S-1 1 ds1.htm FORM S-1 Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on January 5, 2007

Registration No. 333-                    

 


SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 


INNERWORKINGS, INC.

(Exact name of registrant as specified in its charter)

 


 

Delaware   2790  

20-5997364

(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

600 West Chicago Avenue

Suite 850

Chicago, Illinois 60610

Phone: (312) 642-3700

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Steven E. Zuccarini

Chief Executive Officer

InnerWorkings, Inc.

600 West Chicago Avenue, Suite 850

Chicago, Illinois 60610

Phone: (312) 642-3700

Fax: (312) 642-3704

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 


Copies to:

Steven J. Gavin, Esq.

Richard E. Ginsberg, Esq.

Matthew F. Bergmann, Esq.

Winston & Strawn LLP

35 West Wacker Drive

Chicago, Illinois 60601

Phone: (312) 558-5600

Fax: (312) 558-5700

 

John J. Sabl, Esq.

Sidley Austin LLP

One South Dearborn

Chicago, Illinois 60603

Phone: (312) 853-7437

Fax: (312) 853-7036

Approximate date of commencement of proposed sale to the public:    As soon as practicable after this Registration Statement becomes effective.

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, please 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 to be 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 of the earlier effective registration statement for the same offering:  ¨

If this Form is a post-effective amendment 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:  ¨

 


CALCULATION OF REGISTRATION FEE

 

                     

Title of each class of

Securities to be registered

  

Amount to be

registered(1)

  

Proposed

maximum

offering price

per share(2)

  

Proposed
maximum
aggregate

offering price(2)

  

Amount of

registration fee

Common Stock, $.0001 par value per share

   9,200,000    $15.98    $147,016,000    $15,730.71
                     

 

(1)   Includes 1,200,000 shares of common stock that may be sold if the over-allotment option granted to the underwriters is exercised in full.
(2)   Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c) under the Securities Act of 1933, as amended, and based on the average high and low prices of the common stock as reported on the Nasdaq Global Market on January 3, 2007.

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.

 



Table of Contents

The information in this prospectus is not complete and may be changed. Neither we nor the selling stockholders may sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

PROSPECTUS (Subject to Completion)

Issued January 5, 2007

8,000,000 Shares

LOGO

COMMON STOCK

 


InnerWorkings, Inc. is offering 3,000,000 shares of its common stock and the selling stockholders are offering 5,000,000 shares of common stock. We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders.

 


Our common stock is listed on the Nasdaq Global Market under the symbol “INWK.” On January 4, 2007, the closing sale price of our common stock as reported on the Nasdaq Global Market was $16.42 per share.

 


Investing in our common stock involves risks. See “Risk Factors” beginning on page 9.

 


PRICE $         A SHARE

 


 

   

Price to

Public

 

Underwriting Discounts

and Commissions

  Proceeds to
InnerWorkings
 

Proceeds to

Selling

Stockholders

Per Share

  $           $           $           $        

Total

  $                   $                   $                   $                

The selling stockholders have granted the underwriters the right to purchase up to an additional 1,200,000 shares 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. Any representation to the contrary is a criminal offense.

Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers on                         , 2007.

 


MORGAN STANLEY    JPMORGAN

 


JEFFERIES & COMPANY

PIPER JAFFRAY

WILLIAM BLAIR & COMPANY

                    , 2007


Table of Contents

LOGO


Table of Contents

TABLE OF CONTENTS

     Page

Prospectus Summary

   1

Risk Factors

   9

Forward-Looking Statements

   18

Use Of Proceeds

   19

Market Price of Common Stock

   19

Dividend Policy

   19

Capitalization

   20

Selected Consolidated Financial And Other Data

   21

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   23

Business

   41

Management

   51

Compensation Discussion and Analysis

   55
     Page

Certain Relationships And Related Party Transactions

   72

Principal And Selling Stockholders

   76

Description Of Capital Stock

   82

Shares Eligible For Future Sale

   85

Certain Material U.S. Federal Income Tax Consequences To Non-U.S. Holders

   87

Underwriting

   90

Legal Matters

   94

Experts

   94

Where You Can Find Additional Information

   94

Index To Historical Consolidated Financial Statements

   F-1

 


You should rely only on the information contained in this prospectus. We have not, and the selling stockholders and the underwriters have not, authorized anyone to provide you with additional information or information different from that contained in this prospectus. We and the selling stockholders are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where those offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock.

We operate in an industry in which it is difficult to obtain precise industry and market information. Although we have obtained some industry data from third party sources that we believe to be reliable, in certain cases we have based certain statements contained in this prospectus regarding our industry and our position in the industry on our estimates concerning our customers and competitors. These estimates are based on our experience in the industry, conversations with our principal suppliers and our own investigation of market conditions. Unless otherwise noted, the statistical data contained in this prospectus regarding the print industry is based on data we obtained from the Print Industries of America/Graphic Arts Technical Foundation, or PIA/GATF, a graphic arts trade association, Datamonitor, a business information company specializing in industry analysis, or International Data Corporation, or IDC, a provider of market intelligence for the information technology, telecommunications and consumer technology markets.

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in the prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, especially the risks of investing in our common stock discussed under “Risk Factors” beginning on page 9, and the consolidated financial statements and notes to those consolidated financial statements before making an investment decision.

INNERWORKINGS, INC.

Our Company

We are a leading provider of print procurement solutions to corporate clients in the United States. Utilizing our proprietary technology and database, as well as our extensive domain expertise, we create a competitive bid process to procure, purchase and deliver printed products as part of a comprehensive outsourced enterprise solution and in individual transactions. Our technology is designed to capitalize on excess manufacturing capacity and other inefficiencies in the traditional print supply chain to obtain favorable pricing and to deliver high-quality products and services for our clients.

Our proprietary software applications and database, PPM4™, create a fully-integrated solution that stores, analyzes and tracks the production capabilities of our supplier network, as well as quote and price data for each bid we receive and print job we execute. As a result, we believe PPM4™ contains one of the largest independent repositories of equipment profiles and price data for print suppliers in the United States. We leverage our technology to match each print job with the supplier that is optimally suited to meet the client’s needs at a highly competitive price. Our procurement managers use PPM4™ to manage the print procurement process from end-to-end.

Through our network of over 4,500 suppliers, we offer a full range of print, fulfillment and logistics services that allows us to procure printed products on virtually any substrate. The breadth of our product offerings and services and the depth of our supplier network enable us to fulfill up to 100% of the print procurement needs of our clients. By leveraging our technology platform, our clients are able to reduce overhead costs, redeploy internal resources and obtain favorable pricing and service terms. In addition, our ability to track individual transactions and provide customized reports detailing print procurement activity on an enterprise-wide basis provides our clients with greater visibility and control of their print expenditures.

We generate revenue by procuring and purchasing printed products from our suppliers and selling those products to our clients. We procure printed products for clients across a wide range of industries, such as advertising, consumer products, publishing and retail. Our clients fall into two categories, enterprise and transactional. We enter into arrangements with our enterprise clients to provide some, or substantially all, of their printed products, typically on a recurring basis. We provide printed products to our transactional clients on an order-by-order basis. For the year ended December 31, 2005, enterprise and transactional clients accounted for 69% and 31% of our revenue, respectively. For the nine months ended September 30, 2006, enterprise and transactional clients accounted for 77% and 23% of our revenue, respectively.

We were formed in 2001 and commenced operations in 2002. From our inception through December 31, 2005, we served over 1,100 clients, received approximately 96,000 bids and executed approximately 26,000 print jobs through over 1,100 suppliers, and through September 30, 2006, we served over 1,600 clients, received approximately 120,000 bids and executed approximately 37,000 print jobs through over 1,600 suppliers. We have increased our revenue from $5.0 million in 2002 to $76.9 million in 2005, representing a compound annual growth rate of 148%. In 2005, our revenue was $76.9 million, compared to $38.9 million in 2004. For the nine months ended September 30, 2006, our revenue was $99.4 million, compared to $54.6 million for the nine months ended September 30, 2005.

 

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Our Industry

Our business of providing print procurement solutions intersects two large and growing industries, commercial printing and business process outsourcing, or BPO. Total shipments in the worldwide commercial print industry were approximately $373 billion in 2005 and are expected to increase by an average of $9 billion per year through 2010, according to a 2006 Datamonitor global commercial printing industry profile. To become more competitive, many businesses seek to focus on core competencies and outsource non-core business functions, such as print procurement. According to a 2006 IDC global BPO forecast, the worldwide market for BPO is estimated to grow from $384 billion in 2005 to $618 billion in 2010, representing a compound annual growth rate of 10%.

In addition, the U.S. print industry is highly fragmented, with an estimated 39,300 printing plants. In 2005, the ten largest commercial print companies accounted for only approximately 16% of the total domestic print market. The traditional process of designing, procuring and producing a print order requires extensive collaboration by printers, designers, brokers and other middlemen and is often highly inefficient for the customer, who typically pays a mark-up at each intermediate stage of the supply chain. Print procurement is often dispersed across several areas of a business enterprise, including sales, marketing, communications and finance. Consolidating all print activities across the organization represents an opportunity to reduce total print expenditure and decrease the number of vendors in the print supply chain. Applying software and database technology to manage the print procurement process also provides for enhanced tracking and auditing capabilities.

In recent years, the print industry has been impacted by developments in technology, including enhanced output capacity of printing presses and increased utilization of Internet-based communications and digital printing. These developments have lowered barriers to entry, increased the number of print suppliers available to our clients and reduced the utilization of printing presses. As a result, the print industry has experienced, and is continuing to experience, significant excess manufacturing capacity and the market for printed products has become increasingly commoditized.

Our Competitive Strengths

We believe a number of important competitive strengths will continue to drive our success in the future, including:

Disruptive business solution.    Our fully-integrated print procurement solution disrupts the traditional print supply chain by aggregating the collective print demand of our clients and greatly increasing the number of suppliers that can efficiently bid for our clients’ print jobs. Our print procurement costs are often 30 to 50% less than the print expenditures historically incurred by our clients, and we believe that we offer a compelling value proposition to our clients by passing on to them a considerable portion of such cost savings. In addition, our solution reduces the amount of internal resources our clients must dedicate to print procurement, accelerates the print procurement process and consistently delivers a high-quality product. We believe that our business model, which is unencumbered by commercial print production assets, offers the first enterprise solution capable of meeting the entire print procurement needs of corporate clients.

Proprietary software and database.    PPM4™ is a fully-integrated proprietary software solution that allows us to match each print job with the supplier in our network that is optimally suited to produce the job at a highly competitive price. Our technology also enables us to efficiently manage critical aspects of the print procurement process, including gathering job specifications, identifying suppliers, establishing pricing, managing print production and purchasing and coordinating delivery of the finished product.

We believe our proprietary database contains one of the largest independent repositories of equipment profiles and price data for print suppliers in the United States. This data provides us with valuable insight into how excess manufacturing capacity and other industry factors impact the pricing of printed products, and enhances our ability to capitalize on those trends to our clients’ advantage. Our database expands with each job we quote and becomes more difficult to replicate, which we believe increases our competitive advantage.

 

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Extensive and diverse supplier network.    The more than 4,500 suppliers in our network, which produced more than $50 billion of printed products in 2005, have been selected from among thousands of potential suppliers worldwide based on their ability to effectively serve our clients on the basis of price and service. Through these suppliers, we offer a full range of print, fulfillment and logistics services that allows us to procure printed products on virtually any substrate, including books, magazines, catalogues, direct mail, point-of-purchase displays, commercial print, packaging, labels and promotional products. By leveraging our access to a full range of print and print-related services, we are able to provide a complete and cost-effective outsourced solution for our clients.

Deep domain knowledge and procurement management expertise.    Effective management of the outsourced printing procurement process requires highly experienced and dedicated personnel to work closely with both clients and print suppliers. Our teams of account executives and procurement managers ensure high levels of execution and the on-time delivery of a quality product, while delivering domain expertise that spans advertising, consumer products, manufacturing, publishing, retail and other print-related industries. As of September 30, 2006, we had over 110 account executives, who average 17 years of experience in the printing industry, and over 75 procurement managers, who average 13 years of experience in the printing industry.

Scalable business model with significant operating leverage.    Our technology solution can support a significant increase in the number of clients we serve and jobs we process without significant capital investment. In addition, our extensive supplier network provides access to a vast supply of manufacturing capacity without requiring any capital expense. Because we do not own commercial print production assets, the primary incremental operating cost of growing our business is hiring additional account executives who market and sell our services, and procurement managers who manage the print procurement process. As a result, our revenue growth has significantly outpaced the increase in our operating expenses. Our revenue increased from $5.0 million in 2002 to $76.9 million in 2005, while our operating expenses as a percentage of revenue, which exclude cost of goods sold, decreased from 23.2% in 2002 to 14.3% in 2005. Our revenue increased from $54.6 million during the nine months ended September 30, 2005 to $99.4 million during the nine months ended September 30, 2006, while our operating expenses as a percentage of revenue, which exclude cost of goods sold, decreased from 14.6% during the nine months ended September 30, 2005 to 13.4% during the nine months ended September 30, 2006.

Experienced management team.    We have a highly experienced management team with extensive industry knowledge. Our Chief Executive Officer, Steven Zuccarini, is the former president of the Catalog & Retail and the Global Solutions business units of North America’s largest print company, R.R. Donnelley & Sons Company, where he was responsible for providing enterprise solutions to its largest clients. Our non-executive Chairman, John Walter, is the former Chairman and Chief Executive Officer of R.R. Donnelley.

Our Growth Strategy

We intend to become the preeminent provider of print procurement solutions on a global basis. The key elements of our growth strategy include:

Expand our base of enterprise clients.    We are focused on continuing to increase our business with clients using our technology enabled enterprise solution. During 2005, we entered into contracts with 23 enterprise clients, including 17 new clients and six clients that we initially serviced on a transactional basis. During the nine months ended September 30, 2006, we entered into contracts with 17 enterprise clients, including 12 new clients and five clients that we initially serviced on a transactional basis. We seek to attract new enterprise clients by targeting companies which have substantial and recurring print requirements. We also seek to transition transactional clients to our enterprise solution in order to capture a greater portion of their recurring print expenditures and become more fully integrated into their business infrastructure. This strategy has been highly successful as 28 of our 86 enterprise clients as of September 30, 2006 began as transactional accounts.

 

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Expand our base of transactional clients.    As a significant portion of our new transactional business results from our recruitment of sales executives, we intend to continue to hire account executives, or acquire groups of them, with established client relationships. We believe our business model is extremely attractive to these executives, as it enables sales professionals to leverage our technology and supplier network to market a broader range of products and services to their clients than were available with their previous employers. As these executives are hired, we expect to expand our base of transactional clients, thereby expanding our pipeline of clients to which we can market our enterprise solution.

Further penetrate our established customer base.    We believe our established customer base presents a substantial opportunity for growth. Our ability to deliver a full range of printed products at competitive prices and procure up to 100% of the print requirements of our clients allows us to capitalize on our established client relationships to increase our sales. As we further develop our relationships with clients, we seek to manage more of their total print expenditures over time. For example, we estimate that during 2005 sales to our ten largest enterprise clients accounted for less than 25% of their total print expenditures.

Broaden geographic presence.    We believe the opportunity exists to expand our business into new geographic markets. Our headquarters are located in Chicago, and as of September 30, 2006 approximately 51% of our clients were located in Illinois. We also maintain offices in New York, California, Hawaii, Michigan and Missouri. Our objective is to increase our sales in other major print markets in the United States, such as Atlanta, Boston, Dallas, Los Angeles and Minneapolis. We intend to hire or acquire more account executives within close proximity to these large markets, which accounted for, in aggregate, $17.3 billion of print expenditures in 2005, according to PIA/GATF. In addition, given that the print industry is a global business, over time we intend to evaluate opportunities to access attractive markets outside the United States. For example, in March 2006 we entered into a strategic agreement to grant SNP Corporation Ltd. a non-exclusive, non-transferable license to use certain non-core applications of our software in China, Singapore and Hong Kong.

Recent Developments

Initial Public Offering.    In August 2006, we completed an initial public offering of shares of our common stock. We offered and sold 7,060,000 shares of our common stock and certain selling stockholders offered and sold an additional 5,118,500 shares of our common stock at a price of $9.00 per share. Our net proceeds from the initial public offering were approximately $56.3 million.

Applied Graphics Acquisition.    In October 2006, we acquired Applied Graphics, Inc., a provider of print management and print-on-demand services headquartered in San Rafael, California. As a result of the acquisition, we believe we established a significant presence in the West Coast market with sales executives in California, Hawaii and Nevada. We added 35 sales executives, approximately 1,000 transactional clients and approximately 500 new suppliers. This significantly expanded our pipeline of clients to which we can market our enterprise solution. The acquisition consideration consisted of approximately $7.0 million in cash paid in October 2006 and up to an additional $4.9 million contingent upon the attainment of certain performance measures by Applied Graphics on or prior to September 30, 2008.

CoreVision Acquisition.    In September 2006, we acquired CoreVision Group, Inc., a provider of end-to-end marketing solutions, including design, print, promotional products and fulfillment services, located in Carol Stream, Illinois. As a result of the acquisition, we added 15 sales executives, including our first sales executives in the states of Michigan and Missouri. The acquisition consideration for CoreVision consisted of approximately $1.1 million, $10,000 paid in September 2006 and the remaining $1.1 million to be paid in monthly installments through August 2007. The former owner of CoreVision is also eligible to receive up to an additional $2.5 million in acquisition consideration based on gross profit generated by CoreVision on or prior to December 31, 2009.

 

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Risk Factors

 

Investing in our common stock involves risks. You should carefully read the section entitled “Risk Factors” beginning on page 9 for an explanation of these risks before investing in our common stock. In particular, the following considerations, among others, may offset our competitive strengths or have a negative effect on our growth strategy, which could cause a decrease in the price of our common stock and result in a loss of all or a portion of your investment:

 

    Competition could substantially impair our business and our operating results.

 

    If our services do not achieve widespread commercial acceptance, our business will suffer.

 

    If our suppliers do not meet our needs or expectations, or those of our clients, our business will suffer.

 

    A decrease in the number of our suppliers could adversely affect our business.

 

    If we are unable to expand the number of account executives, or if a significant number of our account executives leave us, our ability to increase our revenues could be negatively impacted.

 

    If we are unable to retain and expand our enterprise client base, our revenue growth may be negatively impacted.

 


 

Our principal executive offices are located at 600 West Chicago Avenue, Suite 850, Chicago, IL 60610, and our telephone number at this address is (312) 642-3700. Our website is www.iwprint.com. Information contained on our website is not a part of this prospectus.

 

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THE OFFERING

 

Common stock offered by InnerWorkings

   3,000,000 shares  

Common stock offered by the selling stockholders

   5,000,000 shares  
      

Total

   8,000,000 shares  
      

Common stock to be outstanding after this offering

   47,472,961 shares

Over-allotment option offered by the selling stockholders

  

1,200,000 shares

Use of proceeds

   We expect our net proceeds from this offering will be
approximately $       million. We intend to use our net
proceeds from this offering to expand our sales force,
to acquire or make strategic investments in
complementary businesses and for working capital
and other general corporate purposes.

Risk factors

   See “Risk Factors” and other information included in
this prospectus for a discussion of factors you should
carefully consider before deciding to invest in shares
of our common stock.

Nasdaq Global Market symbol

   “INWK”

Unless otherwise indicated, the number of shares of common stock to be outstanding after this offering excludes:

 

    5,024,075 shares of common stock issuable (after giving effect to the exercise of options to purchase 458,642 shares of common stock, which shares are being sold by certain selling stockholders) in this offering upon the exercise of outstanding stock options at a weighted average exercise price of $1.99 per share; and

 

    843,450 shares of common stock available for additional grants under our stock incentive plan.

Unless otherwise indicated, all information in this prospectus assumes the underwriters’ over-allotment option is not exercised.

 

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SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA

The following table presents summary consolidated financial and other data as of and for the periods indicated. You should read the following information together with the more detailed information contained in “Selected Consolidated Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the accompanying notes. The pro forma consolidated statements of operations data for the year ended December 31, 2005 and for the nine months ended September 30, 2006 give effect to the May 31, 2006 acquisition of Graphography Limited LLC and the October 11, 2006 acquisition of Applied Graphics, Inc. as if these acquisitions had occurred on January 1, 2005 and reflect the elimination of preferred dividends accrued during the periods presented as a result of the recapitalization of all outstanding shares of our Series B preferred stock, Series D preferred stock and Series E preferred stock into shares of our common stock as if the recapitalization had occurred on January 1, 2005 and the elimination of interest expense incurred during the periods presented as a result of the repayment of all outstanding indebtedness under our line of credit as if the repayment had occurred on January 1, 2005. In addition, the pro forma consolidated statements of operations data reflect income tax expense as if our January 3, 2006 conversion from a limited liability company to a C corporation had occurred at the beginning of the period presented, as well as the consummation of this offering. The pro forma consolidated statements of operations data do not necessarily indicate the results that would have actually occurred if the acquisitions of Graphography Limited LLC and Applied Graphics, Inc. had occurred on January 1, 2005 or that may occur in the future. You should read the pro forma consolidated statements of operations data together with the more detailed information contained in Unaudited Pro Forma Condensed Consolidated Financial Statements and the accompanying notes.

 

    Years ended December 31,     Pro forma
year ended
December 31,
2005
    Nine months
ended September 30,
    Pro forma
nine months
ended
September 30,
2006
 
  2003     2004     2005       2005     2006    
                      (unaudited)     (unaudited)     (unaudited)     (unaudited)  
    (in thousands, except per share amounts)  

Consolidated statements of operations data:

             

Revenue

  $ 16,229     $ 38,884     $ 76,870     $ 130,737     $ 54,626     $ 99,362     $ 134,394  

Cost of goods sold

    12,487       30,483       61,272       101,640       43,359       78,228       103,025  
                                                       

Gross profit

    3,742       8,401       15,598       29,097       11,267       21,134       31,369  

Selling, general and administrative expenses:

             

Commission expenses

    577       1,788       3,492       7,904       3,040       4,651       6,079  

General and administrative expenses

    2,382       4,317       7,114       15,239       4,671       8,119       15,961  
                                                       

Total selling, general and administrative expenses

    2,959       6,105       10,606       23,143       7,711       12,770       22,040  

Depreciation and amortization

    18       223       388       881       256       574       846  
                                                       

Income from operations

    765       2,073       4,604       5,073       3,300       7,790       8,483  

Other income (expense)

    (86 )     (124 )     (29 )     (154 )     (25 )     339       101  

Minority interest income (expense)

    (8 )     (192 )     58       58       58              
                                                       

Total other income (expense)

    (94 )     (316 )     29       (96 )     33       339       101  
                                                       

Income before income taxes

    671       1,757       4,633       4,977       3,333       8,129       8,584  

Income tax expense

                      (1,962 )           3,215       (3,395 )
                                                       

Net income

    671       1,757       4,633       3,015       3,333       4,914       5,189  

Dividends on preferred shares

    (176 )     (462 )     (762 )           (584 )     (1,409 )  
                                                       

Net income applicable to common stockholders

  $ 495     $ 1,295     $ 3,871     $ 3,015     $ 2,749     $ 3,505     $ 5,189  
                                                       

Net income per share of common stock:

             

Basic

  $ 0.02     $ 0.04     $ 0.12       $ 0.09     $ 0.13    

Diluted

  $ 0.02     $ 0.04     $ 0.12       $ 0.09     $ 0.13    

Shares used in per share calculations:

             

Basic

    26,139       29,449       31,010         30,701       27,518    

Diluted

    26,139       29,449       32,707         31,890       36,804    

Unaudited pro forma income tax provision(1)

  $ 262     $ 685     $ 1,807       $ 1,300      

Unaudited pro forma net income(1)

  $ 409     $ 1,072     $ 2,826       $ 2,033      

Unaudited pro forma net income per share of common stock(2):

             

Basic

        $ 0.07         $ 0.11  

Diluted

        $ 0.07         $ 0.10  

Shares used in unaudited pro forma per share calculations(2):

             

Basic

          43,607           46,989  

Diluted

          44,367           49,516  

Other data (unaudited):

             

Enterprise clients(3)

    14       46       69       71       64       86       86  

Transactional clients(4)

    294       593       667       3,229       574       701       3,401  

Total clients(5)

    308       639       736       3,300       638       787       3,487  

Total print jobs(6)

    2,002       6,972       10,736             8,111       11,160        

Employees and independent contractors(7)

    43       85       154       233       136       240       320  

 

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(1)   The unaudited pro forma data presented gives effect to our conversion on January 3, 2006 into a Delaware corporation as if it occurred at the beginning of the period presented. The unaudited pro forma income tax provision represents a combined federal and state effective tax rate of 39.0% and does not consider potential tax loss carrybacks, carryforwards or realizability of deferred tax assets. The unaudited pro forma net income represents our net income for the periods presented as adjusted to give effect to the pro forma income tax provision.
(2)   Unaudited pro forma net income per share of common stock (i) reflects the recapitalization of all outstanding shares of our Class A common stock, Class B common stock, Series B preferred stock, Series D preferred stock and Series E preferred stock into shares of our common stock on a one-for-one basis, which we effectuated in connection with our initial public offering, (ii) includes 3,000,000 shares of common offered by us in this offering and (iii) gives effect to the elimination of interest expense on the outstanding indebtedness under our line of credit that we repaid with a portion of the proceeds from our initial public offering, less the related income tax effect.
(3)   Reflects number of enterprise clients as of the last day of the applicable period.
(4)   Reflects number of transactional clients served in the applicable period. The increase in the number of transactional clients is primarily due to the acquisition of Applied Graphics, which has historically had significantly lower average revenue per client than our historical business.
(5)   Reflects total number of enterprise clients as of the last day of the applicable period and number of transactional clients served in the applicable period.
(6)   Reflects total number of print jobs executed in the applicable period.
(7)   Reflects number of employees and independent contractors as of the last day of the applicable period.

The pro forma balance sheet data in the table below gives effect to the October 11, 2006 acquisition of Applied Graphics, Inc. as if the acquisition had occurred on September 30, 2006.

The pro forma as adjusted balance sheet data in the table below reflects the sale of 3,000,000 shares of our common stock offered by us in this offering assuming a public offering price of $16.42 per share, the closing sale price per share of our common stock as reported on the Nasdaq Global Market on January 4, 2007, after deducting estimated underwriting discounts and commissions and offering expenses payable by us.

 

     As of September 30, 2006
      Actual    Pro forma
before Offering
   Pro forma
as adjusted
     (unaudited)
     (in thousands)

Consolidated balance sheet data:

        

Cash and cash equivalents

   $ 34,284    $ 27,328    $ 73,545

Working capital

     61,862      55,712      101,929

Total assets

     104,116      109,326      155,543

Line of credit

          2,444      2,444

Capital leases

     313      330      330

Total stockholders’ equity

     78,533      78,533      124,750

 

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RISK FACTORS

 

Investing in our common stock involves a high degree of risk. You should carefully consider the following risks and other information in this prospectus before you decide to buy our common stock. Our business, financial condition or operating results may suffer if any of the following risks is realized. If any of these risks or uncertainties occurs, the trading price of our common stock could decline and you might lose all or part of your investment.

 

Risks Related to Our Business

 

Our limited operating history makes it difficult to evaluate our business, prospects and future financial performance.

 

We formed our business in September 2001 and have a limited operating history, which makes evaluating our current business and prospects difficult. The revenue and income potential of our business is uncertain, which makes it difficult to predict accurately our future financial performance. We may face periods where our financial performance falls below investor expectations. As a result, the price of our common stock may decline.

 

Competition could substantially impair our business and our operating results.

 

We operate in the print industry and several print-related industries, including paper and pulp, graphics art and pre-press and fulfillment and logistics. Competition in these industries is intense. Our primary competitors are printers that employ traditional methods of marketing and selling their printed materials. Many of these printers, such as Quad/Graphics, Quebecor and R.R. Donnelley have larger client bases and significantly more resources than we do. Print buyers may prefer to utilize the traditional services offered by the printers with whom we compete. Alternatively, some of these printers may elect to offer outsourced print procurement services or enterprise software applications, and their well-established client relationships, industry knowledge, brand recognition, financial and marketing capabilities, technical resources and pricing flexibility may provide them with a competitive advantage over us.

 

We also compete with a number of print suppliers, distributors and brokers. Several of these competitors, such as Cirqit, Workflow/Relizon and Newline/Noosh offer outsourced print procurement services or enterprise software applications for the print industry. These competitors, or new competitors that enter the market, may also offer print procurement services similar to and competitive with or superior to our current or proposed offerings and achieve greater market acceptance. In addition, a software solution and database similar to PPM4TM could be created over time by a competitor with sufficient financial resources and comparable experience in the print industry. If our competitors are able to offer comparable services, we could lose clients, and our market share could decline.

 

Our competitors may also establish cooperative relationships to increase their ability to address client needs. Increased competition may lead to revenue reductions, reduced gross margins or a loss of market share, any one of which could harm our business.

 

If our services do not achieve widespread commercial acceptance, our business will suffer.

 

Most companies currently coordinate the procurement and management of their print orders with their own employees using a combination of telephone, facsimile, e-mail and the Internet. Growth in the demand for our services depends on the adoption of our outsourcing model for print procurement services. We may not be able to persuade prospective clients to change their traditional print management processes. Our business could suffer if our services are not accepted or are not perceived by the marketplace to be effective or valuable.

 

If our suppliers do not meet our needs or expectations, or those of our clients, our business would suffer.

 

The success of our business depends to a large extent on our relationships with our clients and our reputation for high quality printed products and print procurement services. We do not own printing presses or

 

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other printing equipment. Instead, we rely on third-party suppliers to deliver the printed products and services that we provide to our clients. As a result, we do not directly control the manufacturing of the products or the services provided by our suppliers. If our suppliers do not meet our needs or expectations, or those of our clients, our professional reputation may be damaged, our business would be harmed and we could be subject to legal liability.

A decrease in the number of our suppliers could adversely affect our business.

In 2005, our top 10 suppliers accounted for approximately 40% of the products we sold, and our top three suppliers accounted for approximately 21% of the products we sold. We expect to continue to rely on these suppliers to fulfill a substantial portion of our print orders in the future. These suppliers are not contractually required to continue to accept orders from us. If production capacity at a significant number of these suppliers becomes unavailable, we will be required to use fewer suppliers, which could significantly limit our ability to serve our clients on competitive terms. In addition, we rely on price bids provided by our suppliers to populate our database. If the number of our suppliers decreases significantly, we will not be able to obtain sufficient pricing information for PPM4 TM, which could affect our ability to obtain favorable pricing for our clients.

If we are unable to expand the number of our account executives, or if a significant number of our account executives leave InnerWorkings, our ability to increase our revenues could be negatively impacted.

Our ability to expand our business will depend largely on our ability to attract additional account executives with established client relationships. Competition for qualified account executives can be intense and we may be unable to hire such persons. Any difficulties we experience in expanding the number of our account executives could have a negative impact on our ability to expand our client base, increase our revenue and continue our growth.

In addition, we must retain our current account executives and properly incentivize them to obtain new clients and maintain existing client relationships. If a significant number of our account executives leave InnerWorkings and take their clients with them, our revenue could be negatively impacted. We have entered into non-compete agreements with our account executives to mitigate this risk, but we may need to litigate to enforce our rights under these agreements, which could be time-consuming, expensive and ineffective. A significant increase in the turnover rate among our current account executives could also increase our recruiting costs and decrease our operating efficiency and productivity, which could lead to a decline in the demand for our services.

If we are unable to expand our enterprise client base, our revenue growth rate may be negatively impacted.

As part of our growth strategy, we seek to attract new enterprise clients and migrate our transactional client relationships into enterprise engagements under long-term contracts. If we are unable to attract new enterprise clients or expand our relationships with our existing transactional clients, our ability to expand our business will be hindered.

Many of our clients may terminate their relationship with us on short notice and with no penalties or limited penalties.

Our transactional clients, which accounted for approximately 50%, 31% and 23% of our revenue in 2004, 2005 and the nine months ended September 30, 2006, respectively, typically use our services on an order-by-order basis rather than under long-term contracts. These clients have no obligation to continue using our services and may stop purchasing from us at any time. We have entered into contracts with our enterprise clients, which accounted for approximately 50%, 69% and 77% of our revenue in 2004, 2005 and the nine months ended September 30, 2006, respectively, that generally have an open-ended duration. Most of these contracts, however, do not impose minimum purchase or volume requirements, and typically permit the clients to terminate our engagements on prior notice ranging from 90 days to 12 months with limited or no penalties.

The volume and type of services we provide our clients may vary from year to year and could be reduced if the client were to change its outsourcing or print procurement strategy. If a significant number of our

 

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transactional or enterprise clients elect to terminate or not to renew their engagements with us, or if the volume of their print orders decreases, our business, operating results and financial condition could suffer.

A significant portion of our revenue is derived from a relatively limited number of large clients and any loss of, or decrease in sales to, these clients could harm our results of operations.

A significant portion of our revenue is derived from a relatively limited number of large clients. Revenue from our top ten clients accounted for 43%, 46% and 51% of our revenue during the years ended December 31, 2004 and December 31, 2005 and the nine months ended September 30, 2006, respectively. In 2005, our largest client accounted for 16% of our revenue. During the nine months ended September 30, 2006, our largest client accounted for 18% of our revenue. We are likely to continue to experience ongoing client concentration, particularly if we are successful in attracting large enterprise clients. Moreover, there may be a loss or reduction in business from one or more of our large clients. It is also possible that revenue from these clients, either individually or as a group, may not reach or exceed historical levels in any future period. The loss or significant reduction of business from our major clients would adversely affect our results of operations.

There are risks that our acquisitions could disrupt our business and harm our financial condition. These risks include:

 

  Ÿ   problems with integrating the operations and technologies of our acquired companies with our business;

 

  Ÿ   distraction and diversion of management time and attention from our existing core business;

 

  Ÿ   inability to retain business relationships with the customers of our acquired companies; and

 

  Ÿ   inability to retain key employees of our acquired companies.

In addition, a large percentage of Graphography’s revenues have historically come from only two customers. Revenues from these customers would have accounted for approximately 9% of our pro forma revenue for the nine months ended September 30, 2006. The loss of either of these customers or a reduction in the business they send us could cause our business and financial results to deteriorate, leading to possible lower earnings, future impairment of goodwill and other intangible assets and a loss in the market value of our shares of common stock.

We may not be able to develop or implement new systems, procedures and controls that are required to support the anticipated growth in our operations.

Our revenues increased from $5.0 million in 2002 to $76.9 million in 2005, representing a compound annual growth rate of 148%. Between January 1, 2002 and September 30, 2006, the number of our employees and independent contractors increased from 21 to 240. Continued growth could place a significant strain on our ability to:

 

  Ÿ   recruit, motivate and retain qualified account executives, procurement managers and management personnel;

 

  Ÿ   preserve our culture, values and entrepreneurial environment;

 

  Ÿ   develop and improve our internal administrative infrastructure and execution standards; and

 

  Ÿ   maintain high levels of client satisfaction.

To manage our growth, we must implement and maintain proper operational and financial controls and systems. Further, we will need to manage our relationships with various clients and suppliers. We cannot give any assurance that we will be able to develop and implement, on a timely basis, the systems, procedures and

 

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controls required to support the growth in our operations or effectively manage our relationships with various clients and suppliers. If we are unable to manage our growth, our business, operating results and financial condition could be adversely affected.

 

A decrease in levels of excess capacity in the U.S. commercial print industry could have an adverse impact on our business.

 

We believe that for the past several years, the U.S. commercial print industry has experienced significant levels of excess capacity. Our business seeks to capitalize on imbalances between supply and demand in the print industry by obtaining favorable pricing terms from suppliers in our network through a competitive bid process. Reduced excess capacity in the print industry generally and in our supplier network specifically could have an adverse impact on our ability to execute our business strategy and on our business results and growth prospects.

 

Our inability to protect our intellectual property rights may impair our competitive position.

 

If we fail to protect our intellectual property rights adequately, our competitors could replicate our proprietary technology in order to offer similar services and harm our competitive position. We rely on a combination of trademark and trade secret laws and confidentiality and nondisclosure agreements to protect our proprietary technology. We cannot be certain that the steps we have taken to protect our intellectual property rights will be adequate or that third parties will not infringe or misappropriate our rights or imitate or duplicate our services or methodologies, including PPM4™. We may need to litigate to enforce our intellectual property rights or determine the validity and scope of the rights of others. Any such litigation could be time-consuming and costly.

 

If we are unable to maintain PPM4™, demand for our services and our revenues could decrease.

 

We rely heavily on PPM4™ to procure printed products for our clients. To keep pace with changing technologies and client demands, we must correctly interpret and address market trends and enhance the features and functionality of our technology in response to these trends, which may lead to significant research and development costs. We may be unable to accurately determine the needs of print buyers, the trends in the print industry or to design and implement the appropriate features and functionality of our technology in a timely and cost-effective manner, which could result in decreased demand for our services and a corresponding decrease in our revenue.

 

In addition, we must protect our systems against physical damage from fire, earthquakes, power loss, telecommunications failures, computer viruses, hacker attacks, physical break-ins and similar events. Any software or hardware damage or failure that causes interruption or an increase in response time of PPM4™ could reduce client satisfaction and decrease usage of our services.

 

If the key members of our management team do not remain with us in the future, our business, operating results and financial condition could be adversely affected.

 

Our future success will depend to a significant extent on the continued services of Steven Zuccarini, our Chief Executive Officer, Nicholas Galassi, our Chief Financial Officer, Scott Frisoni, our Executive Vice President of Sales, Eric Belcher, our Chief Operating Officer, and Neil Graver, our Chief Technology Officer. The loss of the services of any of these or other individuals could adversely affect our business, operating results and financial condition and could divert other senior management time in searching for their replacements.

 

Our management team has limited experience managing a public company, and regulatory compliance may divert its attention from the day-to-day management of our business.

 

The individuals who now constitute our management team have limited experience managing a publicly-traded company and limited experience complying with the increasingly complex laws pertaining to public companies. Our management team may not successfully or efficiently manage our transition into a public

 

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company that will be subject to significant regulatory oversight and reporting obligations under federal securities laws. In particular, these new obligations will require substantial attention from our senior management and divert its attention away from the day-to-day management of our business, which could materially and adversely impact our business operations.

 

Because many of the members of our management team have been employed with us for a short period of time, we cannot be certain that they will be able to manage our business successfully.

 

We are dependent on our management team for our business to be successful. Because of our limited operating history, many of our key management personnel have been employed by us for less than two years. Therefore, we cannot be certain that we will be able to allocate responsibilities appropriately and that the new members of our management team will succeed in their roles. Our inability to integrate members of our current management team with our business model would make it difficult for us to manage our business successfully and to pursue our growth strategy.

 

Our business is subject to seasonal sales fluctuations, which could result in volatility or have an adverse effect on the market price of our common stock.

 

Our business is subject to some degree of sales seasonality. Historically, the percentage of our annual revenue earned during the third and fourth fiscal quarters has been higher due, in part, to a greater number of print orders in anticipation of the year-end holiday season. If our business continues to experience seasonality, we may incur significant additional expenses during our third and fourth quarters, including additional staffing expenses. Consequently, if we were to experience lower than expected revenue during any future third or fourth quarter, whether from a general decline in economic conditions or other factors beyond our control, our expenses may not be offset, which would have a disproportionate impact on our operating results and financial condition for that year.

 

Price fluctuations in raw materials costs could adversely affect the margins on our print orders.

 

The print industry relies on a constant supply of various raw materials, including paper and ink. Prices within the print industry are directly affected by the cost of paper, which is purchased in a price sensitive market that has historically exhibited price and demand cyclicality. Prices are also affected by the cost of ink. Our profit margin and profitability is largely a function of the rates that our suppliers charge us compared to the rates that we charge our clients. If our suppliers increase the price of our print orders, and we are not able to find suitable or alternative suppliers, our profit margin may decline.

 

If any of our products cause damages or injuries, we may experience product liability claims.

 

Clients and third parties who claim to suffer damages or an injury caused by our products may bring lawsuits against us. Defending lawsuits arising out of any of the products we provide to our clients could be costly and absorb substantial amounts of management attention, which could adversely affect our financial performance. A significant product liability judgment against us could harm our reputation and business.

 

If any of our key clients fail to pay for our services, our profitability would be negatively impacted.

 

We take full title and risk of loss for the printed products we procure from our suppliers. Our obligation to pay our suppliers is not contingent upon receipt of payment from our clients. In 2004, 2005 and the nine months ended September 30, 2006, our revenue was $38.9 million, $76.9 million and $99.4 million, respectively, and our top 10 clients accounted for 43%, 46% and 51%, respectively, of such revenue. If any of our key clients fails to pay for our services, our profitability would be negatively impacted.

 

We may not be able to identify suitable acquisition candidates, effectively integrate newly acquired businesses or achieve expected profitability from acquisitions.

 

Part of our growth strategy is to increase our revenue and the markets that we serve through the acquisition of additional businesses. We are actively considering certain acquisitions and will likely consider others. There

 

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can be no assurance that suitable candidates for acquisitions can be identified or, if suitable candidates are identified, that acquisitions can be completed on acceptable terms, if at all. Even if suitable candidates are identified, any future acquisitions may entail a number of risks that could adversely affect our business and the market price of our common stock, including the integration of the acquired operations, diversion of management’s attention, risks of entering markets in which we have limited experience, adverse short-term effects on our reported operating results, the potential loss of key employees of acquired businesses and risks associated with unanticipated liabilities.

 

We may use common stock to pay for acquisitions. If the owners of potential acquisition candidates are not willing to receive common stock in exchange for their businesses, our acquisition prospects could be limited. Future acquisitions could also result in accounting charges, potentially dilutive issuances of equity securities and increased debt and contingent liabilities, including liabilities related to unknown or undisclosed circumstances, any of which could have a material adverse effect on our business and the market price of our common stock.

 

We incur increased costs as a result of being a public company.

 

We face increased legal, accounting, administrative and other costs and expenses as a public company that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, including the requirements of Section 404, as well as new rules and regulations subsequently implemented by the Securities and Exchange Commission (the SEC), the Public Company Accounting Oversight Board and the Nasdaq Global Market, impose additional reporting and other obligations on public companies. We expect that continuing compliance with these public company requirements will increase our costs and make some activities more time-consuming. A number of those requirements will require us to carry out activities we have not done previously. For example, under Section 404 of the Sarbanes-Oxley Act, for our annual report on Form 10-K for our fiscal year ending December 31, 2007 we will need to document and test our internal control procedures, our management will need to assess and report on our internal control over financial reporting and our independent accountants will need to issue an opinion on that assessment and the effectiveness of those controls. Furthermore, if we identify any issues in complying with those requirements (for example, if we or our accountants identified a material weakness or significant deficiency in our internal control over financial reporting), we could incur additional costs rectifying those issues, and the existence of those issues could adversely affect us, our reputation or investor perceptions of us. We also expect that it will be difficult and expensive to maintain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers. Advocacy efforts by stockholders and third parties may also prompt even more changes in governance and reporting requirements. We expect that the additional reporting and other obligations imposed on us by these rules and regulations will increase our legal and financial compliance costs and the costs of our related legal, accounting and administrative activities by approximately $1.3 million per year. These increased costs will require us to divert a significant amount of money that we could otherwise use to expand our business and achieve our strategic objectives.

 

Our ability to raise capital in the future may be limited, and our failure to raise capital when needed could prevent us from growing.

 

We may in the future be required to raise capital through public or private financing or other arrangements. Such financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed could harm our business. Additional equity financing may be dilutive to the holders of our common stock, and debt financing, if available, may involve restrictive covenants and could reduce our profitability. If we cannot raise funds on acceptable terms, we may not be able to grow our business or respond to competitive pressures.

 

A significant or prolonged economic downturn, or a dramatic decline in the demand for printed products, could adversely affect our revenues and results of operations.

 

Our results of operations are affected directly by the level of business activity of our clients, which in turn is affected by the level of economic activity and cyclicality in the industries and markets that they serve. Certain of

 

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our products are sold to industries, including the advertising industry, that experience significant fluctuations in demand based on general economic conditions, cyclicality and other factors beyond our control. An economic stagnation or downturn could result in a reduction of the marketing budgets of our clients or a decrease in the number of print jobs that our clients order from us. Reduced demand from one of these industries or markets could adversely affect our revenues, operating income and profitability.

 

Risks Related to this Offering and Ownership of Our Common Stock

 

The trading price of our common stock may be volatile, and you might not be able to sell your shares at or above the offering price.

 

The trading prices of many newly publicly-traded companies are highly volatile. Since our initial public offering in August 2006, the closing sale price of our common stock as reported by the Nasdaq Global Market has ranged from a low of $10.10 on August 23, 2006 to a high of $17.80 on November 24, 2006.

 

Certain factors may continue to cause the market price of our common stock to fluctuate, including:

 

  Ÿ   fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us;

 

  Ÿ   changes in market valuations of similar companies;

 

  Ÿ   success of competitive products or services;

 

  Ÿ   changes in our capital structure, such as future issuances of debt or equity securities;

 

  Ÿ   announcements by us, our competitors, our clients or our suppliers of significant products or services, contracts, acquisitions or strategic alliances;

 

  Ÿ   regulatory developments in the United States or foreign countries;

 

  Ÿ   litigation involving our company, our general industry or both;

 

  Ÿ   additions or departures of key personnel;

 

  Ÿ   investors’ general perception of us; and

 

  Ÿ   changes in general economic, industry and market conditions.

 

In addition, if the stock market in general experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, financial condition or results of operations. If any of the foregoing occurs, it could cause our stock price to fall and may expose us to class action lawsuits that, even if unsuccessful, could be costly to defend and a distraction to management. As a result, you could lose all or part of your investment.

 

If equity research analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our common stock, the price of our common stock could decline.

 

The trading market for our common stock relies in part on the research and reports that equity research analysts publish about us and our business. We do not control these analysts. The price of our stock could decline if one or more equity analysts downgrade our stock or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business.

 

Our quarterly results are difficult to predict and may vary from quarter to quarter, which may result in our failure to meet the expectations of investors and increased volatility of our stock price.

 

The continued use of our services by our clients depends, in part, on the business activity of our clients and our ability to meet their cost saving needs, as well as their own changing business conditions. The time between

 

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our payment to the supplier of a print job and our receipt of payment from our clients varies with each print job and client. In addition, a significant percentage of our revenue is subject to the discretion of our enterprise and transactional clients, who may stop using our services at any time, subject, in the case of most of our enterprise clients, to advance notice requirements. Therefore, the number, size and profitability of print jobs may vary significantly from quarter to quarter. As a result, our quarterly operating results are difficult to predict and may fall below the expectations of current or potential investors in some future quarters, which could lead to a significant decline in the market price of our stock. This may lead to volatility in our stock price. The factors that are likely to cause these variations include:

 

  Ÿ   the demand for our print procurement solution;

 

  Ÿ   the use of outsourced enterprise solutions;

 

  Ÿ   clients’ business decisions regarding the quantities of printed products they purchase;

 

  Ÿ   the number, timing and profitability of our print jobs, unanticipated contract terminations or print job postponements;

 

  Ÿ   new product introductions and enhancements by our competitors;

 

  Ÿ   changes in our pricing policies;

 

  Ÿ   our ability to manage costs, including personnel costs; and

 

  Ÿ   costs related to possible acquisitions of other businesses.

Because a limited number of stockholders will control the majority of the voting power of our common stock, investors in this offering will not be able to determine the outcome of stockholder votes.

Upon completion of this offering, Orange Media, LLC, an entity controlled by Elizabeth Kramer Lefkofsky, who is the wife of Eric P. Lefkofsky, Richard A. Heise, Jr. and Incorp, LLC, an entity controlled by Orange Media and Mr. Heise, will beneficially own and have the ability to exercise voting control over, in the aggregate, 33.9% of our outstanding common stock. In addition, New Enterprise Associates 11, Limited Partnership and NEA Ventures 2005, Limited Partnership will beneficially own, and have the ability to exercise voting control over, in the aggregate, 17.3% of our outstanding common stock. As a result, these stockholders will be able to exercise significant control over all matters requiring stockholder approval, including the election of directors, any amendments to our certificate of incorporation and significant corporate transactions. These stockholders may exercise this control even if they are opposed by our other stockholders. Without the consent of these stockholders, we could be delayed or prevented from entering into transactions (including the acquisition of our company by third parties) that may be viewed as beneficial to us or our other stockholders. In addition, this significant concentration of stock ownership may adversely affect the trading price of our common stock if investors perceive disadvantages in owning stock in a company with controlling stockholders.

The future sale of our common stock could negatively affect our stock price after this offering.

After this offering, we will have 47,472,961 shares of common stock outstanding, 15,637,142 of which will be available for immediate public sale. 31,835,819 shares of common stock outstanding after this offering, including an aggregate of 26,023,849 shares beneficially owned by Orange Media, LLC, Richard A. Heise, Jr., Incorp, LLC, New Enterprise Associates 11, Limited Partnership, NEA Ventures 2005, Limited Partnership and Printworks Series E, LLC, will be available for public sale under Rule 144 from time to time, subject to volume, manner of sale and other restrictions under Rule 144. Additional sales of our common stock in the public market after this offering, or the perception that these sales could occur, could cause the market price of our common stock to decline.

Our directors, officers and certain stockholders have agreed to enter into “lock up” agreements with the underwriters, in which they will agree to refrain from selling their shares for a period of 90 days after this

 

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offering. 31,583,742 of these shares, or 66.5% of our common stock outstanding upon the completion of this offering, will become available for public sale 90 days (45 days in the case of 850,000 shares) after this offering upon the expiration of these agreements. Increased sales of our common stock in the market could exert significant downward pressure on our stock price. These sales also may make it more difficult for us to sell equity or equity-related securities in the future at a time and price we deem appropriate.

In addition, 10,066,104 of our shares of common stock, including shares beneficially owned by New Enterprise Associates 11, Limited Partnership, NEA Ventures 2005, Limited Partnership and Printworks Series E, LLC, will be entitled to registration rights with respect to these shares after this offering. Such holders may require us to register the resale of all or substantially all of these shares upon demand. These holders include certain individuals and entities that will be selling shares of our common stock in this offering.

We do not currently intend to pay dividends, which may limit the return on your investment in us.

We have not declared or paid any cash dividends on our common stock. We currently intend to retain all available funds and any future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future.

If our board of directors authorizes the issuance of preferred stock, holders of our common stock could be diluted and harmed.

Our board of directors has the authority to issue up to 5,000,000 shares of preferred stock in one or more series and to establish the preferred stock’s voting powers, preferences and other rights and qualifications without any further vote or action by the stockholders. The issuance of preferred stock could adversely affect the voting power and dividend liquidation rights of the holders of common stock. In addition, the issuance of preferred stock could have the effect of making it more difficult for a third party to acquire, or discouraging a third party from acquiring, a majority of our outstanding voting stock or otherwise adversely affect the market price of our common stock. It is possible that we may need to raise capital through the sale of preferred stock in the future.

 

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FORWARD-LOOKING STATEMENTS

 

Many of the statements included in this prospectus contain forward-looking statements and information relating to our company. We generally identify forward-looking statements by the use of terminology such as “may,” “will,” “could,” “should,” “potential,” “continue,” “expect,” “intend,” “plan,” “estimate,” “anticipate,” “believe,” or similar phrases or the negatives of such terms. We base these statements on our beliefs as well as assumptions we made using information currently available to us. Such statements are subject to risks, uncertainties and assumptions, including those identified in “Risk Factors,” as well as other matters not yet known to us or not currently considered material by us. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. Given these risks and uncertainties, prospective investors are cautioned not to place undue reliance on such forward-looking statements, which speak only as of the date of this prospectus. Forward-looking statements do not guarantee future performance and should not be considered as statements of fact.

 

Factors that may cause actual results to differ from expected results include, among others:

 

  Ÿ   general economic conditions and a downturn in the printing and business process outsourcing industry;

 

  Ÿ   competition in our industry and innovation by our competitors;

 

  Ÿ   our failure to anticipate and adapt to future changes in our industry;

 

  Ÿ   uncertainty regarding our product and service innovations;

 

  Ÿ   our inability to successfully identify and manage our acquisitions or hire qualified account executives;

 

  Ÿ   adverse developments concerning our relationships with certain key clients or suppliers;

 

  Ÿ   our inability to adequately protect our intellectual property and litigation regarding intellectual property;

 

  Ÿ   the increased expenses and administrative workload associated with being a public company; and

 

  Ÿ   failure to maintain an effective system of internal controls necessary to accurately report our financial results and prevent fraud.

 

All future written and verbal forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We undertake no obligation, and specifically decline any 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, uncertainties and assumptions, the forward-looking events discussed in this prospectus might not occur.

 

See the section entitled “Risk Factors” for a more complete discussion of these risks and uncertainties and for other risks and uncertainties. These factors and the other risk factors described in this prospectus are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors also could harm our results. Consequently, there can be no assurance that the actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, us.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from the sale of the 3,000,000 shares of our common stock we are offering at an assumed public offering price of $16.42 per share (the closing price for our common stock as reported on the Nasdaq Global Market on January 4, 2007) will be approximately $46.2 million after deducting the estimated underwriting discounts and expenses payable by us. We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders.

We intend to use our net proceeds from this offering to expand our sales force, to acquire or make strategic investments in complementary businesses and for working capital and other general corporate purposes. As of the date of this prospectus, we have no binding commitment or agreement relating to any acquisition or investment. We have not yet determined the amount of our net proceeds to be used specifically for any of the foregoing purposes. Accordingly, management will have significant flexibility in applying our net proceeds of this offering. Pending their use, we intend to invest our net proceeds from this offering in short-term, investment grade interest-bearing instruments.

MARKET PRICE OF COMMON STOCK

Our common stock has been listed on the Nasdaq Global Market under the symbol “INWK” since August 16, 2006. Prior to that time, there was no public market for our common stock. The following table sets forth, for the periods indicated in the fiscal year ending December 31, 2006, the high and low closing sale prices per share for our common stock as reported on the Nasdaq Global Market.

     Common stock price

2006

   High    Low

Third quarter (from August 16, 2006)

   $ 12.58    $ 10.10

Fourth quarter

   $ 17.80    $ 11.68

2007

         

First quarter (through January 4, 2007)

   $ 16.42    $ 15.75

On January 4, 2007, the closing sale price per share for our common stock as reported on the Nasdaq Global Market was $16.42 per share. As of January 3, 2007, there were approximately 35 holders of record of our common stock.

DIVIDEND POLICY

We currently do not intend to pay any dividends on our common stock after the completion of this offering. We intend to retain all available funds and any future earnings for use in the operation and expansion of our business. Any determination in the future to pay dividends will depend upon our financial condition, capital requirements, operating results and other factors deemed relevant by our board of directors, including any contractual or statutory restrictions on our ability to pay dividends.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of September 30, 2006:

 

    on an actual basis;

 

    on a pro forma basis to give effect to the October 11, 2006 acquisition of Applied Graphics, Inc. as if the acquisition had occurred as of September 30, 2006; and

 

    on a pro forma as adjusted basis to give effect to the sale of 3,000,000 shares of our common stock offered by us in this offering at an assumed public offering price of $16.42 per share, the closing sale price per share of our common stock as reported on the Nasdaq Global Market on January 4, 2007, after deducting estimated underwriting discounts and offering expenses payable by us.

You should read this table together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Description of Capital Stock,” and our consolidated financial statements and related notes which are included elsewhere in this prospectus.

 

     As of September 30, 2006  
     Actual    

Pro forma

before Offering

    Pro forma
as adjusted
 
     (in thousands)  
           (unaudited)        

Cash and cash equivalents

   $ 34,284     $ 27,328     $ 73,545  
                        

Line of credit

   $     $ 2,444     $ 2,444  

Long-term debt, including current portion and capital leases(1)

     313       330       330  

Stockholders’ equity:

      

Common Stock, par value $0.0001 per share, 200,000,000 shares authorized, 44,014,319 shares issued and outstanding, actual; 200,000,000 shares authorized, 44,014,319 shares issued and outstanding, pro forma; 200,000,000 shares authorized, 47,472,961 shares issued and outstanding, pro forma as adjusted

     115,344       115,344       115,344  

Preferred Stock, par value $0.0001 per share, 5,000,000 shares authorized, no shares issued and outstanding, actual; 5,000,000 shares authorized, no shares issued and outstanding, pro forma; 5,000,000 shares authorized, no shares issued and outstanding, pro forma as adjusted

                  

Additional paid-in capital

     5,323       5,323       51,540  

Treasury stock at cost

     (40,000 )     (40,000 )     (40,000 )

Unrealized loss on marketable securities

     (31 )     (31 )     (31 )

Accumulated deficit

     (2,103 )     (2,103 )     (2,103 )
                        

Total stockholders’ equity

     78,533       78,533       124,750  
                        

Total capitalization

   $ 78,846     $ 81,307     $ 127,524  
                        

(1)   Reflects the amount outstanding as of September 30, 2006 pursuant to a loan relating to the purchase of certain computer equipment, furniture and commercial software licenses.

 

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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

The following table presents selected consolidated financial and other data as of and for the periods indicated. You should read the following information together with the more detailed information contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the accompanying notes.

 

    Years ended December 31,     Nine months ended
September 30,
 
  2002     2003     2004     2005     2005     2006  
                            (unaudited)  
    (in thousands, except per share amounts)  

Consolidated statements of operations data:

 

         

Revenue

  $ 4,970     $ 16,229     $ 38,884     $ 76,870     $ 54,626     $ 99,362  

Cost of goods sold

    3,737       12,487       30,483       61,272       43,359       78,228  
                                               

Gross profit

    1,233       3,742       8,401       15,598       11,267       21,134  

Selling, general and administrative expenses:

           

Commission expenses

    285       577       1,788       3,492       3,040       4,651  

General and administrative expenses

    864       2,382       4,317       7,114       4,671       8,119  
                                               

Total selling, general and administrative expenses

    1,149       2,959       6,105       10,606       7,711       12,770  

Depreciation and amortization

    5       18       223       388       256       574  
                                               

Income from operations

    79       765       2,073       4,604       3,300       7,790  

Other income (expense)

    (148 )     (86 )     (124 )     (29 )     (25 )     339  

Minority interest income (expense)

          (8 )     (192 )     58       58        
                                               

Total other income (expense)

    (148 )     (94 )     (316 )     29       33       339  
                                               

Income before income taxes

    (69 )     671       1,757       4,633       3,333       8,129  

Income tax expense

                                  3,215  
                                               

Net income (loss)

    (69 )     671       1,757       4,633       3,333       4,914  

Dividends on preferred shares

    (60 )     (176 )     (462 )     (762 )     (584 )     (1,409 )
                                               

Net income (loss) applicable to common stockholders

  $ (129 )   $ 495     $ 1,295     $ 3,871     $ 2,749     $ 3,505  
                                               

Net income (loss) per share of common stock:

           

Basic

  $ (0.01 )   $ 0.02     $ 0.04     $ 0.12     $ 0.09     $ 0.13  

Diluted

  $ (0.01 )   $ 0.02     $ 0.04     $ 0.12     $ 0.09     $ 0.13  

Shares used in per share calculations:

           

Basic

    15,314       26,139       29,449       31,010       30,701       27,518  

Diluted

    15,314       26,139       29,449       32,707       31,890       36,804  

Unaudited pro forma income tax provision (benefit)(1)

  $     $ 262     $ 685     $ 1,807     $ 1,300    

Unaudited pro forma net income (loss)(1)

  $ (69 )   $ 409     $ 1,072     $ 2,826     $ 2,033    

Other data (unaudited):

           

Enterprise clients(2)

    5       14       46       69       64       86  

Transactional clients(3)

    69       294       593       667       574       701  

Total clients(4)

    74       308       639       736       638       787  

Total print jobs(5)

    723       2,002       6,972       10,736       8,111       11,160  

Employees and independent contractors(6)

    21       43       85       154       136       240  

(1)  

The unaudited pro forma data presented gives effect to our conversion on January 3, 2006 into a Delaware corporation as if it occurred at the beginning of the period presented. The unaudited pro forma income tax provision represents a combined federal and state effective tax rate of 39.0% and does not consider potential tax loss carrybacks, carryforwards or realizability of deferred tax assets. The unaudited pro forma net income

 

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represents our net income for the periods presented as adjusted to give effect to the pro forma income tax provision (benefit).

(2)   Reflects number of enterprise clients determined as of the last day of the applicable period.
(3)   Reflects number of transactional clients served in the applicable period.
(4)   Reflects total number of enterprise clients as of the last day of the applicable period and number of transactional clients served in the applicable period.
(5)   Reflects total number of print jobs executed in the applicable period.
(6)   Reflects number of employees and independent contractors as of the last day of the applicable period.

 

     As of December 31,   

As of

September 30,

   2002    2003    2004    2005    2006
                         (unaudited)
     (in thousands)

Consolidated balance sheet data:

              

Cash and cash equivalents

   $ 252    $ 966    $ 1,476    $ 2,963    $ 34,284

Working capital

     536      2,688      3,467      3,540      61,862

Total assets

     1,680      6,385      14,713      26,685      104,116

Line of credit

     84           678      2,924     

Long-term debt

               2,022          

Capital leases

               128      393      313

Convertible redeemable preferred shares

          2,511      2,863      5,008     

Total members’ equity/stockholders’ equity

     566      320      91      1,252      78,533

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes, which appear elsewhere in this prospectus. It contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this prospectus, particularly under the heading “Risk Factors.”

 

Overview

 

We are a leading provider of print procurement solutions to corporate clients in the United States. Utilizing our proprietary technology and database, as well as our extensive domain expertise, we create a competitive bid process to procure, purchase and deliver printed products as part of a comprehensive outsourced enterprise solution and in individual transactions. Our technology is designed to capitalize on excess manufacturing capacity and other inefficiencies in the traditional print supply chain to obtain favorable pricing and to deliver high-quality products and services for our clients.

 

Our proprietary software applications and database, PPM4™, create a fully-integrated solution that stores, analyzes and tracks the production capabilities of our supplier network, as well as quote and price data for each bid we receive and print job we execute. As a result, we believe PPM4™ contains one of the largest independent repositories of equipment profiles and price data for print suppliers in the United States. We leverage our technology to match each print job with the supplier that is optimally suited to meet the client’s needs at a highly competitive price. Our procurement managers use PPM4™ to manage the print procurement process from end-to-end.

 

Through our network of over 4,500 suppliers, we offer a full range of print, fulfillment and logistics services that allows us to procure printed products on virtually any substrate. The breadth of our product offerings and services and the depth of our supplier network enable us to fulfill up to 100% of the print procurement needs of our clients. By leveraging our technology platform, our clients are able to reduce overhead costs, redeploy internal resources and obtain favorable pricing and service terms. In addition, our ability to track individual transactions and provide customized reports detailing print procurement activity on an enterprise-wide basis provides our clients with greater visibility and control of their print expenditures.

 

We believe the opportunity exists to expand our business into new geographic markets. Our headquarters are located in Chicago, and approximately 51% of our clients as of September 30, 2006 were located in Illinois. We also maintain offices in New York, California, Hawaii, Michigan and Missouri. Our objective is to increase our sales in other major print markets in the United States, such as Atlanta, Boston, Dallas, Los Angeles and Minneapolis. We intend to hire or acquire more account executives within close proximity to these large markets, which accounted for, in aggregate, $17.3 billion of print expenditures in 2005, according to PIA/GATF. In addition, given that the print industry is a global business, over time we intend to evaluate opportunities to access attractive markets outside the United States. For example, in March 2006 we entered into a strategic agreement to grant SNP Corporation Ltd. a non-exclusive, non-transferable license to use certain non-core applications of our software in China, Singapore and Hong Kong.

 

We acquired Graphography Limited LLC on May 31, 2006, CoreVision Group, Inc. on September 12, 2006 and Applied Graphics, Inc. on October 11, 2006. Our results of operations during the nine months ended September 30, 2006 include the results of operations from Graphography from June 1, 2006 and CoreVision from September 1, 2006. Our results of operations in future periods will include the results of operations from Applied Graphics from October 1, 2006.

 

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Recent Developments

Initial Public Offering.    In August 2006, we completed an initial public offering of shares of our common stock. We offered and sold 7,060,000 shares of our common stock and certain

selling stockholders offered and sold an additional 5,118,500 shares at a price of $9.00 per share. Our net proceeds from the initial public offering were approximately $56.3 million.

Applied Graphics Acquisition.    In October 2006, we acquired Applied Graphics, Inc., a provider of print management and print-on-demand services headquartered in San Rafael, California. As a result of the acquisition, we believe we established a significant presence in the West Coast market with sales executives in California, Hawaii and Nevada. In total, we added 35 sales executives, approximately 1,000 transactional clients and approximately 500 new suppliers. This significantly expanded our pipeline of clients to which we can market our enterprise solution.

The acquisition consideration for Applied Graphics consisted of approximately $7.0 million in cash paid on October 11, 2006. In addition, the former owners of Applied Graphics will receive:

 

    $1.9 million if gross profit generated by Applied Graphics equals or exceeds $9.7 million from October 1, 2006 to September 30, 2007,

 

    $1.9 million if gross profit generated by Applied Graphics equals or exceeds $19.3 million from October 1, 2006 to September 30, 2008,

 

    $500,000 if earnings before interest, taxes, depreciation and amortization (EBITDA) generated by Applied Graphics equals or exceeds $2.5 million from October 1, 2006 to September 30, 2007, or a portion thereof if EBITDA is between $2.3 million and $2.5 million during that period, and

 

    $500,000 if EBITDA generated by Applied Graphics equals or exceeds $2.8 million from October 1, 2007 to September 30, 2008, or a portion thereof if EBITDA is between $2.6 million and $2.8 million during that period.

CoreVision Acquisition.    In September 2006, we acquired CoreVision Group, Inc., a provider of end-to-end marketing solutions, including design, print, promotional products and fulfillment services, located in Carol Stream, Illinois. As a result of the acquisition, we added 15 sales executives, including our first sales executives in the states of Michigan and Missouri. The acquisition consideration for CoreVision consisted of approximately $1.1 million, $10,000 paid in September 2006 and the remaining $1.1 million to be paid in monthly installments through August 2007. In addition, the former owner of CoreVision is eligible to receive up to:

 

    $666,666 if gross profit generated by CoreVision equals or exceeds $1.7 million from September 1, 2006 to December 31, 2006, or a portion thereof if gross profit is less than $1.7 million,

 

    $667,000 if gross profit generated by CoreVision equals or exceeds $5.1 million from January 1, 2007 to December 31, 2007, or a portion thereof if gross profit is less than $5.1 million,

 

    $667,000 if gross profit generated by CoreVision equals or exceeds $5.1 million from January 1, 2008 to December 31, 2008, or a portion thereof if gross profit is less than $5.1 million, and

 

    $500,000 if gross profit generated by CoreVision equals or exceeds $6.5 million from January 1, 2009 to December 31, 2009.

Revenue

We generate revenue through the sale of printed products to our clients. Our revenue was $5.0 million, $16.3 million, $38.9 million and $76.9 million in 2002, 2003, 2004 and 2005, respectively, reflecting growth rates of 226.5%, 139.6% and 97.7% in 2003, 2004 and 2005, respectively, as compared to the corresponding prior year. Our revenue was $54.6 million and $99.4 million during the nine months ended September 30, 2005 and 2006, respectively, reflecting a growth rate of 81.9%. As our revenue has grown, our growth rates have decreased. We expect this trend to continue as our revenue increases. Our revenue is generated from two

 

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different types of clients: enterprise and transactional. Enterprise jobs usually involve higher dollar amounts

and volume than our transactional jobs. We categorize a client as an enterprise client if we have a contract with the client for the provision of printing services on a recurring basis; if the client has signed an open-ended purchase order, or a series of related purchase orders; or if the client has enrolled in our e-stores program, which enables the client to make online purchases of printing services on a recurring basis. We categorize all other clients as transactional. We enter into contracts with our enterprise clients to provide some or a substantial portion of their printed products on a recurring basis. Our contracts with enterprise clients generally have an open-ended term subject to termination by either party upon prior notice ranging from 90 days to twelve months. Several of our larger enterprise clients have outsourced substantially all of their recurring print needs to us. We provide printed products to our transactional clients on an order-by-order basis. As of December 31, 2005, we had 69 enterprise clients, and as of September 30, 2006 we had 86 enterprise clients. From our inception through September 30, 2006, we have served over 1,800 transactional clients. During 2005 and the nine months ended September 30, 2006, enterprise clients accounted for 69% and 77% of our revenue, respectively, while transactional clients accounted for 31% and 23% of our revenue, respectively.

 

Our revenue consists of the prices paid by our clients for printed products. These prices, in turn, reflect the amounts charged to us by our suppliers plus our gross profit. Our gross profit margin, in the case of some of our enterprise clients, is fixed by contract or, in the case of transactional clients, is negotiated on a job-by-job basis. Once either type of client accepts our pricing terms, the selling price is established and we procure the product for our own account in order to re-sell it to the client. We take full title and risk of loss for the product upon shipment. The finished product is typically shipped directly from our supplier to a destination specified by our client. Upon shipment, our supplier invoices us for its production costs and we invoice our client.

 

Our revenue from enterprise clients tends to generate lower gross profit margins than our revenue from transactional clients because the gross profit margins established in our contracts with large enterprise clients are generally lower than the gross profit margins we typically realize in our transactional business. Although our enterprise revenue generates lower gross profit margins, our enterprise business tends to be more profitable than our transactional business on an operating profit basis because the commission expense associated with enterprise jobs is generally lower.

 

The print industry has historically been subject to seasonal sales fluctuations because a substantial number of print orders are placed for the year-end holiday season. We have historically experienced seasonal client buying patterns with a higher percentage of our revenue being earned in our third and fourth quarters. We expect these seasonal revenue patterns to continue.

 

Cost of Goods Sold and Gross Profit

 

Our cost of goods sold consists primarily of the price at which we purchase products from our suppliers. Our selling price, including our gross profit, in the case of some of our enterprise jobs, is based on a fixed gross margin established by contract or, in the case of transactional jobs, is determined at the discretion of the account executive or procurement manager within predetermined parameters. Our gross margins on our enterprise jobs are typically lower than our gross margins on our transactional jobs. As a result, our cost of goods sold as a percentage of revenue for our enterprise jobs is typically higher than those for our transactional jobs. Our gross profit for 2003, 2004 and 2005 was $3.7 million, $8.4 million and $15.6 million, respectively. Our gross profit for the nine months ended September 30, 2005 and 2006 was $11.3 million and $21.1 million, respectively. We have early payment discount terms with several of our key suppliers. We have taken advantage of early payment terms on a more frequent basis in recent periods, thereby reducing our overall cost of goods sold as a percentage of revenue.

 

Operating Expenses and Income from Operations

 

Commissions paid to our account executives are a significant component of our operating expenses. The commissions we pay to our account executives are based on the gross profit we collect from the clients for which they have responsibility. As a percentage of our gross profit, commissions were 15.4%, 21.3% and 22.4% in

 

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2003, 2004 and 2005, respectively. The increase in commissions as a percentage of our gross profit was a result

of the relatively high volume of business in 2003 initiated by our senior management, to whom we do not pay sales commissions. This business as a percentage of our total revenue decreased in 2004 and 2005, resulting in relatively higher commissions as a percentage of our total revenue in those years.

 

As a percentage of our gross profit, commissions were 27.0% and 22.0% during the nine months ended September 30, 2005 and 2006, respectively. The decrease in commissions as a percentage of gross profit resulted from a higher concentration of revenue from enterprise clients. For the nine months ended September 30, 2006, 77% of our revenue was generated from enterprise clients compared to 66% for the nine months ended September 30, 2005. Commission rates as a percentage of gross profit are generally lower for enterprise accounts.

 

We accrue for commissions when we recognize the related revenue. Some of our account executives receive a monthly draw to provide them with a more consistent income stream. The cash paid to our account executives in advance of commissions earned is reflected as a prepaid expense on our balance sheet. As our account executives earn commissions, a portion of their commission payment is withheld and offset against their prepaid commission balance, if any. Our prepaid commission balance was $565,000 as of December 31, 2003, $470,000 as of December 31, 2004, $1.6 million as of December 31, 2005 and $1.6 million as of September 30, 2006.

 

Our general and administrative expenses consist mainly of compensation costs for our management team and procurement managers. Our general and administrative expenses also include compensation costs for our finance and support employees, corporate systems, and accounting, legal, facilities and travel and entertainment expenses. We have been able to manage our business with relatively low general and administrative expenses. General and administrative expenses as a percentage of revenue were 14.7%, 11.1% and 9.3% in 2003, 2004 and 2005, respectively, and 8.6% and 8.2% for the nine months ended September 30, 2005 and 2006, respectively. The decrease in general and administrative expenses as a percentage of revenue reflects our ability to add clients and account executives without incurring a corresponding increase in our general and administrative expenses.

 

We agree to provide our clients with printed products that conform to the industry standard of a “commercially reasonable quality,” and our suppliers in turn agree to provide us with products of the same quality. In addition, the quotes we execute with our clients include customary industry terms and conditions that limit the amount of our liability for product defects. Product defects have not had a material adverse effect on our results of operations.

 

We are required to make payment to our suppliers for completed print jobs regardless of whether our clients make payment to us. To date, the failure of our clients to make required payments has not had a material adverse effect on our results of operations. Our bad debt expense was approximately $125,000, $149,000, and $176,000 in 2003, 2004 and 2005, respectively, and $28,000 and $111,000 for the nine months ended September 30, 2005 and 2006, respectively.

 

Our income from operations for 2003, 2004 and 2005 was $765,000, $2.1 million and $4.6 million, respectively, and $3.3 million and $7.8 million for the nine months ended September 30, 2005 and 2006, respectively.

 

Recapitalization

 

On August 15, 2006, we recapitalized all outstanding shares of our Class A common stock, Class B common stock, Series B preferred stock, Series D preferred stock and Series E preferred stock into shares of our common stock on a one-for-one basis. For a discussion of the recapitalization, see “Certain Relationships and Related Party Transactions—Recapitalization.”

 

Income Taxes

 

On January 3, 2006, our company completed a conversion pursuant to which InnerWorkings, LLC, a limited liability company, converted to InnerWorkings, Inc., a corporation. As a limited liability company, we were

 

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treated as a partnership for federal, state and local income tax purposes. As a result, all items of income, expense, gain and loss of InnerWorkings were generally reportable on the tax returns of members of InnerWorkings, LLC. Accordingly, we made no provisions for income taxes at the company level through December 31, 2005. Our earnings are now subject to federal, state and local taxes at a combined rate of approximately 39.0%.

 

Critical Accounting Policies

 

Revenue Recognition

 

Revenue is recognized when the product is shipped from a third party to the customer, which is when title transfers. In accordance with EITF Issue 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent, we recognize revenue on a gross basis, as opposed to a net basis similar to a commission arrangement, because we bear the risks and benefits associated with revenue-generated activities by: (1) acting as a principal in the transaction; (2) establishing prices; (3) being responsible for fulfillment of the order; (4) taking the risk of loss for collection, delivery and returns; and (5) marketing our products, among other things.

 

Goodwill and Other Intangibles

 

Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible and identified assets of businesses acquired. Under SFAS No. 142, Goodwill and other Intangible Assets, goodwill and other intangible assets with indefinite lives are not amortized, but instead are tested for impairment annually, or if certain circumstances indicate a possible impairment may exist, in accordance with the provisions of SFAS No. 142. We evaluate recoverability of goodwill using a two-step impairment test approach at the reporting unit level. In the first step, the fair value for the reporting unit is compared to its book value, including goodwill. If the fair value of the reporting unit is less than the book value, a second step is performed, which compares the implied fair value of the reporting unit’s goodwill to the book value of the goodwill. The fair value for the goodwill is determined based on the difference between the fair values of the reporting units and the net fair values of the identifiable assets and liabilities of such reporting units. If the fair value of the goodwill is less than the book value, the difference is recognized as an impairment. As of December 31, 2005, our net goodwill balance was $353,000.

 

SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to the estimated residual values, and reviewed for the impairment in accordance with SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets. Our intangible assets consist of customer lists and non-compete agreements with account executives and are amortized on the straight-line basis. We believe the customer lists have ten-year useful lives, and we are amortizing the non-compete agreements over the terms of the agreements. As of December 31, 2005, the net balance of our intangible assets was $931,000.

 

Stock-Based Compensation

 

Prior to January 1, 2006, we accounted for stock-based employee compensation arrangements in accordance with provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and complied with the disclosure requirements of Financial Accounting Standards Board (FASB) No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure—An Amendment of FASB Statement No. 123. Effective January 1, 2006, we adopted the fair value recognition provisions of FAS 123 (R), Share-Based Payments, using the prospective transition method and Black-Scholes as the option valuation model. Under the transition method, we will continue to account for nonvested equity awards outstanding at the date of adopting Statement 123 (R) in the same manner as they had been accounted for prior to adoption. As a result, under APB No. 25, compensation expense is based on the difference, if any, on the grant date between the estimated fair value of our stock and the exercise price of options to purchase that stock. The compensation expense is then amortized over the vesting period of the stock options.

 

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Between June 30, 2005 and June 30, 2006, we granted options to purchase 2,192,000 shares of our common stock. The estimated per share fair value of the shares underlying these option grants ranged from $0.65 to $5.35.

 

Between June 30, 2005 and December 31, 2005, we granted options to purchase 997,000 shares of our common stock. In August 2005, we engaged an independent valuation specialist to perform a retrospective valuation of our common stock as of November 30, 2004. On September 16, 2005, the valuation specialist delivered a report stating that the fair value of our common stock as of November 30, 2004 was $0.43 per share. Shortly after our receipt of the report, we used the valuation specialist’s methodology to determine that the fair value of our common stock as of June 30, 2005 was $0.65 per share. In October 2005, we used the valuation specialist’s methodology to determine that the fair value of our common stock as of September 30, 2005 was $0.65 per share. Based on these determinations, we established an exercise price of no less than $0.65 per share for the options granted between June 30, 2005 and December 31, 2005. Using the valuation specialist’s methodology, we valued our business as of June 30, 2005 and September 30, 2005 by calculating the present value of our future available cash flows at an appropriate rate. For purposes of estimating our future available cash flows, we made significant assumptions with respect to revenue growth rates, forecasted net income and debt-free future cash flow. We applied a 40% rate to calculate the present value of our future available cash flows based on the independent valuation specialist’s determination that we were in our second stage, or “expansion” stage, of development. We also applied a 5% lack of marketability discount to our enterprise value, which took into account the fact that minority investments in private companies are less liquid than similar investments in publicly-traded companies. There is inherent uncertainty in these estimates.

 

We believe that the per share fair value of our common stock increased from $0.43 as of November 30, 2004 to $0.65 as of September 30, 2005 as a result of the following developments, among others:

 

During the nine months ended September 30, 2005, two Fortune 500 companies became enterprise clients. We hired 51 employees and independent contractors during this period, increasing the total to 136. Revenue during this period increased more than 130% from revenue during the prior comparable period.

 

We accounted for options granted prior to December 31, 2005 in accordance with APB Opinion No. 25. The exercise price of all of the options that we granted during this period was at or above fair market value. As a result, there was no intrinsic value associated with these option grants. Pursuant to APB Opinion No. 25, we were not required to record any compensation expense in connection with these option grants.

 

On March 1, 2006, we granted options to purchase 30,000 shares of our common stock. The estimated per share fair value of this option grant was $4.92. The basis for determining the estimated per share fair value of this option grant was the contemporaneous arm’s length negotiation of a transaction involving the sale of certain shares of our common stock to SNP. Effective January 1, 2006, we calculate compensation expense under SFAS No. 123 (R) based on the Black-Scholes value of options at the time of grant and record compensation expense in equal amounts as the options vest. We estimated the Black-Scholes value of these options using the following assumptions: expected volatility: 33.5%; risk-free interest rate: 4.63%; expected life: 10 years; exercise price: $4.92 per share; and fair market value: $4.92 per share. We recorded compensation expense of $112,628 in the six months ended June 30, 2006.

 

On May 8 and June 5, 2006, we granted options to purchase a total of 1,165,000 shares of our common stock. The exercise price of the options to purchase 1,150,000 shares of our common stock that we granted on May 8, 2006 was $4.92 per share, which was the price per share paid by SNP in April 2006. On June 1, 2006, the same valuation specialist that we engaged in August 2005 delivered a report stating that the fair value of our common stock as of May 8, 2006 was $5.35 per share. We used this as the exercise price of the options to purchase 15,000 shares of our common stock that we granted on June 5, 2006. We also used this as the estimated per share fair value of this option grant and the May 8, 2006 option grant. We estimated the Black-Scholes value of these options using the following assumptions: expected volatility: 33.5%; risk-free interest rate: 5.01%; expected life: 10 years; exercise price: $4.92 per share or $5.35 per share, as applicable; and fair market value: $5.35 per share. We expect that our expense for our 2006 option grants will be approximately $430,000 in 2006 and $640,000 in 2007.

 

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We believe that the per share fair value of our common stock increased from $0.65 as of September 30, 2005 to $5.35 as of May 8, 2006 as a result of the following developments, among others:

From January 1, 2006 to April 30, 2006, six Fortune 500 companies became enterprise clients. The addition of enterprise agreements and the prospect of additional capital from this offering increased our revenue projections. From January 1, 2006 to April 30, 2006, our revenue increased more than 80% from the prior comparable period. In January 2006, we completed a Series E preferred round of financing at a purchase price of $4.92 per share, which provided $9.3 million of working capital. In April 2006, we entered into a strategic alliance with SNP to license a portion of our technology. This alliance included the sale of our common stock to SNP at a purchase price of $4.92 per share.

As of June 30, 2006, there were 5,315,667 options to purchase shares of our common stock outstanding. Of these outstanding options, 1,905,667 were vested and 3,410,000 were unvested. At our initial public offering price of $9.00 per share, the intrinsic value of these outstanding options as of June 30, 2006 was $39.7 million, of which $16.1 million related to vested options and $23.6 million related to unvested options.

On August 15, 2006, we granted options to purchase 56,050 shares of our common stock under our Stock Incentive Plan to certain employees at an exercise price equal to the initial public offering price of $9.00 per share. The options will vest in equal annual installments over the three-year period following the completion of this offering. At the initial public offering price of $9.00 per share, the value of the option grants, as calculated in accordance with FAS No. 123 (R), Share-Based Payments, will be approximately $141,000, which will be expensed in equal installments over three years.

We believe that the per share fair value of our common stock increased from $5.35 as of May 8, 2006 to the initial public offering price of $9.00 as a result of the following developments, among others:

 

    On May 31, 2006, we acquired Graphography Limited LLC, a provider of production management services, including print procurement and promotional services. In 2005, Graphography generated revenue of $23.8 million, representing 18.2% of our 2005 pro forma revenue. As a result of the acquisition, we established a significant presence in the New York market, which is the third largest print market in the United States. Graphography adds two new significant enterprise clients, a Fortune 500 manufacturing and marketing company and a multi-billion dollar international beverage distributor, each of which would have been in our top five accounts based on revenue generated in 2005 on a pro forma basis. It also adds more than 100 transactional clients, which expands our pipeline of clients to which we can market our enterprise solution. In addition, we gained approximately 400 new suppliers that can provide printing and promotional services to our existing clients. We also acquired three additional sales executives as well as two additional lead production managers, and their corresponding production teams, with significant expertise in the areas of direct mail and promotional products. The acquisition enabled us to populate our proprietary database with over 10,000 historical Graphography print jobs and quotes, increasing the size of our PPM4 database by over 15% and enhancing our ability to identify optional pricing for our clients.

 

    From May 8, 2006 to August 15, 2006, we gained three new enterprise clients, including two Fortune 500 companies, we executed jobs for 50 new transactional clients, including several Fortune 500 companies, and we hired five additional sales executives who brought significant customer relationships to us.

 

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Results of Operations

The following table sets forth our consolidated statements of income data for the periods presented as a percentage of our revenue:

 

       Years ended December 31,     Nine months
ended
September 30,
 
       2003     2004     2005     2005     2006  
                         (unaudited)  

Consolidated statements of income data:

            

Revenue

     100.0 %   100.0 %   100.0 %   100.0 %   100.0 %

Cost of goods sold

     76.9     78.4     79.7     79.4     78.7  
                                

Gross profit

     23.1     21.6     20.3     20.6     21.3  

Selling, general and administrative expenses:

            

Commission expenses

     3.6     4.6     4.5     5.6     4.7  

General and administrative expenses

     14.6     11.1     9.3     8.6     8.2  
                                

Total selling, general and administrative expenses

     18.2     15.7     13.8     14.2     12.9  

Depreciation and amortization

     0.1     0.6     0.5     0.5     0.6  
                                

Income from operations

     4.7     5.3     6.0     5.9     7.8  

Other income (expense)

     (0.5 )   (0.3 )       0.0     0.3  

Minority interest income (expense)

         (0.5 )   0.1     0.1      
                                

Total other income (expense)

     (0.6 )   (0.8 )   0.0     6.0     8.1  

Income tax expense

                     (3.2 )
                                

Net income

     4.1 %   4.5 %   6.0 %   6.0 %   4.9 %
                                

Comparison of three months ended September 30, 2006 and 2005

Revenue

Our revenue increased by $18.3 million, or 78.1%, from $23.5 million during the three months ended September 30, 2005 to $41.8 million during the three months ended September 30, 2006. The revenue growth reflects an increase in both enterprise and transactional clients. Our revenue from enterprise clients increased by $11.9 million, or 61.8%, from $19.3 million during the three months ended September 30, 2005 to $31.2 million during the three months ended September 30, 2006. As of September 30, 2006, we had 86 enterprise clients under contract compared to 64 enterprise clients under contract as of September 30, 2005. Additionally, revenue from transactional clients increased by $6.4 million, or 152.9%, from $4.2 million during the three months ended September 30, 2005 to $10.6 million during the three months ended September 30, 2006. The incremental transactional revenue is largely a result of increasing the number of experienced sales executives. We increased our number of sales executives by 60, or 111.1%, from 54 as of September 30, 2005 to 114 as of September 30, 2006.

Cost of goods sold

Our cost of goods sold increased by $13.6 million, or 72.7%, from $18.7 million during the three months ended September 30, 2005 to $32.2 million during the three months ended September 30, 2006. The increase reflects the revenue growth during the three months ended September 30, 2006. Our cost of goods sold as a percentage of revenue decreased from 79.6% during the three months ended September 30, 2005 to 77.2% during the three months ended September 30, 2006. The decrease is a result of a lower concentration of our business coming from enterprise accounts. During the three months ended September 30, 2005, 82% of our revenue was generated from enterprise accounts compared to 75% during the three months ended September 30, 2006. Additionally, we have early payment terms with many of our suppliers, which we aggressively utilized, thereby reducing our cost of goods sold.

 

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Gross Profit

Our gross profit as a percentage of revenue, which we refer to as gross margin, increased from 20.4% during the three months ended September 30, 2005 to 22.8% during the three months ended September 30, 2006. The increase is the result of a higher concentration of business from transaction accounts as well as early pay discounts with many of our suppliers.

Selling, general and administrative expenses

Commission expense increased by $1.0 million, or 75.4%, from $1.3 million during the three months ended September 30, 2005 to $2.3 million during the three months ended September 30, 2006. As a percentage of gross profit, commission expense decreased from 27.3% during the three months ended September 30, 2005 to 24.1% during the three months ended September 30, 2006. The decrease is a result of a higher concentration of business from clients with lower commission rates.

General and administrative expense increased by $1.6 million, or 88.4%, from $1.8 million during the three months ended September 30, 2005 to $3.4 million during the three months ended September 30, 2006. General and administrative expense increased as a percentage of revenue from 7.6% during the three months ended September 30, 2005 to 8.1% during the three months ended September 30, 2006. The increase is due to the non-cash compensation expense of $198,000 resulting from the adoption of SFAS 123 (R), which was 0.5% of revenue during the three months ended September 30, 2006. Without this compensation expense, general and administrative expense as a percentage of revenue would have been 7.6%.

Depreciation and amortization

Depreciation and amortization expense increased by $135,000, or 128.3%, from $105,000 during the three months ended September 30, 2005 to $240,000 during the three months ended September 30, 2006. The increase in depreciation expense is primarily attributable to purchases of computer hardware and software, equipment and furniture and fixtures as well as capitalization of costs of computer software for internal use in accordance with Statement of Position 98-1 during 2005. The increase in amortization expense is a result of the amortization of the intangible assets acquired in connection with our purchase of Graphography LLC in May 2006.

Income from operations

Income from operations increased by $2.0 million, or 128.2%, from $1.6 million during the three months ended September 30, 2005 to $3.6 million during the three months ended September 30, 2006. As a percentage of revenue, income from operations increased from 6.8% during the three months ended September 30, 2005 to 8.7% during the three months ended September 30, 2006. The increase in income from operations as a percentage of revenue is a result of an increase in our gross profit margin and an increase in our selling, general and administrative expenses as a percentage of revenue.

Other income and expense

Other income and expense increased $240,000 from $9,000 during the three months ended September 30, 2005 to $249,000 during the three months ended September 30, 2006. The significant increase is due to an increase in interest income from $19,000 during the three months ended September 30, 2005 to $315,000 during the three months ended September 30, 2006. The increase in interest income is largely a result of the capital raised in connection with our initial public offering in which we sold 7,060,000 shares of our common stock with net proceeds to us, after preference payments, dividend payments and repayment of outstanding indebtedness under our line of credit, of approximately $46.8 million. These proceeds were invested in money market funds from the receipt date through September 30, 2006.

 

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Provision for income taxes

Provision for income taxes increased by $1.5 million from zero during the three months ended September 30, 2005 to $1.5 million during the three months ended September 30, 2006. The provision for income taxes was zero during the three months ended September 30, 2005 because we were a limited liability company (LLC) and, as a result, did not pay income taxes. The income of our Company flowed through to the members of the LLC. We converted from an LLC to a corporation on January 3, 2006. As a result, we have a provision for federal and state income taxes for the three months ended September 30, 2006.

We used $40 million of the $50 million we received in exchange for the issuance of our Series E preferred stock to redeem Class A common shares held by our existing stockholders in connection with our conversion from a limited liability company to a corporation. The cash distribution was taxable to our stockholders and resulted in a $34.0 million step-up in the basis of our assets for tax purposes. As a result of the $34.0 million step-up, we recognized a deferred tax asset of $13.2 million, for which we recorded a valuation allowance of $6.6 million and a corresponding net increase to additional paid in capital of $6.6 million. For the three months ended September 30, 2006, the provision for federal and state income taxes was $1.5 million, resulting in an effective tax rate of 39%.

Net income

Net income increased by $763,000, or 47.6%, from $1.6 million during the three months ended September 30, 2005 to $2.4 million during the three months ended September 30, 2006. Net income as a percentage of revenue decreased from 6.8% during the three months ended September 30, 2005 to 5.7% during the three months ended September 30, 2006. This is the result of recording no tax provision during the three months ended September 30, 2005 as we were an LLC. Pretax income as a percentage of revenue increased to 9.3% during the three months ended September 30, 2006 compared to 6.8% during the three months ended September 30, 2005. The increase in pretax income as a percentage of revenue is largely a result of improved gross profit margin from 20.4% during the three months ended September 30, 2005 to 22.8% during the three months ended September 30, 2006.

Comparison of nine months ended September 30, 2006 and 2005

Revenue

Our revenue increased by $44.7 million, or 81.9%, from $54.6 million during the nine months ended September 30, 2005 to $99.4 million during the nine months ended September 30, 2006. Our revenue growth primarily reflects an increase in our enterprise business. We increased our business from enterprise clients to 77% of our revenue during the nine months ended September 30, 2006, up from 66% of our revenue during the nine months ended September 30, 2005. Our revenue from enterprise clients increased by $40.1 million, or 111.2%, from $36.1 million during the nine months ended September 30, 2005 to $76.2 million during the nine months ended September 30, 2006. As of September 30, 2006, we had 86 enterprise clients under contract compared to 64 enterprise clients under contract as of September 30, 2005. In addition, we continued to hire or acquire experienced sales executives with existing books of business. We increased our number of sales executives by 60, or 111.1%, from 54 as of September 30, 2005 to 114 as of September 30, 2006.

Cost of goods sold

Our cost of goods sold increased by $34.9 million, or 80.4%, from $43.4 million during the nine months ended September 30, 2005 to $78.2 million during the nine months ended September 30, 2006. The increase reflects the revenue growth during the nine months ended September 30, 2006. Our cost of goods sold as a percentage of revenue decreased from 79.4% during the nine months ended September 30, 2005 to 78.7% during the nine months ended September 30, 2006. The decrease is a result of a greater concentration of higher gross profit margin enterprise business. Additionally, we have early payment terms with many of our suppliers, which we aggressively utilized, thereby reducing our cost of goods sold.

 

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Gross Profit

Our gross profit as a percentage of revenue, which we refer to as gross margin, increased from 20.6% during the nine months ended September 30, 2005 to 21.3% during the nine months ended September 30, 2006. The increase is the result of a greater concentration of higher margin transactional clients as well as early pay discounts with many of our key suppliers.

Selling, general and administrative expenses

Commission expense increased by $1.7 million, or 53.0%, from $3.0 million during the nine months ended September 30, 2005 to $4.7 million during the nine months ended September 30, 2006. As a percentage of revenue, commission expense decreased from 5.6% during the nine months ended September 30, 2005 to 4.7% during the nine months ended September 30, 2006. The decrease is a result of a higher concentration of business with enterprise clients. Historically, lower commission rates have been paid on our enterprise business.

General and administrative expense increased by $3.4 million, or 73.9%, from $4.7 million during the nine months ended September 30, 2005 to $8.1 million during the nine months ended September 30, 2006. General and administrative expense decreased as a percentage of revenue from 8.6% during the nine months ended September 30, 2005 to 8.2% during the nine months ended September 30, 2006. The decrease is primarily due to a decrease in salaries and benefits as a percentage of revenue. Salaries and benefits decreased as a percentage of revenue from 5.4% during the nine months ended September 30, 2005 to 5.0% during the nine months ended September 30, 2006. The decrease reflects our ability to add clients and account executives to increase our revenue without incurring a corresponding increase in our general and administrative expense.

Depreciation and amortization

Depreciation and amortization expense increased by $318,000, or 124.6%, from $256,000 during the nine months ended September 30, 2005 to $574,000 during the nine months ended September 30, 2006. The increase in depreciation expense is primarily attributable to purchases of computer hardware and software, equipment and furniture and fixtures as well as capitalization of costs of computer software for internal use in accordance with Statement of Position 98-1 during 2005. The increase in amortization expense is a result of the amortization of the intangible assets acquired in connection with our purchase of the remaining 49% ownership interest in Insight, LLC in March 2005 and our purchase of Graphography LLC in May 2006.

Income from operations

Income from operations increased by $4.5 million, or 136.0%, from $3.3 million during the nine months ended September 30, 2005 to $7.8 million during the nine months ended September 30, 2006. As a percentage of revenue, income from operations increased from 6.0% during the nine months ended September 30, 2005 to 7.8% during the nine months ended September 30, 2006. The increase in income from operations as a percentage of revenue is a result of an increase in our gross profit margin and a decrease in our selling, general and administrative expenses as a percentage of revenue.

Other income and expense

Other income and expense increased $306,000 from $33,000 during the nine months ended September 30, 2005 to $339,000 during the nine months ended September 30, 2006. The significant increase is due to an increase in interest income from $54,000 during the nine months ended September 30, 2005 to $492,000 during the nine months ended September 30, 2006. The increase in interest income is largely a result of the capital raised in connection with our initial public offering in which we sold 7,060,000 shares of our common stock with net proceeds to us after preference payments, dividend payments and repayment of outstanding indebtedness under our line of credit, of approximately $46.9 million. These proceeds were invested in money market funds from the receipt date through September 30, 2006.

 

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Provision for income taxes

Provision for income taxes increased by $3.2 million from zero during the nine months ended September 30, 2005 to $3.2 million during the nine months ended September 30, 2006. The provision for income taxes was zero during the nine months ended September 30, 2005 because we were a limited liability company (LLC) and, as a result, did not pay income taxes. The income of the company flowed through to the members of the LLC. We converted from an LLC to a corporation on January 3, 2006. As a result, we have a provision for federal and state income taxes for the nine months ended September 30, 2006.

We used $40 million of the $50 million we received in exchange for the issuance of our Series E preferred stock to redeem Class A common shares held by our existing stockholders in connection with our conversion from a limited liability company to a corporation. The cash distribution was taxable to our stockholders and resulted in a $34.0 million step-up in the basis of our assets for tax purposes. As a result of the $34.0 million step-up, we recognized a deferred tax asset of $13.2 million, for which we recorded a valuation allowance of $6.6 million and a corresponding net increase to additional paid in capital of $6.6 million. For the nine months ended September 30, 2006, the provision for federal and state income taxes was $3.2 million, resulting in an effective tax rate of 39.6%.

Net income

Net income increased by $1.6 million, or 47.4%, from $3.3 million during the nine months ended September 30, 2005 to $4.9 million during the nine months ended September 30, 2006. Net income as a percentage of revenue decreased from 6.1% during the nine months ended September 30, 2005 to 4.9% during the nine months ended September 30, 2006. This is a result of no tax provision during the nine months ended September 30, 2005 as we were an LLC. Pretax income as a percentage of revenue increased to 8.2% during the nine months ended September 30, 2006 compared to 6.1% during the nine months ended September 30, 2005. The increase in pretax income as a percentage of revenue is largely a result of improved operating profit. Selling, general and administrative expenses as a percentage of revenue decreased from 14.1% during the nine months ended September 30, 2005 to 12.9% during the nine months ended September 30, 2006.

Comparison of years ended December 31, 2005 and 2004

Revenue

Our revenue increased by $38.0 million, or 97.7%, from $38.9 million in 2004 to $76.9 million in 2005. The revenue growth reflects an increase in transactional and enterprise business in 2005. We increased our business from enterprise clients to 69% of our revenue in 2005, up from 50% of our revenue in 2004. Our revenue from enterprise clients increased by $33.3 million, or 172.5%, from $19.5 million in 2004 to $52.8 million in 2005. As of December 31, 2005, we had 69 enterprise clients under contract, which was an increase of 23, compared to 46 enterprise clients under contract as of December 31, 2004. In addition, we performed 10,736 print jobs in 2005, compared to 6,972 print jobs in 2004.

Cost of goods sold

Our cost of goods sold increased by $30.8 million, or 101.0%, from $30.5 million in 2004 to $61.3 million in 2005. The increase reflects the growth in revenue in 2005. Our cost of goods sold as a percentage of revenue increased from 78.4% in 2004 to 79.7% in 2005. The increase is primarily due to a higher concentration of business with enterprise clients which typically have lower commission rates.

Gross profit

Our gross profit as a percentage of revenue, which we refer to as gross margin, decreased from 21.6% in 2004 to 20.3% in 2005. The decrease primarily resulted from an increase in our enterprise business, which has historically had lower gross profit margins than our transactional business.

 

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Selling, general and administrative expenses

Commission expense increased by $1.7 million, or 95.3%, from $1.8 million in 2004 to $3.5 million in 2005. As a percentage of revenue, commission expense decreased from 4.6% in 2004 to 4.5% in 2005. The decrease resulted from increased enterprise business, which typically have lower commission rates.

General and administrative expenses increased by $2.8 million, or 64.8%, from $4.3 million in 2004 to $7.1 million in 2005. As a percentage of revenue, general and administrative expenses decreased from 11.1% in 2004 to 9.3% in 2005. The decrease is due in part to a decrease in salaries and benefits as a percentage of revenue. Salaries and benefits decreased as a percentage of revenue from 6.0% in 2004 to 5.5% in 2005. The decrease reflects our ability to add clients and account executives to increase our revenue without incurring a corresponding increase in our general and administrative expenses.

Depreciation and amortization

Depreciation and amortization expense increased by $165,000, or 74.0%, from $223,000 in 2004 to $388,000 in 2005. The increase in depreciation expense is primarily attributable to purchases of computer hardware and software, equipment and furniture and fixtures during 2005. The increase in amortization expense is due to the acquisition of intangible assets of Ocular Group, LLC (Ocular), a print broker, in April 2004. The Ocular acquisition included the purchase of intangible assets, including customer lists and sales executives non-compete agreements with values of $889,000 that are being amortized on a straight-line basis over a useful life of five and ten years.

Income from operations

Income from operations increased by $2.5 million, or 122.1%, from $2.1 million in 2004 to $4.6 million in 2005. As a percentage of revenue, income from operations increased from 5.3% in 2004 to 6.0% in 2005. The increase in income from operations as a percentage of revenue reflects a reduction in selling, general and administrative expenses as a percentage of revenue.

Minority interest expense

Minority interest expense decreased by $250,000 from expense of $192,000 in 2004 to income of $58,000 in 2005. For the first two months of 2005, Insight had an operating loss. As a result, we recorded minority interest income for that period. Upon our acquisition of the 49% ownership interest in Insight that we did not already own in March 2005, we ceased recording minority interest expense.

Other income and expense

Interest expense decreased by $34,000, or 25.4%, from $132,000 in 2004 to $98,000 in 2005. The decrease is the result of maintaining a lower average daily balance under our bank line of credit.

Net Income

Net income increased by $2.8 million, or 163.7%, from $1.8 in 2004 to $4.6 million in 2005. As a percentage of revenue, net income increased from 4.5% in 2004 to 6.0% in 2005. The increase in net income as a percentage of revenue is largely a result of improved operating profit. Selling, general and administrative expenses as a percentage of revenue decreased from 15.7% in 2004 to 13.8% in 2005.

Comparison of years ended December 31, 2004 and 2003

Revenue

Our revenue increased by $22.7 million, or 139.6%, from $16.2 million in 2003 to $38.9 million in 2004. The revenue growth reflects an increase in transactional and enterprise business in 2004. We increased our

 

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business from enterprise clients to 50% of our revenue in 2004, up from 37% of our revenue in 2003. Our revenue from enterprise clients increased by $13.5 million, or 225.0%, from $6.0 million in 2003 to $19.5 million in 2004. As of December 31, 2004, we had 46 enterprise clients under contract, which was an increase of 32, compared to 14 enterprise clients under contract as of December 31, 2003. In addition, we performed 6,972 print jobs in 2004, compared to 2,002 print jobs in 2003.

Cost of goods sold

Our cost of goods sold increased by $18.0 million, or 144.1%, from $12.5 million in 2003 to $30.5 million in 2004. The increase reflects the growth in revenue in 2004. Revenue from enterprise clients and Insight accounted for a higher percentage of our revenue. Our gross margins on our enterprise jobs and Insight’s gross margins are typically lower than those on our transactional jobs. As a result, cost of goods sold as a percentage of revenue increased from 76.9% in 2003 to 78.4% in 2004.

Gross profit

Our gross margin decreased from 23.1% in 2003 to 21.6% in 2004. The decrease primarily resulted from an increase in business with enterprise clients and Insight’s lower gross margin. Insight’s gross margin decreased from 17.8% in 2003 to 16.3% in 2004.

Selling, general and administrative expenses

Commission expenses increased by $1.2 million, or 209.9%, from $577,000 in 2003 to $1.8 million in 2004. As a percentage of revenue, commission expense increased from 3.6% in 2003 to 4.6 % in 2004. The increase is due to a higher percentage of revenue being generated from commissioned accounts.

General and administrative expenses increased by $1.9 million, or 81.2%, from $2.4 million in 2003 to $4.3 million in 2004. As a percentage of revenue, general and administrative expenses decreased from 14.6% in 2003 to 11.1% in 2004. The decrease is due in part to a decrease in salaries and benefits as a percentage of revenue. Salaries and benefits decreased as a percentage of revenue from 8.9% in 2003 to 6.0% in 2004. The decrease reflects our ability to add clients and account executives to increase our revenue without incurring a corresponding increase in our general and administrative expenses.

Depreciation and amortization

Depreciation and amortization expense increased by $205,000 from $18,000 in 2003 to $223,000 in 2004. The increase in depreciation expense is primarily attributable to purchases of computer hardware and software, equipment and furniture and fixtures in 2004. The increase in amortization expense is due to the acquisition of Ocular in April 2004. The acquisition of Ocular included the purchase of intangible assets with values of $889,000 that are being amortized on a straight-line basis over a useful life of five and ten years.

Income from operations

Income from operations increased by $1.3 million, or 171.0%, from $765,000 in 2003 to $2.1 million in 2004. As a percentage of revenue, income from operations increased from 4.7% in 2003 to 5.3% in 2004. The increase in income from operations as a percentage of revenue reflects a reduction in general and administrative expenses as a percentage of revenue as a result of our improved operating leverage.

Minority interest expense

Minority interest expense increased by $184,000 from $8,000 in 2003 to $192,000 in 2004. The increase is due to our sale of a 49% ownership interest in Insight in October 2003.

Other income and expense

Interest expense increased by $43,000, or 48.6%, from $89,000 in 2003 to $132,000 in 2004. The increase is due to the interest payments to the former holders of our Series D preferred stock made in 2004.

 

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Net Income

Net income increased by $1.1 million, or 161.9%, from $671,000 in 2003 to $1.8 million in 2004. As a percentage of revenue, net income increased from 4.1% in 2003 to 4.5% in 2004.

Quarterly Results of Operations

The following table represents unaudited statement of operations data for our most recent ten fiscal quarters. You should read the following table in conjunction with our consolidated financial statements and related notes appearing elsewhere in this prospectus. The results of operations of any quarter are not necessarily indicative of the results that may be expected for any future period.

 

    Three months ended
    June 30,
2004
  Sept. 30,
2004
  Dec. 31,
2004
  Mar. 31,
2005
  June 30,
2005
  Sept. 30,
2005
  Dec. 31,
2005
  Mar. 31,
2006
  June 30,
2006
 

Sept. 30,

2006

   

(unaudited)

(in thousands, except per share amounts)

Revenue

  $ 8,551   $ 9,795   $ 15,219   $ 12,420   $ 18,739   $ 23,476   $ 22,244   $ 22,435   $ 35,142   $ 41,785

Gross profit

    1,966     2,221     2,930     2,520     3,950     4,797     4,331     4,512     7,076     9,545

Net income

    263     464     1,014     575     1,159     1,604     1,301     826     1,719     2,367

Net income per share of common stock:

                   

Basic

  $ 0.01   $ 0.01   $ 0.03   $ 0.01   $ 0.03   $ 0.04   $ 0.04   $ 0.01   $ 0.05   $ 0.06

Diluted

  $ 0.01   $ 0.01   $ 0.03   $ 0.01   $ 0.03   $ 0.04   $ 0.03   $ 0.01   $ 0.04   $ 0.05

Impact of Inflation

We believe that our results of operations are not materially impacted by moderate changes in the inflation rate. Inflation and changing prices did not have a material impact on our operations in 2003, 2004, 2005 or the nine months ended September 30, 2006.

Liquidity and Capital Resources

In connection with our initial public offering, we raised approximately $46.9 million net of underwriting discounts, professional fees, preference payments, dividend payments and repayment of outstanding indebtedness under our line of credit. At September 30, 2006, we had $44.3 million of cash, cash equivalents and marketable securities. Cash equivalents and marketable securities are comprised of asset- and mortgage-backed securities, U.S. government and agency securities and domestic and foreign corporate bonds. Historically, we have financed our operations through private sales of common and preferred equity, bank loans and internally generated positive cash flow. We believe that our available cash and cash flows generated from operations will be sufficient to satisfy our working capital requirements for the foreseeable future.

Operating Activities. Cash provided by (used in) operating activities primarily consists of net income adjusted for certain non-cash items including depreciation and amortization and the effect of changes in working capital and other activities. Cash used in operating activities for the nine months ended September 30, 2006 was $7.9 million and primarily reflected net income of $4.9 million and $1.2 million of non-cash items, offset by $14.0 million used to fund working capital and other activities. The most significant impact on working capital and other activities consisted of an increase in accounts receivable of $10.7 million due to revenue growth with an increase in accounts payable of only $600,000 due to early payments to many of our suppliers to take advantage of discount opportunities.

 

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For the nine months ended September 30, 2005, cash provided by operating activities was $3.2 million and principally consisted of net income of $3.3 million. The most significant impact on working capital and other activities consisted of an increase in accounts payable of $4.9 million offset by an increase in prepaid expenses of $3.5 million, an increase in accounts receivable of $1.2 million and an increase in unbilled revenue of $1.3 million.

In 2005, cash provided by operating activities increased by $112,000 to $967,000 from $855,000 in 2004. Cash provided by operating activities increased by only $112,000 compared to an increase in net income of $2.9 million due to the significant increase in prepaid expenses and other. Prepaid expenses increased by over $1.0 million due to professional fees incurred in 2005 in connection with our initial public offering. In addition, other prepaid expenses increased by over $1.0 million due to prepaid paper and other supplier costs for jobs that were not ready to ship to clients. The increase in this current asset reduced the overall net cash provided by operations.

In 2004, cash provided by operating activities increased $1.6 million to $855,000 compared with cash used in operating activities of $697,000 in 2003. The increase in cash provided by operating activities reflects an improvement in our net income and that growth in our accounts receivable outpaced increases in our accounts payable and other short-term liabilities.

Investing Activities. Cash used in investing activities in the nine months ended September 30, 2006 of $14 million was attributable to purchases of marketable securities of $10 million with a portion of the net proceeds received from our initial public offering, cash paid for acquisitions of $3 million and capital expenditures of $1 million.

Cash used in investing activities for the nine months ended September 30, 2005 of $1.6 million was primarily attributable to purchases of marketable securities of $760,000, using a portion of the net proceeds received from our Series D round of financing in February 2005, and capital expenditures of $707,000.

In 2005, cash used in investing activities increased $209,000 to $1.2 million from $991,000 in 2004. In 2004, $681,000 was used to purchase the Ocular Group, LLC, while $309,000 was used for the purchase of property and equipment. In 2005, the purchase of property and equipment increased to $1.0 million related to the purchase of new hardware and software and the capitalization of internal software costs.

Cash used in investing activities increased $921,000 to $991,000 in 2004 from $70,000 in 2003. The increase reflects the purchase of Ocular and purchases of property and equipment.

Financing Activities. Cash provided by financing activities in the nine months ended September 30, 2006 of $53.2 million was primarily attributable to the net proceeds received from our initial public offering, after preference payments, dividend payments and repayment of outstanding indebtedness under the line of credit, of approximately $46.9 million and the proceeds received from our Series E round of financing, net of the subsequent $40 million share repurchase, of approximately $10.0 million.

Cash used in financing activities in the nine months ended September 30, 2005 of $968,000 was primarily attributable to payment of distributions of $1.4 million and payment of dividends on preferred shares of $821,000. This was offset by the net proceeds received from our Series D round of financing of approximately $2.2 million.

In 2005, cash provided by financing activities increased by $1.1 million to $1.7 million from $646,000 in 2004. The increase in cash provided by financing activities is a result of usage of our line of credit in 2005. In addition, we raised capital through the sale of $2.0 million of Series D preferred stock in February 2005.

In 2004, cash provided by financing activities decreased by $854,000 to $646,000 from $1.5 million in 2003. The decrease in cash provided by financing activities primarily reflects proceeds from private sales of common and preferred equity.

 

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Capital expenditures were $70,000 in 2003, $310,000 in 2004, $1.0 million in 2005 and $980,000 for the nine months ended September 30, 2006. We anticipate spending between $1.2 million and $1.6 million for the full year 2006 on capital expenditures, including new hardware and software and the capitalization of internal software costs. Our capital expenditures historically consisted of purchases of resources to manage our operations, including computer hardware and software, office furniture and equipment and leasehold improvements. We expect that our capital expenditures will continue to increase in the future. Since our inception, we have generally funded capital expenditures either through the use of working capital or with capital leases.

We have a $20.0 million line of credit with JPMorgan Chase Bank, N.A. The line of credit was unused as of September 30, 2006. The maximum amount outstanding under our line of credit cannot exceed 80% of the book value of our eligible accounts receivable. Our line of credit contains limitations on our ability to incur indebtedness, create liens and make certain investments. Advances made under our line of credit accrue interest at a per annum rate equal to the prime rate.

We anticipate that our operating expenses and planned capital expenditures will constitute a material use of cash. In addition, we may continue to utilize cash to fund acquisitions of or strategic investments in complementary businesses and to expand our sales force. Although we can provide no assurances, we believe that the net proceeds from this offering, together with our available cash and cash equivalents and amounts available under our line of credit, should be sufficient to meet our working capital and operating expenditure requirements for the foreseeable future. Thereafter, we may find it necessary to obtain additional equity or debt financing. In the event additional financing is required, we may not be able to raise it on acceptable terms or at all.

Contractual Obligations

As of September 30, 2006, we had the following contractual obligations:

 

     Payments due by period
     Total    Less than
1 year
   1-3
years
   3-5
years
   More than
5 years
     (in thousands)

Capital lease obligations

     366      100      170      96     

Operating lease obligations

     10,475      1,580      3,329      2,368      3,198
                                  

Total

   $ 10,841    $ 1,680    $ 3,499    $ 2,464    $ 3,198
                                  

This table does not include contingent obligations related to any acquisitions. See “Management Discussion and Analysis—Recent Developments.”

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Quantitative and Qualitative Disclosure about Market Risk

Commodity Risk

We are dependent upon the availability of paper and paper prices represent a substantial portion of the cost of our products. The supply and price of paper depends on a variety of factors over which we have no control, including environmental and conservation regulations, natural disasters and weather.

Interest Rate Risk

We have exposure to changes in interest rates on our line of credit. The interest rate on our line of credit fluctuates based on the prime rate. Assuming the $20.0 million line of credit was fully drawn, a 1.0% increase in the prime rate would increase our annual interest expense by $200,000.

 

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Our interest income is sensitive to changes in the general level of U.S. interest rates, in particular because all of our investments are in cash equivalents. The average duration of all of our investments as of September 30, 2006 was less than three months. Due to the short-term nature of our investments, we believe that there is no material risk exposure.

We do not use derivative financial instruments for speculative trading purposes.

Recent Accounting Pronouncements

In July 2006, FASB issued Statement of Financial Accounting Standards Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes.” FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS 109, “Accounting for Income Taxes.” FIN 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The new FASB standard also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. We intend to adopt FIN 48 effective January 1, 2007 and we have not yet determined the impact, if any, this adoption will have.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. This Statement is required to be adopted by us in the first quarter of its fiscal year 2008. We are currently evaluating the potential impact of adopting SFAS 157.

 

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BUSINESS

Our Company

We are a leading provider of print procurement solutions to corporate clients in the United States. Utilizing our proprietary technology and database, as well as our extensive domain expertise, we create a competitive bid process to procure, purchase and deliver printed products as part of a comprehensive outsourced enterprise solution and in individual transactions. Our technology is designed to capitalize on excess manufacturing capacity and other inefficiencies in the traditional print supply chain to obtain favorable pricing and to deliver high-quality products and services for our clients.

Our proprietary software applications and database, PPM4™, create a fully-integrated solution that stores, analyzes and tracks the production capabilities of our supplier network, as well as quote and price data for each bid we receive and print job we execute. As a result, we believe PPM4™ contains one of the largest independent repositories of equipment profiles and price data for print suppliers in the United States. We leverage our technology to match each print job with the supplier that is optimally suited to meet the client’s needs at a highly competitive price. Our procurement managers use PPM4™ to manage the print procurement process from end-to-end.

Through our network of over 4,500 suppliers, we offer a full range of print, fulfillment and logistics services that allows us to procure printed products on virtually any substrate. The breadth of our product offerings and services and the depth of our supplier network enable us to fulfill up to 100% of the print procurement needs of our clients. By leveraging our technology platform, our clients are able to reduce overhead costs, redeploy internal resources and obtain favorable pricing and service terms. In addition, our ability to track individual transactions and provide customized reports detailing print procurement activity on an enterprise-wide-basis provides our clients with greater visibility and control of their print expenditures.

We generate revenue by procuring and purchasing printed products from our suppliers and selling those products to our clients. We procure printed products for clients across a wide range of industries, such as advertising, consumer products, publishing and retail. Our clients fall into two categories, enterprise and transactional. We enter into arrangements with our enterprise clients to provide some, or substantially all, of their printed products, typically on a recurring basis. We provide printed products to our transactional clients on an order-by-order basis. For the year ended December 31, 2005, enterprise and transactional clients accounted for 69% and 31% of our revenue, respectively. For the nine months ended September 30, 2006, enterprise and transactional clients accounted for 77% and 23% of our revenue, respectively.

We were formed in 2001 and commenced operations in 2002. From our inception through December 31, 2005, we served over 1,100 clients, received approximately 96,000 bids and executed approximately 26,000 print jobs through 1,100 suppliers, and through September 30, 2006, we served over 1,600 clients, received approximately 120,000 bids and executed approximately 37,000 print jobs through over 1,600 suppliers. We have increased our revenue from $5.0 million in 2002 to $76.9 million in 2005, representing a compound annual growth rate of 148%. In 2005, our revenue was $76.9 million, compared to $38.9 million in 2004. For the nine months ended September 30, 2006, our revenue was $99.4 million, compared to $54.6 million for the nine months ended September 30, 2005.

In October 2006, we acquired Applied Graphics, a provider of print management and print-on-demand services headquartered in San Rafael, California. As a result of the acquisition, we believe we established a significant presence in the West Coast market with sales executives in California, Hawaii and Nevada. We added 35 sales executives, approximately 1,000 transactional clients and approximately 500 new suppliers. This significantly expanded our pipeline of clients to which we can market our enterprise solution.

The acquisition consideration for Applied Graphics consisted of approximately $7.0 million in cash paid in October 2006. In addition, the former owners of Applied Graphics will receive:

 

    $1.9 million if gross profit generated by Applied Graphics equals or exceeds $9.7 million from October 1, 2006 to September 30, 2007,

 

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    $1.9 million if gross profit generated by Applied Graphics equals or exceeds $19.3 million from October 1, 2006 to September 30, 2008,

 

    $500,000 if earnings before interest, taxes, depreciation and amortization (EBITDA) generated by Applied Graphics equals or exceeds $2.5 million from October 1, 2006 to September 30, 2007, or a portion thereof if EBITDA is between $2.3 million and $2.5 million during that period, and

 

    $500,000 if EBITDA generated by Applied Graphics equals or exceeds $2.8 million from October 1, 2007 to September 30, 2008, or a portion thereof if EBITDA is between $2.6 million and $2.8 million during that period.

In September 2006, we acquired CoreVision Group, a provider of end-to-end marketing solutions, including design, print, promotional products and fulfillment services, located in Carol Stream, Illinois. As a result of the acquisition, we added 15 sales executives, including our first sales executives in the states of Michigan and Missouri. The acquisition consideration for CoreVision consisted of approximately $1.1 million, $10,000 paid in September 2006 and the remaining $1.1 million to be paid in monthly installments through August 2007. In addition, the former owner of CoreVision is eligible to receive up to:

 

 

    $666,666 if gross profit generated by CoreVision equals or exceeds $1.7 million from September 1, 2006 to December 31, 2006, or a portion thereof if gross profit is less than $1.7 million,

 

    $667,000 if gross profit generated by CoreVision equals or exceeds $5.1 million from January 1, 2007 to December 31, 2007, or a portion thereof if gross profit is less than $5.1 million,

 

    $667,000 if gross profit generated by CoreVision equals or exceeds $5.1 million from January 1, 2008 to December 31, 2008, or a portion thereof if gross profit is less than $5.1 million, and

 

    $500,000 if gross profit generated by CoreVision equals or exceeds $6.5 million from January 1, 2009 to December 31, 2009.

Industry Overview

Our business of providing print procurement solutions intersects two large and growing industries, commercial printing and business process outsourcing, or BPO. Total shipments in the worldwide commercial print industry were approximately $373 billion in 2005 and are expected to increase by an average of $9 billion per year through 2010, according to a 2006 Datamonitor global commercial printing industry profile. The print industry includes the following product categories:

 

    direct mail and other direct marketing materials;

 

    basic business printing, including business forms, stationery and business cards;

 

    promotional printing, which includes brochures, direct mail and catalogs;

 

    publications, including magazines, books and directories;

 

    bill of material printing, which consists of customized packaging, labels and other shipping materials;

 

    promotional products, such as t-shirts, calendars and advertisements;

 

    warehousing, pick and pack distribution and print on demand; and

 

    multimedia, including CDs and DVDs.

In addition, the U.S. print industry is highly fragmented, with an estimated 39,300 printing plants. In 2005, the ten largest commercial print companies accounted for only approximately 16% of the total domestic print market. The traditional process of designing, procuring and producing a print order requires extensive collaboration by printers, designers, brokers and other middlemen and is often highly inefficient for the customer, who typically pays a mark-up at each intermediate stage of the supply chain. Print procurement is often dispersed across several areas of a business enterprise, including sales, marketing, communications and finance.

 

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To become more competitive, many businesses seek to focus on core competencies and outsource non-core business functions, such as print procurement. The National Association of Procurement Managers ranked print procurement as the third most significant resource procurement outsourcing opportunity for U.S. businesses, underscoring this trend. According to a 2006 IDC global BPO forecast, the worldwide market for BPO is estimated to grow from $384 billion in 2005 to $618 billion in 2010, representing a compound annual growth rate of 10%. Consolidating all print activities across the organization represents an opportunity to reduce total print expenditure and decrease the number of vendors in the print supply chain. Applying software and database technology to manage the print procurement process also provides for enhanced tracking and auditing capabilities.

In recent years, the print industry has been impacted by developments in technology, including enhanced output capacity of printing presses and increased utilization of Internet-based communications and digital printing. These developments have lowered barriers to entry and reduced the utilization of printing presses. As a result, the print industry has historically experienced significant excess manufacturing capacity and the market for printed products has become increasingly commoditized. As developments in technology enable more print companies to provide a broad range of products and services, there are fewer opportunities for print vendors to charge premium prices based on product and service differentiation.

We seek to capitalize on the trends impacting the commercial print industry and the movement towards increased outsourcing of non-core business functions by leveraging our propriety technology, expansive database, extensive supplier network and purchasing power.

Our Solution

Utilizing our proprietary technology and database, we are able to create a competitive bid process to procure, purchase and deliver printed products to our clients. Our network of over 4,500 suppliers offers a wide variety of printed products and a full range of print, fulfillment and logistics services.

Our print procurement software seeks to capitalize on excess manufacturing capacity and other inefficiencies in the traditional print supply chain. We believe that the most competitive price bids we obtain from our suppliers are submitted by the suppliers with the most unused capacity. We utilize our technology and a competitive bid process to:

 

    greatly increase the number of suppliers that our clients can efficiently access;

 

    obtain favorable pricing and deliver high quality products and services for our clients; and

 

    aggregate our purchasing power.

Our proprietary software applications and database, PPM4, streamline the print procurement process for our clients by eliminating inefficiencies within the traditional print supply chain and expediting production. However, our technology cannot manage all of the variables associated with procuring a print job, which often involves extensive collaboration among numerous parties. Effective management of the procurement process requires that dedicated and experienced personnel work closely with both clients and print suppliers. Our account executives and procurement managers perform that critical function.

Account executives act as the primary sales staff to our clients. Procurement managers manage the entire print procurement process for our clients to ensure timely and accurate delivery of the finished product. For each print job we receive, a procurement manager uses our technology to gather print specifications, solicit bids from the optimal suppliers, establish pricing with the client, manage print production and purchase and coordinate the delivery of the finished product.

Each client is assigned an account executive and procurement manager, who develop contacts with client personnel responsible for authorizing and making print purchases. Our largest clients often are assigned multiple procurement managers. In certain cases, our procurement managers function on-site at the client. In other cases, we designate an employee of the client to function as our procurement manager and reimburse the client for the employee’s compensation costs. Whether on-site or off-site, a procurement manager functions as a virtual employee of the client. As of September 30, 2006, we had 75 procurement managers, including 21 procurement managers working on-site at our clients.

 

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Although our clients fall into two categories, enterprise and transactional, the procurement process for each client category is substantially similar. A typical print job moves through our solution in ten steps.

Step 1—Gather print specifications.    After the account executive or procurement manager identifies a sale opportunity, a procurement manager discusses the details and timeline for the print job with the client. PPM4TM automatically generates a customized data entry screen based on the type of printed product and guides the procurement manager to enter the required job specifications.

Step 2—Select appropriate suppliers.    Based on the historical transaction data and supplier capability information contained in our database, PPM4TM generates a list of potential suppliers within our extensive network with the most efficient equipment profiles to produce the job. The procurement manager may select suppliers from this list or select suppliers suggested by the client. Our technology also enables the procurement manager to disaggregate the job into its component parts and put each part out for competitive bid in order to generate additional savings for the client. After selecting the list of optimal suppliers, the procurement manager electronically transfers the job specifications into an e-mail or e-fax in the form of a request for proposal and sends it to those suppliers.

Step 3—Receive bids from suppliers.    The selected suppliers respond to our request for proposal by submitting bids to us. Upon receipt, the procurement manager enters the bid information into our database and generates a report that details and sorts the bids by cost, quality and logistical considerations.

Step 4—Compare bids to proprietary data.    The procurement manager uses PPM4TM to compare the bids received from the suppliers to similar transactions in our database. If the current bids deviate from the competitive price range suggested by this data in a manner that is unfavorable to our client, the procurement manager uses our data to negotiate more favorable pricing with the selected suppliers or re-submits the specifications to different suppliers.

Step 5—Submit quote to client.    The procurement manager works with the account executive to prepare a price quote for the print job. The account executive submits the quote to the client, specifying the total cost to the client for the printed product and the timing and delivery terms.

Step 6—Execute quote and print order.    The client accepts the quote by executing it and returning a signed copy to us. The procurement manager uses PPM4TM to automatically convert the quote into a print order. The print order is sent by e-mail or e-fax to the approved supplier or suppliers for execution. We are now contractually obligated to provide the product to our client and the supplier or suppliers are contractually obligated to provide the product to us. The supplier begins the print process.

Step 7—Manage print process.    The completion of the print process is managed by the procurement manager through a checklist of dates, milestones and deliverables that is monitored electronically. PPM4TM generates automatic reminders to ensure the product is properly produced in accordance with the client’s specifications and timeline.

Step 8—Perform final quality control check.    Prior to production of the entire print quantity, the supplier submits a contract proof of the finished product to the client and procurement manager for approval. Upon written approval of the proof by the client, the supplier prints the finished product.

Step 9—Deliver finished product.    When printing is completed, we purchase the finished product from the supplier and coordinate delivery to the destination specified by the client. We take full title and risk of loss for the product from shipment until it is received and paid for by the client.

Step 10—Generate and reconcile invoices.    Upon shipment of the finished product, the supplier issues an invoice to us for the cost of the job and our technology automatically converts the quote executed by our client into an invoice that we issue to the client. PPM4TM reconciles the supplier’s invoice to the print order to ensure that the supplier adhered to the pricing and other terms set forth in the print order.

 

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The duration of this ten-step process varies based on the type of printed product. For example, this process may take less than 24 hours for limited quantities of a four-page brochure, but last over one month for 1,000,000 copies of a hard cover book.

We regularly request that our clients complete a customer scorecard, which allows them to rate us and our suppliers based on product quality, customer service and overall satisfaction. The data contained in these scorecards is stored in our database and used by our procurement managers during the supplier selection process.

Our Proprietary Technology

PPM4TM is a fully-integrated, proprietary solution that stores equipment profiles for our supplier network and price data for each job we quote and execute, which allows us to match each print job with the supplier in our network that is optimally suited to produce the job at a highly competitive price. Our technology also allows us to efficiently manage the critical aspects of the print procurement process, including gathering job specifications, identifying suppliers, establishing pricing, managing print production and coordinating purchase and delivery of the finished product.

Our database stores the production capabilities of our supplier network, as well as price and quote data for each bid we receive and transaction we execute. As a result, we believe PPM4TM contains one of the largest independent repositories of equipment profiles and price data for print suppliers in the United States. Our procurement managers use this data to discover excess print manufacturing capacity, select optimal suppliers, negotiate favorable pricing, and efficiently procure high-quality products and services for our clients.

With each new print job process, we collect and store additional data in our proprietary database. As the number of print jobs we complete increases, our database further enhances our competitive position and our ability to obtain favorable pricing for our clients.

We believe PPM4TM allows us to procure print more efficiently than traditional manual or semi-automated systems used by many printers and print brokers in the marketplace. PPM4TM includes the following features:

 

  Ÿ   “4caster.    Our proprietary database provides real-time cost estimates for potential print jobs within our major product categories based upon the historical data we have collected from print jobs with similar specifications. These estimates are used by our account executives during the sales process and procurement managers to compare bids and negotiate favorable pricing. Some of our largest suppliers have provided us with pricing tables covering specific product categories, which have also enhanced our ability to discover competitive pricing.

 

  Ÿ   Customized order management.    PPM4TM automatically generates customized data entry screens based on product type and guides the procurement manager to enter the required job specifications. For example, if a procurement manager selects “envelope” in the product field, the screen will automatically prompt the procurement manager to specify the size, paper type, window size and placement and display style.

 

  Ÿ   Cost management.    PPM4TM reconciles supplier invoices to executed print orders to ensure the supplier adhered to the pricing and other terms contained in the print order. In addition, it includes checks and balances that allow us to monitor important financial indicators relating to a print order, such as projected gross margin and significant job alterations.

 

  Ÿ   Standardized reporting.    Our solution generates transaction reports that contain quote, supplier capability, price and customer service information regarding the print jobs the client has completed with us. These reports can be customized, sorted and searched based on a specified time period or the type of printed product, price or supplier. In addition, the reports give our clients insight into their print spend for each individual print job and on an enterprise-wide basis, which allows the client to track the amounts it spends on printed products.

 

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  Ÿ   Task-tracking.    Our solution creates a work order checklist that sends e-mail reminders to our procurement managers regarding the time elapsed between certain milestones and the completion of specified deliverables. These automated notifications enable our procurement managers to focus on more critical aspects of the print process and eliminate delays.

 

  Ÿ   Open architecture.    PPM4TM allows us to integrate clients and suppliers into our solution. Some of our larger clients have limited, secure access to our database, which they can use to directly access their transaction data.

 

  Ÿ   Historical price baseline.    Some of our larger clients have provided us with pricing data for print jobs they completed before they began to use our solution. For these clients, PPM4TM automatically compares our current price for a print job to the price obtained by the client for a comparable historical job, which allows us to demonstrate on an ongoing basis the cost savings we provide.

We have also created customized Internet-based stores, which we refer to as IW stores, for certain of our clients that allow them to order pre-selected products, such as personalized business stationery, marketing brochures and promotional products, through an automated ordering process.

Our Clients

We procure printed products for corporate clients across a wide range of industries, such as advertising, consumer products, manufacturing, publishing and retail. Our clients also include printers that outsource jobs to us because they do not have the requisite capabilities or capacity to complete an order. From our inception through December 31, 2005, we served over 1,100 clients, received approximately 96,000 bids and executed approximately 26,000 print jobs through over 1,100 suppliers, and through September 30, 2006, we served over 1,600 clients, received approximately 120,000 bids and executed approximately 37,000 print jobs through over 1,600 suppliers. For the year ended December 31, 2005, Alliance Publishing Group accounted for 16% of our revenue. For the nine months ended September 30, 2006, ServiceMaster accounted for 18% of our revenue. Revenue from our top ten clients accounted for 46% and 51% of our revenue during the nine months ended September 30, 2005 and 2006, respectively.

We generate revenue by procuring and purchasing printed products from our suppliers and selling those products to our clients. Our clients fall into two categories, enterprise and transactional. We enter into contracts with our enterprise clients to provide some or substantially all of their printed products typically on a recurring basis. Our contracts with our enterprise clients generally have an open-ended term with a termination right upon advance notice ranging from 90 days to twelve months. For the years ended December 31, 2004 and 2005, enterprise clients accounted for 50% and 69% of our revenue, respectively. We provide printed products to our transactional clients on an order-by-order basis. For the years ended December 31, 2004 and 2005, transactional clients accounted for 50% and 31% of our revenue, respectively.

As part of our growth strategy, we seek to expand our base of transactional clients by hiring account executives, or acquiring groups of them, with established client relationships. We also aim to sell our enterprise solution to our transactional clients to capture a greater portion of their recurring print expenditures. We estimate that the total annual print expenditures for our 667 transactional clients during the year ended December 31, 2005 were in excess of $750 million.

As of September 30, 2006, approximately 51% of our clients were located in Illinois. In order to expand our client base, we intend to recruit more account executives in other major print markets in the United States, such as Atlanta, Boston, Dallas, Los Angeles and Minneapolis. We believe that the breadth of our supplier network will allow us to expand into new geographic markets with little upfront cost.

Of our 50 largest clients from 2004, 49 placed orders with us during 2005. We believe that our high level of client retention demonstrates the compelling value proposition that we provide to our clients.

 

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Our Products and Services

We offer a full range of print, fulfillment and logistics services that allows us to procure printed products on virtually any substrate. The printed products we procure for our clients may be printed with any of the eight major types of printing, which include offset sheet-fed, web offset, digital offset, letterpress, screen printing, waterless, flexography and gravure, as well as several forms of specialty printing.

Our major products include:

 

direct mail pieces
books
brochures
catalogues
point-of-purchase
    displays
magazines
packaging
  CDs/DVDs
promotional
    products
annual reports
envelopes
labels
calendars
folders
  posters
newsletters
billboards
playing cards
binders
t-shirts
games
stationery
  postcards
stickers
bags
magnets
warehousing
pick and pack
    distribution
print on demand

We offer a comprehensive range of fulfillment and logistics services, such as kitting and assembly, inventory management and pre-sorting postage. These services are often essential to the completion of the finished product. For example, we assemble multi-level direct mailings, insurance benefits packages and coupons and promotional incentives that are included with credit card and bank statements. We also provide creative services, including copywriting, graphics and website design, identity work and marketing collateral development, and pre-media services, such as image and print-ready page processing and proofing capabilities.

We agree to provide our clients with products that conform with the industry standard of a “commercially reasonable quality” and our suppliers in turn agree to provide us with products of the same quality. The quotes we execute with our clients include customary provisions that limit the amount of our liability for product defects. To date, we have not experienced significant claims or liabilities relating to defective products.

Our Supplier Network

Our network of 4,500 suppliers include printers, graphic designers, paper mills and merchants, digital imaging companies, specialty binders, finishing and engraving firms and fulfillment and distribution centers. These suppliers have been selected from among thousands of potential suppliers worldwide based on their ability to effectively serve our clients on the basis of price, quality and customer service. Our suppliers include 61 of the 100 largest printers in the United States, including eight of the top ten. The suppliers in our network produced more than $50 billion of printed products in 2005. We direct requests for proposal from our clients to potential suppliers based on historical pricing data, quality control rankings, geographic proximity to a client or other criteria specified by our clients.

In 2005, our top 10 suppliers accounted for approximately 40% of the products we sold, and our top three suppliers accounted for approximately 21% of the products we sold. As of December 31, 2005, a majority of our top 100 suppliers had executed supply and service agreements with us. These agreements have an open-ended term with a termination right on 60 days prior written notice and contain non-solicitation provisions that prohibit the supplier from soliciting any client for which the supplier has executed print order for a specified period, generally 24 months, after the expiration of the agreement. Our contractual relationship with the remaining suppliers in our network is governed solely by the print orders we execute with those suppliers on an order-by-order basis.

We have established a quality control program that is designed to ensure that we deliver high quality printed products and services to our clients through the suppliers in our network. As part of this program, we train our procurement managers to accurately gather job specifications and create a checklist to ensure that each item in the print order has been approved by the client. In addition, we regularly request that our clients complete customer scorecards, which are stored in our database and converted into quality control reports. These quality

 

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control reports are accessible to our procurement managers through PPM4TM and are used during the supplier selection process. Our quality control standards are designed to ensure that our clients receive high quality printed products regardless of the supplier that prints the product.

Sales and Marketing

Our account executives sell our print procurement services to corporate clients in the United States. As of September 30, 2006, we had 114 account executives, 68 of whom were independent contractors and 48 of whom were employees, located in 28 cities across the U.S. In addition to our account executives, we have two business development employees responsible for generating sales opportunities with large companies. Our agreements with our account executives require them to market and sell print procurement services for us on an exclusive basis and contain non-compete and non-solicitation provisions that apply during and for a specified period after the term of their service.

Our new client acquisition efforts generally are targeted geographically based on the location of our account executives. Our account tracking solution, IW Pipeline™, which assigns account responsibility for both existing and prospective clients, monitors the sales conversion process and tracks sales activity. An important aspect of our sales process is our periodic analysis of a prospective client’s historic print expenditures, including production and payroll expenses, to demonstrate the potential savings that could be achieved by using our solution.

We expect to continue our growth by recruiting and retaining highly qualified account executives and providing them with the tools to be successful in the marketplace. There are a large number of print sales representatives in North America and we believe that we will be able to identify qualified account executives from this pool of individuals. To coordinate this process, we employ a full-time recruiter whose activities are supplemented by several executive search firms. Candidates are recruited through Internet postings, advertisements in industry publications, industry event attendance, Internet research, referrals and word-of-mouth networking. We also expect to augment our sales force through selective acquisitions of print service businesses, including print brokers, that include experienced sales personnel with established client relationships.

We believe that we offer account executives an attractive opportunity in the print industry because they can utilize our vast supplier network, proprietary pricing data and customized order management solution to sell to their clients virtually any printed product at a highly competitive price. In addition, the diverse production and service capabilities of the suppliers in our network provide our account executives the opportunity to deliver a more complete product and service offering to their clients. We believe we can better attract and retain experienced account executives than our competitors because of the breadth of products offered by our supplier network.

To date, we have been successful in attracting and retaining qualified account executives. As of September 30, 2006, our account executives had an average of over 17 years of sales experience in the print industry, which in certain cases included employment as sales representatives for some of the largest printers in the United States. The integration process consists of training with our sales management, as well as access to a variety of sales and educational resources that are available on our Intranet. In addition, we conduct monthly sales meetings that focus on best practices and industry trends. Because the account executives we hire generally have significant sales experience, they can begin marketing our services after limited training on our model and systems.

Competition

We operate in the print industry and several print-related industries, including paper and pulp, graphics art and digital imaging and fulfillment and logistics. As a result, we compete on some level with virtually every company that is involved in printing, from printers to graphic designers, pre-press firms, paper manufacturers and fulfillment companies.

 

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Our primary competitors are printers that employ traditional methods of marketing and selling their printed materials. The printers with which we compete generally own and operate their own printing equipment and typically serve clients only within the specific product categories and print types that their equipment produces. Some of these printers, such as Quad/Graphics, Quebecor and R.R. Donnelley, have larger client bases and significantly more resources than we do.

We also compete with a number of print distributors and brokers. These competitors generally do not own or operate printing equipment, and typically work with a limited number of suppliers and have minimal financial investment in the quality of the products produced for their clients. Our industry experience indicates that several of these competitors, such as Cirqit, Workflow/Relizon and Newline/Noosh, offer print procurement services or enterprise software applications for the print industry.

The principal elements of competition in print procurement are price, product quality, customer service and reliability. Although we believe our business delivers products and services on competitive terms, our business and the print procurement industry are relatively new and are evolving rapidly. Print buyers may prefer to utilize the traditional services offered by the printers with whom we compete. Alternatively, some of these printers may elect to compete with us directly by offering print procurement services or enterprise software applications, and their well-established client relationships industry knowledge, brand recognition, financial and marketing capabilities, technical resources and pricing flexibility may provide them with a competitive advantage over us.

Intellectual Property

We rely primarily on a combination of copyright, trademark and trade secret laws and restrictions to protect our intellectual property rights. We also protect our proprietary technology through confidentiality and non-disclosure agreements with our employees and independent contractors.

Our IT infrastructure provides a high level of security for our proprietary database. The storage system for our proprietary data is designed to ensure that power and hardware failures do not result in the loss of critical data. The proprietary data is protected from unauthorized access through a combination of physical and logical security measures, including firewalls, antivirus software, anti-spy software, passwords and physical security, with access limited to authorized IT personnel. In addition to our security infrastructure, our system is backed up daily to prevent the loss of our proprietary data due to catastrophic failures or natural disasters. We test our IT recovery ability semi-annually to verify that we can recover our business critical systems in a timely fashion.

 

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Properties

Our principal executive offices are located in Chicago, Illinois. We also maintain sales offices in New York, California, Hawaii, Michigan and Missouri. We believe that our facilities are generally suitable to meet our needs for the foreseeable future. However, we will continue to seek additional space as needed to satisfy our growth. We conduct our business from the properties listed below, all of which are leased. The terms of the leases vary and have expiration dates ranging from January 31, 2007 to December 1, 2015.

 

Location    Use

Chicago, Illinois

   Corporate Headquarters

Carol Stream, Illinois

   Business Development

New York, New York

   Business Development and Warehousing

Del Rey Oaks, California

   Business Development

El Cajon, California

   Business Development

Grover Beach, California

   Business Development

Roseville, California

   Business Development

Santa Clara, California

   Business Development

San Rafael, California

   Business Development and Warehousing

Hilo, Hawaii

   Business Development and Warehousing

Honolulu, Hawaii

   Business Development

Wailuku, Hawaii

   Business Development

Grand Rapids, Michigan

   Business Development

Kansas City, Missouri

   Business Development

Employees

As of September 30, 2006, we had 240 employees and independent contractors, consisting of 50 corporate staff, 76 procurement managers and 114 account executives. We consider our employee relations to be good.

Legal Proceedings

We are not a party to any material pending legal proceedings.

 

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MANAGEMENT

Executive Officers and Directors

The following table sets forth certain information concerning each of our executive officers and directors:

 

Name

   Age   

Position(s)

John R. Walter(1)(2)

   59    Chairman of the Board

Steven E. Zuccarini

   50    Chief Executive Officer, President and Director

Nicholas J. Galassi

   33    Chief Financial Officer and Secretary

Scott A. Frisoni

   35    Executive Vice President of Sales

Eric D. Belcher

   38   

Chief Operating Officer

Neil P. Graver

   35    Chief Technology Officer

Peter J. Barris(1)(2)

   55    Director

Sharyar Baradaran(1)(2)

   39    Director

Jack M. Greenberg(2)

   64    Director

Linda S. Wolf

   59    Director

(1)   Member of our audit committee.
(2)   Member of our compensation and nominating and corporate governance committees.

John R. Walter has served as our non-executive Chairman of the Board since May 2004. Since December 1997, Mr. Walter has been the Chairman, President and Chief Executive Officer of Ashlin Management Company, a private investment firm. Mr. Walter served as President and Chief Operating Officer of AT&T Corporation from October 1996 until his retirement in July 1997, and from 1989 to 1996, he served as Chairman, President and Chief Executive Officer of R.R. Donnelley & Sons Company. Mr. Walter serves on the board of directors of Deere & Company, Manpower, Inc., SNP Corporation Ltd. and VascoData Security International. He is also a trustee of Northwestern University and a director of Evanston Northwestern Healthcare and the Steppenwolf Theatre. He holds a bachelor’s degree from Miami University of Ohio.

Steven E. Zuccarini has served as our Chief Executive Officer since November 2004 and has served on our Board since May 2006. From September 2003 to November 2004, he was the President of the Global Solutions business unit at R.R. Donnelley & Sons Company, and from January 2000 to September 2003, he served as President of the Catalog & Retail business unit. Mr. Zuccarini joined R.R. Donnelley in 1979. Mr. Zuccarini serves on the board of directors of the Chicago Youth Centers and the Direct Marketing Education Foundation. Mr. Zuccarini holds a bachelor’s degree from Northwestern University.

Nicholas J. Galassi has served as our Chief Financial Officer since September 2004. From November 2001 to September 2004, Mr. Galassi was Vice President of Finance at Wolverine Trading, a global derivatives trading firm, and from May 2000 to November 2001, he was the Director of Finance at HA-LO Industries, Inc., a promotional products distributor. From September 1995 to July 1999, Mr. Galassi served as an auditor in the commercial business division of Arthur Andersen. Mr. Galassi is a certified public accountant and holds a bachelor’s degree from the University of Notre Dame.

Scott A. Frisoni has served as our Executive Vice President of Sales since March 2002. From March 1999 to March 2002, Mr. Frisoni was Chief Operating Officer of Decision Support at PurchasePro, a business-to-business software company, and from April 1997 to March 1999, he was Vice President of Sales at Magnitude Network. From May 1993 to April 1997, Mr. Frisoni was a sales executive at The Procter & Gamble Company. Mr. Frisoni holds a bachelor’s degree from Indiana University.

Eric D. Belcher has served as our Chief Operating Officer since December 2006. From June 2005 to December 2006, Mr. Belcher served as our Executive Vice President of Operations. Mr. Belcher served as Chief Operating Officer from March 2003 to June 2005 and as Chief Financial Officer from April 2001 to March 2003 of MAN Roland Inc., a printing equipment manufacturer and distributor. Mr. Belcher was also a director of MAN Roland, Inc. From 1995 to 2000, he led project teams at Marakon Associates, an international

 

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management consulting firm. Mr. Belcher holds a bachelor’s degree from Bucknell University and an MBA from the University of Chicago Graduate School of Business.

Neil P. Graver has served as our Chief Technology Officer since March 2006. From January 2003 to February 2006, Mr. Graver held the title of Director of Information Technology at CAEL, a benefits management company based in Chicago. From January 2002 to January 2003, he managed The Information Management Group’s internal systems. From January 2001 to December 2001, Mr. Graver was Information Systems Manager at Sega North America and from January 1999 to October 2001, he was web site manager at iOwn.com. Mr. Graver received a Bachelor of Science from Southern Illinois University and holds MCSE, MCSA and MCT certificates.

Peter J. Barris has served on our Board since January 2006. Mr. Barris was elected pursuant to voting rights granted to New Enterprise Associates under our voting agreement, which was terminated upon the closing of our initial public offering in August 2006. Since 2000, Mr. Barris has been the Managing General Partner of New Enterprise Associates where he specializes in information technology investing. Mr. Barris also serves on the boards of directors of Vonage Holdings Corp., Boingo Wireless, Inc., eCommerce Industries, Inc., Hillcrest Laboratories, Inc., Mkt10, Inc., Neutral Tandem, Inc. and ProtoStar Ltd. He also serves on the Board of Directors of the National Venture Capital Association. Mr. Barris is a member of the Board of Trustees, Northwestern University; Board of Overseers, Tuck School at Dartmouth College; Board of Advisors, Tuck’s Center for Private Equity and Entrepreneurship at Dartmouth; and Board of Directors, Venture Philanthropy Partners. He received a Masters in Business Administration from Dartmouth College and a Bachelor of Science in Electrical Engineering from Northwestern University.

Sharyar Baradaran has served on our Board since May 2006. Mr. Baradaran was elected pursuant to voting rights granted to the former holders of our Series D preferred stock under our voting agreement, which was terminated upon the closing of our initial public offering in August 2006. Mr. Baradaran has served as Chief Executive Officer and chairman of BaradaranVentures, a privately held investment fund located in Los Angeles, California since April 2001. Mr. Baradaran currently serves on the board of directors of several high growth technology companies, including Rainmakers, Inc. and MOTA Inc. Mr. Baradaran also serves on the advisory boards of Echo Global Logistics Inc., ISENSIX Inc., and KIYON Inc.

Jack M. Greenberg has served on our Board since October 2005. Mr. Greenberg retired as Chairman and Chief Executive Officer of McDonald’s Corporation at the end of 2002. He had served as McDonald’s Chairman since May 1999 and as its Chief Executive Officer since August 1998. Mr. Greenberg served as McDonald’s President from August 1998 to May 1999, and as its Vice-Chairman from December 1991 to 1998. Mr. Greenberg also served as Chairman, from October 1996, and Chief Executive Officer, from July 1997, of McDonald’s USA until August 1998. He is a member of the American Institute of Certified Public Accountants, the Illinois CPA Society and the Chicago Bar Association. Mr. Greenberg serves as the non-executive Chairman of The Western Union Company and is a director of Abbott Laboratories, The Allstate Corporation, Hasbro, Inc. and Manpower Inc. He is also a member of the board of trustees of DePaul University, the Field Museum and the Chicago Community Trust. Mr. Greenberg is a graduate of DePaul University’s School of Commerce and School of Law.

Linda S. Wolf has served on our Board since November 2006. Ms. Wolf retired as Chairman and Chief Executive Officer of Leo Burnett Worldwide in April 2005. She had served as Leo Burnett Worldwide’s Chairman and Chief Executive Officer since January 2001 and as its Chief Executive Officer from July 1996 through December 2000. From March 1992 to June 1996 she was an Executive Vice President responsible for Business Development at Leo Burnett USA. Ms. Wolf is a director of Wal-Mart Stores Inc. and a trustee of Janus Funds. She is also a member of the Board of Trustees of the Field Museum, Children’s Memorial Hospital, Off the Street Club, The Chicago Council on Global Affairs and the Partnership for New Communities. Ms. Wolf holds a bachelor’s degree from Ohio Wesleyan University.

Board of Directors

Our Board of Directors consists of six directors and includes three committees: an audit committee, compensation committee and nominating and corporate governance committee. Each director is subject to election at each annual meeting of stockholders.

 

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We adhere to the Nasdaq Marketplace Rules in determining whether a director is independent. Our board of directors has determined that five of our six directors, Messrs. Walter, Barris, Baradaran, Greenberg and Ms. Wolf, are “independent directors” as defined in Rule 4200 of the Nasdaq Marketplace Rules.

Audit Committee

Our audit committee consists of John R. Walter, Peter J. Barris and Sharyar Baradaran. John R. Walter serves as the chairman of our audit committee. The audit committee reviews and recommends to the Board internal accounting and financial controls and accounting principles and auditing practices to be employed in the preparation and review of our financial statements. In addition, the audit committee has authority to engage public accountants to audit our annual financial statements and determine the scope of the audit to be undertaken by such accountants. John R. Walter is our audit committee financial expert under the SEC rule implementing Section 407 of the Sarbanes-Oxley Act of 2002.

Compensation Committee

Our compensation committee consists of John R. Walter, Jack M. Greenberg, Peter J. Barris and Sharyar Baradaran. Jack M. Greenberg serves as the chairman of our compensation committee. The compensation committee is responsible for, among other things, reviewing and approving compensation of our Chief Executive Officer and our other executive officers. Additionally, the compensation committee reviews and recommends to our Chief Executive Officer and the Board policies, practices and procedures relating to the compensation of managerial employees and the establishment and administration of certain employee benefit plans for managerial employees. The compensation committee has the authority to administer our Stock Incentive Plan, and advise and consult with our officers regarding managerial personnel policies.

Nominating and Corporate Governance Committee

Our nominating and corporate governance committee consists of John R. Walter, Jack M. Greenberg, Peter J. Barris and Sharyar Baradaran. John R. Walter serves as the chairman of our nominating and corporate governance committee. The nominating and corporate governance committee assists the Board with its responsibilities regarding:

 

  Ÿ   the identification of individuals qualified to become directors;

 

  Ÿ   the selection of the director nominees for the next annual meeting of stockholders; and

 

  Ÿ   the selection of director candidates to fill any vacancies on the Board.

Compensation Committee Interlocks and Insider Participation

None of the members of our compensation committee serves, or has at any time served, as an officer or employee of us or any of our subsidiaries. None of our executive officers has served as a member of the compensation committee, or other committee serving an equivalent function, of any other entity, one of whose executive officers served as a member of our compensation committee.

Limitation of Liability and Indemnification of Officers and Directors

Our certificate of incorporation provides that our directors and officers will be not personally liable for monetary damages to us for breaches of their fiduciary duty as directors or officers, except for any breach of their duty of loyalty to us or to our stockholders, acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, authorization of illegal dividends or redemptions or any transaction from which they derived an improper personal benefit from their actions. We have obtained insurance that insures our directors and officers against specified losses. In addition, our by-laws provide that our directors, officers and employees shall be indemnified by us to the fullest extent authorized by Delaware law, as it now exists or may in the future be amended, against all expense, liability and loss reasonably incurred or suffered by them in connection with their service for or on behalf of us.

 

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In addition, we have entered into separate indemnification agreements with our directors and executive officers. We believe that these provisions and agreements are necessary to attract and retain qualified persons as directors and executive officers. These indemnification agreements may require us to indemnify our directors and executive officers for related expenses, including attorneys’ fees, judgments, fines and amounts paid in settlement that were actually and reasonably incurred or suffered by a director or executive officer in an action or proceeding arising out of his or her service as one of our directors or executive officers.

Information about Mr. Eric P. Lefkofsky and Mr. Richard A. Heise, Jr.

Mr. Eric P. Lefkofsky and Mr. Richard A. Heise, Jr. were instrumental in the formation and the development of our company and served as directors until May 2006. Mr. Lefkofsky, who also has served our company as a consultant, is the husband of Elizabeth Kramer Lefkofsky, who controls Orange Media, LLC. Orange Media will own 0.5% of our common stock after this offering. Mr. Heise will own 1.4% of our common stock after this offering. Orange Media and Mr. Heise control Incorp, LLC, which will own 23.1% of our common stock after this offering.

 

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COMPENSATION DISCUSSION AND ANALYSIS

Overview

This compensation discussion describes the material elements of compensation awarded to, earned by, or paid to each of our executive officers who served as named executive officers during the last completed fiscal year. This compensation discussion focuses on the information contained in the following tables and related footnotes and narrative for primarily the last completed fiscal year, but we also describe compensation actions taken before or after the last completed fiscal year to the extent it enhances the understanding of our executive compensation disclosure.

Prior to our initial public offering in August 2006, our Board (and our Board of Managers when we were a limited liability company) oversaw and administered our executive compensation program. The compensation committee currently oversees the design and administration of our executive compensation program.

The principal elements of our executive compensation program are base salary, annual cash incentives, long-term equity incentives in the form of stock options, other benefits and perquisites, post-termination severance and acceleration of stock option vesting for certain named executive officers upon termination and/or a change in control. Our other benefits and perquisites consist of life and health insurance benefits, a qualified 401(k) savings plan and include reimbursement for certain medical insurance and automobile payments. Our philosophy is to position the aggregate of these elements at a level that is commensurate with our size and sustained performance.

Compensation Program Objectives and Philosophy

In General.    The objectives of our compensation programs are to:

 

    attract, motivate and retain talented and dedicated executive officers,

 

    provide our executive officers with both cash and equity incentives to further the interests of us and our stockholders, and

 

    provide employees with long-term incentives so we can retain them and provide stability during our growth stage.

Generally, the compensation of our executive officers is composed of a base salary, an annual incentive compensation award and equity awards in the form of stock options. In setting base salaries, the Board generally reviewed (and going forward the compensation committee will review) the individual contributions of the particular executive. The annual incentive compensation award for 2006 is a discretionary award determined by the compensation committee based on company performance and in 2007 will be based upon our annual incentive plan. In addition, stock options are granted to provide the opportunity for long-term compensation based upon the performance of our common stock over time.

Competitive Market.    We define our competitive market for executive talent and investment capital to be the technology and business services industries. To date, we have not engaged in the benchmarking of executive compensation but we may choose to do so in the future.

Compensation Process.    Prior to our initial public offering, our Board approved the compensation of our named executive officers, including the terms of their employment agreements. Our Board individually negotiated the employment agreements to retain key management and provide stability during our growth stage. Going forward, for each of our named executive officers, the compensation committee will review and approve all elements of compensation taking into consideration recommendations from our principal executive officer (for compensation other than his own), as well as competitive market guidance provided at the request of the compensation committee.

Regulatory Considerations.    We have designed our Annual Incentive Plan so that bonuses paid thereunder (beginning for 2007) will qualify as performance-based compensation under Section 162(m) of the Internal Revenue Code of 1986, as amended (the Code). Given the compensation cost to us of awarding stock options under recent accounting pronouncements, we will consider the size and frequency of any future stock option awards under our long-term equity incentive program.

 

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Base Salaries

In General.    We provide the opportunity for our named executive officers and other executives to earn a competitive annual base salary. We provide this opportunity to attract and retain an appropriate caliber of talent for the position, and to provide a base wage that is not subject to our performance risk. We review base salaries for our named executive officers annually in January and increases are based on our performance and individual performance. The salary of our principal executive officer will be set by our compensation committee, but in accordance with his employment agreement, will not be less than $450,000 in 2007. Our Board, in negotiating his amended employment agreement in May 2006, determined that this salary increase from $300,000 in 2006 would provide a salary commensurate with Mr. Zuccarini’s experience and would recognize his contributions to our growth during the past three years. Based on the other named executive officers’ contributions to our growth, our Board also approved increases in the annual base salary rate from 2005 to 2006 for: Mr. Galassi, from $175,000 to $200,000; Mr. Belcher, from $175,000 to $225,000; and Mr. Frisoni, from $195,000 to $225,000.

Total Compensation Comparison.    Assuming a payout of 2006 incentive bonuses at target level, for 2006, base salaries accounted for approximately 47% of total compensation for the principal executive officer and 72% on average for our other named executive officers. In 2006, base salaries represented a high percentage of total compensation since three of our named executive officers received significant option awards in 2005 and none in 2006.

Annual Cash Incentives

In General.    We provide the opportunity for our named executive officers and other executives to earn an annual cash incentive award. We provide this opportunity to attract and retain an appropriate caliber of talent for the position and to motivate executives to achieve our annual business goals. We plan to review annual cash incentive awards for our named executive officers and other executives annually in January or February to determine award payments for the last completed fiscal year, as well as to establish award opportunities for the current fiscal year. Annual cash incentive awards for 2007 will be administered under our Annual Incentive Plan. Pursuant to the terms of his employment agreement, in addition to any bonus paid under the our Annual Incentive Plan, Mr. Zuccarini will receive an annual targeted bonus of $150,000 beginning for fiscal 2007 if our net income reaches targeted levels approved by our Board.

Target Award Opportunities.    Our 2006 awards are subject to the compensation committee’s discretion and may take into account corporate performance measures, including, but not limited to, revenues, EBITDA and net income. We establish annual target award opportunities expressed as a percentage of base salary paid during the fiscal year and maximum award payment limits expressed as a percentage of the target award. For the last completed fiscal year, annual cash incentive opportunities for the named executive officers are summarized below. There is no threshold or minimum bonus level for 2006.

 

     Annual Cash Incentive Award Opportunity
  

Target

Performance

   Maximum
Performance
   % Salary     $ Amount    % Target     $ Amount

Steven E. Zuccarini

   FY 2006    25 %   $ 75,000    200 %   $ 150,000

Nicholas J. Galassi

   FY 2006    15 %   $ 30,000    200 %   $ 60,000

Eric D. Belcher

   FY 2006    27.5 %   $ 61,875    200 %   $ 123,750

Scott A. Frisoni

   FY 2006    15 %   $ 33,750    200 %   $ 67,500

Neil P. Graver

   FY 2006    10 %   $ 11,800    200 %   $ 23,600

Individual Performance Goals.    There are no specific individual performance goals for 2006 incentive awards, but the compensation committee or the Board may exercise discretion and take into account individual performance in determining awards. For example, Mr. Belcher earned a special bonus of $26,000 in 2006 due to his role in the successful completion of strategic acquisitions.

Discretionary Adjustments.    For 2006, the incentive awards are subject to the compensation committee’s discretion. Under the Annual Incentive Plan, beginning in 2007, we may make adjustments to our overall corporate performance goals and our actual performance results that may cause differences between the numbers used for our

 

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performance goals and the numbers reported in our financial statements. These adjustments may exclude all or a portion of both the positive or negative effect of external events that are outside the control of our executives, such as natural disasters, litigation, or regulatory changes in accounting or taxation standards. These adjustments may also exclude all or a portion of both the positive or negative effect of unusual or significant strategic events that are within the control of our executives but that are undertaken with an expectation of improving our long-term financial performance, such as restructurings, acquisitions, or divestitures.

Total Compensation Comparison.     For the last completed fiscal year, target award opportunities accounted for approximately 12% of total compensation for the principal executive officer and 14% on average for our other named executive officers. In setting the target bonus amounts, our Board took into consideration that our named executive officers have significant equity interests in us through direct ownership of shares or prior option grants, which already provide them with performance incentives.

Long-term Equity Incentives

In General.    We provide the opportunity for our named executive officers and other executives to earn a long-term equity incentive award. Long-term incentive awards provide employees with the incentive to stay with us for longer periods of time, which in turn, provides us with greater stability during our period of growth. These awards also are less costly to us in the short term than cash compensation. We review long-term equity incentives for our named executive officers and other executives annually in January. For the last completed fiscal year, our long-term equity incentive program consisted of grants of stock options.

Stock Options.    For our named executive officers, our stock option program is based on grants that are individually negotiated in connection with employment agreements and other grants to our executives. We have traditionally used stock options as its form of equity compensation because stock options provide a relatively straightforward incentive for our executives, result in less immediate dilution of existing shareholders’ interests and, prior to our adoption of FAS 123(R), resulted in less compensation expense for us relative to other types of equity awards. On March 1, 2006 we granted Mr. Graver options to purchase 30,000 shares of common stock in connection with his commencement of employment. On May 8, 2006, at our request and to better align the value of his equity award with the long-term interests of our stockholders, Mr. Zuccarini agreed to amend his employment agreement to, among other things, eliminate his right to receive vested options to purchase 600,000 shares at an exercise price of $0.50 per share, which were subject to achievement of certain business and financial performance targets. As part of this amendment, Mr. Zuccarini received a grant of options to purchase 750,000 shares of common stock at an exercise price of $4.92 per share, which was the price paid by SNP Corporation Ltd. pursuant to it purchase of 254,065 of our shares in April 2006. The fair market value of our shares as of May 8, 2006 was later (in June 2006) determined by an independent valuation specialist to be $5.35 per share. All other grants of stock options to our employees were granted with exercise prices equal to or greater than the fair market value of our common stock on the respective grant dates. For a discussion of the determination of the fair market value of these grants, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies—Stock-Based Compensation.”

We do not time stock option grants to executives in coordination with the release of material non-public information. Our stock options have a 10-year contractual exercise term. In general, the option grants are also subject to the following post-termination and change in control provisions:

 

     
Event   Award Vesting    Exercise Term
Termination by Us for Reason Other than Cause, Disability or Death   Forfeit Unvested    Earlier of: (1) 1 Year or (2) Remaining Option Period
Disability or Death   Forfeit Unvested    Option Period
Termination for Cause   Forfeit Vested and Unvested    Expire
Other Termination   Forfeit Unvested    Earlier of: (1) Remaining Option Period or (2) 30 Days from Date of Termination
Change in Control   Accelerated*    *

 

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*   The compensation committee may provide that, in the event of a change in control, any outstanding awards that are unexercisable or otherwise unvested will become fully vested and immediately exercisable. If there is a termination of employment, the applicable termination provisions regarding exercise term will apply.

The vesting of certain of our named executive officers’ stock options is accelerated pursuant to the terms of their employment agreements in certain termination and/or change in control events. These terms are more fully described in “—Employment Agreements” and “—Potential Payments upon Termination or Change in Control.”

Total Compensation Comparison.    Assuming a payout of 2006 bonuses at target level, for the last completed fiscal year, long-term equity incentives accounted for approximately 39% of total compensation for the principal executive officer and 5% on average for our other named executive officers. Other than (i) the grant of stock options to Mr. Zuccarini in connection with the amendment of his employment agreement and surrender of his right to receive performance-based stock options (see “—Employment Agreements—Employment Agreement with Steven E. Zuccarini”) and (ii) the grant of stock options to Mr. Graver in connection with the commencement of his employment with us, there were no other grants of stock options to our named executive officers in 2006. The Board determined that our named executive officers had a sufficient equity stake in us, consisting of shares of common stock and/or existing options, to align their interests with ours and our stockholders and consequently there were no new grants in 2006 to our named executive officers other than as described in the preceding sentence.

Executive Benefits and Perquisites

In General.    We provide the opportunity for our named executive officers and other executives to receive certain perquisites and general health and welfare benefits. We also offer participation in our defined contribution 401(k) plan. We do not match employee contributions under our 401(k) plan. We provide these benefits to provide an additional incentive for our executives and to remain competitive in the general marketplace for executive talent. For the last completed fiscal year, we provided the following personal benefits and perquisites to our named executives officers:

 

   
Executive Benefit    Description
Reimbursed Car Payments    Certain executives are reimbursed for their automobile lease payments.
Reimbursed Medical Insurance Premiums    We reimburse certain executives for their medical insurance premium payments.
Health Club Membership    Mr. Galassi’s membership dues are reimbursed.

Total Compensation Comparison.    Assuming a payout of 2006 bonuses at target level, for the last completed fiscal year, personal benefits and perquisites accounted for approximately 2% of total compensation for the principal executive officer and 7% on average for our other named executives officers.

Change in Control and Severance Benefits

In General.    We provide the opportunity for certain of our named executive officers to be protected under the severance and change in control provisions contained in their employment agreements. We provide this opportunity to attract and retain an appropriate caliber of talent for the position. Our severance and change in control provisions for the named executive officers are summarized in “—Employment Agreements” and “—Potential Payments upon Termination or Change in Control.” Our analysis indicates that our severance and change in control provisions are consistent with the provisions and benefit levels of other companies disclosing such provisions as reported in public SEC filings. We believe our arrangements are reasonable in light of the fact that cash severance is limited to two years for Mr. Zuccarini (at a rate of $50,000 per month) and one year for Messrs. Galassi, Belcher and Frisoni (at a rate equal to their then current base salary), there is no severance increase with a change in control and there are no “single trigger” benefits upon a change in control other than the vesting of Mr. Zuccarini’s option awards.

 

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EXECUTIVE COMPENSATION

The following table shows information concerning the annual compensation for services provided to us by our Chief Executive Officer, the Chief Financial Officer and our three other most highly compensated executive officers during 2006.

SUMMARY COMPENSATION TABLE

 

Name and Principal Position

  Year  

Salary

($)

 

Bonus (1)

($)

   

Option
Awards (2)

($)

 

All Other
Compensation (3)

($)

 

Total
Compensation (1)

($)

(a)   (b)   (c)   (d)     (f)   (i)   (j)

Steven E. Zuccarini

  2006   300,000   —       249,194   9,600   558,794

Chief Executive Officer

           

Nicholas J. Galassi

  2006   190,720   —       7,550   22,249   220,518

Chief Financial Officer

           

Eric D. Belcher

  2006   219,097   26,000 (4)   5,202   23,633   273,932

Chief Operating Officer

           

Scott A. Frisoni

  2006   224,375   —       8,750   18,645   251,770

Executive Vice President of Sales

           

Neil P. Graver

  2006   96,695   —       26,700   4,050   127,444

Chief Technology Officer (5)

           

(1)   Amounts of annual incentive awards are not yet available. These amounts will be determined in January or February 2007 and, together with the updated total compensation amount, will be disclosed in a Form 8-K at that time.

 

(2)   Valuation based on the dollar amount of option grants recognized for financial statement reporting purposes pursuant to FAS 123(R) with respect to 2006, except that, with respect to Mr. Galassi and Mr. Frisoni, the amounts reported in this column are $2,750 higher than the amounts reported in our financial statements. This additional expense shown in the summary compensation table results from requirements of the Securities and Exchange Commission to report option grants made prior to 2006 using the modified prospective transition method pursuant to FAS 123(R), whereas we use the prospective transition method pursuant to FAS 123(R). The assumptions used by us with respect to the valuation of option grants are set forth in “InnerWorkings, Inc. Condensed Consolidated Financial Statements—Notes to Financial Statements—Note 1—Summary of Significant Accounting Policies—Stock-Based Compensation.” The individual awards reflected in the summary compensation table are summarized below:

 

    

Grant

Date

   Number
of Shares
   Amount
Recognized in
Financial
Statements
2006 ($)

Steven E. Zuccarini

   5/8/2006    750,000    249,194

Nicholas J. Galassi

   10/1/2005    80,000    4,800

Eric D. Belcher

   9/14/2005    120,000    5,202

Scott A. Frisoni

   10/1/2005    100,000    6,000

Neil P. Graver

   3/1/2006    30,000    26,700

 

(3)   Consists of reimbursed car payments for Mr. Zuccarini, reimbursed car payments and reimbursed medical insurance premiums for Messrs. Belcher and Frisoni, reimbursed car payments, reimbursed medical insurance premiums and health club dues for Mr. Galassi and reimbursed medical insurance premiums for Mr. Graver.

 

(4)   Special discretionary bonus earned in 2006 upon successful completion of strategic acquisitions.

 

(5)   Joined us on March 1, 2006.

 

For a description of the material terms of employment agreements with our named executive officers, see “—Employment Agreements.”

 

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GRANTS OF PLAN-BASED AWARDS (1)

The following table summarizes our awards made to our named executive officers under any plan in 2006.

 

Name

   Grant
Date
   Approval
Date (2)
   All Other Option
Awards: Number
of Securities
Underlying
Options (#)
   Exercise or
Base Price of
Option
Awards ($/Sh)
   Grant Date
Fair Value
of Stock
and Option
Awards
($)(3)
  

Grant Date

Fair Market

Value of

a Share

($/Sh)(4)

(a)    (b)         (j)    (k)    (l)     

Steven E. Zuccarini

   5/8/2006    5/3/2006    750,000    4.92    2,317,500    5.35(4)

Nicholas J. Galassi

   —      —      —      —      —      —  

Eric D. Belcher

   —      —      —      —      —      —  

Scott A. Frisoni

   —      —      —      —      —      —  

Neil P. Graver

   3/1/2006    2/8/2006    30,000    4.92    80,100    4.92

(1)   Each award was granted under the InnerWorkings, LLC 2004 Unit Option Plan, which was later merged into the InnerWorkings, Inc. 2006 Stock Incentive Plan.

 

(2)   Mr. Zuccarini’s grant was approved by the Compensation Committee on May 3, 2006 and ratified by the Board of Directors on May 9, 2006. Mr. Graver’s grant was approved by an authorized officer of ours on February 8, 2006, to be effective on March 1, 2006, the date Mr. Graver commenced employment.

 

(3)   Valuation assumptions are found under “InnerWorkings, Inc. Condensed Consolidated Financial Statements —Notes to Financial Statements—Note 1—Summary of Significant Accounting Policies—Stock-Based Compensation.”

 

(4)   See discussion regarding May 8, 2006 option grant contained in “Management’s Discussion and Analysis—Critical Accounting Policies—Stock-Based Compensation.”

Employee Benefits Plans

2004 Unit Option Plan

Effective January 1, 2004, we adopted the InnerWorkings, LLC 2004 Unit Option Plan. The principal purpose of the Unit Option Plan has been to attract, retain and reward selected employees, consultants and directors through the granting of non-qualified stock options.

Upon adoption in 2006 of our Stock Incentive Plan, the Unit Option Plan was merged into the Stock Incentive Plan and ceased to separately exist. Except with respect to rights that may be protected under prior award agreements, outstanding awards under the Unit Option Plan are now subject to the Stock Incentive Plan. No additional awards may be made under the Unit Option Plan on or after the effective date of the Stock Incentive Plan.

Stock Incentive Plan

We have adopted the InnerWorkings, Inc. 2006 Stock Incentive Plan, which replaces the Unit Option Plan. The principal purpose of the Stock Incentive Plan is to attract, motivate, reward and retain selected employees, consultants and directors through the granting of stock-based compensation awards. The Stock Incentive Plan provides for a variety of awards, including non-qualified stock options, incentive stock options (within the meaning of Section 422 of the Code), stock appreciation rights, restricted stock awards, performance-based awards and other stock-based awards.

 

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Administration.    The Stock Incentive Plan is administered by our compensation committee. The compensation committee may in certain circumstances delegate certain of its duties to one or more of our officers. The compensation committee has the power to interpret the Stock Incentive Plan and to adopt rules for the administration, interpretation and application of the plan according to its terms.

Grant of Awards; Shares Available for Awards.     Certain employees, consultants and directors are eligible to be granted awards under the plan. The compensation committee will determine who will receive awards under the plan, as well as the form of the awards, the number of shares underlying the awards, and the terms and conditions of the awards consistent with the terms of the plan.

The total number of shares of our common stock initially available for issuance or delivery under our Stock Incentive Plan is 1,000,000 shares. The number of shares of our common stock issued or reserved pursuant to the Stock Incentive Plan will be adjusted in the discretion of our Board or the compensation committee as a result of stock splits, stock dividends and similar changes in our common stock. In addition, shares subject to grant under our prior unit option plans (including shares under such plans that expire unexercised or are forfeited, terminated, canceled or withheld for income tax withholding) shall be merged and available for issuance under the Stock Incentive Plan, without reducing the aggregate number of shares available for issuance reflected above.

Stock Options.    The Stock Incentive Plan permits the compensation committee to grant participants incentive stock options, which qualify for special tax treatment in the United States, as well as non-qualified stock options. The compensation committee will establish the duration of each option at the time it is granted, with a maximum ten-year duration for incentive stock options, and may also establish vesting and performance requirements that must be met prior to the exercise of options. Stock option grants (other than incentive stock option grants) also may have exercise prices that are less than, equal to or greater than the fair market value of our common stock on the date of grant. Incentive stock options must have an exercise price that is at least equal to the fair market value of our common stock on the date of grant. Stock option grants may include provisions that permit the option holder to exercise all or part of the holder’s vested options, or to satisfy withholding tax liabilities, by tendering shares of our common stock already owned by the option holder for at least six months (or another period consistent with the applicable accounting rules) with a fair market value equal to the exercise price.

Stock Appreciation Rights.    The compensation committee may also grant stock appreciation rights, which will be exercisable upon the occurrence of certain contingent events. Stock appreciation rights entitle the holder upon exercise to receive an amount in any combination of cash, shares of our common stock (as determined by the compensation committee) equal in value to the excess of the fair market value of the shares covered by the stock appreciation right over the exercise price of the right, or other securities or property owned by us.

Other Equity-Based Awards.    In addition to stock options and stock appreciation rights, the compensation committee may also grant certain employees, consultants and directors shares of restricted stock, restricted stock rights, dividend equivalents, performance-based awards or other stock-based awards, with terms and conditions as the compensation committee may, pursuant to the terms of the Stock Incentive Plan, establish. The Stock Incentive Plan also allows awards to be made in conjunction with a participant’s election to defer compensation in accordance with the rules of Section 409A of the Code.

Change-in-Control Provisions.    In connection with the grant of an award, the compensation committee may provide that, in the event of a change in control, any outstanding awards that are unexercisable or otherwise unvested will become fully vested and immediately exercisable.

Amendment and Termination.    The compensation committee may adopt, amend and rescind rules relating to the administration of the Stock Incentive Plan, and amend, suspend or terminate the Stock Incentive Plan, but no amendment will be made that adversely affects in a material manner any rights of the holder of any award without the holder’s consent, other than amendments that are necessary to permit the granting of awards in compliance with applicable laws. We have attempted to structure the Stock Incentive Plan so that remuneration attributable to stock options and other awards will not be subject to a deduction limitation contained in Section 162(m) of the Code.

 

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Annual Incentive Plan

We have adopted the InnerWorkings Annual Incentive Plan (the Annual Incentive Plan) that rewards employees for meeting and exceeding annual performance goals established by the compensation committee based on one or more criteria set forth in the Annual Incentive Plan. The Annual Incentive Plan will be used to set bonus targets and pay bonuses beginning in 2007.

Eligibility to participate in the Annual Incentive Plan is limited to substantially all regular full-time and part-time employees. Temporary employees, any independent contractors, and certain other specified classifications are not eligible to participate in the Annual Incentive Plan.

Employees are eligible to receive bonuses based on meeting operational and financial goals that may be stated (a) as goals of the company, a subsidiary, or a portion thereof, (b) on an absolute basis and/or relative to other companies, or (c) separately for one or more participants or business units. The objective performance goals for the Annual Incentive Plan are established by our compensation committee at the beginning of the year. Bonus payouts are determined within a reasonable time after the end of the performance period.

Our compensation committee will administer the Annual Incentive Plan and will have the authority to construe, interpret and implement the Annual Incentive Plan and prescribe, amend and rescind rules and regulations relating to the Annual Incentive Plan. The determination of the compensation committee on all matters relating to the Annual Incentive Plan or any award agreement will be final, binding and conclusive. The Annual Incentive Plan may be amended or terminated by the compensation committee or our Board. However, the Annual Incentive Plan may not be amended without the prior approval of our stockholders, if such approval is necessary to qualify bonuses as performance-based compensation under Section 162(m) of the Code.

 

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OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

The following table summarizes the number of securities underlying outstanding plan awards for each named executive officer as of December 31, 2006.

 

     Option Awards

Name

  

Number of
Securities Underlying
Unexercised Options (#)

Exercisable

  

Number of
Securities Underlying
Unexercised Options (#)

Unexercisable

    Option Exercise
Price ($)
   Option Expiration
Date
(a)    (b)    (c)     (e)    (f)

Steven E. Zuccarini

   1,367,167        0.50    11/05/2014
      750,000 (1)   4.92    05/08/2016

Nicholas J. Galassi

   100,000        0.50    09/01/2014
   25,000        0.65    07/15/2015
   40,000    40,000 (2)   0.65    10/01/2015

Eric D. Belcher

   105,000        1.00    07/20/2015
   40,000    80,000 (3)   0.65    09/14/2015
   50,000    50,000 (4)   1.00    10/01/2015

Scott A. Frisoni

   25,000        0.65    07/15/2015
   50,000    50,000 (2)   0.65    10/01/2015

Neil P. Graver

   10,000    20,000 (5)   4.92    03/01/2016

(1)   These options vest in six equal annual installments beginning on May 8, 2007.

 

(2)   These options vest on October 1, 2007.

 

(3)   These options vest in two equal annual installments beginning on June 20, 2007.

 

(4)   These options vest on June 20, 2007.

 

(5)   These options vest in two equal annual installments beginning on September 1, 2007.

 

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OPTION EXERCISES AND STOCK VESTED

The following table summarizes stock option exercises by our named executive officers in 2006.

    

Option Awards

   Stock Awards

Name

  

Number of Shares
Acquired on

Exercise (#)

   Value Realized on
Exercise ($)
   Number of Shares
Acquired on
Vesting (#)
   Value Realized on
Vesting ($)
(a)    (b)    (c)    (d)    (e)

Steven E. Zuccarini

  

132,833

   587,122(1)      

Nicholas J. Galassi

  

         —

            —      

Eric D. Belcher

            —             —      

Scott A. Frisoni

            —             —      

Neil P. Graver

            —             —      

(1)   Value based on aggregate difference between the closing market price on the date of exercise and the exercise price.

Pension Benefits

We do not sponsor any qualified or non-qualified defined benefit plans.

Nonqualified Deferred Compensation

We do not maintain any non-qualified defined contribution or deferred compensation plans. The Compensation Committee, which is comprised solely of “outside directors” as defined for purposes of Section 162(m) of the Code, may elect to provide our officers and other employees with non-qualified defined contribution or deferred compensation benefits if the Compensation Committee determines that doing so is in our best interests. We sponsor a tax qualified defined contribution 401(k) plan in which Messrs. Belcher, Frisoni and Graver participate.

Employment Agreements

Employment Agreement with Steven E. Zuccarini

We entered into an employment agreement with Steven E. Zuccarini, our Chief Executive Officer, in November 2004 and amended the agreement in May 2006. The employment agreement provides that the amount of Mr. Zuccarini’s base salary will be determined annually by our Board, but will not be less than $450,000 commencing in 2007. Also commencing in 2007, Mr. Zuccarini will receive an annual bonus of $150,000 in the event target levels of net income approved by our Board are exceeded. In addition, Mr. Zuccarini will be eligible to receive an annual bonus based on performance targets approved by our Board.

In connection with the execution of his employment agreement in November 2004, Mr. Zuccarini received options to purchase 1,500,000 shares of common stock at an exercise price of $0.50 per share. These options vested upon the completion of our initial public offering. As of December 31, 2006, 1,367,167 of these options remained outstanding.

In connection with his November 2004 employment agreement, Mr. Zuccarini also became entitled to receive fully vested options to purchase 600,000 shares of common stock at an exercise price of $0.50 per share, subject to the achievement of certain business and financial performance targets. In May 2006, at our request and to better align the value of this equity award with the long-term interests of the stockholders, Mr. Zuccarini agreed to amend his employment agreement to eliminate his rights to these options. As part of this amendment, Mr. Zuccarini received a grant of options to purchase 750,000 shares of common stock at an exercise price of $4.92 per share, which was the price per share paid by SNP Corporation Ltd. pursuant to its purchase of 254,065 of our shares in April 2006. These options will vest ratably over six years at a rate of 125,000 per year. Vesting of these options will accelerate in the event of a change of control (as defined in the agreement).

 

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Mr. Zuccarini’s employment agreement may be terminated, with or without cause, by our Board. If we terminate the employment agreement for cause (as defined in the agreement) or on account of death or disability or if Mr. Zuccarini terminates the agreement for any reason other than a good reason (as defined in the agreement), Mr. Zuccarini is entitled to no further compensation or benefits other than those earned through the date of termination. If we terminate the agreement for any reason other than for cause, death or disability, we will provide the following severance benefits:

 

    continued payment of cash compensation at a rate of $600,000 per year for two years following termination,

 

    additional vesting of his options that would have otherwise vested if he had remained employed by us during the two years following the termination of his employment, and

 

    continued employee benefits for a period of two years following the termination of his employment or until comparable benefits are provided by a new employer.

Mr. Zuccarini’s employment agreement expires in November 2012.

Employment Agreements with Other Executive Officers

In addition to the employment agreement with Mr. Zuccarini, we have entered into employment agreements with Nicholas J. Galassi, Eric D. Belcher and Scott A. Frisoni. The employment agreements generally provide for a base salary and eligibility to receive an annual performance bonus up to a specified percentage of base salary. The actual amount of the annual bonus is discretionary and determined based upon the executive’s performance, our performance and certain performance targets approved by our Board (and by the compensation committee under our Annual Incentive Plan). The agreements also grant options to purchase shares of common stock and contain customary non-competition and non-solicitation provisions.

The agreements may be terminated, with or without cause, by the executive, the Chief Executive Officer or our Board. If the executive’s employment is terminated by us for cause (as defined in the agreements), on account of death or disability or if the executive terminates his own employment for any reason other than for good reason (as defined in the agreements), the executive is entitled to no further compensation or benefits other than those earned through the date of termination. If the executive’s employment is terminated by us for any reason other than for cause, death or disability, or if the executive terminates his own employment for good reason, we will provide the following severance benefits: (i) continued payment of base salary for 12 months following termination and (ii) immediate vesting of any options that would have been exercisable in the next two years, as if the executive’s employment had continued for the two-year period (for Mr. Belcher, this clause (ii) only applies upon termination in connection with a change in control).

If, during the three months prior to the public announcement of a proposed change of control (as defined in the agreements), or 12 months following a change of control, the executive’s employment is terminated by us for any reason other than cause, or terminated by the executive for good reason, the executive is generally entitled to the same benefits described above. The employment agreements with Messrs. Galassi and Frisoni expire in December 2007, and the employment agreement with Mr. Belcher expires in June 2008.

 

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POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL

Assuming the employment of our named executive officers were to be terminated without cause or for good reason, each as of December 31, 2006, the following individuals would be entitled to payments in the amounts set forth opposite to their name in the below table:

 

    

Cash Severance

Steven E. Zuccarini

   $50,000 per month for 24 months

Nicholas J. Galassi

   $16,667 per month for 12 months

Eric D. Belcher

   $18,750 per month for 12 months

Scott A. Frisoni

   $18,750 per month for 12 months

Neil P. Graver

   None

We are not obligated to make any cash payments to these executives if their employment is terminated by us for cause or by the executive not for good reason. No severance or benefits are provided for any of the executive officers in the event of death or disability. A change in control does not affect the amount or timing of these cash severance payments.

Assuming the employment of our named executive officers were to be terminated without cause or for good reason, each as of December 31, 2006, the following individuals would be entitled to accelerated vesting of their outstanding stock options described in the table below:

 

    

Value of Equity Awards: Termination
Without Cause or For Good Reason (1)

  

Value of Equity Awards:

In Connection With a Change in Control (1)

Steven E. Zuccarini

  

Additional vesting that would have otherwise vested if employed during 24 months after termination.

250,000 options with value of $2,760,000

  

Fully Vested.

750,000 options with value of $8,280,000

Nicholas J. Galassi

  

Immediate vesting of next 2 year’s options as if employment continued for 24 months after termination.

40,000 options with value of $612,400

  

Upon termination, immediate vesting of next 2 year’s options as if employment continued for 24 months after termination.

40,000 options with value of $612,400

Eric D. Belcher

   None   

Upon termination, immediate vesting of next 2 full year’s options as if employment continued for 2 years after termination.

130,000 options with value of $1,972,800

Scott A. Frisoni

  

Immediate vesting of next 2 full year’s options as if employment continued for 24 months after termination.

50,000 options with value of $765,500

  

Upon termination, immediate vesting of next 2 full year’s options as if employment continued for 24 months after termination.

50,000 options with value of $765,500

Neil P. Graver

   None    None

(1)   Values are based on the aggregate difference between the respective exercise prices and the closing sale price of our common stock on December 29, 2006, which was $15.96 per share.

 

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In connection with a termination without cause or a termination for good reason, no payments are due unless the executive executes a general release and waiver of claims against us. During the executive’s employment and for a period of two (2) years following a termination for any reason (including a termination without cause or for good reason or a termination in connection with a change in control), the executive cannot, anywhere in the specified geographic region, directly or indirectly:

 

  (i)   perform services for, have any ownership interest in, or participate in the financing, operation, management or control of, any firm, partnership, corporation, or business that engages or participates in a competing business purpose;

 

  (ii)   induce or attempt to induce any customer, potential customer, supplier, licensee, licensor or business relation of ours to cease doing business with us, or in any way interfere with the such relationships or solicit the business of any customer or potential customer of ours; or

 

  (iii)   solicit, encourage, hire, or take any other action which is intended to induce or encourage, or has the effect of inducing or encouraging, any employee or independent contractor of ours to terminate his or her employment or relationship with us.

Additionally, in the event of a termination without cause or for good reason, Steven E. Zuccarini is entitled to receive benefits under any executive and employee benefit plans and/or insurance programs, as may be in effect, for twenty-four months following termination or until he becomes eligible for comparable benefits by virtue of new employment. Based on a December 31, 2006 termination, the benefits would have an estimated aggregate value of $28,066.

The following definitions apply to the termination and change in control provisions in the employment agreements.

A termination for “Cause” occurs if we terminate employment for the any of the following reasons:

 

  (i)   the executive’s failure to perform his reasonably assigned duties after written notice of such failure and a reasonable opportunity to remedy such failure;

 

  (ii)   theft, dishonesty, or falsification of any employment or our records by the executive;

 

  (iii)   the determination that the executive has committed an act or acts constituting a felony or any act involving moral turpitude;

 

  (iv)   the determination that the executive has engaged in willful misconduct or gross negligence that has had a material adverse effect on the our reputation or business; or

 

  (v)   the material breach by the executive of any provision of the employment agreement after written notice of such breach and a reasonably opportunity to cure such breach.

Per Mr. Zuccarini’s employment agreement, clause (i) above no longer applies to him after the completion of our initial public offering in 2006.

A termination for “Good Reason” occurs if the executive terminates his employment for any of the following reasons:

 

  (i)   we materially reduce the executive’s duties or responsibilities below what is customary for that executive’s position without the executive’s consent;

 

  (ii)   we require the executive to relocate his office more than 100 miles from our current office without his consent; or

 

  (iii)   we have breached the terms of the employment agreement and such breach continues for more than thirty (30) days after notice from the executive to us specifying the action which constitutes the breach and demanding its discontinuance.

 

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“Change in Control” means:

 

  (i)   An effective change of control pursuant to which any person or persons acting as a group acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) beneficial ownership of our stock representing more than thirty-five percent (35%) of the voting power of our then outstanding stock; provided, however, that a Change in Control will not be deemed to occur by virtue of any of the following acquisitions: (A) by us or any Affiliate, (B) by any employee benefit plan (or related trust) sponsored or maintained by us or any Affiliate, or (C) by any underwriter temporarily holding securities pursuant to an offering of such securities;

 

  (ii)   Any person or persons acting as a group acquires beneficial ownership of our stock that, together with our common stock already held by such person or group, constitutes more than fifty (50%) of the total fair market value or voting power of our then outstanding stock. The acquisition of our stock by us in exchange for property, which reduces the number of outstanding shares and increases the percentage ownership by any person or group to more than 50% of our then outstanding stock will be treated as a Change in Control;

 

  (iii)   Individuals who constitute the Board immediately after the Effective Date (the “Incumbent Directors”) cease for any reason to constitute at least a majority of the Board during any 12-month period; provided, however, that: (A) any person becoming a director subsequent thereto whose election or nomination for election was approved by a vote of a majority of the Incumbent Directors then on the Board (either by a specific vote or by approval of our proxy statement in which such person is named as a nominee for director, without written objection to such nomination) will be an Incumbent Director, provided that no individual initially elected or nominated as director as a result of an actual or threatened election contest with respect to directors or as a result of any other actual or threatened solicitation of proxies or consents by or on behalf of any person other than the Board will be deemed to be an Incumbent Director; and (B) a Change in Control will not be deemed to have occurred pursuant to this paragraph (iii) if, after the Board is reconstituted, the Incumbent Stockholders (as defined below) beneficially own our stock representing more than thirty-five percent (35%) voting power of our then outstanding stock; or

 

  (iv)   Any person or persons acting as a group acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) assets from us that have a total gross fair market value of at least forty percent (40%) of the total gross fair market value of all of our assets immediately prior to such acquisition. For purposes of this section, gross fair market value means the value of our assets, or the value of the assets being disposed of, without regard to any liabilities associated with such assets. The event described in this paragraph (iv) shall not be deemed to be a Change in Control if the assets are transferred to (A) any owner of our stock in exchange for or with respect to our stock, (B) an entity in which we own, directly or indirectly, at least fifty percent (50%) of the entity’s total value or total voting power, (C) any person that owns, directly or indirectly, at least fifty percent (50%) of our stock, or (D) an entity in which a person described in (iv)(C) above owns at least fifty percent (50%) of the total value or voting power. For purposes of this section, and except as otherwise provided, a person’s status is determined immediately after the transfer of the assets.

Notwithstanding the foregoing, shares of our stock beneficially owned by any of the following (collectively, the “Incumbent Stockholders”) will be excluded for purposes of determining a Change in Control: Incorp., LLC; Richard A. Heise, Jr.; Old Willow Partners, LLC: Heise Family 2005 Grantor Retained Annuity Trust; InnerWorkings Series C Investment Partners, LLC; Orange Media, LLC: Baradaran Revocable Trust; Sam Nazarian; Shula Nasarian Torbati; David and Angella Nazarian Family Trust; Anthony P. Bobulinski; Printworks, LLC; Printworks Series E, LLC; Younes & Soraya Nazarian Revocable Trust; Younes Nazarian 2006 Annuity Trust—Printworks; Soraya T. Nazarian 2006 Annuity Trust—Printworks; New Enterprise Associates 11, Limited Partnership; NEA Ventures 2005, Limited Partnership; or any of their respective affiliates, successors or assigns. In no event will a Change in Control be deemed to have occurred, with respect to

 

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the executive, if an employee benefit plan maintained by us or an Affiliate or the executive is part of a purchasing group that consummates the transaction that would otherwise result in a Change in Control. The employee benefit plan or the executive will be deemed “part of a purchasing group” for purposes of the preceding sentence if the plan or the executive is an equity participant in the purchasing company or group, except where participation is: (i) passive ownership of less than two percent (2%) of the stock of the purchasing company; or (ii) ownership of equity participation in the purchasing company or group that is otherwise not significant, as determined prior to the Change in Control by a majority of the non-employee continuing directors.

 

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DIRECTOR COMPENSATION

The following table summarizes compensation that our directors earned during 2006 for services as members of our Board.

 

 

Name (1)

  

Fees Earned or
Paid in Cash

($)

  

Options
Awards

($) (2)

  

All Other
Compensation

($)

  

Total

($)

John R. Walter

   —      132,903    —      132,903

Peter J. Barris

   —      —      —      —  

Sharyar Baradaran

   —      —      —      —  

Jack M. Greenberg

   —      12,000    —      12,000

Linda S. Wolf

   —      17,063    —      17,063

(1)   Eric P. Lefkofsky and Richard A. Heise, Jr. were our directors until May 2006, but received no compensation for their service as directors in 2006.
(2)   Valuation based on the dollar amount of option grants recognized for financial statement reporting purposes pursuant to FAS 123(R) with respect to 2006, except that, with respect to Mr. Greenberg, the amount reported in this column is $12,000 higher than the amount reported in our financial statements. This additional expense shown in the director compensation table attributable to Mr. Greenberg’s option award results from requirements of the Securities and Exchange Commission to report option grants made prior to 2006 using the modified prospective transition method pursuant to FAS 123(R), whereas we use the prospective transition method pursuant to FAS 123(R). The assumptions we used with respect to the valuation of option grants are set forth in “InnerWorkings, Inc. Condensed Consolidated Financial Statements—Notes to Financial Statements—Note 1—Summary of Significant Accounting Policies—Stock-Based Compensation.” The aggregate option awards outstanding for each person in the table set forth above as of December 31, 2006 are as follows:

 

Name

   Vested    Unvested    Exercise
Price
   Expiration
Date

Jack M. Greenberg

   50,000    50,000    $ 0.65    10/1/2015

John R. Walter

   1,200,000    —      $ 0.50    6/1/2014

John R. Walter

   —      400,000    $ 4.92    5/8/2016

Linda S. Wolf

   —      50,000    $ 16.41    11/15/2016

Mr. Walter’s options to purchase 400,000 shares are exercisable in 16.67% annual installments beginning May 8, 2007. Mr. Greenberg’s options are exercisable in 50% annual installments beginning June 20, 2006. Ms. Wolf’s options are exercisable in 25% annual installments beginning November 15, 2007. Mr. Barris and Mr. Baradaran have not received any stock options.

The grant date fair values of option grants to our directors in 2006 are as follows:

 

Name

   Options    Grant
Date
  

Grant Date
Fair Value

($)

John R. Walter

   400,000    05/08/2006    1,236,000

Linda S. Wolf

   50,000    11/15/2006    546,000

Assumptions for calculating the grant date fair values are found under “InnerWorkings, Inc. Condensed Consolidated Financial Statements—Notes to Financial Statements—Note 1—Summary of Significant Accounting Policies—Stock-Based Compensation.”

Summary of Director Compensation

We do not provide cash compensation to our directors for their services as members of the Board or for attendance at Board or committee meetings. However, our directors will be reimbursed for reasonable travel and other expenses incurred in connection with attending meetings of the Board and its committees. Under our Stock Incentive Plan, directors are eligible to receive stock option grants at the discretion of the compensation committee or other administrator of the plan.

In March 2004, we entered into an agreement with John R. Walter in connection with his election as Chairman of the Board. Under this agreement, Mr. Walter:

 

    purchased 100,000 shares of common stock at a price of $0.80 per share in March 2004,

 

    purchased 200,000 shares of common stock at a price of $0.80 per share in May 2005, and

 

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    received options to purchase an additional 1,200,000 shares of common stock at an exercise price of $0.50 per share in March 2004. All of these options are vested.

In connection with the March 2004 agreement, Mr. Walter also became entitled to receive fully vested options to purchase 300,000 shares of common stock at an exercise price of $0.50 per share, subject to the achievement of certain business and financial performance targets. In May 2006, at our request and to better align the value of this equity award with the long-term interests of the stockholders, Mr. Walter agreed to eliminate his rights to these options in exchange for the grant of options to purchase 400,000 shares of common stock at an exercise price of $4.92 per share, which was the price per share paid by SNP in April 2006. These options will vest ratably over six years at a rate of 66,666 per year. Vesting of these options will accelerate in the event of a change of control (as defined in Mr. Walter’s agreement).

In October 2005, we entered into a compensation agreement with Jack Greenberg in connection with his election to the Board. Pursuant to this agreement, we granted Mr. Greenberg options to purchase 100,000 shares of common stock at an exercise price of $0.65 per share. These options vest in two equal installments on June 30, 2006 and 2007, provided Mr. Greenberg continues to serve on the Board on such dates. Vesting of these options will accelerate in the event of a change of control (as defined in Mr. Greenberg’s agreement).

Upon her appointment to the Board on November 15, 2006, Ms. Wolf was granted options to purchase 50,000 shares of our common stock at an exercise price of $16.41 per share. These options have a term of ten years and vest in four equal annual installments beginning on November 15, 2007.

 

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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

In the ordinary course of our business and in connection with our financing activities, we have entered into a number of transactions with our directors, officers and 5% or greater stockholders. All of the transactions set forth below were approved by the unanimous vote of our Board of Directors. We believe that we have executed all of the transactions set forth below on terms no less favorable to us than we could have obtained from unaffiliated third parties. Our audit committee is responsible for approving related party transactions, as defined in applicable rules by the Securities and Exchange Commission. Our audit committee operates under a written charter pursuant to which all related party transactions are reviewed for potential conflicts of interest situations. Such transactions must be approved by our audit committee prior to consummation.

Recapitalization

On August 15, 2006, we recapitalized all outstanding shares of our Class A common stock, Class B common stock, Series B preferred stock, Series D preferred stock and Series E preferred stock into shares of our common stock on a one-for-one basis. In connection with the recapitalization, we made approximately $7.0 million of required preference and accrued dividend payments to the former holders of our Series B, D and E preferred shares.

Minority Interest in Echo Global Logistics, LLC

As of September 30, 2006, we owned 2,000,000 shares of Class A common stock, or 6.6%, of Echo Global Logistics, LLC, an enterprise transportation management firm, which we acquired in February 2005 for $125,000. Other than Linda S. Wolf, each member of our Board of Directors has a direct and/or an indirect ownership interest in Echo. Certain members of Echo (and their respective ownership interests in Echo) include:

 

  Ÿ   John R. Walter (3.1%), who also is a member of Echo’s Board of Directors,

 

  Ÿ   Old Willow Partners, LLC (0.14%), which is owned by Richard A. Heise, Jr.,

 

  Ÿ   Blue Media, LLC (0.14%), which is owned by Elizabeth Kramer Lefkofsky,

 

  Ÿ   Polygal Row, LLC (31.8%), the members of which include Old Willow, Blue Media, Steven E. Zuccarini, Nicholas J. Galassi, Scott A. Frisoni and Eric D. Belcher,

 

  Ÿ   Echo Global Logistics Series C Investment Partners, LLC (14.0%), the members of which include Steven E. Zuccarini and John R. Walter,

 

  Ÿ   Entities affiliated with New Enterprise Associates (15.6%),

 

  Ÿ   Younes & Soraya Nazarian Revocable Trust (9.75%), a beneficiary of which includes Sharon Baradaran, the wife of Sharyar Baradaran, and

 

  Ÿ   Frog Ventures, LLC (15.1%), the members of which include John R. Walter and Jack M. Greenberg.

We provide general administrative services to Echo, including financial management, legal, accounting, tax, treasury services, employee benefit plan and marketing services. As consideration for these services, Echo paid us approximately $194,000 and $29,152 during 2005 and the nine months ended September 30, 2006, respectively. In addition, Echo provided transportation services to us during 2005 and during the nine months ended September 30, 2006. As consideration for these services, we paid Echo approximately $209,000 and $519,996 during 2005 and the nine months ended September 30, 2006, respectively. We also sub-lease a portion of our office space to Echo. Effective January 1, 2006, we entered into a sub-lease agreement with Echo pursuant to which Echo leases approximately 20% of our office space for approximately $7,500 per month.

Effective October 1, 2006, we entered into a referral agreement with Echo pursuant to which Echo agreed to pay us a fee equal to 5% of its gross profit on jobs generated through our referral of new customers. Echo had paid us approximately $60,000 for such referrals.

Sales of Our Securities

We sold the following Class A common units, Series B preferred units, Series C preferred units and Series D preferred units of InnerWorkings, LLC and Series E preferred shares of InnerWorkings, Inc. to our

 

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directors, officers and 5% or greater stockholders and their respective affiliates, in private transactions on the dates set forth below. In June 2005, all of our Series C preferred units were converted on a one-for-one basis into Class A common units in accordance with the terms of the Series C preferred units. In connection with our conversion in January 2006, the outstanding units of InnerWorkings, LLC were converted into shares of InnerWorkings, Inc. on a one-for-one basis.

 

Name of Unitholder/Stockholder

  Class A
Common
Units
  Series B
Convertible
Preferred
Units
  Series C
Convertible
Preferred
Units
    Series D
Convertible
Preferred
Units
 

Series E

Convertible

Preferred
Shares

  Date of
Purchase
    Total
Purchase
Price

Incorp, LLC(1)

  9,500,000             1/7/03       (2)

Scott A. Frisoni

  300,000             2/15/03       (3)

InnerWorkings Series C Investment Partners, LLC(4)

  387,000     2,580,000 (5)       (6 )   $ 2,580,000

Incorp, LLC

  3,500,000             10/1/03       (2)

Printworks, LLC(5)

  100,000             11/14/03       (5)

John R. Walter

  100,000     -         3/25/04     $ 80,000

The Soraya Nazarian Annuity Trust 2003 dated 10/01/03

          640,000     8/19/04     $ 2,000,000

Incorp, LLC

  50,000             9/20/04       (7)

Incorp, LLC

  175,000             1/2/05       (8)

Printworks, LLC(5)

  300,000         320,000     2/25/05     $ 1,000,000

The Soraya Nazarian Annuity Trust 2003 dated 10/01/03

          640,000     2/25/05     $ 2,000,000

John R. Walter

  200,000             5/18/05     $ 160,000

Entities affiliated with New Enterprise Associates

            8,134,184   1/3/06     $ 40,000,000

Printworks Series E, LLC

            2,033,546   1/3/06     $ 10,000,000

(1)   Incorp, LLC is owned by the following individuals and entities: (i) Orange Media, LLC (43.49%), which is owned by Elizabeth Kramer Lefkofsky, (ii) Old Willow Partners, LLC (30.53%), which is controlled by Richard A. Heise, Jr., (iii) the Heise Family Grantor Retained Annuity Trust (15.58%), which is controlled by Mr. Heise, (iv) Scott A. Frisoni (1.36%), (v) Nicholas J. Galassi (0.99%) and (vi) non-related parties (8.05%). The Board of Managers of Incorp consists of Orange Media, Old Willow and Barry Friedland, one of our former directors.
(2)   These units were issued in connection with the sale of Insight, LLC by Incorp to InnerWorkings, LLC. See “—Acquisition of Insight, LLC.”
(3)   These units were issued to Scott A. Frisoni as partial compensation for his continued employment with InnerWorkings, LLC.
(4)   Richard A. Heise, Jr. is the managing member of InnerWorkings Series C Investment Partners, LLC. Series C Investment Partners was formed to facilitate our Series C financing and is owned by the following individuals and entities: (i) Mr. Heise (38.0%), (ii) Orange Media, LLC (1.9%) and (iii) non-related parties (60.1%). In June 2005, all of the Series C preferred units held by Series C Investment Partners were converted on a one-for-one basis into Class A common units in accordance with the terms of the Series C preferred units.
(5)  

In November 2003, InnerWorkings, LLC issued 100,000 Class A common units to Printworks as consideration for the business and investment relationship established as a result of Printworks’ investment in 1,000,000 Series C preferred units and 150,000 Class A common units through Series C Investment Partners. In February 2005, InnerWorkings, LLC redeemed the 1,000,000 Series C preferred units and 150,000 Class A common units that were held by Series C Investment Partners for the benefit of Printworks at a price of $1.00 per unit. Concurrently with this redemption, Printworks purchased 320,000 Series D preferred units and 150,000 Class A non-voting common units and InnerWorkings, LLC issued 150,000

 

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Class A non-voting common units to Printworks in replacement of the 150,000 Class A common units that it previously held indirectly through Series C Investment Partners.

(6)   These units were issued in a series of transactions that began in April 2003 and concluded in January 2004.
(7)   These units were issued to Incorp for the benefit of Nicholas J. Galassi as partial consideration for his continued employment with InnerWorkings, LLC.
(8)   InnerWorkings, LLC issued 50,000 of these units to Incorp for the benefit of Scott A. Frisoni and 125,000 of these units to Incorp for the benefit of Nicholas J. Galassi, in each case, as partial consideration for his continued employment with InnerWorkings, LLC.

Acquisition of Insight, LLC

In January 2003, we acquired 100% of the equity ownership of Insight, LLC (Insight) from Incorp in exchange for a total of 13,000,000 Class A common units, 9,500,000 of which were issued in January 2003 and 3,500,000 of which were issued in October 2003. Prior to the Insight transaction, Incorp owned 10,000,000 of our Class A common units, which represented 61.5% of the then total outstanding units of InnerWorkings, LLC.

Payments to Holders of Preferred Shares

Upon the completion of our initial public offering in August 2006, we made the following approximate payments:

 

    a $20,000 dividend payment to the former holders of our Series B preferred shares,

 

    a $5.135 million dividend and preference payment to the former holders of our Series D preferred shares, and

 

    a $1.835 million dividend and preference payment to the former holders of our Series E preferred shares.

Agreement with Zion Consulting, Inc.

In November 2003, we entered into a consulting agreement with Zion Consulting, Inc., a business consulting firm. Eric P. Lefkofsky is the president and sole stockholder of Zion Consulting. Through Zion Consulting, Mr. Lefkofsky has provided consulting services to us since our inception and to Incorp, LLC, our largest stockholder. Under the terms of this agreement, we paid approximately $34,000, $87,000, $90,000 and $79,600 to Zion Consulting for services rendered in 2003, 2004, 2005 and the six months ended June 30, 2006, respectively. We terminated this agreement as of June 30, 2006.

Sale of Units to Orange Media, LLC

In February 2002, InnerWorkings, LLC sold 57,812 Class A common units and 231,250 Series B preferred units to Orange Media, LLC. As consideration for the Class A common units and the Series B preferred units, Orange Media, LLC issued a demand note to InnerWorkings, LLC in the principal amount of $188,469. The note accrued interest at a fixed rate equal to 2.78%, which was due and payable on the date on which the principal amount of the note was paid. Orange Media, LLC is owned by Elizabeth Kramer Lefkofsky. The principal and accrued and unpaid interest on this note was paid by Orange Media in May 2006.

Transfer of Units to Incorp, LLC

In February 2004, InnerWorkings, LLC purchased a total of 2,400,000 Class A common units from two of our employee stockholders and re-issued the same number of Class A common units to Incorp. As consideration for these transactions, Incorp made cash payments totaling $100,000 to these stockholders and we agreed to eliminate the outstanding commission balances for each of these stockholders, which totaled $410,000 as of the date of the transfer, and to make monthly cash payments to these stockholders totaling $224,000 over a two-year period ending February 2006. We sub-lease a portion of our office space to Incorp. Effective January 1, 2006, we

 

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entered into a sub-lease agreement with Incorp pursuant to which Incorp leases approximately 20% of our office space for approximately $7,500 per month.

Series E Investment

In January 2006, we issued 10,167,730 Series E preferred shares, or approximately 25% of our equity interests on a fully-diluted basis, to New Enterprise Associates 11, Limited Partnership, NEA Ventures 2005, Limited Partnership and Printworks Series E, LLC in exchange for $50 million in cash, or $4.92 per share. We retained $10 million of these proceeds for working capital and general corporate purposes. We used the remaining $40 million of these proceeds to redeem Class A common shares held by our existing stockholders on a pro rata basis at a purchase price of $4.92 per share. In connection with this redemption, the following of our directors, officers and 5% or greater stockholders (or their respective affiliates) received the payments listed below:

 

Director, Officer

or 5% Stockholder

(or Affiliate)

 

Shares Redeemed

  Redemption
Payment
Amount

Incorp, LLC

  6,597,563 Class A common shares   $ 32,443,638

Orange Media, LLC

  24,214 Class A common shares     119,073

Old Willow Partners, LLC

  125,000 Class A common shares     614,690

InnerWorkings Series C Investment Partners, LLC

  402,263 Class A common shares     1,978,136

John R. Walter

  132,833 Class A common shares     653,209

Steven E. Zuccarini

  132,833 Class A common shares     653,209

Scott A. Frisoni

  71,951 Class A common shares     353,820

Mark D. Desky

  1,100 Class A common shares     5,409

Registration Rights

We granted piggyback registration rights to the former holders of our Series B, D and E preferred shares pursuant to the terms of an investor rights agreement that we entered into on January 3, 2006. The registration of shares being sold by certain selling stockholders is being made pursuant to these rights. For a more detailed description of these registration rights, see “Description of Capital Stock—Registration Rights.”

 

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PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information regarding beneficial ownership of our common stock prior to and after this offering:

 

  Ÿ   each person known to us to own beneficially more than 5% of our outstanding common stock;

 

  Ÿ   each of our executive officers named in the summary compensation table;

 

  Ÿ   each of our directors;

 

  Ÿ   all of our executive officers and directors as a group; and

 

  Ÿ   each selling stockholder.

The beneficial ownership of our common stock set forth in the table is determined in accordance with the rules of the Securities and Exchange Commission. We have 44,014,319 shares of common stock outstanding at January 4, 2007. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options or warrants held by that person that are currently exercisable or will become exercisable within 60 days after the date of this prospectus are considered outstanding, while these shares are not considered outstanding for purposes of computing percentage ownership of any other person. Unless otherwise indicated in the footnotes below, we believe based on information furnished to us, that the persons and entities named in the table have sole voting and investment power as to all shares of common stock beneficially owned.

Unless otherwise initiated, the address of each beneficial owner listed below is c/o InnerWorkings, Inc., 600 West Chicago Avenue, Suite 850, Chicago, Illinois 60610.

 

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Principal and selling stockholders


Name of beneficial owner

 

Shares of common stock beneficially

owned prior to this offering

 

Number of

shares of
common
stock to

be sold in
this offering

 

Number of

shares of
common stock
to be sold
in over-
allotment
option(1)

 

Shares of common stock beneficially

owned after this offering(1)

 

Options

exercisable

within

60 days

 

Total

Remaining

Shares and
Options

  Shares   Options   Total   %       Shares   Options   Total   %    

Selling Stockholders (other than Directors and Executive Officers)

                       

Incorp, LLC (2)

  14,755,835   —     14,755,835   33.5%   3,269,721   490,458   10,995,656   —     10,995,656   23.2%   —     10,995,656

Orange Media, LLC (3)

  318,617   —     318,617   *   67,441   10,116   241,059   —     241,059   *   —     241,059

Richard A. Heise, Jr. (4)

  883,293   —     883,293   2.0%   186,966   28,045   668,282   —     668,282   1.4%   —     668,282

Entities affiliated with New Enterprise Associates (5)

  8,134,184   —     8,134,184   18.5%   —     —     8,134,184   —     8,134,184   17.1%   —     8,134,184

c/o   New Enterprise Associates

        1119 St. Paul Street

        Baltimore, Maryland 21202

                       

Printworks Series E, LLC (6)

  1,931,920   —     1,931,920   4.4%   97,770   14,665   1,819,485   —     1,819,485   3.8%   —     1,819,485

Brian Tuffin

  7,036   —     7,036   *   1,489   223   5,323   —     5,323   *   —     5,323

The Scion Group

  70,363   —     70,363   *   14,894   2,234   53,235   —     53,235   *   —     53,235

Scott P. George Trust

  15,980   —     15,980   *   3,382   507   12,090   —     12,090   *   —     12,090

Richard A. Heise, Sr. Living Trust

  297,702   —     297,702   *   63,014   9,452   225,236   —     225,236   *   —     225,236

Anne Curley Zagar

  7,036   —     7,036   *   1,489   223   5,323   —     5,323   *   —     5,323

Russ Stepke

  35,181   —     35,181   *   7,447   1,117   26,617   —     26,617   *   —     26,617

Michael K. Reilly Trust

  112,581   —     112,581   *   23,830   3,574   85,177   —     85,177   *   —     85,177

Baradaran Revocable Trust

  748,000   —     748,000   1.7%   47,318   7,098   693,584   —     693,584   1.5%   —     693,584

Sam Nazarian

  491,500   —     491,500   1.1%   24,874   3,731   462,895   —     462,895   1.0%   —     462,895

Shula Nazarian Torbati

  272,000   —     272,000   *   13,765   2,065   256,170   —     256,170   *   —     256,170

David and Angella Nazarian Family Trust

  272,000   —     272,000   *   13,765   2,065   256,170   —     256,170   *   —     256,170

Younes & Soraya Nazarian Revocable Trust

  171,500   —     171,500   *   8,679   1,302   161,519   —     161,519   *   —     161,519

 

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Name of beneficial owner

 

Shares of common stock beneficially

owned prior to this offering

 

Number of

shares of
common
stock to

be sold in
this offering

 

Number of

shares of
common stock
to be sold
in over-
allotment
option(1)

 

Shares of common stock beneficially

owned after this offering(1)

 

Options

exercisable

within

60 days

 

Total

Remaining

Shares and
Options

  Shares   Options   Total   %       Shares   Options   Total   %    

Brian McCormack (7)

    1,529,637   —       1,529,637     3.5%      323,777     48,567     1,157,294   —       1,157,294     2.4%   —       1,157,294

SNP Corporation Ltd.

  199,651   —     199,651   *   42,260   6,339   151,052   —     151,052   *   —     151,052

William and Sandra Lefkofsky

  125,000   —     125,000   *   26,459   3,969   94,573   —     94,573   *   —     94,573

Mark D. Desky

  3,900   70,000   73,900   *   15,642   2,346   —     55,911   55,911   *   15,000   70,911

Joseph Del Preto

  —     10,000   10,000   *   2,117   318   —     7,566   7,566   *   —     7,566

George Keenan (8)

  122,371   —     122,371   *   25,902   3,885   92,584   —     92,584   *   —     92,584

Orazio Buzza (9)

  61,186      125,000   186,186   *   10,741   1,611   48,834      125,000   173,834   *   —     173,834

Robert Jordan

  196,457   —     196,457   *   41,584   6,238   148,636   —     148,636   *   —     148,636

Renee Simpson

  3,900   —     3,900   *   826   124   2,951   —     2,951   *   —     2,951

Barry Friedland (10)

  7,800   —     7,800   *   1,651   248   5,901   —     5,901   *   —     5,901

Robert Maus

  —     10,000   10,000   *   2,117   318   —     7,566   7,566   *   —     7,566

Robert Saldeen

  3,900   75,000   78,900   *   16,701   2,505   —     59,694   59,694   *   15,000   74,694

Brad Gerard

  —     9,500   9,500   *   2,011   302   —     7,188   7,188   *   —     7,188

Brian Gillespie

  —     5,000   5,000   *   1,058   159   —     3,783   3,783   *   —     3,783

James Pouba

  77,861   45,000   122,861   *   26,006   3,901   47,954   45,000   92,954   *   80,000   172,954

John Calzeretta

  —     5,000   5,000   *   1,058   159   —     3,783   3,783   *   —     3,783

JP Thomas

  —     5,000   5,000   *   1,058   159   —     3,783   3,783   *   —     3,783

Katherine Verhaalen

  —     500   500   *   106   16   —     378   378   *   —     378

Genji Leclair

  —     25,000   25,000   *   5,292   794   —     18,915   18,915   *   50,000   68,915

Marc Collins

  —     25,000   25,000   *   5,292   794   —     18,915   18,915   *   50,000   68,915

Michael Avery

  —     7,500   7,500   *   1,588   238   —     5,674   5,674   *   —     5,674

Michael Dorman

  —     11,500   11,500   *   2,434   365   —     8,701   8,701   *   —     8,701

Michael Gellert

  —     5,000   5,000   *   1,058   159   —     3,783   3,783   *   —     3,783

 

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Name of beneficial owner

 

Shares of common stock beneficially

owned prior to this offering

 

Number of

shares of
common
stock to

be sold in
this offering

 

Number of

shares of
common stock
to be sold
in over-
allotment
option(1)

 

Shares of common stock beneficially

owned after this offering(1)

 

Options

exercisable

after

60 days

 

Total

Remaining

Shares and
Options

  Shares   Options   Total   %       Shares   Options   Total   %    

Phil Kenny

  —     125,000   125,000   *        26,459       3,969   —     94,573   94,573   *   —     94,573

Rick Emanuel

  —     3,500   3,500   *   741   111   —     2,648   2,648   *   7,000   9,648

Ron Gabaldon

  —     15,000   15,000   *   3,175   476   —     11,349   11,349   *   15,000   26,349

Directors and Executive Officers

                       

John R. Walter (11)

  188,460   1,200,000   1,388,460   3.1%   232,510   34,876   —     1,121,074   1,121,074   2.3%   400,000   1,521,074

Steven E. Zuccarini (12)

  —     1,367,167   1,367,167   3.0%   276,052   41,408   —     1,049,707   1,049,707   2.2%   750,000   1,799,707

Jack M. Greenberg (13)

  21,293   50,000   71,293   *   15,091   2,264   3,939   50,000   53,939   *   50,000   103,939

Peter J. Barris (14)

    8,127,067   —       8,127,067   18.5%   —     —       8,127,067   —     8,127,067   17.1%   —     8,127,067

c/o   New Enterprise Associates

        1119 St. Paul Street

        Baltimore, Maryland 21202

                       

Sharyar Baradaran (15)

  748,000   —     748,000   1.7%   47,318   7,098   693,584   —     693,584   1.5%   —     693,584

Linda S. Wolf

  —     —     —     *   —     —     —     —     —     *   50,000   50,000

Nicholas J. Galassi (16)

  —     165,000   165,000   *   —     —     —     165,000   165,000   *   40,000   205,000

Scott A. Frisoni (17)

  253,049   75,000   328,049   *   —     —     253,049   75,000   328,049   *   50,000   378,049

Eric D. Belcher (18)

  —     195,000   195,000   *   41,275   6,191   —     147,533   147,533   *   130,000   277,533

Neil P. Graver (19)

  —     10,000   10,000   *   2,117   318   —     7,566   7,566   *   20,000   27,566

Executive officers and directors as a group (10 persons)

  9,337,869   3,062,167   12,400,036   26.3%   614,363   92,155   9,077,639   2,615,880   11,693,519   23.3%   1,490,000   13,183,519

 


*   Represents beneficial ownership of less than one percent of the outstanding common stock.

 

(1)   Assumes the over-allotment option is exercised in full.

 

(2)   Incorp, LLC is owned by the following individuals and entities: (i) Orange Media, LLC (43.49%), which is controlled by Elizabeth Kramer Lefkofsky, (ii) Old Willow Partners, LLC (30.53%), which is controlled by Richard A. Heise, Jr., (iii) the Heise Family Grantor Retained Annuity Trust (15.58%), which is controlled by Mr. Heise, (iv) Scott A. Frisoni (1.36%), (v) Nicholas J. Galassi (0.99%) and (vi) non-related parties (8.05%). The Board of Managers of Incorp consists of Orange Media, Old Willow and Barry Friedland, one of our former directors.

 

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(3)   Orange Media, LLC is controlled by Elizabeth Kramer Lefkofsky. Does not include 6,417,759 shares of common stock held by Incorp, LLC, which reflect Orange Media’s proportionate economic interest in the shares of common stock held by Incorp. Orange Media is one of our former directors.

 

(4)   Does not include 6,803,245 shares of common stock held by Incorp, LLC, which reflect Old Willow Partners, LLC’s and the Heise Family Grantor Retained Annuity Trust’s proportionate economic interests in the shares of common stock held by Incorp. Mr. Heise is one of our former directors.

 

(5)   Includes 8,127,067 shares of common stock held by New Enterprise Associates 11, Limited Partnership and 7,117 shares of common stock held by NEA Ventures 2005, L.P.

 

(6)   Sharon Baradaran, the wife of Sharyar Baradaran, owns 20% of Printworks Series E, LLC through various entities. Mr. Baradaran does not have voting and investment control with respect to the shares of common stock held by Printworks Series E, LLC and disclaims beneficial ownership of such shares, except to the extent of pecuniary interest therein.

 

(7)   Mr. McCormack is one of our former directors.

 

(8)   Mr. Keenan is one of our former directors.

 

(9)   Mr. Buzza is our former Chief Financial Officer.

 

(10)   Mr. Friedland is one of our former directors.

 

(11)   Includes 21,293 shares of common stock held by Ashlin Management Co. Mr. Walter is the President and Chief Executive Officer/Managing Member of Ashlin Management Co. Mr. Walter has sole voting and investment control with respect to the shares held by Ashlin Management Co. If the over-allotment option is exercised in full, Mr. Walter will sell 267,386 shares in this offering, representing approximately 15% of his aggregate shares of common stock and options to purchase shares of common stock, based on 188,460 shares and options to purchase 1,600,000 shares (400,000 of which are not included in the beneficial ownership table above due to the fact that they are not exercisable within 60 days) held by Mr. Walter immediately prior to this offering. 78,926 shares to be sold by Mr. Walter will be acquired pursuant to the exercise of options.

 

(12)   If the over-allotment option is exercised in full, Mr. Zuccarini will sell 317,460 shares in this offering, representing approximately 15% of his aggregate options to purchase shares of common stock, based on options to purchase 2,117,707 shares (750,000 of which are not included in the beneficial ownership table above due to the fact that they are not exercisable within 60 days) held by Mr. Zuccarini immediately prior to this offering. All the shares to be sold by Mr. Zuccarini will be acquired pursuant to the exercise of options.

 

(13)   Includes options to purchase 50,000 shares of common stock held for the benefit of members of Mr. Greenberg’s family. Mr. Greenberg has voting and investment control with respect to the shares underlying these options.

 

(14)   Includes 8,127,067 shares of common stock held by New Enterprise Associates 11, Limited Partnership. Mr. Barris shares voting and investment control with respect to the shares held by New Enterprise Associates 11, Limited Partnership in his capacity as a manager of NEA 11 GP, LLC, the sole general partner of NEA Partners 11, Limited Partnership, which is the sole general partner of New Enterprise Associates 11, Limited Partnership. Mr. Barris disclaims beneficial ownership of the shares held by New Enterprise Associates 11, Limited Partnership, except to the extent of his pecuniary interest in such shares.

 

(15)   Includes 748,000 shares of common stock held by the Baradaran Revocable Trust. Mr. Baradaran has voting and investment control with respect to these shares of stock. Does not include shares held by Sharon Baradaran, the wife of Sharyar Baradaran, through Printworks Series E, LLC.

 

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(16)   Does not include 145,995 shares of common stock held by Incorp, LLC, which represent Mr. Galassi’s proportionate economic interest in the shares of common stock held by Incorp. Mr. Galassi does not have voting or investment control with respect to these shares. Of these shares, 52,649 will be sold in this offering if the over-allotment option is exercised in full, representing approximately 15% of Mr. Galassi’s aggregate ownership interest, based on his proportionate economic interest in 145,995 shares held by Incorp and options to purchase 205,000 shares (40,000 of which are not included in the beneficial ownership table above due to the fact that they are not exercisable within 60 days) held by Mr. Galassi immediately prior to this offering.

 

(17)   Does not include 200,144 shares of common stock held by Incorp, LLC, which represent Mr. Frisoni’s proportionate economic interest in the shares of common stock held by Incorp. Mr. Frisoni does not have voting or investment control with respect to these shares. Of these shares, 86,728 will be sold in this offering if the over-allotment option is exercised in full, representing approximately 15% of Mr. Frisoni aggregate ownership interest, based on his proportionate economic interest in 200,144 shares held by Incorp, 253,049 shares and options to purchase 125,000 shares (50,000 of which are not included in the beneficial ownership table above due to the fact that they are not exercisable within 60 days) held by Mr. Frisoni immediately prior to this offering.

 

(18)   If the over-allotment option is exercised in full, Mr. Belcher will sell 47,466 shares in this offering, representing approximately 15% of his aggregate options to purchase shares of common stock, based on options to purchase 325,000 shares (130,000 of which are not included in the beneficial ownership table above due to the fact that they are not exercisable within 60 days) held by Mr. Belcher immediately prior to this offering. All the shares to be sold by Mr. Belcher will be acquired pursuant to the exercise of options.

 

(19)   If the over-allotment option is exercised in full, Mr. Graver will sell 2,435 shares in this offering, representing approximately 15% of his aggregate options to purchase shares of common stock, based on options to purchase 30,000 shares (20,000 of which are not included in the beneficial ownership table above due to the fact that they are not exercisable within 60 days) held by Mr. Graver immediately prior to this offering. All the shares to be sold by Mr. Graver will be acquired pursuant to the exercise of options.

 

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DESCRIPTION OF CAPITAL STOCK

General

The total amount of our authorized capital stock consists of 200,000,000 shares of common stock, $0.0001 par value, and 5,000,000 shares of preferred stock, $0.0001 par value. In July 2006, we adopted, and our stockholders approved, a recapitalization agreement, an amendment to our amended and restated certificate of incorporation, a second amended and restated certificate of incorporation and amended and restated by-laws. The discussion herein describes our capital stock, second amended and restated certificate of incorporation and amended and restated by-laws in effect as of the date of this prospectus. The following summary of certain provisions of our capital stock describes certain material provisions of, but does not purport to be complete and is subject to and qualified in its entirety by, our second amended and restated certificate of incorporation and amended and restated by-laws, which are included as exhibits to the registration statement of which this prospectus forms a part, and by the provisions of applicable law.

Common Stock

As of the date of this prospectus, there are 44,014,319 shares of common stock outstanding held by approximately 35 holders of record. Holders of common stock are entitled to one vote for each share held on all matters subject to a vote of stockholders, subject to the rights of holders of any outstanding preferred stock. Accordingly, holders of a majority of the shares of common stock entitled to vote in any election of directors may elect all of the directors standing for election, subject to the rights of holders of any outstanding preferred stock. Holders of common stock are entitled to receive ratably any dividends that the board of directors may declare out of funds legally available therefor, subject to any preferential dividend rights of outstanding preferred stock. Upon our liquidation, dissolution or winding up, the holders of common stock are entitled to receive ratably our net assets available after the payment of all debts and other liabilities and subject to the prior rights of holders of any outstanding preferred stock. Holders of common stock have no preemptive, subscription, redemption or conversion rights. There are no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of our capital stock are fully paid and nonassessable.

Preferred Stock

We are authorized to issue 5,000,000 shares of preferred stock, which may be issued from time to time in one or more series upon authorization by the Board of Directors. The Board of Directors, without further approval of the stockholders, is authorized to fix the number of shares constituting any series, as well as the dividend rights and terms, conversion rights and terms, voting rights and terms, redemption rights and terms, liquidation preferences and any other rights, preferences, privileges and restrictions applicable to each series of preferred stock. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could also adversely affect the voting power and dividend and liquidation rights of the holders of common stock. The issuance of preferred stock could also, under certain circumstances, have the effect of making it more difficult for a third party to acquire, or discouraging a third party from acquiring, a majority of our outstanding voting stock or otherwise adversely affect the market price of our common stock. It is not possible to state the actual effect of the issuance of any shares of preferred stock on the rights of holders of common stock until the Board of Directors determines the specific rights of that series of preferred stock.

Registration Rights

New Enterprise Associates 11, Limited Partnership, NEA Ventures 2005, L.P. and Printworks Series E, LLC, who collectively hold 10,066,104 shares of our common stock, have the right to require us to register the resale of their shares under the Securities Act pursuant the terms of an investor rights agreement among us, these holders and certain other holders. Subject to limitations specified in the agreement, these registration rights include the following:

Demand Registration Rights.    If holders of a majority of these 10,066,104 shares of our common stock request that we register all or a portion of these shares, we will also be required to register, upon request,

 

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2,346,964 shares of common stock held by the other holders party to the investor rights agreement, subject to limitations that the underwriters may impose on the number of shares included in the registration. We are only required to file two registration statements upon the exercise of these demand registration rights.

Piggyback Registration Rights.    If we propose to file a registration statement under the Securities Act to register our shares of common stock, New Enterprise Associates 11, Limited Partnership, NEA Ventures 2005, L.P., Printworks Series E, LLC and the other holders party to the investor rights agreement are entitled to notice of such registration and have the right, subject to limitations that the underwriters may impose on the number of shares included in the registration, to include their shares in the registration. These holders of our common stock also have the right to include their shares in our future registrations, including secondary offerings of our common stock.

Form S-3 Registration Rights.    If we become eligible to file registration statements on Form S-3 (which eligibility is expected to commence in August 2007), the holders party to the investor rights agreement, who collectively hold shares of our common stock, can require us to register their shares on Form S-3 if the aggregate offering price to the public is at least $10 million. We will not be required to effect more than two registrations on Form S-3 in any given calendar year and are not required to effect a registration on a Form S-3 during the period beginning 30 days prior to, and 90 days following, any public offering of our common stock, subject to certain exceptions.

Expenses of Registration.    With specified exceptions, we are required to pay all expenses of registration, including the fees and expenses of one legal counsel to the holders, up to a prescribed maximum amount, but excluding underwriters’ discounts and commissions.

The registration rights described above will terminate, with respect to any particular stockholder, upon the earlier of (i) an acquisition of us under certain circumstances or (ii) three years after the completion of the initial public offering, which was completed in August 2006. Each party to the investor rights agreement has agreed not to sell or otherwise dispose of any shares of our common stock for a period of 90 days, 45 days in the case of 850,000 shares, following the effective date of this offering.

Elimination of Liability in Certain Circumstances

Our certificate of incorporation eliminates the liability of our directors to us or our stockholders for monetary damages resulting from breaches of their fiduciary duties as directors. Directors remain liable for breaches of their duty of loyalty to us or our stockholders, as well as for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, and transactions from which a director derives improper personal benefit. Our certificate of incorporation does not absolve directors of liability for payment of dividends or stock purchases or redemptions by us in violation of Section 174 (or any successor provision of the Delaware General Corporation Law).

The effect of this provision is to eliminate the personal liability of directors for monetary damages for actions involving a breach of their fiduciary duty of care, including any such actions involving gross negligence. We do not believe that this provision eliminates the liability of our directors to us or our stockholders for monetary damages under the federal securities laws. The certificate of incorporation and by-laws also provide indemnification for the benefit of our directors and officers to the fullest extent permitted by the Delaware General Corporation Law as it may be amended from time to time, including most circumstances under which indemnification otherwise would be discretionary.

Number of Directors; Removal; Vacancies

We currently have six directors. Our by-laws provide that the number of directors may be changed by the board of directors. Vacancies on the board of directors may be filled only by the affirmative vote of a majority of the remaining directors then in office. Our by-laws provide that directors may be removed, with or without cause, at meetings of stockholders by the affirmative vote of the holders of a majority of the outstanding shares entitled to vote generally in the election of directors.

 

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Special Meetings of Stockholders; Limitations on Stockholder Action by Written Consent

Our certificate of incorporation provides that special meetings of our stockholders may be called only by our chairman of the board, our chief executive officer, our board of directors or holders of not less than a majority of the outstanding shares entitled to vote on the matter or matters for which the meeting is being called. Any action required or permitted to be taken by our stockholders must be effected at an annual or special meeting of stockholders and may not be effected by written consent unless the action to be effected and the taking of such action have been approved in advance by our board of directors.

Amendments; Vote Requirements

Certain provisions of our certificate of incorporation and by-laws provide that the affirmative vote of a majority of the shares entitled to vote on any matter is required to amend our certificate of incorporation or by-laws, including those provisions relating to action by written consent and the ability of stockholders to call special meetings.

Authorized but Unissued Shares

The authorized but unissued shares of common stock are available for future issuance without stockholder approval. These additional shares may be utilized for a variety of corporate purposes, including future public offerings to raise additional capital, corporate acquisitions, and employee benefit plans. The existence of authorized but unissued shares of common stock could render it more difficult or discourage an attempt to obtain control of us by means of a proxy contest, tender offer, merger or otherwise.

Advance Notice Requirements for Stockholder Proposals and Nomination of Directors

Our by-laws provide that stockholders seeking to bring business before an annual meeting of stockholders, or to nominate candidates for election as directors at an annual meeting of stockholders, must provide timely notice in writing. To be timely, a stockholder’s notice must be delivered to or mailed and received at our principal executive offices not less than 60 days nor more than 90 days prior to the anniversary date of the immediately preceding annual meeting of stockholders. However, in the event that the annual meeting is called for a date that is not within 30 days before or after such anniversary date, such notice will be timely only if received not later than the close of business on the tenth day following the date on which notice of the date of the annual meeting was mailed to stockholders or made public, whichever first occurs. Our by-laws also specify requirements as to the form and content of a stockholder’s notice.

Transfer Agent and Registrar

The transfer agent and registrar for our common stock is The Bank of New York.

Listing

Our common stock is listed on the Nasdaq Global Market under the symbol “INWK.”

 

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SHARES ELIGIBLE FOR FUTURE SALE

Following this offering, we will have 47,472,961 shares of common stock outstanding. After giving effect to the 3,458,642 shares of our common stock sold in this offering, 15,637,142 shares of our common stock will be freely tradable without restriction or further registration under the Securities Act, except that any shares purchased by our affiliates, as that term is defined in Rule 144, may generally only be sold in compliance with the limitations of Rule 144 described below.

31,835,819 shares of common stock outstanding following this offering will be “restricted securities” as the term is defined under Rule 144. We issued and sold these restricted securities in private transactions in reliance on exemptions from registration under the Securities Act. Restricted securities may be sold in the public market only if they are registered or if they qualify for an exemption under Rule 144 or Rule 701 under the Securities Act, as summarized below.

We have agreed with the underwriters that we will not, without the prior written consent of Morgan Stanley, issue any additional shares of common stock or securities convertible into, exercisable for or exchangeable for shares of common stock for a period of 90 days (subject to extensions) after the date of this prospectus, except that we may grant options to purchase shares of common stock under our stock incentive plan and issue shares of common stock upon the exercise of outstanding options and warrants.

Our officers and directors and certain of our other stockholders, who will hold an aggregate of 31,583,742 shares of common stock upon completion of this offering, have agreed that they will not, without the prior written consent of Morgan Stanley, offer, sell, pledge or otherwise dispose of any shares of our common stock or any securities convertible into or exercisable or exchangeable for, or any rights to acquire or purchase, any of our common stock, or publicly announce an intention to effect any of these transactions, for a period of 90 days (subject to extensions) after the date of this prospectus without the prior written consent of Morgan Stanley, except that (i) nothing will prevent any of them from exercising outstanding options and warrants and (ii) up to 850,000 shares of common stock may be disposed of by NEA Enterprise Associates II, Limited Partnership after 45 days (subject to extensions). These lock-up agreements are subject to such stockholders’ rights to transfer their shares of common stock as a bona fide gift or to a trust for the benefit of an immediate family member or to an affiliate, provided that such donee or tra