-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, McmrQ/JyMHPyfnHeZP7TDWsAlx2zn+xVX6muOblrgaoqqOHGKjUAMVQ496U6OpBR cD5VRy0rPsJEljx0GFZmLQ== 0001012870-99-004262.txt : 19991117 0001012870-99-004262.hdr.sgml : 19991117 ACCESSION NUMBER: 0001012870-99-004262 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19991116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ORGANICNET INC CENTRAL INDEX KEY: 0001092693 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-88277 FILM NUMBER: 99758193 BUSINESS ADDRESS: STREET 1: 330 TOWNSEND STREET STREET 2: SUITE 206 CITY: SAN FRANCISCO STATE: CA ZIP: 94107 MAIL ADDRESS: STREET 1: 330 TOWNSEND STREET STREET 2: SUITE 206 CITY: SAN FRANCISCO STATE: CA ZIP: 94107 S-1/A 1 AMENDMENT #1 TO FORM S-1 As filed with the Securities and Exchange Commission on November 16, 1999 Registration No. 333-88277 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 --------------- AMENDMENT NO. 1 TO THE FORM S-1 REGISTRATION STATEMENT Under The Securities Act of 1933 --------------- ORGANICNET, INC. (Exact name of registrant as specified in its charter) --------------- Delaware 7372 68-0347739 (State or other (Primary Standard Industrial (I.R.S. Employer jurisdiction of Classification Code Number) Identification No.) incorporation --------------- or organization) 330 Townsend Street, Suite 206 San Francisco, CA 94107-1630 (415) 495-4741 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) --------------- Jack D. Anderson Chief Executive Officer OrganicNet, Inc. 330 Townsend Street, Suite 206 San Francisco, CA 94107-1630 (415) 495-4741 (Name, address, including zip code, and telephone number, including area code, of agent for service) --------------- Copies to: Patrick A. Pohlen, Esq. Rodd M. Schreiber, Esq. Cooley Godward LLP Skadden, Arps, Slate, Meagher & Flom (Illinois) Five Palo Alto Square 333 West Wacker Drive 3000 El Camino Real Chicago, IL 60606 Palo Alto, CA 94306-2155 --------------- Approximate date of commencement of the proposed sale to the public: as soon as practicable after the effective date of the Registration Statement. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] CALCULATION OF REGISTRATION FEE - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
Proposed Maximum Aggregate Amount of Title of Each Class of Offering Price Registration Securities to be Registered (1) Fee (2) - -------------------------------------------------------------------------------- Common Stock, $.001 par value per share............ $31,050,000 $8,631 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the amount of the Registration Fee in accordance with Rule 457(o) of the Securities Act of 1933, as amended. (2) $14,386.50 was paid in connection with the original filing of this Registration Statement. --------------- The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ + + +The information in this preliminary prospectus is not complete and may be + +changed. These securities may not be sold until the registration statement + +filed with the Securities and Exchange Commission becomes effective. This + +preliminary prospectus is not an offer to sell these securities nor does it + +seek offers to buy these securities in any jurisdiction where the offer or + +sale is not permitted. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED NOVEMBER , 1999 PRELIMINARY PROSPECTUS 4,500,000 Shares OrganicNet, Inc. Common Stock ------------ We are offering 4,500,000 shares of common stock with this prospectus. We expect the initial public offering price to be between $5.00 and $6.00 per share. We have applied for quotation of our common stock on the Nasdaq National Market under the symbol "OGNT." ------------ Investing in the common stock involves risks. See "Risk Factors" beginning on page 5. ------------ - -------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------
Per Share Total - -------------------------------------------------------------------------------------- Initial Public Offering Price....................... $ $ - -------------------------------------------------------------------------------------- Underwriting Discount............................... $ $ - -------------------------------------------------------------------------------------- Proceeds, before expenses, to OrganicNet, Inc....... $ $ - -------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------
The underwriters may also purchase up to an additional 675,000 shares from us at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus, to cover over-allotments. The Securities and Exchange Commission and state securities regulators have not approved or disapproved of these securities or determined if this prospectus is truthful or complete. It is illegal for any person to tell you otherwise. ------------ Needham & Company, Inc. Punk, Ziegel & Company The date of this Prospectus is , 1999 Description of Artwork: 1. Front inside cover: Description of artwork. This diagram represents our ASP architecture. The top box, labeled the Organic Browser, diagrams the client side of our client server architecture and depicts the user view. It is connected to the Internet either via a local network or directly through modems. The Internet feeds the application data from the client side into OrganicNet's ASP. The OrganicNet ASP (the Server side of the architecture) resides on our partner Conxion's Internet Service Provider, providing full outsourced hosting services. 2. Back inside cover. Description: Five overlapping circles. The circles are labelled Clinic Management, Practice Management, Credentialing, Clinical Drug Trials and Disease Management. The words The CoreModel appear in the center. Bullets points above the graphic are as follows: . Internet Delivery, ASP Delivery Service . Fully integrated solutions, built on a single model, the CoreModel(TM) . Manages the entire clinical and business process in a single system . Multiple users with simultaneous access . Scalable to accommodate a growing number of users and solutions . Easily tailored to accommodate user process and practice variations . Easy to use, easy to change . Cost effective alternative to legacy applications The text of the caption below the graphic reads as follows: Our CoreModel(TM) is a model of the real world components of the healthcare delivery process. Each of the components is represented by an object. The CoreModel(TM) is the blueprint to how these objects can be linked to build applications. The specialized knowledge of healthcare required to build the CoreModel(TM) originated from the experience of our employees as well as extensive interviews with our users and other healthcare professionals. TABLE OF CONTENTS
Page ---- Prospectus Summary....................................................... 1 Risk Factors............................................................. 5 Forward-Looking Statements............................................... 16 Use of Proceeds.......................................................... 17 Dividend Policy.......................................................... 17 Dilution................................................................. 18 Capitalization and Short-Term Debt....................................... 19 Selected Consolidated Financial Data..................................... 20 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 22 Business................................................................. 33 Management............................................................... 47 Certain Relationships and Related Transactions........................... 58 Principal Stockholders................................................... 62 Description of Capital Stock............................................. 64 Shares Eligible for Future Sale.......................................... 67 Underwriting............................................................. 69 Legal Matters............................................................ 71 Experts.................................................................. 71 Available Information.................................................... 71 Index to Financial Statements............................................ F-1
---------------- You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with different information. We are not making an offer of these securities in any jurisdiction where the offer or sale is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front cover of this prospectus. PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary is not complete and may not contain all of the information that investors should consider before investing in the common stock of OrganicNet. Investors should read the entire prospectus carefully. OrganicNet We are an application service provider (ASP) that develops software solutions for healthcare clinics and physician group practices using our proprietary technology platform. ASPs provide a contractual service offering to deploy, host, manage and rent access on a subscription basis to, software applications from remote servers. ASPs are responsible for providing all of the specific activities and expertise aimed at managing a set of software applications. Our customers can access and use our solutions over the Internet or their own private information networks. We currently have developed and implemented ASP solutions in three areas: disease management, clinical drug trials recruitment and workers' compensation. Since we first launched an ASP solution in February of 1999, we have implemented several ASP solutions with existing and new customers. In addition, we have multiple contracts in place for ASP solutions to be implemented within the next year which we expect will result in additional subscription revenue. Our ASP software solutions are built using our object-oriented technology, which we refer to as the Organic Architecture. We have created a technology that represents a major change in the way software is built and deployed. Our technology allows us to build applications without traditional software code and therefore avoid many of the limitations associated with traditional technologies. Our applications are built using data. The data is interpreted by the architecture and then presented as an application to the user. By being able to build applications without code we are able to utilize network resources in a more efficient way due to the smaller amount of communication resources necessary to transmit data. With a basic connection to the Internet, our applications run as quickly and efficiently as they would on a private information network. We have applied for five patents on our technology, three in 1997 and two in 1998. We have received a Notice of Allowance from the United States Patent and Trademark Office on each of the first three applications. Central to the development of our solutions is our CoreModel, which is comprised of individual sets of data that model a comprehensive representation of the clinical and business processes in the healthcare industry. We are developing solutions designed to manage all elements of the business and clinical processes of our customers within a single integrated system. Our software solutions can be quickly tailored to meet our customers' specific needs. To develop our CoreModel and solutions, we selectively acquired companies with expertise in particular areas of healthcare. These acquisitions also provided us with traditional code-based legacy software products and related service capabilities, customers and revenues. We intend to phase out sales of these legacy products and related services, which historically represented substantially all of our revenues while simultaneously selling our ASP solutions as upgrades to our legacy products. The growth of the managed care, risk sharing and other alternative payment and reimbursement mechanisms, increased government regulation and the rise of healthcare delivery networks have increased the need for information technology products and services. In order to reduce unnecessary spending and manage costs while delivering quality care, healthcare providers are increasingly demanding software solutions that enable them to effectively extract and analyze data located throughout their enterprises, measure clinical results, evaluate operational efficiency and support process improvement. The Internet has emerged as an accessible, low-cost and flexible means of accessing and distributing information, making it particularly well-suited for deploying software solutions for the healthcare industry. We believe that the ASP model addresses many of the shortcomings of traditional healthcare information technology solutions. Customers rent, rather than own the applications they require, reducing the capital commitment necessary for information technology and reducing the need for a dedicated staff of information technology personnel. 1 Our objective is to become the leading healthcare ASP serving clinics and group practices by capitalizing on our early market entrance, extending our technology and continuing to implement a subscription-based business model that generates recurring revenue. We intend to achieve this objective by: . leveraging our proprietary technology platform by rapidly developing additional solutions, functions and features; . achieving rapid market penetration by focusing on customers within our target market segments and cross-selling our ASP software solutions to our existing base of customers; and . enhancing our capabilities by forming strategic alliances that provide us with specific expertise and access to new customer channels. Our ASP software solutions provide the following advantages: Comprehensive. Our solutions are designed to enable our customers to rely on us as the single source for their software solutions, whether these solutions are deployed over the Internet or their own private information network. Cost-effective. Our solutions eliminate the need for our customers to incur significant capital expenditures for hardware, operating systems and application software and significantly reduce the costs for technical support and training. Adaptable. Our solutions are built with flexible links between data sets instead of code, which makes them easier and less expensive to tailor to accommodate practice variations and workflow of each user. Integrated. Information and applications are stored on a single remote database and can be accessed simultaneously by multiple users in geographically dispersed locations. In addition, our ASP software solutions are scalable, modular, secure and easy to use. As part of our strategy, we have entered into relationships with strategic partners for distribution, consulting and implementation services, Internet infrastructure and application hosting. Our initial ASP software solution, which manages patient-reported health and clinical data, is being distributed as part of our strategic relationship with Pfizer Health Solutions Inc, with whom we have had a relationship since 1997. We also have entered into an alliance with Superior Consultant Holdings Corporation. Under this agreement, Superior will introduce and outline the advantages of our ASP software solutions based on client interests, as well as provide systems integration, process improvement, consulting and implementation services to healthcare organizations. Superior is a leading provider of business solutions, including consulting, systems integration, e-Health and outsourcing to the healthcare industry. Superior serves clients nationally and internationally and has over 1,500 professionals located throughout the United States. We also have entered into agreements with Conxion Corporation, which provides us with application hosting, Internet infrastructure and data centers. We depend on Conxion to provide these services and support the delivery of our software solutions and do not intend to provide these services ourselves. Our business relationship with Conxion began in May 1997, and in April 1999 Conxion purchased $550,000 of our preferred stock. We were incorporated in California in January 1995 under the name Object Products, Inc. and reincorporated in Delaware in April 1996. The company changed its name to OrganicNet, Inc. in May 1999. Our principal executive offices are located at 330 Townsend Street, Suite 206, San Francisco, California, 94107-1630. Our telephone number is (415) 495-4741. Our website is www.organic-net.com. Information contained on our website is not a part of this prospectus. -------------- The terms "OrganicNet", "company", "we", "our" and "us" refer to OrganicNet, Inc. and its subsidiaries unless the context suggests otherwise. The term "you" refers to a prospective investor. OrganicNet, the OrganicNet logo, Organic Architecture, Object Products, CoreModel and Organic Browser are trademarks of OrganicNet, Inc. Each trademark, trade name or service mark of any other company appearing in this prospectus belongs to its holder. 2 The Offering Shares offered by OrganicNet.................. 4,500,000 shares Total shares outstanding after this offering.. 18,302,514 shares Use of proceeds............................... To repay short-term debt, including amounts owed to or guaranteed by certain of our directors, officers and stockholders, to continue development of our solutions and architecture, expand our sales and marketing efforts, expand our administrative infrastructure, acquisitions and for working capital and other general corporate purposes. Proposed Nasdaq National Market symbol........ OGNT
The common stock to be outstanding after this offering is based on the shares outstanding as of October 31, 1999 and excludes: . 1,809,749 shares of common stock issuable as of October 31, 1999 upon the exercise of outstanding stock options issued at a weighted average exercise price of $1.70 per share under our stock option plans; . 621,897 shares of common stock reserved for issuance under our stock option plans as of October 31, 1999; Except as otherwise indicated, information in this prospectus assumes the following: . the conversion of all outstanding shares of preferred stock into common stock upon consummation of this offering; . the filing of our amended and restated certificate of incorporation, the provisions of which are summarized in "Description of Capital Stock;" and . no exercise of the underwriters' over-allotment option. Risk Factors You should consider the risk factors before investing in OrganicNet's common stock and the impact from various events which could adversely affect our business. 3 Summary Financial Data The following table summarizes our consolidated statements of operations for the years ended December 31, 1996, 1997 and 1998 and the nine months ended September 30, 1998 and 1999, as well as our unaudited pro forma combined statements of operations for the year ended December 31, 1998 and the nine months ended September 30, 1999 that gives effect to our acquisition of PSI-Med Corporation as if the acquisition occurred at the beginning of the periods presented. The unaudited pro forma information is not necessarily indicative of the results that would have occurred had the acquisition taken place as of the beginning of the periods presented, nor is it necessarily indicative of results that may occur in the future. The table also includes our consolidated balance sheet as of September 30, 1999 on an actual and pro forma as adjusted basis. See the consolidated financial statements and related notes included elsewhere in this prospectus.
Years Ended December 31, Nine Months Ended September 30, -------------------------------------- ----------------------------------- Pro Forma Pro Forma 1996 1997 1998 1998 1998 1999 1999 ------- ------- ------- ----------- ----------- ----------- ----------- (unaudited) (unaudited) (unaudited) (unaudited) (in thousands, except per share information) Consolidated Statement of Operations: Revenue: License................ $ -- $ 424 $ 571 $ 1,087 $ 376 $ 778 $ 1,077 Product development.... -- 1,238 565 565 391 340 340 Service................ 371 1,310 3,488 5,182 2,763 3,106 4,245 ------- ------- ------- ------- ------- ------- ------- Total revenue.......... 371 2,972 4,624 6,834 3,530 4,224 5,662 ------- ------- ------- ------- ------- ------- ------- Cost of revenue: License................ -- 475 756 756 577 551 596 Product development.... -- 320 209 209 168 61 61 Service................ 238 892 2,314 3,850 1,818 2,068 2,941 ------- ------- ------- ------- ------- ------- ------- Total cost of revenue.. 238 1,687 3,279 4,815 2,563 2,680 3,598 ------- ------- ------- ------- ------- ------- ------- Gross profit............ 133 1,285 1,345 2,019 967 1,544 2,064 ------- ------- ------- ------- ------- ------- ------- Operating expense: Sales and marketing.... 24 1,395 1,644 1,812 1,249 1,624 1,686 Research and development........... 724 1,345 1,833 2,070 1,480 1,842 2,068 General and administrative........ 1,690 3,332 3,768 4,597 2,422 2,859 3,150 ------- ------- ------- ------- ------- ------- ------- Total operating expense............... 2,438 6,072 7,245 8,479 5,151 6,325 6,904 ------- ------- ------- ------- ------- ------- ------- Operating loss.......... (2,305) (4,787) (5,900) (6,460) (4,184) (4,781) (4,840) Interest expense........ (9) (20) (93) (93) (48) (104) (114) Other income (expense).. 7 14 (9) (95) (5) 10 (15) ------- ------- ------- ------- ------- ------- ------- Loss before income taxes.................. (2,307) (4,793) (6,002) (6,648) (4,237) (4,875) (4,969) Provision for income taxes.................. 4 6 4 5 4 5 6 ------- ------- ------- ------- ------- ------- ------- Net loss................ $(2,311) $(4,799) $(6,006) $(6,653) $(4,241) $(4,880) $(4,975) ======= ======= ======= ======= ======= ======= ======= Net loss per share: Basic and diluted...... $ (0.45) $ (0.88) $ (1.10) $ (1.22) $ (0.78) $ (0.89) $ (0.91) Weighted average shares outstanding: Basic and diluted...... 5,189 5,426 5,448 5,448 5,443 5,490 5,490
As of September 30, 1999 ---------------------------- Pro Forma Actual As Adjusted ------------ -------------- (unaudited) (in thousands) Consolidated Balance Sheet Data: Cash and cash equivalents......................... $ 895 $ 22,112 Working capital (deficit)......................... (3,289) 18,228 Total assets...................................... 5,013 26,230 Total stockholders' equity (deficit).............. (735) 20,783
The preceding consolidated balance sheet data is shown on a pro forma as adjusted basis to give effect to: . the conversion of all outstanding shares of preferred stock into shares of common stock upon consummation of this offering, . the sale of 4,500,000 shares of common stock in this offering at an assumed initial public offering price of $5.50 per share, after deducting the underwriting discounts and commissions and estimated offering expenses and application of the net proceeds therefrom, and . the use of proceeds of $300,000 to repay notes payable to related parties. 4 RISK FACTORS You should carefully consider the following risk factors, in addition to the other information set forth in this prospectus, before purchasing shares of common stock of OrganicNet. Each of these risk factors could adversely affect our business, operating results and financial condition, as well as adversely affect the value of an investment in our common stock. This investment involves a high degree of risk. Risks Related To Our Business Our business is difficult to evaluate because we have a limited operating history. We were incorporated in January 1995 and have a limited operating history, which makes an evaluation of our business and prospects difficult. Since our inception, we have been developing our codeless, object-oriented technology as the platform for our solutions. We have also been marketing legacy software products created using traditional software code that were developed by the companies we acquired. In February 1999, we delivered our first ASP software solution. As a result, we only have a limited number of ASP software solutions currently in use. Revenue to date from our ASP software solutions has not been material. You must consider our business and prospects in light of the risks, uncertainties and difficulties frequently encountered by companies in their early stages of development, particularly those in new and rapidly evolving markets such as ours, which use new and unproven business models. We cannot assure you that our business strategy will be successful or that we will be able to complete the development of and sell our ASP software solutions. Our historical revenue was derived primarily from products and services that we do not expect to be the focus of our business in the future, which makes it difficult to evaluate our current and future financial performance. We currently derive substantially all of our revenue from the sale of our legacy software products and services. These software products and related services are substantially different from the ASP software solutions that will be our focus. We intend to phase out sales of legacy products and related services and expect the associated revenue to decline substantially. As a result, our historical financial information does not reflect the results of the current and future focus of our business and cannot be used to predict our future revenue or results of operations. We expect to continue to incur operating losses and net cash outflow and may never achieve profitability, which may cause our stock price to decline. We have experienced net losses in each quarterly and annual period since inception. We recorded net operating losses of approximately $4.8 million for the year ended December 31, 1997, approximately $5.9 million for 1998 and approximately $4.8 million for the nine months ended September 30, 1999. As of September 30, 1999, we had an accumulated deficit of approximately $18.2 million. We intend to increase our operating expenses substantially, particularly expenses related to development of our solutions and architecture, expansion of our sales and marketing efforts, and expansion of our administrative infrastructure. Therefore, we expect to incur significant operating losses and to record significant net cash outflow for the foreseeable future. We cannot assure you that we will achieve significant revenues from our solutions or achieve, sustain or improve profitability on a quarterly or annual basis in the future. Our quarterly operating results are expected to fluctuate and could cause our stock price to decline. Our quarterly operating results have varied in the past and we expect them to continue to fluctuate in future periods. These fluctuations depend on a number of factors described below and elsewhere in this "Risk Factors" section of the prospectus, many of which are outside our control. In particular, the sale and implementation of our software solutions are subject to delay due to our potential customers' internal procedures for approving expenditures and deploying new technologies within their clinics or group practices. 5 We provide our solutions to customers on a monthly subscription basis. We cannot predict subscription fees accurately because we have limited experience selling our solutions. In addition, our customers may decide to stop using our solutions at any time with very little notice. We may spend substantial time and resources developing or tailoring solutions for channel partners or customers prior to the time that we have entered into subscription agreements with them. If we do not enter into agreements with these channel partners and customers or if our customers do not subscribe for these solutions for a sufficient period of time, we will not be able to achieve revenue to recoup our investment. For these and other reasons, our stock price could decline. Our business model is unproven and may not effectively address our market. Providing software solutions over the Internet to the healthcare industry is a business that has only recently begun to develop. It is difficult to value our business and evaluate our prospects because our business model and our revenue and income potential are unproven. Our business model depends on our ability to generate usage by a large number of clinics and group practices. Growth in demand for and acceptance of business software applications, including our ASP offerings, by clinics and group practices is highly uncertain. This uncertainty is due in part to the possibility that customers using existing systems may refuse to adopt new systems when they have made extensive investment in hardware, software, and training for existing systems, or if they perceive that our ASP solutions will not adequately or cost- effectively address their requirements. In order to successfully sell our software solutions, we may need to convince potential customers that the features and functionality of our solutions justify their cost, as well as the time and administrative expense required to switch to our solutions. Achieving market acceptance for our software solutions will require substantial marketing efforts and expenditure of significant funds to increase awareness and demand by our target customers. We cannot assure you that we will be able to succeed in positioning our ASP offerings as appropriate solutions to address the clinical and business needs of potential users, or that our ASP model will be economically viable or acceptable to clinics and group practices. If our strategy does not prove successful or if the market for our solutions does not grow or grows more slowly than we currently anticipate, achieving profitability could take longer than expected or we may never achieve profitability, either of which could harm our business. If we cannot develop additional software solutions, we may be unable to achieve or sustain profitability. We are unlikely to achieve or sustain profitability unless we offer and successfully market a broad range of software solutions. Our business strategy depends on developing solutions to manage the entire clinical and business process for clinics and group practices. We have only completed development of solutions for a limited number of applications and have not commenced development of the full range of applications required to provide such a solution. We cannot assure you that we will be able to develop the applications we need to keep our ASP software solutions competitive and to meet our business plan objectives. If we cannot develop these additional applications, our sales may suffer and achieving profitability could take longer than expected or we may never achieve profitability, either of which could cause our stock price to decline. We depend on third parties to provide our Internet infrastructure and application hosting. We do not intend to develop or maintain Internet infrastructure or application hosting capabilities to support delivery of our software solutions over the Internet. Therefore, we are dependent on obtaining those capabilities from third parties. We currently obtain Internet infrastructure and application hosting services from Conxion Corporation and include them as part of our ASP software solutions. The ability to deliver our software solutions over the Internet is central to our business strategy and depends on the efficient and uninterrupted operation of the computer and Internet network systems at Conxion. Conxion's operations are vulnerable to damage or interruption from fire, flood, tornado, hurricane, earthquake, power loss, telecommunications or Internet failure, viruses, physical and electronic break-ins, or 6 other similar events and they have recently suffered a service disruption at one of their data centers related to a system upgrade. The ability of Conxion or any other third party we might use to prevent system failures or manage the effects of system failures which occur in computer and Internet network systems is limited. If Conxion or another third party suffers a system failure, it would prevent us from maintaining our service standards. The occurrence of such a failure could harm our reputation, business and prospects. If Conxion fails to perform its obligations under this agreement or if this agreement is terminated or not renewed and we are unable to obtain comparable services on favorable financial terms, or at all, our business would be harmed. Our systems may be vulnerable to security breaches and viruses. Our success depends on the confidence of our customers in our ability to securely transmit confidential information over the Internet. Any failure to provide secure online communication services could harm our business and reputation. Our systems and those of our hosting services provider rely on encryption, authentication and other security technology licensed from third parties to achieve secure transmission of confidential information. Neither we nor any third party may be able to stop unauthorized attempts to gain access to or disrupt the transmission of communications by our customers. Anyone who is able to circumvent our security measures could misappropriate confidential user information or interrupt our, or our customers', operations. In addition, our servers at Conxion's data centers may be vulnerable to viruses, physical or electronic break-ins, and similar disruptions. We depend on Conxion to prevent these disruptions and its failure to do so could limit use of our solutions and otherwise harm our business. Computer viruses, break-ins and other disruptions could lead to interruptions or delays in data transmissions to our customers, or loss of customer data. In addition to purposeful security breaches, the inadvertent transmission of computer viruses could impair our ability to deliver our software solutions to our customers which could expose us to litigation, damage our reputation or otherwise harm our business. Although we generally limit warranties and liabilities relating to security in our customer contracts, our customers may seek to hold us liable for any losses suffered as a result of unauthorized access to their information. We may not have adequate insurance to cover these losses. We may be required to expend significant capital and other resources to protect against these security breaches or to alleviate the problems they cause and to defend any lawsuits or claims. Moreover, concerns over the security of transactions conducted on the Internet and commercial online services, which may be heightened by publicized compromises of security, may also deter future customers from using our solutions or cause current customers to terminate their solution subscriptions. In either case, this could harm our business and prospects. Our security measures may not be sufficient to prevent security breaches, and failure to prevent security breaches could harm our reputation, business and prospects. Errors in our Organic Architecture or software solutions may harm our reputation and cause us to lose customers. Our Organic Architecture and software solutions may contain undetected errors resulting in performance problems. Such errors are most frequently found during the period immediately following introduction of new software solutions or enhancements to existing solutions. Despite extensive product testing prior to introduction, our software has in the past contained errors that were discovered after commercial introduction. We cannot assure you that errors or performance problems will not be discovered in the future with respect to any of our products. Errors and mistakes in the processing of client data may result in loss of data, inaccurate information and delays. Such errors could cause us to lose clients and incur liability. Any errors in our Organic Architecture and software solutions could harm our reputation, business and prospects. We plan to expand rapidly and it may be difficult to manage our growth. We intend to rapidly grow our business. However, we cannot be sure that we will successfully manage our growth. In order to successfully manage our growth, we must: . expand and enhance our administrative infrastructure; 7 . improve our management, financial and information systems and controls; and . expand, train and manage our employees effectively. Continued growth could place a further strain on our management, operational and financial resources. There will also be additional demands on our sales, marketing and administrative resources as we increase our solutions offerings and expand our target markets and customers. We cannot assure you that our operating and financial control systems, administrative infrastructure, facilities and personnel will be adequate to support our future operations or to effectively adapt to future growth. If we cannot manage our growth effectively, our business may be harmed. We may undertake additional acquisitions which may pose risks to our business. Our strategy contemplates the possibility of completing additional acquisitions. We may be unable to retain the acquired companies' personnel or integrate them into our company. In addition, we may be unable to integrate their operations, services, or technology into our business model. Our profitability may suffer because of acquisition related costs or amortization of acquired goodwill and other intangible assets. Similarly, the time and expense associated with finding suitable and compatible companies to enhance our object-oriented software technology or grow our ASP delivery model could disrupt our ongoing business and divert our management's focus. Others may seize the market opportunity we have identified because we may not effectively execute our strategy. If we fail to execute our strategy in a timely or effective manner, our competitors may be able to seize the marketing opportunities we have identified. Our strategy is complex and requires that we successfully and simultaneously complete many tasks, including: . developing and protecting our technology; . developing economically attractive solutions for our current and future customers; . negotiating and maintaining effective channel partnerships for the delivery of our solutions; . selling and marketing our solutions; . attracting and retaining highly skilled employees; and . integrating acquired companies into our operations. We cannot assure you that we will be able to successfully execute any or all elements of our strategy. If we are unable to do so, our business could be harmed and our stock price could decline. We may be unable to attract and retain qualified personnel and we depend on certain personnel. We believe that our success depends largely on our ability to attract and retain highly skilled technical, managerial and marketing personnel to develop our object-oriented technology and our ASP delivery model. Individuals with the information technology skills we need to further develop our solutions are in short supply and competition for qualified personnel is particularly intense. We may not be able to hire the necessary personnel to implement our business strategy, or we may need to pay higher compensation for employees than we currently expect. We cannot assure you that we will succeed in attracting and retaining the personnel we need to continue to grow and to implement our business strategy. If we are unable to do so, our business could be harmed. We depend on the performance of our executive officers and other key employees. The loss of any member of our senior management or other key employees could negatively impact our ability to execute our strategy. We do not maintain "key person" life insurance policies on any of our employees. 8 We are dependent upon a third party database management system. We use a database management system to store our data and software solutions, which we license from a third party. If we change our database management system or if the license of our current database management system is terminated, we would need to secure a license to use another database management system. If we were to use a different database management system, we would need to modify the interface with our application server to recognize that system, which could take several weeks. If modifying that interface took longer than expected or if there was insufficient time to obtain and implement the new system before we lost the use of our current system, we would be unable to provide uninterrupted service to our customers, and our business and reputation would be harmed. If we are unable to protect our intellectual property rights from third party challenges, it may significantly impair our competitive position. We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect the intellectual property rights related to our legacy and object-oriented technology. We cannot assure you that the patent applications we have filed on aspects of our technology will be successful. We also enter into confidentiality or license agreements with our employees, consultants and corporate partners, and control access to and distribution of our software, documentation and other proprietary information. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Monitoring use of our products is difficult, and we cannot assure you that the steps we have taken will prevent unauthorized use of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. Intellectual property infringement claims against us could cost a significant amount of money to defend and could divert management's attention away from our business. As the number of software products in our target markets increases and as the functionality of these products further overlaps, we may become increasingly subject to the threat of infringement claims. Any infringement claims alleged against us, even if without merit, can be time consuming and expensive to defend. Any such claims may divert our management team's attention and resources, and could also cause delays in the delivery of our solutions to our customers. Settlement of any infringement claims could also require us to enter into costly royalty or licensing agreements. If a claim of product infringement against us was successful and we were unable to license the infringing or similar technology, our business, financial condition and results of operations could be harmed and our stock price could decline. Risks Related To Our Industry Our success depends on Internet acceptance. Our success depends, in part, on the adoption of Internet solutions by commercial users. Our business could suffer dramatically if Internet solutions are not accepted or are not perceived to be effective. The recent growth in Internet use has resulted in frequent periods of poor performance. Internet service providers and other organizations with links to the Internet have responded by upgrading routers and switches, telecommunications links and other components forming the Internet infrastructure. Any perceived degradation in the performance of the Internet as a whole could undermine the value of the solutions we provide over the Internet. Performance improvements in our solutions partly depend upon, and are ultimately limited by, the speed and reliability of networks. In order for the market for our solutions to emerge and grow, improvements must be made to the entire Internet infrastructure to ease overloading and congestion. Several telecommunications carriers are supporting regulation of the Internet by the Federal Communications Commission (FCC) in the same manner that the FCC regulates other telecommunications services. If the FCC regulates the Internet in the manner it regulates other telecommunications services and imposes fees, it could increase the cost of doing business on or through the Internet, slow the growth of the Internet and adversely affect the demand for our products and services or increase our cost of doing business. 9 Technology solutions may change faster than we are able to update our technology. The healthcare software application market in which we compete is characterized by rapidly changing technology, evolving industry standards, emerging competition and the frequent introduction of new services, software and other products. Our success depends partly on our ability to: . develop new or enhance existing solutions, software and services to meet our customers' changing needs in a timely and cost-effective way; . respond effectively to technological changes and new product offerings of our competitors; and . maintain and continue to develop relationships with providers of Internet infrastructure and application hosting capabilities. We cannot assure you that we will be able to accomplish any or all of these goals. Many of our competitors may develop products or technologies that are better or more attractive than ours or that may render our technology or solutions obsolete. If we do not succeed in adapting our technology, our business could be harmed. Our business may be harmed if our software solutions are not compatible with other products and services. Our ability to compete successfully also depends on the continued compatibility of our software solutions with products, services and architectures offered by other software vendors, particularly for customers who have installed other software applications. We cannot assure you that other products will be compatible with our software solutions. Although we currently plan to support emerging standards, we cannot anticipate what new industry standards will develop. In addition, we cannot assure you that we will be able to conform to these new standards quickly enough to stay competitive. If our software solutions are not compatible with other products and services, our business could be harmed and our stock price could decline. The markets we serve are highly competitive and many of our competitors have much greater resources. The business of providing application software and services to clinics and group practices is extremely competitive. In addition, the market for Internet- based application service providers is relatively new and evolving, and we anticipate that competition will continue to intensify as the use of the Internet grows. Our competitive position in the healthcare software application market is difficult to evaluate due to the variety of current and potential competitors and the evolving nature of our market and the ASP model. Our primary competitors include legacy software vendors, application service providers, and healthcare e-commerce and portal companies. Each of these types of companies either competes or in the future can be expected to compete with us in delivering software solutions to the clinic and group practice markets, including the delivery of software applications over the Internet. Furthermore, major software companies and other entities, including those specializing in the healthcare industry that are not currently offering applications, products or services that compete with our solutions, may enter our markets. In addition, our existing and future strategic partners may compete with us from time to time by selling, consulting on or hosting other software that competes with our software solutions. Many of our competitors have substantially greater financial, technical and marketing resources, larger customer bases, longer operating histories, greater name recognition and more established relationships in the healthcare application market than we have. In addition, the lack of barriers to entry in our market exposes us to a potentially increasing number of competitors. We cannot assure you that we will have the resources or expertise to compete successfully in the future. If we are unable to develop and expand our software solutions or adapt to changing customer needs as well as our current or future competitors are able to do, we may experience reduced profitability and a loss of market share, either of which could harm our business. 10 The principal competitive factors in our market include: . features and functionality; . fit with the user's practice, processes and needs; . cost; . ease of implementation and use; . level of service; . business and technical expertise; . integration of applications; . quality of customer service and support; . reliability; and . scalability. We cannot assure you that we will have the resources or expertise to compete successfully in the future based on these or any other criteria or that competitive pressures we face will not harm our business. Government regulation and legal uncertainties could add additional costs to doing business on the Internet and could limit our customers' use of the Internet. Laws and regulations directly applicable to communications or commerce over the Internet are becoming more prevalent. Laws and regulations may be adopted with respect to the Internet or other online services covering issues such as user privacy, pricing, content, copyrights, distribution and characteristics, and quality of products and services. The adoption of any additional laws or regulations may impede the growth of the Internet, which could, in turn, decrease the demand for our applications and services and increase our cost of doing business, or otherwise harm our business. Moreover, the applicability to the Internet of existing laws in various jurisdictions governing issues such as property ownership, sales and other taxes, libel and personal privacy is uncertain and may take years to resolve. Any such new legislation or regulation, the application of laws and regulations from jurisdictions whose laws do not currently apply to our business, or the application of existing laws and regulations to the Internet and other online services could harm our business. The confidentiality of patient records and the circumstances under which records may be released for inclusion in our databases are subject to substantial regulation by state governments. These state laws and regulations govern both the disclosure and the use of confidential patient medical record information. Although compliance with these laws and regulations is at present principally the responsibility of the healthcare provider, regulations governing patient confidentiality rights are evolving rapidly. Additional legislation governing the dissemination of medical record information has been proposed at both the state and federal level. This legislation may require holders of this information to implement security measures. Such legislation might require us to make substantial expenditures to implement such measures. We cannot assure you that changes to state or federal laws will not materially restrict the ability of healthcare providers to submit information from patient records using our applications. Legislation currently being considered at the federal level could impact the manner in which we conduct our business. The Health Insurance Portability and Accountability Act of 1996 (HIPAA) mandates the use of standard transactions, standard identifiers, security and other provisions by the year 2000. We are designing our solutions to enable compliance with the proposed regulations but cannot assure you that we will be able to comply with those proposed regulations in a timely manner or at all. Moreover, until the proposed regulations become final, they could change, which could require us to expend additional resources to comply with the revised standards and we may not be able to comply with the revised standards in a timely manner or at all. Based on our present business operations, we believe that the HIPAA requirements related to the maintenance 11 and exchange of electronic health information may apply to legacy products sold by our wholly owned subsidiary, PSI-Med Corporation, but not to our other products, services or solutions. If any of our products, services or solutions are subject to those regulations, we may be required to incur additional expenses in order to comply with these requirements and we may not be able to comply with them in a timely manner or at all. In addition, the success of our compliance efforts may also be dependent on the success of healthcare participants in dealing with the standards. If we are unable to comply with regulations implementing HIPAA in a timely manner or at all, the sale of our solutions and business could be harmed. The United States Food and Drug Administration (FDA) is responsible for assuring the safety and effectiveness of medical devices under the Federal Food, Drug and Cosmetic Act. Computer applications and software are considered medical devices and are subject to regulation by the FDA when they are indicated, labeled or intended to be used in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment or prevention of disease, or are intended to affect the structure or function of the body. We do not believe that any of our current applications or services are subject to FDA regulation as medical devices; however, we plan to expand our application and service offerings into areas that may be subject to FDA regulation. We have no experience in complying with FDA regulations. Our compliance with such FDA regulations could prove to be time consuming, burdensome and expensive, which could adversely affect our ability to introduce new applications or services in a timely manner. Changes in the regulatory and economic environment and consolidation in the healthcare industry could adversely affect our business. The healthcare industry is highly regulated and is subject to changing political, economic and regulatory influences. These factors affect the purchasing practices and operation of healthcare organizations. Changes in current healthcare financing and reimbursement systems could require us to make unplanned enhancements of solutions or services, or result in delays or cancellations of orders or in the revocation of endorsement of our services by our channel partners and others. Federal and state legislatures have periodically considered programs to reform or amend the U.S. healthcare system at both the federal and state level. These programs may contain proposals to increase governmental involvement in healthcare, lower reimbursement rates or otherwise change the environment in which healthcare industry participants operate. Healthcare industry participants may respond by reducing their investments or postponing investment decisions, including investments in our solutions and services. We do not know what effect any of these proposals would have on our business. Many healthcare industry participants are consolidating to create integrated healthcare delivery systems with greater market power. As the healthcare industry consolidates, competition to provide products and services to industry participants will become more intense and the importance of establishing a relationship with each industry participant will become greater. These industry participants may try to use their market power to negotiate price reductions for our software solutions and services. If we were forced to reduce our prices, our operating results could suffer. Failure of computer systems and software products to be Year 2000 compliant could increase our costs, disrupt our services and reduce demand from our clients. Many currently installed computer systems and software products are coded to accept only two-digit entries in the date code field. These date code fields will need to accept four-digit entries in order for 20th century dates to be distinguished from 21st century dates. As a result, before the end of this year, computer systems and software used by many companies may need to be upgraded to comply with these "Year 2000" requirements. We confront the Year 2000 problem in three contexts: Our Solutions. Because we sell computer-related solutions, our risk of lawsuits relating to Year 2000 issues is likely to be greater than that of companies in other industries. Because computer products and services may incorporate components from different providers, it may be difficult to determine which component may 12 cause a Year 2000 problem. As a result, we may be subjected to Year 2000- related lawsuits whether or not our software solutions and services are Year 2000 compliant. There can be no assurance as to what the outcomes or impact of any such lawsuits may be. Our acquired subsidiaries have several contracts which make Year 2000 warranties. The potential liability arising from these warranties is not limited. Any Year 2000-related lawsuits or claims may divert management's attention and resources. If such lawsuits or claims are resolved against us, our business may be harmed. Our Suppliers. We rely on third party network infrastructure providers to gain access to the Internet. If such providers experience business interruptions as a result of their failure to achieve Year 2000 compliance, our ability to provide Internet connectivity could be impaired, which could harm our reputation and our business. We use and license software and hardware from third parties. If this software or hardware is not Year 2000 compliant, our business may suffer. We also rely on third parties for other products and services required to operate our business. If we cannot obtain products or services that are Year 2000 compliant, or if vendors and service suppliers cannot deliver their products or services because of Year 2000 compliance problems, our business may be harmed. Our Customers. Many of our customers and potential customers maintain their operations on computer hardware that may be impacted by Year 2000 complications. Healthcare is one of the least prepared major industries in the United States with respect to Year 2000 related problems. Many of our customers may not be Year 2000 compliant. Customer difficulties due to Year 2000 issues could interfere with healthcare transactions or the transmission of information, which might expose us to significant potential liability. If customer failures result in the failure of our systems, it could harm our reputation and our business. Furthermore, Year 2000 issues may affect the purchasing patterns of these customers or potential customers as companies expend significant resources to become Year 2000 compliant. The costs of becoming Year 2000 compliant for current or potential customers may result in reduced funds being available to purchase and implement our solutions and services, which would harm our sales and our business. Risks Related To This Offering Our management will have broad discretion to allocate the net proceeds of this offering and the proceeds may not be used appropriately. Our management will retain broad discretion allocating the proceeds of this offering. We estimate the net proceeds from this offering to be approximately $18.0 million, after deducting estimated offering expenses. We plan to use these proceeds to repay short-term debt, including amounts owed to or guaranteed by certain of our directors, officers and stockholders, for development of our solutions and architecture, expansion of our sales and marketing efforts, and expansion of our administrative infrastructure. We have no specific allocations for any other net proceeds of this offering. Consequently, management will retain a significant amount of discretion over the application of these proceeds. Because of the number and variability of factors that will determine the use of these proceeds, how we spend the proceeds may vary substantially from our current intentions. We may need additional capital to fund our operations and finance our growth, and we may not be able to obtain it on terms acceptable to us or at all. We will require substantial additional capital to finance our future growth and solutions development activities. We expect that the net proceeds from this offering, together with our existing assets, anticipated debt and capital lease financing, and revenue from operations will be sufficient to fund our operations for at least the next 12 months. The timing and amount of our capital requirements will depend on many factors, including: . acceptance and demand for our solutions; . the costs of developing new solutions or enhancing existing solutions; . the costs associated with expanding our operations; and . the number and timing of acquisitions. 13 If we issue additional stock to raise capital, your percentage ownership will be reduced. If funding is insufficient at any time in the future, we may be unable to develop or enhance our solutions, take advantage of business opportunities or respond to competitive pressures, any of which could harm our business. Our existing principal stockholders, executive officers and directors will continue to control our company and the outcome of proposals put to a vote of stockholders after this offering. When this offering is completed, our executive officers, directors, existing 5% or greater stockholders and their affiliates will, in the aggregate, own shares representing approximately 38.4% of our outstanding voting capital stock. As a result, these persons, acting together, will be able to have a significant influence on all matters submitted to our stockholders for approval and on our management and affairs. The market price of our common stock could be affected by the substantial number of shares that are eligible for future sale. After this offering is completed, 18,302,514 shares of our common stock will be issued and outstanding, assuming no exercise of the underwriter's over- allotment option. There can be no assurance as to what effect, if any, future sales of shares or the availability of shares for future sale will have on the market price of the common stock. The market price of our common stock could drop due to sales of a large number of shares in the market after this offering or the perception that sales of large numbers of shares could occur. These factors could also make it more difficult to raise funds through future offerings of common stock. All of the shares of common stock sold in this offering will be freely tradable under the Securities Act of 1933, as amended, unless purchased by our "affiliates," as that term is defined in the Securities Act. Our officers, directors and stockholders have entered into lock-up agreements under which they have agreed not to, directly or indirectly, offer, sell, offer to sell, pledge, grant any option to purchase or otherwise sell or dispose of any shares of common stock or securities convertible into or exchange or exerciseable for shares of common stock for a period of 180 days after the date of this prospectus without the prior written consent of the underwriters. Upon expiration of this lock-up period and as set forth in the chart below, the shares owned by these persons prior to completion of this offering may be sold into the public market without a registration statement under the Securities Act in compliance with the volume limitations and other applicable restrictions of Rule 144 under the Securities Act. As these restrictions on resale end, the market price of our common stock could drop significantly if the holders of these restricted shares sell them or are perceived by the market as intending to sell them.
Date of availability for resale Number of shares into public market ---------------- ------------------------------- 180 days after the date of this prospectus due to a lock-up agreement our officers, directors and stockholders have with the underwriters. However, the underwriters can waive this restriction at any time and without notice. Between 180 and 365 days after the date of this prospectus due to the requirements of the federal securities laws.
After the date of this prospectus, we intend to file one or more registration statements under the Securities Act to register all shares of common stock issuable upon the exercise of outstanding stock options or reserved for issuance under our stock plans, of which 1,234,360 shares will be immediately exercisable upon the completion of this offering and an additional 13,000 shares will be exercisable within 60 days of October 31, 1999. Those registration statements are expected to become effective immediately upon filing, and subject to the vesting requirements and exercise of the related options as well as the terms of the lock-up agreements, shares covered by those registrations statements will be eligible for sale in the public markets, except for any shares held by our "affiliates." 14 Our stock price could be volatile. The trading price of our common stock is likely to be volatile. The stock market in general, and the market for technology and Internet-related companies in particular, has experienced extreme volatility. This volatility has often been unrelated to the operating performance of particular companies. We cannot assure you that an active public market for our common stock will develop or continue after this offering. Investors may not be able to sell their common stock at or above our initial public offering price. Prices for the common stock will be determined in the marketplace and may be influenced by many factors, including variations in our financial results, changes in earnings estimates by industry research analysts, investors' perceptions of us and our financial prospects, and general economic, industry and market conditions. We believe that there are relatively few comparable companies that have publicly-traded equity securities. This may also affect the trading price of our common stock after this offering. In addition, the stock market has from time to time experienced extreme price and volume volatility, and this volatility may adversely affect the market price of our common stock. We have certain anti-takeover defenses that could delay or prevent a change of control and that could adversely affect the price of our common stock. Provisions of our amended and restated certificate of incorporation and bylaws and the provisions of Delaware law could delay, defer or prevent an acquisition or change of control of OrganicNet or otherwise adversely affect the price of our common stock. For example, our board of directors is staggered in three classes, so that only one-third of the directors could be replaced at any annual meeting. Additionally, our bylaws limit the ability of stockholders to call a special meeting or act by written consent. Our certificate of incorporation also permits our board to issue shares of preferred stock without stockholder approval. In addition to delaying or preventing an acquisition, the issuance of a substantial number of preferred shares could adversely affect the price of the common stock. 15 FORWARD-LOOKING STATEMENTS This prospectus includes forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends affecting the financial condition of our business. These forward-looking statements are subject to a number of risks, uncertainties and assumptions about OrganicNet, including, among other things: . general economic and business conditions, both nationally and in our markets; . our expectations and estimates concerning future financial performance, financing plans and the impact of competition; . anticipated trends in our business; . existing and future regulations affecting our business; and . other risk factors set forth under "Risk Factors" in this prospectus. In addition, in this prospectus, the words "believe", "may", "will", "estimate", "continue", "anticipate", "intend", "expect" and similar expressions, as they relate to OrganicNet, our business or our management, are intended to identify forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this prospectus may not occur and actual results could differ materially from those anticipated or implied in the forward- looking statements. 16 USE OF PROCEEDS Our net proceeds from the sale of the 4,500,000 shares of common stock in this offering, assuming a public offering price of $5.50 per share, are estimated to be $21.5 million ($25.0 million if the underwriters' over- allotment option is exercised in full), after deducting underwriting discounts and commissions and estimated offering expenses. The primary purposes of this offering are to take advantage of favorable market conditions, to raise additional equity capital, to create a public market for our common stock and to facilitate future access to public markets. Approximately $300,000 of the proceeds will be used to repay short-term debt, including amounts owed to or guaranteed by certain of our directors officers and shareholders. See "Certain Relationships and Related Transactions." We have no other current specific plans for the remaining net proceeds from this offering. We generally intend to use the remaining net proceeds as follows: . to continue the development of our solutions and architecture; . to continue the expansion of our sales and marketing efforts; . to continue the expansion of our administrative infrastructure; and . for working capital and other general corporate purposes. In addition, the net proceeds may also be used to fund acquisitions or acquire complementary products, technologies or businesses; however, we currently have no commitments or agreements and are not involved in any negotiations to do so. Pending these uses, we may invest the net proceeds from this offering temporarily in short-term, investment-grade, interest bearing securities or guaranteed obligations of the United States government. DIVIDEND POLICY We have not declared or paid, and do not anticipate declaring or paying, any dividends on our common stock in the near future. We currently intend to retain future earnings, if any, to fund the expansion and growth of our business. Any future determination as to the declaration and payment of dividends will be at the discretion of our board of directors and will depend on then existing conditions, including our financial condition, results of operations, contractual restrictions, capital requirements, business prospects and other factors that our board of directors considers relevant. 17 DILUTION Purchasers of our common stock in this offering will experience immediate and substantial dilution in the pro forma net tangible book value of their common stock from the initial public offering price. Pro forma net tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by the number of shares of common stock outstanding on a pro forma basis after giving effect to the conversion of all outstanding shares of our preferred stock upon the consummation of this offering. The pro forma net tangible book value of our common stock on September 30, 1999 was $(2,789,109), or approximately $(0.20) per share. Dilution in pro forma net tangible book value per share represents the difference between the amount per share paid by purchasers of shares of our common stock in this offering and the net tangible book value per share of our common stock immediately afterwards. After giving effect to the sale of 4,500,000 shares of common stock by us in this offering at an assumed initial public offering price of $5.50 and after deducting the underwriting discounts and commissions and estimated offering expenses and the application of the estimated net proceeds therefrom, our pro forma net tangible book value would have been $18,728,391 or approximately $1.02 per share. This represents an immediate increase in pro forma net tangible book value of $1.22 per share to existing stockholders and an immediate and substantial dilution of $4.48 per share to new investors. The following table illustrates this per share dilution. Assumed initial public offering price........................ $5.50 Pro forma net tangible book value as of September 30, 1999...................................................... $(0.20) Increase attributable to new investors..................... $ 1.22 Pro forma net tangible book value after this offering........ 1.02 ----- Dilution in pro forma net tangible book value to new investors................................................... $4.48 =====
The following table sets forth, as of September 30, 1999, on the same pro forma basis, the number of shares of common stock purchased from us by existing stockholders and by the new investors at the assumed initial public offering price together with the total price and average price per share paid by each of these groups, before deducting underwriting discounts and commissions and estimated offering expenses.
Shares Purchased Total Consideration Average ------------------ ------------------- Price Number Percent Amount (1) Percent Per Share ---------- ------- ----------- ------- --------- Existing stockholders....... 13,793,729 75% $17,203,284 41% $1.25 New investors............... 4,500,000 25 24,750,000 59 5.50 ---------- --- ----------- --- Total..................... 18,293,729 100% 41,953,284 100% ========== === =========== ===
- -------- (1) For existing stockholders, includes $13,685,376 of cash consideration paid, $2,052,209 of stock issued in connection with acquisitions and $1,465,699 of stock issued for services, compensation and repayment of loans. Except as noted above, the foregoing discussions and tables assume no exercise of any outstanding stock options or warrants. As of September 30, 1999, there were options outstanding to purchase 1,817,366 shares of common stock pursuant to our stock option plans at a weighted average exercise price of $1.69 per share. To the extent that any of these options are exercised, there will be further dilution to the new investors. 18 CAPITALIZATION AND SHORT-TERM DEBT The following table sets forth as of September 30, 1999: . our actual capitalization and short-term debt; . our pro forma capitalization after giving effect to the conversion of all outstanding shares of our preferred stock into a total of 8,292,200 shares of common stock upon the consummation of this offering, and . our pro forma as adjusted capitalization after giving effect to the sale of 4,500,000 shares of common stock sold in this offering at the assumed initial public offering price of $5.50 per share, after deducting the underwriting discounts and commissions and the estimated offering expenses and the application of the estimated net proceeds therefrom. You should read the following table in conjunction with our consolidated financial statements and related notes appearing elsewhere in this prospectus.
As of September 30, 1999 -------------------------------- Pro Forma Actual Pro Forma As Adjusted -------- --------- ----------- (in thousands) Short-term debt, including lines of credit and note payable to bank, notes payable to related parties and others, and current portion of capital leases................................. $ 872 $ 872 $ 572 Capital lease obligations, less current portion........................................ 53 53 53 Notes payable to employee and others, less current portion................................ 38 38 38 -------- -------- -------- 963 963 663 -------- -------- -------- Stockholders' equity (deficit): Convertible preferred stock, all $0.01 par value, none pro forma and pro forma as adjusted: Series A, 1,500,000 shares authorized; 1,418,270 shares issued and outstanding actual....................................... 14 -- -- Series A-II, 115,000 shares authorized; 78,157 shares issued and outstanding actual ........ 1 -- -- Series A-III, 5,416 shares authorized; 5,416 shares issued and outstanding actual ........ -- -- -- Series B, 1,250,000 shares authorized; 1,202,470 shares issued and outstanding actual....................................... 12 -- -- Series C, 4,000,000 shares authorized; 4,000,000 shares issued and outstanding actual....................................... 40 -- -- Common stock, $0.001 par value, 29,500,000 shares authorized actual and pro forma, 29,500,000 shares authorized pro forma as adjusted; 5,501,529 shares issued and outstanding actual, 13,793,729 shares issued and outstanding pro forma and 18,184,638 shares issued and outstanding pro forma as adjusted...................................... 5 14 18 Additional paid-in capital..................... 18,031 18,089 39,603 Receivable for shares purchased................ (550) (550) (550) Deferred compensation.......................... (80) (80) (80) Accumulated deficit............................ (18,208) (18,208) (18,208) -------- -------- -------- Total stockholders' equity (deficit)............ (735) (735) 20,783 -------- -------- -------- Total capitalization............................ $ 228 $ 228 $ 21,446 ======== ======== ========
The shares of common stock outstanding in the actual, pro forma and pro forma adjusted columns exclude: . 1,817,366 shares of common stock issuable as of September 30, 1999 upon the exercise of outstanding stock options issued at a weighted average exercise price of $1.69 per share under our stock option plans; . 478,499 shares of common stock reserved for issuance under our stock option plans as of September 30, 1999; and .The use of proceeds of $300,000 to repay notes payable to related parties. 19 SELECTED CONSOLIDATED FINANCIAL DATA The selected data presented below under the captions "Consolidated Statement of Operations" and "Consolidated Balance Sheet Data," as of and for each of the years in the four years ended December 31, 1995, 1996, 1997 and 1998, are derived from the consolidated financial statements of OrganicNet, Inc. and subsidiaries, which consolidated financial statements have been audited by KPMG LLP, independent certified public accountants. The consolidated financial statements as of December 31, 1997 and 1998 and for each of the years in the three-year period ended December 31, 1998, and the independent auditors' report thereon, are included elsewhere in this prospectus. The pro forma selected data presented below for the year ended December 31, 1998 and the nine months ended September 30, 1999 are derived from the unaudited pro forma condensed combined financial statements of OrganicNet, Inc. and its subsidiaries, including PSI-Med Corporation, included elsewhere in this prospectus and give effect to our acquisition of PSI-Med Corporation as if such acquisition had occurred as of the beginning of the periods presented. The unaudited pro forma information is not necessarily indicative of the combined results that would have occurred had such acquisition taken place as of the beginning of the periods presented, nor is it necessarily indicative of results that may occur in the future. The selected data presented below for the nine months ended September 30, 1998 and 1999, and as of September 30, 1998 and 1999, are derived from the unaudited consolidated financial statements of OrganicNet, Inc. and its subsidiaries included elsewhere in this prospectus.
Nine Months Ended Years Ended December 31, September 30, ---------------------------------------------- ----------------------------------- Pro Forma Pro Forma 1995 1996 1997 1998 1998 1998 1999 1999 ------ ------- ------- ------- ----------- ----------- ----------- ----------- (unaudited) (unaudited) (unaudited) (unaudited) (in thousands, except per share information) Consolidated Statement of Operations: Revenue: License................ $ -- $ -- $ 424 $ 571 $ 1,087 $ 376 $ 778 $ 1,077 Product development.... -- -- 1,238 565 565 391 340 340 Service................ 525 371 1,310 3,488 5,182 2,763 3,106 4,245 ------ ------- ------- ------- ------- ------- ------- ------- Total revenue.......... 525 371 2,972 4,624 6,834 3,530 4,224 5,662 ------ ------- ------- ------- ------- ------- ------- ------- Cost of revenue: License................ -- -- 475 756 756 577 551 596 Product development.... -- -- 320 209 209 168 61 61 Service................ -- 238 892 2,314 3,850 1,818 2,068 2,941 ------ ------- ------- ------- ------- ------- ------- ------- Total cost of revenue.. -- 238 1,687 3,279 4,815 2,563 2,680 3,598 ------ ------- ------- ------- ------- ------- ------- ------- Gross profit............ 525 133 1,285 1,345 2,019 967 1,544 2,064 ------ ------- ------- ------- ------- ------- ------- ------- Operating expense: Sales and marketing.... 7 24 1,395 1,644 1,812 1,249 1,624 1,686 Research and development........... 508 724 1,345 1,833 2,070 1,480 1,842 2,068 General and administrative........ 212 1,690 3,332 3,768 4,597 2,422 2,859 3,150 ------ ------- ------- ------- ------- ------- ------- ------- Total operating expense............... 727 2,438 6,072 7,245 8,479 5,151 6,325 6,904 ------ ------- ------- ------- ------- ------- ------- ------- Operating loss.......... (202) (2,305) (4,787) (5,900) (6,460) (4,184) (4,781) (4,840) Interest expense........ (9) (9) (20) (93) (93) (48) (104) (114) Other income (expense).. 1 7 14 (9) (95) (5) 10 (15) ------ ------- ------- ------- ------- ------- ------- ------- Loss before income taxes.................. (210) (2,307) (4,793) (6,002) (6,648) (4,237) (4,875) (4,969) Provision for income taxes.................. 1 4 6 4 5 4 5 6 ------ ------- ------- ------- ------- ------- ------- ------- Net loss................ $ (211) $(2,311) $(4,799) $(6,006) $(6,653) $(4,241) $(4,880) $(4,975) ====== ======= ======= ======= ======= ======= ======= ======= Net loss per share: Basic and diluted...... $(0.05) $ (0.45) $ (0.88) $ (1.10) $ (1.22) $ (0.78) $ (0.89) $ (0.91) Weighted average shares outstanding: Basic and diluted...... 4,000 5,189 5,426 5,448 5,448 5,443 5,490 5,490
20
As of December 31, As of September 30, ------------------------------ ----------------------------------- Pro Forma As Adjusted 1995 1996 1997 1998 1998 1999 1999 ----- ----- ------- ------- ----------- ----------- ----------- (unaudited) (unaudited) (unaudited) (in thousands) Consolidated Balance Sheet Data: Cash and cash equivalents........... $ 25 $ -- $ 47 $ 41 $ 14 $ 895 $22,112 Working capital (deficit)............. 223 (524) (3,149) (6,290) (5,240) (3,289) 18,228 Total assets........... 144 761 2,904 2,215 2,244 5,013 26,230 Total stockholders' equity (deficit)...... (205) (55) (1,257) (5,047) (3,775) (735) 20,783
The preceding consolidated balance sheet data is shown on a pro forma as adjusted basis to give effect to: . the conversion of all outstanding shares of preferred stock into shares of common stock upon consummation of this offering, . the sale of 4,500,000 shares of common stock in this offering at an assumed initial public offering price of $5.50 per share, after deducting the underwriting discounts and commissions and estimated offering expenses and application of the net proceeds therefrom, and . the use of proceeds of $300,000 to repay notes payable to related parties. 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the "Selected Consolidated Financial Data" and the accompanying financial statements and related notes included elsewhere in this prospectus. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include but are not limited to, those discussed below and elsewhere in this prospectus, particularly in "Risk Factors." Overview We are an application service provider (ASP) that develops software solutions for clinics and group practices using our proprietary technology platform. Our customers can access and use our solutions over the Internet or their own private networks. We charge our customers a monthly subscription fee for our ASP software solutions. We also market and support legacy software products that were developed by the companies we acquired, as discussed below. Our software solutions and acquired legacy products are sold by our own direct sales force and through third parties. We currently provide the following range of services principally related to our acquired legacy products: post-contract customer support, maintenance, technical support, consulting, installation of simple interfaces, training, credentialing and case management services. Historically, we derived substantially all of our revenue from the sale of legacy software products and services. Our legacy products address credentialing, scheduling, resource management, case management and disease/outcomes management. From our inception in January 1995, we have been developing our Organic Architecture, a flexible platform for creating software applications without code. As a part of our development strategy, we have acquired companies that provided us with expertise in particular areas of healthcare, as well as near-term products, customers and revenues. In February 1999, we delivered our first pre-production ASP software solution using our Organic Architecture to customers, and in April 1999, we deployed our first pre-production ASP software solution over the Internet. With the introduction of our ASP software solutions, we are de-emphasizing the sale of legacy systems and expect sales of these systems and related service revenue to substantially decline in future periods. We expect to market and sell these ASP software solutions as an upgrade to our existing legacy products in the future, as we develop additional ASP software solutions to replace our legacy products. Due to the anticipated substantial decline in revenue associated with these legacy systems and the costs associated with the development and commercialization of our ASP software solutions, as well as the development of sales and marketing support for these solutions, we expect that our operating losses will increase substantially in future periods and continue for at least the next several years. Our ability to achieve profitability will depend on our successful development and marketing of our solutions. With our strategy, we are subject to the risks inherent in both the ASP business model and the entry into a new and uncertain market. Our solutions may not achieve market acceptance. Accordingly, the extent of future losses and the time required to achieve profitability, if any, is highly uncertain. We have generated and will continue to generate revenue from software license, product development and service fees from our legacy products. Software license fees are derived from the licensing of acquired legacy products and are expected to decline substantially in future periods. Product development fees have been and will continue to be generated from co- development agreements with Pfizer Health Solutions Inc, but we expect these revenues and their related costs to substantially decline in the future. Revenue received under these co-development agreements with Pfizer Health Solutions Inc represented 46% of total revenue in 1997, 20% of total revenue in 1998 and 20% of total revenue for the nine months ended September 30, 1999. Service fees are derived from post-contract software support, case management, credentialing, training, installation and simple interfaces for legacy products, which we expect to decline substantially as sales of our legacy systems decline. In the future, we expect to generate revenue substantially from subscription and service fees from the sale of our ASP software solutions. Subscription fees will be derived from our ASP software solutions on a monthly 22 basis. We began to generate subscription fees for these solutions in the second quarter of 1999. We cannot predict subscription fees accurately because we have limited experience selling our solutions. In addition, our customers may decide to stop using our solutions at any time with very little notice. We may spend substantial time and resources developing or tailoring solutions for channel partners or customers prior to the time we have entered into subscription agreements with them. If we do not enter into agreements with these channel partners and customers do not subscribe for these solutions for a sufficient period of time, we will not be able to achieve revenue to recoup our investment. Service fees related to our solutions will increase as we deploy them. License revenue is recognized when the related contract has been executed, the product has been shipped, collectibility is probable and the software license fees are fixed and determinable. In the event that the contract provides for multiple elements (e.g., training, simple interfaces or post- contract customer support), the total fee is allocated to these elements based on vendor-specific objective evidence of fair value. If any portion of the license fee is subject to forfeiture, refund or other contractual contingencies, we will postpone revenue recognition until these contingencies have been removed. Subscription fees for our ASP software solutions will be recognized on a monthly basis. We recognize product development revenue from our co-development agreements using a percentage-of-completion method either as services are performed or based on meeting key milestone events over the term of the contracts. Service revenue from post-contract customer support and maintenance is recognized ratably over the term of the maintenance period. Revenue from case management, credentialing, training and installation services is recorded as the services are performed. Historically, cost of revenue consisted of the cost of licenses, product development and services. In the future, we expect cost of revenue to consist of the cost of subscription, license and service related to our ASP software solutions. Cost of subscription revenue will include the charges paid to our Internet service, application host and data center provider, as well as the amortization of the costs of third party database licenses and ongoing annual fees for these licenses. Cost of license revenue consists of personnel salaries, benefits and related overhead expenses, as well as the amortization of acquired technologies. Cost of service revenue includes direct costs, such as salaries and benefits, and related overhead expenses, such as occupancy charges. As we focus on our ASP solutions, we expect the cost of subscription revenue and services related to our ASP solutions to increase and the cost of license revenue and services related to our legacy products to decrease. Sales and marketing expense consists of salaries, related benefits, commissions, printing of promotional material, public relations, attendance at industry trade shows, advertising and other costs associated with our sales and marketing efforts. We expect to incur substantial expenditures related to sales and marketing as we build our direct sales force and expand our distribution channels. Research and development expense consists primarily of salaries, related benefits, third party consultant fees and other costs. With respect to software development, we establish technological feasibility once testing of a working model has been completed. The time between establishment of a working model and general release is short. Development costs incurred subsequent to technological feasibility have not been material. We expect to continue to make substantial investments in research and development activities as we seek to advance our technology and broaden our ASP software solutions. General and administrative expense consists primarily of salaries and related benefits, amortization of goodwill and workforce-in-place, and fees for professional services, such as legal and accounting. We expect general and administrative expense to increase as we add personnel, including select senior management personnel, and incur additional costs related to the anticipated growth of our business and operation as a public company. We were incorporated in January 1995 as a California corporation and reincorporated in Delaware in 1996. Since our inception, we have incurred significant losses and as of September 30, 1999, had an accumulated deficit of approximately $18.2 million. 23 Acquisitions As a result of our experience with healthcare information systems, we concluded that the legacy software applications used by the healthcare industry could not provide the adaptable, cost-effective solutions needed by clinics and group practices. To develop solutions that could address these needs, we decided to pursue a strategy of selectively acquiring companies with healthcare domain expertise and enabling technologies. In April 1996, we completed our first acquisition, a company with expertise in and technology tools for the development of object-oriented software. With our second acquisition, we acquired a company with expertise in modeling and business process reengineering methodology. Using this methodology, we created a map of the core processes involved in managing a clinic or group practice. This map became the process map of the Organic Clinic and it was used to identify the tasks needed to deliver a software solution that could manage the entire clinical and business process. We then targeted and acquired six small software and service companies, each representing specialized healthcare domains that had been identified in the process map. In our first three years of operations, we completed the following acquisitions:
Company Acquisition date Expertise - ------- ----------------- ------------------------------ First Principles, Inc. ...... April 22, 1996 Object Technology RiteLine Systems, Inc. ...... April 30, 1996 Business Methodology Comprehensive Provider Credentialing Services, Inc. ....................... May 23, 1996 Credentialing Service Velocity Healthcare Informatics, Inc. .......... December 20, 1996 Outcomes/Disease Management Res-Q, Inc., formerly MMS, Inc. ....................... May 14, 1997 Scheduling/Resource Management Intedata, Inc. .............. June 4, 1997 Marketing Service L.I.N.C., Inc. .............. June 23, 1997 Case Management Healthcheck, Incorporated ... November 14, 1997 Credentialing Service
Healthcheck, L.I.N.C., Res-Q and Velocity Healthcare Informatics remain wholly owned operating subsidiaries and function as an integrated part of OrganicNet. All of our acquisitions were accounted for using the purchase method of accounting and, accordingly, the results of the acquired companies' operations are included in our consolidated financial statements from their respective effective dates forward. Under the terms of the acquisition agreements, the consideration included preferred shares, notes payable, common shares and cash. We acquired all of the outstanding common stock for each of the acquired companies except for Velocity Healthcare Informatics, which was structured as an asset purchase. Total consideration for our acquisitions, completed through December 31, 1998, was approximately $1.7 million. For each of the acquired companies, the purchase price was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their fair values on the acquisition date. Amounts allocated to acquired technology and workforce-in-place are amortized on a straight-line basis over a three-year period. Amounts allocated to goodwill are amortized on a straight-line basis over an estimated useful life of three to seven years. PSI-Med Corporation On September 20, 1999, we completed our acquisition of PSI-Med Corporation, which sells and services practice management software and is engaged as a full service provider of medical insurance billing and accounts receivable collection services. We acquired all of the outstanding capital stock of PSI- Med Corporation in exchange for 16,667 shares of preferred stock, which will convert into 333,340 shares of our common stock upon the closing of this offering. These shares have been valued at approximately $667,000. Our acquisition was accounted for using the purchase method of accounting, resulting in approximately $1.6 million of goodwill to be amortized using the straight-line method over its estimated useful life of seven years. The results of PSI-Med's operations are included in our consolidated financial statements beginning with the effective date of the acquisition which was August 31, 1999. 24 Results of Operations Nine Months Ended September 30, 1999 and 1998 License revenue License revenue includes fees from the licensing of our acquired legacy products. License revenue increased 107% to approximately $778,000 for the nine months ended September 30, 1999 from approximately $376,000 for the nine months ended September 30, 1998. The increase in license revenue was primarily due to an increase of $436,000 in our scheduling and resource management products related to increased customer sales offset by a $50,000 decrease in sales of our case management product related to the timing of installations. Product development revenue Product development revenue is primarily generated from co-development agreements addressing outcomes, credentialing and survey software and services with Pfizer Health Solutions Inc. Product development revenue decreased 13% to approximately $340,000 for the nine months ended September 30, 1999 from approximately $391,000 for the nine months ended September 30, 1998 due to the timing and size of co-development contracts completed with Pfizer Health Solutions Inc. Service revenue Service revenue is comprised of fees from post-contract software support, case management services, credentialing services, training and installation of simple interfaces. Service revenue increased 12% to approximately $3.1 million for the nine months ended September 30, 1999 from approximately $2.8 million for the nine months ended September 30, 1998. The increase in service revenue was primarily due to an increase of $347,000 in sales of credentialing services and approximately $140,000 of revenues associated with our acquisition of PSI- Med, offset by a decrease of approximately $230,000 of revenue from our scheduling and resource management products. Cost of license revenue Cost of license revenue consists of personnel salaries, benefits and related overhead expenses, as well as the amortization of acquired technologies. Cost of license revenue decreased 5% to approximately $551,000 for the nine months ended September 30, 1999 from approximately $577,000 for the nine months ended September 30, 1998 due to the redirection of our resources from our legacy products to the development of our ASP software solutions. Cost of product development revenue Cost of product development includes direct costs, such as personnel salaries and benefits, and related overhead expenses, such as occupancy charges. Cost of product development revenue decreased 64% to approximately $61,000 for the nine months ended September 30, 1999 from approximately $168,000 for the nine months ended September 30, 1998, due to the decreased level of development efforts associated with the Pfizer Health Solutions Inc co-development agreements. Cost of service revenue Cost of service revenue includes direct costs, such as personnel salaries and benefits, and related overhead expenses, such as occupancy charges. Cost of service revenue increased 14% to approximately $2.1 million in the nine months ended September 30, 1999 from approximately $1.8 million for the nine months ended September 30, 1998, primarily due to $243,000 of increased costs associated with our increased sales of credentialing services. 25 Sales and marketing expense Sales and marketing expense consists primarily of salaries, related benefits, commissions, printing of promotional material, public relations, attendance at industry trade shows, advertising and other costs associated with our sales and marketing efforts. Sales and marketing expenses increased 30% to approximately $1.6 million for the nine months ended September 30, 1999 from approximately $1.2 million for the nine months ended September 30, 1998. This increase was due to a one-time expense of approximately $745,000 associated with the stock options issued to Superior Consultant in September 1999 offset by decreased spending for trade show and third party marketing activities. Research and development expense Research and development expense consists primarily of salaries, related benefits, third party consultant fees and other costs. Research and development expense increased 24% to approximately $1.8 million for the nine months ended September 30, 1999 from approximately $1.5 million for the nine months ended September 30, 1998, due to increased personnel costs associated with additional headcount and facilities expense for the development of our Organic Architecture and ASP software solutions. General and administrative expense General and administrative expense consists primarily of salaries and related benefits, amortization of intangible assets for goodwill and workforce- in-place, and fees for professional services, such as legal and accounting. General and administrative expense increased 18% to approximately $2.9 million for the nine months ended September 30, 1999 from approximately $2.4 million for the nine months ended September 30, 1998, due to an increase of approximately $150,000 in salaries and related expenses, an increase in bad debts of $65,000, and approximately $50,000 associated with the acquisition of PSI-Med. The remaining increase was due to increases in general corporate expenses. Interest expense Interest expense increased 117% to approximately $104,000 for the nine months ended September 30, 1999 from approximately $48,000 for the nine months ended September 30, 1998, primarily due to increased borrowings used to fund our operations. Income taxes Income taxes paid to state taxing authorities consisted of minimum payments of $4,800 for the nine months ended September 30, 1999 and $4,000 for the nine months ended September 30, 1998. As a result of operating losses, no provision or benefit for income taxes has been recorded for either period. Deferred tax assets associated with net operating losses generated have not been recognized as there is substantial uncertainty as to the likelihood of the realization of those net operating losses. Years Ended December 31, 1998 and 1997 License revenue License revenue increased 35% to approximately $571,000 in 1998 from approximately $424,000 in 1997. Of this increase, $136,000 was primarily due to inclusion in 1998 of a full year of license revenue for our scheduling, resource management and case management products compared to a partial year of license revenue in 1997. Product development revenue Product development revenue decreased 54% to approximately $565,000 in 1998 from approximately $1.2 million in 1997, due to the timing and size of co- development contracts completed with Pfizer Health Solutions Inc in 1998 as compared to 1997. 26 Service revenue Service revenue increased 166% to approximately $3.5 million in 1998 from approximately $1.3 million in 1997. Of this increase, $1.1 million was due to the inclusion in 1998 of a full year of service revenue for sales of service and support contracts and $851,000 was due to the increased sales of credentialing services. Cost of license revenue Cost of license revenue increased 59% to approximately $756,000 in 1998 from approximately $475,000 in 1997. Of this increase, $167,000 was due to 1998 being the first full year of amortization of our acquired technologies and $114,000 was due to the increased costs from inclusion in 1998 of a full year of license revenue as compared to a partial year of license revenue in 1997. Cost of product development revenue Cost of product development revenue decreased 35% to approximately $209,000 in 1998 from approximately $320,000 in 1997 due to the decreased level of development under our Pfizer Health Solutions Inc co-development agreements. Cost of service revenue Cost of service revenue increased 159% to approximately $2.3 million in 1998 from approximately $892,000 in 1997. Of this increase, $841,000 was due to the inclusion in 1998 of a full year of costs associated with generating service revenue for our outcomes surveys, scheduling, resource management and case management products and $540,000 was due to higher costs associated with our increased sales of credentialing services. Sales and marketing expense Sales and marketing expense increased 18% to approximately $1.6 million in 1998 from approximately $1.4 million in 1997, due to the inclusion of a full year of salaries and benefits associated with sales and marketing personnel gained through our acquisitions made in 1997. Research and development expense Research and development expense increased 36% to approximately $1.8 million in 1998 from approximately $1.3 million in 1997, primarily due to an increase of $469,000 from the growth in personnel costs through additional headcount and facilities expense for the development of our Organic Architecture and ASP software solutions. General and administrative expense General and administrative expense increased 13% to approximately $3.8 million in 1998 from approximately $3.3 million in 1997, due to increased personnel and facility costs as a result of a full year of operations from the businesses we acquired in 1997. Interest expense Interest expense increased 365% to approximately $93,000 in 1998 from approximately $20,000 in 1997, due to increased borrowings used to fund our operations. Income taxes Income taxes paid to state tax authorities consisted of minimum payments of $4,000 in 1998 and $6,400 in 1997. As a result of operating losses, no provision or benefit for income taxes has been recorded. Deferred tax assets associated with net operating losses generated have not been recognized as there is substantial uncertainty as to the likelihood of the realization of those net operating losses. 27 Years Ended December 31, 1997 and 1996 License revenue License revenue of approximately $424,000 in 1997 was attributable to the software products of the companies we acquired in 1997. We had no license revenue in 1996. Product development revenue Product development revenue was approximately $1.2 million in 1997, due to 1997 being the first year of our co-development agreements with Pfizer Health Solutions Inc. Service revenue Service revenue increased 253% to approximately $1.3 million in 1997 from approximately $371,000 in 1996. Of this increase, $647,000 was due to the inclusion of service revenue associated with companies we acquired in 1997 and $291,000 was due to the inclusion in 1997 of a full year of service revenue for companies we acquired in 1996, including service and support contracts associated with the legacy software products we acquired in each year. Deferred revenue increased from 1996 to 1997 due to our acquisitions in 1997 of LINC, Res-Q, and Healthcheck. Deferred revenue from these businesses resulted from payments received in advance of rendering services under post customer support and credentialing service contracts. Cost of license revenue Cost of license revenue was approximately $475,000 in 1997. We had no cost of license revenue in 1996. Of this increase, $281,000 was due to amortization of our acquired technologies and $194,000 was attributable to the cost of software products of the companies we acquired in 1997. Cost of product development revenue Cost of product development revenue was approximately $320,000 in 1997, due to the first year of our co-development agreements with Pfizer Health Solutions Inc. Cost of service revenue Cost of service revenue increased 275% to approximately $892,000 in 1997 from approximately $238,000 in 1996. Of this increase, $415,000 was due to the inclusion of the cost of service revenue associated with companies we acquired in 1997 and $239,000 was due to the inclusion in 1997 of a full year of the cost of service revenue for companies we acquired in 1996, including service and support contracts associated with the legacy software products we acquired in each year. Sales and marketing expense Sales and marketing expense increased to approximately $1.4 million in 1997 from approximately $24,000 in 1996, due to the increase in salaries and benefits of the sales and marketing personnel acquired through our 1997 acquisitions. Research and development expense Research and development expense increased 86% to approximately $1.3 million in 1997 from approximately $724,000 in 1996. Of this increase, $435,000 was due to the growth in personnel costs as a result of increased headcount and facilities expense for the development of Organic Architecture and ASP software solutions. 28 General and administrative expense General and administrative expense increased 97% to approximately $3.3 million in 1997 from approximately $1.7 million in 1996, due to increased personnel and facility costs as a result of a full year of operations from the businesses we acquired in 1996. Interest expense Interest expense increased to approximately $20,000 in 1997 from approximately $9,000 in 1996, due to increased borrowings used to fund our operations. Income taxes Income taxes paid to state tax authorities consisted of minimum payments of $6,400 in 1997 and $4,000 in 1996. As a result of operating losses, no provision or benefit for income taxes has been recorded. Deferred tax assets associated with net operating losses generated have not been recognized as there is substantial uncertainty as to the likelihood of the realization of those net operating losses. Pro Forma Financial Information The unaudited condensed combined financial statements included elsewhere herein give effect to our business combination with PSI-Med Corporation. See "Unaudited Pro Forma Condensed Combined Financial Information, OrganicNet, Inc. and PSI-Med Corporation." Pro Forma Nine Months Ended September 30, 1999 On a pro forma basis, our revenue for the nine months ended September 30, 1999 was approximately $5.7 million, compared to actual revenue of approximately $4.2 million. Pro forma total revenue of PSI-Med includes sales of medical accounting software and service revenue from post-contract customer support agreements, accounts receivable management and collection services, and rental arrangements for medical accounting software on a shared computer system maintained at PSI-Med. Our pro forma operating loss for the nine months ended September 30, 1999 was approximately $4.8 million, compared to an actual operating loss of approximately $4.8 million. The operating loss remained relatively unchanged as a result of PSI-Med's operating income of $115,000 being offset by the additional goodwill amortization from the business combination of approximately $174,900. Our pro forma net loss for the nine months ended September 30, 1999 was approximately $5.0 million, which reflects the increase in the operating loss from the additional goodwill amortization resulting from the business combination. Pro Forma Year Ended December 31, 1998 Our pro forma total revenue for 1998 was approximately $6.8 million compared to our actual revenue of approximately $4.6 million. Our pro forma operating loss in 1998 was approximately $6.5 million compared to our actual operating loss of approximately $5.9 million. The increase in our operating loss on a pro forma basis was primarily the result of the addition of approximately $317,000 in pro forma PSI-Med operating losses and the additional goodwill amortization of approximately $241,000 resulting from the business combination. Our pro forma net loss for 1998 was approximately $6.7 million compared to our actual net loss of approximately $6.0 million. The increase in our net loss was for the same reasons as the increase in our operating loss. 29 Liquidity and Capital Resources Since inception, we have spent approximately $12.7 million primarily for our operations and the development of our Organic Architecture and ASP software solutions. We have financed these operating and development activities through approximately $14.4 million raised from the sale of our capital stock and the issuance of notes to employees and stockholders. Investing activities included receipt of an aggregate approximately $234,000 in cash from acquired businesses offset by an aggregate approximately $465,000 investment in capital assets. As of September 30, 1999, we have approximately $895,000 in cash reserves and a working capital deficit of approximately $3.3 million. Net cash used in operating activities was approximately $5.4 million for the nine months ended September 30, 1999, approximately $2.5 million in 1998, approximately $2.7 million in 1997 and approximately $2.1 million in 1996. Cash used in operating activities for the nine months ended September 30, 1999 resulted primarily from the funding of our operations and our payment of current liabilities. Our investing activities used approximately $108,000 for the nine months ended September 30, 1999, used approximately $32,000 in 1998, provided approximately $6,000 in 1997 and used approximately $97,000 in 1996. Investing activities during those periods consisted primarily of aggregate net cash obtained from acquisitions of approximately $234,000 and capital expenditures of approximately $151,000 for the nine months ended September 30, 1999, approximately $32,000 in 1998, approximately $207,000 in 1997 and approximately $75,000 in 1996. We have no significant capital spending or purchase commitments other than normal commitments under facilities and equipment leases. Financing activities provided cash of approximately $6.4 million during the nine months ended September 30, 1999, approximately $2.6 million in 1998, approximately $2.8 million in 1997 and approximately $2.2 million in 1996, primarily from the aggregate net proceeds from sales of capital stock and the issuance of notes to employees and stockholders. We used cash from financing activities to make aggregate payments under notes payable to employees and stockholders and capital leases of approximately $603,000 during these periods. As of September 30, 1999, we had net operating loss carryforwards for federal income tax purposes of approximately $18.6 million expiring in the years 2013 through 2019. We had net operating loss carryforwards for state income tax purposes of approximately $10.0 million expiring primarily in 2003. The difference between federal and state net operating loss carryforwards is due primarily to a 50% limitation on net operating loss carryforwards for California income tax purposes. Due to the "change in ownership" provisions of the Tax Reform Act of 1986, utilization of the net operating loss carryforwards will be subject to an annual limitation regarding their utilization against taxable income in future periods. We expect that the net proceeds from this offering, together with our existing assets, anticipated debt and capital lease financing, and revenue from operations will be sufficient to fund our operations for at least the next 18 months. Thereafter, we may seek to raise additional funds through public or private equity financings or from other sources. If we raise additional funds by issuing equity securities, dilution to stockholders may result. There can be no assurance that additional financing will be available on favorable terms or at all. If funding is insufficient at any time in the future, we may be unable to develop or enhance our products or services, take advantage of business opportunities or respond to competitive pressures, any of which could harm our business. Year 2000 Preparedness Many currently installed computer systems and software products are written using two digits rather than four to define the applicable year. These systems may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in systems failures or miscalculations causing disruptions of operations for any company using such computer systems or software, including, among other things, a temporary inability to process transactions, send invoices or engage in normal business activities. As a result, many companies' computer systems may need to be upgraded or replaced in order to avoid this "Year 2000" issue. 30 The majority of the software and hardware we use to manage our business has been purchased or developed in the last five years. Generally, hardware and software design within the current decade and the past several years in particular have addressed the Year 2000 issue. All of the solutions we have developed are written with four digits to define the applicable year. Testing has been completed on our internal information technology systems and based on that testing, we believe that our information technology systems are Year 2000 compliant. In addition to our internally developed software, we use and license software and hardware from third parties. We have obtained certifications from our key suppliers of hardware and networking equipment for our data centers that such hardware and networking equipment is Year 2000 compliant. Based upon an initial evaluation of our broader list of software and hardware providers, we are aware that all of these providers are in the process of reviewing and implementing their own Year 2000 compliance programs, and we are working with these providers to address and remediate any exposure to the Year 2000 issue and continue to seek assurances from them that their products are Year 2000 compliant. We also rely on third party network infrastructure providers to gain access to the Internet. If such providers experience business interruptions as a result of their failure to achieve Year 2000 compliance, our ability to provide Internet connectivity and deliver our ASP software solutions could be impaired, which could harm our reputation and our business. Many of our customers may not be Year 2000 compliant. Healthcare is one of the least prepared industries in the United States for Year 2000 related problems. Customer difficulties due to Year 2000 issues could interfere with healthcare transactions or the transmission of information, which might expose us to significant potential liability. If customer failures result in the failure of our systems, it could harm our reputation and business. Furthermore, Year 2000 issues may affect the purchasing patterns of customers or potential customers as companies expend significant resources to become Year 2000 compliant. The costs of becoming Year 2000 compliant for current or potential customers may result in reduced funds being available to purchase and implement our software solutions. We have not incurred any significant costs to date with respect to our Year 2000 compliance efforts, and we do not anticipate that future costs associated with Year 2000 remediation efforts will be material. However, if our customers, our providers of hardware and software, our third party network providers or we fail to remedy any Year 2000 issues, our services and certain transactions could be interrupted and we could experience a material loss of revenue that could harm our business, financial condition and operating results. We would consider such an interruption to be the most reasonably likely unfavorable result of any failure by us, or failure by the third parties upon which we rely, to achieve Year 2000 compliance. Presently, we believe we are unable to reasonably estimate the duration and extent of any such interruption or quantify the effect it may have on our future revenue. We have yet to develop a comprehensive contingency plan to address the issues that could result from Year 2000 issues. We are prepared to develop such a plan if our ongoing assessment leads us to conclude we have significant exposure based upon the likelihood of such an event. For more information about Year 2000 risks, see "Risk Factors--Failure of computer systems and software products to be Year 2000 compliant could increase our costs, disrupt our services and reduce demand from our clients." Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), and in July 1999 issued Financial Accounting Standard No. 137, "Accounting For Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133, an Amendment of FASB Statement No. 133" (SFAS 137). SFAS 137 delayed the effective date for SFAS 133 to fiscal years beginning after June 15, 2000. We do not believe that the impact of this statement will have a material effect on our financial position or results of operations upon the adoption of this accounting standard. 31 Quantitative and Qualitative Disclosure about Market Risk We have considered the provision of Financial Reporting Release No. 48 "Disclosure of Accounting Policies for Derivative Financial Investments and Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative Information about Market Risk Inherent in Derivative Financial Instruments, Other Financial Instruments and Derivative Commodity Instruments." We had no holdings of derivative financial or commodity instruments at September 30, 1999, nor has the Company had any foreign currency denominated sales. However, we are exposed to financial market risks associated with interest rates. This exposure is directly related to our normal operating and funding activities. We manage interest rate exposure by investing excess funds in cash equivalents and short-term investments bearing variable interest rates, which are tied to various market indices. As a result, we do not believe that near- term changes in interest rates will result in a material effect on our future earnings, fair values or cash flows. 32 BUSINESS Overview We are an application service provider (ASP) that develops proprietary software solutions for clinics and group practices using our proprietary technology platform. Our customers can access and use our solutions over the Internet or their local or private information network. We are developing integrated solutions designed to manage all elements of the business and clinical processes of our customers within a single system. We currently have developed and implemented solutions in three areas: disease management, clinical drug trials recruitment and workers' compensation. We charge our customers a monthly subscription fee for our solutions. Industry Background According to the Health Care Financing Administration, the healthcare industry is the largest sector of the United States economy with annual expenditures reaching approximately $1.3 trillion by the year 2000. Rising costs have driven employers, insurers and the government sector to attempt to control expenses through managed care. Rising costs have also led to the creation of new payment mechanisms, including fixing fees, lowering reimbursement rates, restricting coverage for services, limiting access to a select group of providers, negotiating discounts and shifting the economic risk for the delivery of care through alternative reimbursement modes, such as capitation and risk pools. As a result, healthcare providers are bearing greater financial risk and need to contain costs and deliver care efficiently in order to operate profitably and remain competitive. Pressures to control costs have also contributed to the movement of care from relatively expensive inpatient settings to less costly outpatient settings. These outpatient care providers, particularly clinics and group practices, deliver the majority of healthcare services and are responsible for a substantial portion of total healthcare spending. In order to provide quality and cost-efficient healthcare while managing costs, hospitals, large healthcare organizations, individual physicians, physician groups and other outpatient care providers are forming affiliations with one another to take advantage of economies of scale. Although these affiliations have enhanced economies of scale, they have generally not addressed the inefficient delivery of healthcare services. Substantial resources are wasted in the healthcare industry through the delivery of unnecessary care, performance of redundant procedures and tests, or excessive administrative costs. We believe that a portion of this wasteful spending is attributable to the inefficient collection, management, sharing and storage of data. To operate efficiently, healthcare delivery networks must be able to manage patient care and workflow processes which may extend across multiple locations and member organizations. We anticipate that process and information management will become even more critical to healthcare organizations as new governmental regulations requiring greater documentation are adopted. For example, the Health Insurance Portability and Accountability Act of 1996 (HIPAA) imposes additional regulatory compliance responsibilities on the healthcare industry relating to the storage, maintenance and transmission of healthcare information. Proposed regulations implementing HIPAA would impose new requirements on the healthcare industry to maintain the security of healthcare information. Demand for Information Services in Healthcare The growth of managed care, the increase in government regulation and the rise of healthcare delivery networks have increased the need for information technology products and services. Annual healthcare information systems expenses are expected to reach approximately $18 billion by the year 2000 according to industry sources. Healthcare providers increasingly demand integrated solutions that offer the core functions required to manage healthcare clinical and business processes. In addition, geographically dispersed healthcare delivery networks require central databases and analysis tools that permit them to effectively extract and analyze data located throughout the enterprise, measure clinical results, control costs, evaluate operational efficiency and support process improvement. 33 Traditional Healthcare Information Systems Traditional healthcare information systems, known as legacy systems, were built with specialized computer languages using "code." The first legacy systems were introduced in the 1970s. Building systems out of code requires highly trained technicians and can take anywhere from several months to several years to complete. Users' needs frequently change before code-based systems are completed from the initial design to product delivery. Modifying the original code is a time-consuming and expensive process. As a result, legacy systems cannot be easily adapted to the changing functional requirements of end-users, such as the need to address practice variations within clinics and group practices. These factors contribute to the high cost of legacy systems, which often requires a significant commitment of capital for the initial acquisition of hardware and system infrastructure. In addition, healthcare providers may incur additional capital expenditures in expanding installed systems when increasing their internal capacity. Most legacy systems were originally developed to address the financial aspects of information management, such as capturing charges and generating bills. Most hospitals and managed care organizations have installed legacy systems that continue to perform the functions for which they were originally designed. As end-user information requirements expanded to include the need to manage clinical information, legacy vendors introduced code-based legacy applications that were either built by those legacy vendors or acquired from other software developers. Because these new applications generally were not included in the design of the original systems, these legacy vendors are required to develop complex system interfaces that permit the integrated exchange of information between applications and systems. The time and expense associated with building interfaces make legacy systems less adaptable to structural and organizational changes within healthcare organizations. The Emergence of the Internet and the ASP Model in Healthcare The Internet has emerged as an important means of accessing and distributing information, as well as a medium to facilitate the transfer of secure information between organizations. We believe the Internet's key attributes as an open, accessible, low-cost and flexible network make it particularly well- suited for the information technology and communication needs of the healthcare industry. We believe that the Internet will ultimately become the primary method of communication and commerce in the healthcare industry. The increasing acceptance of the Internet as a medium to access and exchange data has contributed to the development of a new business model for the delivery of mission-critical healthcare software solutions--the application service provider model. ASPs offer software applications deployed over the Internet from a remote facility. This eliminates the need for a customer to invest in complex and expensive software and hardware, such as installing network servers. Industry analysts estimate that the total cost of hosted applications under the ASP model can be significantly less than traditional licensing and internally managed software. According to the International Data Corporation (IDC), in 1998 the enterprise ASP market was $23.1 million. Over the next five years, IDC estimates the ASP market to grow to $2 billion. Designing a Comprehensive Information Technology Solution Healthcare entities' information technology needs vary greatly and are dependent upon their range of operating activities, which can be impacted by frequent government and regulatory changes, ongoing margin pressures and Year 2000 challenges. Large, self-contained healthcare entities with significant information technology budgets have been able to keep up with the changing requirements. However, smaller healthcare entities, such as clinics and group practices, need sophisticated information technology solutions that can be accessed cost-effectively. We believe that a comprehensive information technology solution for the smaller healthcare provider should: . manage the entire clinical and business process in a single system; . expand easily to accommodate more users and applications; 34 . enable the creation of fully integrated solutions; . allow trained users to quickly and easily tailor solutions to accommodate their different needs; . offer a cost-effective alternative to currently available software applications; . permit Internet delivery or on-site installation; . provide different users simultaneous access and the ability to modify data in real time; . contain the requisite healthcare domain expertise; and . facilitate easy use. The OrganicNet Solution Our proprietary technology provides a platform for the rapid development and deployment of codeless software solutions designed to manage the entire clinical and business process for clinics and group practices. These processes include patient enrollment and patient health assessment, scheduling, diagnosis, selecting and monitoring treatment plans, billing and contract management. We design our software solutions to be deployed over the Internet, the user's intranet, or their local or private information network with our ASP model. As an ASP, we charge our customers on a monthly subscription basis for the delivery of our software solutions. We provide integrated solutions that can be incrementally implemented, easily extended and rapidly tailored for each user's needs. Our solutions offer the following benefits: Comprehensive. We provide our customers with a comprehensive solution that combines our software applications with Internet infrastructure, application hosting, as well as consulting and implementation services provided by our strategic partners. Our software applications address a range of business and clinical processes, such as billing and claims, scheduling, credentialing and disease management. Our solutions are designed to enable our customers to rely on us as the single source for their software solutions, whether these solutions are deployed over the Internet or their local or private information network. Cost-effective. We believe that our ASP model allows users to access sophisticated software solutions for a lower start-up cost and reduced operating cost. Our technology enables most customers to run our solutions using their existing computer equipment. Each user needs only a relatively modest desktop computer and a modem that allows the computer to connect to our remote servers over standard telephone lines. As a result, our solutions eliminate the need for the user to incur significant capital expenditures for hardware, operating systems and application software. In addition, our solutions are designed to significantly reduce the costs for technical support and training, thereby reducing the need for in-house information technology experts. Adaptable. Our applications are built with data instead of code. As a result, we can avoid many of the limitations of code-based software systems and more easily tailor any component of a solution to meet the needs of each user. Trained clients can quickly modify our software to adapt to practice variation and practice changes. Our clients do not have to conform their clinical and business processes to the fixed features and functions of rigidly-coded legacy systems. Scalable. Our solutions run on an object-oriented database management system designed to manage large and complex databases. In addition, we have partnered with Conxion Corporation to provide application hosting services, Internet infrastructure and data centers. The combination of our proprietary architecture and technology, the bandwidth capacity of Conxion's data centers and the storage capacity of our database management system minimizes the cost of adding incremental users and applications. Integrated. Our software solutions are built on a single, integrated database so that information and applications are stored centrally and shared simultaneously by all users. As a result, data is entered once and shared across all applications on the system. We believe the single entry of patient and other data will increase efficiency and lower costs while reducing the errors that result from duplicative data entry. Changes to data made by a single user in one application are immediately shared by all authorized users across applications. 35 Internet accessible. Our solutions can be provided over the Internet. Multiple users can simultaneously and continuously access the same software applications and data from geographically dispersed locations. Users access our software solutions using our Organic Browser, a proprietary, thin client browser that provides the interface between the user, the applications and the database. Easy to use. We design our software solutions in consultation with users to accommodate their workflow and processes. The appearance of the computer screen and the information that is displayed can be designed so that users see only those features that they need. Users are not required to navigate through features and applications they do not need or use. For example, schedulers will see only the scheduling tools and information they need on their screens. Embedded domain expertise. Our solutions incorporate the collective healthcare knowledge and experience of our personnel. We are highly experienced in each of the following domains: . outcomes and disease management; . clinical drug trials; . practice management; . credentialing and provider profiling; . scheduling and resource management; . business process reengineering; and . case management. We use our expertise in these areas to create comprehensive, integrated software solutions for our customers and to continually refine those solutions as the needs of our customers evolve. Security. To safeguard user data, we have designed our solutions to support the security options necessary to meet our user's requirements on an application by application basis. We offer the following security options: . client authentication: proprietary communication protocols that generate a public key infrastructure-based key to uniquely identify each client; . user authentication: standard login ID/password identification and other more secure means to identify and authenticate users; . access control: system mechanisms to restrict a user's access to only the data they have clearance to see; . channel security: proprietary transmission protocol makes it difficult to intercept data during transmission; . database security: data in the database can be encrypted; and . physical site security: Conxion hosts our data and applications at government rated Class A data centers. To be rated as a Class A data center, Conxion must conform to government security requirements and be able to guarantee 72 hours of independent continuous operations. 36 Our Strategy Our objective is to become the leading ASP serving clinics and group practices. We believe that we are one of the first ASPs to deliver software solutions to clinics and group practices over the Internet. Our strategy is to capitalize upon our early market entrance, extend our technology and implement a subscription-based business model focused on recurring revenue. Elements of our strategy include: Leverage our proprietary technology platform. Our proprietary, object- oriented technology provides a platform for the rapid, codeless development of ASP software solutions for clinics and group practices. Our platform combines a universal set of clinical and business processes with the capability to quickly create a solution that can be easily tailored to meet the specific needs of each customer. Using this platform, we have delivered solutions for the disease management, clinical drug trials and workers' compensation markets. We are using our platform to complete development of a software solution that manages the entire clinical and business process for clinics and group practices. The scalable, adaptable and interactive design of our software solutions enables us to offer a customer an initial solution targeting a specific business or clinical need, with the opportunity to easily sell additional functions and features. Achieve rapid market penetration. We are using a sales and marketing strategy that focuses on identifying channels of customers with common needs and cross-selling our solutions to our existing customer base. We intend to establish relationships with specialty healthcare industry groups who will endorse and co-market our solutions to their customers and members in these channels. In addition, we have an existing base of over 500 customers using the legacy systems sold by the companies we have acquired. To capitalize on our customer base, we developed and are developing ASP software solutions that will be sold as an upgrade to our existing systems. We use our Internet sales team to quickly reach many customers and increase our market penetration. Enhance our capabilities by forming strategic alliances. We believe that our ability to offer a complete, integrated and adaptable software solution to our customers will be an important element in their selection of us as their solutions provider. In order to continue to specialize in software solution development, we have formed and will continue to form strategic alliances with leading companies that can provide us with specific expertise in areas important to providing complete solutions, such as Internet infrastructure, application hosting, consulting and implementation services. Given the significant time, financial and human resources required to internally develop our own Internet connectivity and data storage requirements, we believe that we can offer cost-effective software solutions by partnering with recognized leaders in these areas. Our strategic alliance with Conxion Corporation, a leader in network hosting, is an example of such a partnership. Selectively acquire complementary businesses and technologies. Historically, we have grown through acquisitions that brought us new personnel with domain knowledge of the healthcare industry, additional customers, software products and technology. In the future, we will continue to acquire businesses and domain knowledge, product lines or technologies that will enhance our solutions and domain expertise, and increase our customer base. Protect our intellectual property. We believe that our technology incorporates a unique approach to the codeless development of software applications. We believe that our software technology is a significant asset which we intend to actively protect. We have filed five patent applications relating to key elements of our architecture and intend to seek appropriate intellectual property protection for the technologies that we develop in the future. Our Technology Object-oriented technology. Our solutions embody object-oriented technology. Traditional software applications are built with computer language using "code." Code essentially instructs the computer how to use pieces of information, or "data." Most commercial software applications consist of up to millions of lines of code. Each line is written by a highly trained programmer. Object-oriented technology breaks up the lines of 37 code into specialized programs, or "objects," which perform discrete tasks within the application. An object can also be simultaneously used by different applications so that complex systems can be easily built. The self-contained nature of objects allows them to be tested, modified and maintained independently from the rest of the system. Therefore, object-oriented applications can be upgraded and maintained without modifying the entire application. After five years of development, we have developed a method of interpreting data without instructions written in code. Using this method, we can build applications that are not based on code. Since September 1999, we have received a Notice of Allowance from the United States Patent and Trademark Office for three of our inventions including the ability to write applications using data instead of code and the ability to write queries using data instead of code. CoreModel. The experience and knowledge of our healthcare industry experts, and input from clinicians and users, has contributed to the development of our CoreModel. Our CoreModel is a model of the real-world components of the healthcare delivery process. Each of the components is represented by an object. The CoreModel is the blueprint of how these objects can be linked to build applications. As objects can be shared by different applications, all our applications can be built using the set of objects contained in our CoreModel. Therefore, data is not duplicated and applications are integrated. Once a user has one of our solutions, other solutions can be added incrementally without needing to be integrated, since integration is organic to all applications. Organic Browser. The Organic Browser is our application browser that resides on the user's computer. Applications are delivered to the user by the interaction between our proprietary application server software and the Organic Browser. When a user logs on to the system and enters a user name and password, the Organic Browser requests the data required to display the user's software solutions from the application server. The application server communicates that request to our database management system, which retrieves the data required and delivers it to the application server. The application server then assembles the user's software solution and delivers it to the Organic Browser which renders it on the user's screen. Our Organic Browser is able to do this as quickly as traditional systems with modest computers and an Internet connection over standard telephone lines. The Organic Browser and our application server require relatively little hard disk space on the user's computer regardless of the size of the software applications they are running because of our data-based and object-oriented architecture. As a result, most users can run our software solutions on their existing computers and do not have to invest in additional hardware. The Organic Browser requires only four megabytes of hard disk space on the user's computer to run, which is less computing power than general purpose Internet browsers, which typically require about 80 megabytes. Applications, such as our browser, that require little disk space and are used to access applications stored on a server are referred to as "thin clients." Our software solutions can run on a thin client because they are built using data, which can be stored in a database on a server instead of on the user's computer. In contrast, typical software applications built with code must be stored and executed on the user's computer and therefore cannot be run with a thin client. Because our CoreModel is stored in the database, we can increase the total number of software applications and the functionality of any software application running on our system without changing the Organic Browser or the rest of the user's system. Our application server software requires only one megabyte of hard disk space. Typically, application server software requires at least 10 megabytes of storage space, but can require up to several hundred megabytes for more complex applications. Our application server software requires less disk space because the processes, generally referred to as "server side processes," are written in data rather than code and stored in the database. Server side processes generally include: . queries: used to locate and retrieve data elements from the database; . triggers: used to activate particular processes upon the occurrence of another process; and . constraints: used to limit acceptance of data entry to defined parameters. 38 Our ability to store server side processes as data, instead of code, enables us to quickly and easily modify the server side processes for increased adaptability. Our Software Solutions We are in the process of developing the Organic Clinic, a software solution that will manage the entire clinical and business process for clinics and group practices. We are designing the Organic Clinic to be deployed over the Internet or the user's intranet or area network using our ASP model. In the interim, we are providing software solutions for use in specific practice areas, such as disease management, clinical drug trials recruitment and workers' compensation. We have targeted these areas to accelerate adoption of our technology based on our domain knowledge, the strength of our channel partner contacts and the potential of these markets. To build our solutions, we begin by spending a few days in a clinic interviewing users and modeling and mapping the processes of that clinic. We assemble a solution by using the library of healthcare tasks built by our domain experts as extensions of the CoreModel. These tasks share the same data objects and are integrated with all of our solutions. We have built and can utilize hundreds of healthcare specific tasks such as "enroll a patient," "schedule a patient" or "bill a patient." These tasks comprise the templates we use to tailor a solution for a particular clinic. Providing a tailored solution generally takes three to six weeks, depending on the complexity of the process and practice variation. We are currently delivering the following ASP solutions to customers: Disease Management. Healthcare providers are increasingly employing disease management solutions to achieve favorable patient outcomes while controlling costs. Annually, an aggregate of over $50 billion is spent in the United States to treat the disease states of asthma, diabetes and congestive heart failure. A number of specialty healthcare providers have targeted the treatment of these specific disease states. These providers often contract to treat patients at a fixed cost and therefore depend on strict patient compliance with treatment plans to manage their costs and to deliver quality care to their patients. We have designed effective disease management solutions that have the following attributes: . Improved patient selection. Our solutions use patient questionnaires and clinical data to identify and select patients with specific chronic conditions who are most at risk for poor clinical outcomes. . Automated clinical process. Our solutions link all network users, including doctors, laboratories and pharmacies, track compliance, and provide real time and updated information. . Customized care plans. Our solutions allow healthcare providers to design and monitor care plans that meet the specific needs of individual at-risk patients using guidelines and predictive outcomes established at the clinic. We delivered our first disease management solution in February 1999. As of October 31, 1999, we have deployed eight of our ASP software solutions for the disease management market. As part of our disease management solutions, we developed Outcomes Partner III, a healthcare outcomes management software solution. This solution was developed in collaboration with Pfizer Health Solutions Inc, a subsidiary of Pfizer Inc. that provides information technology solutions to Pfizer Inc. clients. Outcomes Partner III combines patient-reported health and functional status with outcomes program administration and reporting tools that evaluate the effectiveness of disease management. Through our relationship with Pfizer Inc., we have installed Outcomes Partner III at the American Medical Group Association's headquarters. The American Medical Group Association is a trade association representing over 230 medical groups composed of approximately 48,000 physicians. In conjunction with Pfizer Inc., we intend to market Outcomes Partner III to the American Medical Group Association's member clinics. 39 Clinical Drug Trials Recruitment. We believe there is a significant market for a software solution that improves the efficiency of clinical drug trials management based on the level of expenditures spent on clinical trials to support drug development efforts. We believe there is not an adequate system for managing patient recruitment and enrollment in the clinical drug trials process. A clinic's participation in the clinical drug trial process begins with patient recruitment and enrollment. Participation in clinical drug trials can be a significant revenue source for clinics and group practices. Pharmaceutical companies set compensation for investigators based on the number of patients enrolled and the time taken to complete recruitment. Clinical drug trials recruitment is conducted by various types of healthcare organizations including clinics and group practices. These organizations must conduct broad searches of their practice management systems to identify patients who meet general criteria. They then review patients' medical charts to find individuals who meet the trial's requirements. Manual chart review is a time consuming and expensive process. Even for simple studies, it can take a clinic site several months to identify, screen, recruit and enroll its target number of patients. We believe an effective patient recruitment solution can significantly reduce the time required to complete these tasks. Our patient recruitment solution provides a comprehensive set of easy-to-use tools for efficient patient screening, recruitment and enrollment. Our first solution was delivered in February 1999. Our solution offers clinics and group practices several important benefits, such as: . Simplified data management. Interfaces with a practice management system to eliminate the need to duplicate data entry. . Reduced number of chart reviews. Quickly queries system data to prioritize patients that are most likely to meet the inclusion criteria for a trial. . Customized patient screening. Uses adaptable tools to enable customized follow-up screening interviews and medical history questionnaires with no additional programming, and provides survey administration over the Internet. . Reduced enrollment time. Facilitates quick and efficient enrollment of patients who meet the inclusion criteria for a trial. . Integrated patient contact tracking. Includes user-friendly tools to help track and manage all contacts with patients from initial screening through the completion of their participation in a clinical drug trial. . Reduced computer hardware costs. Permits data input using scan forms, which enables clinic staff to interact with the system without a computer on their desk. Workers' Compensation. Annually, approximately $24 billion is spent to treat workers' compensation claims in the United States. Workers' compensation is a separate healthcare delivery system for employment-related injury and health issues. Patient treatment is funded through insurance premiums paid by the employer. When a job-related injury occurs, the employee is sent to either an industrial medicine clinic or a network of doctors contracted to treat workers' compensation injuries. We believe there is currently no clinical management software solution to handle these claims across a network of clinics and group practices. Moreover, we believe no reporting system is available to employers who are funding the system and want to track employee status and compliance with treatment protocols. Our clinical management solution links doctors, clinics and group practices to a single database and to a single and unique patient record. In addition, we are developing a solution with American Medical Information Systems, Inc. to integrate the management of clinical and business processes in occupational medicine. This solution would enable us to track progress and compliance during the course of a patient's treatment. Our solution will capture patient medical histories, help physicians determine diagnoses and suggest appropriate treatment protocols at the point of care. The criteria for diagnosis and treatment protocols will be established by the physicians at the treatment clinic. 40 The Internet enables different organizations, such as physical therapy centers, laboratories and pharmacies, to inexpensively link to the same system. Our solution allows employers to track the treatment of their employees on their desktop. Employers are linked to the same database the clinic network is using. The use of standard methods of treatment can then be monitored by all parties connected to the network, including employers. We have installed our first workers' compensation solution in a clinic running on a remote server over the Internet under an agreement with American Medical Information Systems. We expect that we will have the final version of this solution installed and that AMIS will accept it by the end of 1999. AMIS plans to offer employers a network of existing clinics that can treat those of their employees with workers' compensation claims and allow the employer to track the treatment of their employees using the Internet. AMIS is in the process of building this network and as of September 15, 1999, one clinic has agreed to participate in this network. Under our agreement with AMIS, they have the exclusive rights for 12 months from acceptance of the system to use and market the solution in California and in the United States with AMIS clinics and affiliate clinics so long as AMIS has paid us for a minimum number of AMIS clinics and affiliate clinics for a period of 12 months. If AMIS has not paid us for at least half of the minimum number of required users by the end of the first six months, then we may cancel the exclusive arrangement. Similarly, we may cancel the exclusive arrangement if AMIS has not paid us for an increased minimum number of users during each subsequent year. Our Software Solutions in Development. As part of our strategy of completing the Organic Clinic and targeting markets in which we have domain knowledge, channel partners or existing customers, we are currently developing the following solutions: . Patient Management. We are developing a patient management solution that will streamline claims processing by making eligibility information obtained at a clinic available to the billing service over the Internet. In September 1999, we entered into a letter of intent with California Medical Billing Association, an association of billing service bureaus, to market this solution to its 200 member billing services and their clinic customers. We cannot assure you that this letter of intent will result in a definitive agreement. . Medical Record Management. We are developing a medical record management solution to expand the process of managing clinical data by making electronic medical records available over the Internet to the association's entire network. This solution is covered by our letter of intent with California Medical Billing Association. . Practice Management. This solution will provide scheduling, billing and contract management features. We will initially market this solution as an upgrade to the traditional legacy products sold by PSI-Med Corporation, one of our wholly owned subsidiaries. . Case Management. This solution will provide tracking, management and analysis of case-specific information required to manage a patient's treatment. We will initially market this solution as an upgrade to the traditional application sold through L.I.N.C., Inc., one of our wholly owned subsidiaries. . Credentialing. We are developing this solution to provide credentialing capabilities to healthcare organizations over the Internet. We developed this solution with and will initially market this solution through Healthcheck, Incorporated, one of our wholly owned subsidiaries. . Urology Management. We are developing a clinical management solution for urology clinics and have a letter of intent with a urology association to market the solution. Our Legacy Software Products. We currently market traditional legacy software products for credentialing, scheduling, resource management, case management and outcomes management applications. These products were developed by the companies we have acquired since our inception in 1995. We acquired these companies primarily for their specific domain expertise and enabling technologies. Our acquired domain expertise is incorporated into our CoreModel and has been used to build our current solutions and solutions in development. We intend to continue to market these legacy products until we have completed development of a comparable solution that can be delivered using our ASP model. As each of these solutions is completed, we 41 will market it as an upgrade to our existing legacy products. For more information concerning our acquisitions, see "Management's Discussion and Analysis of Financial Condition and Results of Operations." Strategic Relationships and Alliances We have entered into strategic relationships and alliances with companies to expand our sales distribution capabilities and improve our ability to deliver reliable, scalable ASP software solutions. We will continue to consider strategic relationships and alliances that enable us to leverage our core competencies in the development of advanced technologies and software solutions. These strategic relationships and alliances include the following: Pfizer Health Solutions Inc. We have had a strategic relationship with Pfizer Health Solutions Inc, a subsidiary of Pfizer Inc., since 1997. We have entered into agreements with Pfizer Health Solutions Inc that provide it with non-exclusive distribution rights to the solutions described below. Pursuant to these agreements, we cannot enter into distribution agreements for the same solutions with any competitor of Pfizer Inc. Since 1997 through September 30, 1999, we have received over $3.2 million in revenue through this relationship with Pfizer and its customers. The solutions covered by these agreements include: . Outcomes Partner III. We are working to implement this quality measurement tool in innovative pilot projects, including several designed to use outcomes in support of disease management. This is a three-year agreement which expires on May 27, 2000. This agreement may be renewed by mutual agreement of the parties for additional periods of 12 months. . Surveys. We also collaborate with Pfizer Health Solutions Inc in marketing and implementing standard and tailored surveys for managed care organizations. This is a two-year agreement which expires on June 15, 2000. This agreement may be renewed by mutual agreement of the parties for additional periods of 12 months. . Credentialing. Along with Pfizer Health Solutions Inc, we offer credentialing services and software on a contract basis. This is a three-year agreement which expires on January 15, 2002, unless testing of the final version of the software extends beyond January 15, 2000, in which case the term of the agreement will be extended by the period by which such testing is extended. This agreement may be renewed by mutual agreement of the parties for additional periods of 12 months. Superior Consultant Holdings Corporation. In September 1999, we entered into a Distribution and Services Agreement, as amended, with Superior Consultant Holdings Corporation under which Superior agreed to introduce and outline the advantages of our ASP software solutions based on client interests, as well as providing systems integration, process improvement, consulting and implementation services to healthcare organizations. We agreed to market Superior's healthcare consulting services and business integration services, to promote Superior as our exclusive alliance partner for the provision of healthcare consulting services and not to offer distribution rights to our Organic Architecture and solutions to any direct competitor of Superior without Superior's prior written approval. Under the agreement, Superior has a non- exclusive worldwide license to market, use, install and display our Organic Architecture and solutions. We have also appointed Superior as our international provider of healthcare consulting services to our clients. The agreement entitles Superior to appoint a member to our board of directors and to receive a vested non-statutory stock option grant exercisable for 200,000 shares of our common stock at an exercise price of $6.00 per share. The initial term of the agreement runs through August 31, 2002 and may be renewed by Superior for up to two additional two-year terms. Conxion Corporation. We have entered into several agreements with Conxion Corporation, under which they supply us with application hosting services and Internet infrastructure for our ASP software solutions. Conxion houses the equipment for these services in government rated Class A data centers from which our ASP software solutions are deployed and run. Our business relationship with Conxion began in May 1997, and in April 1999 Conxion purchased $550,000 of our preferred stock. We have been using Conxion's services to deploy our ASP solutions since May 1999 and have been using them as our Internet service provider since June 1998. These agreements typically have terms of one year. Conxion has agreed to enter into extensions of these 42 agreements and to enter into supplemental service agreements, as required by us on terms not less favorable to us as they offer to any of their customers. Conxion cannot terminate or suspend the services provided under these agreements even if a bona fide dispute exists so long as undisputed payments are paid. If we withhold an undisputed payment, Conxion must notify us of the breach in writing and provide us thirty days to cure the breach. In connection with these agreements, Conxion purchased $550,000 of our Series C Preferred Stock. Sales and Marketing Our sales and marketing strategy is to increase acceptance of our ASP solutions in clinics and group practices by (1) entering into partnerships with specialty industry groups and associations who provide us access to customer channels and (2) selling our ASP solutions as upgrades to our installed base of over 500 customers that currently use legacy systems. We believe that our channel partner relationships will enable us to identify customers with common needs as a channel for our sales efforts. Our current channel partners, American Medical Information Systems and Pfizer Health Solutions Inc, endorse our ASP software solutions and provide for co-marketing to their members and customers. Our sales force is divided into Internet, strategic and tactical teams. The Internet team sells services and products over the Internet and telephone, which makes more efficient use of their time. The strategic sales team is focused on selling through our channel partners as well as through our strategic relationships with Superior and Pfizer Health Solutions Inc. The tactical sales team focuses on selling our legacy software products and services. Our tactical sales force is also responsible for selling our ASP software solutions as upgrades to our installed legacy products. We currently have nine employees in our sales force, five of which are in the tactical sales team. We intend to expand the Internet and strategic sales teams significantly following this offering. We market our solutions and services through our website, articles in industry publications, direct mail and participation in trade shows. From our website, prospective customers can obtain product information, and download and run demonstration software. We also use our website to identify and qualify prospective customers who request information. We believe that publication of relevant articles in key trade journals is an important method of building industry awareness. Since 1998, we have published 13 articles under the bylines of our staff. Research and Development Our research and development organization is comprised of development engineers who work on system architecture and solution development teams who work with our domain experts to build solutions for each domain incorporated in the CoreModel. As of September 15, 1999, we had 28 professionals dedicated to architecture and solutions development. We will continue to make substantial investments in research and development to enhance our proprietary architecture and support the development of additional solutions. Competition The business of providing application software and services to clinics and group practices is extremely competitive. In addition, the market for Internet- based ASPs is relatively new and evolving, and we anticipate that competition will continue to intensify as the use of the Internet grows. Our competitive position in the healthcare software application market is difficult to evaluate due to the variety of current and potential competitors and the evolving nature of our market and the ASP model. Our primary competitors include: . Legacy software vendors such as Cerner Corporation, Eclipsys Corporation, IDX Systems Corporation, McKesson HBOC, Inc. and Medical Manager Corporation; . Application service providers such as CareTools, Inc., Confer Software, Inc., MedicaLogic, Inc., The Trizetto Group, Inc. and U.S. Internetworking, Inc.; and . Healthcare e-commerce and portal companies such as CareInsite, Inc. and Healtheon Corporation. 43 Each of these types of companies either is or in the future can be expected to compete with us in delivering software solutions to the clinic and group practice markets, including the delivery of software applications over the Internet. Furthermore, major software companies and other entities, including those specializing in the healthcare industry that are not currently offering applications, products or services that compete with our products and services, may enter our markets. In addition, our existing and future strategic partners may compete with us from time to time by selling, consulting on or hosting other software that competes with our software solutions. We believe the principal differentiating characteristics upon which we compete are: . features and functionality--our solutions provide different users simultaneous access and the ability to modify data in real time; . fit with the user's practice, processes and needs--our solutions can be tailored to specific users' needs; . cost--our solutions are accessed over the Internet eliminating the need for costly servers and reducing the need for in-house technology experts; . ease of implementation and use--our solutions can be designed so that users do not need to navigate through features they do not use; . business and technical expertise--our solutions incorporate the collective healthcare knowledge of our personnel and other healthcare experts; . integration of applications--our solutions are designed to allow users to manage the entire clinical and business process in a single system; . reliability--our solutions are easy to maintain because they are built with data instead of code; . scalability--the scope of our solutions can be expanded or reduced to easily and quickly accommodate our customers' specific and changing needs; Despite these differentiating characteristics, many of our competitors have greater financial, technical and marketing resources, greater name recognition and more established relationships in the healthcare market than we have. Low barriers to entry also expose us to potential new competitors. We cannot assure you that we will be able to compete successfully now or in the future. To remain competitive, we must continue to enhance our software solutions, as well as expand our sales, marketing and distribution channels to respond promptly and effectively to: . changing needs of clinics and group practices; . advances in the delivery of software applications over the Internet; . technological innovation and change; . our competitors' new products, services and pricing models; and . challenges of hiring and retaining qualified information technology professionals. For additional information concerning risks associated with competition, see "Risk Factors--The markets we serve are highly competitive and many of our competitors have much greater resources." Intellectual Property Rights Our success and ability to compete are dependent in part upon our proprietary technology. We rely upon a combination of copyright, patent, trademark and trade secret laws and other means to protect our technology. However, the steps we have taken may not prevent the misappropriation of our products or technology. In addition, effective proprietary rights protection may be unavailable or limited in some foreign countries. We have two U.S. patent applications pending and have received a Notice of Allowance from the United States Patent and Trademark Office for three of our inventions. In addition, we have five registered trademarks and have 13 trademark applications pending. 44 We retain ownership of our CoreModel and the software applications we develop. In addition, we have entered into agreements for the right to use third party software components, such as our database program, in our products on a non-exclusive basis. Our breach of these agreements could result in our loss of these rights and would harm our business. Our success will depend in part on our ability to continue to license additional third party software and upgrades to existing third party software in order to enhance our products. However, we may not be able to license additional rights for this software on commercially reasonable terms or at all. If we cannot obtain required licenses, we could encounter delays or unanticipated development expense while we attempt to internally develop substitute technology. We may become the target of intellectual property litigation. Although we have not been notified that any of our products infringe third party intellectual property rights, we may receive notices of these claims in the future. Any litigation to determine the validity of such claims, including claims arising from our contractual indemnification obligations to our customers, regardless of its merit or resolution, would likely be costly and may divert management's attention and resources, or cause service implementation delays. In the event of an adverse ruling in any such litigation, we could be required to pay substantial damages, cease the sale of infringing products or obtain a license of the intellectual property rights of the third party claiming infringement. There can be no assurance that such a license would be available to us on reasonable terms or at all. We also seek to protect our trade secrets and proprietary technology through confidentiality agreements with employees, customers, consultants and other appropriate parties. However, we may not have an adequate remedy in the event these agreements are breached or any remedy if our trade secrets are independently developed by others. For information concerning risks associated with intellectual property rights, see "Risk Factors." Government Regulation Government Regulation and Healthcare Reform. Laws and regulations directly applicable to communications or commerce over the Internet are becoming more prevalent. Laws and regulations may be adopted with respect to the Internet covering issues such as user privacy, pricing, content, copyrights, distribution and characteristics and quality of products and services. The adoption of any additional laws or regulations may impede the growth of the Internet or other online services, which could, in turn, decrease the demand for our applications and services and increase our cost of doing business, or otherwise have an adverse effect on our business, financial condition and results of operations. Moreover, the applicability to the Internet of existing laws in various jurisdictions governing issues such as property ownership, sales and other taxes, libel and personal privacy is uncertain and may take years to resolve. Any such new legislation or regulation, the application of laws and regulations from jurisdictions whose laws do not currently apply to our business, or the application of existing laws and regulations to the Internet and other online services could harm our business. The confidentiality of patient records and the circumstances under which records may be released for inclusion in our databases are subject to substantial regulation by state governments. These state laws and regulations govern both the disclosure and the use of confidential patient medical record information. Although compliance with these laws and regulations is at present principally the responsibility of the hospital, physician or other healthcare provider, regulations governing patient confidentiality rights are evolving rapidly. Additional legislation governing the dissemination of medical record information has been proposed at both the state and federal level. This legislation may require holders of this information to implement security measures. Such legislation might require us to make substantial expenditures to implement such measures. We cannot assure you that changes to state or federal laws will not materially restrict the ability of healthcare providers to submit information from patient records using our applications. Legislation currently being considered at the federal level could impact the manner in which we conduct our business. The Health Insurance Portability and Accountability Act of 1996 (HIPAA) mandates the use of standard transactions, standard identifiers, security and other provisions by the year 2000. We are designing our 45 applications to enable compliance with the proposed regulations, but cannot assure you that we will be able to comply with those proposed regulations in a timely manner or at all. Moreover, until the proposed regulations become final, they could change, which could require us to expend additional resources to comply with the revised standards and we may not be able to comply with the revised standards in a timely manner or at all. Based on our present business operations, we believe that the HIPAA requirements related to the maintenance and exchange of electronic health information may apply to legacy products sold by our wholly owned subsidiary, PSI-Med Corporation, but not to our other products, services or solutions. If any of our products, services or solutions are subject to those regulations, we may be required to incur additional expenses in order to comply with these requirements and we may not be able to comply with them in a timely manner or at all. In addition, the success of our compliance efforts may also be dependent on the success of healthcare participants in dealing with the standards. If we are unable to comply with regulations implementing HIPAA in a timely manner or at all, the sale of our solutions and business could be harmed. The United States Food and Drug Administration is responsible for assuring the safety and effectiveness of medical devices under the Federal Food, Drug and Cosmetic Act. Computer applications and software are considered medical devices and subject to regulation by the FDA when they are indicated, labeled or intended to be used in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment or prevention of disease, or are intended to affect the structure or function of the body. We do not believe that any of our current applications or services are subject to FDA regulation as medical devices; however, we plan to expand our application and service offerings into areas that may subject it to FDA regulation. We have no experience in complying with FDA regulations. Our compliance with such FDA regulations could prove to be time consuming, burdensome and expensive, which could have a material adverse effect on our ability to introduce new applications or services in a timely manner. Employees As of October 31, 1999, we had approximately 125 employees. Our employees are not subject to any collective bargaining agreements and we generally have good relationships with our employees. Facilities We lease eight facilities, all of which are located within the United States. Our principal executive and corporate offices are located in San Francisco, California. In addition, we maintain offices in Berkeley, Santa Ana and Calabasas, California, Denver, Wheat Ridge and Ft. Collins, Colorado and Minneapolis, Minnesota. Our leases have expiration dates ranging from January 2000 to August 2002. We believe that our facilities are adequate for our current operations and that additional leased space can be obtained if needed. Legal Proceedings There are no legal proceedings pending to which we are a party and our management is unaware of any contemplated actions against us. 46 MANAGEMENT Directors and Executive Officers The following table presents information regarding each of our directors and executive officers as of October 31, 1999.
Name Age Position ---- --- -------- Jack D. Anderson...................... 55 Chairman of the Board; Chief Executive Officer William W. Shaw, III.................. 42 President, Secretary and Treasurer William H. Matthews................... 45 Chief Financial Officer Robert L. Anderson.................... 54 Director; Senior Vice President Michael J. Barry...................... 38 Chief Information Officer David W. McComb....................... 46 Director; Vice President, Research and Development Michael E. Meisel..................... 45 Chief Sales Officer; President and CEO of Res-Q, Inc., a wholly owned subsidiary of OrganicNet M. Jan Roughan........................ 53 Director; President and CEO of L.I.N.C., Inc., a wholly owned subsidiary of OrganicNet Robert S. Garvie...................... 50 Director Gail E. Oldfather..................... 64 Director Michael A. Wilson..................... 52 Director
Jack D. Anderson co-founded OrganicNet in January 1995. He has been Chairman of the Board and Chief Executive Officer since inception. Mr. Anderson has approximately 28 years of experience in healthcare management and approximately 20 years of experience in healthcare information systems. From 1993 to 1994, Mr. Anderson served as a Business Development Consultant for Velocity Healthcare Informatics, Inc., which was purchased by OrganicNet in December 1996. In 1978, he co-founded Cost Containment Systems, Inc., a healthcare software company, which was subsequently merged with Serving Software, Inc. Mr. Anderson served as a director of Serving Software from 1992, when it became a public company, until it was acquired by HBO & Company in 1994. William W. Shaw, III has been President of OrganicNet since February 1997 and Secretary and Treasurer since July 1996. From July 1996 to June 1999, he also served as Chief Financial Officer of OrganicNet. Mr. Shaw was a consultant to the Company from October 1995 to July 1996. Mr. Shaw has approximately 16 years of management experience in the healthcare industry. From February 1993 to July 1995, he was Executive Vice President, Vice President of Marketing and Research and Development for Aesculap, Inc., a surgical products company and wholly owned subsidiary of Aesculap AG. From 1983 to February 1993, Mr. Shaw held several other positions at Aesculap including Chief Operating Officer, Vice President Finance, Treasurer and Controller. From 1980 to 1983, Mr. Shaw was an Audit Supervisor with Coopers & Lybrand. William H. Matthews has been the Chief Financial Officer of OrganicNet since June 1999. He joined OrganicNet in February 1999 as a financial and accounting consultant. From October 1994 to February 1999, Mr. Matthews was the Chief Financial Officer for Imagicast, Inc., formerly Telescan Systems, Inc., a developer of software and hardware for interactive retail point of sale applications. From 1993 to 1994, Mr. Matthews served as the controller for Ravenswood Winery. From 1988 to 1992, Mr. Matthews was the Chief Financial Officer for Ocean Colony Partners, a real estate development firm. From 1981 to 1987, Mr. Matthews held financial management positions for various companies. From 1977 to 1981, he was a Senior Auditor for Coopers & Lybrand. Robert L. Anderson co-founded OrganicNet in January 1995 and has been Senior Vice President of OrganicNet since January 1996. He has served as a director since inception. Mr. Anderson has approximately 20 years of experience in the development of solutions for complex project and program management engagements. From August 1993 to October 1994, he served as Director of Practice Development of BSW Advanced Technology, Inc., an object-oriented project management software company. 47 Michael J. Barry joined OrganicNet as Chief Information Officer in January 1996. Mr. Barry has approximately 20 years of software development experience. From June 1993 to January 1996, he served as Vice President of Research and Development at Velocity Healthcare Informatics, Inc. From 1991 to 1993, Mr. Barry served as the Information Systems Manager for the Carlson Companies, Inc., a relationship marketing company. From 1985 to 1991, he was an independent software consultant. David W. McComb co-founded OrganicNet in January 1995. He has been Vice President of Research and Development and a director since June 1995. Mr. McComb has approximately 20 years of experience in software project management. From 1989 to 1994, he was President of First Principles, Inc., which he founded to develop an object-oriented business application framework. First Principles was acquired by OrganicNet in April 1996. From June 1993 to January 1995, Mr. McComb also served as Vice President of Research and Development for BSW Advanced Technology, where he developed object-oriented project management systems. From 1976 to 1989, he managed client software projects at Andersen Consulting. He is a frequent lecturer for systems development groups and has published numerous articles on the subject of systems development. Michael E. Meisel was appointed Chief Sales Officer of the Company in February 1999. Since 1987, Mr. Meisel has served as the President of Res-Q, Inc., formerly MMS, Inc., which became a wholly owned subsidiary of OrganicNet in May 1997. Mr. Meisel has approximately 20 years of experience in healthcare systems product development. M. Jan Roughan has been a director of OrganicNet since December 1998. She joined OrganicNet as the President and Chief Executive Officer of L.I.N.C., Inc. in connection with OrganicNet's acquisition of L.I.N.C. in June 1997. Ms. Roughan founded L.I.N.C. in 1987. From 1982 to 1987, she worked for the Equitable Life Assurance Society in various capacities including Vice President and Business Manager. Ms. Roughan is a Registered Nurse, a Certified Disability Management Specialist, a Certified Rehabilitation Registered Nurse, a Certified Case Manager and a Certified Developmental Disabilities Nurse. Robert S. Garvie has been a director of OrganicNet since March 1996. Mr. Garvie has served as a director for various private companies in the medical device and healthcare industries. In 1993, Mr. Garvie founded ArthroCare, a medical device company. From 1992 to 1993, Mr. Garvie served as the Vice President of Sales and Marketing for Citation Caliber, Inc., a diagnostic medical device company. From 1991 to 1992, Mr. Garvie was a consultant for Shaw Medical Management Group, an electrosurgical products company. From 1986 to 1991, Mr. Garvie served as Vice President, Surgical Products Division for Haemonetics, a medical device company. Prior to Haemonetics, Mr. Garvie co- founded Cost Containment Systems, Inc., a healthcare software company. Gail E. Oldfather has been a director of OrganicNet since October 1995. Since 1985, Mr. Oldfather has held various positions for GEO Communications, a financial consulting company. Mr. Oldfather is currently the President of GEO Communications. Michael A. Wilson has been a director of OrganicNet since March 1998. He is currently an independent healthcare consultant. From September 1997 to July 1999, he was President and Chief Executive Officer of the CHW Medical Foundation in San Francisco, a division of Catholic Healthcare West. Before joining CHW in September 1997, Mr. Wilson served for eight years as President and Chief Administrative Officer of the Dean Medical Clinic in Madison, Wisconsin. He is also a former president of the Medical Group Management Association and is a member of the board of directors of Physician Insurance Company of Wisconsin. Board Composition The board of directors currently consists of seven members. OrganicNet's Amended and Restated Certificate of Incorporation, as in effect immediately prior to the consummation of this offering, divides the board of directors into three classes. The members of each class of directors serve for staggered three-year terms. The board of directors is composed of (1) two Class II directors, Messrs. Robert S. Garvie and Gail E. 48 Oldfather, whose terms expire upon the election and qualification of directors at the annual meeting of stockholders to be held in 1999; (2) three Class I directors, Messrs. Jack D. Anderson, Robert L. Anderson and David W. McComb, whose terms expire upon the election and qualification of directors at the annual meeting of stockholders to be held in 2000; and (3) two Class III directors, Mr. Michael A. Wilson and Ms. M. Jan Roughan, whose terms expire upon the election and qualification of directors at the annual meeting of stockholders to be held in 2001. Pursuant to our agreement with Superior Consultant Holdings Corporation, Superior has the right to appoint a member to our board of directors prior to this offering. Our executive officers are appointed by the board of directors and serve until their successors are qualified and appointed. There are no family relationships among any of our directors or executive officers. Director Compensation Directors who are also executive officers do not receive additional compensation for serving on the board or any board committee. Directors are reimbursed for reasonable travel expenses incurred in attending meetings. There are no formal arrangements for compensating non-employee directors. We have compensated non-employee directors with stock options for their service on the board. In December 1996, Robert S. Garvie received an option to purchase 10,000 shares of common stock at an exercise price of $.50 per share and Gail E. Oldfather received an option to purchase 18,000 shares of common stock at an exercise price of $.50 per share. In March 1998, Mr. Garvie and Mr. Oldfather each received options to purchase 4,500 shares of common stock at an exercise price of $1.50 per share. All of Mr. Garvie's and Mr. Oldfather's options are fully vested. Michael A. Wilson received an option in March 1998 to purchase 2,500 shares of common stock at an exercise price of $1.50, half of which are fully vested. In addition, the following directors received the following options to purchase common stock in consideration for granting bridge loans to us: . In October 1998, Robert S. Garvie received an option to purchase 1,000 shares of common stock at an exercise price of $2.00 per share; . In October 1998, Gail E. Oldfather received an option to purchase 1,200 shares of common stock at an exercise price of $2.00 per share; and . In December 1998, Gail E. Oldfather received an option to purchase 1,000 shares of common stock at an exercise price of $2.00 per share. See "Certain Relationships and Related Transactions" for a description of these bridge loans. Committees of the Board Of Directors In September 1999, the board of directors established an audit committee to review our internal accounting procedures and consult with, and review the services provided by, our independent auditors. The audit committee currently consists of Messrs. Oldfather, McComb and Wilson. In July 1997, the board of directors established a compensation committee. The compensation committee reviews and recommends to the board the compensation and benefits of all of our executive officers and establishes and reviews general policies relating to compensation and benefits of our employees and its subsidiaries. The compensation committee currently consists of Messrs. Garvie, Oldfather and Shaw. Compensation Committee Interlocks and Insider Participation Prior to July 1997, we did not have a separate compensation committee or other board committee performing equivalent functions. These functions were performed by Jack D. Anderson and William W. Shaw, III. No interlocking relationships exist between our board of directors or compensation committee and the board of directors or compensation committee of any other company, nor has any other interlocking relationship existed in the past. 49 Executive Compensation The following table sets forth the total compensation for services rendered by our Chief Executive Officer and each of our seven other most highly compensated executive officers including Ms. Roughan, who is an executive officer of one of our wholly owned subsidiaries during the fiscal year ended December 31, 1998. These individuals are referred to as the "named executive officers." The titles listed below are the titles of the named executive officers as of September 30, 1999. William H. Matthews joined OrganicNet in June 1999 and will be compensated at an annual base salary of $125,000 during the fiscal year ending on December 31, 1999. Summary Compensation Table
Long-Term Annual Compensation Compensation ------------------------ ---------------------- Securities Name and Principal Position Salary Bonus Underlying Options (#) - --------------------------- ---------- --------- ---------------------- Jack D. Anderson, Chairman of the Board and Chief Executive Officer....................... $ 120,000 (1) $ -- -- William W. Shaw, III, President, Secretary and Treasurer..................... 120,000 (1) -- 10,000 William H. Matthews, Chief Financial Officer............. -- -- -- Robert L. Anderson, Senior Vice President..................... 120,000 (1) -- -- Michael J. Barry, Chief Information Officer........... 120,000 (1) -- 10,000 David W. McComb, Vice President, Research and Development................... 120,000 (2) -- -- Michael E. Meisel, Chief Sales Officer; President and CEO of Res-Q, Inc.................... 150,000 (3) 11,877 5,000 M. Jan Roughan, President and Chief Executive Officer of L.I.N.C., Inc................. 175,000 12,472 --
- -------- (1) Includes $85,000 of salary accrued during fiscal year 1998 but has not yet been paid. (2) Includes $40,000 of salary accrued during fiscal year 1998 but has not yet been paid. (3) Includes $12,000 of salary accrued during fiscal year 1998 but has not yet been paid. 50 Option Grants in Last Fiscal Year and the Six Months Ended June 30, 1999 The following table sets forth grants of stock options to each of the named executive officers during the fiscal year ended December 31, 1998. The potential realizable value is calculated by assuming that the initial public offering price appreciates at the indicated rate for the entire term of the option and that the option is exercised at the exercise price on the last day at the appreciated price. The 5% and 10% assumed annual rates of stock price appreciation are mandated by the rules of the Securities and Exchange Commission and do not represent our estimate or projection of future common stock prices.
Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Individual Grants Option Term (2) ---------------------------------------------------- --------------------- Number of Percent of Securities Total Options Underlying Granted to Options Employees in Expiration Name Granted Fiscal Year (1) Exercise Price Date 5% 10% - ---- ---------- --------------- -------------- ---------- ---------- ---------- Jack D. Anderson........ -- -- -- -- -- -- William W. Shaw, III.... 5,000 1.26% $1.50 01/13/08 $ 37,294 $ 63,826 5,000 1.26% 2.00 09/25/08 $ 34,794 $ 61,326 William H. Matthews..... -- -- -- -- -- -- Robert L. Anderson...... -- -- -- -- -- -- Michael J. Barry........ 5,000 1.26% 1.50 01/13/08 $ 37,294 $ 63,826 5,000 1.26% 2.00 09/25/08 $ 34,794 $ 61,326 David W. McComb......... -- -- -- -- -- -- Michael E. Meisel....... 5,000 1.26% 1.50 01/13/08 $ 37,294 $ 63,826 M. Jan Roughan.......... -- -- -- -- -- --
- -------- (1) In 1998, we granted options to purchase an aggregate of 398,183 shares of common stock. (2) The potential realizable value is calculated by assuming that the initial public offering price of $5.50 per share appreciates at the indicated rate for the entire term of the option and that the option is exercised at the exercise price and sold on the last day of its term at the appreciated price. The potential realizable value computation is net of the applicable exercise price, but does not take into account applicable federal or state income tax consequences and other expenses of option exercises or sales of appreciated stock. The values shown do not consider non-transferability or termination of the options upon termination of such employee's employment with OrganicNet. The following table sets forth option grants to the named executive officers for the time period of January 1, 1999 to June 30, 1999.
Individual Grants ----------------------------------- Number of Securities Underlying Options Name Granted Exercise Price Expiration Date - ---- -------------------- -------------- --------------- Jack D. Anderson............ -- -- -- William W. Shaw, III........ 7,500 $2.00 03/02/09 William H. Matthews......... 4,000 2.50 04/21/09 2,465 2.50 06/22/09 90,000 2.50 06/22/09 Robert L. Anderson.......... -- -- -- Michael J. Barry............ 7,500 2.00 03/02/09 David W. McComb............. -- -- -- Michael E. Meisel........... 4,000 2.00 03/02/09 M. Jan Roughan.............. 3,500 2.00 03/02/09
51 Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values The following table sets forth summary information with respect to exercisable and unexercisable stock options held as of December 31, 1998 by each of the named executive officers and with respect to the fiscal year ended December 31, 1998. None of the named executive officers exercised options in the fiscal year ended December 31, 1998.
Number of Securities Underlying Value of Unexercised Unexercised Options In-the-Money Options at at December 31, 1998 December 31, 1998 (2) ----------------------------- ------------------------- Name Exercisable (1) Unexercisable Exercisable Unexercisable - ---- --------------- ------------- ----------- ------------- Jack D. Anderson........ -- -- -- -- William W. Shaw, III.... 171,666 88,334 $850,830 $436,670 William H. Matthews..... -- -- -- -- Robert L. Anderson...... -- -- -- -- Michael J. Barry........ 171,666 88,334 $850,830 $436,670 David W. McComb......... -- -- -- -- Michael E. Meisel....... -- 5,000 -- $ 20,000 M. Jan Roughan.......... -- -- -- --
- -------- (1) Exercisable refers to those options which will be vested and exercisable immediately upon completion of this offering, while "unexercisable" refers to those options which will be unvested at such time. (2) Value is determined by subtracting the exercise price from the fair market value of the common stock based on an assumed initial public offering price of $5.50, multiplied by the number of shares underlying the options. Employment Agreements and Change of Control Arrangements Jack D. Anderson entered into an employment agreement with OrganicNet on January 1, 1996. Mr. Anderson's employment agreement provides that it may be terminated with or without cause and with or without notice at any time by either Mr. Anderson or the company. Under the terms of his employment agreement, Mr. Anderson receives a base salary of $120,000, subject to change at the sole discretion of the board of directors. In addition, the board of directors, or a duly appointed committee thereof will, no less than once annually, determine if the award of a bonus is warranted and the amount of such bonus, if any. If we terminate Mr. Anderson's employment without cause or if Mr. Anderson resigns for good reason, upon a change of control or due to disability or death, he would be entitled to receive his then existing base salary for a period of 18 months from the date of termination. In addition, Mr. Anderson would be entitled to his annual bonus, prorated to his date of termination, and immediate and full vesting of all outstanding stock options granted through any termination date. The terms of Mr. Anderson's employment agreement also provide that Mr. Anderson will not, during the course of his employment and the 18 months following the date of the termination of his employment with us: (1) engage or otherwise have a financial interest in any business activity which is in competition with us or (2) solicit our employees. William W. Shaw, III entered into an employment agreement with OrganicNet on June 1, 1996. Mr. Shaw's employment agreement provides that it may be terminated with or without cause and with or without notice at any time by either Mr. Shaw or the company. Under the terms of his employment agreement, Mr. Shaw receives a base salary of $120,000, subject to change at the sole discretion of the board of directors. In addition, the board of directors, or a duly appointed committee thereof will, no less than once annually, determine if the award of a bonus is warranted and the amount of such bonus, if any. Pursuant to his employment agreement, we issued Mr. Shaw options to purchase up to 250,000 shares of our common stock and he is eligible for future issuances at the discretion of the board of directors. If we terminate Mr. Shaw's employment without cause or if Mr. Shaw resigns for good reason, upon a change of control or due to disability or death, he would be entitled to receive his then existing base salary for a period of 18 months from the date of termination. In addition, Mr. Shaw would be entitled to his annual bonus, including the cash value of shares issued, prorated to his date of termination, and immediate and full vesting of all outstanding stock 52 options granted through the termination date. The terms of Mr. Shaw's employment agreement also provide that Mr. Shaw will not, during the course of his employment and the 18 months following the date of the termination of his employment with us: (1) engage or otherwise have a financial interest in any business activity which is in competition with us or (2) solicit our employees. William H. Matthews entered into an employment agreement with OrganicNet on June 17, 1999. Mr. Matthew's employment agreement provides that it may be terminated with or without cause and with or without notice at any time by either Mr. Matthews or the company. Under the terms of his employment agreement, Mr. Matthews receives a base salary of $125,000 which will be adjusted by the compensation committee within 45 days of the closing of this offering to an amount that represents a market range salary for a public company of our size and in our industry. Pursuant to his employment agreement, we issued to Mr. Matthews options to purchase up to 90,000 shares of our common stock at an option price of $2.50 per share and he is eligible for future issuances. Upon the occurrence of a change of control before June 20, 2000, fifty percent of Mr. Matthews' remaining unvested options will vest. Should a change of control occur after June 20, 2000, all of his remaining options will vest. Robert L. Anderson entered into an employment agreement with OrganicNet on January 1, 1996. Mr. Anderson's employment agreement provides that it may be terminated with or without cause and with or without notice at any time by either Mr. Anderson or the company. Under the terms of his employment agreement, Mr. Anderson receives a base salary of $120,000, subject to change at the sole discretion of the board of directors. In addition, the board of directors, or a duly appointed committee thereof will, no less than once annually, determine if the award of a bonus is warranted and the amount of such bonus, if any. If we terminate Mr. Anderson's employment without cause or if Mr. Anderson resigns for good reason, upon a change of control or due to disability or death, he would be entitled to receive his then existing base salary for a period of 18 months from the date of termination. In addition, Mr. Anderson will be entitled to his annual bonus, including the cash value of shares issued, prorated to his date of termination, and immediate and full vesting of all outstanding stock options granted through the termination date. The terms of Mr. Anderson's employment agreement also provide that Mr. Anderson will not, during the course of his employment and the 18 months following the date of the termination of his employment with us: (1) engage or otherwise have a financial interest in any business activity which is in competition with us or (2) solicit our employees. Michael J. Barry entered into an employment agreement with OrganicNet on January 1, 1996. Mr. Barry's employment agreement provides that it may be terminated with or without cause and with or without notice at any time by either Mr. Barry or the company. Under the terms of his employment agreement, Mr. Barry receives a base salary of $120,000, subject to change at the sole discretion of the board of directors. In addition, the board of directors, or a duly appointed committee thereof will, no less than once annually, determine if the award of a bonus is warranted and the amount of such bonus, if any. Pursuant to his employment agreement, we issued to Mr. Barry options to purchase up to 250,000 shares of our common stock and he is eligible for future issuances at the discretion of the board of directors. If we terminate Mr. Barry's employment without cause or if Mr. Barry resigns for good reason, upon a change of control or due to disability or death, he would be entitled to receive his then existing base salary for a period of 18 months from the date of termination. In addition, Mr. Barry would be entitled to his annual bonus, including the cash value of shares issued, prorated to his date of termination, and immediate and full vesting of all outstanding stock options granted through the termination date. The terms of Mr. Barry's employment agreement also provide that Mr. Barry will not, during the course of his employment and the 18 months following the date of the termination of his employment with us: (1) engage or otherwise have a financial interest in any business activity which is in competition with us or (2) solicit our employees. M. Jan Roughan entered into an employment agreement with OrganicNet on January 1, 1997. Ms. Roughan's employment agreement ends on December 31, 1999. Under the terms of her employment agreement, Ms. Roughan receives a base salary of $175,000. In addition, incentive bonuses will be awarded to Ms. Roughan based upon net revenue realized from the sale of L.I.N.C., Inc. software products during the preceding year. Either OrganicNet or Ms. Roughan may terminate this agreement by giving written notice to the other party. Pursuant to the terms of her employment agreement, if Ms. Roughan is terminated for cause, as 53 specified in the agreement, or upon her death, the company is obligated to pay her base salary and benefits through the effective date of termination, or the date of her death, as applicable, plus an additional 12 months of base salary and benefits. If Ms. Roughan is terminated without cause upon a majority vote of the board of directors, she is entitled to the greater of her base salary and benefits through the term of the agreement or 12 months of her then base salary and benefits. The terms of Ms. Roughan's employment agreement also provide that she will not, during the course of her employment and the 12 months following the date of the termination of her employment with us: (1) engage or otherwise have a financial interest in any business activity which is in competition with us or (2) solicit our employees. Limitation of Liability and Indemnification Matters Our bylaws limit the personal liability of our directors to the fullest extent permitted by Delaware law. Section 145 of the Delaware General Corporation Law empowers a corporation to indemnify its directors and officers and to purchase insurance with respect to liability arising out of their capacity or status as directors and officers, provided that this provision does not eliminate or limit the liability of a director for the following: . any breach of the director's duty of loyalty to us or our stockholders; . acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; . unlawful payments of dividends or unlawful stock repurchases or redemptions; . any transaction from which the director derived an improper personal benefit; . if the officer or director did not act in good faith and in a manner reasonably believed to be in, or not opposed to, our best interests; or . with respect to any criminal action or proceeding, if the officer or director had reasonable cause to believe his conduct was unlawful. We believe that indemnification provisions under our bylaws covers at least negligence and gross negligence on the part of indemnified parties. 1997 Stock Option/Stock Issuance Plan In November 1997, the board of directors adopted, and the stockholders approved, the 1997 Stock Option/Stock Issuance Plan. An aggregate of 1,478,513 shares of common stock currently are authorized for issuance under the incentive plan and the share reserve will automatically be increased on the first business day of each calendar year by an amount equal to 2% of the total outstanding shares of common stock on the last business day of the immediately preceding calendar year. No incentive stock option may be granted on the basis of the annual share increases. When a stock award expires, is terminated before it is exercised or is cancelled, the shares set aside for that award are returned to the pool of shares available for future awards. Shares that are issued when an award is exercised and that are subsequently repurchased by us will again become available for future awards. The 1997 Plan permits the grant of options to employees, non-employee directors, and consultants and other independent advisors to the company. Options may be either ISOs within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, or nonstatutory stock options. In addition, the 1997 Plan permits the grant of stock bonuses and rights to purchase restricted stock. The 1997 Plan is administered by the board of directors. The board of directors may delegate its authority to administer the 1997 Plan to a committee of two or more board members appointed by the board of directors. The administrator has the authority to select the eligible persons to whom award grants are to be made, to designate the number of shares to be covered by each award, to determine whether an option is to be an ISO or nonstatutory stock option, to establish vesting schedules, to specify the exercise price of options and the type of consideration to be paid upon exercise and to specify other terms of awards. 54 In general, the stock options granted under the 1997 Plan may not exceed 10 years. An optionholder may not transfer a stock option other than by will or the law of descent or distribution. The exercise price for an ISO cannot be less than 100% of the fair market value of the common stock on the date of grant. The exercise price for nonstatutory stock options cannot be less than 85% of the fair market value of the common stock on the date of grant. In the event the optionholder is a 10% stockholder, then the exercise price per share shall not be less than 110% of the fair market value of common stock on the date of grant. Unless the terms of an optionholder's stock option agreement provide for earlier termination, in the event an optionholder's service relationship with us, or any affiliate of ours, ceases due to disability or death, the optionholder (or his beneficiary) may exercise any vested options up to 12 months after the date such service relationship ends. If an optionholder's relationship with us, or any affiliate of ours, ceases for any reason other than disability or death, the optionholder may (unless the terms of the stock option agreement provide for earlier termination) exercise any vested options up to three months from cessation of service. Should an optionholder's relationship with us be terminated for misconduct, then all outstanding options held by the optionholder will terminate immediately and cease to remain outstanding. ISOs may be granted only to our employees. The aggregate fair market value, determined at the time of grant, of shares of our common stock with respect to which ISOs are exercisable for the first time by an optionholder during any calendar year under all of our stock plans may not exceed $100,000. If any ISO is granted to any employee who at the time of the grant owns or is deemed to own stock possessing more than 10% of the total combined voting power of the Company or any of its affiliates, the term of the ISO award may not exceed five years from the date of grant. In the event of certain changes in control, all outstanding options under the incentive plan either may be assumed, continued or substituted for by any surviving entity. If the surviving entity determines not to assume, continue or substitute for such awards, the vesting provisions of such stock options will be accelerated and such stock options will be terminated upon the change in control if not previously exercised. The portion of any ISO accelerated by a change in control will remain exercisable as an ISO only to the extent the $100,000 limitation is not exceeded. To the extent this dollar limitation is exceeded, the accelerated portion of such option will be exercisable as a nonstatutory stock option under the Federal tax laws. Even if the surviving entity does assume or substitute outstanding stock awards, if the holder of an award is terminated other than for misconduct, or constructively terminated, within a specified period not more than 18 months following the change in control, the holder's award will vest in full. The terms of any stock bonuses or restricted stock purchase awards granted under the 1997 Plan will be determined by the administrator. However, the administrator may not impose a vesting schedule which is more restrictive than 20% per year, with initial vesting to occur no later than one year after the issuance date. Such limitation shall not apply to any common stock issuance made to officers, non-employee directors or consultants. The administrator may award stock bonuses in consideration of past services without a purchase payment. Shares sold or awarded under the 1997 Plan may be subject to repurchase by us. The purchase price of restricted stock under any restricted stock purchase agreement will not be less than 85% of the fair market value of the company's common stock on the date of grant. However, the purchase price per share of common stock for a 10% stockholder shall not be less then 110% of the fair market value on the date of grant. Upon a change in control, all outstanding repurchase rights will terminate and the shares of common stock subject to those rights will immediately vest in full, except to the extent the repurchase rights are assigned to the successor entity or such accelerated vesting is precluded by limitations imposed by the administrator at the time the repurchase right was issued. In addition, the administrator will have full and complete discretion with regard to outstanding shares to provide that repurchase rights will automatically terminate on an accelerated basis and that the shares shall immediately vest in the event the participant's relationship with the company should terminate by reason of the change in control within no more than 18 months following the effective date of the change in control. 55 The board of directors may amend or modify the 1997 Plan at any time. However, no such amendment or modification shall adversely affect the right and obligations with respect to options or unvested awards unless the participant consents to such an amendment or modification. In addition, certain amendments may require stockholder approval. As of October 31, 1999, the Company had issued and outstanding under the 1997 Plan options to purchase 989,431 shares of common stock. 1996 Stock Option/Stock Issuance On April 30, 1996, the board of directors adopted, and the stockholders approved, the 1996 Stock Option/Stock Issuance Plan. On April 22, 1997, the board of directors adopted, and on November 21, 1997, the stockholders approved, an amendment and restatement of the incentive plan. A maximum of 1,000,000 shares are authorized under the 1996 Plan. The authorized share reserve is comprised of (1) 750,000 shares originally available under the incentive plan and (2) an additional 250,000 shares of common stock authorized by the board on April 22, 1997, subject to stockholder approval. When a stock award expires, is terminated before it is exercised or is cancelled, the shares set aside for that award are returned to the pool of shares available for future awards. Awards may be granted in excess of the number of shares of common stock then available for issuance under the 1996 Plan, provided any excess shall be held in escrow until stockholder approval is obtained increasing the number of shares of common stock available for issuance. If approval is not obtained within 12 months after the issuance of the excess is made, then (1) any unexercised options granted on the basis of the excess will terminate and cease to be outstanding and (2) the company will refund the exercise or purchase price plus interest. The 1996 Plan permits the grant of options to employees, non-employee directors and consultants. Options may be either ISOs within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, or nonstatutory stock options. In addition, the 1996 Plan permits the grant of stock bonuses and rights to purchase restricted stock. The 1996 Plan is administered by the board of directors. The board of directors may delegate its authority to administer the 1996 Plan to a committee of two or more board members appointed by the board of directors. The administrator has the authority to select the eligible persons to whom award grants are to be made, to designate the number of shares to be covered by each award, to determine whether an option is to be an ISO or nonstatutory stock option, to establish vesting schedules, to specify the exercise price of options and the type of consideration to be paid upon exercise and to specify other terms of awards. In general, the stock options granted under the 1996 Plan may not exceed 10 years. An optionholder may not transfer a stock option other than by will or the law of descent or distribution. However, a nonstatutory option may be assigned in whole or in part during optionholder's lifetime in accordance with the terms of a qualified domestic relations order. The exercise price for an ISO cannot be less than 100% of the fair market value of the common stock on the date of grant. The exercise price for nonstatutory stock options cannot be less than 85% of the fair market value of the common stock on the date of grant. In the event the optionholder is a 10% stockholder, then the exercise price per share will not be less than 110% of the fair market value of common stock on the date of grant. Unless the terms of an optionholder's stock option agreement provide for earlier termination, in the event an optionholder's service relationship with us, or any affiliate of ours, ceases due to death, the optionholder's beneficiary may exercise any vested options up to 12 months after the date such service relationship ends. In the event an optionholder's service relationship with us, or any affiliate of ours, ceases due to disability, the optionholder may exercise any vested option up to six months (12 months for permanent disability) after the cessation of service. If an optionholder's relationship with us, or any affiliate of ours, ceases for any reason other than disability or death, the optionholder may (unless the terms of the stock option agreement provide for earlier termination) exercise any vested options up to three months from cessation of service. Should an 56 optionholder's relationship with us be terminated for misconduct, then all outstanding options held by the optionholder will terminate immediately and cease to remain outstanding. ISOs may be granted only to our employees. The aggregate fair market value, determined at the time of grant, of shares of our common stock with respect to which incentive stock options are exercisable for the first time by an optionholder during any calendar year under all of our stock plans may not exceed $100,000. If any ISO is granted to any employee who at, the time of the grant, owns or is deemed to own stock possessing more than 10% of the total combined voting power of the Company or any of its affiliates, the term of the ISO award may not exceed five years from the date of grant. In the event of certain changes in control, all outstanding options under the incentive plan may be assumed by any surviving entity. If the surviving entity determines not to assume the options, they will terminate and no longer be outstanding on the effective date of such change in control. The terms of any stock bonuses or restricted stock purchase awards granted under the 1996 Plan will be determined by the administrator. However, the administrator may not impose a vesting schedule which is more restrictive than 20% per year, with initial vesting to occur no later than one year after the issuance date. Such limitation shall not apply to any common stock issuance made to officers, non-employee directors or consultants. The administrator may award stock bonuses in consideration of past services without a purchase payment. Shares sold or awarded under the 1996 Plan may be subject to repurchase by the company. The purchase price of restricted stock under any restricted stock purchase agreement will not be less than 85% of the fair market value of the company's common stock on the date of grant. However, the purchase price per share of common stock for a 10% stockholder will not be less then 110% of the fair market value on the date of grant. Upon a change in control, all outstanding repurchase rights will terminate to the extent the surviving entity does not accept the assignment of the repurchase rights. The board of directors may amend or modify the 1996 Plan at any time. However, no such amendment or modification shall adversely affect the right and obligations with respect to options or unvested awards unless the participant consents to such an amendment or modification. In addition, the board of directors will not without the approval of the stockholders (1) increase the maximum number of shares issuable under the 1996 Plan (except for permissible adjustments in the event of certain changes in the Company's capitalization), (2) materially modify the eligibility requirements for participation or (3) materially increase the benefits accruing to participants. As of October 31, 1999, the Company had issued and outstanding under the 1996 Plan options to purchase 820,318 shares of common stock. 401(k) Plan We sponsor a 401(k) plan, a defined contribution plan intended to qualify under Section 401 of the Internal Revenue Code of 1986, as amended. All employees who exceed 20 hours per week and 1,000 hours per year and who complete one month of service are eligible to participate. Participants may make pre-tax contributions to the 401(k) plan of up to 20% of their eligible earnings, subject to a statutorily prescribed annual limit ($10,000 in calendar year 1999). Under the 401(k) plan, each employee is fully vested in his or her deferred salary contributions. Employee contributions are held and invested by the 401(k) plan's trustee. The 401(k) plan also permits us to make matching contributions and profit-sharing contributions, subject to established limits. Each participant's contributions and the corresponding investment earnings are generally not taxable to the participants until withdrawn. Individual participants may direct the trustee to invest their accounts in authorized investment alternatives. 57 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Since January 1, 1998, some of our directors, executive officers and affiliates have entered into transactions with us as follows: Purchase Of Capital Stock
Number of Shares of Common Stock Issuable After Conversion Date of Number of of Preferred Name Purchase Type of Security Price per Share Shares Stock(5) - ---- -------- ------------------------ --------------- --------- ------------ Jack D. Anderson (1).... 08/10/99 Series C Preferred Stock $2.75 51,789 51,789 William H. Matthews..... 04/17/98 Series C Preferred Stock 2.75 10,909 10,909 01/06/99 Series C Preferred Stock 2.75 7,143 7,143 06/30/99 Series C Preferred Stock 2.75 5,000 5,000 08/02/99 Series C Preferred Stock 2.75 20,000 20,000 Michael E. Meisel....... 04/01/99 Series C Preferred Stock 2.75 5,000 5,000 Robert S. Garvie (2).... 02/19/99 Series C Preferred Stock 2.75 31,110 31,110 04/05/99 Common Stock (4) 0.50 10,000 -- 04/05/99 Common Stock (4) 1.50 4,500 -- 04/05/99 Common Stock (4) 2.00 1,000 -- 04/05/99 Series C Preferred Stock 2.75 11,581 11,581 08/05/99 Series C Preferred Stock 2.75 36,363 36,363 Gail E. Oldfather (3)... 03/10/98 Series C Preferred Stock 2.75 17,945 17,945 11/25/98 Series C Preferred Stock 2.75 29,753 29,753 12/28/98 Series C Preferred Stock 2.75 1,800 1,800 03/31/99 Series C Preferred Stock 2.75 10,000 10,000 07/20/99 Series C Preferred Stock 2.75 75,000 75,000
- -------- (1) Includes shares purchased on behalf of Mr. Anderson's spouse. (2) Includes shares purchased by Omeah Ltd. Partnership. Mr. Garvie is a General Partner of Omeah Ltd. Partnership. (3) Includes shares purchased on behalf of Mr. Oldfather's spouse and relatives. (4) Shares purchased pursuant to the exercise of stock options. (5) The shares of the Company's Preferred Stock will convert into shares of common stock on a one-to-one basis effective upon the closing of this offering. 58 Since January 1, 1998, we have granted options to purchase common stock to some of our directors, executive officers and affiliates as follows: Issuance Of Stock Options
Name Date Granted Exercise Price Options - ---- ------------ -------------- ------- William W. Shaw, III........................ 01/13/98 $1.50 5,000 09/25/98 2.00 5,000 03/02/99 2.00 7,500 08/06/99 2.50 10,000 William E. Matthews......................... 04/21/99 2.50 4,000 06/22/99 2.50 2,465 06/22/99 2.50 90,000 Michael J. Barry............................ 01/13/98 1.50 5,000 09/25/98 2.00 5,000 03/02/99 2.00 7,500 08/06/99 2.50 10,000 Michael E. Meisel........................... 01/13/98 1.50 5,000 03/02/99 2.00 4,000 M. Jan Roughan.............................. 03/02/99 2.00 3,500 Robert S. Garvie............................ 03/12/98 1.50 2,500 03/12/98 1.50 2,000 10/29/98 2.00 1,000 Gail E. Oldfather........................... 03/12/98 1.50 2,500 03/12/98 1.50 2,000 10/29/98 2.00 1,200 12/10/98 2.00 1,000 08/06/99 2.50 27,000 Michael A. Wilson........................... 03/12/98 1.50 2,500
Lock-Up Agreements Each of the individuals listed above have entered into lock-up agreements pursuant to which they have agreed not to, directly or indirectly, offer, sell, offer to sell, contract to sell, pledge, grant any option to purchase or otherwise sell or dispose of any shares of common stock, preferred stock or any substantially similar securities or securities convertible into or exchangeable or exercisable for shares of common stock, preferred stock or any substantially similar securities for a period of 180 days from the date of this prospectus without the prior written consent of the underwriter. The underwriter may, at any time and without notice, waive the terms of these lock-up agreements. ASP Agreement with Conxion Corporation We have entered into several agreements with Conxion Corporation under which Conxion supplies us with application hosting services and Internet infrastructure for our ASP software solutions. In connection with these agreements, Conxion invested $550,000 in our Series C preferred stock. See "Business--Strategic Relationships and Alliances" for a description of these agreements. Loan From Jack D. Anderson and Peggy L. Anderson to OrganicNet On September 30, 1997, Mr. and Mrs. Anderson loaned $60,000 to us at an interest rate of 6.5% per annum. As of September 30, 1999, the Company has repaid a total of approximately $56,371 of the loan, approximately $31,453 of which was repaid in cash and approximately $24,917 of which was repaid in the form of 9,060 shares of Series C preferred stock. The remaining balance on this loan is approximately $11,057. 59 Agreement with Superior Consultant Holdings Corporation We entered into a marketing alliance with Superior Consultant Holdings Corporation in September 1999, under which Superior will introduce, promote and demonstrate our ASP software solutions. Pursuant to this agreement, we granted Superior an option to purchase 200,000 shares of our common stock at an exercise price of $6.00 per share. See "Business--Strategic Relationships and Alliances" for a description of this agreement. Indemnity and Subrogation Agreement between Michael E. Meisel and OrganicNet On January 1, 1998, Michael E. Meisel entered into an Indemnity and Subrogation Agreement with us in connection with a line of credit agreement between our wholly owned subsidiary Res-Q, Inc. (formerly MMS, Inc.) and Wells Fargo Bank. This line of credit was assigned to and assumed by us upon the acquisition of MMS, Inc. In connection with this line of credit, Mr. Meisel provided a personal guaranty. OrganicNet agreed to indemnify Mr. Meisel for a maximum amount of $200,000, the current amount of Mr. Meisel's guaranty plus accrued interest, for any deficiency in repayment that he may suffer after making a claim for reimbursement from the principal borrower. Promissory Note dated April 1, 1999 between Michael E. Meisel and OrganicNet In connection with our acquisition of Res-Q, Inc. (formerly MMS, Inc.), OrganicNet and Mr. Meisel executed two $50,000 promissory notes on April 4, 1997 and December 1, 1997, respectively. These notes were consolidated on April 1, 1999. Under this consolidated promissory note, we are obligated to pay Mr. Meisel $105,187, plus interest at the rate of 10% per annum, compounded monthly. This note becomes due and payable on December 31, 1999 and can be prepaid at any time in whole or in part without premium or penalty. As of September 30, 1999, the outstanding balance of this note was $104,270. In August 1999, we repaid $5,000 of this note. We will repay the entire outstanding balance of this note from the proceeds of this offering. Line of Credit Agreement between First National Bank and Jack D. Anderson, David W. McComb and Robert L. Anderson On October 28, 1997, First National Bank extended a line of credit in the amount of $100,000 to three of our executive officers and directors, Jack D. Anderson, David W. McComb and Robert L. Anderson. The terms of the line of credit are for a term for one year at a variable rate of interest, currently 10%. The line of credit has been extended to September 30, 2000. Messrs. Anderson, McComb and Anderson have borrowed $100,000 under this line of credit for our benefit. We have assumed the obligation to repay this loan. Messrs. Anderson, McComb and Anderson have executed promissory notes with First National Bank and have personally guaranteed this loan. Promissory Notes dated June 1, 1997 and December 1, 1997 between M. Jan Roughan and OrganicNet In connection with our acquisition of L.I.N.C., Inc. on June 23, 1997, OrganicNet and Ms. Roughan executed two promissory notes in the amount of $50,000 each on June 1, 1997 and December 1, 1997. As of September 30, 1999, the total balance of these notes was $116,610. In August 1999, we repaid a total of $5,000 of these notes. We will repay the entire outstanding balance of these notes from the proceeds of this offering. Promissory Note dated October 2, 1998 between Robert S. Garvie and OrganicNet On October 2, 1998, Mr. Garvie loaned us $20,000 at an interest rate of 12% per annum. As consideration for this loan, we granted Mr. Garvie options to purchase 1,000 shares of common stock at an exercise price of $2.00 per share. We have repaid this loan. Promissory Note dated November 25, 1998 between Gail B. Oldfather and OrganicNet On November 25, 1998, Mr. Oldfather loaned us $20,000 at an interest rate of 12% per annum. As consideration for this loan, we granted Mr. Oldfather options to purchase 1,000 shares of common stock at an exercise price of $2.00 per share. We have repaid this loan. 60 Promissory Note dated October 19, 1998 between Gail B. Oldfather and OrganicNet On October 19, 1998, Mr. Oldfather loaned us $24,000 at an interest rate of 12% per annum. As consideration for this loan, we granted Mr. Oldfather options to purchase 1,200 shares of common stock at an exercise price of $2.00 per share. We have repaid this loan. Other Related Party Transactions We have entered into an employment agreement with William H. Matthews, a named executive officer. See "Management--Employment Agreements and Change of Control Arrangements." Indemnification Agreements We intend to enter into indemnification agreements with our officers and directors containing provisions that require us, among other things, to indemnify our officers and directors against certain liabilities that may arise by reason of their status or service as officers or directors, other than liabilities arising from willful misconduct of a culpable nature, and to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified. We believe that all transactions described in this section "Certain Relationships and Related Transactions" were made on terms no less favorable to us than would have been obtained from unaffiliated third parties. All future transactions, if any, with our executive officers, directors and affiliates will be on terms no less favorable to us than could be obtained from unrelated third parties and will be approved by a majority of the board of directors and by a majority of the disinterested members of the board of directors. 61 PRINCIPAL STOCKHOLDERS The following table sets forth information with respect to beneficial ownership of our common stock as of October 31, 1999 and as adjusted to reflect the sale of common stock offered by us pursuant to this offering. The following table lists: . each person known by us to beneficially own more than 5% of our outstanding common stock; . each director; . each named executive officer; and . all directors and executive officers as a group. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and includes voting or investment power with respect to the securities. The address for each listed director and officer is OrganicNet, Inc., 330 Townsend Street, Suite 206, San Francisco, California, 94107-1630. Except as indicated by footnote, and subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. The number of shares of common stock outstanding used in calculating the percentage for each listed person includes the shares of common stock underlying options that are exercisable within 60 days of October 31, 1999, but excludes shares of common stock underlying options held by any other persons. Percentage of beneficial ownership prior to the offering is based on 13,802,514 shares of common stock outstanding as of October 31, 1999 after giving effect to the conversion of our currently outstanding preferred stock. Percentage of beneficial ownership after the offering is based on 18,302,514 shares outstanding after the offering.
Percentage of Shares Shares Beneficially Owned Beneficially -------------------------------- Name of Beneficial Owner Owned Prior to Offering After Offering - ------------------------ ------------ ----------------- -------------- Jack D. Anderson............ 2,287,813 (1) 16.57% 12.50% William W. Shaw, III........ 343,889 (2) 2.44% 1.85% William H. Matthews......... 90,160 (3) * * Robert L. Anderson.......... 1,353,986 (4) 9.81% 7.40% Michael J. Barry............ 330,505 (5) 2.35% 1.78% David W. McComb............. 923,139 (6) 6.69% 5.04% Michael E. Meisel........... 517,658 (7) 3.75% 2.83% M. Jan Roughan.............. 260,233 1.88% 1.42% Robert S. Garvie............ 236,904 (8) 1.72% 1.29% Gail E. Oldfather........... 701,812 (9) 5.06% 3.82% Michael A. Wilson........... 2,500 (10) * * All directors and executive officers as a group (11 persons)................... 7,048,599 (11) 48.94% 37.30%
- -------- * Represents beneficial ownership of less than one percent of the common stock. (1) Includes 228,170 shares of common stock owned by Mr. Anderson's spouse and held in trust for the benefit of Mr. Anderson and his spouse. (2) Includes 266,667 shares of common stock beneficially owned as a result of options that become exercisable within 60 days of October 31, 1999. (3) Includes 6,465 shares of common stock beneficially owned as a result of options that become exercisable within 60 days of October 31, 1999. (4) Includes 46,000 shares of common stock owned by Mr. Anderson's spouse and children and held in trust for the benefit of Mr. Anderson's children. (5) Includes 266,667 shares of common stock beneficially owned as a result of options that become exercisable within 60 days of October 31, 1999. (6) Includes 28,652 shares of common stock owned by Mr. McComb's spouse. 62 (7) Includes 213,966 shares of common stock owned by Mr. Meisel's spouse and held in trusts established for the benefit of Mr. Meisel's children, and 1,667 shares of common stock beneficially owned as a result of options that become exercisable within 60 days of October 31, 1999. (8) Includes 3,636 shares of common stock held in trust for the benefit of Mr. Garvie's family and 233,268 shares owned by Omeah Ltd. Partnership. Mr. Garvie is a General Partner of Omeah Ltd. Partnership. (9) Includes 367,112 shares held in trusts established for the benefit of Mr. Oldfather's family, and 51,700 shares of common stock beneficially owned as a result of options that become exercisable within 60 days of October 31, 1999. (10) Includes 2,500 shares of common stock beneficially owned as a result of options that become exercisable within 60 days of October 31, 1999. (11) Includes shares described in the notes above, as applicable. 63 DESCRIPTION OF CAPITAL STOCK Following the closing of the sale of the shares offered by this prospectus, our authorized capital stock will consist of shares of common stock, $0.001 par value, and shares of preferred stock, $0.01 par value. Common Stock As of October 31, 1999, there were 13,802,514 shares of common stock outstanding held of record by approximately 460 stockholders, on an as- converted basis. There will be 18,302,514 shares of common stock outstanding after giving effect to the sale of the shares of common stock offered in this prospectus. This number assumes no exercise of the underwriter's over-allotment option and no exercise of options after October 31, 1999. The holders of common stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders. Subject to preferences that may be applicable to any outstanding shares of preferred stock, the holders of common stock are entitled to receive ratably such dividends as may be declared by the board of directors out of legally available funds. In the event of our liquidation, dissolution or winding up, holders of the common stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preferences of any outstanding shares of preferred stock. Holders of common stock have no preemptive rights or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of common stock are, and all shares of common stock to be outstanding upon completion of this offering will be, fully paid and nonassessable. Preferred Stock Effective upon the closing of this offering, we will be authorized to issue shares of undesignated preferred stock. Our board of directors will have the authority to issue the undesignated preferred stock in one or more series and to determine the powers, preferences and rights and the qualifications, limitations or restrictions granted to or imposed upon any wholly unissued series of undesignated preferred stock and to fix the number of shares constituting any series and the designation of such series, without any further vote or action by the stockholders. The issuance of preferred stock may have the effect of delaying, deferring or preventing any change in control may adversely affect the voting and other rights of holders of common stock, and the likelihood that the holders will receive dividend payments and payments upon liquidation. At present, we have no plans to issue any shares of preferred stock. Registration Rights The Amended and Restated Investor Rights Agreement dated October 31, 1997, provides holders of the preferred stock rights to register shares of our capital stock. At any time after the later of six months after the effective date of the first registration statement that we file under the Securities Act or December 31, 2001, holders of a majority of the registrable securities, as defined in the Investor Rights Agreement, may require us to effect registration under the Securities Act of their Registrable Securities, subject to the board of directors' right to defer the registration for a period of up to 120 days. The investors also have the right, upon demand made by 25% of the holders of registrable securities, to cause us to register their securities on Form S-3 when it becomes available to us if they propose to register securities having a value of at least $1 million. In addition, if we propose to register securities under the Securities Act, other than registrations on Form S-4 or Form S-8, then any of the investors has a right, subject to quantity limitations, as determined by the underwriter if the offering is underwritten to request that we register such holder's registrable securities. We will bear all registration expenses incurred in connection with registrations. We have agreed to indemnify the investors against liabilities related to the accuracy of the registration statement used in connection with any registration effected pursuant to the foregoing. 64 Effect of Selected Provisions of the Certificate of Incorporation and Bylaws, and the Delaware Anti-takeover Statute Amended and Restated Certificate of Incorporation and Bylaws Upon the closing of this offering, our amended and restated certificate of incorporation will provide that our board of directors be classified into three classes of directors and all stockholder action must be effected at a duly called meeting of stockholders and not by a consent in writing. The amended and restated certificate of incorporation and bylaws provide that only our Chief Executive Officer, the Chairman of the board of directors or a majority of the members of the board of directors may call a special meeting of the stockholders. Directors may not be removed without cause. The amended and restated bylaws establish procedures including advance notice with regard to the nomination of directors and stockholder proposals. These provisions of the amended and restated certificate of incorporation and bylaws could discourage potential acquisition proposals and could delay or prevent a change in control. These provisions also may have the effect of preventing changes in our management. The board of directors has authority to issue up to shares of preferred stock and to fix the rights, preferences, privileges and restrictions, including voting rights, of these shares without any further vote or action by the stockholders. The rights of the holders of the common stock will be subject to, and may be harmed by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock, thereby delaying, deferring or preventing a change in control. Delaware Takeover Statute We are subject to Section 203 of the Delaware General Corporation Law, which, subject to certain exceptions, prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested stockholder, unless: . prior to that date, the board of directors of the corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; . upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned: . by persons who are directors and also officers; and . by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or . on or subsequent to that date, the business combination is approved by the board of directors of the corporation and authorized at an annual or special meeting of stockholders and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock that is not owned by the interested stockholder. Section 203 defines "business combination" to include the following: . any merger or consolidation involving the corporation and the interested stockholder; . any sale, transfer, plan or other disposition of 10% or more of the assets of the corporation involving the interested stockholder; 65 . subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; . any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; and . the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by any of these entities or persons. Transfer Agent and Registrar The transfer agent and registrar for the common stock is LaSalle Bank N.A. Listing We have applied for our common stock to be quoted on the Nasdaq National Market under the trading symbol "OGNT." 66 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no public market for our common stock. The market price of our common stock could drop due to sales of a large number of shares of our common stock or the perception that such sales could occur. These factors could also make it more difficult to raise funds through future offerings of common stock. After this offering, 18,302,514 shares of common stock will be outstanding, 18,977,514 shares if the underwriter exercises its over-allotment options in full. Of these shares, the 4,500,000 shares sold in this offering, 5,175,000 shares if the underwriter's over-allotment options are exercised in full, will be freely tradable without restriction under the Securities Act except for shares purchased by our "affiliates" as defined in Rule 144 under the Securities Act. The remaining 13,802,514 shares are "restricted securities" within the meaning of Rule 144 under the Securities Act. The restricted securities generally may not be sold unless they are registered under the Securities Act or are sold pursuant to an exemption from registration, such as the exemption provided by Rule 144 under the Securities Act. Our officers, directors and stockholders holding shares of common stock have entered into lock-up agreements under which they have agreed not to, directly or indirectly, offer, sell, offer to sell, contract to sell, pledge, grant any option to purchase or otherwise sell or dispose of, any shares of common stock, preferred stock or any substantially similar securities or securities convertible into or exchangeable or exercisable for shares of common stock, preferred stock or any substantially similar securities for a period of 180 days after the date of this prospectus without the prior written consent of the underwriters. The underwriters do not intend to release any "affiliates" of the Company from the lock-up agreements. The underwriters will not provide notice of the release of any stockholder from a lock-up agreement. Following the lock-up period and as set forth in the chart below, these shares will be eligible for sale in the public market without registration under the Securities Act if such sales meet the applicable conditions and restrictions of Rule 144 as described above. As these restrictions on resale end, the market price of our common stock could drop significantly if the holders of these restricted shares sell them, or are perceived by the market as intending to sell them.
Date of availability for resale Number of shares into public market ---------------- ------------------------------- 180 days after the date of this prospectus due to a lock-up agreement our officers, directors and stockholders have with the underwriters. However, the underwriters can waive this restriction at any time and without notice. Between 180 and 365 days after the date of this prospectus due to the requirements of the federal securities laws.
In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, any person, or persons whose shares are aggregated, including an affiliate, who has beneficially owned shares for a period of at least one year is entitled to sell, within any three-month period, a number of shares that does not exceed the greater of: . 1% of the then-outstanding shares of common stock; and . the average weekly trading volume in the common stock during the four calendar weeks immediately preceding the date on which the notice of such sale on Form 144 is filed with the Securities and Exchange Commission. Sales under Rule 144 are also subject to provisions relating to notice and manner of sale and the availability of current public information about us. In addition, a person or persons whose shares are aggregated who has not been an affiliate of us at any time during the 90 days immediately preceding a sale, and who has beneficially owned the shares for at least two years, would be entitled to sell such shares under Rule 144(k) without regard to the volume limitation and other conditions described above. The above summary of Rule 144 is not intended to be a complete description. 67 In addition, our employees, directors, officers, advisors or consultants who were issued shares pursuant to a written compensatory plan or contract may be entitled to rely on the resale provisions of Rule 701, which permits nonaffiliates to sell their Rule 701 shares without having to comply with the public information, holding period, volume limitation or notice provisions of Rule 144, and permits affiliates to sell their Rule 701 shares without having to comply with Rule 144's holding period restrictions, in each case commencing 90 days after the date of this prospectus. As soon as practicable following the closing of this offering, we intend to file a registration statement under the Securities Act to register shares of common stock issuable upon the exercise of outstanding stock options or reserved for issuance under our stock option plans and our stock purchase plans, of which 1,234,360 shares subject to options under our stock option plans will be exercisable immediately upon the closing of this offering and an additional 13,000 shares subject to options under our stock option plans will be exercisable within 60 days of October 31, 1999. After the effective date of such registration statement, these shares will be available for sale in the open market subject to the lock-up agreements described above and, for our affiliates, to the conditions and restrictions of Rule 144. 68 UNDERWRITING We have entered into an underwriting agreement with the underwriters named below. We are obligated to sell, and the underwriters are obligated to purchase, all of the shares offered on the cover page of this prospectus, if any are purchased. Subject to certain conditions of the underwriting agreement, the underwriter has agreed to purchase the shares indicated opposite its name:
Number Underwriter of Shares - ----------- --------- Needham & Company, Inc................................................ Punk, Ziegel & Company, L.P........................................... ---- Total............................................................... ====
The underwriters may sell more shares than the total number of shares offered on the cover page of this prospectus and it has for a period of 30 days from the date of this prospectus, an over-allotment option to purchase up to 450,000 additional shares from us. If any additional shares are purchased, the underwriters will purchase the shares in the same proportion as per the table above. The underwriters have advised us that the shares will be offered to the public at the offering price indicated on the cover page of this prospectus. The underwriters may allow selected dealers a concession not in excess of $ per share and such dealers may reallow a concession not in excess of $ per share to certain other dealers. After the shares are released for sale to the public, the underwriter may change the offering price and the concessions. The underwriters have informed us that they do not intend to sell shares to any investor who has granted them discretionary authority. We have agreed to pay to the underwriters the following fees, assuming both no exercise and full exercise of the underwriters' over-allotment option to purchase additional shares:
Total Fees ------------------------------------------- Fee Without Exercise of Full Exercise of Per Share Over-Allotment Option Over-Allotment Option --------- --------------------- --------------------- Fees paid by us........... $ $ $
In addition, we estimate that we will spend approximately $ in expenses for this offering. We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, or contribute to payments that the underwriters may be required to make in respect of these liabilities. We, our officers and directors, and our stockholders have entered into lock- up agreements pursuant to which we and they have agreed not to, directly or indirectly, offer, sell, offer to sell, contract to sell, pledge, grant any option to purchase or otherwise sell or dispose of any shares of common stock, preferred stock or any substantially similar securities or securities convertible into or exchangeable or exercisable for shares of common stock, preferred stock or any substantially similar securities for a period of 180 days from the date of this prospectus without the prior written consent of the underwriters. The underwriters may, at any time and without notice, waive the terms of these lock-up agreements as specified in such agreements. Prior to this offering, there has been no public market for the common stock of OrganicNet. The initial public offering price, negotiated between OrganicNet and the underwriters, will be based upon various 69 factors such as our financial and operating history and condition, our prospects, the prospects for our industry and prevailing market conditions. The underwriters may engage in the following activities in accordance with applicable securities rules: . Over-allotments involving sales in excess of the offering size, creating a short position. The underwriter may elect to reduce this short position by exercising some or all of the over-allotment option. . Stabilizing and short covering; stabilizing bids to purchase the shares are permitted if they do not exceed a specified maximum price. After the distribution of shares has been completed, short covering purchases in the open market may also reduce the short position. These activities may cause the price of the shares to be higher than would otherwise exist in the open market. . Penalty bids permitting the underwriters to reclaim concessions from a syndicate member for the shares purchased in the stabilizing or short- covering transactions. Such activities, which may be commenced or discontinued at any time, may be effected on the Nasdaq National Market, in the over-the-counter market or otherwise. In March 1998, certain entities and persons affiliated with Punk, Ziegel & Company, L.P. purchased an aggregate of 60,227 shares of our Series C Preferred Stock at a purchase price of $2.75 per share for an aggregate amount of approximately $165,624. Such shares will convert into 60,227 shares of common stock upon the closing of this offering. We have asked the underwriters to reserve shares for sale at the offering price to our officers, directors, employees and other business affiliates or related third parties. The number of shares available for sale to the general public in the offering will be reduced to the extent such persons purchase the reserved shares. 70 LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for us by Cooley Godward LLP, Palo Alto, California. Certain legal matters will be passed upon for the underwriter by Skadden, Arps, Slate, Meagher & Flom (Illinois), Chicago, Illinois. EXPERTS The consolidated financial statements and the related consolidated financial statement schedule of OrganicNet, Inc. as of December 31, 1997 and 1998, and for each of the years in the three-year period ended December 31, 1998, and the financial statements of PSI-Med Corporation as of May 31, 1998 and 1999, and for each of the years in the three-year period ended May 31, 1999, have been included herein and in the registration statement in reliance upon the reports of KPMG LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. The report of KPMG LLP concerning the May 31, 1999 PSI-Med Corporation financial statements contains an explanatory paragraph that states that PSI-Med Corporation's recurring losses from operations and net capital deficiency raise substantial doubt about PSI-Med Corporation's ability to continue as a going concern. The PSI-Med Corporation financial statements do not include any adjustments that might result from the outcome of that uncertainty. AVAILABLE INFORMATION We have filed with the Securities and Exchange Commission (the "Commission"), a registration statement on Form S-1, including the exhibits and schedules thereto, under the Securities Act of 1933, as amended, with respect to the common stock offered hereby. This prospectus does not contain all of the information contained in the registration statement and the exhibits and schedules to the registration statement. Some items are omitted in accordance with the rules and regulations of the Commission. For further information about OrganicNet and the common stock offered under this prospectus, you should review the registration statement and the exhibits and schedules filed as a part of the registration statement. Descriptions of contracts or other documents referred to in this prospectus are not necessarily complete. If the contract or document is filed as an exhibit to the registration statement, you should review that contract or document. You should be aware that when we discuss these contracts or documents in the prospectus we are assuming that you will read the exhibits to the registration statement for a more complete understanding of the contract or document. The registration statement and its exhibits and schedules may be inspected without charge at the public reference facilities maintained by the Commission in Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C., 20549, and the Commission's regional offices located at 500 West Madison Street, Suite 1400, Chicago, Illinois, 60661 and Seven World Trade Center, 13th Floor, New York, New York, 10048. Copies of all or any portion of the registration statement may be obtained from the Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C. 20549, or by calling the Commission at 1-800-SEC-0330, at prescribed rates. The Commission also maintains a website at www.sec.gov that contains reports, proxy and information statements and other information regarding registrants, such as OrganicNet, that make electronic filings with the Commission. We intend to furnish to our stockholders annual reports containing financial statements audited by an independent public accounting firm. 71 INDEX TO FINANCIAL STATEMENTS
Page ---- Consolidated Financial Statements, OrganicNet, Inc. Independent Auditors' Report........................................... F-2 Consolidated Balance Sheets............................................ F-3 Consolidated Statements of Operations.................................. F-4 Consolidated Statements of Stockholders' Deficit....................... F-5 Consolidated Statements of Cash Flows.................................. F-6 Notes to Consolidated Financial Statements............................. F-7 Unaudited Pro Forma Condensed Combined Financial Information, OrganicNet, Inc. and PSI-Med Corporation Financial Information.................................................. F-25 Condensed Combined Statement of Operations............................. F-26 Financial Statements, PSI-Med Corporation Independent Auditors' Report........................................... F-28 Balance Sheets......................................................... F-29 Statements of Operations............................................... F-30 Statements of Stockholders' Deficit.................................... F-31 Statements of Cash Flows............................................... F-32 Notes to Financial Statements.......................................... F-33
F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors OrganicNet, Inc.: We have audited the accompanying consolidated balance sheets of OrganicNet, Inc. (a Delaware Corporation) and subsidiaries (the Company) as of December 31, 1997 and 1998, and the related consolidated statements of operations, stockholders' deficit and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of OrganicNet, Inc. and subsidiaries as of December 31, 1997 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ KPMG LLP San Francisco, California October 22, 1999, F-2 OrganicNet, Inc. CONSOLIDATED BALANCE SHEETS
December 31, September 30, 1999 ------------------------- ------------------------------ Pro forma stockholders' 1997 1998 Actual deficit (note 1) ----------- ------------ ------------ ---------------- (unaudited) ASSETS ------ Current assets: Cash and cash equivalents.......... $ 46,558 $ 41,104 $ 894,897 Accounts receivable, net of allowance for doubtful accounts of $113,000, $128,800 and $254,714 in 1997, 1998 and 1999, respectively......... 805,687 732,370 859,901 Prepaids and other current assets....... 119,340 158,186 68,819 Prepaid offering costs................ -- -- 544,174 ----------- ------------ ------------ Total current assets.............. 971,585 931,660 2,367,791 Property and equipment, net of accumulated depreciation of $426,475, $615,402 and $1,164,461 in 1997, 1998 and 1999, respectively........... 504,867 348,134 412,001 Intangible assets, net of accumulated amortization of $364,110, $928,094 and $1,391,554 in 1997, 1998 and 1999, respectively........... 1,392,291 884,970 2,054,320 Other noncurrent assets................. 35,598 50,284 178,428 ----------- ------------ ------------ $ 2,904,341 $ 2,215,048 $ 5,012,540 =========== ============ ============ LIABILITIES AND STOCKHOLDERS' DEFICIT --------------------- Current liabilities: Accounts payable...... $ 1,289,354 $ 2,359,263 $ 1,476,901 Deferred revenue...... 1,589,817 2,372,162 2,231,930 Due to employees...... 516,180 1,162,895 665,628 Notes payable to employees and stockholders......... 464,479 918,892 667,617 Lines of credit and note payable to bank................. 92,790 163,897 127,200 Current portion of capital leases....... 39,342 19,506 31,521 Current portion of note payable......... -- -- 46,000 Other current liabilities.......... 129,122 224,695 410,024 ----------- ------------ ------------ Total current liabilities......... 4,121,084 7,221,310 5,656,821 Long-term portion of capital leases......... 40,742 40,742 52,597 Long-term portion of note payable to employee............... -- -- 27,490 Long-term portion of note payable........... -- -- 10,421 ----------- ------------ ------------ Total liabilities.... 4,161,826 7,262,052 5,747,329 Commitments and contingencies Stockholders' deficit: Series A, A-II, A-III, B and C preferred stock, $0.01 par value, authorized 14,000,000 shares; issued and outstanding 2,904,712, 3,679,446 and 6,704,313 shares in 1997, 1998 and 1999, respectively; none pro forma; with an aggregate liquidation preference of $4,725,880, $6,856,398 and $15,128,904 in 1997, 1998 and 1999, respectively......... 29,047 36,794 67,043 $ -- Common stock, $0.001 par value, 29,500,000 shares authorized; 5,425,672, 5,463,447 and 5,501,529 shares issued and outstanding in 1997, 1998 and 1999, respectively; 13,793,729 shares pro forma................ 5,426 5,464 5,502 13,794 Additional paid-in capital.............. 6,030,273 8,238,670 18,030,771 18,089,522 Receivable related to sale of stock........ -- -- (550,000) (550,000) Deferred compensation......... -- -- (80,014) (80,014) Accumulated deficit... (7,322,231) (13,327,932) (18,208,091) (18,208,091) ----------- ------------ ------------ ------------ Total stockholders' deficit............. (1,257,485) (5,047,004) (734,789) $ (734,789) ----------- ------------ ------------ ============ $ 2,904,341 $ 2,215,048 $ 5,012,540 =========== ============ ============
See accompanying notes to consolidated financial statements. F-3 OrganicNet, Inc. CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended Years Ended December 31, September 30, ------------------------------------- ------------------------ 1996 1997 1998 1998 1999 ----------- ----------- ----------- ----------- ----------- (unaudited) Revenue: License............... $ -- $ 424,340 $ 570,694 $ 376,144 $ 777,486 Product development... -- 1,237,500 564,560 390,517 340,354 Service............... 371,054 1,309,645 3,488,397 2,763,340 3,106,266 ----------- ----------- ----------- ----------- ----------- Total revenue....... 371,054 2,971,485 4,623,651 3,530,001 4,224,106 ----------- ----------- ----------- ----------- ----------- Cost of revenue: License............... -- 474,849 756,156 577,040 551,050 Product development... -- 319,974 208,533 168,309 60,813 Service............... 238,431 892,183 2,314,026 1,817,671 2,068,029 ----------- ----------- ----------- ----------- ----------- Total cost of revenue............ 238,431 1,687,006 3,278,715 2,563,020 2,679,892 ----------- ----------- ----------- ----------- ----------- Gross profit............ 132,623 1,284,479 1,344,936 966,981 1,544,214 ----------- ----------- ----------- ----------- ----------- Operating expense: Sales and marketing... 24,335 1,394,852 1,643,868 1,249,019 1,624,426 Research and development.......... 724,231 1,344,640 1,832,783 1,480,236 1,841,604 General and administrative....... 1,689,723 3,332,443 3,768,388 2,422,076 2,858,705 ----------- ----------- ----------- ----------- ----------- Total operating expense............ 2,438,289 6,071,935 7,245,039 5,151,331 6,324,735 ----------- ----------- ----------- ----------- ----------- Operating loss.......... (2,305,666) (4,787,456) (5,900,103) (4,184,350) (4,780,521) Interest expense........ (2,084) (3,397) (27,543) (13,282) (51,061) Interest expense to related parties........ (6,550) (16,355) (65,412) (34,522) (53,367) Other income (expense).. 6,566 13,596 (8,643) (4,676) 9,590 ----------- ----------- ----------- ----------- ----------- Loss before income taxes.................. (2,307,734) (4,793,612) (6,001,701) (4,236,830) (4,875,359) Provision for income taxes.................. 4,000 6,400 4,000 4,000 4,800 ----------- ----------- ----------- ----------- ----------- Net loss................ $(2,311,734) $(4,800,012) $(6,005,701) $(4,240,830) $(4,880,159) =========== =========== =========== =========== =========== Net loss per share: Basic and diluted..... $ (0.45) $ (0.88) $ (1.10) $ (0.78) $ (0.89) =========== =========== =========== =========== =========== Weighted average shares outstanding: Basic and diluted..... 5,188,513 5,425,672 5,447,820 5,442,553 5,490,060 =========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements. F-4 OrganicNet, Inc. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT Years Ended December 31, 1996, 1997 and 1998 and Nine Months Ended September 30, 1999 (Nine Months Ended September 30, 1999 is Unaudited)
Preferred Stock Common Stock Additional Receivable Total ----------------- ---------------- paid-in Deferred Accumulated related to stockholders' Shares Amount Shares Amount capital compensation deficit sale of stock deficit --------- ------- --------- ------ ----------- ------------ ------------ ------------- ------------- Balances at December 31, 1995............ -- $ -- 3,789,467 $3,790 $ 6,210 $ -- $ (210,485) $ (5,000) $ (205,485) Issuance of Series A preferred stock........... 1,333,270 13,333 -- -- 1,319,937 -- -- -- 1,333,270 Issuance of Series B preferred stock........... 401,182 4,012 -- -- 898,648 -- -- -- 902,660 Paydown of notes receivable...... -- -- -- -- -- -- -- 5,000 5,000 Common stock issued upon the acquisition of FPI............. -- -- 1,596,066 1,596 158,010 -- -- -- 159,606 Series A-II preferred stock issued upon the acquisition of CPCS ........... 1,783 18 -- -- 3,951 -- -- -- 3,969 Common stock issued upon the acquisition of CPCS............ -- -- 40,139 40 3,974 -- -- -- 4,014 Series A-II and A-III preferred stock issued upon the acquisition of Velocity........ 10,832 108 -- -- 48,636 -- -- -- 48,744 Series A-II preferred stock issued upon the acquisition of RiteLine........ 2,333 23 -- -- 5,109 -- -- -- 5,132 Net loss......... -- -- -- -- -- -- (2,311,734) -- (2,311,734) --------- ------- --------- ------ ----------- --------- ------------ --------- ----------- Balances at December 31, 1996............ 1,749,400 17,494 5,425,672 5,426 2,444,475 -- (2,522,219) -- (54,824) Issuance of Series A preferred stock in lieu of compensation.... 85,000 850 -- -- 84,150 -- -- -- 85,000 Issuance of Series B preferred stock........... 761,288 7,613 -- -- 1,710,361 -- -- -- 1,717,974 Issuance of Series B preferred stock in lieu of compensation.... 40,000 400 -- -- 89,600 -- -- -- 90,000 Issuance of Series C preferred stock........... 217,066 2,171 -- -- 594,805 -- -- -- 596,976 Series A-II preferred stock issued upon the acquisition of Res-Q........... 23,333 233 -- -- 497,227 -- -- -- 497,460 Series A-II preferred stock issued upon the acquisition of LINC............ 13,333 133 -- -- 284,393 -- -- -- 284,526 Series A-II preferred stock issued upon the acquisition of Healthcheck..... 8,624 86 -- -- 183,055 -- -- -- 183,141 Series A-II preferred stock issued upon the acquisition of Intedata........ 6,668 67 -- -- 142,207 -- -- -- 142,274 Net loss......... -- -- -- -- -- -- (4,800,012) -- (4,800,012) --------- ------- --------- ------ ----------- --------- ------------ --------- ----------- Balances at December 31, 1997............ 2,904,712 29,047 5,425,672 5,426 6,030,273 -- (7,322,231) -- (1,257,485) Issuance of Series C preferred stock........... 774,734 7,747 -- -- 2,122,771 -- -- -- 2,130,518 Stock options granted to non- employees....... -- -- -- -- 29,001 -- -- -- 29,001 Common shares issued for purchase price adjustment for CPCS............ -- -- 37,775 38 56,625 -- -- -- 56,663 Net loss......... -- -- -- -- -- -- (6,005,701) -- (6,005,701) --------- ------- --------- ------ ----------- --------- ------------ --------- ----------- Balances at December 31, 1998............ 3,679,446 36,794 5,463,447 5,464 8,238,670 -- (13,327,932) -- (5,047,004) Issuance of Series C preferred stock, net............. 2,538,855 25,388 -- -- 6,867,210 -- -- -- 6,892,598 Issuance of Series C preferred stock to Conxion...... 200,000 2,000 -- -- 548,000 -- -- (550,000) -- Issuance of Series C preferred stock in exchange for legal services.. 150,000 1,500 -- -- 411,000 -- -- -- 412,500 Issuance of Series C preferred stock in exchange for other services.. 36,183 362 -- -- 99,141 -- -- -- 99,503 Issuance of Series C preferred stock to repay loans to related parties......... 83,162 832 -- -- 227,864 -- -- -- 228,696 Series A-II preferred stock issued upon the acquisition of PSI-Med ........ 16,667 167 -- -- 666,513 -- -- -- 666,680 Issuance of common stock pursuant to exercise of stock options... -- -- 38,082 38 36,276 -- -- -- 36,314 Stock options granted to non- employees....... -- -- -- -- 67,412 -- -- -- 67,412 Stock options granted to Superior Consultant Holdings Corporation..... -- -- -- -- 744,800 -- -- -- 744,800 Deferred compensation related to stock option grants... -- -- -- -- 123,885 (123,885) -- -- -- Amortization of deferred compensation.... -- -- -- -- -- 43,871 -- -- 43,871 Net loss......... -- -- -- -- -- -- (4,880,159) -- (4,880,159) --------- ------- --------- ------ ----------- --------- ------------ --------- ----------- Balances at September 30, 1999............ 6,704,313 $67,043 5,501,529 $5,502 $18,030,771 $ (80,014) $(18,208,091) $(550,000) $ (734,789) ========= ======= ========= ====== =========== ========= ============ ========= ===========
See accompanying notes to consolidated financial statements. F-5 OrganicNet, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended Years Ended December 31, September 30, ------------------------------------- ------------------------ 1996 1997 1998 1998 1999 ----------- ----------- ----------- ----------- ----------- (unaudited) Cash flows from operating activities: Net loss............... $(2,311,734) $(4,800,012) $(6,005,701) $(4,240,830) $(4,880,159) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization......... 76,535 522,506 752,911 598,941 622,657 Provision for bad debts................ -- 113,000 15,800 -- 101,684 Noncash compensation expense.............. -- 175,000 29,001 16,600 856,083 Changes in operating assets and liabilities: Accounts receivable... 154,699 (61,920) 57,517 291,276 (93,209) Prepaid expenses and other current and non-current assets... (16,450) (28,079) (53,532) (96,971) (562,555) Accounts payable and other current liabilities.......... (78,060) 5,645 1,184,988 592,997 (825,342) Deferred revenue...... 78,030 805,558 782,345 687,505 (213,442) Due to employees...... -- 516,180 646,716 344,432 (451,386) Interest on notes from related parties...... 6,550 16,355 65,412 34,522 53,367 ----------- ----------- ----------- ----------- ----------- Net cash used in operating activities.......... (2,090,430) (2,735,767) (2,524,543) (1,771,528) (5,392,302) ----------- ----------- ----------- ----------- ----------- Cash flows from investing activities: Capital expenditures... (74,752) (206,916) (32,194) (109,195) (150,864) Cash (paid for) received from acquisitions.......... (22,032) 212,822 -- -- 43,111 ----------- ----------- ----------- ----------- ----------- Net cash (used in) provided by investing activities.......... (96,784) 5,906 (32,194) (109,195) (107,753) ----------- ----------- ----------- ----------- ----------- Cash flows from financing activities: Proceeds from notes payable to related parties............... 110,000 448,125 389,000 185,000 -- Repayment of notes payable to related parties............... (31,000) (77,168) -- -- (437,313) Borrowings (payments) from banks, net....... -- 92,790 71,107 -- (36,697) Proceeds from preferred stock issued in private placements.... 2,078,660 2,314,950 2,130,518 1,650,371 6,892,598 Repayment of note receivable............ 5,000 -- -- -- -- Repayment of long-term debt.................. -- -- -- -- (85,286) Proceeds from exercise of stock options...... -- -- -- -- 36,314 Repayment of capital lease obligations..... -- (2,278) (39,342) 12,739 (15,768) ----------- ----------- ----------- ----------- ----------- Net cash provided by financing activities.......... 2,162,660 2,776,419 2,551,283 1,848,110 6,353,848 ----------- ----------- ----------- ----------- ----------- Net (decrease) increase in cash and cash equivalents............ (24,554) 46,558 (5,454) (32,613) 853,793 Cash and cash equivalents at beginning of period.... 24,554 -- 46,558 46,558 41,104 ----------- ----------- ----------- ----------- ----------- Cash and cash equivalents at end of period................. $ -- $ 46,558 $ 41,104 $ 13,945 $ 894,897 =========== =========== =========== =========== =========== Supplemental disclosure of cash flow information: Cash paid during the period for income taxes................ $ 4,000 $ 6,400 $ 4,000 $ 4,000 $ -- Supplemental schedule of noncash investing and financing activities: Summary of the acquisitions described in note 2: Fair value of assets acquired............. $ 781,900 $ 2,435,357 $ 56,663 $ 56,663 $ 1,861,412 Net cash (paid) received............. (22,032) 212,822 -- -- 43,111 Stock issued.......... (221,465) (1,107,401) (56,663) (56,663) (666,680) Notes issued.......... -- (200,000) -- -- -- ----------- ----------- ----------- ----------- ----------- Liabilities assumed.. $ 538,403 $ 1,340,778 $ -- $ -- $ 1,237,843 =========== =========== =========== =========== =========== Receivable related to sale of stock........ $ -- $ -- $ -- $ -- $ 550,000 Stock and options issued in exchange for equity finders fees................. -- -- -- -- 87,479 Stock issued as settlement for legal services rendered in prior periods ....... -- -- -- -- 412,500 Stock issued as settlement for other services rendered in prior periods ....... -- -- -- -- 99,503 Stock issued to repay loans to related parties.............. 157,270 -- -- -- 228,696 Assets acquired under capital lease obligations.......... -- 114,524 33,620 -- --
See accompanying notes to consolidated financial statements. F-6 OrganicNet, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1997 and 1998, and September 30, 1998 and 1999 (Information as of and for the Nine Months Ended September 30, 1998 and 1999 is unaudited) (1) Nature of Business and Summary of Significant Accounting Policies Business of the Company We are an application service provider (ASP) that develops proprietary software solutions for healthcare clinics and physician group practices using our proprietary technology platform. Our customers can access and use our solutions over the Internet or their local or private information networks. We are developing integrated solutions designed to manage all elements of the business and clinical processes of our customers within a single system. Our software solutions are built using our object-oriented Organic Architecture. Central to our Organic Architecture is our CoreModel, which is comprised of objects that represent a universal set of clinical and business processes. To develop our CoreModel and solutions, we selectively acquired companies with healthcare domain expertise and enabling technologies. These acquisitions also provided near term products, customers and revenues. We were incorporated in January 1995 as a California corporation and reincorporated in Delaware in April 1996. We changed our name to OrganicNet, Inc. in May 1999. We are headquartered in San Francisco, California. Basis of Presentation Our consolidated financial statements include the accounts of OrganicNet, Inc. and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. Interim Financial Information The consolidated financial statements and related notes for the nine months ended September 30, 1998 and 1999 are unaudited, but include all adjustments (consisting solely of normal recurring adjustments) which are, in our opinion, necessary for a fair presentation. The results of operations for the nine months ended September 30, 1998 and 1999 are not necessarily indicative of operating results to be expected in any future period. Accounting Estimates The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Revenue Recognition License revenue includes fees from the licensing of our acquired legacy products. Product development revenue consists of revenue derived from development of customer requested software or customer satisfaction surveys and development of the related database. Service revenue is composed of post- contract software support, case management, credentialing, training, and installation of simple interfaces for legacy products. Beginning January 1, 1998, we have recognized revenue in accordance with the American Institute of Certified Public Accountants' Statement of Position (SOP) No. 97-2, Software Revenue Recognition, as amended by SOP No. 98-9, Software Revenue Recognition with Respect to Certain Transactions. Revenue is recognized from licenses of our software application products when the contract has been executed, the product has been shipped, collectibility is probable and the software license fees are fixed and determinable. In the F-7 OrganicNet, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) event that the contract provides for multiple elements (e.g., training, installation of simple interfaces or post-contract customer support), the total fee is allocated to these elements based on vendor-specific objective evidence of fair value. If any portion of the license fee is subject to forfeiture, refund or other contractual contingencies, we will postpone revenue recognition until these contingencies have been removed. Revenues from fees paid for access to our applications delivered through the ASP model will be recorded as subscription revenue earned over the access period. We recognize product development revenue from co-development contracts using a percentage-of-completion method either as services are performed or based on meeting key milestone events over the term of the contracts. Service revenue from post-contract customer support (PCS) and maintenance is recognized ratably over the term of the maintenance period. Revenue from case management, credentialing, training and installation of simple interfaces is recorded as the services are performed. Our adoption of SOP 97-2 did not have a material effect on our revenue recognition or our results of operations. Prior to adoption of SOP 97-2, we accounted for software and related revenues in accordance with SOP 91-1, Software Revenue Recognition. Deferred Revenue We defer revenues related to annual payments of PCS agreements and recognize those revenues as the services are performed over the PCS contract periods. Payments of license fees received prior to fulfilling our obligations are recorded as deferred revenue until the obligations have been completed. Advance payments and deposits received on other service contracts are deferred and recognized as the related services are rendered. Research and Development Research and development expenditures are charged to expense in the period incurred. Advertising Costs All costs associated with advertising and promoting products are charged to expense in the period incurred. Income Taxes We account for income taxes in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. Under SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Net Loss per Share We compute net loss per share based upon SFAS No. 128, Earnings per Share. The basic net loss per share is computed by dividing the net loss available to common stockholders by the weighted-average number of common shares outstanding. Potential common shares relating to stock options of 590,333, 860,936, 1,243,769 and 1,817,366 in 1996, 1997 and 1998, and for the nine months ended September 30, 1999, respectively, are anti-dilutive due to the net losses sustained by us. Convertible preferred stock of 1,749,400, 2,904,712, 3,679,446 and 6,704,313 shares in 1996, 1997, 1998 and for the nine months ended September 30, 1999, respectively, has also been excluded from the calculation of net loss per share as the impact would be anti-dilutive. Thus, the diluted net loss per share in these years is the same as the basic net loss per share. F-8 OrganicNet, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Unaudited pro forma basic and diluted net loss per share was $(0.69) and $(0.47) for the year ended December 31, 1998 and the nine months ended September 30, 1999, respectively, based on pro forma weighted average shares outstanding of 8,700,043 and 10,370,386 for those respective periods. This information reflects per share data assuming the conversion of all outstanding shares of convertible preferred stock at a conversion rate of 20 common shares for each preferred share of Series A-II and A-III and at a conversion rate of one common share for each preferred share of Series A, B, and C as if the conversion of the preferred stock had taken place at the beginning of 1998 or at the date of issuance, if later. Stock-Based Compensation We account for our stock option plans under SFAS No. 123, Accounting for Stock-Based Compensation. This statement establishes financial accounting and reporting standards for stock-based compensation, including employee stock purchase plans and stock option plans. As allowed by SFAS No. 123, we continue to measure compensation expense for options granted to employees under the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. We have recorded deferred compensation for the difference between the exercise price and the deemed fair market value of the common stock for financial reporting purposes of stock options granted to employees. The compensation expense related to such grants is amortized over the vesting period of the related stock options. Comprehensive Loss We have no components of other comprehensive loss other than our net loss and, accordingly, our comprehensive loss is equivalent to our net loss for all periods presented. Cash and Cash Equivalents We consider all highly liquid investments purchased with an original maturity of three months or less from the date of purchase to be cash equivalents. Long-Lived Assets, Including Intangible Assets We account for long-lived assets under SFAS No. 121, Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. SFAS No. 121 requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment loss to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. We estimate fair value based on the best information available, making judgments and projections as considered necessary. Intangible assets consist of items related to our business combinations. Goodwill is amortized over a three to seven year period depending on the acquisition. Acquired technology is being amortized over its estimated useful life of approximately three years. Workforce-in-place is being amortized over the lesser of the employment tenure of the employee or the agreement term. Software Development Costs Software development costs are accounted for in accordance with SFAS No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed. This statement provides for capitalization of F-9 OrganicNet, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) certain software development costs once technological feasibility is established. We establish technological feasibility once testing of a working model has been completed. The time between establishment of a working model and general release is short. Therefore, we believe that software development costs incurred subsequent to technological feasibility have not been material. Property and Equipment Property and equipment is stated at cost. Computer and related equipment is depreciated over a useful life of three years using the straight-line method. Office furniture and fixtures are depreciated over useful lives ranging from three to five years using the straight-line method. Leasehold improvements are amortized on a straight-line basis over the shorter of the useful life or remaining lease term. Concentrations of Credit Risk Financial instruments, which potentially subject us to concentrations of credit risk, consist principally of trade receivables. We control credit risk through credit approvals, credit limits, a reserve for doubtful accounts, and monitoring procedures. We have several product development and collaborative agreements with Pfizer Health Solutions Inc to co-develop, market, license and distribute various OrganicNet products and services. Co-development and marketing agreements to date include development of OrganicNet's Outcomes Partner III, care management and credentialing applications. Additionally, we have co- developed and marketed several survey products including the National Committee for Quality Assurance Member Satisfaction Survey, disenrollment and patient satisfaction surveys. Sales to Pfizer Health Solutions Inc amounted to approximately $0, $1,375,000, $945,000, $779,000 and $862,000 for the years ended December 31, 1996, 1997 and 1998, and the nine months ended September 30, 1998 and 1999, respectively. These sales represented approximately 0%, 46%, 20%, 22% and 20%, respectively, of our total revenue for those periods. Accounts receivable from Pfizer Health Solutions Inc amounted to approximately $74,000, $253,000, and $37,000 at December 31, 1997 and 1998 and at September 30, 1999, respectively. A different customer accounted for 14% of total revenue for the nine months ended September 30, 1999. Fair Value of Financial Instruments The carrying amounts of trade receivables, accounts payable, lines of credit and notes payable and other current liabilities approximate fair value due to the short maturities of these instruments. The related party liabilities are not traded on any public market and approximate our best estimate of fair value. Pro Forma Stockholders' Deficit (Unaudited) The unaudited pro forma stockholders' deficit gives effect to the conversion of 6,704,313 shares of Series A, A-II, A-III, B and C convertible preferred stock outstanding as of September 30, 1999 into 8,292,200 shares of common stock, at a conversion rate of 20 common shares for each preferred share of Series A-II and A-III and at a conversion rate of one common share for each preferred share of Series A, B and C, upon closing of our initial public offering. F-10 OrganicNet, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (2) Business Combinations (a) Acquisitions prior to December 31, 1998 During the years ended December 31, 1996 and 1997, we completed the following acquisitions:
Company Acquisition Date Expertise - ------- ----------------- ------------------------------ First Principles, Inc. (FPI)....................... April 22, 1996 Object Technology RiteLine Systems, Inc. (RiteLine).................. April 30, 1996 Business Methodology Comprehensive Provider Credentialing Services, Inc. (CPCS)...................... May 23, 1996 Credentialing Service Velocity Healthcare Informatics, Inc. (Velocity).................. December 20, 1996 Outcomes/Disease Management Res-Q, Inc., formerly MMS, Inc. (Res-Q)................ May 14, 1997 Scheduling/Resource Management Intedata, Inc. (Intedata).... June 4, 1997 Marketing Service L.I.N.C., Inc. (LINC)........ June 23, 1997 Case Management Healthcheck, Incorporated (Healthcheck)............... November 14, 1997 Credentialing Service
We acquired all of the outstanding stock of each of the above companies, with the exception of Velocity. We purchased certain assets of Velocity, including all of its intellectual property. Under terms of the acquisition agreements, we paid cash and issued notes payable and the following shares of common, Series A-II preferred and Series A-III preferred stock, valued at the fair market value of the stock on the respective acquisition dates:
Series A-II Series A-III Common preferred preferred Acquired company stock stock stock ---------------- --------- ----------- ------------ FPI....................................... 1,596,066 -- -- RiteLine.................................. -- 2,333 -- CPCS...................................... 77,914 1,783 -- Velocity.................................. -- 5,416 5,416 Intedata.................................. -- 6,668 -- LINC...................................... -- 13,333 -- Res-Q..................................... -- 23,333 -- Healthcheck............................... -- 8,624 --
The acquisitions were accounted for using the purchase method of accounting and, accordingly, the results of the companies' operations are included in our consolidated financial statements from their respective acquisition dates forward. The consideration paid is as follows: Common stock..................................................... $ 220,283 Series A-II preferred stock...................................... 1,140,874 Series A-III preferred stock..................................... 24,372 Cash paid (CPCS)................................................. 74,900 Notes payable (LINC and Res-Q)................................... 200,000 ---------- $1,660,429 ==========
F-11 OrganicNet, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The purchase price was allocated to the assets acquired and liabilities assumed as follows: Cash............................................................ $ 265,690 Accounts receivable............................................. 874,855 Other current assets............................................ 145,719 Property and equipment.......................................... 440,283 Goodwill........................................................ 492,964 Workforce-in-place.............................................. 142,274 Acquired technology............................................. 1,177,826 Liabilities..................................................... (761,456) Customer deposits and deferred maintenance...................... (1,117,726) ----------- $ 1,660,429 ===========
In conjunction with the Intedata acquisition, we entered into two employment agreements with the former founders of Intedata. As there were no assets to be acquired or liabilities to be assumed in the Intedata acquisition, the full purchase price has been allocated to those agreements as workforce-in-place and is being amortized over the lesser of the employment tenure of the employee or the agreement term of three years from the acquisition date. We acquired certain software technology in the LINC and Res-Q acquisitions. The fair value of this technology was determined using a discounted cash flow analysis of the revenue stream to be derived from such technology. Acquired software technology is being amortized on a straight-line basis over its expected economic life of approximately three years, which is when we expect to release our ASP software version of the legacy product. Goodwill, which arose from the FPI, CPCS and Healthcheck acquisitions, represents the excess of the purchase price over the fair value of the assets acquired and liabilities assumed, and is amortized using the straight-line method over their estimated lives of three years for FPI and seven years for CPCS and Healthcheck. The above purchase price includes $56,663 of contingent payments to CPCS for the issuance of 37,775 shares of our common stock valued at $1.50 per share which was the value of our common stock on the date the contingency was resolved. This amount has been allocated to goodwill and is being amortized using the straight-line method over five years, which is the remaining estimated life of the goodwill. Effective March 1998, the operations of CPCS were combined with Healthcheck. Effective December 31, 1996, the operations of FPI and RiteLine were combined with our Corporate Headquarters. We issued four $50,000 notes to the former shareholders of LINC and Res-Q in conjunction with the LINC and Res-Q acquisitions. The notes are due on December 31, 1999 and bear interest at 10% per year. F-12 OrganicNet, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The results of operations for all of the acquired entities are included in the 1998 results of operations of the Company for the full year. The following table presents unaudited pro forma results of operations as if the acquisitions had occurred on the first day of the earliest period presented. The unaudited pro forma information is not necessarily indicative of the combined results that would have occurred had the acquisitions taken place on the first day of the period presented, nor is it necessarily indicative of results that may occur in the future:
Years Ended December 31, ------------------------ 1996 1997 ----------- ----------- (unaudited) Pro forma basis: Total net revenues.............................. $ 4,480,048 $ 5,040,332 Net loss........................................ $(2,877,036) $(4,980,815) Net loss per share basic and diluted............ $ (0.53) $ (0.92) Weighted average shares outstanding: Basic and diluted............................... 5,425,672 5,425,672
(b) Acquisition of PSI-Med Corporation On September 20, 1999, we completed our acquisition of all of the outstanding stock of PSI-Med Corporation (PSI-Med) in exchange for 16,667 shares of our Series A-II preferred stock. PSI-Med Corporation sells and services practice management software and is engaged as a full service provider of medical insurance billing and accounts receivable collection services. The Series A-II preferred stock has been valued at $666,680. We accounted for the acquisition under the purchase method of accounting and, accordingly, the results of PSI-Med's operations are included in our consolidated financial statements beginning with the effective date of the acquisition which was August 31, 1999. The allocation of the purchase price to the assets acquired and liabilities assumed is as follows: Cash............................................................. $ 43,111 Accounts receivable.............................................. 136,006 Other assets..................................................... 20,396 Property and equipment........................................... 72,199 Goodwill......................................................... 1,632,811 Accounts payable ................................................ (240,512) Notes payable ................................................... (380,724) Capital lease obligations ....................................... (39,638) Other accrued expenses .......................................... (362,052) Long-term debt .................................................. (141,707) Customer deposits and deferred maintenance....................... (73,210) ---------- $ 666,680 ==========
Goodwill represents the excess of the purchase price over the fair value of the assets acquired and liabilities assumed, and is amortized using the straight-line method over its estimated useful life of seven years. F-13 OrganicNet, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following table shows unaudited pro forma results of operations assuming the acquisition of PSI-Med had been consummated at the beginning of 1998. The unaudited pro forma information is not necessarily indicative of the combined results that would have occurred had the acquisition taken place as of the beginning of the periods presented, nor is it necessarily indicative of results that may occur in the future:
Year Ended Nine Months Ended December 31, September 30, 1998 1999 ------------ ----------------- (unaudited) Pro forma basis: Total net revenues........................ $ 6,834,242 $ 5,662,151 Net loss.................................. $(6,651,008) $(4,974,096) Net loss per share: Basic and diluted..... $ (1.22) $ (0.91) Weighted average shares outstanding: Basic and diluted....................... 5,447,820 5,490,060
(3) Property and Equipment Property and equipment consists of the following:
December 31, ------------------------ September 30, 1997 1998 1999 ----------- ----------- ------------- Computers and related equipment.... $ 746,195 $ 752,400 $ 1,241,506 Furniture and fixtures............. 176,114 201,076 303,016 Leasehold improvements............. 9,033 10,060 31,940 ----------- ----------- ----------- 931,342 963,536 1,576,462 Less accumulated depreciation and amortization...................... (426,475) (615,402) (1,164,461) ----------- ----------- ----------- $ 504,867 $ 348,134 $ 412,001 =========== =========== ===========
Depreciation and amortization expense on property and equipment was approximately $60,000, $175,000, $189,000, $121,000 and $159,000 for the years ended December 31, 1996, 1997 and 1998, and for the nine months ended September 30, 1998 and 1999, respectively. (4) Intangible Assets Intangible assets consist of the following:
December 31, ------------------------ September 30, 1997 1998 1999 ----------- ----------- ------------- Goodwill........................... $ 436,301 $ 492,964 $ 2,125,774 Acquired technology................ 1,177,826 1,177,826 1,177,826 Workforce-in-place................. 142,274 142,274 142,274 ----------- ----------- ----------- 1,756,401 1,813,064 3,445,874 Less accumulated amortization...... (364,110) (928,094) (1,391,554) ----------- ----------- ----------- $ 1,392,291 $ 884,970 $ 2,054,320 =========== =========== ===========
F-14 OrganicNet, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (5) Other Current Liabilities The following items are included in other current liabilities:
December 31, ----------------- September 30, 1997 1998 1999 -------- -------- ------------- Accounts payable, non-trade.................. $ -- $ 15,000 $ 15,000 Bank overdraft............................... 119,596 62,025 -- Franchise taxes payable...................... -- -- 4,800 Other accrued expenses....................... 9,526 147,670 390,224 -------- -------- -------- $129,122 $224,695 $410,024 ======== ======== ========
(6) Notes Payable to Employees and Stockholders The notes payable to employees and stockholders consist of notes with interest rates generally ranging from 9% to 12%. All notes are due on December 31, 1999. Certain of the notes to stockholders provided for the lender to receive options for shares of the Company's common stock at a rate of 10% times the principal loaned divided by $2.00, which was the fair market value of our common stock when the notes were issued. Options to purchase 10,400 shares of the Company's common stock were granted in conjunction with this provision. A portion of the proceeds of the notes was allocated to the value of the options based on the Black-Scholes option pricing model and was amortized into the statement of operations during the year ended December 31, 1998 (note 9). All of these notes payable to stockholders were repaid during the nine months ended September 30, 1999. We acquired certain notes payable to stockholders from our PSI-Med acquisition in September 1999. The interest rates range from 10%-12% on those notes. One note is due on February 1, 2002. The current and long-term portions of this note at September 30, 1999 were $20,000 and $27,490, respectively. As of September 30, 1999, a second note due on June 1, 2000 had a balance outstanding of $41,502 and the balance of the remaining notes of $205,474 was due on demand. (7) Commitments, Contingencies and Borrowings Leases We lease office facilities and equipment under noncancelable operating and capital leases. The leases provide for us to pay property taxes, insurance and other operating costs of the leased property and generally contain renewal provisions. F-15 OrganicNet, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Future minimum lease payments under all noncancelable capital and operating leases as of September 30, 1999 are as follows:
Capital Operating leases leases ------- ---------- Year ending December 31: 1999.................................................... $33,771 $ 280,486 2000.................................................... 53,306 470,354 2001.................................................... 34,715 328,049 2002.................................................... 6,100 251,806 2003 and thereafter..................................... -- 72,360 ------- ---------- Total minimum payments................................... 127,892 $1,403,055 ========== Less amount representing interest........................ 43,774 ------- Present value of capital lease obligations............... 84,118 Less current portion..................................... 31,521 ------- Lease obligations, long term............................. $52,597 =======
Equipment recorded under capital leases is included in property and equipment as follows:
December 31, ----------------- September 30, 1997 1998 1999 -------- ------- ------------- Computers and related equipment............. $114,524 $62,968 $ 530,896 Accumulated depreciation.................... (32,991) (31,540) (443,512) -------- ------- --------- $ 81,533 $31,428 $ 87,384 ======== ======= =========
Rent expense for operating leases totaled approximately $33,000, $248,000, $428,000, $283,000 and $340,000 for the years ended December 31, 1996, 1997 and 1998, and for the nine months ended September 30, 1998 and 1999, respectively. Lines of Credit We have a $200,000 revolving line of credit with Wells Fargo Bank, which bears interest at a rate of 1.0% above the prime rate. The weighted average interest rate was approximately 9.50%, 8.75% and 8.81% for the years ended December 31, 1997 and 1998, and for the nine months ended September 30, 1999, respectively. We are required to make regular monthly payments of accrued interest. The line of credit is collateralized by all accounts receivable, inventory and furniture and equipment of Res-Q. In addition, an officer of Res- Q has provided a guaranty in connection with this line of credit. We agreed to indemnify the officer for a maximum amount of $200,000 (the amount of the officer's guaranty plus accrued interest) for any deficiency that may be suffered after making a claim for reimbursement from the principal borrower. On July 8, 1999 we entered into a $25,000 line of credit with Foothills Bank which bears interest at a rate of 2.25% above the prime rate. The weighted average interest rate was approximately 10.5% for the nine months ended September 30, 1999. We make monthly payments of accrued interest. The line of credit matures on January 8, 2000 and is secured by accounts receivable of Healthcheck. The balance outstanding under lines of credit was $92,790, $163,897 and $92,356 at December 31, 1997 and 1998 and at September 30, 1999, respectively. F-16 OrganicNet, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Notes Payable We acquired a note payable to a bank from our PSI-Med acquisition that is secured by PSI-Med's assets and a personal guarantee by an officer of PSI-Med. The note bears interest at a rate of prime plus 6.25% (14.50% at September 30, 1999). Principal and interest are due monthly and the note matures on June 15, 2000. The balance due on the note was $34,844 at September 30, 1999. We have an unsecured non-interest bearing note payable to the prior owners of a company acquired by PSI-Med. Principal is payable monthly based on a percentage of gross billings collected related to the acquired customer base. The note is due January 15, 2001. The current and long-term portions due were $46,000 and $10,421 at September 30, 1999. (8) Capital Stock We are authorized to issue 14,000,000 shares of preferred stock. The preferred shares are automatically convertible into common shares upon an initial public offering of our common stock. A summary of preferred stock follows:
December 31, --------------------- September 30, 1997 1998 1999 ---------- ---------- ------------- Series A, 1,500,000 shares designated, $.01 par value per share, 1,418,270 shares issued and outstanding, liquidation preference of $1,418,270 in 1997, 1998 and 1999................ $1,418,270 $1,418,270 $ 1,418,270 Series A-I, 1,500,000 shares designated, $.01 par value per share, none issued and outstanding........... -- -- -- Series A-II, 115,000 shares designated, $.01 par value per share, 61,490 shares issued and outstanding in 1997 and 1998 and 78,157 issued and outstanding in 1999................... 1,140,874 1,140,874 1,807,554 Series A-III, 5,416 shares designated, $.01 par value per share, 5,416 shares issued and outstanding in 1997, 1998 and 1999.............................. 24,372 24,372 24,372 Series B, 1,250,000 shares designated, $.01 par value per share, 1,202,470 shares issued and outstanding, liquidation preference of $2,710,634 in 1997, 1998 and 1999................ 2,710,634 2,710,634 2,710,634 Series B-I, 1,250,000 shares designated, $.01 par value per share, none issued and outstanding........... -- -- -- Series C, 4,000,000 shares designated, $.01 par value per share, 217,066, 991,800 and 4,000,000 shares issued and outstanding in 1997, 1998 and 1999, respectively, liquidation preference of $596,976, $2,727,494 and $11,000,000 in 1997, 1998 and 1999, respectively, net of cash transaction costs of $65,066 in 1999.............. 596,976 2,727,494 10,934,934 Series C-I, 4,000,000 shares designated, $.01 par value per share, none issued and outstanding........... -- -- -- ---------- ---------- ----------- $5,891,126 $8,021,644 $16,895,764 ========== ========== ===========
F-17 OrganicNet, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Series A-II and Series A-III preferred shares have been issued in conjunction with our acquisitions as discussed in note 2. Series A shares were issued at $1.00 per share, Series B shares were issued at $2.25 per share, and Series C shares were issued at $2.75 per share. In addition to Series C transaction costs paid, we issued 8,769 shares of Series C stock valued at $2.75 and issued options to purchase 40,569 shares of common stock valued at $63,364 (note 9) as Series C finders fees. The rights, preferences, and privileges of preferred stockholders are as follows: . Series A, B and C stockholders are entitled to cumulative dividends, if declared by the Board of Directors, of $.08 per share per annum, payable in preference to the payment of any dividends on the common stock (other than a common stock dividend). No such dividends have been declared. Series A-II and A-III stockholders are not entitled to receive dividends. . Series, A, B and C stockholders have a liquidation preference of an amount equal to the original price of the preferred stock plus any declared but unpaid dividends. Any remaining liquidation proceeds are distributed pro rata to the common, Series A-II and Series A-III stockholders. . Each share of Series A, A-II, B and C votes equally with shares of common stock. Series A-III shares have no voting rights. . Each share of Series A, A-II, A-III, B and C is convertible at any time into common stock at the original issue price, with automatic conversion upon an initial public offering, upon the consolidation or merger of the Company, or upon the sale of substantially all of the assets of the Company. The conversion rate is one for one for Series A, B and C shares and 20 shares of common stock for each share of Series A-II and A-III. The conversion price will be equal to the issue price of the shares. (9) Stock Option Plans We have been authorized to issue options to purchase up to 1,000,000 and 1,478,513 shares of our common stock in connection with our 1996 and 1997 stock option plans (the Plans) to employees, directors, and consultants. The number of shares of common stock available for issuance under the 1997 stock option plan automatically increases on the first business day of each calendar year during the term of the 1997 stock option plan, beginning with the 1999 calendar year, by an amount equal to two percent (2%) of the shares of common stock outstanding on the last business day of the immediately preceding calendar year. The Plans provide for the issuance of stock purchase rights, incentive stock options, or nonstatutory stock options. Under the Plans, the exercise price for incentive stock options is at least 100% of the stock's fair market value on the date of the grant for employees owning less than 10% of the voting power of all classes of stock, and at least 110% of the fair market value on the date of grant for employees owning more than 10% of the voting power of all classes of stock. For nonqualified stock options, the exercise price is also at least 110% of the fair market value on the date of grant for employees owning more than 10% of the voting power of all classes of stock and no less than 85% for employees owning less than 10% of the voting power of all classes of stock. Options granted under the Plans generally expire in 10 years. However, the term of the options may be limited to 5 years if the optionee owns stock representing more than 10% of the voting power of all classes of stock. Vesting periods are determined by the Board of Directors and generally provide for shares to vest at a rate of 1/3 of the shares at the end of each subsequent anniversary of the initial vesting date, subject to continued service as an employee. As of September 30, 1999, options to purchase 825,936 and 991,430 shares of our common stock were outstanding under the 1996 and 1997 stock option plans, respectively. As of September 30, 1999, 478,499 shares were available for grant under the 1997 stock option plan. With the creation of the 1997 stock option plan, no further issuance of options under the 1996 stock option plan are allowed. F-18 OrganicNet, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Stock-Based Compensation We continue to apply APB Opinion No. 25 in accounting for our employee stock-based compensation plans and use the intrinsic-value method in accounting for options granted to employees. Accordingly, compensation cost has only been recognized in the accompanying consolidated statements of operations for any stock options granted to employees where the exercise price of the option was less than the fair value of the underlying common stock as of the grant date. Had we determined compensation cost based on the fair value at the grant date for stock options under SFAS No. 123 for our stock-based compensation plans, net loss and basic and diluted net loss per share would have been as follows:
Years Ended December 31, ------------------------- Nine Months Ended 1996 1997 1998 September 30, 1999 ------- ------- ------- ------------------ (in thousands, except per share amounts) Net loss: As reported................... $(2,312) $(4,800) $(6,006) $(4,880) Pro forma..................... (2,319) (4,837) (6,116) (5,042) Basic and diluted net loss per share: As reported................... $ (0.45) $ (0.88) $ (1.10) $ (0.89) Pro forma..................... (0.45) (0.89) (1.12) (0.92)
These pro forma results assume that we began recording compensation expense for option grants to employees subsequent to January 1, 1995 and may not be indicative of pro forma results to be expected in future periods. The fair value of each option was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
Years Ended December 31, ----------------------- Nine Months Ended 1996 1997 1998 September 30, 1999 ------- ------- ------- ------------------ Expected volatility.................. 40% 40% 40% 40% Average life......................... 5 years 5 years 5 years 5 years Risk-free interest rate.............. 6.82% 6.89% 5.64% 6.24% Dividends............................ -- -- -- --
Compensation cost recognized in the accompanying consolidated statements of operations for stock options granted to employees at less than the fair market value of the underlying common stock was approximately $44,000 for the nine months ended September 30, 1999. The value of each option granted to non-employees was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
Nine Months Year ended Ended December 31, September 30, 1998 1999 ------------ ------------- Expected volatility.................................. 40% 40% Average life......................................... 10 years 10 years Risk-free interest rate.............................. 5.32% 5.94% Dividends............................................ -- --
The weighted-average fair value of options granted to non-employees was $1.05 and $3.09 for the year ended December 31, 1998 and for the nine months ended September 30, 1999, respectively. No options were granted to non- employees during the years ended December 31, 1996 and 1997. F-19 OrganicNet, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) We granted options to purchase 17,133 and 42,942 shares of common stock to non-employees for the twelve and nine months ended December 31, 1998 and September 30, 1999, respectively, in exchange for contract accounting and consulting services that had been previously rendered. Compensation cost recognized in the accompanying consolidated statements of operations related to these option grants was $16,597 and $67,384 for the twelve and nine months ended December 31, 1998 and September, 30, 1999, respectively. We granted options to purchase 10,400 shares of common stock to stockholders for the twelve months ended December 31, 1998 in accordance with the terms of note agreements with those stockholders. Compensation cost recognized in the accompanying consolidated statements of operations related to these option grants was $12,404 for the twelve months ended December 31, 1998. We granted options to purchase 40,569 shares of common stock to non- employees as finders fees for our Series C financing for the nine months ended September 30, 1999. The value of these options of $63,364 has been credited against additional paid-in capital as a cost of the financing. In addition, we granted options to purchase 200,000 shares of common stock to Superior in conjunction with our strategic relationship with Superior in September 1999. Compensation cost recognized in the accompanying consolidated statements of operations related to this option grant was $744,800 for the nine months ended September 30, 1999 (note 12). A summary of the activity within our stock option plans is as follows:
Years Ended December 31, --------------------------------------------------------- Nine Months Ended 1996 1997 1998 September 30, 1999 ----------------- ------------------ -------------------- -------------------- Weighted- Weighted- Weighted- Weighted- average average average average exercise exercise exercise exercise Shares price Shares price Shares price Shares price ------- --------- ------- --------- --------- --------- --------- --------- Outstanding at beginning of period.............. -- $ -- 590,333 $0.15 860,936 $0.42 1,243,769 $0.78 Granted................. 590,333 0.15 286,256 1.00 398,183 1.56 655,281 3.39 Exercised............... -- -- -- -- -- -- (38,082) 0.95 Canceled................ -- -- (15,653) 0.69 (15,350) 1.24 (43,602) 1.69 ------- ----- ------- ----- --------- ----- --------- ----- Outstanding at end of period................. 590,333 $0.15 860,936 $0.42 1,243,769 $0.78 1,817,366 $1.69 ======= ===== ======= ===== ========= ===== ========= ===== Options exercisable at end of period.......... 67,333 $0.50 234,602 $0.24 539,466 $0.46 1,194,179 $1.68 ======= ===== ======= ===== ========= ===== ========= ===== Weighted average fair value of options granted at fair value during the period...... $0.06 $0.46 $0.68 $2.15 ===== ===== ===== ===== Weighted average fair value of options granted below fair value during the period................. $ -- $ -- $ -- $0.95 ===== ===== ===== =====
F-20 OrganicNet, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following table summarizes information about stock options outstanding as of September 30, 1999:
Options Outstanding Options Exercisable ----------------------------------------------------------------------- Weighted- Weighted- average Weighted-average average exercise remaining exercise Option price Shares price contractual life Shares price ------------ --------- --------- ---------------- --------- --------- $ 0.10 520,000 $0.10 6.6 505,000 $0.10 0.50 43,062 0.50 7.2 43,062 0.50 1.00 263,374 1.00 7.5 174,036 1.00 1.50 301,549 1.50 8.4 82,570 1.50 2.00 274,370 2.00 9.3 86,000 2.00 2.50 215,011 2.50 9.7 103,511 2.50 6.00 200,000 6.00 9.9 200,000 6.00 ---------- --------- ----- --- --------- ----- $0.10-6.00 1,817,366 $1.69 8.2 1,194,179 $1.68 ========= ===== === ========= =====
(10) Employee Retirement and Savings Plan We sponsor an employee savings plan (the Plan) pursuant to Section 401(k) of the Internal Revenue Code. All employees who work at least 20 hours per week with one month of service may defer a portion of their salary. The Plan allows us to make discretionary contributions. However, we have not made any discretionary contributions for the periods presented. (11) Internet Hosting Agreements In fiscal year 1999, we have entered into several agreements with Conxion Corporation under which it will supply us with application hosting services and Internet infrastructure for our ASP software solutions. These agreements typically have terms of one year. Conxion has agreed to enter into extensions of these agreements and to enter into supplemental service agreements, as required by us on terms not less favorable to us as they offer to any of their customers. In addition, they have agreed not to terminate or suspend the services provided under these agreements in the event of a bona fide dispute so long as undisputed payments are not withheld. In connection with these agreements, Conxion invested $550,000 in exchange for 200,000 shares of our Series C preferred stock which was recorded as a $550,000 receivable at September 30, 1999. This receivable was paid in full in October 1999. At September 30, 1999, the Company had an accrual for approximately $41,500 in accrued expenses for hosting services incurred during the nine months ended September 30, 1999. (12) Superior Consultant Holdings Corporation In September 1999, we entered into a Distribution and Services Agreement, as amended, with Superior Consultant Holdings Corporation under which Superior agreed to market our product as a preferred ASP solution for healthcare organizations. We agreed to market Superior's healthcare consulting services and business integration services. In conjunction with this agreement we granted a fully vested, nonforfeitable, non-statutory stock option grant exercisable for 200,000 shares of our common stock at an exercise price of $6.00 per share. The option was valued at $3.72 per share using the Black- Scholes option pricing model and $744,800 has been recognized as expense in the accompanying statement of operations for the nine months ended September 30, 1999. The initial term of the agreement runs through August 31, 2002 and may be renewed by Superior for up to two additional two-year terms. F-21 OrganicNet, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (13) Income Taxes The provision for income taxes consists of the following components:
Years Ended December 31, -------------------- Nine Months Ended 1996 1997 1998 September 30, 1999 ------ ------ ------ ------------------ Current portion: Federal............................ $ -- $ -- $ -- $ -- State.............................. 4,000 6,400 4,000 4,800 Deferred portion..................... -- -- -- -- ------ ------ ------ ------ $4,000 $6,400 $4,000 $4,800 ====== ====== ====== ======
A reconciliation from the federal tax assuming the statutory rate to the total provision for the income taxes is as follows:
Years Ended December 31, ----------------------------------- Nine Months Ended 1996 1997 1998 September 30, 1999 --------- ----------- ----------- ------------------ Tax at statutory rate... $(784,629) $(1,629,828) $(2,040,578) $(1,657,622) State income taxes, net of federal taxes....... 2,640 4,224 2,640 3,168 Permanent differences, including goodwill..... 5,327 35,449 59,310 59,964 Net operating losses not benefited.............. 780,662 1,596,555 1,982,628 1,599,290 --------- ----------- ----------- ----------- $ 4,000 $ 6,400 $ 4,000 $ 4,800 ========= =========== =========== ===========
The components of our net deferred tax asset are as follows:
December 31, ------------------------ September 30, 1997 1998 1999 ----------- ----------- ------------- Deferred tax liabilities: Property and equipment............... $ 58,460 $ 26,617 $ 40,289 Intangibles.......................... 172,819 48,982 -- State taxes.......................... 139,074 253,107 339,966 ----------- ----------- ---------- Total deferred tax liabilities..... 370,353 328,706 380,255 ----------- ----------- ---------- Deferred tax assets: Various accruals and reserves not deductible for tax purposes......... 222,032 790,659 543,748 Intangibles.......................... -- -- 41,077 Net operating loss carryforwards..... 3,101,362 4,696,158 7,228,471 Tax credit carryforwards............. 16,073 16,073 16,073 ----------- ----------- ---------- Total deferred tax assets.......... 3,339,467 5,502,890 7,829,369 ----------- ----------- ---------- Net deferred tax assets.............. 2,969,114 5,174,184 7,449,114 Valuation allowance.................. (2,969,114) (5,174,184) (7,449,114) ----------- ----------- ---------- Net deferred tax assets after valuation allowance............... $ -- $ -- $ -- =========== =========== ==========
The net changes in the valuation allowance for the years ended December 31, 1997 and 1998 and for the nine months ended September 30, 1999 were increases of $1,950,719, $2,205,070 and $2,274,930, respectively. We believe sufficient uncertainty exists regarding our ability to realize our deferred tax assets and, accordingly, a valuation allowance has been established against the net deferred tax assets. F-22 OrganicNet, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) As of September 30, 1999, we had approximately $18,600,000 and $10,000,000 of net operating loss carryforwards for federal and state purposes, respectively. The federal net operating loss carryforwards expire between 2013 and 2019 and the state net operating loss carryforwards expire primarily in 2004. The difference between the federal and state net operating loss carryforwards is due primarily to a 50% limitation on net operating loss carryforwards for California income tax purposes. Federal and state laws impose substantial restrictions on the utilization of net operating loss carryforwards in the event of an "ownership change," as defined in Section 382 of the Internal Revenue Code. We have not yet determined whether an ownership change occurred due to significant stock transactions in each of the reported years. If an ownership change has occurred, utilization of the net operating loss carryforwards could be significantly reduced. Additionally, the utilization of the net operating loss carryforwards of approximately $2.4 million acquired in the acquisition of Healthcheck and PSI- Med is limited to the taxable income generated by the operations of the two entities. (14) Segment Information We have adopted the provisions of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 establishes standards for the reporting by public business enterprises of information about operating segments, products and services, geographic areas and major customers. Our chief operating decision maker is considered to be the Company's President. The President reviews discrete financial information regarding profitability of our six segments: Corporate Headquarters, Healthcheck, Velocity, PSI-Med LINC, and Res-Q. The corporate headquarters manages the corporate business, oversees all of the segments and performs research and development for our organic product. Healthcheck specializes in a service that researches the history and credentials of healthcare professionals. LINC offers software used by hospitals to monitor costs of patient care and offers expert testimony services related to management of medical cases. Velocity provides services that survey and track the effectiveness of medical procedures as well as services related to development of customized software and patient satisfaction surveys. Res-Q offers scheduling software to hospitals. We do substantially all of our business in the United States. F-23 OrganicNet, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The accounting policies of the segments are the same as those described in the summary of significant accounting policies in the accompany notes to the consolidated financial statements. Information about our segments as of and for the years ended December 31, 1996, 1997, and 1998, and as of and for the nine months ended September 30, 1999 are as follows:
Corporate Headquarters Velocity Healthcheck PSI-MED Res-Q LINC Consolidated ------------ ---------- ----------- --------- ---------- --------- ------------ 1996 Revenue from external customers: Service............... $ -- $ 3,755 $ 367,299 $ -- $ -- $ -- $ 371,054 Depreciation and amortization........... 33,218 1,392 41,925 -- -- -- 76,535 Interest expense........ 8,583 -- 51 -- -- -- 8,634 Income tax expense...... 4,000 -- -- -- -- -- 4,000 Net loss................ (1,994,958) (41,851) (274,925) -- -- -- (2,311,734) Total assets............ 307,725 319,706 133,585 -- -- -- 761,016 1997 Revenue from external customers: License............... $ -- $ 15,693 $ -- $ -- $ 347,166 $ 61,481 $ 424,340 Product development... -- 1,237,500 -- -- -- -- 1,237,500 Service............... -- 491,018 171,721 -- 497,597 149,309 1,309,645 Depreciation and amortization........... 133,161 60,159 40,326 -- 135,797 153,063 522,506 Interest expense........ 18,605 -- 1,147 -- -- -- 19,752 Income tax expense...... 6,400 -- -- -- -- -- 6,400 Net loss................ (4,037,950) 289,569 (308,826) -- (284,200) (458,605) (4,800,012) Total assets............ 673,289 354,953 649,612 -- 736,730 489,757 2,904,341 1998 Revenue from external customers: License............... $ -- $ 25,460 $ -- $ -- $ 421,395 $ 123,839 $ 570,694 Product development... -- 564,560 -- -- -- -- 564,560 Service............... 73,000 637,067 1,022,937 -- 1,024,324 731,069 3,488,397 Depreciation and amortization........... 219,489 65,453 17,155 -- 216,176 234,638 752,911 Interest expense........ 90,344 -- -- -- 2,611 -- 92,955 Income tax expense...... 4,000 -- -- -- -- -- 4,000 Net loss................ (4,674,652) (443,703) (113,242) -- (372,191) (401,913) (6,005,701) Total assets............ 380,061 450,414 558,704 -- 465,208 360,661 2,215,048 1999 Revenue from external customers: License............... $ -- $ 41,113 $ -- $ -- $ 633,739 $ 102,634 $ 777,486 Product development... 29,765 310,589 -- -- -- -- 340,354 Service............... 13,735 718,161 1,150,313 146,111 525,379 552,567 3,106,266 Depreciation and amortization........... 183,571 58,772 24,727 5,875 174,813 174,899 622,657 Interest expense........ 93,103 -- 7,605 3,720 -- -- 104,428 Income tax expense...... 4,800 -- -- -- -- -- 4,800 Net (loss) income....... (4,335,695) (72,988) 101,188 (45,287) (274,997) (252,380) (4,880,159) Total assets............ 1,525,766 218,433 537,750 1,895,609 711,119 123,863 5,012,540
In 1996, we had not acquired LINC and Res-Q and the information for Healthcheck reflects CPCS only as Healthcheck was not acquired until 1997. The information for Healthcheck reflects the combined operations of Healthcheck and CPCS in 1997 and 1998 as those operations were combined in early 1998. CPCS was also in the business of providing credentialing services. F-24 OrganicNet, Inc. and PSI-Med Corporation UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION The following unaudited pro forma condensed combined statements of operations have been prepared to illustrate the effect of our acquisition of PSI-Med Corporation and included in this prospectus an Unaudited Pro Forma Condensed Combined Statements of Operations for the nine months ended September 30, 1999 and the year ended December 31, 1998. The pro forma condensed combined statements of operations are based on the historical consolidated financial statements of OrganicNet, Inc. and the historical financial statements of PSI- Med Corporation. The Unaudited Pro Forma Condensed Combined Statement of Operations for the nine months ended September 30, 1999 assume that the acquisition had been consummated as of the first day of the earliest period presented. F-25 OrganicNet, Inc. and PSI-Med Corporation UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 1999
Pro forma Pro forma OrganicNet PSI-Med adjustments combined ----------- ---------- ----------- ----------- (A) Revenue: License................ $ 777,486 $ 299,262 $ -- $ 1,076,748 Product development.... 340,354 -- -- 340,354 Service................ 3,106,266 1,138,783 -- 4,245,049 ----------- ---------- --------- ----------- Total revenue........ 4,224,106 1,438,045 -- 5,662,151 ----------- ---------- --------- ----------- Cost of revenue: License................ 551,050 44,777 -- 595,827 Product development.... 60,813 -- -- 60,813 Service................ 2,068,029 873,232 -- 2,941,261 ----------- ---------- --------- ----------- Total cost of revenue............. 2,679,892 918,009 -- 3,597,901 ----------- ---------- --------- ----------- Gross profit ............ 1,544,214 520,036 -- 2,064,250 ----------- ---------- --------- ----------- Operating Expense: Sales and marketing.... 1,624,426 61,996 -- 1,686,422 Research and development........... 1,841,604 226,095 -- 2,067,699 General and administrative........ 2,858,705 116,631 174,944 (B) 3,150,280 ----------- ---------- --------- ----------- Total operating expense............. 6,324,735 404,722 174,944 6,904,401 ----------- ---------- --------- ----------- Operating loss........... (4,780,521) 115,314 (174,944) (4,840,151) Interest (expense)....... (104,428) (9,259) -- (113,687) Other income (expense)... 9,590 (24,248) -- (14,658) ----------- ---------- --------- ----------- Net (loss) income before income taxes............ (4,875,359) 81,807 (174,944) (4,968,496) Provision for income taxes................... 4,800 800 -- 5,600 ----------- ---------- --------- ----------- Net loss................. $(4,880,159) $ 81,007 $(174,944) $(4,974,096) =========== ========== ========= =========== Net loss per share: Basic and diluted...... $ (0.89) $ (0.91) =========== =========== Weighted average shares outstanding: Basic and diluted...... 5,490,060 5,490,060 =========== ===========
(A) Reflects the operations of PSI-Med for the eight months ended August 31, 1999 as the operations of PSI-Med are included in our statement of operations from September 1, 1999. (B) To reflect the expense due to the amortization of goodwill on a straight-line basis over seven years. F-26 OrganicNet, Inc. and PSI-Med Corporation UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1998
Pro forma Pro forma OrganicNet PSI-Med adjustments combined ----------- ---------- ----------- ----------- Revenue: License................ $ 570,694 $ 516,559 $ -- $ 1,087,253 Product development.... 564,560 -- -- 564,560 Service................ 3,488,397 1,694,032 -- 5,182,429 ----------- ---------- --------- ----------- Total revenue........ 4,623,651 2,210,591 -- 6,834,242 ----------- ---------- --------- ----------- Cost of revenue: License................ 756,156 -- -- 756,156 Product development.... 208,533 -- -- 208,533 Service................ 2,314,026 1,535,514 -- 3,849,540 ----------- ---------- --------- ----------- Total cost of revenue............. 3,278,715 1,535,514 -- 4,814,229 ----------- ---------- --------- ----------- Gross profit............. 1,344,936 675,077 -- 2,020,013 ----------- ---------- --------- ----------- Operating expense: Sales and marketing.... 1,643,868 168,135 -- 1,812,003 Research and development........... 1,832,783 237,105 -- 2,069,888 General and administrative........ 3,768,388 587,077 241,225 (C) 4,596,690 ----------- ---------- --------- ----------- Total operating expense............. 7,245,039 992,317 241,225 8,478,581 ----------- ---------- --------- ----------- Operating loss........... (5,900,103) (317,240) (241,225) (6,458,568) Interest expense......... (92,955) -- -- (92,955) Other expense............ (8,643) (86,042) -- (94,685) ----------- ---------- --------- ----------- Loss before income taxes................... (6,001,701) (403,282) (241,225) (6,646,208) Provision for income taxes................... 4,000 800 -- 4,800 ----------- ---------- --------- ----------- Net loss................. $(6,005,701) $ (404,082) $(241,225) $(6,651,008) =========== ========== ========= =========== Net loss per share: Basic and diluted...... $ (1.10) $ (1.22) =========== =========== Weighted average share outstanding: Basic and diluted...... 5,447,820 5,447,820 =========== ===========
(C) To reflect the amortization expense due to the amortization of goodwill on a straight-line basis over seven years. F-27 INDEPENDENT AUDITORS' REPORT The Board of Directors PSI-Med Corporation: We have audited the accompanying balance sheets of PSI-Med Corporation as of May 31, 1998 and 1999 and the related statements of operations, stockholders' deficit and cash flows for each of the years in the three-year period ended May 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of PSI-Med Corporation as of May 31, 1998 and 1999 and the results of its operations and its cash flows for each of the years in the three-year period ended May 31, 1999, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 8 to the financial statements, the Company has suffered significant losses from operations and has a net capital deficiency which have raised substantial doubt about the Company's ability to continue as a going concern. Management's plans in regards to these matters are also described in Note 8. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. KPMG LLP Orange County, California August 4, 1999, except as to notes 8 and 10, which are as of November 11, 1999 and September 7, 1999, respectively F-28 PSI-Med Corporation BALANCE SHEETS May 31, 1998 and 1999
1998 1999 ----------- ----------- ASSETS Current assets: Cash and cash equivalents........................... $ 17,158 $ 38,850 Accounts receivable, net of allowances for doubtful accounts of $182,518 and $56,607 for 1998 and 1999, respectively....................................... 112,417 126,720 Prepaid expenses.................................... 2,145 10,801 ----------- ----------- Total current assets............................. 131,720 176,371 Furniture, fixtures and equipment, net............... 102,902 85,214 Goodwill, net of accumulated amortization of $12,413 as of May 31, 1999.................................. -- 53,713 Other assets......................................... 11,588 9,738 ----------- ----------- $ 246,210 $ 325,036 =========== =========== LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable.................................... $ 491,142 $ 395,762 Accrued liabilities................................. 141,851 140,680 Advances from affiliate............................. 8,000 22,000 Current portion of notes payable to related parties............................................ 353,057 576,673 Notes payable....................................... 67,639 46,459 Deferred compensation payable to related parties.... 300,000 300,000 Unearned revenue.................................... 68,487 66,807 Sales taxes payable................................. 133,926 130,988 Current portion of capital lease obligations........ 15,673 17,021 ----------- ----------- Total current liabilities........................ 1,579,775 1,696,390 Capital lease obligations, excluding current portion............................................. 44,110 28,880 Notes payable to related parties, less current maturities.......................................... 299,329 123,408 ----------- ----------- Total liabilities................................ 1,923,214 1,848,678 ----------- ----------- Commitments and subsequent events Stockholders' deficit: Common stock, no par value, 200,000 shares authorized; 84,693 shares issued and outstanding as of May 31, 1998 and 1999........................... 367,204 367,204 Additional paid-in capital.......................... -- 90,000 Accumulated deficit................................. (2,044,208) (1,980,846) ----------- ----------- Total stockholders' deficit...................... (1,677,004) (1,523,642) ----------- ----------- $ 246,210 $ 325,036 =========== ===========
See accompanying notes to financial statements. F-29 PSI-Med Corporation STATEMENTS OF OPERATIONS Years Ended May 31, 1997, 1998 and 1999
1997 1998 1999 ---------- ---------- ---------- Revenue: Software................................ $ 651,119 $ 122,199 $ 102,500 Service and support..................... 1,939,766 2,128,828 2,151,167 ---------- ---------- ---------- Total revenue......................... 2,590,885 2,251,027 2,253,667 ---------- ---------- ---------- Cost of revenue: Software................................ 162,465 118,812 179,721 Service and support..................... 1,602,554 1,188,153 1,241,428 ---------- ---------- ---------- Total cost of revenue................. 1,765,019 1,306,965 1,421,149 ---------- ---------- ---------- Gross profit.............................. 825,866 944,062 832,518 Operating expense--selling, general and administrative........................... 1,676,594 1,459,107 743,457 ---------- ---------- ---------- Operating income (loss)................... (850,728) (515,045) 89,061 Other income (expense), net............... (61,106) 63,604 (24,899) ---------- ---------- ---------- Earnings (loss) before income taxes....... (911,834) (451,441) 64,162 Income tax expense........................ 800 800 800 ---------- ---------- ---------- Net earnings (loss)....................... $ (912,634) $ (452,241) $ 63,362 ========== ========== ========== Basic net earnings (loss) per share....... $ (11.88) $ (5.34) $ 0.75 ========== ========== ========== Weighted average number of shares outstanding.............................. 76,813 84,693 84,693 ========== ========== ========== Diluted net earnings (loss) per share..... $ (11.88) $ (5.34) $ 0.70 ========== ========== ========== Weighted average number of shares outstanding.............................. 76,813 84,693 90,884 ========== ========== ==========
See accompanying notes to financial statements. F-30 PSI-Med Corporation STATEMENTS OF STOCKHOLDERS' DEFICIT Years Ended May 31, 1997, 1998 and 1999
Common stock Additional --------------- paid-in Accumulated Shares Amount capital deficit Total ------ -------- ---------- ----------- ----------- Balances at May 31, 1996.................... 54,118 $ 5,086 $ -- $ (679,333) $ (674,247) Issuance of common stock................... 30,575 362,118 -- -- 362,118 Net loss................. -- -- -- (912,634) (912,634) ------ -------- ------- ----------- ----------- Balances at May 31, 1997.................... 84,693 367,204 -- (1,591,967) (1,224,763) Net loss................. -- -- -- (452,241) (452,241) ------ -------- ------- ----------- ----------- Balances at May 31, 1998.................... 84,693 367,204 -- (2,044,208) (1,677,004) Contribution of executive compensation ........... -- -- 90,000 -- 90,000 Net earnings............. -- -- -- 63,362 63,362 ------ -------- ------- ----------- ----------- Balances at May 31, 1999.................... 84,693 $367,204 $90,000 $(1,980,846) $(1,523,642) ====== ======== ======= =========== ===========
See accompanying notes to financial statements. F-31 PSI-Med Corporation STATEMENTS OF CASH FLOWS Years Ended May 31, 1997, 1998 and 1999
1997 1998 1999 --------- --------- -------- Cash flows from operating activities: Net earnings (loss)........................... $(912,634) $(452,241) $ 63,362 Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Depreciation and amortization................ 47,871 45,677 59,414 Contribution of executive compensation....... -- -- 90,000 Provision for deferred employee compensation................................ 45,756 -- -- Changes in operating assets and liabilities: Accounts receivable......................... (23,016) 67,943 (14,303) Other assets................................ (7,621) 3,118 (6,806) Accounts payable............................ 347,015 39,118 (95,380) Accrued liabilities......................... 230,655 (88,804) (1,171) Advance from affiliates..................... -- 8,000 14,000 Unearned revenue............................ 58,702 9,785 (1,680) Sales taxes payable......................... 168,182 (160,529) (2,938) --------- --------- -------- Net cash (used in) provided by operating activities................................ (45,090) (527,933) 104,498 --------- --------- -------- Cash flows from investing activities: Purchase of furniture, fixtures and equipment.................................... (134,483) (30,371) (29,313) Acquisition of Physicians Management Services, Inc.......................................... -- -- (6,000) --------- --------- -------- Net cash used in investing activities...... (134,483) (30,371) (35,313) --------- --------- -------- Cash flows from financing activities: Proceeds from issuance of capital stock....... 362,118 -- -- Increase in borrowings from related parties... (48,306) 320,264 (12,431) Net increase in borrowings.................... 60,050 (31,911) (21,180) Principal payments on lease obligations....... 10,077 47,493 (13,882) --------- --------- -------- Net cash provided by (used in) financing activities................................ 383,939 335,846 (47,493) --------- --------- -------- Increase (decrease) in cash and cash equivalents............................... 204,366 (222,458) 21,692 --------- --------- -------- Cash and cash equivalents at beginning of year.......................................... 35,250 239,616 17,158 --------- --------- -------- Cash and cash equivalents at end of year....... $ 239,616 $ 17,158 $ 38,850 ========= ========= ======== Supplemental disclosure of cash flow information: Cash paid for income taxes.................... $ 800 $ 800 $ 800 Cash paid for interest........................ 29,952 24,286 37,234 ========= ========= ======== Supplemental disclosure of noncash investing activities: Promissory note issued in exchange for the acquisition of Physical Management Services, Inc.......................................... $ -- $ -- $ 77,116 ========= ========= ========
See accompanying notes to financial statements. F-32 PSI-Med Corporation NOTES TO FINANCIAL STATEMENTS May 31, 1997, 1998 and 1999 (1) Organization and Summary of Significant Accounting Policies Business Description We are a California corporation which develops and distributes medical accounting software for medical facilities such as health maintenance organizations, independent physicians associations, medical groups, and medical accounting service bureaus located throughout the United States. The software has been sold as stand alone systems with customers maintaining the HP3000 hardware required to run the software at their site. We also maintain our own computer system at our corporate offices in order to service physicians requiring complete accounts receivable management and collection services. Additionally, we offer local clients the use of our medical accounting software through our computer system in a time share mode. These models have been the prevailing methods because of the high cost of communication lines and equipment. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents include cash on deposit with banks with original maturities of three months or less. Furniture, Fixtures and Equipment Furniture, fixtures and equipment are stated at cost. Depreciation of furniture, fixtures and equipment is provided using the straight-line method over the estimated useful lives of the assets of three to five years. Revenue Recognition The Company recognizes revenue in accordance with the American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 97-2, "Software Revenue Recognition." Under SOP 97-2, if a software sales arrangement does not require significant modification or customization of the software, revenue from the sale of the software is recognized when evidence of an arrangement exists, the fee is fixed and determinable, the license agreement has been delivered and collection of any resulting receivable is probable. As a result of certain issues raised in applying SOP 97-2, in March 1998, the AICPA issued an SOP which delayed for one year the effective date of certain provisions of SOP 97-2 with respect to what constitutes vendor- specific objective evidence of fair value of the delivered software element in certain multiple-element arrangements that include service elements entered into by entities that never sell the software elements separately. In December 1998, the AICPA issued SOP 98-9, which amended certain paragraphs of SOP 97-2 to require recognition of revenue using the residual method under certain circumstances, and is effective for fiscal years beginning after March 15, 1999. We do not expect the adoption of this SOP to have a material impact on our financial statements. Revenue from the sales of software is recognized when delivery has occurred, the fee is fixed and determinable and collection of any resulting receivable is probable. Revenue from servicing and support is recognized as the related services are performed. F-33 PSI-Med Corporation NOTES TO FINANCIAL STATEMENTS--(Continued) Adoption of Accounting Pronouncements In June 1997, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards (SFAS) No. 130 and SFAS No. 131, "Reporting Comprehensive Income" and "Disclosures about Segments of an Enterprise and Related Information," respectively (collectively, the Statements). The Statements are effective for fiscal years beginning after December 15, 1997. SFAS No. 130 establishes standards for reporting of comprehensive income and its components in annual financial statements. SFAS No. 131 establishes standards for reporting financial and descriptive information about an enterprise's operating segments in its annual financial statements and selected segment information in interim financial reports. Reclassification or restatement of comparative financial statements or financial information for earlier periods is required upon adoption of SFAS No. 130 and SFAS No. 131, respectively. For the years ended May 31, 1997, 1998 and 1999, comprehensive income (loss) is equal to our net earnings (loss). The Company operates in one segment and all operations and customers are within the United States. Application of the Statements' requirements did not have a material impact on our financial position or results of operations. In 1998, the American Institute of Certified Public Accountants' Accounting Standards Executive Committee ("AcSEC) issued SOP No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires certain costs incurred in connection with developing or obtaining internal-use software to be capitalized and other costs to be expensed. Application of this SOP's requirements did not have a material impact on our financial position or results of operations. Stock-Based Compensation We adopted SFAS No. 123, "Accounting for Stock-Based Compensation," which permits entities to recognize as expense over the service period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations, and provide pro forma net income (loss) disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. We have elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. Fair Value of Financial Instruments Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments," defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. The carrying amounts of cash and cash equivalents, accounts receivable, unbilled accounts receivable, other assets, notes payable, notes payable to related parties, advances from affiliate, accounts payable and accrued expenses, approximate fair value because of the short maturity of these instruments. We use market prices, when available, or discounted cash flows to calculate these fair values. The fair value of our notes payable is estimated based on the current rates offered to us for notes payable of the same remaining maturities and approximates its carrying value. Year 2000 We recognize the need to ensure our operations will not be adversely impacted by Year 2000 software failures. Software failures due to processing errors potentially arising from calculations using the Year 2000 date are a known risk. We are addressing this risk to the availability and integrity of financial systems and products and the reliability of operational systems. We have tested our Integrated Provider Network System and have completed the Year 2000 conversion of this system. We are in the process of assessing the system's F-34 PSI-Med Corporation NOTES TO FINANCIAL STATEMENTS--(Continued) Year 2000 compliance identifying Year 2000 remaining compliance issues in its other systems, equipment and processes. In addition to a review of internal systems, we have initiated formal communications with third parties with which we do business in order to determine whether or not they are Year 2000 compliant and the extent to which we may be vulnerable to third parties' failure to become Year 2000 compliant. Additionally, we are making changes to such systems, updating or replacing such equipment and modifying such processes to make them Year 2000 compliant. The total cost of compliance and its effect on our future results of operations are not expected to be material. However, due to the complexities of estimating the cost of modifying applications to become Year 2000 compliant and the difficulties in assessing third parties' ability to become Year 2000 compliant, estimates may be subject to change. We have not developed a Year 2000 contingency plan and believe that our information systems will be Year 2000 compliant; however, there can be no assurance that all of our systems will be Year 2000 compliant, that the costs to be Year 2000 compliant will not exceed our current expectations, or that the failure of such systems to be Year 2000 compliant will not have a material adverse effect on our business. Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of Long-lived assets and certain identifiable intangibles (including goodwill) are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Capitalized Software Development Costs Software development costs incurred after the establishment of technological feasibility are capitalized and later amortized using the greater of the straight-line method or based on the estimated revenue distribution over the remaining estimated economic life of the products. Such policy results in our amortizing our capitalized software development costs over an estimated economic life of three to seven years. Software development costs were fully amortized as of May 31, 1996. Goodwill Goodwill is the excess of the purchase price paid over the fair value of the net assets of the acquired company at the date of acquisition. Goodwill is amortized on a straight-line basis over two years. The Company periodically assesses the recoverability of goodwill based on an analysis of the cash flows generated by the underlying assets. In the opinion of management, no impairment of goodwill has occurred as of May 31, 1999. Income Taxes We account for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 provides that deferred tax assets and liabilities be recognized for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities and expected benefits of utilizing net operating loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The impact on deferred taxes of changes in tax rates and laws, if any, are applied to the years during which temporary differences are expected to be settled and reflected in the financial statements in the period enacted. F-35 PSI-Med Corporation NOTES TO FINANCIAL STATEMENTS--(Continued) Concentration of Credit Risk Financial instruments that potentially subject us to concentrations of credit risk consist principally of accounts receivable. Revenue from one customer accounted for 19% and 13% of total revenues for the year ended May 31, 1998 and 1999, respectively. Net Earnings (loss) Per Share We compute net earnings (loss) per share based upon SFAS No. 128, "Earnings per Share." The basic net earnings (loss) per share is computed by dividing the net earnings (loss) available to common stockholders by the weighted-average number of common shares outstanding. Potential common shares relating to stock options have been included in the calculation of diluted net earnings per share in the year ended May 31, 1999. Potential common shares relating to stock options in each of the years ended May 31, 1997 and 1998 are anti-dilutive, thus the diluted net earnings (loss) per share in these years is the same as the basic net earnings (loss) per share. (2) Acquisition of Physician Management Services, Inc. On January 15, 1999, we acquired the fixed assets and customer base of Physician Management Services, Inc. (PMS). The PMS purchase price totaled $83,116, payable in $6,000 in cash and $77,116 evidenced by an unsecured promissory note. The acquisition was accounted for as a purchase. PMS is an accounts receivable management company which performs the total collection process for doctors and medical groups. The primary client's of PMS are the University of California, Irvine (UCI) departments and doctors affiliated with UCI. The purchase price of $83,116 will be reduced if 12% of the collections for 24 months, related to the acquired customer base, are less than $83,116. The goodwill recorded in conjunction with the purchase is being amortized over two years, the life of the purchase contract. Select unaudited pro forma financial data for the years ended May 31, 1998 and 1999, assuming the PMS acquisition occurred on June 1, 1997, are presented as follows:
Unaudited ------------------------ 1998 1999 ----------- ----------- Revenue............................................ $ 2,761,306 $ 2,564,768 =========== =========== Net earnings (loss)................................ $ (392,102) $ 159,785 =========== =========== Stockholders' deficit.............................. $(1,634,516) $(1,474,832) =========== ===========
These pro forma results of operations and equity have been prepared for comparative purposes only and do not purport to be indicative of the results of operations and equity which actually would have resulted had the acquisition occurred on the date indicated, or which may result in the future. (3) Furniture, Fixtures and Equipment Furniture, fixtures and equipment consist of the following:
1998 1999 --------- --------- Furniture and fixtures................................. $ 70,004 $ 78,320 Computer equipment..................................... 375,489 393,911 Office equipment....................................... 1,177 3,752 --------- --------- 446,670 475,983 Accumulated depreciation............................... (343,768) (390,769) --------- --------- $ 102,902 $ 85,214 ========= =========
F-36 PSI-Med Corporation NOTES TO FINANCIAL STATEMENTS--(Continued) (4) Commitments We lease office space and equipment under noncancelable operating and capital leases with various expiration dates through the year 2002. Future minimum lease payments under noncancelable leases are as follows:
Capital Operating leases leases -------- --------- Period ending May 31: 2000................................................. $ 26,834 $117,877 2001................................................. 20,460 4,009 2002................................................. 7,994 -- -------- -------- Total minimum lease payments....................... 55,288 $121,886 ======== Less amounts representing interest..................... (9,387) -------- Present value of minimum lease payments............ 45,901 Less current portion of obligations under capital leases................................................ (17,021) -------- Obligations under capital leases, excluding current portion............................................... $ 28,880 ========
Rent expense for the years ended May 31, 1997, 1998 and 1999 was $169,196, $143,487 and $130,967, respectively. F-37 PSI-Med Corporation NOTES TO FINANCIAL STATEMENTS--(Continued) (5) Notes Payable
1998 1999 -------- -------- Notes payable to related parties consist of the following (see note 10): Note payable to stockholder for $25,000; bearing fixed interest rate of 12%; principal and interest payable at maturity; due on demand........................... $ 29,166 $ 32,864 Note payable to affiliate for $14,000; bearing fixed interest rate of 12%; principal and interest payable at maturity; due on demand........................... 14,317 16,014 Note payable to affiliate for $32,000; bearing fixed interest rate of 12%; principal and interest payable at maturity; due on demand........................... 32,483 36,240 Notes payable to related party for $90,000; bearing interest rate of 8% until December 31, 1997 and 12% thereafter; principal and interest payable at maturity; due on demand.............................. 106,155 119,618 Note payable to related party for $30,000; bearing fixed interest rate of 12%; interest payable monthly; due on demand........................................ 30,000 30,000 Note payable to majority stockholder for $147,284; bearing fixed interest rate of 11%; interest payable quarterly; due June 1, 2000.......................... 85,629 60,506 Note payable to related party for $162,996; bearing fixed interest rate of 10%; principal and interest due monthly; due February 16, 2004................... 159,699 138,725 Unsecured note payable to PMS for $77,116; bearing no interest rate; principal payable monthly calculated as 12% of gross billings collected; due January 15, 2001................................................. -- 66,684 Note payable to related party for $150,000; bearing no interest; due October 11, 1999....................... 150,000 150,000 -------- -------- Note payable to stockholder for $15,000; bearing fixed interest rate of 10%; interest and principal payable at maturity; due on demand........................... 44,937 49,430 Note payable to a bank secured by the Company's assets and a personal guarantee by an officer of the Company; bearing interest rate of prime plus 6.25% (14% at May 31, 1999); principal and interest due monthly; due June 15, 2000......................................... 67,639 46,459 -------- -------- 720,025 746,540 Less current portion................................... (420,696) (623,132) -------- -------- Total notes payable, less current maturities......... $299,329 $123,408 ======== ========
Total notes payable to related parties............. 652,386 700,081 Principal maturities of the notes payable at May 31, 1999 are as follows: 1999.............................................................. $623,132 2000.............................................................. 56,684 2001.............................................................. 36,000 2002.............................................................. 30,724 -------- $746,540 ========
F-38 PSI-Med Corporation NOTES TO FINANCIAL STATEMENTS--(Continued) (6) Related Party Transactions Accounts Payable to Related Parties At May 31, 1998 and 1999, we had the following accounts payable to related parties recorded within accounts payable in the accompanying balance sheet:
1998 1999 -------- ------- Accounts payable to related parties...................... $116,595 $73,129 ======== =======
Deferred Compensation Payable to Related Parties At May 31, 1998 and 1999, we had the following deferred compensation payable to related parties: Deferred compensation payable to related parties........ $300,000 $300,000 ======== ========
Executive Compensation Since June 7, 1998, OrganicNet, Inc. has committed to fund the salary of PSI-Med's President and majority shareholder. The portion of the President's salary attributable to the Company's business totals $90,000 and has been charged to expense in the accompanying 1999 financial statements and credited to additional paid-in capital. (7) Income Taxes Income tax expense for the years ended May 31, 1997, 1998 and 1999, respectively, consists of the following:
1997 1998 1999 ---- ---- ---- Current: Federal..................................................... $-- $-- $-- State and local............................................. 800 800 800 Deferred: Federal..................................................... -- -- -- State and local............................................. -- -- -- ---- ---- ---- $800 $800 $800 ==== ==== ====
F-39 PSI-Med Corporation NOTES TO FINANCIAL STATEMENTS--(Continued) The following table summarizes the tax effects of temporary differences which give rise to significant portions of the deferred tax assets and liabilities as of May 31, 1998 and 1999, respectively:
1998 1999 --------- --------- Deferred tax assets: Current assets: Accrued liabilities and other deferred tax assets.......................................... $ 331,645 $ 283,768 --------- --------- Total.......................................... 331,645 283,768 Less valuation allowance for current deferred tax assets.......................................... (331,645) (283,768) --------- --------- Net current deferred tax assets................ -- -- --------- --------- Noncurrent assets: Net operating loss carryforward.................. 402,286 386,458 Depreciation and amortization.................... 7,422 16,722 --------- --------- Total.......................................... 409,708 403,180 Less valuation allowance for non-current deferred tax assets........................................ (409,708) (403,180) --------- --------- Net noncurrent deferred tax assets................. -- -- --------- --------- Net deferred tax assets............................ $ -- $ -- ========= =========
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as operating loss carryforward. Realization of the deferred tax assets is dependent on generating future taxable income. For financial reporting purposes, a valuation allowance was recorded at May 31, 1998 and 1999 to reflect the uncertainty of generating taxable income sufficient to utilize the gross deferred tax asset. In addition, the utilization of the net operating loss carryforwards may be limited due to restrictions imposed under applicable Federal and state tax law due to a change in ownership. The valuation allowance decreased by $239,809 and increased by $54,405 for the years ended May 31, 1998 and 1999, respectively. As of May 31, 1999, we have net operating loss carryforwards for federal and state income tax purposes of approximately $1,038,000 and $470,000, respectively, which are available to offset future taxable income, if any, through 2019. Due to the uncertainty surrounding the realization of the benefits of our favorable tax attributes in future tax returns, we have fully reserved our deferred tax assets as of May 31, 1998 and 1999, respectively. In assessing the potential realization of deferred tax assets, we considered whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. (8) Liquidity We have incurred significant losses resulting in a net capital deficiency through May 31, 1999. As of May 31, 1999, we have reached maximum borrowing capacity on our notes payable and we have no commitments to raise additional capital. On August 31, 1999, we were acquired by OrganicNet, Inc. Management of OrganicNet is developing plans to provide additional future sources of capital. F-40 PSI-Med Corporation NOTES TO FINANCIAL STATEMENTS--(Continued) (9) Stock Options A summary of the activity of our stock options are as follows:
Weighted- average Shares of exercise price options per option --------- -------------- Outstanding as of May 31, 1996...................... 3,000 $20.00 Granted during the year ended May 31, 1997.......... 5,278 44.47 ----- Outstanding at May 31, 1997......................... 8,278 35.60 Granted during the year ended May 31, 1998.......... -- -- ----- Outstanding at May 31, 1998......................... 8,278 35.60 Granted during the year ended May 31, 1999.......... -- -- ----- Outstanding at May 31, 1999......................... 8,278 35.60 -----
The following table summarizes information about stock options exercisable at May 31, 1999:
Number of Options Weighted-average Weighted-average Range of Exercisable at exercise price remaining exercise prices May 31, 1999 at date of grant contractual life --------------- ----------------- ---------------- ---------------- $ 20.00 3,000 $20.00 9 yrs. 39.71 1,939 39.71 4 yrs. 47.23 3,339 47.23 4.75 yrs. ----- 8,278 =====
The Company applies APB No. 25 in accounting for its employee stock based compensation plan and uses the intrinsic value method in accounting for options granted to employees. Accordingly, no compensation costs have been recognized in the accompanying statements of operations for any of its stock options granted to employees because the exercise price of each option equaled or exceeded the fair value of the underlying common stock. Had we determined compensation costs based on the fair value at the grant date for our stock options under SFAS No. 123, pro forma net earnings (loss) would have been as follows:
1997 1998 1999 ----------- --------- ------- Net earnings (loss): As reported............................... $ (912,634) $(452,241) $63,362 Assumed stock compensation cost........... 119,252 -- -- ----------- --------- ------- Pro forma, adjusted..................... $(1,031,886) $(452,241) $63,362 =========== ========= ======= Basic net earnings (loss) per share: As reported............................... $ (11.88) $ (5.34) $ 0.75 ----------- --------- ------- Pro forma, adjusted..................... $ (13.43) $ (5.34) $ 0.75 ----------- --------- ------- Diluted net earnings (loss) per share: As reported............................... $ (11.88) $ (5.34) $ 0.70 ----------- --------- ------- Pro forma, adjusted..................... $ (13.43) $ (5.34) $ 0.70 =========== ========= =======
The above pro forma results assume we began recording compensation expense for options granted to employees subsequent to June 1, 1996 and may not be indicative of pro forma results to be expected in future F-41 PSI-Med Corporation NOTES TO FINANCIAL STATEMENTS--(Continued) periods. The fair value of each option was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
1997 1998 1999 ---- ---- ---- Expected volatility......................................... 40% -- -- Average life................................................ 7 yrs. -- -- Weighted-average risk-free rate............................. 6.80% -- -- Dividends................................................... -- -- --
The weighted-average fair value of options granted for the year ended May 31, 1997 was $22.59. (10) Subsequent Events As part of our plans to replace our debt obligations, agreements were signed to convert obligations to common stock at $30 per share:
Debt to Contract be Shares Date Converted of stock -------- --------- ------------ Accounts payable to stockholder............. 06/16/99 $ 25,000 833 shares Note payable to stockholders................ 06/28/99 32,864 1,095 shares Deferred compensation to related party...... 06/16/99 200,000 6,666 shares Note payable to related party............... 08/05/99 150,000 5,000 shares Deferred compensation to related party...... 08/16/99 50,000 1,667 shares
Additionally, management negotiated the following settlements to reduce the Company's obligations:
Final amount paid by Date Total the settled obligation Company -------- ---------- -------- Accounts payable to vendors.................... 08/10/99 $ 66,674 $ 39,474 Accounts payable to employees.................. 08/25/99 52,083 27,415 Note payable to related party.................. 09/13/99 133,147 70,151 -------- -------- $251,904 $137,040 ======== ========
Effective August 31, 1999, our shareholders exchanged all of their shares of our common stock for 16,667 shares of Series A-II preferred stock of OrganicNet, Inc. F-42 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Through and including , 1999 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer's obligation to deliver a prospectus when acting as underwriter and with respect to its unsold allotments or subscriptions. 4,500,000 Shares [ORGANICNET LOGO] Common Stock ----------------------------- Preliminary Prospectus ----------------------------- Needham & Company, Inc Punk,.Ziegel & Company , 1999 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by the Registrant in connection with the sale of Common Stock being registered. All amounts are estimates except the registration fee and the NASD filing fee. Registration fee.................................................. $ 14,387 NASD filing fee................................................... 5,675 Nasdaq National Market listing fee................................ 94,000 Printing and engraving............................................ 200,000 Legal fees and expenses........................................... 300,000 Accounting fees and expenses...................................... 850,000 Transfer agent fees............................................... 10,000 Blue sky fees and expenses........................................ 10,000 Miscellaneous..................................................... * --------- Total........................................................... 1,484,062 =========
- -------- * To be filed by amendment. Item 14. Indemnification of Directors and Officers Section 145 of the Delaware General Corporation Law authorizes a court to award, or a corporation's board of directors to grant, indemnity to directors and officers in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act of 1933, as amended (the "Securities Act"). Article VI of the Registrant's Amended and Restated Certificate of Incorporation provides for indemnification of its directors to the maximum extent permitted by the Delaware General Corporation Law and Section 43 of Article XI of the Registrant's Bylaws provides for indemnification of its directors, officers, employees and other agents to the maximum extent permitted by the Delaware General Corporation Law. In addition, the Registrant intends to enter into Indemnification Agreements with each director and certain officers containing provisions which are in some respects broader than the specific indemnification provisions contained in the Delaware General Corporation Law. The indemnification agreements may require the Company, among other things, to indemnify its directors against certain liabilities that may arise by reason of their status or service as directors (other than liabilities arising from willful misconduct of culpable nature), to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified, and to obtain directors' insurance if available on reasonable terms. Reference is also made to indemnifying officers and directors of the Company against certain liabilities. Reference is made to the following documents filed as exhibits to this Registration Statement regarding relevant indemnification provisions described above and elsewhere herein: (1) the form of Underwriting Agreement, filed as Exhibit 1.1; (2) the Amended and Restated Certificate of Incorporation, filed as Exhibit 3.1; (3) the Bylaws of the Registrant, filed as Exhibit 3.2; (4) the form of Indemnification Agreement entered into by the Registrant with each of its directors and executive officers, filed as Exhibit 10.25; and (5) the Indemnity and Subrogation Agreement, filed as Exhibit 10.7. Item 15. Recent Sales of Unregistered Securities Since August 1996, the Registrant issued and sold the following unregistered securities: (1) During the period, the Registrant granted stock options covering an aggregate of 1,413,553 shares of common stock, at a weighted average exercise price of $2.25 per share. The Registrant sold an aggregate of 46,867 shares of its common stock for consideration in the aggregate amount of $47,434 pursuant to the exercise of stock options granted under the Registrant's stock option plans. II-1 (2) From August 1996 to August 1999, the Registrant issued and sold an aggregate of 1,202,470 shares of Series B Preferred Stock at a price of $2.25 per share to a group of investors for an aggregate purchase price of approximately $2,705,558. Such shares of Series B preferred stock will convert into shares of common stock of the Registrant upon completion of this offering. (3) On December 20, 1996, the Registrant issued 5,416 shares of Series A- II preferred stock and 5,416 shares of Series A-III preferred stock to Velocity Healthcare Informatics, Inc. in exchange for substantially all of the assets of Velocity Healthcare Informatics, Inc. Such shares of Series A-II and Series A-III preferred stock will convert into 216,640 shares of common stock of the Registrant upon the closing of this offering. (4) On June 4, 1997, the Registrant issued 6,668 shares of Series A-II preferred stock to the shareholders of Intedata, Inc. for the acquisition of 100% of the voting securities of Intedata, Inc. Such shares of Series A-II preferred stock will convert into 133,360 shares of common stock of the Registrant upon the closing of this offering. (5) On June 23, 1997, the Registrant issued 13,333 shares of Series A-II preferred stock to the sole shareholder of L.I.N.C., Inc. For the acquisition of 100% of the voting securities of L.I.N.C., Inc. Such shares of Series A-II preferred stock will convert into 266,660 shares of common stock of the Registrant upon the closing of this offering. (6) On May 14, 1997, the Registrant issued 23,333 shares of Series A-II preferred stock to the shareholders of MMS, Inc. for the acquisition of 100% of the voting securities of MMS, Inc. Such shares of Series A-II preferred stock will convert into 466,660 shares of common stock of the Registrant upon the closing of this offering. (7) From October 1997 to August 1999, the Registrant issued and sold an aggregate of 4,000,000 shares of Series C preferred stock at a price of $2.75 per share to a group of investors for an aggregate purchase price of $11,000,000. Such shares of Series C preferred stock will convert into 4,000,000 shares of common stock of the Registrant upon completion of this offering. (8) On November 14, 1997, the Registrant issued 8,624 shares of Series A- II preferred stock to the shareholders of Healthcheck, Inc. for the acquisition of 100% of the voting securities of Healthcheck, Inc. Such shares of Series A-II preferred stock will convert into 172,480 shares of common stock of the Registrant upon the closing of this offering. (9) On September 9, 1998, the Registrant issued 37,775 shares of common stock to the former shareholders of Comprehensive Providers Credentialing Services, Inc. pursuant to an adjustment provision contained in the merger agreement by and between such shareholders and the Registrant, dated May 23, 1996. (10) On September 20, 1999, the Registrant issued 16,667 shares of Series A-II preferred stock to the shareholders of PSI-Med Corporation for the acquisition of 100% of the voting securities of PSI-Med. Such shares of Series A-II preferred stock will convert into 333,340 shares of common stock of the Registration upon completion of this offering. The issuances described in Items 2 through 9 were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act as transactions by an issuer not involving a public offering. In addition, the issuances described in Item 1 were deemed exempt from registration under the Securities Act in reliance on Rule 701 promulgated thereunder as transactions pursuant to compensatory benefit plans and contracts relating to compensation. The recipients of securities in each such transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and other instruments issued in such transactions. All recipients either received adequate information about the Company or had access, through employment or other relationships, to such information. II-2 INDEPENDENT AUDITORS' REPORT ON THE CONSOLIDATED FINANCIAL STATEMENT SCHEDULE The Board of Directors OrganicNet, Inc.: The audits referred to in our report dated October 22, 1999, included the related consolidated financial statement schedule for each of the years in the three-year period ended December 31, 1998 included in the registration statement. This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this consolidated financial statement schedule based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ KPMG LLP San Francisco, California October 22, 1999 II-3 OrganicNet, Inc. SCHEDULE II-VALUATION & QUALIFYING ACCOUNTS
Balance at Charged to Balance at Beginning of Costs and End of Description Period Expenses Deductions Other(1) Period ----------- ------------ ---------- ---------- -------- ---------- Year Ended 1996: Allowance for Doubtful Accounts............. $ -- $ -- $ -- $ -- $ -- Year Ended 1997: Allowance for Doubtful Accounts............. $ -- $113,000 $ -- $ -- $113,000 Year Ended 1998: Allowance for Doubtful Accounts............. $113,000 $ 15,800 $ -- $ -- $128,800 Nine Months Ended September 30, 1999 (unaudited): Allowance for Doubtful Accounts ............ $128,800 $101,684 $(32,377) $56,607 $254,714
- -------- (1) Reflects PSI-Med reserves acquired II-4 Item 16. Exhibit and Financial Statement Schedule
Exhibit Number Description of Document ------- ----------------------- 1.1* Form of Underwriting Agreement 3.1(1)* Amended and Restated Certificate of Incorporation of Registrant 3.2(1)* Bylaws of Registrant 4.1* Specimen Certificate for shares of Common Stock, $.001 par value, of the Registrant 5.1* Legal Opinion of Cooley Godward LLP 10.1** Amended and Restated Investor Rights Agreement, dated October 31, 1997, between Registrant and the Series A, B and C Investors 10.2** Indemnity and Subrogation Agreement, dated January 1, 1998, between the registrant and Michael Meisel 10.3** 1996 Stock Option/Stock Issuance Plan 10.4** 1997 Stock Option/Stock Issuance Plan 10.5** Employment Agreement with Jack D. Anderson dated January 1, 1996 10.6** Employment Agreement with Robert L. Anderson dated January 1, 1996 10.7** Employment Agreement with William W. Shaw, III dated June 1, 1996 10.8** Employment Letter Agreement with William H. Matthews dated June 17, 1999 10.9** Employment Agreement with M. Jan Roughan dated January 1, 1997 10.10** Employment Agreement with Michael J. Barry dated January 1, 1996 10.11 Form of Indemnification Agreement 10.12** Promissory Note, dated April 1, 1999, between Michael E. Meisel and the Registrant 10.13 Promissory Note, dated June 1, 1997 between M. Jan Roughan and the Registrant 10.14 Promissory Note, dated December 1, 1997 between M. Jan Roughan and the Registrant 10.15** Lease Agreement, dated January 5, 1999 between 1301 Evans Street Associates, LLC and the Registrant 10.16+** Dedicated Server Agreement between Conxion and the Registrant dated April 8, 1999 10.17+** Dedicated Server Agreement between Conxion and the Registrant dated May 3, 1999 10.18+** T1 Service Agreement between Conxion and the Registrant dated May 23, 1999 10.19+** Dedicated Server Agreement between Conxion and the Registrant dated June 1, 1999 10.20+** T1 Service Agreement between Conxion and the Registrant dated September 1, 1999 10.21 Application Service Provider Agreement between Conxion and the Registrant dated September 17, 1999 10.22 Distribution and Services Agreement between Superior Consultant Holdings Corporation and the Registrant dated September 20, 1999 21.1** Subsidiaries of Registrant 23.1 Consent of KPMG LLP, independent auditors 23.2 Consent of KPMG LLP, independent auditors 24.1** Power of Attorney (see signature page) 27.1 Financial Data Schedule
- -------- (1) As proposed to be filed with the Secretary of State of the State of Delaware prior to the effectiveness of this offering. * To be filed by amendment. ** Previously filed. + Confidential treatment requested on portions of this exhibit. Unredacted versions of this exhibit have been filed separately wih the Commission. II-5 Item 17. Undertakings Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions referenced in Item 14 of this Registration Statement or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, the Registrant will, unless in the opinion of its counsel the matters have been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes for the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 479(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. The undersigned Registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriter or permit prompt delivery to each purchaser. II-6 SIGNATURES Pursuant to the requirements of the Securities Act, as amended, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of San Francisco, State of California, on November 16, 1999. ORGANICNET, INC. /s/ Jack D. Anderson, *By: ________________________________ Jack D. Anderson Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, as amended, this registration statement has been signed by the following persons in the capacities and on the dates indicated:
Signature Title Date --------- ----- ---- /s/ Jack D. Anderson Chairman of the Board and November 16, 1999 ______________________________________ Chief Executive Officer Jack D. Anderson (Principal Executive Officer) /s/ William W. Shaw, III President November 16, 1999 ______________________________________ William W. Shaw, III * Chief Financial Officer November 16, 1999 ______________________________________ (Principal Financial William H. Matthews Officer) * Director November 16, 1999 ______________________________________ Gail E. Oldfather * Director November 16, 1999 ______________________________________ Michael A. Wilson * Director November 16, 1999 ______________________________________ Robert S. Garvie * Director November 16, 1999 ______________________________________ Robert L. Anderson * Director November 16, 1999 ______________________________________ M. Jan Roughan * Director November 16, 1999 ______________________________________ David W. McComb
/s/ William W. Shaw, III *By: ___________________________ William W. Shaw, III Attorney-in-fact II-7
Exhibit Number Description of Document Page ------- ----------------------- ---- 1.1* Form of Underwriting Agreement 3.1(1)* Amended and Restated Certificate of Incorporation of Registrant 3.2(1)* Bylaws of Registrant 4.1* Specimen Certificate for shares of Common Stock, $.001 par value, of the Registrant 5.1* Legal Opinion of Cooley Godward LLP 10.1** Amended and Restated Investor Rights Agreement, dated October 31, 1997, between Registrant and the Series A, B and C Investors 10.2** Indemnity and Subrogation Agreement, dated January 1, 1998, between the registrant and Michael Meisel 10.3** 1996 Stock Option/Stock Issuance Plan 10.4** 1997 Stock Option/Stock Issuance Plan 10.5** Employment Agreement with Jack D. Anderson dated January 1, 1996 10.6** Employment Agreement with Robert L. Anderson dated January 1, 1996 10.7** Employment Agreement with William W. Shaw, III dated June 1, 1996 10.8** Employment Letter Agreement with William H. Matthews dated June 17, 1999 10.9** Employment Agreement with M. Jan Roughan dated January 1, 1997 10.10** Employment Agreement with Michael J. Barry dated January 1, 1996 10.11 Form of Indemnification Agreement 10.12** Promissory Note, dated April 1, 1999, between Michael E. Meisel and the Registrant 10.13 Promissory Note, dated June 1, 1997 between M. Jan Roughan and the Registrant 10.14 Promissory Note, dated December 1, 1997 between M. Jan Roughan and the Registrant 10.15** Lease Agreement, dated January 5, 1999 between 1301 Evans Street Associates, LLC and the Registrant 10.16+** Dedicated Server Agreement between Conxion and the Registrant dated April 8, 1999 10.17+** Dedicated Server Agreement between Conxion and the Registrant dated May 3, 1999 10.18+** T1 Service Agreement between Conxion and the Registrant dated May 23, 1999 10.19+** Dedicated Server Agreement between Conxion and the Registrant dated June 1, 1999 10.20+** T1 Service Agreement between Conxion and the Registrant dated September 1, 1999 10.21 Application Service Provider Agreement between Conxion and the Registrant dated September 17, 1999 10.22 Distribution and Services Agreement between Superior Consultant Holdings Corporation and the Registrant dated September 20, 1999 21.1** Subsidiaries of Registrant 23.1 Consent of KPMG LLP, independent auditors 23.2 Consent of KPMG LLP, independent auditors 24.1** Power of Attorney (see signature page) 27.1 Financial Data Schedule
- -------- (1) As proposed to be filed with the Secretary of State of the State of Delaware prior to the effectiveness of this offering. * To be filed by amendment. ** Previously filed. + Confidential treatment requested on portions of this exhibit. Unredacted versions of this exhibit have been filed separately with the Commission. EX-10.11 2 FORM OF INDEMNIFICATION AGREEMENT Exhibit 10.11 INDEMNIFICATION AGREEMENT This Agreement is made and entered into this ____ day of _________, 1999 by and between OrganicNet, Inc. a Delaware corporation (the "Corporation"), and _________ ("Agent"). Recitals Whereas, Agent performs a valuable service to the Corporation in his/her capacity as ________ of the Corporation; Whereas, the stockholders of the Corporation have adopted bylaws (the "Bylaws") providing for the indemnification of the directors, officers, employees and other agents of the Corporation, including persons serving at the request of the Corporation in such capacities with other corporations or enterprises, as authorized by the Delaware General Corporation Law, as amended (the "Code"); Whereas, the Bylaws and the Code, by their non-exclusive nature, permit contracts between the Corporation and its agents, officers, employees and other agents with respect to indemnification of such persons; and Whereas, in order to induce Agent to continue to serve as __________ of the Corporation, the Corporation has determined and agreed to enter into this Agreement with Agent; Now, Therefore, in consideration of Agent's continued service as ____________ after the date hereof, the parties hereto agree as follows: Agreement 1. Services to the Corporation. Agent will serve, at the will of the Corporation or under separate contract, if any such contract exists, as ____________ of the Corporation or as a director, officer or other fiduciary of an affiliate of the Corporation (including any employee benefit plan of the Corporation) faithfully and to the best of his ability so long as he is duly elected and qualified in accordance with the provisions of the Bylaws or other applicable charter documents of the Corporation or such affiliate; provided, however, that Agent may at any time and for any reason resign from such position (subject to any contractual obligation that Agent may have assumed apart from this Agreement) and that the Corporation or any affiliate shall have no obligation under this Agreement to continue Agent in any such position. 2. Indemnity of Agent. The Corporation hereby agrees to hold harmless and indemnify Agent to the fullest extent authorized or permitted by the provisions of the Bylaws and the Code, as the same may be amended from time to time (but, only to the extent that such 1. amendment permits the Corporation to provide broader indemnification rights than the Bylaws or the Code permitted prior to adoption of such amendment). 3. Additional Indemnity. In addition to and not in limitation of the indemnification otherwise provided for herein, and subject only to the exclusions set forth in Section 4 hereof, the Corporation hereby further agrees to hold harmless and indemnify Agent: (a) against any and all expenses (including attorneys' fees), witness fees, damages, judgments, fines and amounts paid in settlement and any other amounts that Agent becomes legally obligated to pay because of any claim or claims made against or by him in connection with any threatened, pending or completed action, suit or proceeding, whether civil, criminal, arbitrational, administrative or investigative (including an action by or in the right of the Corporation) to which Agent is, was or at any time becomes a party, or is threatened to be made a party, by reason of the fact that Agent is, was or at any time becomes a director, officer, employee or other agent of Corporation, or is or was serving or at any time serves at the request of the Corporation as a director, officer, employee or other agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise; and (b) otherwise to the fullest extent as may be provided to Agent by the Corporation under the non-exclusivity provisions of the Code and Section 43 of the Bylaws. 4. Limitations on Additional Indemnity. No indemnity pursuant to Section 3 hereof shall be paid by the Corporation: (a) on account of any claim against Agent for an accounting of profits made from the purchase or sale by Agent of securities of the Corporation pursuant to the provisions of Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any federal, state or local statutory law; (b) on account of Agent's conduct that was knowingly fraudulent or deliberately dishonest or that constituted willful misconduct; (c) on account of Agent's conduct that constituted a breach of Agent's duty of loyalty to the Corporation or resulted in any personal profit or advantage to which Agent was not legally entitled; (d) for which payment is actually made to Agent under a valid and collectible insurance policy or under a valid and enforceable indemnity clause, bylaw or agreement, except in respect of any excess beyond payment under such insurance, clause, bylaw or agreement; (e) if indemnification is not lawful (and, in this respect, both the Corporation and Agent have been advised that the Securities and Exchange Commission believes that indemnification for liabilities arising under the federal securities laws is against public policy and is, therefore, unenforceable and that claims for indemnification should be submitted to appropriate courts for adjudication); or (f) in connection with any proceeding (or part thereof) initiated by Agent, or any proceeding by Agent against the Corporation or its directors, officers, employees or other 2. agents, unless (i) such indemnification is expressly required to be made by law, (ii) the proceeding was authorized by the Board of Directors of the Corporation, (iii) such indemnification is provided by the Corporation, in its sole discretion, pursuant to the powers vested in the Corporation under the Code, or (iv) the proceeding is initiated pursuant to Section 9 hereof. 5. Continuation of Indemnity. All agreements and obligations of the Corporation contained herein shall continue during the period Agent is a director, officer, employee or other agent of the Corporation (or is or was serving at the request of the Corporation as a director, officer, employee or other agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise) and shall continue thereafter so long as Agent shall be subject to any possible claim or threatened, pending or completed action, suit or proceeding, whether civil, criminal, arbitrational, administrative or investigative, by reason of the fact that Agent was serving in the capacity referred to herein. 6. Partial Indemnification. Agent shall be entitled under this Agreement to indemnification by the Corporation for a portion of the expenses (including attorneys' fees), witness fees, damages, judgments, fines and amounts paid in settlement and any other amounts that Agent becomes legally obligated to pay in connection with any action, suit or proceeding referred to in Section 3 hereof even if not entitled hereunder to indemnification for the total amount thereof, and the Corporation shall indemnify Agent for the portion thereof to which Agent is entitled. 7. Notification and Defense of Claim. Not later than thirty (30) days after receipt by Agent of notice of the commencement of any action, suit or proceeding, Agent will, if a claim in respect thereof is to be made against the Corporation under this Agreement, notify the Corporation of the commencement thereof; but the omission so to notify the Corporation will not relieve it from any liability which it may have to Agent otherwise than under this Agreement. With respect to any such action, suit or proceeding as to which Agent notifies the Corporation of the commencement thereof: (a) the Corporation will be entitled to participate therein at its own expense; (b) except as otherwise provided below, the Corporation may, at its option and jointly with any other indemnifying party similarly notified and electing to assume such defense, assume the defense thereof, with counsel reasonably satisfactory to Agent. After notice from the Corporation to Agent of its election to assume the defense thereof, the Corporation will not be liable to Agent under this Agreement for any legal or other expenses subsequently incurred by Agent in connection with the defense thereof except for reasonable costs of investigation or otherwise as provided below. Agent shall have the right to employ separate counsel in such action, suit or proceeding but the fees and expenses of such counsel incurred after notice from the Corporation of its assumption of the defense thereof shall be at the expense of Agent unless (i) the employment of counsel by Agent has been authorized by the Corporation, (ii) Agent shall have reasonably concluded that there may be a conflict of interest between the Corporation and Agent in the conduct of the defense of such action or (iii) the Corporation shall not in fact have employed counsel to assume the defense of such action, in each of which cases the fees and expenses of Agent's separate counsel shall be at the expense of the Corporation. 3. The Corporation shall not be entitled to assume the defense of any action, suit or proceeding brought by or on behalf of the Corporation or as to which Agent shall have made the conclusion provided for in clause (ii) above; and (c) the Corporation shall not be liable to indemnify Agent under this Agreement for any amounts paid in settlement of any action or claim effected without its written consent, which shall not be unreasonably withheld. The Corporation shall be permitted to settle any action except that it shall not settle any action or claim in any manner which would impose any penalty or limitation on Agent without Agent's written consent, which may be given or withheld in Agent's sole discretion. 8. Expenses. The Corporation shall advance, prior to the final disposition of any proceeding, promptly following request therefor, all expenses incurred by Agent in connection with such proceeding upon receipt of an undertaking by or on behalf of Agent to repay said amounts if it shall be determined ultimately that Agent is not entitled to be indemnified under the provisions of this Agreement, the Bylaws, the Code or otherwise. 9. Enforcement. Any right to indemnification or advances granted by this Agreement to Agent shall be enforceable by or on behalf of Agent in any court of competent jurisdiction if (i) the claim for indemnification or advances is denied, in whole or in part, or (ii) no disposition of such claim is made within ninety (90) days of request therefor. Agent, in such enforcement action, if successful in whole or in part, shall be entitled to be paid also the expense of prosecuting his claim. It shall be a defense to any action for which a claim for indemnification is made under Section 3 hereof (other than an action brought to enforce a claim for expenses pursuant to Section 8 hereof, provided that the required undertaking has been tendered to the Corporation) that Agent is not entitled to indemnification because of the limitations set forth in Section 4 hereof. Neither the failure of the Corporation (including its Board of Directors or its stockholders) to have made a determination prior to the commencement of such enforcement action that indemnification of Agent is proper in the circumstances, nor an actual determination by the Corporation (including its Board of Directors or its stockholders) that such indemnification is improper shall be a defense to the action or create a presumption that Agent is not entitled to indemnification under this Agreement or otherwise. 10. Subrogation. In the event of payment under this Agreement, the Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of Agent, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Corporation effectively to bring suit to enforce such rights. 11. Non-Exclusivity of Rights. The rights conferred on Agent by this Agreement shall not be exclusive of any other right which Agent may have or hereafter acquire under any statute, provision of the Corporation's Certificate of Incorporation or Bylaws, agreement, vote of stockholders or directors, or otherwise, both as to action in his official capacity and as to action in another capacity while holding office. 4. 12. Survival of Rights. (a) The rights conferred on Agent by this Agreement shall continue after Agent has ceased to be a director, officer, employee or other agent of the Corporation or to serve at the request of the Corporation as a director, officer, employee or other agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise and shall inure to the benefit of Agent's heirs, executors and administrators. (b) The Corporation shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Corporation, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform if no such succession had taken place. 13. Separability. Each of the provisions of this Agreement is a separate and distinct agreement and independent of the others, so that if any provision hereof shall be held to be invalid for any reason, such invalidity or unenforceability shall not affect the validity or enforceability of the other provisions hereof. Furthermore, if this Agreement shall be invalidated in its entirety on any ground, then the Corporation shall nevertheless indemnify Agent to the fullest extent provided by the Bylaws, the Code or any other applicable law. 14. Governing Law. This Agreement shall be interpreted and enforced in accordance with the laws of the State of Delaware. 15. Amendment and Termination. No amendment, modification, termination or cancellation of this Agreement shall be effective unless in writing signed by both parties hereto. 16. Identical Counterparts. This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute but one and the same Agreement. Only one such counterpart need be produced to evidence the existence of this Agreement. 17. Headings. The headings of the sections of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction hereof. 18. Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given (i) upon delivery if delivered by hand to the party to whom such communication was directed or (ii) upon the third business day after the date on which such communication was mailed if mailed by certified or registered mail with postage prepaid: (a) If to Agent, at the address indicated on the signature page hereof. 5. (b) If to the Corporation, to OrganicNet, Inc. 330 Townsend Street, Suite 206 San Francisco, CA 94107 or to such other address as may have been furnished to Agent by the Corporation. In Witness Whereof, the parties hereto have executed this Agreement on and as of the day and year first above written. OrganicNet, Inc. By: ------------------------ Title: --------------------- Agent --------------------------- 6. EX-10.13 3 PROMISSORY NOTE DATED 6/1/97 Exhibit 10.13 PROMISSORY NOTE $ 50,000.00 Amount Date: June 1, 1997 San Francisco, California For Value Received, Object Products, Inc., a Delaware corporation ("Obligor"), hereby promises to pay to the order of Mary Jan Roughen, a California resident ("Payee"), in lawful money of the United States, at the address of Payee set forth below, the principal sum of fifty thousand Dollars ($50,000.00). This Promissory Note (the "Note") shall be due and payable May 15, 1998 (the "Maturity Date") and shall be subject to an interest rate of ten percent (1.0%) per annum, compounded monthly. This Note may be prepaid at any time in whole or in part without premium or penalty. Interest may be paid at any time prior to maturity at the option of the Obligor. Obligor waives presentment, demand for performance, notice of nonperformance, protest, notice of protest, and notice of dishonor. No delay on the part of Payee in exercising any right hereunder shall operate as a waiver of such right under this Note. This Note is being delivered in and shall be construed in accordance with the laws of the State of California. If the indebtedness represented by this Note or any part thereof is collected at law or in equity or in bankruptcy, receivership or other judicial proceedings, or if this Note is placed in the hands of attorneys for collection after default, Obligor agrees to pay, in addition to the principal and interest payable hereon, reasonable attorneys' fees and costs incurred by Payee. This Note may be amended only with the written consent of the Obligor and the Payee. Any amendment effected in accordance with this paragraph shall be binding upon the Payee and the Obligor. Obligor and Payee agree that if any legal action is necessary to enforce or collect this Note or my other obligations for nonpayment at maturity, the prevailing party shall be entitled to reasonable attorney's fees in addition to costs and any other relief to which that party may be entitled. Any notice or other communication (except payment) required or permitted hereunder shall be in writing and shall, be deemed to have been given upon delivery if personally delivered or upon deposit if deposited in the United States mail for mailing by certified mail, postage prepaid, and addressed as follows: If to Obligor: Object Products, Inc. Attention: William W. Shaw 330 Townsend Street, Suite 206 San Francisco, CA 94107-1630 If to Payee: Mary Jan Roughen 910 Victoria Arcadia, CA 91006 Each of the above addressees may change its address for purposes of this paragraph by giving to the other addressee notice in conformance with this paragraph of such new address. Any payment shall be deemed made upon receipt by Payee. In Witness Whereof, the parties hereto have executed this Note as of the date first written above. Obligor: /s/ William W. Shaw, III ------------------------ Object Products, Inc. William W. Shaw, III President Payee: /s/ Mary Jan Roughan -------------------- Mary Jan Roughan EX-10.14 4 PROMISSORY NOTE DATED 12/1/97 Exhibit 10.14 PROMISSORY NOTE $ 50,000.00 Amount Date: December 1, 1997 San Francisco, California For Value Received, Object Products, Inc., a Delaware corporation ("Obligor"), hereby promises to pay to the order of Mary Jan Roughen, a California resident ("Payee"), in lawful money of the United States, at the address of Payee set forth below, the principal sum of fifty thousand Dollars ($50,000.00). This Promissory Note (the "Note") shall be due and payable May 15, 1998 (the "Maturity Date") and shall be subject to an interest rate of ten percent (10%) per annum, compounded monthly. This Note may be prepaid at any time in whole or in part without premium or penalty. Interest may be paid at any time prior to maturity at the option of the Obligor. Obligor waives presentment, demand for performance, notice of nonperformance, protest, notice of protest, and notice of dishonor. No delay on the part of Payee in exercising any right hereunder shall operate as a waiver of such right under this Note. This Note is being delivered in and shall be construed in accordance with the laws of the State of California. If the indebtedness represented by this Note or any part thereof is collected at law or in equity or in bankruptcy, receivership or other judicial proceedings, or if this Note is placed in the hands of attorneys for collection after default, Obligor agrees to pay, in addition to the principal and interest payable hereon, reasonable attorneys' fees and costs incurred by Payee. This Note may be amended only with the written consent of the Obligor and the Payee. Any amendment effected in accordance with this paragraph shall be binding upon the Payee and the Obligor. Obligor and Payee agree that if any legal action is necessary to enforce or collect this Note or my other obligations for nonpayment at maturity, the prevailing party shall be entitled to reasonable attorney's fees in addition to costs and any other relief to which that party may be entitled. Any notice or other communication (except payment) required or permitted hereunder shall be in writing and shall be deemed to have been given upon delivery if personally delivered or upon deposit if deposited in the United States mail for mailing by certified mail, postage prepaid, and addressed as follows: If to Obligor: Object Products, Inc. Attention: William W. Shaw 330 Townsend Street, Suite 206 San Francisco, CA 94107-1630 If to Payee: Mary Jan Roughen 910 Victoria Arcadia, CA 91006 Each of the above addressees may change its address for purposes of this paragraph by giving to the other addressee notice in conformance with this paragraph of such new address. Any payment shall be deemed made upon receipt by Payee. In Witness Whereof, the parties hereto have executed this Note as of the date first written above. Obligor: /s/ William W. Shaw, III ------------------------ Object Products, Inc. William W. Shaw, III President Payee: /s/ Mary Jan Roughan -------------------- Mary Jan Roughan EX-10.21 5 APPLICATION SERVICE PROVIDER AGREEMENT EXHIBIT 10.21 Application Service Provider Agreement This Application Service Provider Agreement (the "Agreement") is entered into as of September 17th, 1999 (the "Effective Date") by and between OrganicNet, Inc., a Delaware corporation with offices at 330 Townsend Street, Suite 206, San Francisco, California 94107 ("OrganicNet") and Conxion Corporation, a California corporation with offices at 4201 Burton Drive, Santa Clara, California 95054 ("Conxion") (collectively, the "Parties"). OrganicNet is expanding its software distribution strategy to include an Internet Application Service Provider ("ASP") model whereby OrganicNet customers can access OrganicNet's software through the Internet on equipment hosted for OrganicNet by third parties. The Parties have previously entered into three Dedicated Server Agreements, dated as of April 8, May 3, and June 1, 1999, and two T1 Service Agreements, dated as of May 23 and September 1, 1999 (collectively, the "Service Agreements"), a copy of each of which is attached hereto as Exhibit A, pursuant to which Conxion will continue to provide the services described therein ("Services") for OrganicNet. In consideration for entering into this Agreement, Conxion has purchased $550,000 of OrganicNet Series C preferred stock. The Parties wish to modify the terms of the Service Agreements to accommodate the ASP software distribution model. In consideration of the terms and conditions and mutual obligations contained in this Agreement, the parties agree as follows: Agreement 1. Governance. In the event that the terms of this Agreement are inconsistent with the terms of any Service Agreement entered into by the Parties now or in the future, the terms of this Agreement shall govern, notwithstanding any terms to the contrary in any such Service Agreement. 2. ASP Model. Conxion acknowledges and agrees that OrganicNet may use the services provided pursuant to the Service Agreements in fulfillment of the ASP software distribution model and, in particular, that end users of OrganicNet software shall be entitled to access such services. 3. Service Standards. Conxion agrees to supply the Services in a manner described in the Service Agreements (including attached proposals). 4. Maintenance And Upgrade Windows. Conxion agrees not perform maintenance or upgrades that would materially and adversely affect the Services except (i) when maintenance or upgrades are performed during the hours of 10:00 p.m. to 3:00 a.m., Pacific Time (the "Routine Window"), (ii) when the deferral of such maintenance or upgrades to a Routine Window would materially and adversely affect the security or performance of a Conxion data center. Conxion shall perform maintenance or upgrades in such a manner as to utilize the redundancy of any Services, to minimize the adverse impact on the Services and notify OrganicNet as far in advance as practicable of any maintenance or upgrades. 5. Enhanced Service Level Guarantee. In addition to the "Service and Performance Guarantees" set forth in the Service Agreements, Conxion shall provide the following enhanced service and performance guarantees to OrganicNet: 5.1 In the event of an Outage (as defined below) under an existing Service Agreement during any business day, Conxion shall provide OrganicNet with a free day of service under such Service Agreement; 5.2 In the event of five (5) Outages under an existing Service Agreement during any thirty (30) day period, Conxion shall provide OrganicNet with a free month of service under such Service Agreement; 1. 5.3 In the event of two (2) consecutive months of free services under an existing Service Agreement, Conxion shall allow OrganicNet to cancel the applicable Service Contract without penalty. As used herein, an "Outage" related to any Service Agreement shall mean a service degradation on Conxion's network adversely affecting the Services under such Service Agreement that is greater than an average of 50% over any 12 minute period (excluding Routine Upgrade Windows) or circuit bandwidth utilization of greater than an average of 70% (Seventy Percent) for the circuit relating to such Services. 6. Service Rate Changes. Conxion reserves the right to change the service rates upon sixty (60) days prior written notice to OrganicNet; provided, however, that the new service rates charged to OrganicNet will be at least as favorable to OrganicNet as Conxion offers at such time to any customer. In the event any service rate change is greater than 10% (Ten Percent), Conxion may allow OrganicNet to cancel the applicable Service Contract with 60 days written notice without penalty. 7. Term and Termination. 7.1 Term and Additional Service Agreements. Notwithstanding anything contained in the Service Agreements, (i) Conxion may not terminate or suspend Services under any Service Agreements in the event of a bona fide dispute between the parties so long as undisputed payments are not withheld, and (ii) Conxion shall enter into extensions of existing Service Agreements upon the end of the applicable contract term, as required by OrganicNet, or into supplemental Service Agreements, as required by OrganicNet, on terms no less favorable to OrganicNet than Conxion offers at such time to any customer. Any subsequent Service Agreement shall be deemed to be a Service Agreement hereunder and shall be attached as an exhibit hereto and added to Exhibit A. 7.2 Termination; Cure. In addition to the limitations on termination contained in Section 7.1, Conxion may not terminate any of this Agreement or the Services Agreements except in the event of a material breach of such agreement by OrganicNet; provided, however, that in the event of such a breach, Conxion may not terminate the applicable agreement until it shall have provided written notice of such breach to OrganicNet and OrganicNet shall have not have cured such breach within thirty (30) days of such notice. 7.3 Survival. This Agreement shall survive termination of any Service Agreement. 8. General. 8.1 Notices. All notices, consents and approvals under this Agreement must be delivered in writing by courier, or by certified or registered mail, (postage prepaid and return receipt requested) to the other party at the address set forth beneath such party's signature, and will be effective upon receipt. Either party may change its address by giving notice of the new address to the other party. If to OrganicNet: If to Conxion: 330 Townsend Street, Suite 206 4201 Burton Drive San Francisco, CA 94107 Santa Clara, CA 95054 Attn: William W. Shaw, III Attn: Antonio Salerno 8.2 Governing Law. This Agreement will be governed by the laws of the State of California as such laws apply to contracts between California residents performed entirely within California. 8.3 Waivers. All waivers must be in writing. Any waiver or failure to enforce any provision of this Agreement on one occasion will not be deemed a waiver of any other provision or of such provision on any other occasion. 8.4 Counterparts. This Agreement may be executed in counterparts, each of which will be considered an original, but all of which together will constitute the same instrument. 2. 8.5 Entire Agreement. This Agreement constitutes the entire agreement between the parties regarding the subject hereof and supersedes all prior or contemporaneous agreements, understandings, and communication, whether written or oral. This Agreement may be amended only by a written document signed the Parties. In Witness Whereof, the Parties have executed this Application Service Provider Agreement as of the Effective Date. OrganicNet, Inc. Conxion Corporation By: /s/ William W. Shaw, III By: /s/ James C. Hunt ----------------------------------- ------------------------------- Name: William W. Shaw, III Name: James C. Hunt --------------------------------- ----------------------------- Title: President Title: CFO -------------------------------- ---------------------------- Date: 9/17/99 Date: 9/17/99 --------------------------------- ----------------------------- 3. Exhibit A Service Agreements TYPE OF CONTRACT DATE Dedicated Server Agreements April 8, 1999 Dedicated Server Agreements May 3, 1999 T1 Service Agreement May 23, 1999 Dedicated Server Agreements June 1, 1999 T1 Service Agreement September 1, 1999 EX-10.22 6 DISTRIBUTION & SERVICE AGREEMENT Exhibit 10.22 DISTRIBUTION AND SERVICES AGREEMENT This Distribution and Services Agreement ("Agreement") is entered this 20th day of September, 1999 ("Effective Date") by and between OrganicNet, Inc., a corporation organized under the laws of Delaware, with its principal office at 330 Townsend Street, Suite 206, San Francisco, California 94107 (hereinafter referred to as "OrganicNet"), and Superior Consultant Company, a corporation organized under the laws of Michigan, with its principal office at 4000 Town Center, Suite 1100, Southfield, Michigan 48075 (hereinafter referred to as "SUPC" or "Superior"). Whereas, OrganicNet owns rights in certain software and methodologies (the "OrganicNet Software"); and, Whereas, SUPC is a healthcare consulting firm providing Health Care Consulting Services, including Business Integration Services, as defined below. Whereas, SUPC desires to promote the OrganicNet Software as a preferred Application Services Provider ("ASP") solution for healthcare organizations, to obtain a license to facilitate SUPC's integration and implementation services and to be identified by OrganicNet as its services partner for the OrganicNet Software and OrganicNet's adaptable object oriented architecture ("OrganicWare") in healthcare; and, Whereas, OrganicNet desires to grant certain rights and licenses to SUPC, to market and provide services related to the OrganicNet Software, as provided herein; Now Therefore, in consideration of the promises and covenants contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties do mutually agree as follows: SECTION 1 - DEFINITIONS The following defined terms used in this Agreement shall have the meanings specified in this Section 1. 1.1 "Affiliate" means, as to either party, an entity in which the party has an ownership percentage of greater than 55%, or which has an ownership percentage of greater than 55% in the party. 1.2 "Business Integration Services" means the implementation by SUPC of modifications, extensions and interfaces to software systems, identification of operational strategies and business changes required to take advantage of a software product, integration and implementation and conversion assistance, and organization design and conversion training, and as a general matter may include strategic systems planning, productivity improvement/work simplification, change management and training, and systems management and outsourcing. 1.3 "Healthcare Consulting Services" means integrated management, information systems, and e-commerce related consulting services to all segments of the healthcare industry, including but not limited to information systems planning, information-systems audits, information systems outsourcing, management outsourcing, systems integration and interfaces, product design, development and implementation, management consulting, process refinement and reengineering, physician services, patient accounting and financial management consulting, nursing management consulting and reengineering, nursing informatics and total quality management (TQM/CQI) assistance. Healthcare Consulting Services includes Business Integration Services. 1.4 "Client" means any third party that has licensed or may license the OrganicNet Software or has engaged or may engage SUPC's Healthcare Consulting Services as a result of the parties' joint marketing efforts in connection with this Agreement. 1.5 "Direct Competitor" means any person or entity that offers products or services that are similar in nature to, with respect to OrganicNet, OrganicNet Software, and with respect to SUPC, Healthcare Consulting Services. 1.6 "Documentation" means all functional documentation, user and system operating manuals, training materials, program descriptions, system guides, specifications, instructions and explanatory materials regarding and related to the OrganicNet Software. 1.7 "SUPC" means SUPC and its Affiliates. 1.8 "OrganicNet" means OrganicNet and its Affiliates. 1.9 "OrganicNet Software" means OrganicNet's OrganicWare, including, modules, programs, configuration files, reference data files, and help files, and Evolution(TM), OrganicNet's proprietary methodology, including but not limited to OrganicNet's processes for business process reengineering, semantic modeling, use case and quality functional deployment and which are further described in Exhibit A. The OrganicNet Software includes any Third Party Software. OrganicNet Software also includes all future versions, enhancements, modifications and/or derivatives of any of the above during the term of this Agreement. 1.10 "OrganicWare" means OrganicNet's proprietary OrganicNet oriented architecture. 1.11 "Third Party Software" means any computer code, modules, programs, data files, or Documentation that is proprietary to or licensed by a third party to OrganicNet and that is embedded or that is inseparable from the OrganicNet Software. SECTION 2 - GRANT OF SPECIFIC LICENSE 2.1 OrganicNet hereby grants to SUPC a non-transferable (except as provided in Section 12.2 hereof) non-exclusive royalty free worldwide license to market, use, install, and display the OrganicNet Software during the term of this Agreement and strictly in accordance with its terms solely for the following purposes: (i) marketing, promoting and demonstrating the OrganicNet Software in exhibits, as appropriate in present and future SUPC facilities, and to potential Clients; (ii) developing and demonstrating implementation methodology utilizing the OrganicNet Software; (iii) developing client solutions utilizing OrganicNet Software; (iv) and training SUPC personnel. 2.2 Unless otherwise agreed by the parties in writing, SUPC shall not sub-license the OrganicNet Software. 2.3 OrganicNet shall make available to SUPC, at no charge, copies of the OrganicNet Software, as well as available Documentation. Further, within thirty (30) days following commercial release of any version of the OrganicNet Software, OrganicNet shall make available to SUPC, at no charge, copies of the latest version of the OrganicNet Software, as well as available Documentation and reasonable support for SUPC's use for any and all purposes set forth in this Agreement. OrganicNet will specify the hardware required to run the OrganicNet Software. SUPC will be responsible for procuring and maintaining the hardware. Throughout the term of this Agreement, OrganicNet shall provide to SUPC updates to all such versions as they are made generally available by OrganicNet. SUPC may make copies of the OrganicNet Software as necessary solely for backup, and archival purposes, or for the uses described in Section 2.1. SUPC shall include all of OrganicNet's copyright and other proprietary rights notices contained in the OrganicNet Software as provided by OrganicNet on all such copies. Additionally, each SUPC facility shall be entitled to receive only a single copy of the OrganicNet Software hereunder, and SUPC shall remain fully responsible, under Section 5, for such copies. SUPC shall have the right to inform its clients and prospective Clients of its relationship with OrganicNet as a marketer of the OrganicNet Software as set forth in this Agreement. 2.4 SUPC will receive no payments of any kind from OrganicNet in connection with licenses of the OrganicNet Software, except as may be provided in a separate written agreement. 2.5 The OrganicNet Software shall be and remain the exclusive property of OrganicNet or its third party suppliers, and SUPC shall have no rights or interest in the OrganicNet Software other than the rights expressly granted to SUPC under this Agreement. Except as otherwise expressly permitted herein, SUPC shall not (a) transfer, sublicense, lease or distribute the OrganicNet Software to any third party; (b) reverse engineer, reverse assemble, reverse compile or otherwise engage in similar manipulation of the OrganicNet Software; and (c) export or re-export the OrganicNet Software in violation of the export administration regulations of the U.S. Department of Commerce or any other applicable export law or regulation of the United States. SECTION 3 - MARKETING AND SERVICES ARRANGEMENTS 3.1 In conjunction with the rights granted in Section 2.1 above, SUPC will promote the OrganicNet Software as a preferred ASP solution for healthcare organizations. OrganicNet will promote SUPC as their exclusive alliance partner for the provision of Healthcare Consulting Services ("Exclusive Alliance Partner") and OrganicNet will not offer distribution rights to any Direct Competitor of SUPC during the term of this Agreement, without SUPC's prior written approval. 3.2 OrganicNet appoints Superior as its exclusive international provider of Healthcare Consulting Services and Business Integration Services to OrganicNet clients ("Exclusive Provider"). As OrganicNet's Exclusive Provider, Superior will be the sole provider of Healthcare Consulting Services to OrganicNet clients (whether as a sub-contractor with OrganicNet, or as a direct contractor with the OrganicNet client), unless: (1) Superior (or its subsidiaries and Affiliates) does not have competence with respect to the services; (2) Superior (or its subsidiaries and Affiliates) does not have experienced staff available on a timely basis; (3) OrganicNet's client has rejected Superior, demanded that OrganicNet contract with a third-party, or has an existing contractual obligation with a third-party; or (4) Superior declines an opportunity to provide the services. 3.3 SUPC will use reasonable commercial efforts to promote the OrganicNet Software as a preferred ASP solution for healthcare organizations. However, OrganicNet understands that Superior may also promote and provide services relating to Direct Competitors of the OrganicNet Software. OrganicNet further understands that Superior is not obligated to promote the OrganicNet Software to any particular Client, and will do so only when Superior determines, in its sole discretion, that the OrganicNet Software is the correct solution for a particular Client. 3.4 Notwithstanding anything to the contrary herein, OrganicNet will not be restricted from: (i) marketing its products and services to any entity that is not a Direct Competitor of Superior; or (ii) entering into alliance or marketing arrangements with any third party which is not a Direct Competitor with Superior. Notwithstanding anything to the contrary herein, SUPC will not be restricted from promoting or providing any product or service or entering into any agreement, alliance or marketing arrangement with any person, including Clients and Direct Competitor of OrganicNet. 3.5 If SUPC provides Healthcare Consulting Services to OrganicNet clients as a sub-contractor to OrganicNet, it shall do so pursuant to the Master Service Agreement (MSA) incorporated into this Agreement as Exhibit B and Work Order(s) in the form attached as Exhibit C. 3.6 SUPC will have the right, but not the obligation, to provide Business Integration Services and Healthcare Consulting Services and applications software related to OrganicNet's Software. 3.7 It is anticipated that in most instances SUPC will provide its Business Integration Services, and OrganicNet will provide the OrganicNet Software, directly to the Client, and not as a subcontractor of the other. Each party will determine the terms of its contracts with the Client in its sole discretion. The parties may, subject to each party's written agreement, act in a prime-sub or co-prime relationship if appropriate to a particular Client opportunity. Except as provided in Section 3.5, the terms of any sub-contract or co-prime agreement shall be consistent with this Agreement, but shall otherwise be negotiated by the parties in the future. 3.8 It is anticipated that SUPC will provide to OrganicNet or Clients on-line subscription based Healthcare Consulting Services and other such services that the parties determine are valuable to Clients, including without limitation remote application/help desk support, remote sourcing of value-added offerings, etc. 3.9 Each party will retain 100% of the fees payable to it under any agreement with a Client. 3.10 SUPC and OrganicNet will, within 60 days of the execution of this Agreement, jointly develop and implement a marketing and sales plan for the OrganicNet Software and transaction services and the relevant SUPC Healthcare Consulting Services and Business Integration Services offerings, which plan shall, in all material respects, be intended to further the purposes of this Agreement as expressed herein. The developed marketing and sales plan shall be Confidential Information for the purposes of Section 5 of this Agreement. The promotional plan shall be revised from time-to-time as the parties deem appropriate. 3.11 Each party will be responsible for its own costs associated with the activities performed under this Agreement. 3.12 SUPC and OrganicNet shall use reasonable commercial efforts to market the other party's offering through its normal marketing and distribution channels (the OrganicNet Software being OrganicNet's offering and Healthcare Consulting Services and Business Integration Services being SUPC's offering). However, neither party will have any obligation to establish or maintain a formal sales or marketing organization under this Agreement or otherwise. Neither party shall make any binding commitments to third parties relating to the offering of the other. 3.13 SUPC and OrganicNet will share leads related to potential sales of the OrganicNet Software and OrganicNet's transaction services as well as SUPC's Business Integration Services and Healthcare Consulting Services. 3.14 SUPC shall be entitled to elect or have elected, to OrganicNet's Board of Directors, one nominee designated by SUPC. OrganicNet further shall cause the foregoing provisions to be included in an agreement among holders of OrganicNet voting securities having not less than the minimum number of votes necessary to cause the foregoing conditions to be satisfied and the foregoing actions to be taken. SUPC and OrganicNet further agree that upon the Effective Date, two SUPC nominees to the Advisory Council of OrganicNet shall be appointed and shall serve a term running from the Effective Date to December 31, 2001. 3.15 Nothing in this Agreement shall be deemed a commitment or obligation of OrganicNet to affect any level of revenue for SUPC's Business Integration Services. 3.16 OrganicNet will provide initial product training to SUPC personnel, pursuant to a mutually-agreed upon training plan for the purpose of such personnel becoming knowledgeable in the features and capabilities of OrganicNet's Software. OrganicNet will provide such training to SUPC at no cost. SUPC will incur travel expenses for training of SUPC consultant staff. 3.17 Optionally, OrganicNet may elect, at its sole discretion to provide additional training at no cost based on the opportunities that the two organizations may jointly enjoy. Such additional no charge training must be approved by OrganicNet in writing prior to the training event. SUPC will make its training facilities, including all necessary hardware available to OrganicNet at no charge for the purposes of carrying out product training. Each party shall be responsible for its direct expenses incurred to carry out all Training. At no charge to SUPC OrganicNet will provide to SUPC a reasonable number of copies of its available marketing materials (developed by OrganicNet), training and end-user documentation to allow SUPC to effectively market the OrganicNet Software and provide Business Integration Services and Healthcare Consulting Services to Clients. Throughout the term of this Agreement, OrganicNet shall provide to SUPC any updates to all such marketing materials as OrganicNet makes such marketing materials generally available to Clients. In order for SUPC to promote the OrganicNet Software as provided for in this Agreement, such marketing materials (excluding OrganicNet's training materials and technical documentation, which may only be distributed with OrganicNet's written consent) provided by OrganicNet to SUPC can be used and distributed by SUPC to third parties without restrictions or limitations on disclosure, provided that any materials that contain any of OrganicNet's Confidential Information may be disclosed only pursuant to OrganicNet's prior written consent and an executed non-disclosure agreement copied to OrganicNet that contains provisions at least as restrictive as the provisions of Section 5. 3.18 OrganicNet agrees to periodically brief SUPC personnel (subject to the obligations of Section 5 hereof) regarding planned or prospective technological innovations being undertaken by OrganicNet relating to the OrganicNet Software. SUPC agrees to periodically apprise OrganicNet personnel regarding planned or prospective technological innovations being undertaken by SUPC relating to its Business Integration Services, its use of the OrganicNet Software, Client feedback on the OrganicNet Software, and its views on marketplace trends and developing business needs. 3.19 OrganicNet shall permit SUPC personnel and SUPC clients to participate in OrganicNet modeling and product development planning meetings. 3.20 In connection with each party's marketing and promotional activities herein, OrganicNet and SUPC hereby further grant to the other during the term of this Agreement a limited non-exclusive, nontransferable, royalty-free, license to use, under the terms and conditions of this Section, each party's company name and trademarks used by each party and any name used by each party in connection with the marketing of the OrganicNet Software (with respect to OrganicNet) and the Healthcare Consulting Services and Business Integration Services (with respect to SUPC) (the "Marks"). Written approval must be obtained prior to the use of the other party's Marks for each desired use of the Mark. Such uses of SUPC's Marks will be in accordance with SUPC's policies and guidelines for its Marks. Such uses will include approved descriptions of the alliance in press releases and marketing collateral. Any press release related to this Agreement must be approved by both parties in writing in advance, not to be unreasonably withheld. SECTION 4 - PAYMENTS 4.1 Structure of Fees. The fees charged by OrganicNet to SUPC for services rendered on SUPC's Client projects shall be at least as favorable as the fees charged by OrganicNet to any third party for developing comparable projects, except for those fees charged to state or federal governments or agencies thereof. Payment terms shall be agreed upon, in writing, for each client project. SECTION 5 - CONFIDENTIALITY 5.1 During the course of this Agreement, SUPC and OrganicNet may be given access to Confidential Information. "Confidential Information" means information that (i) relates to the other's past, present, and future research, development, business activities, products, services, and technical knowledge, and (ii) has been either marked or otherwise identified in writing as confidential ("Confidential Information"). Notwithstanding the above, the OrganicNet Software and OrganicWare (including any source code (if any) furnished to SUPC hereunder) shall be considered OrganicNet's Confidential information. In connection therewith the following shall apply to all Confidential Information disclosed by either party under this Agreement: 5.1.1 The Confidential Information of the other party may be used by the recipient only in connection with the performance of its obligations under this Agreement; 5.1.2 Each party agrees to protect the confidentiality of the Confidential Information of the other in the same manner that it protects the confidentiality of its own proprietary and confidential information of like kind, which in no event shall be less than commercially reasonable efforts. 5.1.3 The Confidential Information may not be copied or reproduced without the discloser's prior written consent. 5.1.4 The Confidential Information may not be disclosed to anyone other than the recipient's employees who have a need to know such information for the purposes of this Agreement. 5.2 All Confidential Information made available hereunder, including copies thereof, shall, upon written request, be returned or destroyed upon termination of this Agreement. 5.3 Notwithstanding anything in this Agreement to the contrary, Confidential Information does not include information: (i) previously known to it without obligation of confidence, (ii) independently developed by it, without any use of or reference to the information disclosed, (ii) acquired by it from a third party which is not under an obligation of confidence with respect to such information, or (iv) which is or becomes publicly available through no breach of this Agreement. 5.4 In the event either party receives a subpoena or other validly issued administrative or judicial process requesting Confidential Information of the other party, it shall provide prompt notice to the other of such receipt and cooperate with such other party in seeking appropriate protection of such Confidential Information. The party receiving the subpoena shall thereafter be entitled to comply with such subpoena or other process to the minimal extent necessary to comply therewith, acting on reasonable advice of counsel. 5.5 During the course of this Agreement, SUPC and OrganicNet may each be given access to information of Clients of the other which is protected as confidential information under the terms of an agreement with the Client. Each party agrees to treat such Client confidential information in accordance with the terms of the applicable Client confidentiality agreement. 5.6 Except as necessary to fulfill its obligations in relation to the activities contemplated by this Agreement, both parties agree to keep the terms of this Agreement confidential, except that either party may disclose the terms of this agreement to a third party in connection with a potential financing or a merger or acquisition involving a party, provided that such disclosure shall be pursuant to a non-disclosure agreement containing provisions at least as restrictive as the provisions of this Section 5. SECTION 6 - WARRANTIES TO CLIENTS 6.1 OrganicNet shall extend to each Client the standard warranties and indemnification for the OrganicNet Software and services that it extends to licensees or purchasers of the applicable product or service. 6.2 As between the parties, SUPC shall remain solely responsible to Clients for the performance of the Business Integration Services or Healthcare Consulting Services. As between the parties, OrganicNet shall remain solely responsible to Clients for the performance and good working order of the OrganicNet Software and the performance of its services. 6.3 Neither party shall make any representation or warranty to any Client with respect to the products or services provided to such Client by the other party. 6.4 NEITHER PARTY MAKES ANY WARRANTY TO THE OTHER, EITHER EXPRESS OR IMPLIED, WITH RESPECT TO THE PRODUCTS OR SERVICES IT PROVIDES TO CLIENTS, AND BOTH PARTIES SPECIFICALLY DISCLAIM ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT THERETO. SECTION 7 - OWNERSHIP & PROPRIETARY RIGHTS; NON-COMPETITION 7.1 Each party will retain ownership of all of its proprietary software or materials used in the performance of this Agreement, including but not limited to software, designs, knowledge capital and methodology and all other Confidential Information of such party. Unless otherwise agreed to in writing, the parties will each license their own materials to the Client. 7.2 During joint marketing activities and/or the Client engagement process materials may be developed such as certain software, products, configuration templates, presentations, software documentation, marketing collateral, methodology, work plans and training materials (collectively, "Materials"). As between the parties, the ownership and intellectual property rights to the Materials will fall into the following three categories: (a) OrganicNet Developed and Owned: All Materials developed by OrganicNet and any software related products (training, documentation, marketing collateral) upon which OrganicNet contributes substantially to the development of will be considered to be owned by OrganicNet. (b) SUPC Developed and Owned: Any Materials developed by SUPC with less than substantial involvement from OrganicNet personnel will be exclusively owned by SUPC; provided, however, that with respect to any extension or improvement of the OrganicNet Software developed by SUPC, which OrganicNet deems to be of general use to Clients (an "Improvement"), SUPC grants OrganicNet a royalty-free paid up, perpetual, exclusive, license to market, use, offer for sale, any such Improvement. (c) Jointly Developed: Ownership rights to Materials jointly developed by OrganicNet and SUPC will be agreed to in writing in advance. Unless specifically agreed to by the parties in writing, ownership of such jointly owned Materials will be determined by product type, as follows: (i) Configurations, product demonstrations and training materials relating to the OrganicNet Software will be owned by OrganicNet. However, SUPC will have non-exclusive use of the Materials for the benefit of Clients for the term of this Agreement. OrganicNet will not provide support for such Materials, unless it incorporates such Materials in a supported release of the OrganicNet Software. (ii) Other marketing material, including, presentations and marketing collateral will be jointly owned and copyrighted and may be used without restriction for the term of this Agreement subject to Section 5 hereof. (iii) Methodologies, procedures, skills, technicians and know-how relating to the performance of business Integration Services and Healthcare Consulting Services will be solely owned by Superior. 7.3 If any Materials (whether or not jointly owned by the parties) contain Confidential Information of either party, the applicable portions of such Materials will be designated as such and will be distributed only pursuant to a non-disclosure agreement containing provisions at least as restrictive as the provisions of Section 5 hereof. 7.4 The parties will cooperate with each other and execute such other documents as may be appropriate to achieve the objectives of this Section 7. Notwithstanding the provisions of this Section 7 regarding ownership, SUPC shall have a royalty free, non-exclusive and non-transferable license to use Materials jointly developed, pursuant to Section 7.2 (c)(i) to support SUPC's marketing activities and services to Clients during the term of this Agreement. SECTION 8 - REPRESENTATIONS SUPC warrants and represents that it has the right to grant to OrganicNet the rights purported to be granted by or pursuant to this Agreement, and has all other rights necessary for the performance of its obligations under this Agreement, without violating any rights of any other party. OrganicNet warrants and represents that it has the right to grant to SUPC the rights purported to be granted by or pursuant to this Agreement and has all other rights necessary for the performance of its obligations under this Agreement, without violating any rights of any other party. SECTION 9 - INDEMNIFICATION 9.1 OrganicNet will defend, at its expense, any action brought against SUPC, to the extent that such action is based on a claim that the OrganicNet Software infringes any issued United States patent, copyright or trade secret right of any third party resulting from the supply to SUPC by OrganicNet, or the use by SUPC or a Client, of the OrganicNet Software as delivered by OrganicNet. OrganicNet shall pay all damages and costs finally awarded against SUPC that are attributable to such claim, subject to the provisions of Section 9.4 hereof. 9.2 SUPC will defend, at its expense, any action brought against OrganicNet, to the extent that such action is based on a claim that any of its work product infringes any issued United States patent, copyright or trade secret right of any third party resulting from the use by OrganicNet or a Client of any such work product. SUPC shall pay all damages and costs finally awarded against OrganicNet that are attributable to such claim, subject to the provisions of Section 9.4 hereof. 9.3 SUPC and OrganicNet shall each be solely responsible for its respective products and services and any claims from Clients with respect to such products or services. SUPC and OrganicNet shall each not be responsible for the performance of the other party's products or services or any warranty claims relating to the other party's products or services. In furtherance of this obligation: 9.3.1 OrganicNet will defend, at its expense, any action brought against SUPC, to the extent that such action is based on a claim that the OrganicNet Software or other OrganicNet product or service is defective, breaches any warranty or other contractual obligation of OrganicNet, or otherwise fails to satisfy any statutory or common-law obligation of OrganicNet. 9.3.2 SUPC will defend, at its expense, any action brought against OrganicNet, to the extent that such action is based on a claim that a Business Integration Service is defective, breaches any warranty or other contractual obligation of SUPC, or otherwise fails to satisfy any statutory or common-law obligation of SUPC. 9.4 The party to be indemnified under this Section 9 agrees to: 9.4.1 promptly notify the indemnifying party of any such claim or suit by a third party and furnish the indemnifying party with a copy of each communication, notice or other action relating to such claim or suit; and 9.4.2 permit the indemnifying party to assume sole authority to conduct the trial or settlement of such claim or suit or any negotiations related thereto at the indemnifying party's own expense; and 9.4.3 provide information and assistance at its own expense reasonably requested by the indemnifying party in connection with such claim or suit. If either party fails to comply with any obligation under Section 9.4, the other party shall be relieved if its indemnity obligation under this Section 9 only if and to the extent such failure materially prejudices the indemnifying party. 9.5 Should any software subject to the provisions of Sections 9.1 or 9.2 hereunder (an "Infringing Program") become, or in the indemnifying party's opinion be likely to become the subject of a claim, then the indemnifying party may, at its option and expense, (i) procure for the indemnified party (or a Client, as the case may be) the right to use the Infringing Program free of any liability for infringement; (ii) replace or modify the Infringing Program with a non-infringing substitute otherwise complying with all the functionality for the replaced system. If either remedy (i) or (ii) is not reasonably available to the indemnifying party, this Agreement shall be terminable at the option of the indemnified party, and the indemnifying party shall have no additional liability with respect to the Infringing Program except as provided in Section 9.1, 9.2 and 9.3, above. 9.6 Neither party shall be obligated to defend, or be liable for costs and damages, if the claim arises out of (a) a modification of the Infringing Program other than by the indemnifying party, (b) the compliance with the specifications of the indemnified party (or a Client who is making a claim), to the extent the same go beyond specifications of software previously developed by the indemnifying party; or (c) use of the Infringing Program after the indemnified party has notice of an actual or potential claim, if such claim involves use of an Infringing Program in a form which does not include the most recent releases provided by the indemnified party under this Agreement or the distribution of which has been discontinued by the indemnified party. 9.7 Sections 9.1, 9.2 and 9.4-9.6 sets forth both party's sole and exclusive liability, and each party's sole and exclusive remedies, with respect to any claims of infringement. 9.8 The indemnity obligations under this Section 9 shall extend to any claims brought against an officer, director, or agent of the party entitled to indemnification. SECTION 10 - LIMITATION OF LIABILITY Except in relation to each party's indemnification obligations specified in Section 9 hereof and confidentiality obligations under Section 5 hereof, neither party will be liable to the other for any indirect, special, incidental, consequential, exemplary or punitive loss, damages or expenses (including lost profits or savings) regardless if whether a party has been advised of the likelihood thereof. Except in relation to each party's indemnification obligations specified in Section 9 hereof, the scope of license rights under Section 2 hereof, and confidentiality obligations under Section 5 hereof, the limitation on each party's direct damages under this Agreement shall be one million dollars ($1,000,000.00). SECTION 11 - TERM AND TERMINATION 11.1 The initial period of this Agreement shall run through August 31, 2002. Thereafter, Superior may at its option, renew the Agreement for two additional consecutive two (2) year periods by written notice not less than sixty (60) days before the expiration of the period. 11.2 In the event either party defaults in the performance of any material obligation hereunder, the non-defaulting party may terminate this Agreement by written notice specifying the default, which notice shall become effective thirty (30) days after the delivery of notice to the defaulting party, unless during such thirty (30) day period the default shall have been corrected by the defaulting party to the non-defaulting party's reasonable satisfaction. 11.3 Either party may terminate this Agreement immediately upon giving notice to the other party if the other party is adjudicated as bankrupt, becomes insolvent, suffers permanent or temporary court-appointed receivership of substantially all of its property, makes a general assignment for the benefit of creditors, or suffers the filing of a voluntary or involuntary bankruptcy petition that is not dismissed within forty-five (45) days after filing. Termination under this provision will not release either party from financial obligations for services or products already completed and delivered. 11.4 Upon termination or expiration of this Agreement, for any reason, each party shall, subject to Section 11.5, immediately: 11.4.1 Cease holding itself out, in any manner, as affiliated with the other party, except as may be provided in any surviving separate agreement; and 11.4.2 Discontinue any and all use of trade names and/or trademarks authorized for use under this Agreement, except as necessary for either party to fulfill its obligations to a Client existing prior to the date of termination; and 11.4.3 Return to the other party or destroy the other party's Confidential Information in its possession unless this Agreement provides otherwise; and 11.4.4 Reimburse the other party for any amounts due for services provided or products delivered. 11.5 Termination of this Agreement shall not release either party from obligations to resell, sub-license or license OrganicNet Software made prior to the receipt of any notice of termination, and shall not affect existing licenses for the OrganicNet Software. Notwithstanding the provisions of this Section, each party may continue to exercise the rights and licenses granted hereunder to the extent necessary to allow such party to fulfill its obligations under agreements with Clients or included in any binding proposal to a Client outstanding at the time of termination. SUPC specifically shall retain the right to use the OrganicNet Software for as long as necessary to meet any binding obligations that SUPC has undertaken prior to the receipt of any notice of termination. SUPC shall also continue to have the right to use and access the OrganicNet Software to allow SUPC to fulfill its obligations to Clients to whom a proposal has been submitted prior to the receipt of any notice of termination. SECTION 12 - ADDITIONAL CONSIDERATION 12.1 As further consideration for Superior's agreement to promote the OrganicNet Software as a preferred ASP solution for healthcare organizations, OrganicNet agrees to issue to SUPC an option in the form attached as Exhibit B (the "Option"), to purchase 200,000 shares of OrganicNet common stock at a price of $6.00 per share, subject to approval by OrganicNet's Board of Directors. If such approval is not granted within 30 days within the Effective Date, SUPC may terminate this Agreement pursuant to Section 11.2. The Option shall be exercisable immediately upon execution of this Agreement and shall expire ten (10) years from the date of this Agreement. SECTION 13 - MISCELLANEOUS 13.1 The parties agree that in the event of any dispute or alleged breach under this Agreement, they will work together in good faith first to resolve this matter internally by escalating it to higher levels of management and then, if necessary, to submit to binding arbitration. This Agreement shall be governed by and construed in accordance with the laws of the State of California without regard to the conflicts of law provisions thereof. The parties agree that all disputes arising under this Agreement and its interpretation, and not resolved in good faith first, shall be decided by binding arbitration, to be conducted before a single arbitrator in accordance with the then in-effect commercial roles of the American Arbitration Association in Southfield, Michigan. Both parties agree to accept the decision of such an arbitrator as final, and explicitly waive all rights to appeal such decision save for such grounds as are provided in the Federal Arbitration Act 9U-S-C-(S)1, in any court of the United States, its several states, or in any jurisdiction abroad. In any action or proceeding to enforce rights under this Agreement the prevailing party will be entitled to recover reasonable costs and reasonable attorneys' fees. 13.2 Neither party may assign any of its rights or obligations under this Agreement without the prior written consent of the other, which shall not be unreasonably withheld. However, either party may assign this Agreement to an Affiliate. 13.3 Neither party shall be liable for any delays or failures in performance due to circumstances beyond its reasonable control, including failures of computers, computer-related equipment, hardware or software. 13.4 If any provision of this Agreement is found to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of the Agreement. 13.5 Sections 4, 5, 6, 7, 8, 9, 10, 11 and 13 extend beyond the expiration or termination of this Agreement and shall survive and remain in effect beyond any expiration or termination. 13.6 This Agreement may be executed in one or more counterparts, each of which shall be considered an original counterpart, and shall become a binding agreement when each party shall have executed one counterpart. 13.7 Captions appearing in this Agreement are for convenience only and shall not be deemed to explain, limit or amplify the provisions hereof. 13.8 Any notice or other communication given shall be in writing and shall be deemed to have been received either when delivered personally to the party for whom intended by United States mail certified mail, return receipt requested, or by a national courier service (e.g., Federal Express, or UPS), addressed to such party at the address set forth below: For OrganicNet: ORGANICNET, INC. 330 Townsend Street, Suite 206 San Francisco, CA 94107 Attention: Mr. William W. Shaw, III For SUPC: SUPERIOR CONSULTANT COMPANY, INC. 4000 Town Center, Suite 1100 Southfield, MI 48075 Attention: General Counsel Either party may designate a different address by notice to the other given in accordance herewith. 13.9 Nothing contained in this Agreement shall be deemed or construed as creating a joint venture or partnership between OrganicNet and SUPC. Except as specifically set forth herein, neither party shall have the power to control the activities and operations of, or contractually bind or commit, the other party, and their status with respect to one another is that of independent contractors. 13.10 Without the prior written consent of the other party, OrganicNet and SUPC each agree to refrain from conducting employment discussions with, or hiring, directly or indirectly, the other party's employees, agents, and subcontractors who have worked on any matter under or arising out of this Agreement until twelve (12) months after the date the agent, employee, or subcontractor of the other party was last involved in any activity under or arising out of this Agreement. 13.11 This Agreement contains the entire understanding of the parties with regard to the subject matter contained herein. OrganicNet and SUPC may, by mutual agreement in writing, amend, modify and supplement this Agreement. The failure of any party hereto to enforce at any time any provision of this Agreement shall not be construed to be a waiver of such provision, nor in any way to affect the validity of this Agreement or any part hereof or the right of such party thereafter to enforce each and every such provision. No waiver of any breach of this Agreement shall be held to constitute a waiver of any other or subsequent breach. Both parties represent that they have read this Agreement, understand it, and agree to be bound by the terms and conditions stated herein. ORGANICNET, INC. SUPERIOR CONSULTANT COMPANY, INC. By: /s/ William W. Shaw III By: /s/ Joel F. French -------------------------------- --------------------------------- Name: William W. Shaw III Name: Joel F. French ------------------------------ ------------------------------- Title: President Title: Corporate Vice President, ----------------------------- ------------------------------ Strategic Development Date: 9/20/99 Date: 9/20/99 ------------------------------ ------------------------------- EXHIBIT A Methodology: Evolution(TM) OrganicWare(TM) (including): Organic Clinic(TM) Outcomes Partner(TM) III Care Partner (tentative name) Disease Partner (tentative name) Patient Recruiter (tentative name) OrganicNet(TM) Tactical Products: Res-Q OR(TM) Res-Q RN(TM) LINC CMA(TM) PSI-MED Surveys and Assessments - HEDIS Patient Satisfaction Member Satisfaction Disenrollment EXHIBIT B Option Agreement OBJECT PRODUCTS, INC. NOTICE OF GRANT OF STOCK OPTION Notice is hereby given of the following option grant (the "Option") to purchase shares of the Common Stock of Object Products, Inc. (the "Corporation"): Optionee: Richard D. Helppie --------- Grant Date: September 17, 1999 ----------- Vesting Commencement Date: Not Applicable. -------------------------- Exercise Price: $6.00 per share --------------- Number of Option Shares: 200,000 shares of Common Stock ------------------------ Expiration Date: September 16, 2009 ---------------- Type of Option: ____ Incentive Stock Option --------------- X Non-Statutory Stock Option ---- Date Exercisable: Immediately Exercisable ----------------- Vesting Schedule: Not Applicable. The Option Shares shall ----------------- be fully vested. Optionee understands and agrees that the Option is granted subject to and in accordance with the terms of the Object Products, Inc. 1997 Stock Option/Stock Issuance Plan (the "Plan"). Optionee further agrees to be bound by the terms of the Plan and the terms of the Option as set forth in the Stock Option Agreement attached hereto as Exhibit A. Optionee understands that any Option Shares purchased under the Option will be subject to the terms set forth in the Stock Purchase Agreement attached hereto as Exhibit B, with the exception of First Right of Refusal which is waived. Optionee further acknowledges receipt of a copy of the Plan in the form attached hereto as Exhibit C. In regards to language between this Notice of Grant of Stock Option and the Plan or the Stock Purchase Agreement, this Notice of Grant of Stock Option shall role. No Employment or Service Contract. Nothing in this Notice or in the attached Stock Option Agreement or Plan shall confer upon Optionee any right to continue its Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Parent or Subsidiary employing or retaining Optionee) or of Optionee, which rights are hereby expressly reserved by each, to terminate Optionee's Service at any time for any reason, with or without cause. Definitions. All capitalized terms in this Notice shall have the meaning ----------- assigned to them in this Notice or in the attached Stock Option Agreement. DATED: September 17, 1999 ORGANICNET, INC. By: /s/ William W. Shaw III ------------------------------------ Title: Secretary OPTIONEE /s/ Joel F. French --------------------------------------- Superior Consulting Company, Inc. Its Corporate Vice President, Strategic Development Address: 4000 Town, Suite 1100 ------------------------------- Southfield, MI 48075 ------------------------------- ATTACHMENTS: Exhibit A - Stock Option Agreement Exhibit B - Stock Purchase Agreement Exhibit C - 1997 Stock Option/Stock Issuance Plan EXHIBIT A STOCK OPTION AGREEMENT ORGANICNET, INC. STOCK OPTION AGREEMENT RECITALS I. The Board has adopted the Plan for the purpose of retaining the services of selected Employees, non-employee members of the Board or the board of directors of any Parent or Subsidiary and consultants and other independent advisors in the service of the Corporation (or any Parent or Subsidiary). A. Optionee is to render valuable services to the Corporation (or a Parent or Subsidiary), and this Agreement is executed pursuant to, and is intended to carry out the purposes of, the Plan in connection with the Corporation's grant of an option to Optionee. B. All capitalized terms in this Agreement shall have the meaning assigned to them in the attached Appendix. NOW, THEREFORE, it is hereby agreed as follows: 1. Grant of Option. The Corporation hereby grants to Optionee, as of the Grant Date, an option to purchase up to the number of Option Shares specified in the Grant Notice. The Option Shares shall be purchasable from time to time during the option term specified in Paragraph 2 at the Exercise Price. 2. Option Term. This option shall have a term of ten (10) years measured from the Grant Date and shall accordingly expire at the close of business on the Expiration Date, unless sooner terminated in accordance with Paragraph 5 or 6. 3. Limited Transferability. This option shall be exercisable only by Optionee and shall not be assignable or transferable. 4. Dates of Exercise. This option shall become exercisable for the Option Shares in one or more installments as specified in the Grant Notice. As the option becomes exercisable for such installments, those installments shall accumulate, and the option shall remain exercisable for the accumulated installments until the Expiration Date or sooner termination of the option term under Paragraph 5 or 6. 5. Cessation of Service. The option term specified in Paragraph 2 shall terminate (and this option shall cease to be outstanding) prior to the Expiration Date should any of the following provisions become applicable: (a) Should Optionee cease to remain in Service for any reason (other than death, Disability or Misconduct) while this option is outstanding, then Optionee shall have a period of three (3) months (commencing with the date of such cessation of Service) during which to exercise this option, but in no event shall this option be exercisable at any time after the Expiration Date. (b) During the limited period of post-Service exercisability, this option may not be exercised in the aggregate for more than the number of Option Shares in which Optionee is, at the time of Optionee's cessation of Service, vested pursuant to the Vesting Schedule specified in the Grant Notice or the special vesting acceleration provisions of Paragraph 6. Upon the expiration of such limited exercise period or (if earlier) upon the Expiration Date, this option shall terminate and cease to be outstanding for any vested Option Shares for which the option has not been exercised. To the extent Optionee is not vested in the Option Shares at the time of Optionee's cessation of Service, this option shall immediately terminate and cease to be outstanding with respect to those shares. (c) Should Optionee's Service be terminated for Misconduct, then this option shall terminate immediately and cease to remain outstanding. 6. Accelerated Vesting. (a) In the event of any Corporate Transaction, the Option Shares at the time subject to this option but not otherwise vested shall automatically vest in full so that this option shall, immediately prior to the effective date of the Corporate Transaction, become fully exercisable for all of those Option Shares and may be exercised for any or all of those Option Shares as fully- vested shares of Common Stock. However, the Option Shares shall not vest on such an accelerated basis if and to the extent: (i) this option is assumed by the successor corporation (or parent thereof) in the Corporate Transaction and the Corporation's repurchase rights with respect to the unvested Option Shares are assigned to such successor corporation (or parent thereof) or (ii) this option is to be replaced with a cash incentive program of the successor corporation which preserves the spread existing on the unvested Option Shares at the time of the Corporate Transaction (the excess of the Fair Market Value of those Option Shares over the Exercise Price payable for such shares) and provides for subsequent payout in accordance with the same Vesting Schedule applicable to those unvested Option Shares as set forth in the Grant Notice. (b) Immediately following the Corporate Transaction, this option shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or parent thereof) in connection with the Corporate Transaction. (c) If this option is assumed in connection with a Corporate Transaction, then this option shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and class of securities which would have been issuable to Optionee in consummation of such Corporate Transaction had the option been exercised immediately prior to such Corporate Transaction, and appropriate adjustments shall also be made to the Exercise Price, provided the aggregate Exercise Price shall remain the same. (d) The Option Shares may also vest upon an accelerated basis in accordance with the terms and conditions of any special addendum attached to this Agreement. (e) This Agreement shall not in any way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. 7. Adjustment in Option Shares. Should any change be made to the Common Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration, appropriate adjustments shall be made to (i) the total number and/or class of securities subject to this option and (ii) the Exercise Price in order to reflect such change and thereby preclude a dilution or enlargement of benefits hereunder. 8. Stockholder Rights. The holder of this option shall not have any stockholder rights with respect to the Option Shares until such person shall have exercised the option, paid the Exercise Price and become the holder of record of the purchased shares. 9. Manner of Exercising Option. (a) In order to exercise this option with respect to all or any part of the Option Shares for which this option is at the time exercisable, Optionee (or any other person or persons exercising the option) must take the following actions: (i) Execute and deliver to the Corporation a Purchase Agreement for the Option Shares for which the option is exercised, and (ii) Pay the aggregate Exercise Price for the purchased shares in cash or check made payable to the Corporation. Should the Common Stock be registered under Section 12 of the 1934 Act at the time the option is exercised, then the Exercise Price may also be paid as follows: (A) in shares of Common Stock held by Optionee (or any other person or persons exercising the option) for the requisite period necessary to avoid a charge to the Corporation's earnings for financial reporting purposes and valued at Fair Market Value on the Exercise Date; or (B) to the extent the option is exercised for vested Option Shares, through a special sale and remittance procedure pursuant to which Optionee (or any other person or persons exercising the option) shall concurrently provide irrevocable instructions (a) to a Corporation-designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate Exercise Price payable for the purchased shares plus all applicable Federal, state, and local income and employment taxes required to be withheld by the Corporation by reason of such exercise and (b) to the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale. Except to the extent the sale and remittance procedure is utilized in connection with the option exercise, payment of the Exercise Price must accompany the Purchase Agreement delivered to the Corporation in connection with the option exercise. (iii) Furnish to the Corporation appropriate documentation that the person or persons exercising the option (if other than Optionee) have the right to exercise this option. (iv) Execute and deliver to the Corporation such written representations as may be requested by the Corporation in order for it to comply with the applicable requirements of Federal and state securities laws. (v) Make appropriate arrangements with the Corporation (or Parent or Subsidiary employing or retaining Optionee) for the satisfaction of all Federal, state and local income and employment tax withholding requirements applicable to the option exercise. (b.) As soon as practical after the Exercise Date, the Corporation shall issue to or on behalf of Optionee (or any other person or persons exercising this option) a certificate for the purchased Option Shares, with the appropriate legends affixed thereto. (c.) In no event may this option be exercised for any fractional shares. 10. Compliance with Laws and Regulations. (a.) The exercise of this option and the issuance of the Option Shares upon such exercise shall be subject to compliance by the Corporation and Optionee with all applicable requirements of law relating thereto and with all applicable regulations of any stock exchange (or the Nasdaq National Market, if applicable) on which the Common Stock may be listed for trading at the time of such exercise and issuance. (b.) The inability of the Corporation to obtain approval from any regulatory body having authority deemed by the Corporation to be necessary to the lawful issuance and sale of any Common Stock pursuant to this option shall relieve the Corporation of any liability with respect to the non- issuance or sale of the Common Stock as to which such approval shall not have been obtained. The Corporation, however, shall use its best efforts to obtain all such approvals. 11. Successors and Assigns. Except to the extent otherwise provided in Paragraphs 3 and 6, the provisions of this Agreement shall inure to the benefit of, and be binding upon, the Corporation and its successors and assigns and Optionee, Optionee's assigns and the legal representatives, heirs and legatees of Optionee's estate. 12. Notices. Any notice required to be given or delivered to the Corporation under the terms of this Agreement shall be in writing and addressed to the Corporation at its principal corporate offices. Any notice required to be given or delivered to Optionee shall be in writing and addressed to Optionee at the address indicated below Optionee's signature line on the Grant Notice. All notices shall be deemed effective upon personal delivery or upon deposit in the U.S. mail, postage prepaid and properly addressed to the party to be notified. 13. Construction. This Agreement and the option evidenced hereby are made and granted pursuant to the Plan and are in all respects limited by and subject to the terms of the Plan. All decisions of the Plan Administrator with respect to any question or issue arising under the Plan or this Agreement shall be conclusive and binding on all persons having an interest in this option. 14. Governing Law. The interpretation, performance and enforcement of this Agreement shall be governed by the laws of the State of California without resort to that State's conflict-of-laws rules. 15. Stockholder Approval. If the Option Shares covered by this Agreement exceed, as of the Grant Date, the number of shares of Common Stock which may be issued under the Plan as last approved by the stockholders, then this option shall be void with respect to such excess shares, unless stockholder approval of an amendment sufficiently increasing the number of shares of Common Stock issuable under the Plan is obtained in accordance with the provisions of the Plan. 16. Additional Terms Applicable to an Incentive Option. In the event this option is designated an Incentive Option in the Grant Notice, the following terms and conditions shall also apply to the grant: (a.) This option shall cease to qualify for favorable tax treatment as an Incentive Option if (and to the extent) this option is exercised for one or more Option Shares: (i) more than three (3) months after the date Optionee ceases to be an Employee for any reason other than death or Permanent Disability or (ii) more than twelve (12) months after the date Optionee ceases to be an Employee by reason of Permanent Disability. (b.) This option shall not become exercisable in the calendar year in which granted if (and to the extent) the aggregate Fair Market Value (determined at the Grant Date) of the Common Stock for which this option would otherwise first become exercisable in such calendar year would, when added to the aggregate value (determined as of the respective date or dates of grant) of the Common Stock and any other securities for which one or more other Incentive Options granted to Optionee prior to the Grant Date (whether under the Plan or any other option plan of the Corporation or any Parent or Subsidiary) first become exercisable during the same calendar year, exceed One Hundred Thousand Dollars ($100,000) in the aggregate. To the extent the exercisability of this option is deferred by reason of the foregoing limitation, the deferred portion shall become exercisable in the first calendar year or years thereafter in which the One Hundred Thousand Dollar ($100,000) limitation of this Paragraph 17(b) would not be contravened, but such deferral shall in all events end immediately prior to the effective date of a Corporate Transaction in which this option is not to be assumed, whereupon the option shall become immediately exercisable as as a Non-Statutory Option for the deferred portion of the Option Shares. (c.) Should Optionee hold, in addition to this option, one or more other options to purchase Common Stock which become exercisable for the first time in the same calendar year as this option, then the foregoing limitations on the exercisability of such options as Incentive Options shall be applied on the basis of the order in which such options are granted. APPENDIX The following definitions shall be in effect under the Agreement: A. Agreement shall mean this Stock Option Agreement. B. Board shall mean the Corporation's Board of Directors. C. Code shall mean the Internal Revenue Code of 1986, as amended. D. Common Stock shall mean the Corporation's common stock. E. Corporate Transaction shall mean either of the following stockholder- approved transactions to which the Corporation is a party: (i) a merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, or (ii) the sale, transfer or other disposition of all or substantially all of the Corporation's assets in complete liquidation or dissolution of the Corporation. F. Corporation shall mean Object Products, Inc., a Delaware corporation. G. Disability shall mean the inability of Optionee to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment and shall be determined by the Plan Administrator on the basis of such medical evidence as the Plan Administrator deems warranted under the circumstances. Disability shall be deemed to constitute Permanent Disability in the event that such Disability is expected to result in death or has lasted or can be expected to last for a continuous period of twelve (12) months or more. H. Employee shall mean an individual who is in the employ of the Corporation (or any Parent or Subsidiary), subject to the control and direction of the employer entity as to both the work to be performed and the manner and method of performance. I. Exercise Date shall mean the date on which the option shall have been exercised in accordance with Paragraph 9 of the Agreement. J. Exercise Price shall mean the exercise price payable per Option Share as specified in the Grant Notice. K. Expiration Date shall mean the date on which the option expires as specified in the Grant Notice. L. Fair Market Value per share of Common Stock on any relevant date shall be determined in accordance with the following provisions: (i) If the Common Stock is at the time traded on the Nasdaq National Market, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question, as the price is reported by the National Association of Securities Dealers on the Nasdaq National Market. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (ii) If the Common Stock is at the time listed on any Stock Exchange, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question on the Stock Exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (iii) If the Common Stock is at the time neither listed on any Stock Exchange nor traded on the Nasdaq National Market, then the Fair Market Value shall be determined by the Plan Administrator after taking into account such factors as the Plan Administrator shall deem appropriate. M. Grant Date shall mean the date of grant of the option as specified in the Grant Notice. N. Grant Notice shall mean the Notice of Grant of Stock Option accompanying the Agreement, pursuant to which Optionee has been informed of the basic terms of the option evidenced hereby. O. Incentive Option shall mean an option which satisfies the requirements of Code Section 422. P. Misconduct shall mean the commission of any act of fraud, embezzlement or dishonesty by Optionee, any unauthorized use or disclosure by Optionee of confidential information or trade secrets of the Corporation (or any Parent or Subsidiary), or any other intentional misconduct by Optionee adversely affecting the business or affairs of the Corporation (or any Parent or Subsidiary) in a material manner. The foregoing definition shall not be deemed to be inclusive of all the acts or omissions which the Corporation (or any Parent or Subsidiary) may consider as grounds for the dismissal or discharge of Optionee or any other individual in the Service of the Corporation (or any Parent or Subsidiary). Q. 1934 Act shall mean the Securities Exchange Act of 1934, as amended. R. Non-Statutory Option shall mean an option not intended to satisfy the requirements of Code Section 422. S. Option Shares shall mean the number of shares of Common Stock subject to the option. T. Optionee shall mean the person to whom the option is granted as specified in the Grant Notice. U. Parent shall mean any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation, provided each corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. V. Plan shall mean the Corporation's 1997 Stock Option/Stock Issuance Plan. W. Plan Administrator shall mean either the Board or a committee of the Board acting in its capacity as administrator of the Plan. X. Purchase Agreement shall mean the stock purchase agreement in substantially the form of Exhibit B to the Grant Notice. Y. Service shall mean the Optionee's performance of services for the Corporation (or any Parent or Subsidiary) in the capacity of an Employee, a non- employee member of the board of directors or an independent consultant. Z. Stock Exchange shall mean the American Stock Exchange or the New York Stock Exchange. AA. Subsidiary shall mean any corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation, provided each corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. BB. Vesting Schedule shall mean the vesting schedule specified in the Grant Notice pursuant to which the Optionee is to vest in the Option Shares in a series of installments over his or her period of Service. EXHIBIT C Master Service Agreement Master Service Agreement (MSA) Superior Consultant Company, Inc. for OrganicNet, Inc. - -------------------------------------------------------------------------------- This Master Service Agreement ("MSA") is entered into this 20/th/ day of September, 1999, (the "Effective Date") between OrganicNet, Inc., a Delaware corporation, 330 Townsend Street, Suite 206, San Francisco, California 94107, ("Client") and Superior Consultant Company, Inc., 4000 Town Center Drive, Suite 1100, Southfield, Michigan 48075, as Seller ("Superior"). 1. Service Description Superior will provide its consultants, managers, technical personnel, and other personnel to furnish healthcare information technology, strategic and operations management consulting services, and computer program development services ("Superior's Services") in accordance with the terms and conditions stated in this MSA. All services shall be provided pursuant to Work Orders that are agreed to between the parties. The services to be provided by Superior pursuant to the Work Orders and this MSA are sometimes referred to as the "Project." 2. Term of Master Service Agreement (a) This MSA will begin on the Effective Date and terminate at the same time as the Distribution and Services Agreement to which the MSA is attached. The MSA may be terminated earlier pursuant to Sections 2(b)-2(c), below. The MSA may be extended by a written agreement signed by Client and Superior. The period from commencement until termination will sometimes be referred to as the Term. At the end of the Term, any Work Orders already executed by the parties shall remain in effect and this MSA shall continue in effect as to such Work Orders. (b) Either party may terminate the MSA or any Work Order without cause on sixty (60) days' prior written notice to the other. (c) Either party may terminate this MSA or any Work Order for material breach by the other party, in accordance with the following procedure: The party claiming material breach shall provide the other party with a written notice of breach, specifying in detail the act or omission claimed to constitute the material breach. The other party shall then have thirty (30) days to cure the claimed breach. If the breaching party does not cure the breach within the cure period, then the other party shall be entitled to terminate this MSA immediately upon written notice to the other party. (d) Superior shall be compensated for all services provided prior to the date of termination of the Work Order at Superior's hourly rate in effect at the time the Work Order was executed, provided that in the case of fixed-fee Work Orders such hourly rate compensation shall not exceed the total fixed- fee amount that would have been due upon acceptance. 3. Work Orders (a) All Superor's Services shall be rendered pursuant to Work Orders. To the extent of any conflict or inconsistency between the terms and conditions of a Work Order and the terms and conditions of this MSA, the terms and conditions of the Work Order will control. A Sample Work Order is attached as Schedule A. (b) Each Work Order shall be in writing and signed by both parties, refer specifically to this MSA, and include the following information: (i) the commencement date of the Work Order and, if applicable, the termination date and other dates pertinent to Superior's performance; (ii) the scope of work (i.e., the assistance to be rendered and/or the services to be performed, and/or resources to be provided, and/or applicable deliverables, and/or obligations to be discharged by Superior); (iii) any additional obligations of Client and Superior related to the Work Order, including any Master Service Agreement (MSA) Superior Consultant Company, INC. for OrganicNet, Inc. - -------------------------------------------------------------------------------- any facilities, equipment, personnel, and tasks or other support to be provided or performed; (iv) any other terms and conditions appropriate to the services to be performed and the obligations of the parties; (v) the basis (e.g., hourly rate or fixed fee) and procedure for computation, billing, and payment of professional fees and expenses. The following additional information may be included in Work Orders, as appropriate: (i) for hourly rate Work Orders, the Superior personnel or personnel classifications who will render the services, their respective hourly rates, and the starting and closing dates for performance of services; (ii) for fixed-fee Work Orders, a list of tasks to be completed, a set of milestones specifying the date by which each portion of the work specified in the Work Order will be completed, payment schedule, and acceptance criteria; (iii) for Work Orders involving computer program development, a functional specification, an operational narrative and matrix of conditions to be tested; and (iv) for Work Orders that include deliverables, the testing procedures and/or acceptance criteria, if any, to be applied to the deliverable(s). (c) Both parties recognize that certain Work Orders may require periodic amendments, including adjustments to either party's staffing and/or fees. If such adjustments are necessary, both parties will use their best efforts to accommodate such adjustments as they arise. Any amendments must be in writing and signed by both parties. 4. Project Organization (a) Superior shall be responsible for organizing and staffing each Project, subject to the terms of the applicable Work Order. (b) Superior's Engagement Manager shall have responsibility for managing Superior's performance of its obligations under the Work Order(s) and for communicating with Client regarding Project status and issues. (c) Client shall designate an employee of sufficient management rank as Client's Project Liaison, who shall represent Client and have responsibility for ensuring that Client performs its obligations under this MSA and the Work Orders and for communicating with Superior regarding Project status and issues. (d) Superior will advice Client of Project status on an ongoing basis through periodic written status reports, meetings, and other communications. Status reports will generally be prepared on a biweekly basis and upon the completion of the engagement, or on such other schedule as the Engagement Manager and Client's Project Liaison agree is appropriate for the Project. Status meetings and other communications shall be held as the Engagement Manager and Client's Project Liaison agree is appropriate for the Project. (e) In addition to its Project staff, Superior shall assign a Client Services Executive, who shall have overall responsibility for guiding and supervising Superior's Services under this MSA, and for monitoring client's satisfaction with Superior's Services. 5. Client Support (a) The Client will, to the extent reasonably necessary for the Project(s), provide the following support to Superior: (i) Access to Client staff for interviews. (ii) Technical support, including orientation to data processing shop standards; reasonable training on system and program development software; appropriate technical manuals, computer terminals and other reasonably necessary equipment and information; and documentation in Client's possession of procedures, system instruction manuals, and internal documentation. Master Service Agreement (MSA) Superior Consultant Company, INC. for OrganicNet, Inc. - -------------------------------------------------------------------------------- (iii) When service is performed at the Client, a reasonable work environment and secretarial assistance. (iv) Access to computer facilities on a 24-hour per-day, seven-day- per-week basis, with the exception of normal system downtime for system maintenance and file backup. Access may be by physical entry to the facility or via telecommunications, as dictated by the needs of the Project. (v) Computer operations and system software staffing. (b) Client shall be solely responsible for protection of electronically stored data in its electronic data processing systems, by means of data backup, security devices, and procedures designed to prevent unauthorized access or damage to databases. (c) If Superior is impeded or delayed in its performance of services under this MSA (or any Work Order hereunder) by: (i) failure of Client to meet its support obligations, (ii) unavailability of Client's computer operations and/or Client's system software staffing, or (iii) unsatisfactory performance of Client personnel assigned to Project team(s) then Superior shall be entitled to charge Client, commencing after notice to the Clients Project Liaison, at its hourly rates in effect at the time the Work Order was executed for hours lost due to such impedance or delay, or, at Clients request, and upon written notice to Superior's Engagement Manager, performance by Superior of such support functions or alternative assignments specified by the Client which shall be commensurate with the nature of the work Superior is normally engaged in, at its hourly rates in effect at the time the Work Order was executed. 6. Non Disclosure (a) Superior shall treat Client's Proprietary Information as confidential and will exercise reasonable care to protect it, using not less than the degree of care taken by Superior in the protection of its own confidential information. Without Client's permission, Proprietary Information will not be (i) disclosed to anyone, (ii) used for Superior's personal benefit, or (iii) copied or removed from Client's promises. (b) Proprietary Information of Client shall mean and include all software programs belonging to Client, its affiliates, and licensors and license, whether in written or on magnetic media, and all design documentation, procedures manuals, program listings, source code, working papers and other documentation, methodologies reduced to writing, written strategic business plans or financial information of Client and information related to the foregoing that has been reduced to writing. Proprietary Information shall also include (i) personal or financial information regarding Client's employees, and, if Client is a healthcare provider, (ii) personal, financial, and/or medical information regarding Client's patients and staff. (c) Client agrees that it will, at the time of disclosure to Superior, identify Proprietary Information in writing. This requirement does not apply to strategic business plans or financial Information of Client, nor to (i) personal or financial information regarding Client's employees, and, if Client is a healthcare provider, (ii) personal, financial, and/or medical information regarding Client's patients and staff. (d) Unless otherwise specifically agreed in writing, Proprietary Information of Client does not include the following: (i) any ideas, innovations, information, techniques, procedures or methodologies developed by Superior, either prior to or in the course of this engagement with Client; (ii) any Information previously known to Superior without obligation of confidentiality; (iii) any Information that is or becomes available to or known by persons in the healthcare information management Industry through no fault or wrongdoing of Superior; or (iv) any information developed Master Service Agreement (MSA) Superior Consultant Company, INC. for OrganicNet, Inc. - -------------------------------------------------------------------------------- independently by Superior without reference to Proprietary Information. (e) Client shall treat and shall obligate its personnel to treat, as confidential and proprietary to Superior, all Innovations (as defined in (S)7(b)), the content of this MSA and any Work Orders, the business and financial relationship of Client and Superior, and any other Proprietary Information of Superior identified by Superior in writing as confidential or proprietary. (f) Superior does not wish to have access to proprietary or confidential material owned by any third party, except as herein expressly provided. Client agrees not to disclose any confidential or Proprietary Information of any third party to Superior in any way that is not consistent with the terms of any licensing agreement or other legal rights of the third party. 7. Ownership. (a) Client shall have exclusive ownership of all work product, documentation, computer programs, source code, software products, reports, or other work product reduced to written, magnetic, or other tangible form ("Work Product") that are developed, discovered, conceived, or introduced by Superior in the course of providing services under this MSA. (b) Superior shall have exclusive ownership of all ideas, techniques, methodologies, procedures, skills, innovations, or know-how ("Innovations") developed or introduced by Superior in the course of performing services under this MSA. (i) Superior grants to Client a non-exclusive, non-transferable, limited, perpetual, and royalty-free license to use such Innovations solely in the normal course of Client's business as a healthcare services provider. This license also extends to any entity that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, Client. 8. Professional Fees. Professional fees shall be paid on an hourly rate basis, unless specified differently in a Work Order. 8.1 Hourly Rate Fees. Hourly rate fees will be computed based upon actual time devoted to servicing the Client, including travel time. Travel time is measured from the time Superior's personnel leave Superior's office or their home until arrival at the work site or hotel, and vice versa. Rates for hourly professional fees will adhere to the Fee Schedule, attached as Schedule B, during the first twelve (12) months of this MSA. Rates thereafter may be adjusted subject to a maximum 10% annual increase, or the annual rise in the national consumer price index, whichever is greater. Each biweekly billing for hourly rate assignments shall include a list of each hourly rate Work Order worked on and, for each such Work Order, a list of the personnel performing services, the job classifications, and the hourly rate charged for each. Superior shall maintain time records for all Superior personnel assigned to the Project that shall indicate the name of the individual, job title, date, number of hours worked, and the task worked on. Such records shall be made available to the Client upon the Client's request. 8.2 Fixed-Fee Assignments Professional fees on fixed-fee Work Orders shall be paid as described in the Work Order. 9. Reimbursable Expenses In addition to, and distinct from, professional fees as described above, the Client will also reimburse Superior for all reasonable travel and project expenses according to the Reimbursable Expense Schedule attached as Schedule C. Master Service Agreement (MSA) Superior Consultant Company, INC. for OrganicNet, Inc. - -------------------------------------------------------------------------------- Superior will use commercially reasonable efforts to minimize reimbursable expenses. 10. Invoicing and Payment Schedule Superior will render invoices biweekly for (i) for professional fees on hourly rate Work Orders, and (ii) reimbursable expenses. Biweekly billing periods begin on Sundays and end on the second Saturday following. Superior will render invoices for fixed-fee Work Orders in accordance with the terms of this MSA and the payment and milestone schedule set forth in the applicable Work Order. Payment is due in full upon rendering of invoice. If payment is not received by Superior within thirty (30) days after payment is due, interest on the amount owing will accrue at the rate of 1-1/2% per month, or the maximum interest rate allowed by law, whichever is less, until the amount owing is paid in full. If collection efforts are required, the Client agrees to pay Superior the reasonable cost and expenses of collection, including attorneys' fees. 11. Acceptance Testing This section applies only to fixed-fee Work Orders that provide for acceptance testing. Following written notification by Superior that a deliverable is complete and ready for acceptance testing, Client shall, within the schedule provided in the Work Order, fully complete all acceptance tests set forth in Work Order. Upon completion of acceptance testing, Client shall notify Superior, in writing, that (i) the deliverable is accepted, or (ii) the deliverable has failed acceptance testing. If Client contends that a that a deliverable has failed acceptance testing, then Client shall describe in detail the claimed failure, including specifying for each applicable testing step or criterion, that (i) the deliverable has passed, or (ii) it has failed, or (iii) it could not be tested due to the failure of a dependent component. Thereafter, for each failed deliverable, Superior shall, within the schedule specified in the Work Order, cure the claimed failure and re-submit the assignment for acceptance, provided that, if Superior disputes Client's contention that the deliverable has failed acceptance testing, then Superior shall not be obligated to continue working on the assignment. Deliverables will be deemed to have been accepted if (i) the Client accepts the deliverable in writing, or (ii) Client fails to timely and properly test the deliverable, or (iii) the Client, at any time, places the deliverable into production. 12. Omitted 13. Omitted 14. Superior's Personnel (a) It is expressly understood that personnel provided by Superior for the purpose of performing services under this MSA are the employees or subcontractors of Superior, and under no circumstances will be considered employees of the Client. Superior will be responsible for any and all applicable payroll and employment taxes and employee insurance, and the Client will have no liability therefore. (b) Upon the request of the Client and for good cause, Superior shall immediately remove from the project any Superior personnel. Superior shall thereafter have a reasonable time to replace such person so removed. (c) Services performed under the terms of this MSA will be performed at the Client's offices, Superior's offices, or at other locations. (d) Superior's assigned consultant will be entitled to Superior's standard time-off benefits, including holidays, vacations, sick days and education. Schedule time-off will be subject to Client's review and approval. This time-off will not affect the rates for Superior's services under this Agreement. 15. Bilateral No-Hire Agreement Without the prior written consent of the other party. Client and Superior each agree to refrain from conducting employment discussions with, or hiring, directly or indirectly, the other party's employees, agents, and subcontractors ("Personnel") who have worked on the Project, until twelve (12) months after the date the Personnel were last involved in any activity related to the Project. Master Service Agreement (MSA) Superior Consultant Company, INC. for OrganicNet, Inc. - -------------------------------------------------------------------------------- 16. Warranty and Limitation of Liability (a) Superior warrants that the Project will be performed in a workmanlike and professional manner consistent with the level of care and skill ordinarily exercised by the healthcare management and information systems consulting profession providing similar services under similar conditions. (b) Except as expressly provided in the preceding subpart, ALL SERVICES PERFORMED UNDER THIS MSA ARE PROVIDED WITHOUT WARRANTY, AND THERE IS NO WARRANTY OF MERCHANT ABILITY OR FITNESS FOR A PARTICULAR PURPOSE. (c) SUPERIOR WILL NOT BE LIABLE UNDER ANY CAUSE OF ACTION OR THEORY OF RECOVERY WHATEVER FOR: (i) Punitive, exemplary, special, incidental, or consequential damages for loss, damage, or expense, including but not limited to lost profits or goodwill, and costs of recovering, reprogramming, or reproducing any program or data, even if Superior has been advised of the likelihood of the same. (ii) Loss, claim, or damages of any kind or nature, in any amount in excess of the professional fees actually paid to Superior under the Scope of Work in connection with which the claim arises. (iii) Loss, claim, or damages arising out of any Year 2000 Failure. For purposes of this MSA, "Year 2000 Failure" means the failure of any hardware, software, information system, microprocessor, or other computer system to accurately process date/time data (including, but not limited to, calculating, comparing, and sequencing) from, into, and between the twentieth and twenty- first centuries and the years 1999 and 2000 and leap-year calculations. 17. Indemnification (a) Superior and Client shall each indemnify, defend, and hold harmless the other from and against any third-party claims for loss, damage, expense (including attorneys' fees) liability, and claims for death or personal injury or physical damage to property caused by the negligent acts or omissions of the indemnifying party, its employees, agents, or subcontractors; provided, however, that any loss or destruction of electronically or magnetically stored information or any Year 2000 Failure shall not be deemed an injury to any person or physical damage to property. (b) Each party shall promptly, and in writing, notify the other party of any such claim made against it by any third party, and shall take action as may be necessary to avoid default or other adverse consequences until such time as the other party has a reasonable opportunity to assume the defense of the claim. (c) The party obligated to defend under this Section shall have the right to select counsel and to control such defense. The other party and its personnel shall cooperate and participate as required for such defense. 18. Superior's Business Client recognizes that Superior is in the business of providing services, including, but not limited to, strategic and operational consulting; the design, development, installation, implementation, enhancement, maintenance, administration, operation, training, and support of information management and telecommunication systems; and software and application development solutions. Client further recognizes that some of Superior's clients may compete with or be customers of Client. Except as expressly provided herein, Superior retains the right to continue to provide the same type of services, and any other services, to any other client, including competitors and customers of Client, Master Service Agreement (MSA) Superior Consultant Company, Inc. for OrganicNet, Inc. - -------------------------------------------------------------------------------- provided that Superior maintains its obligations of nondisclosure of Proprietary Information under this MSA. Client acknowledges that Superior retains the right to exercise its skills and expertise and to form and express opinions to its clients that may be based upon experience gained under this MSA. 19. Assignment Neither party may assign its obligations under this MSA, except to its subsidiaries and affiliates, without the other party's prior written consent, which may not be unreasonably withheld. Any purported assignment without prior consent shall be voidable by the other party. 20. Compliance with Law If Client is a healthcare entity subject to Medicare Regulation 42 C.F.R. Section 420.302 and Section 1861 (V)(1)(l) of the Social Security Act, Superior agrees to grant access to the Controller General of the United States, the Department of Health and Human Services, and their duly authorized representatives, to Superior's and its subcontractors' and related organizations' contracts, books, documents, and records pertaining to work performed under this MSA until the expiration of four (4) years after the services are furnished under this MSA or subcontract. 21. Notices Any notices under this MSA shall be given in writing to Superior's Engagement Manager or the Client's Project Liaison, respectively. Any notices of termination or of breach must also be given in writing, as follows: If to Superior: Superior Consultant Company, Inc. 4000 Town Center Drive, Suite 1100 Southfield, Michigan 48075 Attention: General Counsel If to Client: OrganicNet, Inc. 330 Townsend Street, Suite 206 San Francisco, CA 94107 Attention: William W. Shaw, III Notice shall be transmitted by personal delivery or by overnight delivery service (e.g., Federal Express). Notice by either party of a change in its address for purposes of this section shall be in writing. 22. Additional Terms (a) This MSA, including its attachments, sets forth the full and complete agreement of the parties, and both parties warrant that there have been no other promises, obligations, or undertakings, oral or written. This MSA can be modified only by a written document signed by both parties. (b) The captions and headings throughout this MSA are for convenience and reference only, and do not affect the meaning or intent of this MSA. (c) If any section or clause contained in this MSA is found to be invalid by a court of competent jurisdiction, the remaining sections and clauses shall remain in full force and effect. (d) Neither party shall be responsible for any delay or failure in performance, at any time during the term of this MSA, caused by flood, riot, insurrection, fire, earthquake, strike, explosion, war, act of God, Year 2000 Failure, or any other force or cause beyond the control of the party claiming the protection of this section. (e) This MSA shall be interpreted and applied in accordance with the substantive law of the State of Michigan, and without regard to any choice of law provisions that would cause the law of another state to control. The following provisions of the MSA shall survive its termination: Bilateral No-Hire MSA, Non Disclosure, Ownership, Warranty and Limitation of Liability, Indemnification, Superior's Business, and Choice of Law. (f) This MSA may be executed in counterpart. Master Service Agreement (MSA) Superior Consultant Company, Inc. for OrganicNet, Inc. - -------------------------------------------------------------------------------- 23. Authorized Signatures Acknowledged and accepted for OrganicNet, Inc.: By: /s/ William W. Shaw III ---------------------------------------------- Signature President 9/20/99 - --------------------- ---------------------- Title Date Acknowledged and accepted for Superior consultant Company, Inc.: By: /s/ Joel F. French ---------------------------------------------- Signature Corporate VP, Strategy Development 9/20/99 - ------------------------- ---------------------- Title Date Please return an executed copy of this MSA, including all applicable Schedules, to Consultant Company, Inc., Attention Contract Processing, 4000 Town Center Drive, Suite 1100, Southfield, Michigan 48075. Schedule A Work Order #______ {Title Of Work Order} for Organicnet, Inc. -------------------- This Work Order ("WO") is being entered into pursuant to the terms and conditions of that certain Master Service Agreement, dated {DATE}, between Superior Consultant Company, Inc., ("Superior") and {CLIENT NAME} ("Client"). Term This WO shall commence on the Effective Date, and, unless earlier terminated as provided in the Master Service Agreement, shall continue until {INSERT DATE}. ______________________________________________________________ Scope of Work Superior shall: {INSERT OR ATTACH} ______________________________________________________________ Additional {Required if obligations are different or in addition to MSA} Superior Obligations ______________________________________________________________ Client {Required If obligations are different or in addition to MSA} Obligations ______________________________________________________________ Fees {Required if not specified in, or if different from, MSA} ______________________________________________________________ Change of Scope This fixed-fee is based upon the above Scope of Work. If the {Required if Scope of Work change the professional fees shall be revised fixed fee} accordingly. Any changes in the Scope of Work shall be reflected in a written change order signed by each of the parties. Invoicing and {Required if not specified in, or if different from, MSA} Billing Acknowledged and accepted for {ADD CLIENT NAME}: By:______________________________ _________________ _________________ Signature Title Date Acknowledged and accepted for Superior Consultant Company, Inc.: By:______________________________ _________________ _________________ Signature Title Date Please return the countersigned Work Order to: Superior Consultant Company, Inc., Attention Contract Processing, 4000 Town Center Drive, Suite 1100, Southfield, Michigan 48075. Amendment No. 1 to Distribution and Services Agreement This Amendment No. 1 to Distribution and Services Agreement ("Amendment") is entered into as of September 21, 1999, by and between OrganicNet, Inc., a Delaware corporation with a place of business located at 330 Townsend Street, Suite 206, San Francisco, California 94107 ("OrganicNet'), and Superior Consultant Company, Inc. a Michigan corporation with a place of business located at 4000 Town Center, Suite 1100, Southfield, Michigan 48075 ("Superior"), and amends that certain Distribution and Services Agreement (the "Agreement") dated as of September 20, 1999,. The parties hereto hereby agree as follows: 1. Amendment. Section 3.14 of the Agreement is amended and restated to read in its entirety as follows: "3.14 SUPC shall be entitled to have one nominee of SUPC appointed to the board of directors of OrganicNet until the effective date of the initial public offering of the common stock of OrganicNet. SUPC and OrganicNet further agree that two SUPC nominees to the Advisory Council of OrganicNet shall be appointed and shall serve a term running from the date of the formation of the Advisory Council until December 31, 2001. OrganicNet shall act to effect the foregoing as soon as reasonably practicable following the Effective Date." 2. Entire Agreement. Except as expressly amended herein, the Agreement shall remain in place and continue to bind the Parties according to its terms. This Amendment contains the entire agreement between the Parties respecting the matters contained herein, and supersedes all prior discussions, negotiations, and agreements with respect thereto. As used in this Amendment, all capitalized terms used by not defined herein shall have the meanings defined in the Agreement. 3. Governing law. This Agreement will be governed by the laws of the State of California without giving effect to the principles of conflict of laws. In Witness Whereof, the parties have executed this Amendment as of the day and year first above written. OrganicNet, Inc. Superior Consultant Company, Inc. By: /s/ William W. Shaw III By: /s/ Joel F. French ------------------------------- -------------------------------------- William W. Shaw, III, President Joel F. French, Corporate Vice President, Strategic Development Dated: __________________________ Dated: _________________________________ EX-23.1 7 CONSENT OF KPMG LLP Exhibit 23.1 The Board of Directors OrganicNet, Inc. We consent to the use of our reports on the consolidated balance sheets of OrganicNet, Inc. and subsidiaries as of December 31, 1997 and 1998, and the related consolidated statements of operations, stockholders' deficit and cash flows for each of the years in the three-year period ended December 31, 1998, and the related consolidated financial statement schedule, included herein and to the reference to our firm under the headings "Experts" and "Selected Consolidated Financial Data" in the Prospectus. /s/ KPMG LLP San Francisco, California November 12, 1999 EX-23.2 8 CONSENT OF KPMG LLP Exhibit 23.2 The Board of Directors PSI-Med Corporation We consent to the use of our report on the balance sheets of PSI-Med Corporation as of May 31, 1998 and 1999, and the related statements of operations, stockholders' deficit and cash flows for each of the years in the three-year period ended May 31, 1999, included herein and to the reference to our firm under the heading "Experts" in the Prospectus. Our report dated August 4, 1999, except as to notes 8 and 10, which are as of November 11, 1999 and September 7, 1999, respectively, contains an explanatory paragraph that states that the Company has suffered recurring losses from operations and has a net capital deficiency, which raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of that uncertainty. /s/ KPMG LLP Orange County, California November 12, 1999 EX-27.1 9 FINANCIAL DATA SCHEDULE
5 6-MOS YEAR DEC-31-1998 DEC-31-1998 JAN-01-1999 JAN-01-1998 SEP-30-1999 DEC-31-1998 894,897 41,104 0 0 859,901 732,370 254,714 128,800 0 0 2,367,791 931,660 412,001 348,134 1,164,461 615,402 5,012,540 2,215,048 5,656,821 7,221,310 0 0 0 0 67,043 36,794 5,502 5,464 (18,288,105) (5,089,262) 5,012,540 2,215,048 777,486 570,694 4,224,106 4,623,651 2,679,892 3,278,715 6,324,735 7,245,039 9,590 8,643 101,684 15,800 51,061 92,955 4,875,359 (6,001,701) 4,800 4,000 (4,880,159) (6,005,701) 0 0 0 0 0 0 (4,880,159) (6,005,701) (.89) (1.10) (.89) (1.10)
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