of nonstatutory stock options to our employees, outside directors
and consultants. Our 1997 stock option plan is currently administered by our
board of
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directors which selects the optionees, determines the number of shares to be
subject to each option and determines the exercise price of each option. Our
1997 stock option plan authorizes the issuance of an aggregate of up to
22,725,000 shares of common stock. The maximum number of shares that may be
granted to any individual under our 1997 stock option plan in any year is
956,250. As of September 30, 1999, options to purchase an aggregate of
15,712,932 shares of common stock were outstanding under the 1997 stock option
plan, and an aggregate of 5,392,953 shares of common stock remained available
for future grants.
The exercise price of all incentive stock options granted under our 1997
stock option plan must be at least equal to the fair market value of the common
stock on the date of grant. The exercise price of all nonstatutory stock options
granted under our 1997 stock option plan shall be determined by the
administrator, but in no event may be less than 85% of the fair market value on
the date of grant. With respect to any participant who owns stock possessing
more than 10% of the voting power of all our classes of stock, the exercise
price of any incentive or nonstatutory option granted must equal at least 110%
of the fair market value on the grant date and the maximum term of any these
options must not exceed five years. The term of all other options granted under
our 1997 stock option plan may not exceed ten years.
In the event a participant in our 1997 stock option plan ceases to be an
employee, director or consultant, other than upon the participant's death or
disability, the participant may exercise his or her vested options for a period
of three months following termination, unless a different exercise period is
specified in his or her option agreement.
In the event of our merger with or into another corporation or a sale of
substantially all of our assets, our 1997 stock option plan requires that each
outstanding option be assumed or an equivalent option substituted by the
successor corporation; provided, however, that in the event the successor
corporation refuses to assume or substitute for the outstanding options, the
vesting of these options and the time during which these options may be
exercised shall be accelerated prior to such event and the options terminated if
not exercised after such acceleration and at or prior to such event.
In the event of a change of control, all participants shall receive two
additional years of vesting for all outstanding options and all stock acquired
through the exercise of an option. In addition, if a participant is employed by
us or a subsidiary at the time of the change of control and, prior to the
one-year anniversary of the change of control, the participant is either
terminated for reasons other than for cause or terminates employment for good
reason, the participant shall have the greater of 90 days from the date of
termination or the period otherwise specified for exercise after termination to
exercise any vested options. Under the 1997 stock option plan, a change of
control is defined as:
- acquisition of 25% or more of our stock by any individual or entity;
- a change of a majority of the members on our board of directors;
- consummation of our reorganization, merger or consolidation or the sale
or disposition of more than 50% of our operating assets;
- a tender offer made for our stock; or
- approval of a plan of complete liquidation by our stockholders.
Our 1997 stock option plan will terminate in 2007. Our board of directors
has authority to amend or terminate our 1997 stock option plan, provided that
such action will not impair the rights of the holder of any outstanding options
without the written consent of that holder.
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1999 LONG-TERM STOCK INCENTIVE PLAN
Our 1999 long-term stock incentive plan was approved by our board of
directors and our stockholders in November 1999. Our 1999 long-term stock
incentive plan provides for the grant to our employees, including officers and
employee directors, of incentive stock options within the meaning of Section 422
of the Internal Revenue Code and for the grant of nonstatutory stock options to
our employees, directors and consultants, stock appreciation rights and other
types of awards. Our 1999 long-term stock incentive plan will be administered by
our compensation committee which selects the optionees, determines the number of
shares to be subject to each option, determines the exercise price of each
option and determines the vesting and exercise periods of each option. Our 1999
long-term stock incentive plan authorizes the issuance of an aggregate of up to
10,500,000 shares of common stock. No options to purchase shares of common stock
have yet been granted under this plan, therefore options to purchase 10,500,000
shares of common stock remain available for grant.
The exercise price of all incentive stock options granted under our 1999
long-term stock incentive plan must be at least equal to the fair market value
of the common stock on the date of grant. The exercise price of all nonstatutory
stock options granted under our 1999 long-term stock incentive plan shall be
determined by the compensation committee, but in no event may be less than 85%
of the fair market value on the date of grant. With respect to any participant
who owns stock possessing more than 10% of the voting power of all our classes
of stock, the exercise price of any incentive or nonstatutory option granted
must equal at least 110% of the fair market value on the grant date and the
maximum term of any these options must not exceed five years. The term of all
other options granted under our 1999 long-term stock incentive plan may not
exceed ten years.
In the event a participant in our 1999 long-term stock incentive plan
terminates employment, or is terminated by us for any reason other than cause,
any options which have become exercisable prior to the time of termination,
shall remain exercisable for six months from the date of termination if
termination was caused by death or disability, or 30 days from the date of
termination if termination was caused by reasons other than death or disability.
In the event of a change of control, all participants shall receive two
additional years of vesting for all outstanding options and share appreciation
rights, all stock acquired through the exercise of an option or a share
appreciation right, and all other awards. In addition, if a participant is
employed by us or a subsidiary at the time of the change of control and, prior
to the one-year anniversary of the change of control, the participant is either
terminated for reasons other than for cause or terminates employment for good
reason, the participant shall have the greater of 90 days from the date of
termination or the period otherwise specified for exercise after termination to
exercise any vested options. Under the 1999 long-term stock incentive plan, a
change of control is defined as:
- acquisition of 25% or more of our stock by any individual or entity;
- a change of a majority of the members on our board of directors;
- consummation of our reorganization, merger or consolidation or the sale
or disposition of more than 50% of our operating assets;
- a tender offer made for our stock; or
- approval of a plan of complete liquidation by our stockholders.
Unless terminated sooner, our 1999 long-term stock incentive plan will
terminate in 2009. Our board of directors has authority to amend or terminate
our 1999 long-term stock incentive plan, provided that this action will not
impair the rights of any participant without the written consent of that
participant.
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2000 EMPLOYEE STOCK PURCHASE PLAN
Our stock purchase plan was approved by the board of directors on January
7, 2000 and has been approved by a majority of our stockholders.
The stock purchase plan is intended to qualify as an "employee stock
purchase plan" under Section 423 of the Internal Revenue Code in order to
provide our employees with an opportunity to purchase common stock through
payroll deductions. An aggregate of 10,000,000 shares of common stock has been
reserved for issuance and are available for purchase under the stock purchase
plan during the 10 year term of the plan, subject to adjustment in the event of
a stock split, stock dividend or other similar change in our common stock or our
capital structure. All Organic employees whose customary employment is for more
than five months in any calendar year and more than 20 hours per week are
eligible to participate in the stock purchase plan. Employees hired after the
consummation of our initial public offering are eligible to participate in the
stock purchase plan at the beginning of the next offering period.
The stock purchase plan designates offering periods and purchase periods.
Offering periods are generally overlapping periods of 24 months. The initial
offering period begins on the effective date of the stock purchase plan, which
is the first trading day on or after this registration statement is declared
effective and ends on the last trading day in the period ending June 30, 2000.
Purchase periods are generally six month periods, with the initial purchase
period commencing on the first trading day on or after this registration
statement is declared effective and ending on June 30, 2000.
Each employee who is eligible to and wishes to participate chooses a
percentage of his or her compensation, not exceeding 15%, that will be used to
purchase Organic stock. In no event may an employee purchase more than $25,000
worth of stock in a 12 month period or more than 1,250 shares in any six month
purchase period. The percentage designated by the employee will be deducted from
each paycheck of the employee and credited to an account. At the end of a six
month purchase period the amount in the account will be used to purchase Organic
stock. The price of the Organic stock purchased will be the lesser of 85% of the
market price on that date or 85% of the market price, or the case of the initial
offering period, the offering price, on the first day of the offering period
which will begin from six to twenty-four months prior to the purchase date. If
the value of the stock at the end of any purchase period is lower than the value
of the stock on the first day of the next offering period, then all participants
will be automatically withdrawn from the prior offering period immediately after
the exercise of their option and automatically reenrolled in the immediately
following offering period.
The stock purchase plan will be administered by our board of directors or
compensation committee, which will have the authority to terminate or amend the
stock purchase plan, subject to specified restrictions, and otherwise to
administer the stock purchase plan and to resolve all questions relating to the
administration of the stock purchase plan.
401(k) PLAN
In January 1997, we established a 401(k) Plan. All employees with at least
one month of service are eligible to participate in the plan. Employees may
contribute up to 20% of their pre-tax covered compensation through salary
deductions. In 1999, we began contributing 25% of every pre-tax dollar an
employee contributes up to the first 5% of the employee's pre-tax covered
compensation. Employees are 50% vested in the employer's contributions after one
year of service and fully vested after two years. The 401(k) Plan is intended to
qualify under Section 401 of the Internal Revenue Code so that all contributions
and income earned in the plan are not taxable to employees until withdrawn and
our contributions will be deductible by us when made. Our matching contribution
expense was not material for the nine months ended September 30, 1999. In
addition, we may make a discretionary profit-sharing contribution to all
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eligible employees, regardless of whether an employee is participating in the
401(k) Plan. However, no such contributions have been made through September 30,
1999.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Our certificate of incorporation and bylaws provide that we will indemnify
all of our directors and officers to the fullest extent permitted by Delaware
law. Our certificate of incorporation and bylaws also authorize us to indemnify
our employees and other agents, at our option, to the fullest extent permitted
by Delaware. We intend to enter into agreements to indemnify our directors and
officers, in addition to indemnification provided for in our charter documents.
These agreements, among other things, will provide for the indemnification of
our directors and officers for some types of expenses (including attorneys'
fees), judgments, fines and settlement amounts incurred by any such person in
any action or proceeding, including any action by or in the right of Organic,
arising out of such person's services as one of our directors or officers or any
other company or enterprise to which such person provides services at our
request to the fullest extent permitted by applicable law. We believe that these
provisions and agreements will assist us in attracting and retaining qualified
persons to serve as directors and officers.
Delaware law permits a corporation to provide in its certificate of
incorporation that a director of the corporation shall not be personally liable
to the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability for any breach of the
director's duty of loyalty to the corporation or its stockholders, for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, under Section 174 of the General Corporation Law of the State
of Delaware, or for any transaction from which the director derived an improper
personal benefit. Our certificate of incorporation provides for the elimination
of personal liability of a director for breach of fiduciary duty, as permitted
by Delaware law.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers and controlling persons pursuant to
the provisions contained in our charter documents, Delaware law or otherwise, we
have 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. If a claim for indemnification against such
liabilities (other than the payment by us of expenses incurred or paid by one of
our directors, officers or controlling persons in the successful defense of any
action, suit, or proceeding) is asserted by such director, officer or
controlling person, we will, unless in the opinion of our counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by us is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of this issue.
We intend to purchase and maintain insurance on behalf of the officers and
directors insuring them against liabilities that they may incur in such
capacities or arising out of such status.
There is no pending litigation or proceeding involving one of our directors
or officers as to which indemnification is being sought, nor are we aware of any
pending or threatened litigation that may result in claims for indemnification
by any director or officer.
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RELATED PARTY TRANSACTIONS
ORGANIC HOLDINGS, INC.
On January 29, 1997, our predecessor company changed its name from Organic
Online, Inc. to Organic Holdings, Inc., and we were formed as a subsidiary under
the name Organic Online, Inc. At that time, we exchanged 18,323,712 shares of
our Series A preferred stock and nine shares of our common stock for
substantially all of the assets and liabilities of Organic Holdings, Inc.
Organic Holdings, Inc. retained some of our non-operating assets and
liabilities.
Our directors Jonathan Nelson, Michael Hudes and Gary Hromadko are also
directors of Organic Holdings, Inc.
OMNICOM GROUP
In January 1997, we issued 3,351,288 shares of our Series A preferred stock
at $2.9833 per share to Omnicom Group for net cash proceeds of $10.0 million.
In February 1999, we issued 1,488,000 shares of our Series B preferred
stock at $7.2067 per share to Omnicom Group for net cash proceeds of $7.7
million plus the settlement of a $3.0 million short-term bridge loan that we
obtained from Omnicom Group in January 1999.
On August 27, 1999, we entered into a revolving credit facility with
Omnicom Group, which allows us to borrow up to $30.0 million at the lender's
commercial paper rate plus 3.0% until the closing of this offering. Thereafter,
we may borrow up to $15.0 million from Omnicom Group at the lender's commercial
paper rate plus 1.25% through September 30, 2002. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" for further information. Additionally, in connection with the
revolving credit facility, we issued a warrant to purchase 2,249,076 shares of
our common stock to Omnicom Group at an exercise price of $0.0033 per share.
One of our directors, Bruce Redditt, has served as Executive Vice President
of Omnicom Group since 1998.
OFFICER LOAN
On March 31, 1999, we loaned $200,000 to Michael Hudes at an interest rate
of 7%. This loan was secured by a pledge by Mr. Hudes to us of his shares of our
common stock, with principal and interest payments due upon the second, fourth,
sixth, eighth and tenth anniversaries of the loan. The amount becomes payable
upon the expiration of the lock-up period as long as the offering price is at
least $10.00 per share and the aggregate proceeds are at least $75.0 million.
STOCK OPTION GRANTS TO OFFICERS
On March 20, 1997, we issued to Marita Scarfi options to purchase 765,000
shares of our common stock at an exercise price of $0.0011 per share which
became exercisable on July 15, 1997.
On December 8, 1997, we issued to Janis Nakano Spivack options to purchase
382,500 shares of our common stock at an exercise price of $0.0978 per share
which became exercisable on November 17, 1998. On the same date, we issued to
Matthew Bernardini options to purchase 90,000 shares of our common stock at the
same exercise price which became exercisable on October 15, 1998.
On June 24, 1998, we issued to Michael Hudes options to purchase 1,476,000
shares of our common stock at an exercise price of $0.0978 per share which
became exercisable on June 1, 1999.
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On November 25, 1998, we issued to Matthew Bernardini options to purchase
45,000 shares of our common stock at an exercise price of $0.3889 per share
which became exercisable on November 1, 1999.
On June 23, 1999, we issued to Susan Field options to purchase 1,755,000
shares of our common stock at an exercise price of $0.8333 per share which
become exercisable on June 23, 2000.
On July 13, 1999, we issued to Matthew Bernardini options to purchase
382,500 shares of our common stock at an exercise price of $1.3333 per share
which become exercisable on July 13, 2000.
On August 26, 1999, we issued to (a) Margaret Maxwell Zagel options to
purchase 225,000 shares of our common stock which become exercisable on August
26, 2000, (b) Lynda Ward Pierce options to purchase 90,000 shares of our common
stock which become exercisable on July 21, 2000, and (c) Larry Geisel options to
purchase 1,200,000 shares of our common stock which become exercisable on
September 8, 2000. Each of these officers were issued these options at an
exercise price of $1.6667 per share.
On November 22, 1999, we issued to (a) Daniel Lynch options to purchase
845,070 shares of our common stock which became exercisable on January 1, 1999,
(b) Janis Nakano Spivack options to purchase 67,500 shares of our common stock
which become exercisable on November 22, 2000, (c) Lynda Ward Pierce options to
purchase 90,000 shares of our common stock which become exercisable on November
22, 2000, and (d) Arthur Williams options to purchase 690,000 shares of our
common stock which become exercisable on December 14, 2000. Each of these
officers were issued these options at an exercise price of $2.6667 per share.
On January 18, 2000, we issued to Shelly Saunders options to purchase
90,000 shares of our common stock at an exercise price of $3.00 which became
exercisable on January 14, 2000.
We intend to enter into indemnification agreements with each of our
directors and officers. These indemnification agreements will require us to
indemnify these individuals to the fullest extent permitted by Delaware law.
We also have entered into various employment agreements with our officers.
See "Management -- Employment Agreements" for a more detailed description.
REGISTRATION RIGHTS
We have entered into an investors' rights agreement with Organic Holdings,
Inc. and Omnicom Group. This agreement provides that, subject to specified
limitations, if we propose to register any of our common stock under the
Securities Act, Organic Holdings, Inc., Omnicom Group and their permitted
transferees have the right to include their shares of common stock in the
registration. Furthermore, subject to specified limitations, Organic Holdings,
Inc., Omnicom Group and their permitted transferees may require us to register
all or part of the common stock they hold. These demand rights apply during the
period commencing six months after the date of this offering and ending on the
fifth anniversary of this offering. The number of shares included in any
underwritten offering can be limited by the underwriters of that offering.
We believe that all of the transactions set forth above were made on terms
no less favorable to us than could have been obtained from unaffiliated third
parties. We intend that all future transactions, including loans, between us and
our officers, directors, principal stockholders and their affiliates will be
approved by a majority of the board of directors, including a majority of the
independent and disinterested outside directors on the board of directors, and
will be on terms no less favorable to us than could be obtained from
unaffiliated third parties.
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PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of our common stock
as of December 31, 1999 and as adjusted to reflect the sale of the shares of
common stock in this offering by:
- each person or entity known by us to own beneficially more than five
percent of our common stock;
- our chief executive officer, each of the executive officers named in
the summary compensation table and each of our directors; and
- all of our executive officers and directors as a group.
The beneficial ownership is calculated based on 74,582,718 shares of our
common stock outstanding as of December 31, 1999 and 80,082,718 shares
outstanding immediately following the completion of this offering. Beneficial
ownership is determined in accordance with the rules of the SEC and generally
includes voting or investment power with respect to securities. Unless otherwise
indicated, each person or entity named in the table has sole voting power and
investment power, or shares voting and investment power with his or her spouse,
with respect to all shares of capital stock listed as owned by such person.
Shares issuable upon the exercise of options that are currently exercisable or
become exercisable within sixty days of December 31, 1999 are considered
outstanding for the purpose of calculating the percentage of outstanding shares
of our common stock held by the individual, but not for the purpose of
calculating the percentage of outstanding shares of our common stock held by
another individual.
The address of each of the executive officers and directors is c/o Organic,
Inc., 510 Third Street, San Francisco, California 94107.
<TABLE>
<CAPTION>
PERCENTAGE
OF SHARES
SHARES ISSUABLE BENEFICIALLY OWNED
UPON EXERCISE --------------------
NUMBER OF SHARES OF STOCK OPTIONS PRIOR TO AFTER
NAME AND ADDRESS BENEFICIALLY OWNED OR WARRANTS OFFERING OFFERING
---------------- ------------------ ---------------- -------- --------
<S> <C> <C> <C> <C>
5% STOCKHOLDERS
Omnicom Group Inc.
437 Madison Avenue
New York, New York 10022....... 12,734,025 2,249,076 20.1% 18.7%
Organic Holdings, Inc.
c/o Organic, Inc.
510 Third Street
San Francisco, California
94107.......................... 51,954,975 -- 69.7% 64.9%
NAMED EXECUTIVE OFFICERS AND
DIRECTORS
Jonathan Nelson.................. 51,954,975 -- 69.7% 64.9%
Michael Hudes.................... -- 553,500 * *
Janis Nakano Spivack............. 183,282 15,937 * *
Susan Field...................... -- -- * *
Matthew Bernardini............... -- 60,938 * *
Gary F. Hromadko................. -- -- * *
Bruce Redditt.................... -- -- * *
All executive officers and
directors as a group (12
persons)....................... 52,138,257 630,375 70.8% 65.9%
</TABLE>
- ---------------
* Represents beneficial ownership of less than one percent of the common stock.
Shares beneficially owned by Jonathan Nelson consist of 51,954,975 shares owned
by Organic Holdings, Inc., of which Mr. Nelson is the majority stockholder.
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DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 200,000,000 shares of common stock
and 25,000,000 shares of preferred stock. The following description of our
capital stock does not purport to be complete and is subject to, and qualified
in its entirety by, the provisions of our certificate of incorporation and
bylaws, which are included as exhibits to the registration statement of which
this prospectus is a part, and by the provisions of applicable law.
COMMON STOCK
As of September 30, 1999, after giving effect to the conversion of all
outstanding shares of our Series A and Series B preferred stock prior to the
closing of this offering, 71,108,124 shares of common stock were issued and
outstanding and held by approximately 50 stockholders. The holders of our common
stock are entitled to one vote for each share held of record upon such matters
and in such manner as may be provided by law. Subject to preferences applicable
to any outstanding shares of preferred stock, the holders of common stock are
entitled to receive ratably dividends, if any, as may be declared by the board
of directors out of funds legally available for dividend payments. In the event
we liquidate, dissolve or wind up, the holders of common stock are entitled to
share ratably in all assets remaining after payment of liabilities and
liquidation preferences of any outstanding shares of the preferred stock.
Holders of common stock have no preemptive rights or rights to convert their
common stock into any other securities. There are no redemption or sinking fund
provisions applicable to the common stock. All outstanding shares of common
stock are fully paid and nonassessable.
PREFERRED STOCK
As of September 30, 1999, there were 23,163,000 shares of preferred stock
outstanding and held of record by two stockholders. In connection with the
closing of this offering, all outstanding shares of our Series A and Series B
preferred stock will automatically be converted into common stock on a
one-for-three basis. Upon the closing of this offering, our board of directors
will be authorized, absent any limitations prescribed by law, without
stockholder approval, to issue up to an aggregate of 25,000,000 shares of
preferred stock, in one or more series, each of the series to have rights and
preferences, including voting rights, dividend rights, conversion rights,
redemption privileges and liquidation preferences, as shall be determined by the
board of directors.
Following the closing of the offering, 3,000,000 shares of our preferred
stock will be designated as Series C preferred stock. The Series C preferred
stock will be issuable under the terms of our stockholder rights plan. Each one
one-hundredth of a share of Series C preferred stock will have voting rights
equivalent to one share of our common stock and shall have a right to a
preferential quarterly dividend of $0.01 or any higher dividend that is declared
on one share of common stock.
The rights of the holders of common stock will be subject to, and may be
adversely affected by, the rights of holders of Series C preferred stock and any
other preferred stock that may be issued in the future. 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, or of discouraging a third party
from attempting to acquire, a majority of our outstanding voting stock. We have
no present plans to issue any shares of preferred stock or rights to purchase
shares of preferred stock other than rights to purchase shares of Series C
preferred stock issuable under our stockholder rights plan.
WARRANTS
As of September 30, 1999, a warrant to purchase an aggregate of 2,249,076
shares of our common stock issued to Omnicom Group was outstanding at an
exercise price of $0.0033 per
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share. This warrant contains provisions for the adjustment of the exercise price
and the aggregate number of shares issuable upon the exercise of the warrant in
the event of stock dividends, stock splits, reorganizations and
reclassifications and consolidations. The warrant expires by its terms upon the
closing of this offering. As of the date of this prospectus, Omnicom Group has
exercised this warrant.
DELAWARE LAW AND PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS
Provisions of Delaware law and our certificate of incorporation and bylaws
could make our acquisition by means of a tender offer, a proxy contest, or
otherwise, and the removal of incumbent officers and directors more difficult.
These provisions are expected to discourage types of coercive takeover practices
and inadequate takeover bids and to encourage persons seeking to acquire control
to first negotiate with us. We believe that the benefits of increased protection
of our potential ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or restructure us outweighs the disadvantages of
discouraging proposals, including proposals that are priced above the then
current market value of our common stock, because, among other things,
negotiation of these proposals could result in an improvement of their terms.
We are subject to Section 203 of the Delaware General Corporation Law. This
provision generally prohibits any Delaware corporation from engaging in any
business combination with any interested stockholder for a period of three years
following the date the stockholder became an interested stockholder, unless:
- prior to that date the board of directors approved either the business
combination or the transaction that resulted in the stockholder
becoming an interested stockholder;
- upon completion of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock outstanding at the time the transaction
began; or
- on or following that date, the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders 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 a business combination to include:
- any merger or consolidation involving the corporation and the
interested stockholder;
- any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
- subject to some 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; or
- 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 the entity or person.
Our bylaws provide that following the completion of this offering our board
of directors will be divided into three classes of directors designated Class I,
Class II and Class III. Each class
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will have a three-year term. Initially, two directors will serve in Class I, two
directors will serve in Class II and two directors will serve in Class III. The
initial directors in each class will hold office for terms of one year, two
years or three years. Thereafter each class will serve a three-year term.
We believe that a classified board of directors will help to assure the
continuity and stability of the board of directors and our business strategies
and policies as determined by the board of directors, since a majority of the
directors at any given time will have had prior experience as our directors. We
believe that this, in turn, will permit the board of directors to more
effectively represent the interest of our stockholders. With a classified board
of directors, at least two annual meetings of our stockholders, instead of one,
will generally be required to effect a change in the majority of the board of
directors. As a result, a provision relating to a classified board of directors
may discourage proxy contests for the election of directors or purchases of a
substantial block of our common stock because its provisions could operate to
prevent obtaining control of the board of directors in a relatively short period
of time. The classification provision and the prohibition on stockholder action
by written consent also could have the effect of discouraging a third party from
making a tender offer or otherwise attempting to obtain control of us. Under
Delaware law, a director on a classified board may be removed by the
stockholders of the corporation only for cause.
Our bylaws provide that special meetings of the stockholders may be called
only by our President or at the direction of the board of directors, by our
Secretary. Our bylaws require advance written notice, which generally must be
received by our Secretary not less than 30 days prior to the meeting, by a
stockholder of a proposal or director nomination which a stockholder desires to
present at a meeting of stockholders. Our certificate of incorporation does not
include a provision for cumulative voting in the election of directors. Under
cumulative voting, a minority stockholder holding a sufficient number of shares
may be able to ensure the election of one or more directors. The absence of
cumulative voting may have the effect of limiting the ability of minority
stockholders to effect changes in the board of directors and, as a result, may
have the effect of deterring hostile takeover or delaying or preventing changes
in control or our management.
STOCKHOLDER RIGHTS PLAN
We have adopted a stockholder rights plan under which all outstanding
shares of common stock as of the effective date of the offering and each share
of common stock issued between the effective date of the offering and the
distribution date will be coupled with a stockholder right. Unless our board of
directors has previously approved the acquisition or offer, the distribution
date would occur upon the earlier of the following two events:
- The tenth day after the date of the first public announcement that a
person or group of affiliated or associated persons has acquired
beneficial ownership of 15% or more of our outstanding common stock.
The date of this announcement is referred to in the stockholder rights
plan as the stock acquisition date.
- The tenth business day after the commencement or announcement of a
tender offer or exchange offer that would result in a person or group
becoming the beneficial owner of 15% or more of our outstanding common
stock.
A person who becomes the beneficial owner of 15% or more of our outstanding
common stock is referred to in the stockholder rights plan as an acquiring
person.
Initially, the stockholder rights will be attached to the certificates
representing outstanding shares of common stock, and no separate rights
certificates will be distributed. Each right will entitle the holder to purchase
one one-hundredth of a share of our Series C preferred stock.
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Until the right is exercised, the holder of a stockholder right, as such, will
not have any rights as a stockholder, including the right to receive dividends
or to vote at stockholder meetings.
Stockholder rights are not exercisable until the distribution date, and
will expire at the close of business on the tenth anniversary of the date of
this prospectus, unless earlier redeemed or exchanged by us.
If any person becomes an acquiring person, each holder of a stockholder
right will be entitled to exercise the right and receive, instead of Series C
preferred stock, common stock having a value equal to two times the exercise
price of the stockholder right. All stockholder rights that are beneficially
owned by an acquiring person or its transferee will become null and void.
If at any time following a stock acquisition date (1) we are acquired in a
merger or other business combination, or (2) 50% or more of our assets, cash
flow or earning power is sold or transferred, each holder of a stockholder right
other than an acquiring person or its transferee shall have the right to
receive, upon exercise, common stock of the acquiring company having a value
equal to two times the exercise price of the right.
The purchase price payable, the number of one one-hundredths of a share of
Series C preferred stock or other securities or property issuable upon exercise
of rights and the number of rights outstanding are subject to adjustment from
time to time to prevent dilution. With some exceptions, no adjustment in the
purchase price or the number of shares of Series C preferred stock issuable upon
exercise of a stockholder right will be required until the cumulative adjustment
would require an increase or decrease of at least one percent in the purchase
price or number of shares for which a right is exercisable.
At any time until the earlier of (1) ten days after a stock acquisition
date and (2) the termination of the stockholder rights plan, we may redeem the
stockholder rights at a price of $0.01 per right. The terms of the stockholder
rights plan allow us to extend the ten day period referred to in the previous
sentence. At any time after a public announcement that a person has become an
acquiring person, we may exchange the stockholder rights at an exchange ratio of
one share of common stock, or one one-hundredth of a share of Series C preferred
stock per right.
The stockholder rights plan is designed to protect stockholders of Organic
in the event of unsolicited offers to acquire Organic and other coercive
takeover tactics that, in the opinion of our board of directors, could impair
its ability to represent stockholder interests. The provisions of the
stockholder rights plan may render an unsolicited takeover of Organic more
difficult or less likely to occur or might prevent such a takeover, even if such
takeover may offer our stockholders the opportunity to sell their stock at a
price above the prevailing market price and may be favored by the majority of
our stockholders. This could occur because the plan would substantially dilute a
person or group seeking to acquire us without approval of our board of
directors, making such an acquisition prohibitively expensive.
REGISTRATION RIGHTS
Under an investors' rights agreement entered into between us and Organic
Holdings, Inc. and Omnicom Group, we are obligated, under limited circumstances
and subject to specified conditions and limitations, to use our best efforts to
register the shares of common stock held by Organic Holdings, Inc., Omnicom
Group or their permitted transferees under the Securities Act.
We must use our best efforts to register these shares, which are referred
to in the investors' rights agreement as registrable securities:
- if we receive written notice from Organic Holdings, Inc. or Omnicom Group
requesting that we effect a registration with respect to not less than
20% of the outstanding
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registrable securities, or a lesser percentage where the anticipated
aggregate offering price to the public will exceed $10.0 million;
- if we decide to register our own securities, except in connection with
this offering; or
- if we receive written notice from holders of registrable securities
requesting that we effect a registration on Form S-3, which is a
short-form registration statement, with respect to registrable securities
the anticipated price to the public of which is at least $1.0 million, so
long as we are then eligible to use Form S-3, which at the earliest will
occur twelve calendar months after the closing of this offering.
Our obligation to register shares is subject to some conditions and
limitations. If requested to register registrable securities other than on Form
S-3, we can delay registration for up to 120 days, but not more than once in any
twelve-month period. We can delay Form S-3 registrations for up to 60 days, but
not more than once in any twelve-month period. In addition, unless the request
is for a registration on Form S-3, we are obligated to effect only two
registrations requested by the holders of registrable securities. In cases where
we decide to register our own securities, the managing underwriter may limit the
registrable securities to be included in the registration to not less than 20%
of the total amount of securities to be registered.
These registration rights terminate with respect to registrable securities
upon the first to occur of when the holder can transfer his, her or its
registrable securities under Rule 144 in any 90-day period or five years after
the closing of this offering.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is EquiServe Trust
Company, N.A. Its address is 150 Royall Street, Canton, Massachusetts 02021, and
its telephone number is (781) 575-3400.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock.
Future sales of substantial amounts of common stock in the public market could
adversely affect prevailing market prices. As described below, no shares
currently outstanding will be available for sale immediately after this offering
because of contractual restrictions on resale. Sales of substantial amounts of
our common stock in the public market after the restrictions lapse or are
released could adversely affect the prevailing market price and impair our
ability to raise equity capital in the future.
Upon completion of the offering, we will have 78,857,200 outstanding shares
of common stock. Of these shares, the 5,500,000 shares sold in the offering,
plus any shares issued upon exercise of the underwriters' over-allotment option,
will be freely tradable without restriction under the Securities Act, unless
purchased by our "affiliates" as that term is defined in Rule 144 under the
Securities Act. In general, affiliates include officers, directors or 10%
stockholders.
The remaining 73,357,200 shares outstanding are "restricted securities"
within the meaning of Rule 144. Restricted securities may be sold in the public
market only if registered or if they qualify for an exemption from registration
under Rules 144, 144(k) or 701 promulgated under the Securities Act, which are
summarized below. Sales of the restricted securities in the public market, or
the availability of such shares for sale, could adversely affect the market
price of the common stock.
Our directors, officers and stockholders have entered into lock-up
agreements in connection with this offering generally providing that they will
not offer, sell, contract to sell or grant any option to purchase or otherwise
dispose of our common stock or any securities exercisable for or convertible
into our common stock without the prior written consent of Goldman, Sachs & Co.
The lock-up restrictions will expire on the date which is 180 days after the
date of this prospectus. However, Goldman, Sachs & Co. may waive these
restrictions at any time in its discretion before the end of the 180 day lock-up
period. Notwithstanding possible earlier eligibility for sale under the
provisions of Rules 144, 144(k) and 701, shares subject to lock-up agreements
will not be salable until these agreements expire or are waived by Goldman,
Sachs & Co. Taking into account the lock-up agreements, and assuming Goldman,
Sachs & Co. does not release stockholders from these agreements, the following
shares will be eligible for sale in the public market at the following times:
- Beginning on the date of this prospectus, only the shares sold in the
offering will be immediately available for sale in the public market.
- Beginning 180 days after the date of this prospectus, 5,116,746 shares
will be freely tradable pursuant to Rule 144(k), and an additional
68,240,454 shares will be eligible for sale subject to volume
limitations, as explained below, pursuant to Rules 144 and 701.
In general, under Rule 144 as currently in effect, after the expiration of
the lock-up agreements, a person who has beneficially owned restricted
securities for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
- one percent of the number of shares of common stock then outstanding
which will equal approximately 788,572 shares immediately after the
offering; or
- the average weekly trading volume of the common stock during the four
calendar weeks preceding the sale.
Sales under Rule 144 are also subject to requirements with respect to
manner of sale, notice, and the availability of current public information about
us. Under Rule 144(k), a person who is not deemed to have been our affiliate and
any time during the three months preceding a
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sale, and who has beneficially owned the shares proposed to be sold for at least
two years, is entitled to sell these shares without complying with the manner of
sale, public information, volume limitation or notice provisions of Rule 144.
Rule 701, as currently in effect, permits our employees, officers,
directors or consultants who purchased shares pursuant to a written compensatory
plan or contract to resell these shares in reliance upon Rule 144 but without
compliance with specific restrictions. Rule 701 provides that affiliates may
sell their Rule 701 shares under Rule 144 without complying with the holding
period requirement and that non-affiliates may sell these shares in reliance on
Rule 144 without complying with the holding period, public information, volume
limitation or notice provisions of Rule 144.
In addition, we intend to file a registration statement on Form S-8 under
the Securities Act within 180 days following the date of this prospectus to
register shares to be issued pursuant to our employee benefit plans. As a
result, any options or rights exercised under the 1997 stock option plan, the
1999 long-term stock incentive plan, the 2000 employee stock purchase plan we
intend to adopt or any other benefit plan after the effectiveness of the
registration statement will also be freely tradable in the public market.
However, these shares held by affiliates will still be subject to the volume
limitation, manner of sale, notice and public information requirements of Rule
144 unless otherwise resaleable under Rule 701. As of September 30, 1999, there
were outstanding options for the purchase of 15,712,932 shares of common stock,
of which options to purchase 2,525,502 shares were vested and exercisable.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Morrison & Foerster LLP, San Francisco, California. Certain legal matters in
connection with the offering will be passed upon for the underwriters by Wilson
Sonsini Goodrich & Rosati, P.C., Palo Alto, California.
EXPERTS
The audited financial statements included in this prospectus have been so
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in accounting and
auditing.
AVAILABLE INFORMATION
We have filed with Securities and Exchange Commission in Washington, D.C. a
Registration Statement on Form S-1 under the Securities Act with respect to the
common stock offered in this prospectus. This prospectus, filed as part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement and its exhibits and schedules, certain portions of which
have been omitted as permitted by the rules and regulations of the SEC. For
further information about us and the common stock, we refer you to the
Registration Statement and to its exhibits and schedules. Statements in this
prospectus about the contents of any contract, agreement or other document are
not necessarily complete and, in each instance, we refer you to the copy of such
contract, agreement or document filed as an exhibit to the Registration
Statement, and each such statement being qualified in all respects by reference
to the document to which it refers. Anyone may inspect the Registration
Statement and its exhibits and schedules without charge at the public reference
facilities the SEC maintains at 450 Fifth Street, N.W., Washington, D.C. 20549
and at the regional offices of the SEC located at 7 World Trade Center, Suite
1300, New York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago,
Illinois, 60661. You may obtain copies of all or any part of these materials
from the SEC upon the payment of certain fees prescribed by the SEC. You may
also inspect these reports and
75
<PAGE> 76
other information without charge at a Web site maintained by the SEC. The
address of this site is http://www.sec.gov.
Upon completion of this offering, we will become subject to the
informational requirements of the Exchange Act and will be required to file
reports, proxy statements and other information with the SEC. You will be able
to inspect and copy these reports, proxy statements and other information at the
public reference facilities maintained by the SEC and at the SEC's regional
offices at the addresses noted above. You also will be able to obtain copies of
this material from the Public Reference Section of the SEC as described above,
or inspect them without charge at the SEC's Web site. Following the offering,
our common stock will be quoted on the Nasdaq National Market and you will be
able to inspect reports, proxy and information statements and other information
concerning us at the National Association of Securities Dealers, Inc. at 1735 K
Street, N.W., Washington, D.C. 20006.
76
<PAGE> 77
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of PricewaterhouseCoopers LLP, Independent
Accountants............................................... F-2
Consolidated Balance Sheet.................................. F-3
Consolidated Statement of Operations........................ F-4
Consolidated Statement of Stockholders' Equity.............. F-5
Consolidated Statement of Cash Flows........................ F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 78
REPORT OF PRICEWATERHOUSECOOPERS LLP,
INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Organic, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Organic,
Inc. ("the Company") at December 31, 1997, 1998 and September 30, 1999, and the
results of its operations and its cash flows for the years ended December 31,
1996, 1997, and 1998 and the nine months ended September 30, 1999, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers
November 22, 1999
except for the fourth paragraph of Note 1,
which is as of February 8, 2000
San Francisco, California
F-2
<PAGE> 79
ORGANIC, INC.
CONSOLIDATED BALANCE SHEET
AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AT
----------------- SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1999 1999
------- ------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 4,264 $ 1,667 $ 3,204
Short-term investments...................................... 1,871 400 --
Accounts receivable, net of allowance of $96 at December 31,
1997, $283 at December 31, 1998, and $564 at September 30,
1999...................................................... 2,597 5,447 18,084
Accounts receivable -- media spending....................... -- 1,472 2,762
Costs in excess of billings................................. 3 574 5,707
Deposits and prepaid expenses............................... 160 287 612
Other assets................................................ 4 108 318
Deferred tax asset, current................................. 988 -- --
------- ------- --------
Total current assets.................................... 9,887 9,955 30,687
Property and equipment, net................................. 1,313 6,570 9,604
Long-term investments....................................... 100 602 1,289
Deferred bank facility charge, net of accumulated
amortization of $504...................................... -- -- 17,647
Other assets................................................ 126 478 850
------- ------- --------
Total assets............................................ $11,426 $17,605 $ 60,077
======= ======= ========
LIABILITIES
Accounts payable............................................ $ 722 $ 3,899 $ 5,996
Current portion of long-term debt........................... 364 2,735 4,302
Current portion of obligations under capital leases......... -- 36 42
Accrued expenses............................................ 67 674 4,182
Accrued employee costs...................................... 93 187 3,157
Deferred revenue............................................ 351 1,013 3,106
Deferred revenue -- media spending.......................... -- 1,072 6,794
------- ------- --------
Total current liabilities............................... 1,597 9,616 27,579
Long-term debt, net of current portion...................... 604 553 430
Obligations under capital leases, net of current portion.... -- 108 108
Deferred rent............................................... -- 138 338
------- ------- --------
Total liabilities....................................... 2,201 10,415 28,455
------- ------- --------
Commitments and contingencies (Note 10)
Minority interest in consolidated subsidiary................ -- -- 280
STOCKHOLDERS' EQUITY
Convertible Series A preferred stock, $.0001 par value,
21,675,000 shares authorized, issued and outstanding at
December 31, 1997 and 1998 and September 30, 1999
(aggregate liquidation preference $64,664) (none pro
forma).................................................... 2 2 2 $ --
Convertible Series B preferred stock, $.0001 par value,
1,488,000 shares authorized, issued and outstanding at
September 30, 1999 (aggregate liquidation preference
$10,724) (none pro forma)................................. -- -- -- --
Common stock, $.0001 par value, 200,000,000 shares
authorized, 7,002, 902,817 and 1,619,124 shares issued and
outstanding at December 31, 1997, December 31, 1998 and
September 30, 1999, respectively (73,357,200 pro forma)... -- -- -- 7
Additional paid-in capital.................................. 11,250 13,584 89,816 89,818
Deferred compensation....................................... (61) (1,664) (37,993) (37,993)
Accumulated deficit......................................... (1,966) (4,732) (20,469) (20,469)
Accumulated other comprehensive income...................... -- -- (14) (14)
------- ------- -------- --------
Total stockholders' equity.............................. 9,225 7,190 31,342 $ 31,349
------- ------- -------- ========
Total liabilities and stockholders' equity.............. $11,426 $17,605 $ 60,077
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 80
ORGANIC, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------- --------------------------
1996 1997 1998 1998 1999
----------- ------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues................................. $ 4,294 $ 6,780 $ 27,734 $ 20,744 $ 51,781
Operating expenses:
Professional services (exclusive of $0,
$0, $183, $57 and $3,355 reported
below of stock-based compensation for
the years ended 1996, 1997 and 1998
and for the nine months ended
September 30, 1998 and 1999,
respectively)........................ 1,889 4,285 16,801 11,191 29,929
Selling, general and administrative
(exclusive of $53, $87, $511, $234
and $8,102 reported below of
stock-based compensation for the
years ended 1996, 1997 and 1998 and
for the nine months ended September
30, 1998 and 1999, respectively)..... 2,104 5,473 12,068 7,276 26,018
Stock compensation and other stock-
based charges........................ 53 87 694 291 11,457
----------- ------- ----------- ----------- -----------
Total operating expenses............. 4,046 9,845 29,563 18,758 67,404
----------- ------- ----------- ----------- -----------
Operating income (loss).................. 248 (3,065) (1,829) 1,986 (15,623)
Minority interest in operations of
consolidated subsidiary................ (106) -- -- -- (39)
Interest and other income, net........... 4 283 73 73 (11)
----------- ------- ----------- ----------- -----------
Net income (loss) before taxes....... 146 (2,782) (1,756) 2,059 (15,673)
Income tax expense (benefit)............. (91) (997) 1,010 913 64
----------- ------- ----------- ----------- -----------
Net income (loss).................... $ 237 $(1,785) $ (2,766) $ 1,146 $ (15,737)
=========== ======= =========== =========== ===========
Basic net income (loss) per share........ $ 26,286 $ (668) $ (10.81) $ 8.41 $ (13.01)
=========== ======= =========== =========== ===========
Diluted net income (loss) per share...... $ 0.00 $ (668) $ (10.81) $ 0.02 $ (13.01)
=========== ======= =========== =========== ===========
Weighted average common shares
outstanding:
Basic.................................. 9 2,671 255,888 136,259 1,209,591
=========== ======= =========== =========== ===========
Diluted................................ 65,025,009 2,671 255,888 65,424,719 1,209,591
=========== ======= =========== =========== ===========
Unaudited pro forma basic and diluted net
loss per share......................... $ (0.04) $ (0.22)
=========== ===========
Weighted average common shares
outstanding -- unaudited pro forma
basic and diluted...................... 65,280,888 70,389,036
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 81
ORGANIC, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------- ------------------ PAID-IN DEFERRED ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT
---------- ------ --------- ------ ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995................ -- $-- -- $-- $ 900 $ (145) $ (418)
Deferred stock-based compensation........... -- -- -- -- 426 (426) --
Amortization of deferred stock-based
compensation.............................. -- -- -- -- -- 53 --
Cash received in connection with investments
in Organic Holdings prior to
reorganization............................ -- -- -- -- 400 -- --
Adjustments related to certain assets and
liabilities retained by Organic
Holdings.................................. -- -- -- -- (105) -- --
Net income.................................. -- -- -- -- -- -- 237
---------- -- --------- -- ------- -------- --------
BALANCE AT DECEMBER 31, 1996................ -- -- -- -- 1,621 (518) (181)
Issuance of Series A preferred stock on
reorganization............................ 18,323,712 2 9 -- (2) -- --
Issuance of Series A preferred stock........ 3,351,288 -- -- -- 10,000 -- --
Common stock options exercised.............. -- -- 6,993 -- 1 -- --
Amortization of deferred stock-based
compensation.............................. -- -- -- -- -- 87 --
Reduction in deferred stock-based
compensation expense related to stock
options cancelled......................... -- -- -- -- (370) 370 --
Net loss.................................... -- -- -- -- -- -- (1,785)
---------- -- --------- -- ------- -------- --------
BALANCE AT DECEMBER 31, 1997................ 21,675,000 2 7,002 -- 11,250 (61) (1,966)
Common stock options exercised.............. -- -- 895,815 -- 37 -- --
Deferred stock-based compensation........... -- -- -- -- 2,348 (2,348) --
Amortization of deferred stock-based
compensation.............................. -- -- -- -- -- 694 --
Reduction in deferred stock-based
compensation expense related to stock
options cancelled......................... -- -- -- -- (51) 51 --
Net loss.................................... -- -- -- -- -- -- (2,766)
---------- -- --------- -- ------- -------- --------
BALANCE AT DECEMBER 31, 1998................ 21,675,000 2 902,817 -- 13,584 (1,664) (4,732)
Net loss.................................... -- -- -- -- -- -- (15,737)
Foreign currency translation adjustment..... -- -- -- -- -- -- --
Comprehensive loss..........................
Issuance of Series B preferred stock, net of
issuance costs of $6...................... 1,488,000 -- -- -- 10,718 -- --
Common stock options exercised.............. -- -- 716,307 -- 81 -- --
Deferred stock-based compensation........... -- -- -- -- 49,011 (49,011) --
Amortization of deferred stock-based
compensation.............................. -- -- -- -- -- 10,953 --
Reduction in deferred stock-based
compensation expense related to stock
options cancelled......................... -- -- -- -- (1,729) 1,729 --
Issuance of common stock warrants........... -- -- -- -- 18,151 -- --
---------- -- --------- -- ------- -------- --------
BALANCE AT SEPTEMBER 30, 1999............... 23,163,000 $2 1,619,124 $-- $89,816 $(37,993) $(20,469)
========== == ========= == ======= ======== ========
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE STOCKHOLDERS'
INCOME EQUITY
------------- -------------
<S> <C> <C>
BALANCE AT DECEMBER 31, 1995................ $ -- $ 337
Deferred stock-based compensation........... -- --
Amortization of deferred stock-based
compensation.............................. -- 53
Cash received in connection with investments
in Organic Holdings prior to
reorganization............................ -- 400
Adjustments related to certain assets and
liabilities retained by Organic
Holdings.................................. -- (105)
Net income.................................. -- 237
---- --------
BALANCE AT DECEMBER 31, 1996................ -- 922
Issuance of Series A preferred stock on
reorganization............................ -- --
Issuance of Series A preferred stock........ -- 10,000
Common stock options exercised.............. -- 1
Amortization of deferred stock-based
compensation.............................. -- 87
Reduction in deferred stock-based
compensation expense related to stock
options cancelled......................... -- --
Net loss.................................... -- (1,785)
---- --------
BALANCE AT DECEMBER 31, 1997................ -- 9,225
Common stock options exercised.............. -- 37
Deferred stock-based compensation........... -- --
Amortization of deferred stock-based
compensation.............................. -- 694
Reduction in deferred stock-based
compensation expense related to stock
options cancelled......................... -- --
Net loss.................................... -- (2,766)
---- --------
BALANCE AT DECEMBER 31, 1998................ -- 7,190
--------
Net loss.................................... -- (15,737)
Foreign currency translation adjustment..... (14) (14)
--------
Comprehensive loss.......................... (15,751)
Issuance of Series B preferred stock, net of
issuance costs of $6...................... -- 10,718
Common stock options exercised.............. -- 81
Deferred stock-based compensation........... -- --
Amortization of deferred stock-based
compensation.............................. -- 10,953
Reduction in deferred stock-based
compensation expense related to stock
options cancelled......................... -- --
Issuance of common stock warrants........... -- 18,151
---- --------
BALANCE AT SEPTEMBER 30, 1999............... $(14) $ 31,342
==== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 82
ORGANIC, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
AMOUNTS IN THOUSANDS
<TABLE>
<CAPTION>
FOR THE 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 income (loss)........................................... $ 237 $(1,785) $(2,766) $ 1,146 $(15,737)
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization............................. 203 432 1,248 765 2,226
Stock-based compensation and other stock-based charges.... 53 87 694 291 11,457
Provision for doubtful accounts........................... -- -- 280 180 637
Write-off of fixed assets................................. -- -- 12 -- 1,171
Minority interest in operations of consolidated
subsidiary.............................................. -- -- -- -- 280
Provision (benefit) for deferred income taxes............. (91) (1,000) 1,000 830 --
Revenue recognized in exchange for investments............ (90) (100) (577) (252) (687)
Changes in assets and liabilities:
Increase in accounts receivable......................... (159) (1,911) (4,622) (6,651) (14,763)
(Increase) decrease in costs in excess of billings...... 40 34 (571) (355) (5,133)
Increase in deposits and prepaid expenses............... (22) (138) (127) (58) (325)
Increase in other assets................................ (72) (76) (480) (405) (465)
Increase in accounts payable and accrued expenses....... 87 603 3,878 1,406 8,576
Increase (decrease) in deferred revenue................. (139) 235 1,734 2,132 7,814
Increase in deferred rent............................... -- -- 138 19 200
Decrease in income taxes payable........................ (111) -- -- -- --
----- ------- ------- ------- --------
Net cash used in operating activities................. (64) (3,619) (159) (952) (4,749)
----- ------- ------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.......................... (509) (1,099) (5,579) (3,143) (6,195)
Purchase of short-term investments.......................... -- (2,271) (1,865) (1,865) (2,005)
Proceeds from the sale and maturity of short-term
investments............................................... -- 400 3,336 1,880 2,405
Proceeds from the sale of long-term investments............. -- -- 75 75 --
----- ------- ------- ------- --------
Net cash used in investing activities................. (509) (2,970) (4,033) (3,053) (5,795)
----- ------- ------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from investment in Organic Holdings................ 400 -- -- -- --
Proceeds from issuance of convertible preferred stock,
net....................................................... -- 10,000 -- -- 7,718
Proceeds from exercises of common stock options............. -- 1 37 34 81
Proceeds from long-term debt................................ 350 757 1,938 1,100 7,000
Payments on notes payable -- related party.................. -- (8) -- -- --
Payments on capital leases.................................. -- -- (25) (16) (29)
Payments on long-term debt.................................. -- (140) (355) (212) (2,675)
----- ------- ------- ------- --------
Net cash provided by financing activities............. 750 10,610 1,595 906 12,095
Effect of exchange rate changes on cash and cash
equivalents......................................... -- -- -- -- (14)
----- ------- ------- ------- --------
Net increase (decrease) in cash and cash
equivalents....................................... 177 4,021 (2,597) (3,099) 1,537
Cash and cash equivalents at beginning of period............ 66 243 4,264 4,264 1,667
----- ------- ------- ------- --------
Cash and cash equivalents at end of period.................. $ 243 $ 4,264 $ 1,667 $ 1,165 $ 3,204
===== ======= ======= ======= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash paid for interest...................................... $ 13 $ 44 $ 138 $ 81 $ 231
===== ======= ======= ======= ========
Cash paid for income taxes.................................. $ 115 $ 5 $ 90 $ 90 $ 86
===== ======= ======= ======= ========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Property and equipment acquired under financing
obligations............................................... $ -- $ -- $ 906 $ 906 $ 153
===== ======= ======= ======= ========
Conversion of debt into preferred stock..................... $ -- $ -- $ -- $ -- $ 3,000
===== ======= ======= ======= ========
Issuance of common stock warrants........................... $ -- $ -- $ -- $ -- $ 18,151
===== ======= ======= ======= ========
Notes payable issued for investment......................... $ 8 $ -- $ -- $ -- $ --
===== ======= ======= ======= ========
Deferred stock-based compensation........................... $ 426 $ -- $ 2,348 $ 1,058 $ 49,011
===== ======= ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 83
ORGANIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS
NOTE 1 -- THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Organic, Inc. ("Organic" or "the Company") is an international Internet
professional services firm focused on the customer-to-business market. Organic
provides services to our clients including management consulting, creative
design and engineering implementation services; marketing services; public
relations services; and customer service and fulfillment consulting and
transaction management services. The marketing and public relations services are
typically provided under long-term agreements. The customer service and
fulfillment consulting and transaction management services are typically
provided under contracts that range from a few months to over a year.
The accompanying financial statements present the results of operations of the
Company and its predecessor, Organic Online, Inc. On January 29, 1997, Organic
Online Inc. was renamed Organic Holdings, Inc. and the Company was formed as a
subsidiary under the name Organic Online, Inc. The Company exchanged 18,323,712
shares of Series A convertible preferred stock and nine shares of common stock
for substantially all of the assets and liabilities of Organic Holdings, Inc.
Certain non-operating assets and liabilities (approximately $0.3 million, net)
were retained by Organic Holdings, Inc. and have been excluded from the
accompanying financial statements. Because this reorganization did not result in
a change in control of the Company, there was no change in the basis of
accounting at the time of the reorganization. The Company changed its name from
Organic Online, Inc. to Organic, Inc. on January 28, 1999.
CONSOLIDATION AND BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying financial statements include the accounts of the Company's
wholly owned subsidiaries, Organic Media, Inc., Organic Online, Ltd., and
Organic.com Private Ltd. and its share of a 70% owned subsidiary, Organic Brazil
Comunicacao Interativa Limitada. All intercompany transactions have been
eliminated in consolidation.
On May 25, 1999 and February 8, 2000 the Company's Board of Directors effected
3-for-1 splits of its outstanding shares of common and preferred stock. All
share and per share information included in these financial statements have been
retroactively adjusted to reflect these stock splits.
INTERIM FINANCIAL STATEMENTS
The accompanying interim consolidated financial statements and related footnote
information as of and for the nine months ended September 30, 1998 are unaudited
but include, in management's opinion, all adjustments, consisting of only normal
recurring adjustments, necessary to present fairly, in all material respects,
the consolidated financial position, results of operations and cash flows.
Results for the nine months ended September 30, 1998 and 1999 are not
necessarily indicative of results for the entire year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
F-7
<PAGE> 84
ORGANIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist primarily of cash and investments in a money
market fund. The Company considers all highly liquid investments with an
original maturity of three months or less to be cash equivalents. The Company
maintains its cash in bank deposit accounts that, at times, may exceed federally
insured limits.
SHORT-TERM INVESTMENTS
The Company's investments in certain debt and equity securities are categorized
as available for sale securities, as defined by Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities". At December 31, 1997 and 1998, the fair value of
the investments approximated their cost.
CONCENTRATION OF CREDIT RISK
The Company extends credit to customers based on an evaluation of their
financial condition and collateral is not required. The Company performs ongoing
credit evaluations of its customers and maintains an allowance for doubtful
accounts. Revenue derived from customers outside the United States has not been
significant. At December 31, 1997 and 1998, and September 30, 1999, three
customers, two customers and one customer accounted for 48%, 24%, and 21% of
total accounts receivable, respectively. In the year ended 1996, three customers
accounted for 30% of the Company's revenues. In the year ended 1997, no
customers accounted for more than 10% of the Company's revenues. In the year
ended 1998, one customer accounted for 12% of the Company's revenues. For the
nine months ended September 30, 1998 and 1999, one customer and two customers
accounted for 16% and 22% of the Company's revenues, respectively.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost, less accumulated depreciation and
amortization. Depreciation and amortization are calculated using the
straight-line method over the estimated useful lives of the related assets
ranging from three to five years. Leasehold improvements and equipment under
capital leases are amortized over the lease term or estimated useful lives,
whichever is shorter. Repairs and maintenance costs are charged to expense when
incurred. When assets are sold or retired, the cost and the related accumulated
depreciation are removed from the accounts, and any resulting gain or loss is
included in operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Company's cash and cash equivalents, short-term
investments, accounts receivable, and accounts payable approximate fair value
because of the short-term maturity of these instruments. Fair values are based
on quoted market prices and assumptions concerning the amount and timing of
estimated future cash flows and assumed discount rates reflecting varying
degrees of perceived risk. Based upon borrowing rates currently available to the
Company with similar terms, the carrying value of long-term debt and capital
lease obligations approximate fair value.
F-8
<PAGE> 85
ORGANIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS
FOREIGN CURRENCY TRANSLATION
The financial position and results of operations of foreign subsidiaries are
measured using the currency of the respective countries as the functional
currency. Assets and liabilities are translated into the reporting currency
(U.S. dollars) at the foreign exchange rate in effect at the balance sheet date,
while revenues and expenses for the year are translated at the average exchange
rate in effect during the year. Translation gains and losses are not included in
determining net income or loss but are accumulated and reported in stockholders'
equity, as a component of other comprehensive income, on a net of tax basis. The
Company has not entered into hedging contracts during any of the periods
presented.
REVENUE RECOGNITION
Revenue on contracts is recorded using the percentage-of-completion method,
retainer basis, or on a time and materials basis. Under the
percentage-of-completion method, revenue on contracts is recognized based on the
percentage of costs incurred to date to total estimated project costs. Earned
but unbilled project revenues are classified under current assets as costs in
excess of billings. Deferred revenue includes billings in excess of project
revenues earned, amounts payable on behalf of and billed to customers, and cash
received and other amounts billed in advance for services to be performed. The
Company periodically evaluates the estimated costs to complete its contracts.
Provisions for losses are recognized on uncompleted contracts when they become
known. Under the retainer basis, which relates primarily to media and
communications, revenue on contracts is recognized over the life of the contract
on a straight-line basis. Under the time and materials basis, revenue on
contracts is recognized based on agreed-upon hourly rates for the positions that
recorded time on the project during the period plus any materials used and
charged against the project. Sales of other services are recorded as revenue
when services are rendered.
ADVERTISING EXPENSES
The Company expenses the cost of advertising and promoting its services as
incurred. These costs are included in selling, general and administrative on the
statement of operations.
INCOME TAXES
Amounts provided for income tax expense are based on income reported for
financial statement purposes and do not necessarily represent amounts currently
payable under tax laws. Deferred taxes, which arise principally from temporary
differences between the period in which certain income and expenses are
recognized for financial reporting purposes and the period in which they affect
taxable income, are included in the amounts provided for income taxes. Under
this method, the computation of deferred tax assets and liabilities give
recognition to enacted tax rates in effect in the year the differences are
expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to amounts that the Company expects to
realize.
NET INCOME (LOSS) PER SHARE
The Company computes basic and diluted net income (loss) per share in accordance
with SFAS No. 128, "Earnings Per Share", and SEC Staff Accounting Bulletin
("SAB") No. 98. Under the provisions of SFAS No. 128 and SAB No. 98, basic net
income (loss) per share is computed by dividing net income (loss) available to
common stockholders for the period by the weighted
F-9
<PAGE> 86
ORGANIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS
average number of common shares outstanding during the period. Diluted net
income per share is computed by dividing net income available to common
stockholders for the period by the weighted average number of common and common
equivalent shares outstanding during the period. For those periods in which the
Company has incurred a net loss, diluted net loss per share is equivalent to
basic net loss per share since the assumed exercise of the Company's stock
options and a warrant and the assumed conversion of the Company's preferred
stock would be anti-dilutive and, accordingly, have been excluded from the
calculation.
PRO FORMA NET LOSS PER SHARE (UNAUDITED)
Unaudited pro forma net loss per share for the year ended December 31, 1998 and
nine months ended September 30, 1999 included in the statement of operations is
computed using the weighted average number of common shares outstanding,
adjusted to include the pro forma effects of the conversion of Series A and
Series B convertible preferred stock and the exercise of a warrant for common
stock as if such conversion had occurred on January 1, 1998 for the year ended
December 31, 1998 and on January 1, 1999 for the nine months ended September 30,
1999, or at the date of original issuance, if later.
PRO FORMA BALANCE SHEET (UNAUDITED)
Effective upon the closing of the Company's proposed initial public offering,
subject to certain conditions as described in Note 6, the outstanding shares of
Series A and Series B convertible preferred stock will automatically convert
into 65,025,000 and 4,464,000 shares of common stock, respectively, and a
warrant is exercisable for 2,249,076 shares of common stock. The unaudited pro
forma amounts included on the balance sheet reflect these conversions and the
assumed exercise, as if they had occurred on September 30, 1999.
COMPREHENSIVE INCOME
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income", which
requires that an enterprise report and display, by major components and as a
single total, the change in its net assets during the period from non-owner
sources. The adoption of this Statement did not have an impact on the Company's
consolidated financial position, results of operations or cash flows.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation in accordance with the
provisions of Accounting Principles Board Opinion ("APB") No. 25, "Accounting
for Stock Issued to Employees", and complies with the disclosure provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation". Under APB No. 25,
compensation expense is based on the difference, if any, on the date of grant
between the fair value of the Company's common stock and the exercise price of
the options to purchase that stock.
SEGMENT REPORTING
The Company manages its operations on a geographical basis and, to date, has
provided services primarily in the United States. Through September 30, 1999,
foreign operations have not been significant in either revenue or investment in
long-lived assets. Revenues from major customers are disclosed above in
"Concentration of Credit Risk".
F-10
<PAGE> 87
ORGANIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". The
Statement will require the Company to recognize all derivatives on the balance
sheet at fair value. SFAS No. 133 requires that derivative instruments used to
hedge be identified specifically to assets, liabilities, unrecognized firm
commitments or forecasted transactions. The gains or losses resulting from
changes in the fair value of derivative instruments will either be recognized in
current earnings or in other comprehensive income, depending on the use of the
derivative and whether the hedging instrument is effective or ineffective when
hedging changes in fair value or cash flows. This Statement, as amended, is
effective for fiscal years beginning after June 15, 2000. Management believes
that the adoption of this Statement will not have a material effect on the
Company's consolidated financial position or results of operations.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". This SOP provides guidance on
accounting for certain costs in connection with obtaining or developing computer
software for internal use and requires that entities capitalize such costs once
certain criteria are met. The Company adopted SOP 98-1 as of January 1, 1999.
The adoption of this SOP did not have a material effect on the Company's
consolidated financial position or results of operations.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities". This SOP requires that entities expense start-up costs and
organization costs as they are incurred. The Company adopted SOP 98-5 as of
January 1, 1999. The adoption of this SOP did not have a material effect on the
Company's consolidated financial position or results of operations.
NOTE 2 -- PROPERTY AND EQUIPMENT, NET
Property and equipment are carried at cost, less accumulated depreciation and
amortization. As of December 31, 1997 and 1998, and September 30, 1999, the
amounts were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1997 1998 1999
------ ------- -------------
<S> <C> <C> <C>
Computer hardware..................................... $1,322 $ 4,354 $ 7,780
Computer software..................................... 208 1,461 1,707
Equipment............................................. 159 721 986
Furniture............................................. 40 243 278
Leasehold improvements................................ 214 1,638 2,432
------ ------- -------
$1,943 $ 8,417 $13,183
Less: accumulated depreciation and amortization....... (630) (1,847) (3,579)
------ ------- -------
$1,313 $ 6,570 $ 9,604
====== ======= =======
</TABLE>
Depreciation expense for the years ended December 31, 1996, 1997 and 1998, and
for the nine months ended September 30, 1998 and 1999 were $196, $401, $1,220,
$744 and $2,144, respectively.
F-11
<PAGE> 88
ORGANIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS
Included in the above is equipment acquired under capital leases of $169 at
December 31, 1998 and $204 at September 30, 1999. Accumulated amortization on
equipment acquired under capital leases was $28 and $66 at December 31, 1998 and
September 30, 1999 respectively.
NOTE 3 -- INVESTMENTS
The Company's investments comprise of common stock received from its customers
in exchange for services. The common stock, all of which is from privately held
companies, has been recorded on the financial statements based on the estimated
fair value of the services provided to the customers. The Company records a
writedown for any declines in value that are judged to be other than temporary.
During the years ended December 31, 1996, 1997 and 1998, and nine months ended
September 30, 1998 and 1999, the Company received common stock that was recorded
at $90, $100, $577, $252 and $687, respectively.
NOTE 4 -- ACCRUED EXPENSES AND EMPLOYEE COSTS
The following table presents the detailed categories of the Company's accrued
expenses and employee costs that, on an individual basis, exceed five percent of
total current liabilities:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- SEPTEMBER 30,
1997 1998 1999
---- ---- -------------
<S> <C> <C> <C>
Accrued vacation....................................... $ 92 $183 $ 639
Accrued bonuses........................................ -- -- 2,407
Other.................................................. 68 678 4,293
---- ---- ------
$160 $861 $7,339
==== ==== ======
</TABLE>
NOTE 5 -- DEBT
The Company had the following debt outstanding at December 31, 1998 and 1999 and
September 30, 1999:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30,
1997 1998 1999
----- ------- -------------
<S> <C> <C> <C>
Revolving credit facility.............................. $ -- $ -- $ 4,000
Amounts borrowed under equipment line of credit........ 968 2,551 --
Amounts borrowed under software financing agreements... -- 737 732
----- ------- -------
968 3,288 4,732
Less: current portion.................................. (364) (2,735) (4,302)
----- ------- -------
Total long-term debt................................... $ 604 $ 553 $ 430
===== ======= =======
</TABLE>
The revolving credit facility was established in August 1999 with Omnicom Group
and allows the Company to borrow up to $30.0 million at the lender's commercial
paper rate, based on the published 30 day commercial lending rate in The Wall
Street Journal at the last day of the month, plus 3.0% until the closing of the
Company's proposed initial public offering. Thereafter, the Company may borrow
up to $15.0 million at the lender's commercial paper rate plus 1.25%
F-12
<PAGE> 89
ORGANIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS
through September 30, 2002. Interest is payable quarterly. A portion of the
funds was used to repay the amounts borrowed under the equipment line of credit.
Borrowings under the revolving loan agreement are collateralized by certain
long-term investments of the Company and are subject to certain financial
covenants, including minimum revenue targets and limitations on capital
equipment purchases. At September 30, 1999, the Company was in compliance with
these covenants.
In connection with this agreement, the Company issued warrants to purchase
2,249,076 shares of its common stock at $0.0033 per share (Note 6).
The equipment line of credit, together with an additional credit agreement
permitting borrowings through September 30, 1999 with the same financial
institution, allows the Company to borrow up to $1.5 million for equipment
purchases and $2.5 million limited to 75% of eligible accounts receivable and
any outstanding letters of credit up to $1.0 million. At September 30, 1999, the
Company had $144 in outstanding letters of credit under this agreement. Interest
for amounts borrowed under the equipment line of credit was at the bank's prime
lending rate plus 0.50%.
The amounts borrowed under the software financing agreements bear interest at
rates of 6.89% and 8.25% and are repayable $73, $307, $329, and $22, during the
three months ended December 31, 1999 and for each of the years through 2002,
respectively.
NOTE 6 -- COMMON AND CONVERTIBLE PREFERRED STOCK
COMMON AND CONVERTIBLE PREFERRED STOCK
At September 30, 1999, the Company had authorized 35,000,000 shares and
25,000,000 shares of common stock and preferred stock, respectively. Of the
25,000,000 authorized shares of preferred stock, the Company has designated
21,675,000 shares as Series A preferred stock and 1,488,000 shares as Series B
preferred stock. In November 1999, the Company's Board of Directors approved an
amendment to the Articles of Incorporation to increase the number of authorized
common shares to 200,000,000.
VOTING RIGHTS
Preferred stockholders receive one vote for each share of common stock into
which the preferred shares are convertible.
LIQUIDATION PREFERENCE
In the event of liquidation, Series A and B preferred stockholders are entitled
to receive $2.9833 and $7.2067 per share, respectively, plus any declared but
unpaid dividends prior to and in preference to any distribution to the holders
of the Company's common stock. If assets remain upon completion of this
liquidation distribution, the remaining assets of the Company would be
distributed ratably among the holders of the Company's common stock.
DIVIDENDS
Holders of Series A and B preferred stock are entitled to receive noncumulative
dividends at an annual rate of $0.1667 per share, payable when and if declared
by the Company's Board of Directors. The Company may not pay a dividend on its
common stock until Series A and B preferred stock dividends have been paid. The
Company may not pay a dividend if the resulting
F-13
<PAGE> 90
ORGANIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS
aggregate stockholders' equity of the Company falls below $14.0 million. The
Company's Board of Directors through September 30, 1999 has declared no
dividends.
CONVERSION
Currently, at the option of the holder, each share of Series A and B preferred
stock is convertible into one share of the Company's common stock, subject to
adjustments under certain conditions as provided for in the Company's Articles
of Incorporation. Following the 3-for-1 split of the Company's outstanding
common stock, the conversion rate will be one share of preferred stock for three
shares of common stock. Each share of Series A and B preferred stock will be
automatically converted into common stock upon the earlier of i) a vote or
written consent by at least a majority of such shares when fewer than 2,100,000
shares of Series A preferred stock remain outstanding or ii) the closing of the
sale of the Company's common stock at a public offering price equal to or
exceeding $1.11 per share with aggregate proceeds of at least $7.5 million.
WARRANTS
In connection with the revolving credit facility (Note 5), the Company issued a
warrant that entitles the lender to purchase 2,249,076 shares of the Company's
common stock at an exercise price of $0.0033 per share. The warrant is
exercisable until the earlier of an initial public offering of the Company's
common stock or the expiration of the credit facility on September 30, 2002. The
fair value of the warrant of $8.07 per share was estimated using the
Black-Scholes pricing model with the following weighted average assumptions:
risk-free interest rate of 6.77%, expected life of six months, expected dividend
rate of 0%, and volatility of 110%. The Company recorded $18,151 as a deferred
bank facility charge that is being amortized on a straight-line basis over the
life of the revolving credit facility of three years.
NOTE 7 -- STOCK OPTIONS
In April 1997, the Company adopted the 1997 Stock Option Plan ("the Plan") which
authorizes the Board of Directors to grant incentive stock options and
nonstatutory stock options. Incentive stock options ("ISO") may be granted only
to Company employees (including officers and directors who are also employees).
Nonstatutory stock options ("NSO") may be granted to employees, outside
directors and consultants. The maximum number of options, as amended, cannot
exceed 22,725,000 shares of the Company's common stock.
The stock options vest at a rate of 25% of the options granted after one year
from date of grant, with the remaining options vesting on a pro rata monthly
basis over the next 36 months. Options generally expire ten years from the date
of grant; however, in the case of a stock option granted to a person owning more
than 10% of the combined voting power of all classes of the Company's stock, the
term of the option will be five years from the date of the grant. All cancelled
or expired options become available for future grants.
In accordance with the Plan, the stated exercise price shall not be less than
85% of the estimated fair value of the shares on the date of grant as determined
by the Board of Directors, provided, however, that (i) the exercise price of an
ISO and NSO shall not be less than 100% and 85% of the estimated fair value of
the shares on the date of grant, respectively, and (ii) the exercise price of an
ISO and NSO granted to a 10% shareholder shall not be less than 110% of the
estimated fair value of the shares on the date of grant, respectively.
F-14
<PAGE> 91
ORGANIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS
The Company accounts for the Plan in accordance with APB No. 25, "Accounting for
Stock Issued to Employees" and related Interpretations. In connection with
certain stock grants, the Company recognized deferred compensation that is being
amortized over the vesting period of the options. Total stock-based compensation
expense for the years ended December 31, 1996, 1997 and 1998 and nine months
ended September 30, 1998 and 1999 was $53, $87, $694, $291, and $10,953,
respectively, for options granted to employees where the deemed fair value of
the stock for accounting purposes exceeded the exercise price of the option at
the grant date.
The following table summarizes the transactions under the Plan.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, FOR THE NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------- -----------------------------------------------
1997 1998 1998 1999
---------------------- ---------------------- ---------------------- ----------------------
WEIGHTED- WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
---------- --------- ---------- --------- ---------- --------- ---------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of
period............... -- $ -- 8,230,005 $0.09 8,230,005 $0.09 10,649,958 $0.13
Granted.............. 10,364,850 0.09 7,543,575 0.14 4,005,450 0.10 9,528,150 1.14
Exercised............ (6,993) 0.10 (895,815) 0.04 (348,606) 0.10 (716,307) 0.11
Expired or
cancelled.......... (2,127,852) 0.10 (4,227,807) 0.10 (2,935,179) 0.10 (3,748,869) 0.19
---------- ---------- ---------- ----------
Options outstanding,
end of period........ 8,230,005 $0.09 10,649,958 $0.13 8,951,670 $0.09 15,712,932 $0.72
========== ========== ========== ==========
Options exercisable,
end of period........ 1,870,734 $0.08 1,451,949 $0.10 1,879,107 $0.08 2,525,502 $0.09
========== ========== ========== ==========
</TABLE>
The following table summarizes information about stock options outstanding under
the Plan.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AT OPTIONS EXERCISABLE AT
SEPTEMBER 30, 1999 SEPTEMBER 30, 1999
------------------------------------------ -----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
NUMBER REMAINING EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
------------------------ ----------- ---------------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.00...................... 239,202 10.79 years $0.00 79,827 $0.00
0.10 - 0.56...................... 7,732,080 10.08 0.20 2,445,675 0.10
0.67 - 1.33...................... 5,050,650 9.73 1.02 -- --
1.67 - 2.00...................... 2,691,000 9.92 1.75 -- --
---------- ---------
15,712,932 9.95 $0.72 2,525,502 $0.09
========== =========
</TABLE>
At December 31, 1997 and 1998, and September 30, 1998 and 1999, 14,488,002,
11,172,234, 13,417,731, and 5,392,953 shares, respectively, were available for
future stock option grants under the Plan.
F-15
<PAGE> 92
ORGANIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS
The weighted-average fair value of Plan options granted was $0.02 and $0.34 for
the years ended December 31, 1997 and 1998, respectively, and $0.28 and $5.38
for the nine months ended September 30, 1998 and 1999. The fair value of each
option grant has been estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted average assumptions:
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS
YEARS ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------- -------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Risk-free interest rates.......................... 6.09% 5.72% 5.12% 5.12% 5.78%
Expected lives (years)............................ 4 4 4 4 4
Expected dividend yields.......................... 0% 0% 0% 0% 0%
Expected volatility............................... 0% 0% 0% 0% 0%
</TABLE>
Because the determination of fair value of all options granted after such time
as the Company becomes a public entity will include an expected volatility
factor in addition to the factors described above and because additional grants
are made each year, the results below may not be representative of future
periods.
Had the Company accounted for compensation expense on stock options granted to
employees according to SFAS No. 123, "Accounting for Stock-Based Compensation",
the Company's net income (loss) and net income (loss) per share would have
decreased (increased) to the pro forma amounts indicated in the following table.
Since no options were granted prior to 1997 under this Plan, the pro forma
results indicated for those periods presented in the following table do not
reflect the full effect of amortization over the entire vesting period, and
thus, may not be representative of future periods.
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS
YEARS ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------------ ------------------------
1997 1998 1998 1999
------- ------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net income (loss) -- as reported.......... $(1,785) $(2,766) $1,146 $(15,737)
Net income (loss) -- pro forma............ (1,808) (2,883) 1,079 (16,614)
Basic net income per common share -- as
reported................................ $ (668) $(10.81) $ 8.41 $ (13.01)
Basic net income per common share -- pro
forma................................... (677) (11.27) 7.92 (13.73)
Diluted net income (loss) per common
share -- as reported.................... $ (668) $(10.81) $ 0.02 $ (13.01)
Diluted net income (loss) per common
share -- pro forma...................... (677) (11.27) 0.02 (13.73)
</TABLE>
F-16
<PAGE> 93
ORGANIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS
Prior to the adoption of the 1997 Stock Plan, the Company did not have a formal
stock option plan and options were granted to employees and directors to
purchase shares of the Company's predecessor, Organic Online Inc., at various
exercise prices. For the years ended December 31, 1996, 1997 and 1998, and nine
months ended September 30, 1998 and 1999, the employees and directors were
granted 58,000, 24,000, 5,000, 5,000, and 225,409 options, respectively, under
this arrangement. As of September 30, 1999, the number of options outstanding
under this arrangement was 364,517.
NOTE 8 -- INCOME TAXES
As of September 30, 1999, the Company had net operating loss carryforwards of
approximately $2.7 million for federal and state income tax purposes arising
from the taxable loss in the years ended December 31, 1997 and 1998. The federal
net operating loss carryforwards expire in the years 2012 and 2018,
respectively. The state net operating loss carryforwards expire in the years
2005. Valuation allowances have been provided against the net deferred tax
assets due to the uncertainty of their realization.
The Company's ability to utilize its net operating loss carryforwards to offset
future taxable income may be subject to restrictions attributable to equity
transactions that result in changes in ownership as defined in the Tax Reform
Act of 1986. These restrictions may limit, on an annual basis, the Company's
future use of its net operating loss carryforwards.
The difference between the income tax expense (benefit) at the federal statutory
rate of 34% and the Company's effective tax rate is due primarily to net
operating loss carryforwards and the valuation allowance.
Effective January 1, 1996, the Company became an S-Corporation and accordingly,
was not subject to income tax in 1996. The tax benefit in 1996 represents the
reversal of the net deferred tax liabilities at the date the Company changed
from a C-Corporation to an S-Corporation. Upon the formation of the Company into
Organic Online (see Note 1), in January 1997, the Company operated as a
C-Corporation.
F-17
<PAGE> 94
ORGANIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS
The components of income tax expense (benefit) were as follows:
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS
YEARS ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
----------------- --------------------
1997 1998 1998 1999
------- ------ ----------- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Current
Federal...................................... $ -- $ -- $ 60 $--
State........................................ 3 10 23 9
Foreign...................................... -- -- -- 55
------- ------ ---- ---
Total currently payable................... 3 10 83 64
------- ------ ---- ---
Deferred
Federal...................................... (753) 753 629 --
State........................................ (247) 247 201 --
------- ------ ---- ---
Total deferred............................ (1,000) 1,000 830 --
------- ------ ---- ---
Total income tax expense (benefit)........ $ (997) $1,010 $913 $64
======= ====== ==== ===
</TABLE>
The components of the deferred tax assets of the Company were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1997 1998 1999
------ ------- -------------
<S> <C> <C> <C>
Accumulated depreciation.............................. $ 12 $ (26) $ 203
Compensation costs.................................... -- -- 1,365
Organizational costs.................................. -- 6 11
Tax credits........................................... -- 9 66
Accruals and reserves................................. 132 243 2,028
Net operating loss carryforward....................... 856 1,240 1,371
------ ------- -------
Gross deferred tax asset......................... 1,000 1,472 5,044
Valuation allowance................................... -- (1,472) (5,044)
------ ------- -------
Net deferred tax asset........................... $1,000 $ -- $ --
====== ======= =======
</TABLE>
NOTE 9 -- 401(k) SAVINGS PLAN
In January 1997, the Company established a defined contribution plan authorized
under Section 401(k) of the Internal Revenue Code. All benefits-eligible
employees with at least one month of service are eligible to participate in the
plan. Employees may contribute up to 20 percent of their pre-tax covered
compensation through salary deductions. In 1999, the Company began contributing
25 percent of every pre-tax dollar an employee contributes up to the first 5
percent of the employee's pre-tax covered compensation. Employees are 50 percent
vested in the employer's contributions after one year of service and fully
vested after two years.
F-18
<PAGE> 95
ORGANIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS
All employer contributions are tax deductible by the Company. The Company's
matching contribution expense was $57 for the nine months ended September 30,
1999. In addition, the Company may make a discretionary profit-sharing
contribution to all eligible employees, regardless of whether an employee is
participating in the 401(k) plan. However, no such contributions have been made
through September 30, 1999.
NOTE 10 -- COMMITMENTS AND CONTINGENCIES
The Company leases various office space and office equipment under
non-cancelable operating and capital leases with initial or remaining terms of
one year or more. Total rent expense under operating leases was $70, $207, and
$876 for the years ended December 31, 1996, 1997 and 1998, respectively, and
$526 and $1,815 for the nine months ended September 30, 1998 and 1999,
respectively. At September 30, 1999, the future minimum lease payments under all
lease arrangements are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- -------
<S> <C> <C>
Three months ending December 31, 1999....................... $ 546 $ 15
Years ending December 31, 2000.............................. 2,050 62
2001...................................................... 1,607 49
2002...................................................... 1,553 46
2003...................................................... 1,354 26
2004...................................................... 1,118 1
Thereafter.................................................. 4,368 --
------- ----
Total minimum lease payments................................ $12,596 199
=======
Less: amount representing interest.......................... 49
----
Present value of net minimum payments....................... 150
Less: current portion of obligations under capital leases... 42
----
Long-term obligations under capital leases.................. $108
====
</TABLE>
The Company has one lease in San Francisco, California that contains an
escalation clause that will become effective upon the consummation of the
proposed initial public offering. There are no restrictions on paying dividends,
incurring additional debt or negotiating additional leases under the terms of
the present lease agreements.
F-19
<PAGE> 96
ORGANIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS
NOTE 11 -- EARNINGS PER SHARE
The following table presents a reconciliation of basic and diluted net income
per share for the year ended December 31, 1996 and nine months ended September
30, 1998.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
YEAR ENDED ENDED SEPTEMBER 30,
DECEMBER 31, 1996 1998
---------------------- -----------------------
BASIC DILUTED BASIC DILUTED
------- ----------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net income applicable to common stock... $ 237 $ 237 $ 1,146 $ 1,146
======= =========== ======== ===========
Weighted average common shares
outstanding........................... 9 9 136,259 136,259
Additional shares due to:
Assumed conversion of dilutive stock
options............................ -- -- -- 263,460
Assumed conversion of Series A
convertible preferred stock........ -- 65,025,000 -- 65,025,000
------- ----------- -------- -----------
Adjusted weighted average common shares
outstanding........................... 9 65,025,009 136,259 65,424,719
======= =========== ======== ===========
Net income per share.................... $26,286 $ 0.00 $ 8.41 $ 0.02
======= =========== ======== ===========
</TABLE>
The following table sets forth common stock equivalents that were not included
in the calculation of diluted net loss per share because to do so would be
anti-dilutive for those periods presented.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, FOR THE NINE MONTHS
------------------------ ENDED SEPTEMBER 30,
1997 1998 1999
---------- ---------- -------------------
<S> <C> <C> <C>
Weighted average effect of common stock
equivalents:
Series A convertible preferred
stock............................. 65,025,000 65,025,000 65,025,000
Series B convertible preferred
stock............................. -- -- 4,006,154
Common stock options................. 2,671 2,313,711 9,056,148
Common stock warrants................ -- -- 148,291
</TABLE>
NOTE 12 -- RELATED PARTY TRANSACTIONS
On March 31, 1999, the Company entered into a promissory note agreement for $200
with an Executive of the Company. This note bears an annual interest rate of 7%
with interest payments due every other year beginning on March 31, 2001. Under
the terms of this agreement, the entire principal amount will become payable
upon the consummation of the Company's proposed initial public offering, as long
as the offering price is at least $10 per share and the aggregate proceeds are
at least $75.0 million.
Concurrent with the reorganization in January 1997, the Company issued 3,351,288
shares of Series A convertible preferred stock to Omnicom Group for cash
proceeds of $10.0 million. In
F-20
<PAGE> 97
ORGANIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS
February 1999, the Company issued 1,488,000 shares of Series B convertible
preferred stock to Omnicom Group for net cash proceeds of $7,718 plus the
settlement of a $3.0 million short-term bridge loan that was obtained from
Omnicom Group in January 1999. See Note 5 and 6 for detailed information on the
Company's revolving credit facility agreement with Omnicom Group and related
warrants. In the future, the Company expects to have transactions in the
ordinary course of business with Omnicom Group.
NOTE 13 -- SUBSEQUENT EVENTS
On November 4, 1999, the Company entered into a lease for office space in New
York. The office space consists of approximately 110,000 square feet and has a
lease term of 15 years, with a projected commencement date of June 1, 2000. The
monthly lease payment will be approximately $275, $298, and $321 during the
first five years, subsequent five years and last five years, respectively. The
lease has been guaranteed by Omnicom Group for up to $4.5 million.
On November 8, 1999, the Company entered into a lease for new headquarters
office space in San Francisco. In accordance with this lease agreement, the
Company provided a $10.0 million letter of credit to the landlord to secure this
space. The office space consists of approximately 212,000 square feet and has a
lease term of 10 years, with a projected commencement date of September 1, 2000.
The anticipated monthly lease payment during the first year will be
approximately $705 with an annual escalation clause of approximately 4%. The
Company expects to sublease a portion of the office space.
In October 1999, the Company's Board of Directors approved 360,000 options at
$2.33 per share. In November 1999 the Company's Board of Directors approved
5,421,375 stock options at $2.67 per share, an increase in the number of
authorized common shares to 200,000,000, adopted the 1999 long-term stock
incentive plan of 10,500,000 authorized shares, and the 2000 employee stock
purchase plan of 10,000,000 authorized shares.
F-21
<PAGE> 98
UNDERWRITING
Organic and the underwriters named below (the "Underwriters") have entered
into an underwriting agreement with respect to the shares being offered. Subject
to the conditions in the underwriting agreement, each underwriter has severally
agreed to purchase the number of shares indicated in the following table.
Goldman, Sachs & Co., Donaldson, Lufkin & Jenrette Securities Corporation and
Thomas Weisel Partners LLC are the representatives of the underwriters.
<TABLE>
<CAPTION>
Underwriters Number of Shares
------------ ----------------
<S> <C>
Goldman, Sachs & Co. ....................................... 2,150,000
Donaldson, Lufkin & Jenrette Securities Corporation......... 1,290,000
Thomas Weisel Partners LLC.................................. 860,000
A.G. Edwards & Sons, Inc. .................................. 150,000
Edward D. Jones & Co., L.P. ................................ 150,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated.......... 150,000
Salomon Smith Barney Inc. .................................. 150,000
Wasserstein Perella Securities, Inc. ....................... 150,000
Advest, Inc. ............................................... 75,000
Dain Rauscher Incorporated.................................. 75,000
Friedman Billings Ramsey & Co., Inc......................... 75,000
Legg Mason Wood Walker, Incorporated........................ 75,000
May, Davis Group Inc. ...................................... 75,000
Wit Capital Corporation..................................... 75,000
---------
Total............................................. 5,500,000
=========
</TABLE>
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional 825,000
shares from us to cover such sales. They may exercise that option for 30 days.
If any shares are purchased pursuant to this option, the underwriters will
severally purchase shares in approximately the same proportion as set forth in
the table above.
The underwriting fee is equal to the public offering price per share of
common stock less the amount paid by the underwriters to Organic per share of
common stock. The underwriting fee is 7% of the initial public offering price.
The following table shows the per share and total underwriting discounts
and commissions to be paid to the underwriters by Organic. Such amounts are
shown assuming both no exercise and full exercise of the underwriters' option to
purchase 825,000 additional shares.
Paid By Organic
-------------------
<TABLE>
<CAPTION>
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per share............................................... $ 1.40 $ 1.40
Total................................................... $7,700,000 $9,555,000
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $0.84 per share from the initial public offering price. Any such
securities dealers may resell any shares purchased from the underwriters to
certain other brokers or dealers at a discount of up to $0.10 per share from the
U-1
<PAGE> 99
initial public offering price. If all the shares are not sold at the initial
public offering price, the representatives may change the offering price and the
other selling terms.
Each officer, director and shareholder of Organic has agreed with the
underwriters not to dispose of or hedge any of the common stock or securities
convertible into or exchangeable for shares of common stock during the period
from the date of this prospectus continuing through the date 180 days after the
date of this prospectus, except with the prior written consent of Goldman, Sachs
& Co. This agreement does not apply to any existing employee benefit plan and
does not apply to any of the shares offered and sold pursuant to the directed
share program described below. However, Goldman, Sachs & Co. may waive this
lock-up restrictions at any time before the end of the 180 day lock-up period.
See "Shares Eligible for Future Sale" for a discussion of other transfer
restrictions.
Prior to the offering, there has been no public market for the shares. The
initial public offering price for the common stock was negotiated among us and
the representatives of the underwriters. The primary factors considered in
determining the initial public offering price of the shares, in addition to
prevailing market conditions, were Organic's historical performance, estimates
of the business potential and earnings prospects of Organic, an assessment of
Organic's management and the consideration of the above factors in relation to
market valuation of companies in related businesses.
The common stock has been approved for quotation on the Nasdaq National
Market under the symbol "OGNC".
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. Stabilizing
transactions consist of certain bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the common stock while
the offering is in progress.
The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect that market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered. Organic has undertaken a
directed share program, pursuant to which it has directed the underwriters to
reserve up to fifteen percent of the shares of its common stock for sale at the
initial public offering price to directors, officers and friends of Organic. In
addition, Organic has requested that the underwriters reserve 385,000 shares of
its common stock for sale at the initial public offering price to
DaimlerChrysler, one of Organic's clients. The number of shares of common stock
available for sale to the general public will be reduced to the extent such
persons purchase any reserved shares. Any shares not so purchased will be
offered by the underwriters to the general public on the same basis as other
shares offered hereby.
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since December
1998 Thomas Weisel Partners has been named as a lead or co-manager of 106 filed
public offerings of equity securities, of which 79 have been completed, and has
acted as a syndicate member in an
U-2
<PAGE> 100
additional 54 public offerings of equity securities. Thomas Weisel Partners does
not have any material relationship with us or any of our officers, directors or
other controlling persons, except for our contractual relationship with us under
the terms of the underwriting agreement entered into in connection with this
offering.
Organic estimates that its share of the total expenses of the offering,
excluding underwriting discounts and commissions, will be approximately $1.1
million.
Organic has agreed to indemnify the several underwriters against certain
liabilities, including liabilities under the Securities Act.
U-3
<PAGE> 101
INSIDE BACK COVER:
ORGANIC LOGO
SUBHEAD: Key Areas of Focus
IMAGE 1: photo of Organic employees
SUBHEAD 1: Expand Client Engagements
SUBHEAD 2: Attaction & Retention
IMAGE 2: photo of Organic employees
SUBHEAD 3: Understaning & Innovation
SUBHEAD 4: Knowledge Management
IMAGE 3: photo of Organic employees
<PAGE> 102
- ----------------------------------------------------------
- ----------------------------------------------------------
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus is
an offer to sell only the shares offered hereby, but only under circumstances
and in jurisdictions where it is lawful to do so. The information contained in
this prospectus is current only as of its date.
-------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary...................... 3
Risk Factors............................ 8
Special Note Regarding Forward-Looking
Statements............................ 21
Use of Proceeds......................... 22
Dividend Policy......................... 22
Capitalization.......................... 23
Dilution................................ 24
Selected Consolidated Financial Data.... 25
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 27
Business................................ 38
Management.............................. 54
Related Party Transactions.............. 66
Principal Stockholders.................. 68
Description of Capital Stock............ 69
Shares Eligible for Future Sale......... 74
Legal Matters........................... 75
Experts................................. 75
Available Information................... 75
Index to Consolidated Financial
Statements............................ F-1
Underwriting............................ U-1
</TABLE>
-------------------------
Through and including March 5, 2000 (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 a dealer's obligation to deliver a prospectus when acting
as underwriter and with respect to an unsold allotment or subscription.
- ----------------------------------------------------------
- ----------------------------------------------------------
- ----------------------------------------------------------
- ----------------------------------------------------------
5,500,000 Shares
ORGANIC, INC.
Common Stock
-------------------------
[Organic logo]
-------------------------
GOLDMAN, SACHS & CO.
DONALDSON, LUFKIN & JENRETTE
THOMAS WEISEL PARTNERS LLC
Representatives of the Underwriters
- ----------------------------------------------------------
- ----------------------------------------------------------
