Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on May 10, 2006

 

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   36-4469346
(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

 

James J. Junewicz, Esq.

Mayer, Brown, Rowe & Maw LLP

71 South Wacker Drive

Chicago, Illinois 60606

Phone: (312) 782-0600

Fax: (312) 706-8157

 

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

   Proposed
maximum
aggregate
offering price (1)
  

Amount of

registration fee

Common Stock, $0.0001 par value

   $100,000,000    $10,700
           

 

  (1)   Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933.

 

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 contained 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 it is not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PROSPECTUS (Subject to Completion)

Issued May 10, 2006

 

                     Shares

 

LOGO

 

COMMON STOCK

 


 

InnerWorkings, Inc. is offering                 shares of its common stock and the selling stockholders are offering                 shares of common stock. We will not receive any proceeds from the sale of shares by the selling stockholders. This is our initial public offering, and no public market currently exists for our shares. We anticipate that the initial public offering price will be between $        and $        per share.

 


 

We have applied to list our common shares for quotation on the Nasdaq National Market under the symbol “INWK.”

 


 

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              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                     , 2006.

 


 

MORGAN STANLEY

 


 

JEFFERIES BROADVIEW

PIPER JAFFRAY

WILLIAM BLAIR & COMPANY

 

            , 2006.


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

Dividend Policy

   19

Capitalization

   20

Dilution

   21

Selected Consolidated Financial And Other Data

   23

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

   25

Business

   37

Management

   46
     Page

Certain Relationships And Related Party Transactions

   56

Principal And Selling Stockholders

   60

Description Of Capital Stock

   62

Shares Eligible For Future Sale

   66

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

   68

Underwriting

   71

Legal Matters

   75

Experts

   75

Where You Can Find Additional Information

   75

Index To Historical Consolidated Financial Statements

   F-1

 


 

You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized anyone to provide you with additional information or information different from that contained in this prospectus. We 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.

 

Until                     , 2006, 25 days after the commencement of this offering, all dealers that buy, sell or trade shares of our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

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 2,700 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.

 

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. 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 three months ended March 31, 2006, our revenue was $22.4 million, compared to $12.4 million for the three months ended March 31, 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 projected to be approximately $367 billion in 2005 and are expected to increase by an average of $8 billion per year through 2009, according to a 2005 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 2005 IDC global BPO forecast, the worldwide market for BPO is estimated to grow from $422 billion in 2005 to $641 billion in 2009, representing a compound annual growth rate of 11%.

 

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 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.

 

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

 

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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.

 

Extensive and diverse supplier network.    The more than 2,700 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 December 31, 2005, we employed over 80 account executives, who average 17 years of experience in the printing industry, and over 50 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.

 

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. 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 25 of our 76 enterprise clients as of March 31, 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 December 31, 2005 approximately 66% of our clients were located in Illinois. Our objective is to increase our sales in other major print markets in the United States, such as Boston, Los Angeles, Minneapolis, New York and San Francisco. We intend to hire or acquire more account executives within close proximity to these large markets, which accounted for, in aggregate, $18.4 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 Development

 

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 $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.

 

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.

 

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    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 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

  

             shares

Common stock offered by the selling stockholders

  

             shares

Total

  

             shares

Common stock to be outstanding after this offering

  

             shares

Over-allotment option offered by the selling stockholders

  

             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 primarily to expand our sales force, to acquire or make strategic investments in complementary businesses and for working capital and other general corporate purposes. We also intend to use a portion of our net proceeds from this offering to repay all outstanding principal and accrued interest owed under our line of credit. In addition, we intend to use approximately $7.0 million of our net proceeds from this offering to make required preference and accrued dividend payments to the holders of our Series B, D and E preferred shares. See “Use of Proceeds.”

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 National Market symbol

  

“INWK”

 

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

 

                 shares of common stock issuable upon the exercise of outstanding stock options under our stock incentive plan at a weighted average exercise price of $             per share; and

 

                 shares of common stock available for future grants under our stock incentive plan.

 

Prior to the completion of this offering, we intend to recapitalize all outstanding shares of our capital stock into shares of our common stock and consummate a             :                     stock split of our common stock immediately following the recapitalization. See “Certain Relationships and Related Party Transactions—Recapitalization.” Unless otherwise indicated, all share amounts:

 

    assume the underwriters’ over-allotment option is not exercised; and

 

    give effect to our recapitalization and             :                     stock split prior to the completion of this offering.

 

 

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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.

 

     Years ended December 31,

    Three months
ended March 31,


   2003

    2004

    2005

    2005

    2006

                       (unaudited)
     (in thousands, except per share amounts)

Consolidated statements of operations data:

                                      

Revenue

   $ 16,229     $ 38,884     $ 76,870     $ 12,420     $ 22,435

Cost of goods sold

     12,487       30,483       61,272       9,900       17,922
    


 


 


 


 

Gross profit

     3,742       8,401       15,598       2,520       4,513
    


 


 


 


 

Selling, general and administrative expenses:

                                      

Commission expenses

     577       1,788       3,492       522       905

General and administrative expenses

     2,382       4,317       7,114       1,375       2,096
    


 


 


 


 

Total selling, general and administrative expenses

     2,959       6,105       10,606       1,897       3,001

Depreciation and amortization

     18       223       388       66       147
    


 


 


 


 

Income from operations

     765       2,073       4,604       557       1,365

Other income (expense)

     (86 )     (124 )     (29 )     (40 )     45

Minority interest income (expense)

     (8 )     (192 )     58       58       0
    


 


 


 


 

Total other income (expense)

     (94 )     (316 )     29       18       45
    


 


 


 


 

Income tax expense

                             584

Net income

   $ 671     $ 1,757     $ 4,633     $ 575     $ 826
    


 


 


 


 

Net income per share of common stock:

                                      

Basic

   $ 0.02     $ 0.04     $ 0.12     $ 0.01     $ 0.01

Diluted

   $ 0.02     $ 0.04     $ 0.12     $ 0.01     $ 0.01

Shares used in per share calculations:

                                      

Basic

     26,139       29,449       31,010       29,912       24,738

Diluted

     26,139       29,449       32,707       30,663       29,129

Unaudited pro forma income tax provision(1)

   $ 262     $ 685     $ 1,807     $ 224     $

Unaudited pro forma net income(1)

     409       1,072       2,826       351      

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

                                      

Basic

   $       $       $       $       $  

Diluted

   $       $       $       $       $  

Shares used in unaudited pro forma per share calculations:

                                      

Basic

                                      

Diluted

                                      

Other data:

                                      

Enterprise clients(3)

     14       46       69       52       76

Transactional clients(4)

     294       593       667       315       277

Total clients(5)

     308       639       736       347       353

Total print jobs(6)

     2,002       6,972       10,736       2,639       3,617

Employees and independent contractors(7)

     43       85       154       110       164

 

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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 (benefit).
(2)   Pro forma net income per share of common stock is based on the weighted average number of shares of common stock outstanding after giving effect to our recapitalization and stock split. See “Certain Relationships and Related Party Transactions—Recapitalization.”
(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.
(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 reflects the recapitalization of our outstanding shares of capital stock and a             :                     stock split of our common stock immediately following the recapitalization (see “Certain Relationships and Related Party Transactions—Recapitalization”).

 

The pro forma as adjusted balance sheet data in the table below reflects the sale of              shares of our common stock offered by us in this offering assuming an initial public offering price of              per share, the midpoint of the filing range set forth on the cover of this prospectus, after deduction of estimated underwriting discounts and commissions and estimated offering expenses payable by us, and approximately $7.0 million of preference and dividend payments to the holders of our Series B, D and E preferred shares.

 

     As of March 31, 2006

     Actual

    Pro forma

   Pro forma
as adjusted


     (unaudited)
     (in thousands)

Consolidated balance sheet data:

                     

Cash and cash equivalents

   $ 9,535     $                 $             

Working capital

     14,158               

Total assets

     45,278               

Line of credit

     2,197               

Long-term debt

                   

Capital leases

     371               

Convertible redeemable preferred shares

     54,732               

Total members’ equity/stockholders’ (deficit)

     (30,342 )             

 

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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. Additional risks and uncertainties not currently known to us may also adversely affect our business, financial condition or operating results. 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 Banta, 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.

 

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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 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 31% and 50% of our revenue in 2005 and 2004, 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 69% and 50% of our

 

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revenue in 2005 and 2004, 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 90 or 180 days’ notice 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 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 46% and 43% of our revenue during the year ended December 31, 2005 and 2004, respectively. Our largest customer accounted for 16% of our revenue in 2005. We are likely to continue to experience a similar degree of customer concentration, particularly if we are successful in attracting large enterprise clients. We cannot assure you that there will not be a loss or reduction in business from one or more of our large clients. In addition, we cannot assure you that revenue from these clients, either individually or as a group, will 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.

 

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 December 31, 2005, the number of our employees and independent contractors increased from 21 to 154. Continued growth could place a significant strain on our ability to:

 

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

 

  ·   preserve our culture, values and entrepreneurial environment;

 

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

 

  ·   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 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.

 

 

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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 Executive Vice President of Operations, 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 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

 

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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 and 2005, our revenue was $38.9 million and $76.9 million, respectively, and our top 10 clients accounted for 43% and 46%, respectively, of such revenue in the aggregate. If any of our key clients fail 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 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.

 

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

 

We will face increased legal, accounting, administrative and other costs and expenses as a public company that we do 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 National Market, imposes additional reporting and other obligations on public companies. We expect that 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, we will create new board committees and adopt new internal controls and disclosure controls and procedures. In addition, we will incur additional expenses associated with our SEC reporting requirements. 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 obtain 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 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.

 

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Risks Related to this Offering and Ownership of Our Common Stock

 

Our stock price may be volatile, and you may not be able to resell your shares at or above the initial public offering price.

 

Prior to this offering, there has been no public market for shares of our common stock. An active public trading market for our common stock may not develop or, if it develops, may not be maintained after this offering, and the market price could fall below the initial public offering price. If no trading market develops, securities analysts may not initiate or maintain research coverage of our company, which could further depress the market for our common stock. Some of the factors that may cause the market price of our common stock to fluctuate include:

 

  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. Our company, the selling stockholders and the representatives of the underwriters have negotiated to determine the initial public offering price. The initial public offering price may be higher than the trading price of our common stock following this offering.

 

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 will rely 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 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

 

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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 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 owned 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, approximately     % 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, approximately     % 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              shares of common stock outstanding,              of which will be available for immediate public sale. The remaining              shares of common stock outstanding after this offering, including an aggregate of              shares beneficially owned by Orange Media, LLC, Richard A. Heise, Jr., New Enterprise Associates 11, Limited Partnership and NEA Ventures 2005, Limited Partnership, will be available for sale, subject to volume and other limitations as applicable under the federal securities laws. 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, executive officers and 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 180 days after this offering. Approximately              of these shares will become available for sale 180 days 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.

 

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In addition, approximately              of our shares of common stock, including shares beneficially owned by Orange Media, LLC, Mr. Heise and New Enterprise Associates 11, Limited Partnership and NEA Ventures 2005, Limited Partnership, 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 will have broad discretion in using our net proceeds from this offering, and the benefits from our use of the proceeds may not meet investors’ expectations.

 

Our management will have broad discretion over the allocation of our net proceeds from this offering as well as over the timing of their expenditure without stockholder approval. We have not yet determined the specific amounts of the $     million of our net proceeds to be used to expand our sales force, to acquire or make strategic investments in complementary businesses and for working capital and other general corporate purposes. As a result, investors will be relying upon management’s judgment with only limited information about our specific intentions for the use of the balance of our net proceeds from this offering. Our failure to apply these proceeds effectively could cause our business to suffer.

 

Because our existing investors paid substantially less than the initial public offering price when they purchased their shares, new investors will incur immediate and substantial dilution in their investment.

 

Investors purchasing shares in this offering will incur immediate and substantial dilution in net tangible book value per share because the price that new investors pay will be substantially greater than the net tangible book value per share of the shares acquired. This dilution is due in large part to the fact that our existing investors paid substantially less than the initial public offering price when they purchased their shares. In addition, there will be options to purchase approximately              shares of common stock outstanding upon completion of this offering. To the extent such options are exercised in the future, there will be further dilution to new investors.

 

The initial public offering price for the shares sold in this offering was determined by negotiations among us, the selling stockholders and the representatives of the underwriters and may not be indicative of prices that will prevail in the trading market. See “Underwriting” for a discussion of the determination of the initial public offering price.

 

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

 

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.

 

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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              shares of our common stock we are offering will be approximately $         million, assuming an initial public offering price of $         per share, the midpoint of the filing range set forth on the cover of this prospectus, and after deducting the underwriting discounts and estimated 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 primarily 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. We also intend to use a portion of our net proceeds from this offering to repay all outstanding principal and accrued interest owed under our line of credit with JPMorgan Chase Bank, N.A. The amounts borrowed under our line of credit are due in full on June 30, 2006. As of March 31, 2006, the outstanding indebtedness under our line of credit was $2.2 million, which bears interest at the prime rate. We used the borrowings under our line of credit during 2005 for working capital and other general corporate purposes. In addition to the foregoing purposes, we intend to use approximately $7.0 million of our net proceeds from this offering to make required preference and accrued dividend payments to the holders of our Series B, D and E preferred shares. Pending their use, we intend to invest the balance of our net proceeds from this offering in short-term, investment grade interest-bearing instruments.

 

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 March 31, 2006:

 

    on an actual basis;

 

    on a pro forma basis to give effect to the recapitalization of our outstanding shares of capital stock and             :             stock split (see “Certain Relationships and Related Party Transactions— Recapitalization”); and

 

    on a pro forma as adjusted basis to give effect to the sale of              shares of our common stock offered by us in this offering assuming an initial public offering price of          per share, the midpoint of the filing range set forth on the cover of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, and approximately $7.0 million of required preference and accrued dividend payments to the holders of our Series B, D and E preferred shares.

 

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 March 31, 2006

    Actual

    Pro forma

   Pro forma
as adjusted


    (in thousands)
          (unaudited)     

Cash and cash equivalents

  $ 9,535           
   


 
  

Line of credit

  $ 2,197           

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

    371           

Series D Preferred Stock, par value $3.125 per share, 1,600,000 shares authorized, 1,600,000 shares issued and outstanding, actual; no shares authorized, no shares issued and outstanding, pro forma; no shares authorized, no shares issued and outstanding, pro forma as adjusted

    4,861           

Series E Preferred Stock, par value $4.92 per share, 10,167,730 shares authorized, 10,167,730 shares issued and outstanding, actual; no shares authorized, no shares issued and outstanding, pro forma; no shares authorized, no shares issued and outstanding, pro forma as adjusted

    49,871           

Stockholders’ equity:

                

Class A Common Stock, par value $0.0001 per share, 60,000,000 shares authorized, 23,779,089 shares issued and outstanding, actual; no shares authorized, no shares issued and outstanding, pro forma; no shares authorized, no shares issued and outstanding, pro forma as adjusted

    2,423           

Class B Common Stock, par value $0.0001 per share, 5,873,500 shares authorized, 700,000 shares issued and outstanding, actual; no shares authorized, no shares issued and outstanding, pro forma; no shares authorized, no shares issued and outstanding, pro forma as adjusted

    279           

Series B Preferred Stock, par value $0.80 per share, 937,500 shares authorized, 937,500 shares issued and outstanding, actual; no shares authorized, no shares issued and outstanding, pro forma; no shares authorized, no shares issued and outstanding, pro forma as adjusted

    758           

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

                

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

                

Member receivable(2)

    (189 )         

Additional paid-in capital

    8,077           

Treasury stock at cost

    (40,000 )         

Accumulated deficit

    (1,690 )         
   


        

Total stockholders’ equity (deficit)

    (30,342 )         
   


 
  

Total capitalization

  $ 26,958           
   


 
  

(1)   Reflects the amount outstanding as of March 31, 2006 pursuant to a loan relating to the purchase of certain computer equipment, furniture and commercial software licenses.
(2)   This amount was paid in May 2006.

 

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DILUTION

 

If you invest in our common stock, your interest will be diluted immediately to the extent of the difference between the public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock after this offering.

 

Our pro forma net tangible book value as of March 31, 2006 was approximately $         million, or $         per share of common stock. Pro forma net tangible book value per share represents the amount of our total tangible assets reduced by the amount of our total liabilities, divided by the number of shares of common stock outstanding on a pro forma basis after giving effect to the recapitalization of all outstanding shares of our capital stock into shares of our common stock and a             :                     stock split of our common stock to be effectuated immediately prior to the completion of this offering.

 

After giving effect to the sale of the              shares of common stock offered by us assuming an initial public offering price of $         per share, the midpoint of the filing range set forth on the cover of this prospectus, and after deducting the underwriting discounts and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of March 31, 2006 would have been approximately $         million, or $         per share. This represents an immediate increase in pro forma net tangible book value of $         per share to existing stockholders and an immediate dilution of $         per share to new investors. The following table illustrates this dilution:

 

Initial public offering price per share

    

Pro forma net tangible book value per share before this offering

    

Increase in pro forma net tangible book value per share attributable to this offering

    

Pro forma as adjusted net tangible book value per share after this offering

    
    

Dilution per share to new investors

    
    

 

We will not receive any proceeds from the sale of the              shares to be sold by the selling stockholders or the              shares that may be sold by the selling stockholders pursuant to the underwriters’ over-allotment option.

 

The following table sets forth on a pro forma as adjusted basis as of March 31, 2006:

 

    the number of shares of our common stock purchased by existing stockholders, the total consideration and the average price per share paid for those shares;

 

    the number of shares of our common stock purchased by new investors, the total consideration and the average price per share paid for those shares (assuming an initial public offering price of $         per share, the midpoint of the filing range set forth on the cover of this prospectus); and

 

    the percentage of shares purchased by existing stockholders and new investors and the percentage of consideration paid for those shares.

 

These pro forma numbers give effect to the recapitalization of all outstanding shares of our capital stock into shares of our common stock and a             :                     stock split of our common stock to be effectuated immediately prior to the completion of this offering.

 

     Total shares

    Total consideration

    Average
price
per share


     Number

   Percentage

    Amount

   Percentage

   

Existing stockholders

                              

New investors

          %   $        %   $  
    
  

 

  

 

Total

                              
    
  

 

  

 

 

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The outstanding share information shown in the table above excludes:

 

                 shares of common stock issuable upon the exercise of outstanding stock options under our stock incentive plan at a weighted average exercise price of $     per share; and

 

                 shares of common stock available for future grants under our stock incentive plan as of the date of this prospectus.

 

To the extent that any of these options are exercised, your investment will be further diluted. In addition, we may grant more options in the future. If the underwriters exercise their over-allotment option in full, the following will occur:

 

    the pro forma as adjusted number of shares of our common stock held by existing stockholders will decrease to             , or approximately     % of the total number of pro forma as adjusted shares of our common stock outstanding after this offering; and

 

    the pro forma as adjusted number of shares of our common stock held by new investors will increase to             , or approximately     % of the total pro forma as adjusted shares of our common stock outstanding after this offering.

 

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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,

    Three months ended
March 31,


  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     $ 12,420     $ 22,435

Cost of goods sold

    3,737       12,487       30,483       61,272       9,900       17,922
   


 


 


 


 


 

Gross profit

    1,233       3,742       8,401       15,598       2,520       4,513
   


 


 


 


 


 

Selling, general and administrative expenses:

                                             

Commission expenses

    285       577       1,788       3,492       522       905

General and administrative expenses

    864       2,382       4,317       7,114       1,375       2,096
   


 


 


 


 


 

Total selling, general and administrative expenses

    1,149       2,959       6,105       10,606       1,897       3,001

Depreciation and amortization

    5       18       223       388       66       147
   


 


 


 


 


 

Income from operations

    79       765       2,073       4,604       557       1,365

Other income (expense)

    (148 )     (86 )     (124 )     (29 )     (40 )     45

Minority interest income (expense)

          (8 )     (192 )     58       58       0
   


 


 


 


 


 

Total other income (expense)

    (148 )     (94 )     (316 )     29       18       45
   


 


 


 


 


 

Income tax expense

                                  584

Net income (loss)

  $ (69 )   $ 671     $ 1,757     $ 4,633     $ 575     $ 826
   


 


 


 


 


 

Net income (loss) per share of common stock:

                                             

Basic

  $ (0.01 )   $ 0.02     $ 0.04     $ 0.12     $ 0.01     $ 0.01

Diluted

  $ (0.01 )   $ 0.02     $ 0.04     $ 0.12     $ 0.01     $ 0.01

Shares used in per share calculations:

                                             

Basic

    15,314       26,139       29,449       31,010       29,913       24,738

Diluted

    15,314       26,139       29,449       32,707       30,663       29,129

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

  $     $ 262     $ 685     $ 1,807     $ 224     $

Unaudited pro forma net income (loss)(1)

    (69 )     409       1,072       2,826       351      

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

                                             

Basic

  $       $       $       $       $       $  

Diluted

  $       $       $       $       $       $  

Shares used in unaudited pro forma per share calculations:

                                             

Basic

                                             

Diluted

                                             

Other data:

                                             

Enterprise clients(3)

    5       14       46       69       52       76

Transactional clients(4)

    69       294       593       667       315       277

Total clients(5)

    74       308       639       736       347       353

Total print jobs(6)

    723       2,002       6,972       10,736       2,639       3,617

Employees and independent contractors(7)

    21       43       85       154       110       164

 

(footnotes on next page)

 

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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 (benefit).
(2)   Pro forma net income per share of common stock is based on the weighted average number of shares of common stock outstanding after giving effect to our recapitalization and             :             stock split. See “Certain Relationships and Related Party Transactions—Recapitalization.”
(3)   Reflects number of enterprise clients determined as of the last day of the applicable period.
(4)   Reflects number of transactional clients served in the applicable period.
(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.

 

     As of December 31,

  

As of

March 31,


 
   2002

   2003

   2004

   2005

   2006

 
                         (unaudited)  
     (in thousands)  

Consolidated balance sheet data:

                                    

Cash and cash equivalents

   $ 252    $ 966    $ 1,476    $ 2,963    $ 9,534  

Working capital

     536      2,688      3,467      3,540      14,158  

Total assets

     1,680      6,385      14,713      26,685      45,278  

Line of credit

     84           678      2,924      2,197  

Long-term debt

               2,022            

Capital leases

               128      393      371  

Convertible redeemable preferred shares

          2,511      2,863      5,008      54,732  

Total members’ equity/stockholders’ (deficit)

     566      320      91      1,252      (30,342 )

 

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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 2,700 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 66% of our clients as of December 31, 2005 were located in Illinois. Our objective is to increase our sales in other major print markets in the United States, such as Boston, Los Angeles, Minneapolis, New York and San Francisco. We intend to hire or acquire more account executives within close proximity to these large markets, which accounted for, in aggregate, $18.4 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

 

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 $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. See “Certain Relationships and Related Party Transactions—Series E Investment.”

 

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SNP Transaction.    In March 2006, we entered into a strategic agreement to grant to SNP Corporation Ltd. a non-exclusive, non-transferable license to use certain non-core applications of our software in China, Singapore and Hong Kong. Pursuant to the terms of the agreement, SNP is paying us $1.0 million in five monthly installments of $200,000, which began in April 2006. The initial term of the agreement is one year and is automatically renewed in April for successive one-year terms in the absence of a termination by either party. In the event the agreement is renewed, SNP will pay us 1% of the gross revenue for all transactions processed through the licensed software during the term of the agreement. In connection with the agreement, we sold 254,065 shares of our Class A common stock to SNP at a price of $4.92 per share for a total purchase price of $1.25 million.

 

Revenue

 

We generate revenue through the sale of printed products to our clients. Our revenue grew 226.5%, 139.6% and 97.7% in 2003, 2004 and 2005, respectively, as compared to the corresponding prior years. Our revenue is generated from two different types of clients: enterprise and transactional. Our 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 of 90 to 180 days. 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, from our inception through December 31, 2005, we served over 1,100 transactional clients. During 2005, enterprise clients accounted for 69% of our revenues, while transactional clients accounted for 31% of our revenues.

 

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 the supplier to a destination specified by the client. Upon shipment, the supplier invoices us for its production costs and we invoice the 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 larger enterprise clients are generally lower than the gross profit margins we typically earn 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. The revenue from our wholly-owned subsidiary, Insight World Group, LLC, is particularly subject to these seasonal fluctuations because its primary products include toys, games and other items that clients generally order in increased quantities in anticipation of the year-end holiday season. We expect these seasonal revenue patterns to continue in the future.

 

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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.

 

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 our client and are paid after we receive payment from the client. As a percentage of our gross profit, commissions were 15.4%, 21.3% and 22.4% in 2003, 2004 and 2005, respectively.

 

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 and $1.6 million as of December 31, 2005.

 

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.

 

We agree to provide our clients with printed 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. 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.

 

Our income from operations for 2003, 2004 and 2005 was $765,000, $2.1 million and $4.6 million, respectively.

 

Recapitalization

 

Prior to the completion of this offering, we intend to recapitalize all outstanding shares of our capital stock into shares of our common stock and consummate a             :             stock split of our common stock immediately following the recapitalization. For a discussion of the recapitalization and stock split, see “Certain Relationships and Related Party Transactions—Recapitalization.”

 

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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 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

 

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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.

 

In May 2006, we granted John R. Walter, the Chairman of our Board, options to purchase 400,000 shares of our common stock, and we granted Steven E. Zuccarini, our Chief Executive Officer, options to purchase 750,000 shares of our common stock, in each case 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. See “Management—Director Compensation” and “Management—Employment Agreements—Employment Agreement with Steven E. Zuccarini.” We also granted one of our employees options to purchase 30,000 shares of our common stock at an exercise price of $4.92 per share. Pursuant to SFAS No. 123 (R), we are required to measure compensation expense for all stock-based payments (including employee stock options). We calculate the expense under the equity method based on the Black-Scholes value of the option at the time of grant. We record the expense in equal amounts as the options vest. This method requires that we make several estimates, including the volatility of our stock price and the expected life of an option. In making these estimates, we relied on historical data as well as management’s judgment. We expect that our expense for these option grants will be approximately $375,000 in 2006 and $550,000 in 2007.

 

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,

    Three months
ended
March 31,


 
       2003

    2004

    2005

    2005

    2006

 
                         (unaudited)  

Consolidated statements of income data:

                                

Revenue

     100.0 %   100.0 %   100. %   100.0 %   100.0 %

Cost of goods sold

     76.9     78.4     79.7     79.7     79.9  
      

 

 

 

 

Gross profit

     23.1     21.6     20.3     20.3     20.1  
      

 

 

 

 

Selling, general and administrative expenses:

                                

Commission expenses

     3.6     4.6     4.5     4.2     4.0  

General and administrative expenses

     14.6     11.1     9.3     11.1     9.3  
      

 

 

 

 

Total selling, general and administrative expenses

     18.2     15.7     13.8     15.3     13.3  

Depreciation and amortization

     0.1     0.6     0.5     0.5     0.7  
      

 

 

 

 

Income from operations

     4.7     5.3     6.0     4.4     6.1  

Other income (expense)

     (0.5 )   (0.3 )   0.0     (0.3 )   0.2  

Minority interest income (expense)

     0.0     (0.5 )   0.1     0.5     0.0  
      

 

 

 

 

Total other income (expense)

     (0.6 )   (0.8 )   0.0     0.2     0.2  

Income tax expense

                     2.6  
      

 

 

 

 

Net income

     4.1 %   4.5 %   6.0 %   4.6 %   3.7 %
      

 

 

 

 

 

Comparison of three months ended March 31, 2006 and 2005

 

Revenue

 

Our revenue increased by $10.0 million, or 80.6%, from $12.4 million during the three months ended March 31, 2005 to $22.4 million during the three months ended March 31, 2006. The revenue growth reflects an increase in enterprise business during the three months ended March 31, 2006, as offset by a decrease in transactional business. We increased our business from enterprise clients to 74% during the three months ended

 

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March 31, 2006, up from 53% during the three months ended March 31, 2005. Our revenue from enterprise clients increased by $9.6 million, or by 153.9%, from $6.5 million during the three months ended March 31, 2005 to $16.5 million during the three months ended March 31, 2006. As of March 31, 2006, we had 76 enterprise clients, which was an increase of 24, compared to 52 enterprise clients as of March 31, 2005. Additionally, we performed 3,600 print jobs during the three months ended March 31, 2006, compared to 2,600 print jobs during the three months ended March 31, 2005.

 

Cost of goods sold

 

Our cost of goods sold increased by $8.0 million, or 81.0%, from $9.9 million during the three months ended March 31, 2005 to $17.9 million during the three months ended March 31, 2006. The increase reflects the revenue growth during the three months ended March 31, 2006. Our cost of goods sold as a percentage of revenue increased from 79.7% during the three months ended March 31, 2005 to 79.9% during the three months ended March 31, 2006. The slight increase is primarily due to a higher concentration of business with larger enterprise clients.

 

Gross Profit

 

Our gross profit as a percentage of revenue decreased from 20.3% during the three months ended March 31, 2005 to 20.1% during the three months ended March 31, 2006. The slight decrease resulted from an increase in our enterprise business, which has historically had lower gross profit margins than our transactional business.

 

Selling, general and administrative expenses

 

Commission expense increased by $383,000, or 73.4%, from $522,000 during the three months ended March 31, 2005 to $905,000 during the three months ended March 31, 2006. As a percentage of revenue, commission expense decreased from 4.2% during the three months ended March 31, 2005 to 4.0% during the three months ended March 31, 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 $700,000, or 52.4%, from $1.4 million during the three months ended March 31, 2005 to $2.1 million during the three months ended March 31, 2006. General and administrative expense decreased as a percentage of revenue from 11.1% during the three months ended March 31, 2005 to 9.3% during the three months ended March 31, 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 7.4% during the three months ended March 31, 2005 to 5.7% during the three months ended March 31, 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 $81,000, or 122.7%, from $66,000 during the three months ended March 31, 2005 to $147,000 during the three months ended March 31, 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 World Group, LLC, which was completed in March 2005.

 

Income from operations

 

Income from operations increased by $843,000, or 145.1%, from $557,000 during the three months ended March 31, 2005 to $1.4 million during the three months ended March 31, 2006. As a percentage of revenue,

 

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income from operations increased from 4.4% during the three months ended March 31, 2005 to 6.1% during the three months ended March 31, 2006. The increase in income from operations as a percentage of revenue is a result of a decrease in our selling, general and administrative expenses as a percentage of revenue.

 

Minority interest income

 

Minority interest income decreased $58,000 from $58,000 during the three months ended March 31, 2005 to zero during the three months ended March 31, 2006. Our minority interest income during the three months ended March 31, 2005 was attributable to the ownership interest we did not own in Insight World Group, LLC. In March 2005, we purchased the remaining 49% ownership interest in Insight. The minority interest income was reduced to zero as a result of this purchase and the resulting ownership of 100% of the business.

 

Other income and expense

 

Other income and expense increased $85,000 from expense of $40,000 during the three months ended March 31, 2005 to income of $45,000 during the three months ended March 31, 2006. The increase is due to an increase in interest income from $11,000 during the three months ended March 31, 2005 to $99,000 during the three months ended March 31, 2006. The increase in interest income is a result of our issuance of $50 million of Series E preferred stock on January 3, 2006. We retained $10 million of these proceeds, which were invested in money market funds from January 3, 2006 to March 31, 2006.

 

Provision for income taxes

 

Provision for income taxes increased by $584,000 from zero during the three months ended March 31, 2005 to $584,000 during the three months ended March 31, 2006. The provision for income taxes was zero during the three months ended March 31, 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 three months ended March 31, 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 $40 million step-up in the basis of our assets for tax purposes. As a result of the $40 million step-up, we recognized a deferred tax asset of $15.6 million, for which we recorded a valuation allowance of $7.8 million and a corresponding net increase to additional paid in capital of $7.8 million. For the three months ended March 31, 2006, the provision for federal and state income taxes was $584,000, resulting in an effective tax rate of 39%.

 

Net income

 

Net income increased by $251,000, or 43.7%, from $575,000 during the three months ended March 31, 2005 to $826,000 during the three months ended March 31, 2006. Net income as a percentage of revenue decreased from 4.6% during the three months ended March 31, 2005 to 3.7% during the three months ended March 31, 2006. Without the provision for income taxes for the three months ended March 31, 2006, net income as a percentage of revenue increased to 6.3%. 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 15.3% during the three months ended March 31, 2005 to 13.3% during the three months ended March 31, 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 during 2005. We increased our

 

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business from enterprise customers to 69% during 2005 up from 50% during 2004. Our revenue from enterprise clients increased by $33.3 million, or by 172.5%, to $52.8 million during 2005 compared to $19.5 million during 2004. 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. Additionally, we performed 10,700 print jobs during 2005, compared to 6,900 print jobs during 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.

 

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

 

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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 during 2004. We increased our business from enterprise customers to 50% during 2004 up from 37% during 2003. Our revenue from enterprise clients increased by $13.5 million, or 225.0%, to $19.5 million during 2004 compared to $6.0 million during 2003. As of December 31, 2004, we had 46 enterprise clients, which was an increase of 32 compared to 14 enterprise clients as of December 31, 2003. Additionally, we performed 6,900 print jobs during 2004, compared to 2,000 print jobs during 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.

 

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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 holders of our Series D preferred stock made in 2004.

 

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 nine 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

    Mar. 31,
2004


  June 30,
2004


  Sept. 30,
2004


  Dec. 31,
2004


  Mar. 31,
2005


  June 30,
2005


  Sept. 30,
2005


  Dec. 31,
2005


  Mar. 31,
2006


    (unaudited)
    (in thousands, except per share amounts)

Revenue

  $ 5,318   $ 8,551   $ 9,795   $ 15,219   $ 12,420   $ 18,739   $ 23,476   $ 22,244   $ 22,435

Gross profit

    1,283     1,966     2,221     2,930     2,520     3,950     4,797   $ 4,331     4,512

Net income (loss)

    16     263     464     1,014     575     1,159     1,604     1,301     826

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

                                                     

Basic

  $   $     $     $     $     $     $     $     $  

Diluted

  $   $     $     $     $     $     $     $     $  

 

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 three months ended March 31, 2006.

 

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Liquidity and Capital Resources

 

Since inception, we have financed our operations through private sales of common and preferred equity, with net proceeds of $18.5 million, bank loans and internally generated positive cash flow. As of March 31, 2006, we had $9.5 million in cash and cash equivalents and $14.3 million in working capital.

 

Cash provided by operating activities decreased from $1.0 million in the three months ended March 31, 2005 to a use of $1.6 million in the three months ended March 31, 2006. The decrease resulted from a significant increase in the accounts receivable balance of $2.0 million during the three months ended March 31, 2006 compared to the accounts receivable balance decrease of $2.6 million in the prior period. Additionally, the accounts payable balance increased by only $147,000 during the three months ended March 31, 2006, largely as a result of the company taking advantage of early pay discount terms with vendors at the end of March.

 

In 2005, cash provided by operating activities increased by $112,000 to $967,000 from $855,000 in 2004. The increase in cash provided by operating activities increased by only $112,000 compared to an increase of 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 this offering. Additionally, other prepaid expenses increased by over $1.0 million related to prepaid paper and other vendor costs for jobs that were not ready to ship to the customer. 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 our accounts payable and other short-term liabilities.

 

For the three months ended March 31, 2006, cash used in investing activities decreased $32,000 to $279,000 from $311,000 in the three months ended March 31, 2005. The decrease is a result of a $125,000 investment in Echo Global Logistics, LLC during the three months ended March 31, 2005.

 

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, 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 improvement reflects purchases of property and equipment and the purchase of Ocular.

 

For the three months ended March 31, 2006, cash provided by financing activities increased $7.5 million to $8.4 million from $873,000 in the three months ended March 31, 2005. The increase is due to the net raise of $10.0 million of capital from the Series E round of financing that was funded on January 3, 2006. The increase was $7.5 million because we raised $2.0 million of capital from the second portion of the Series D round of financing that was funded in February 2005.

 

In 2005, cash provided by financing activities increased by $1.1 million to $1.7 million from $646,000 2004. The increase in cash provided by financing activities is a result of usage of the bank facility during 2005. Additionally, the company 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 compared with $1.5 million in 2003. The decrease in cash provided by financing activities primarily reflects proceeds from private sales of common and preferred equity.

 

Capital expenditures were $70,000 in 2003, $310,000 in 2004, $1.0 million in 2005 and $279,000 in the three months ended March 31, 2006. Our capital expenditures historically consisted of purchases of resources to

 

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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 $10.0 million credit facility with Bank One, NA, $2.2 million was outstanding on the line as of March 31, 2006. The maximum amount outstanding under our credit facility cannot exceed 80% of the book value of our eligible accounts receivable. Our credit facility contains limitations on our ability to incur indebtedness, create liens and make certain investments. Advances made under our credit facility 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 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 December 31, 2005, 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)

Line of credit

   $ 2,924    $ 2,924    $    $    $

Capital lease obligations

     465      131      174      160     

Operating lease obligations

     8,220      545      1,389      1,730      4,556
    

  

  

  

  

Total

   $ 11,609    $ 3,600    $ 1,563    $ 1,890    $ 4,556
    

  

  

  

  

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements.

 

Quantitative and Qualitative Disclosures 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 $10.0 million line of credit was fully drawn, a 1.0% increase in the prime rate would increase our annual interest expense by $100,000, without taking into account our expected application of a portion of our net proceeds from this offering to pay down the line of credit.

 

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 March 31, 2006 was less than three months. Due to the short-term nature of our investments, we believe that there is no material risk exposure.

 

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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 2,700 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.

 

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. 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 three months ended March 31, 2006, our revenue was $22.4 million, compared to $12.4 million for the three months ended March 31, 2005.

 

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 projected to be approximately $367 billion in 2005 and are expected to increase by an average of $8 billion per year through 2009, according to a 2005 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;

 

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    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; 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.

 

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 second most significant resource procurement outsourcing opportunity for U.S. businesses, underscoring this trend. According to a 2005 IDC global BPO forecast, the worldwide market for BPO is estimated to grow from $422 billion in 2005 to $641 billion in 2009, representing a compound annual growth rate of 11%. 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 2,700 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.

 

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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 December 31, 2005, we had 52 procurement managers, including eight procurement managers working on-site at our clients.

 

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 PPM4 TM to automatically convert the quote into a print order. The

 

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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. PPM4 TM 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.

 

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

 

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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.

 

  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 1,100 suppliers. For the year ended December 31, 2005, Alliance Publishing Group accounted for 16% of our revenue. Revenue from our top ten clients accounted for 43% and 46% of our revenue during the years ended December 31, 2004 and 2005, 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

 

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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 to 180 days. 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 December 31, 2005, approximately 66% 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 Boston, Los Angeles, Minneapolis, New York and San Francisco. 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.

 

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

 

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.

 

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Our Supplier Network

 

Our network of 2,700 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 $43 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 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 December 31, 2005, we had 86 account executives, 66 of whom were independent contractors and 20 of whom were employees, located in 17 cities across the U.S. We hired nine account executives in 2002, 17 in 2003, 20 in 2004 and 33 in 2005. 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.

 

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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. The account executives we have hired through December 31, 2005 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.

 

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 Banta, 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,

 

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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.

 

Properties

 

Our principal executive offices are located in Chicago, Illinois. We maintain a sales office in Naperville, Illinois. We believe that our facilities are generally suitable to meet our needs for the foreseeable future; however, we continue to seek additional space as needed to satisfy our growth.

 

Employees

 

As of December 31, 2005, we had 154 employees and independent contractors, consisting of 16 corporate staff, 52 procurement managers and 86 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

   49    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

   37    Executive Vice President of Operations

Neil P. Graver

   35    Chief Technology Officer

Mark D. Desky

   39    Chief Marketing Officer

Peter Barris(1)(2)

   54    Director

Sharyar Baradaran(1)(2)

   38    Director

Jack M. Greenberg(2)

   63    Director

(1)   Member of our audit committee.
(2)   Member of our compensation committee 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 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 Abbott Laboratories, 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 Executive Vice President of Operations since June 2005. 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 his MCSE, MCSA and MCT certificates.

 

Mark D. Desky has served as our Chief Marketing Officer since April 2002. From May 2000 to December 2001, Mr. Desky was Executive Vice President of Marketing for HA-LO Industries, Inc. From March 1997 to November 1999, Mr. Desky led the customer relationship management initiative at Allstate Insurance Company. Mr. Desky received a bachelor’s degree and a Masters in Marketing from Northwestern University.

 

Peter 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 will be terminated upon the closing of this offering. 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 holders of our Series D preferred stock under our voting agreement, which will be terminated upon the closing of this offering. 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 is a director of Abbott Laboratories, The Allstate Corporation, First Data 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.

 

Board of Directors

 

Upon the completion of this offering, our Board of Directors will consist of five directors and will include three committees: an audit committee, compensation committee and nominating and corporate governance committee. Each director will be subject to election at each annual meeting of stockholders.

 

Audit Committee

 

Upon the completion of this offering, our audit committee will consist of John Walter, Peter Barris and Sharyar Baradaran. John Walter will serve as the chairman of our audit committee. The audit committee will

 

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review and recommend 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 will have authority to engage public accountants to audit our annual financial statements and determine the scope of the audit to be undertaken by such accountants. Mr. Walter is our audit committee financial expert under the SEC rule implementing Section 407 of the Sarbanes-Oxley Act of 2002.

 

Compensation Committee

 

Upon the completion of this offering, our compensation committee will consist of John R. Walter, Jack M. Greenberg, Peter Barris and Sharyar Baradaran. Jack M. Greenberg will serve as the chairman of our compensation committee. The compensation committee will review and recommend 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 will have authority to administer our stock incentive plan, and advise and consult with our officers regarding managerial personnel policies.

 

Nominating and Corporate Governance Committee

 

Upon the completion of this offering, our nominating and corporate governance committee will consist of John R. Walter, Jack M. Greenberg, Peter Barris and Sharyar Baradaran. John R. Walter will serve as the chairman of our nominating and corporate governance committee. The nominating and corporate governance committee will assist 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.

 

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, 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 our 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 our Board. Under this agreement, Mr. Walter:

 

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

 

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

 

  Ÿ   received options to purchase 300,000 shares of our common stock at an exercise price of $0.50 per share in March 2004, which were fully vested upon issuance and have a term of 10 years, and

 

  Ÿ   received options to purchase an additional 900,000 shares of our common stock at an exercise price of $0.50 per share in March 2004. These options vest at the rate of 300,000 per year upon Mr. Walter’s re-election as Chairman of our Board, subject to acceleration upon the occurrence of certain events, including our completion of an initial public offering. As of March 31, 2006, 300,000 of these options were vested, and upon completion of this offering the remaining 600,000 options will vest.

 

In connection with the March 2004 agreement, Mr. Walter also became entitled to receive fully vested options to purchase 300,000 shares of our common stock at an exercise price of $0.50 per share, subject to our achievement of certain business and financial performance targets. In May 2006, at the request of the Company

 

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and to better align the value of this equity award with the long-term interests of our stockholders, Mr. Walter agreed to eliminate his rights to these options in exchange for the grant of options to purchase 400,000 shares of our 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 our Board. Pursuant to this agreement, we granted Mr. Greenberg options to purchase 100,000 shares of our 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 our 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).

 

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 will provide 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, unless they violated their duty of loyalty to us or to our stockholders, acted in bad faith, knowingly or intentionally violated the law, authorized illegal dividends or redemptions or derived an improper personal benefit from their actions as directors. Prior to the completion of this offering, we intend to obtain insurance that insures our directors and officers against specified losses. In addition, our by-laws will 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 expenses and liabilities reasonably incurred by them in connection with their service for or on behalf of us.

 

In addition, prior to the completion of this offering, we intend to enter 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 settlement amounts incurred 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.

 

Executive Compensation

 

Summary Compensation Table

 

The following table sets forth the annual salary of our Chief Executive Officer and each of our other four most highly salaried executive officers for the year ending December 31, 2006.

 

Name and principal position


   Annual
Salary


Steven E. Zuccarini

Chief Executive Officer

   $ 300,000

Nicholas J. Galassi

Chief Financial Officer

     200,000

Eric D. Belcher

Executive Vice President of Operations

     225,000

Scott A. Frisoni

Executive Vice President of Sales

     225,000

Mark D. Desky

Chief Marketing Officer

     141,700

 

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The following table sets forth information regarding the compensation of our Chief Executive Officer and each of our other four most highly-compensated executive officers, referred to in this prospectus as the “named executive officers,” for the year ended December 31, 2005.

 

Name and principal position


   Annual Compensation

   Long-Term
Compensation
Awards


   All other
compensation (1)


 
   Salary

   Bonus

   Securities
Underlying
Options (#)


  

Steven E. Zuccarini

Chief Executive Officer

   $ 300,000    $ 125,000         $ 8,800 (2)

Nicholas J. Galassi

Chief Financial Officer

     146,402      18,750    105,000      11,926  

Eric D. Belcher (3)

Executive Vice President of Operations

     90,152      25,000    325,000      2,991  

Scott A. Frisoni

Executive Vice President of Sales

     177,573         125,000      6,808 (2)

Mark D. Desky

Chief Marketing Officer

     130,000         85,000      3,780  

(1)   Except for compensation reported for Mr. Zuccarini and Mr. Frisoni, other compensation consists of reimbursed medical insurance premiums.
(2)   Other compensation consists solely of reimbursement for a company car.
(3)   Mr. Belcher began his employment with us in June 2005.

 

Option Grants in 2005

 

The following table shows certain information concerning grants of options to our named executive officers for the year ended December 31, 2005.

 

Option Grants in 2005


   Number of Securities
Underlying Options


    Percent of Total
Options Granted
to Employees


    Exercise Price
Per Share


    Expiration
Date


    Grant Date
Value(1)


 

Steven E. Zuccarini

                      

Nicholas J. Galassi

   105,000 (2)   7.8 %   $ 0.65     (2 )   (2 )

Eric D. Belcher

   325,000 (3)   24.3       (3 )   (3 )   (3 )

Scott A. Frisoni

   125,000     9.3       0.65     (4 )   (4 )

Mark D. Desky

   85,000     6.4       0.65     (5 )   (5 )

(1)   These values were estimated using a minimum value option pricing model.
(2)   25,000 options were fully vested on July 15, 2005 and expire on July 15, 2015 and have a grant date value of $0.11 per share. 80,000 options vest in 50% annual installments beginning on October 1, 2006 and expire on October 1, 2015 and have a grant date value of $0.12 per share.
(3)   105,000 options were fully vested on July 20, 2005 and expire on July 20, 2015, with an exercise price of $1.00 per share. Because these options were granted at less than fair market value, they have no grant date value. 120,000 options vest in 33% annual installments beginning on June 20, 2006 and expire on September 19, 2015, with an exercise price of $0.65 per share and a grant date value of $0.12 per share. 100,000 options vest in a 50% installment on October 1, 2006 and a 50% installment on June 20, 2007, and expire on October 1, 2015, with an exercise price of $1.00 per share. Because these options were granted at less than fair market value, they have no grant date value.
(4)   25,000 options were fully vested on July 15, 2005 and expire on July 15, 2015 and have a grant date value of $0.11 per share. 100,000 options vest in 50% annual installments beginning on October 1, 2006 and expire on October 1, 2015 and have a grant date value of $0.12 per share.
(5)   55,000 options were fully vested on July 15, 2005 and expire on July 15, 2015 and have a grant date value of $0.11 per share and 30,000 options vest in 50% annual installments beginning on October 1, 2006 and expire on October 1, 2015 and have a grant date value of $0.12 per share.

 

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Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values

 

The following table shows certain information concerning option holdings as of December 31, 2005 with respect to our named executive officers. No options were exercised by the named executive officers during the year ended December 31, 2005.

 

Name


   Number of securities
underlying
unexercised options at
December 31, 2005 (#)


  

Value of unexercised

in-the-money options at

December 31, 2005 (1)


     Exercisable

   Unexercisable

   Exercisable

   Unexercisable

Steven E. Zuccarini

   300,000    1,200,000    $                     $                 

Nicholas J. Galassi

   125,000    80,000              

Eric D. Belcher

   105,000    220,000              

Scott A. Frisoni

   25,000    100,000              

Mark D. Desky

   55,000    30,000              

(1)   There was no public trading market for our common stock as of December 31, 2005. Accordingly, the value of the unexercised in-the-money options as of December 31, 2005 has been determined by calculating the difference between an assumed initial public offering price of             , the midpoint of the filing range set forth on the cover of this prospectus, and the option exercise price of each applicable in-the-money option multiplied by the number of shares underlying such option.

 

The option grants listed above, plus options to purchase 2,083,500 shares of common stock held by other employees, constitute all options outstanding as of December 31, 2005. We expect that options to purchase an additional 500,000 shares of common stock will be reserved for issuance under our Long-Term Incentive Plan.

 

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 our common stock at an exercise price of $0.50 per share. Of these options, 300,000 vested at the time of grant and the remaining 900,000 vest ratably at the rate of 300,000 per year, subject to acceleration upon the occurrence of certain events, including our completion of an initial public offering. As of March 31, 2006, 467,167 of these options were vested, and upon the completion of this offering the remaining 900,000 options will vest.

 

In connection with his November 2004 employment agreement, Mr. Zuccarini also became entitled to receive fully vested options to purchase 600,000 shares of our common stock at an exercise price of $0.50 per share, subject to our achievement of certain business and financial performance targets. In May 2006, at the request of the Company and to better align the value of this equity award with the long-term interests of our 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 our 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 125,000 per year. Vesting of these options will accelerate in the event of a change of control (as defined in the agreement).

 

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

 

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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:

 

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

 

  Ÿ   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.

 

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

 

Employment Agreements with Other Executive Officers

 

In addition to our 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 of Directors. The agreements also grant options to purchase shares of our common stock and contain customary non-competition and non-solicitation provisions.

 

The agreements may be terminated, with or without cause, by the executive, our Chief Executive Officer or our Board of Directors. 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 a 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.

 

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.

 

Employee Benefits Plans

 

2004 Unit Option Plan

 

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

 

Administration.    The 2004 Plan is administered by our Board. Our officers have the authority to act on our behalf, if it is within their apparent authority, with respect to matters, rights, obligations, determinations or elections delegated to the Company under the 2004 Plan.

 

Grant of Options; Shares Available for Options.    Certain employees, consultants and directors are eligible to be granted awards under the plan. Our Board determines who receives options under the plan and the terms and conditions of the options consistent with the terms of the plan. Our Board has also determined the fair market value of the shares underlying options previously granted under the plan.

 

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The total number of shares of our common stock available for issuance or delivery under our 2004 Plan is determined by our Board. The number of shares of our common stock issued or reserved pursuant to the 2004 Plan will be subject, at our Board’s discretion, to adjustment as a result of stock splits, stock dividends and similar changes in our common stock.

 

Stock Options.    The 2004 Plan permits our Board to grant participants non-qualified stock options, which do not qualify for special tax treatment in the United States. Our Board establishes the duration of each option at the time it is granted, with a maximum ten-year duration, and establishes any vesting requirements that must be met prior to the exercise of options. Stock option grants must have exercise prices that are at least equal to the fair market value of our common stock on the date of grant. Stock option grants may allow holders to pay the exercise price of the holder’s vested options by promissory note, by tendering shares of common stock already owned by the option holder for at least six months, if the stock was not acquired from the Company, or by another method approved by our Board. Stock acquired by exercise of an option granted under the 2004 Plan may be subject to a right of first refusal, repurchase options, or other conditions and restrictions determined by our Board at the time the option is granted. Upon a change in control of the Company, the acquiring company may assume the Company’s rights under the outstanding options or substitute its own securities for the Company stock underlying outstanding options.

 

Amendment and Termination.    Our Board may amend or terminate the 2004 Plan, but no termination or amendment will be made that adversely affects any then outstanding option or any unexercised portion thereof without the holder’s consent, other than amendments that are necessary to permit the granting of awards in compliance with applicable laws, regulations or rules.

 

Future Grants.    We do not intend to grant any additional options under the 2004 Plan.

 

Stock Incentive Plan

 

Prior to the completion of this offering, we expect to adopt the InnerWorkings, Inc. 2006 Stock Incentive Plan (the “Long-Term Incentive Plan”) which will replace the 2004 Plan. The principal purpose of the Long-Term Incentive Plan is to attract, motivate, reward and retain selected employees, consultants and directors through the granting of stock-based compensation awards. The Long-Term Incentive Plan will provide for a variety of awards, including non-qualified stock options, incentive stock options (within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”)), stock appreciation rights, restricted stock awards, performance-based awards and other stock-based awards.

 

Administration.    The Long-Term Incentive Plan is expected to be administered by our compensation committee. The committee may in certain circumstances delegate certain of its duties to one or more of InnerWorkings, Inc.’s officers. The committee has the power to interpret the Long-Term 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 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 Long-Term Incentive Plan will be              shares. Once Section 162(m) of the Code applies, the maximum number of shares or share equivalents that may be subject to awards made to any one plan participant in any fiscal year, whether paid in shares or in cash, will be              shares. The number of shares of our common stock issued or reserved pursuant to the Long-Term Incentive Plan will be subject, at the discretion of our Board of Directors (or the committee if so empowered), to adjustment as a result of stock splits, stock dividends and similar changes in our common stock. In addition, shares subject to grant under the Company’s 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 Long-Term Incentive Plan, without reducing the aggregate number of shares available for issuance listed above.

 

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Stock Options.    The Long-Term Incentive Plan will permit the 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 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 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. We expect options to purchase 500,000 shares of our common stock will be allocated for grant under this plan.

 

Stock Appreciation Rights.    The 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 committee) equal in value to the excess of the fair market value of the shares covered by the right over the exercise price of the stock appreciation right, or other securities or property of the Company.

 

Other Equity-Based Awards.    In addition to stock options and stock appreciation rights, the committee may also grant to 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 committee may, pursuant to the terms of the Long-Term Incentive Plan, establish. The Long-Term 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 committee if so empowered, may provide that, in the event of a change in control of the Company, any outstanding awards that are unexercisable or otherwise unvested will become fully vested and immediately exercisable.

 

Amendment and Termination.    The committee may adopt, amend and rescind rules relating to the administration of the Long-Term Incentive Plan, and amend, suspend or terminate the Long-Term 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 Long-Term 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.

 

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.

 

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.

 

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Upon the completion of this offering, 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 committee or our Board of Directors.

 

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 will be the beneficial owner of     % of our stock after this offering. Mr. Heise will beneficially own     % of our stock after the offering. Mr. Lefkofsky served as an executive officer and a director and Mr. Heise served as a director of HA-LO Industries, Inc., a NYSE-listed company that filed for bankruptcy in July 2001.

 

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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. It is our intention to ensure that all future transactions between us and our officers, directors and principal stockholders and their affiliates, are approved by a majority of the Board of Directors, including a majority of the independent and disinterested members of the Board of Directors, and are on terms no less favorable to us than those that we could obtain from unaffiliated third parties. As a public company following this offering, our audit committee will be responsible for reviewing the fairness of related party transactions in accordance with the Nasdaq Marketplace Rules.

 

Recapitalization

 

Immediately prior to the completion of this offering, we intend to recapitalize our outstanding shares of capital stock into shares of our common stock and consummate a     :     stock split immediately after the recapitalization. In connection with the recapitalization and the closing of this offering, we intend to make approximately $7.0 million of required preference and accrued dividend payments to the holders of our Series B, D and E preferred shares.

 

Distribution of Minority Interest in Echo Global Logistics, LLC

 

As of December 31, 2005, we held a 7.6% ownership interest in Echo Global Logistics, LLC, an enterprise transportation management firm, which we acquired in February 2005 for $125,000. The members of Echo include:

 

  Ÿ   John R. Walter,

 

  Ÿ   Old Willow Partners, LLC, which is owned by Richard A. Heise, Jr.,

 

  Ÿ   Blue Media, LLC, which is owned by Elizabeth Kramer Lefkofsky,

 

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

 

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

 

  Ÿ   Nazarian Holdings, which is controlled by the beneficial owners of our Series D preferred shares and a portion of our Series E preferred shares.

 

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 during 2005. In addition, Echo provided transportation services to us during 2005. As consideration for these services, we paid Echo approximately $209,000 during 2005. 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.

 

Prior to the completion of this offering, we intend to distribute our minority ownership interest in Echo ratably to our stockholders and option holders on a fully-diluted basis assuming the exercise of all outstanding options. We will not receive any proceeds from this distribution. As of March 31, 2006, our minority ownership interest in Echo had a book value of $125,000.

 

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Sales of Our Units

 

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 Class A common shares and Series E preferred shares of InnerWorkings, Inc. to our directors, officers and 5% or greater stockholders and their respective affiliates, in private financing 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


   Class A
Common
Units/
Shares


   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)

   120,000       800,000 (7)         4/1/03    $ 800,000

Incorp, LLC

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

Printworks, LLC(5)

   100,000                 11/14/03      (5)

InnerWorkings Series C Investment Partners, LLC(4)

   267,000       1,780,000 (4)(5)         11/17/03    $ 1,780,000

John R. Walter

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

The Soraya Nazarian Annuity Trust 2003 dated 10/01/03(5)

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

Incorp, LLC

   50,000                 9/20/04      (6)

Incorp, LLC

   175,000                 1/2/05      (7)

Printworks, LLC

   450,000           320,000       2/25/05    $ 1,000,000

The Soraya Nazarian Annuity Trust 2003 dated 10/01/03(5)

             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 (42.92%), which is owned by Elizabeth Kramer Lefkofsky, (ii) Old Willow Partners, LLC (30.13%), which is controlled by Richard A. Heise, Jr., (iii) the Heise Family Grantor Retained Annuity Trust (15.37%), which is controlled by Mr. Heise, (iv) Scott A. Frisoni (1.00%), (v) Nicholas J. Galassi (0.63%) and (vi) non-related parties (9.95%). 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 World Group, LLC by Incorp to InnerWorkings, LLC. See “—Acquisition of Insight World Group, 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

 

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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 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 to Incorp for the benefit of Nicholas J. Galassi as partial consideration for his continued employment with InnerWorkings, LLC.
(7)   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 World Group, LLC

 

In January 2003, we acquired 100% of the equity ownership of Insight World Group, 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 this offering, we will be required to make the following approximate payments:

 

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

 

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

 

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

 

We intend to use a portion of our net proceeds from this offering to satisfy these payment obligations.

 

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 owner 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 $41,000 to Zion Consulting for services rendered in 2003, 2004, 2005 and the three months ended March 31, 2006, respectively. We intend to terminate this agreement upon the completion of this offering.

 

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

 

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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 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 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. These rights have been waived with respect to this offering. 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 ownership of our common stock prior to and after this offering:

 

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

 

  ·   each selling stockholder;

 

  ·   each of our directors;

 

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

 

  ·   all of our directors and executive officers as a group.

 

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                  shares of common stock outstanding. 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, the persons and entities named in the table have sole voting and investment power as to all shares beneficially owned. Unless otherwise indicated below, the address of each person listed in the table is c/o InnerWorkings, Inc., 600 West Chicago Avenue, Suite 850, Chicago, Illinois 60610.

 

Name and address of beneficial owner


   Shares of capital stock
beneficially owned prior
to this offering(1)


   

Number of

shares to

be sold in
this offering


   Shares of common stock
beneficially owned after
this offering


   Number

   Percentage

       Number

   Percentage

5% Stockholders

                         

Incorp, LLC(2)

   19,027,437    51.2 %              

Entities affiliated with New Enterprise Associates(3)

   8,134,184    21.9                

Executive Officers and Directors

                         

Steven E. Zuccarini(4)

   467,167    1.2                

Nicholas J. Galassi(5)

   125,000    *                

Scott A. Frisoni(6)

   278,049    *                

Eric D. Belcher(7)

   105,000    *                

Mark D. Desky(8)

   58,900    *                

John R. Walter(9)

   767,167    1.3                

Sharyar Baradaran(10)

   748,000    2.0                

Peter Barris(11)

   8,127,067    21.9                

Jack M. Greenberg(12)

      *                

Directors and executive officers as a group (9 persons)

   10,676,350    28.7                

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

 

(1)   Reflects shares of capital stock beneficially owned prior to the recapitalization and     :     stock split, which are to occur immediately prior to the completion of this offering.
(2)   Includes 19,027,437 shares held by Incorp, LLC, which is owned by the following individuals and entities: (i) Orange Media, LLC (42.92%), which is controlled by Elizabeth Kramer Lefkofsky, (ii) Old Willow Partners, LLC (30.13%), which is controlled by Richard A. Heise, Jr., (iii) the Heise Family Grantor Retained Annuity Trust (15.37%), which is controlled by Mr. Heise, (iv) Scott A. Frisoni (1.00%), (v) Nicholas J. Galassi (0.63%) and (vi) non-related parties (9.95%). 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)   Includes 8,127,067 shares of Series E preferred stock held by New Enterprise Associates 11, Limited Partnership and 7,117 shares of Series E preferred stock held by NEA Ventures 2005, L.P. Peter Barris, one of our directors, 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. Mr. Barris does not have voting or investment control with respect to the shares held by NEA Ventures 2005, L.P.
(4)   Includes options to purchase 467,167 shares of Class A common stock.
(5)   Includes options to purchase 125,000 shares of Class A common stock. Does not include 120,685 shares of Class A common stock held by Incorp, which represent Mr. Galassi’s proportionate interest in the shares of Class A common stock held by Incorp. Mr. Galassi does not have voting or investment control with respect to the shares held by Incorp.
(6)   Includes options to purchase 25,000 shares of Class A common stock and 253,049 shares of Class A common stock. Does not include 190,274 shares of common stock held by Incorp, which represent Mr. Frisoni’s proportionate interest in the shares of Class A common stock held by Incorp. Mr. Frisoni does not have voting or investment control with respect to the shares held by Incorp.
(7)   Includes options to purchase 105,000 shares of Class A common stock.
(8)   Includes 3,900 shares of Class A common stock and options to purchase 55,000 shares of Class A common stock.
(9)   Includes 167,167 shares of Class A common stock and options to purchase 600,000 shares of Class A common stock. Does not include 27,096 shares of Class A common stock held by InnerWorkings Series C Investment Partners, LLC, which reflect Mr. Walter’s proportionate interest in the shares of Class A common stock held by Series C Investment Partners. Mr. Heise is the managing member of Series C Investment Partners. Mr. Walter does not have voting or investment control with respect to the shares held by Series C Investment Partners.
(10)   Includes 748,000 shares of Class A common stock held by the Baradaran Revocable Trust. Mr. Baradaran has voting and investment control with respect to the shares of Class A common stock held by the Baradaran Revocable Trust.
(11)   Includes 8,127,067 shares of Series E preferred stock. Mr. Barris, one of our directors, 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.
(12)   Does not include 27,096 shares of Class A common stock held by InnerWorkings Series C Investment Partners, LLC, which reflects Mr. Greenberg’s proportionate interest in the shares of Class A common stock held by Series C Investment Partners. Mr. Heise is the managing member of Series C Investment Partners. Mr. Greenberg does not have voting or investment control with respect to the shares held by Series C Investment Partners.

 

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DESCRIPTION OF CAPITAL STOCK

 

General

 

Upon the closing of this offering, the total amount of our authorized capital stock will consist of              shares of common stock, $0.0001 par value, and              shares of preferred stock, $0.0001 par value. We intend to adopt, and intend to submit for approval by our stockholders, a recapitalization agreement, a second amended and restated certificate of incorporation and amended and restated by-laws to become effective immediately prior to the closing of this offering. We also intend to consummate a     :     stock split of our common stock immediately following the recapitalization and immediately prior to the closing of this offering. The discussion herein describes the recapitalization and also describes our capital stock, second amended and restated certificate of incorporation and amended and restated by-laws as anticipated to be in effect upon the closing of this offering. 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.

 

Recapitalization

 

Prior to the completion of this offering, each outstanding share of our capital stock will be reclassified and converted into one share of our common stock. Additionally, immediately prior to the closing of this offering, each outstanding option will be converted into an option to receive one share of common stock upon the applicable exercise date. Immediately following the recapitalization and immediately prior to the closing of this offering, we intend to consummate a     :     stock split of our common stock.

 

Common Stock

 

Following the recapitalization and the stock split, and immediately prior to the closing of this offering, there will be              shares of common stock outstanding held by          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, and have cumulative voting rights. 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 will be 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 will be 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 will be no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of our capital stock are fully paid and nonassessable, and the shares of common stock to be issued on completion of this offering will be fully paid and nonassessable.

 

Preferred Stock

 

Following the recapitalization and immediately prior to the closing of this offering, we will be authorized to issue              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, will be 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 some circumstances, have the effect of making

 

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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

 

Upon the completion of this offering, the former holders of our Series B, D and E preferred shares, who will own approximately                  shares of our common stock, will 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 between us and these holders. Subject to limitations specified in the agreement, these registration rights include the following:

 

Demand Registration Rights.    If the former holders of our Series E preferred shares request that we register all or a portion of their shares, we are also required to register, upon request, the shares held by the former holders of our Series B and D preferred shares, 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 stockholders’ exercise of these demand registration rights. We will not be required to effect a demand registration during the period starting with the date of filing, and ending 180 days following the effective date of, this registration statement.

 

Piggyback Registration Rights.    If we propose to file a registration statement under the Securities Act to register our shares of common stock, the former holders of our Series B, D and E preferred shares 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 rights have been waived with respect to this offering. The holders of our Series B, D and E preferred shares 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, the former holders of our Series B, D and E preferred shares can require us to register their shares on Form S-3 if the aggregate offering price to the public is at least $1.0 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.

 

Right of First Refusal.    Each party to the investor rights agreement has a right of first refusal to purchase its pro rata share of certain of our equity securities. These rights do not apply to this offering and terminate immediately upon the effective date of this registration statement.

 

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 this offering. 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 180 days following the effective date of this offering.

 

Elimination of Liability in Certain Circumstances

 

Our certificate of incorporation will eliminate the liability of our directors to us or our stockholders for monetary damages resulting from breaches of their fiduciary duties as directors. Directors will 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

 

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improper personal benefit. Our articles of incorporation will 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 believe that this provision does not eliminate the liability of our directors to us or our shareholders for monetary damages under the federal securities laws. The articles of incorporation and by-laws will 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

 

Our by-laws will provide that we have seven directors, provided that this number 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.

 

Special Meetings of Stockholders

 

Our by-laws will provide 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 all the outstanding shares entitled to vote on the matter for which the meeting is being called or the purpose or purposes stated in the meeting notice.

 

Amendments; Vote Requirements

 

Our certificate of incorporation and by-laws will provide that the affirmative vote of a majority of the shares entitled to vote on any matter is required to amend a corporation’s 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 will 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 will also specify requirements as to the form and content of a stockholder’s notice.

 

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Transfer Agent and Registrar

 

The transfer agent and registrar for our common stock is                                         .

 

Listing

 

After the pricing of this offering, we expect that the shares will be quoted on the Nasdaq National Market under the symbol “INWK.”

 

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SHARES ELIGIBLE FOR FUTURE SALE

 

Following this offering, we will have                  shares of common stock outstanding. All                  shares sold in this offering 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.

 

The remaining                  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 180 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 our other stockholders, who will hold an aggregate of                  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 180 days (subject to extensions) after the date of this prospectus without the prior written consent of Morgan Stanley, except that nothing will prevent any of them from exercising outstanding options and warrants. 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 transferee agrees in writing to be bound by the terms of the lock-up agreement.

 

Taking into account the lock-up agreements, and assuming Morgan Stanley does not release stockholders from these agreements, the following shares will be eligible for sale in the public market at the following times:

 

  Ÿ   on the date of this prospectus, the                  shares sold in this offering will be immediately available for sale in the public market;

 

  Ÿ   180 days after the date of this prospectus,                  shares will be eligible for sale,                  of which will be subject to volume, manner of sale and other limitations under Rule 144; and

 

  Ÿ   the remaining                  shares will be eligible for sale under Rule 144 from time to time upon the expiration of various one-year holding periods.

 

Shares issuable upon exercise of options we granted prior to the date of this prospectus will also be available for sale in the public market pursuant to Rule 701 under the Securities Act, subject to certain Rule 144 limitations and, in the case of some holders, to the lock-up agreements. Rule 701 permits resales of these shares beginning 90 days after the date of this prospectus by persons other than affiliates.

 

In general, under Rule 144, a stockholder who owns restricted shares that have been outstanding for at least one year is entitled to sell, within any three-month period, a number of these restricted shares that does not exceed the greater of:

 

  Ÿ   one percent of the then outstanding shares of common stock, or approximately                  shares immediately after this offering; or

 

  Ÿ   the average weekly trading volume in the common stock on the Nasdaq National Market during the four calendar weeks preceding the sale.

 

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Our affiliates must comply with the restrictions and requirements of Rule 144, other than the one-year holding period requirement, to sell shares of common stock which are not restricted securities.

 

Under Rule 144(k), a stockholder who is not currently, and who has not been for at least three months before the sale, an affiliate of ours and who owns restricted shares that have been outstanding for at least two years may resell these restricted shares without compliance with the above requirements. The one- and two-year holding periods described above do not begin to run until the full purchase price is paid by the person acquiring the restricted shares from us or an affiliate of ours.

 

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CERTAIN MATERIAL U.S. FEDERAL INCOME TAX

CONSEQUENCES TO NON-U.S. HOLDERS

 

The following summary describes certain material United States federal income tax consequences of the ownership and disposition of common stock by a Non-U.S. Holder (as defined below) holding shares of our common stock as capital assets (i.e., generally for investment) as of the date of this prospectus. This discussion does not address all aspects of United States federal income taxation and does not deal with estate, gift, foreign, state and local tax consequences that may be relevant to such Non-U.S. Holders in light of their personal circumstances. Special U.S. tax rules may apply to certain Non-U.S. Holders, such as “controlled foreign corporations,” “passive foreign investment companies,” corporations that accumulate earnings to avoid U.S. federal income tax, investors in partnerships or other pass-through entities for U.S. federal income tax purposes, dealers in securities, holders of securities held as part of a “straddle,” “hedge,” “conversion transaction” or other risk reduction transaction, and certain former citizens or long-term residents of the United States that are subject to special treatment under the Code. Such entities and persons should consult their own tax advisors to determine the U.S. federal, state, local and other tax consequences that may be relevant to them. Furthermore, the discussion below is based upon the provisions of the Code, and Treasury regulations promulgated thereunder, rulings and judicial decisions thereunder as of the date hereof, and such authorities may be repealed, revoked or modified with or without retroactive effect so as to result in United States federal income tax consequences different from those discussed below.

 

If a partnership (or an entity treated as a partnership for U.S. federal income tax purposes) holds the common stock, the tax treatment of a partner will generally depend on the status of the partner and the activities of the partnership. Persons who are partners in partnerships holding the common stock should consult their tax advisors.

 

The authorities on which this summary is based are subject to various interpretations, and any views expressed within this summary are not binding on the Internal Revenue Service (which we also refer to as the IRS) or the courts. No assurance can be given that the IRS or the courts will agree with the tax consequences described in this prospectus.

 

As used herein, a “Non-U.S. Holder” means a beneficial owner of our common stock that is not any of the following for U.S. federal income tax purposes:

 

  Ÿ   a citizen or resident of the United States,

 

  Ÿ   a corporation, or other entity treated as a corporation for United States federal income tax purposes, created or organized in or under the laws of the United States, any state thereof or the District of Columbia,

 

  Ÿ   an estate the income of which is subject to United States federal income taxation regardless of its source, or

 

  Ÿ   a trust (i) which is subject to primary supervision by a court situated within the United States and as to which one or more United States persons have the authority to control all substantial decisions of the trust, or (ii) that has a valid election in effect under applicable U.S. Treasury regulations to be treated as a United States person.

 

Prospective purchasers are urged to consult their own tax advisors regarding the U.S. federal income tax consequences, as well as other U.S. federal, state, and local income and estate tax consequences, and non-U.S. tax consequences, to them of acquiring, owning, and disposing of our common stock.

 

Dividends

 

If we make distributions on our common stock, such distributions paid to a Non-U.S. Holder will generally constitute dividends for U.S. federal income tax purposes to the extent such distributions are paid from our

 

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current or accumulated earnings and profits, as determined under U.S. federal income tax principles. If a distribution exceeds our current and accumulated earnings and profits, the excess will be treated as a tax-free return of the Non-U.S. Holder’s investment to the extent of the Non-U.S. Holder’s adjusted tax basis in our common stock. Any remaining excess will be treated as capital gain. See “Gain on Disposition of Common Stock” for additional information.

 

Dividends paid to a Non-U.S. Holder generally will be subject to withholding of United States federal income tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. A Non-U.S. Holder of common stock who wishes to claim the benefit of an applicable treaty rate for dividends will be required to (a) complete IRS Form W-8BEN (or appropriate substitute form) and certify, under penalty of perjury, that such holder is not a U.S. person and is eligible for the benefits with respect to dividends allowed by such treaty or (b) hold common stock through certain foreign intermediaries and satisfy the certification requirements for treaty benefits of applicable Treasury regulations. Special certification requirements apply to certain Non-U.S. Holders that are “pass-through” entities for U.S. federal income tax purposes. A Non-U.S. Holder eligible for a reduced rate of United States withholding tax pursuant to an income tax treaty may obtain a refund of any excess amounts withheld by timely filing an appropriate claim for refund with the IRS.

 

This United States withholding tax generally will not apply to dividends that are effectively connected with the conduct of a trade or business by the Non-U.S. Holder within the United States, and, if a treaty applies, attributable to a United States permanent establishment or fixed base of the Non-U.S. Holder. Dividends effectively connected with the conduct of a trade or business, as well as those attributable to a United States permanent establishment or fixed base of the Non-U.S. Holder under an applicable treaty, are subject to United States federal income tax generally in the same manner as if the Non-U.S. Holder were a U.S. person, as defined under the Code. Certain IRS certification and disclosure requirements must be complied with in order for effectively connected dividends to be exempt from withholding. Any such effectively connected dividends received by a Non-U.S. Holder that is a foreign corporation may, under certain circumstances, be subject to an additional “branch profits tax” at a 30% rate or such lower rate as may be specified by an applicable income tax treaty.

 

Gain on Disposition of Common Stock

 

A Non-U.S. Holder generally will not be subject to United States federal income tax (or any withholding thereof) with respect to gain recognized on a sale or other disposition of common stock unless:

 

  Ÿ   the gain is effectively connected with a trade or business of the Non-U.S. Holder in the United States and, where a tax treaty applies, is attributable to a United States permanent establishment or fixed base of the Non-U.S. Holder,

 

  Ÿ   the Non-U.S. Holder is an individual who is present in the United States for 183 or more days during the taxable year of disposition and meets certain other requirements, or

 

  Ÿ   we are or have been a “U.S. real property holding corporation” within the meaning of Section 897(c)(2) of the Code, also referred to as a USRPHC, for United States federal income tax purposes at any time within the five-year period preceding the disposition (or, if shorter, the Non-U.S. Holder’s holding period for the common stock).

 

Gain recognized on the sale or other disposition of common stock and effectively connected with a United States trade or business, or attributable to a United States permanent establishment or fixed base of the Non-U.S. Holder under an applicable treaty, is subject to United States federal income tax on a net income basis generally in the same manner as if the Non-U.S. Holder were a U.S. person, as defined under the Code. Any such effectively connected gain from the sale or disposition of common stock received by a Non-U.S. Holder that is a foreign corporation may, under certain circumstances, be subject to an additional “branch profits tax” at a 30% rate or such lower rate as may be specified by an applicable income tax treaty.

 

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An individual Non-U.S. Holder who is present in the United States for 183 or more days during the taxable year of disposition generally will be subject to a 30% tax imposed on the gain derived from the sale or disposition of our common stock, which may be offset by U.S. source capital loses realized in the same taxable year.

 

In general, a corporation is a USRPHC if the fair market value of its “U.S. real property interests” equals or exceeds 50% of the sum of the fair market value of its worldwide (domestic and foreign) real property interest and its other assets used or held for use in a trade or business. For this purpose, real property interests include land, improvements and associated personal property.

 

We believe that we currently are not a USRPHC. In addition, based on these financial statements and current expectations regarding the value and nature of our assets and other relevant data, we do not anticipate becoming a USRPHC.

 

If we become a USRPHC, a Non-U.S. Holder nevertheless will not be subject to United States federal income tax if our common stock is regularly traded on an established securities market, within the meaning of applicable Treasury regulations, and the Non-U.S. Holder holds no more than five percent of our outstanding common stock, directly or indirectly, during the applicable testing period. Our common stock has been approved for quotation on the Nasdaq National Market and we expect that our common stock may be regularly traded on an established securities market in the United States so long as it is so quoted.

 

Information Reporting and Backup Withholding

 

We must report annually to the IRS and to each Non-U.S. Holder the amount of dividends paid to such holder and the tax withheld with respect to such dividends, regardless of whether withholding was required. Copies of the information returns reporting such dividends and withholding may also be made available to the tax authorities in the country in which the Non-U.S. Holder resides under the provisions of an applicable income tax treaty.

 

The United States imposes a backup withholding tax on dividends and certain other types of payments to United States persons (currently at a rate of 28%) of the gross amount. Dividends paid to a Non-U.S. Holder will not be subject to backup withholding if proper certification of foreign status (usually on an IRS Form W-8BEN) is provided, and the payor does not have actual knowledge or reason to know that the beneficial owner is a United States person, or the holder is a corporation or one of several types of entities and organizations that qualify for exemption, also referred to as an exempt recipient.

 

Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against such holder’s U.S. federal income tax liability provided the required information is timely furnished to the IRS.

 

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UNDERWRITING

 

Under the terms and subject to the conditions in an underwriting agreement dated the date of this prospectus, the underwriters named below, for whom Morgan Stanley & Co. Incorporated is acting as representative, have severally agreed to purchase, and we and the selling stockholders have agreed to sell to them, severally, the number of shares indicated below:

 

Name


  

Number of

Shares


Morgan Stanley & Co. Incorporated

    

Jefferies Broadview

    

Piper Jaffray & Co.

    

William Blair & Company, L.L.C.

    
    

Total

    
    

 

The underwriters and the representative are collectively referred to as the “underwriters” and the “representative,” respectively. The underwriters are offering the shares of common stock subject to their acceptance of the shares from us and subject to prior sale. The underwriting agreement provides that the obligations of the several underwriters to pay for and accept delivery of the shares of common stock offered by this prospectus are subject to the approval of certain legal matters by their counsel and to certain other conditions. The underwriters are obligated to take and pay for all of the shares of common stock offered by this prospectus if any such shares are taken. However, the underwriters are not required to take or pay for the shares covered by the underwriters’ over-allotment option described below.

 

The underwriters initially propose to offer part of the shares of common stock directly to the public at the offering price listed on the cover page of this prospectus and part to certain dealers. After the initial offering of the shares of common stock, the offering price and other selling terms may from time to time be varied by the representative.

 

The selling stockholders have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to                  additional shares of common stock at the public offering price listed on the cover page of this prospectus, less underwriting discounts and commissions. The underwriters may exercise this option solely for the purpose of covering over-allotments, if any, made in connection with the offering of the shares of common stock offered by this prospectus. To the extent the option is exercised, each underwriter will become obligated, subject to certain conditions, to purchase about the same percentage of the additional shares of common stock as the number listed next to the underwriter’s name in the preceding table bears to the total number of shares of common stock listed next to the names of all underwriters in the preceding table.

 

The following table shows the per share and total public offering price, underwriting discounts and commissions, and proceeds before expenses to us and the selling stockholders. These amounts are shown assuming both no exercise and full exercise of the underwriters’ option to purchase up to an additional                  shares of common stock.

 

     Per Share

  

No

Exercise


  

Full

Exercise


Public offering price

   $                         $                         $                     

Underwriting discounts and commissions to be paid by:

                    

Us

                    

The selling stockholders

                    

Proceeds, before expenses, to us

                    

Proceeds, before expenses, to the selling stockholders

                    

 

The estimated offering expenses payable by us, exclusive of the underwriting discounts and commissions, are approximately $                .

 

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The underwriters have informed us that they do not intend sales to discretionary accounts to exceed 5% of the total number of shares of common stock offered by them.

 

We have applied to list our common shares for quotation on the Nasdaq National Market under the symbol “INWK.”

 

We and all directors and officers and the holders of all of our outstanding stock and stock options have agreed that, without the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the underwriters, we and they will not, during the period ending 180 days after the date of this prospectus:

 

  Ÿ   offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase lend or otherwise transfer or dispose of, directly or indirectly, any shares of common stock or any securities convertible into or exercisable or exchangeable for shares of common stock;

 

  Ÿ   file any registration statement with the Securities and Exchange Commission relating to the offering of any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock; or

 

  Ÿ   enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the common stock.

 

whether any such transaction described above is to be settled by delivery of common stock or such other securities, in cash or otherwise. In addition, we and each such person agrees that, without the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the underwriters, it will not, during the period ending 180 days after the date of this prospectus, make any demand for, or exercise any right with respect to, the registration of any shares of common stock or any security convertible into or exercisable or exchangeable for common stock.

 

The restrictions described in the immediately preceding paragraph to do not apply to:

 

  Ÿ   the sale of shares to the underwriters;

 

  Ÿ   the grant of options or the issuance of shares of common stock pursuant to any employee benefit plan described in this prospectus;

 

  Ÿ   the filing with the Securities and Exchange Commission of any registration statement on Form S-8 in respect of any employee benefit plan described in this prospectus;

 

  Ÿ   transactions by a selling stockholder relating to shares of common stock or other securities acquired in open market transactions after the completion of the offering of the shares;

 

  Ÿ   transfers of shares of common stock or any security convertible into common stock as a bona fide gift;

 

  Ÿ   transfers of shares of common stock to any trust, partnership or limited liability company for the direct or indirect benefit of the signer or the immediate family of the signer;

 

  Ÿ   transfers of shares of common stock to any beneficiary of the signer pursuant to a will or other testamentary document or applicable laws of descent;

 

  Ÿ   transfers of shares of common stock or any securities convertible into or exercisable or exchangeable for common stock to the company;

 

  Ÿ   distributions of shares of common stock or any security convertible into common stock to limited partners or stockholders of the signer; or

 

  Ÿ   transfers of shares of common stock to any wholly-owned subsidiary of the signer or to the parent corporation of the signer or any wholly-owned subsidiary of the signer or to the parent corporation of the signer or any wholly-owned subsidiary of such parent corporation;

 

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provided that in the case of any of the last seven bullets, (i) each donee distributee or transferee shall sign and deliver a lock-up agreement and (ii) no filing under Section 16(a) of the Exchange Act, reporting a reduction in beneficial ownership of shares of common stock, shall be required or shall be voluntarily made in connection with such transfer or distribution during the 180 day period (including extensions).

 

The 180 day restricted period described in the preceding paragraph will be extended if:

 

  Ÿ   during the last 17 days of the 180 day restricted period we issue an earnings release or material news event relating to us occurs, or

 

  Ÿ   prior to the expiration of the 180 day restricted period, we announce that we will release earnings results during the 16 day period beginning on the last day of the 180 day period,

 

in which case the restrictions described in the preceding paragraph will continue to apply until the expiration of the 18 day period beginning on the issuance of the earnings release or the occurrence of material news or a material event.

 

In order to facilitate the offering of the common stock, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the common stock. Specifically, the underwriters may sell more shares than they are obligated to purchase under the underwriting agreement, creating a short position. A short sale is covered if the short position is no greater than the number of shares available for purchase by the underwriters under the over-allotment option. The underwriters can close out a covered short sale by exercising the over-allotment option or purchasing shares in the open market. In determining the source of shares to close out a covered short sale, the underwriters will consider, among other things, the open market price of shares compared to the price available under the over-allotment option. The underwriters may also sell shares in excess of the over-allotment option, creating a naked short position. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market after pricing that could adversely affect investors who purchase in this offering. As an additional means of facilitating this offering, the underwriters may bid for, and purchase, shares of common stock in the open market to stabilize the price of the common stock. These activities may raise or maintain the market price of the common stock above independent market levels or prevent or retard a decline in the market price of the common stock. The underwriters are not required to engage in these activities and may end any of these activities at any time.

 

We, the selling stockholders and the underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act.

 

A prospectus in electronic format may be made available on websites maintained by one or more underwriters, or selling group members, if any, participating in this offering. The representative may agree to allocate a number of shares of common stock to underwriters for sale to their online brokerage account holders. Internet distributions will be allocated by the representative to underwriters that may make Internet distributions on the same basis as other allocations.

 

European Economic Area

 

In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive, each underwriter has represented and agreed that with effect from and including the date on which the Prospectus Directive is implemented in that Member State it has not made and will not make an offer of shares to the public in that Member State, except that it may, with effect from and including such date, make an offer of shares to the public in that Member State:

 

(a) at any time to legal entities which are authorised or regulated to operate in the financial markets or, if not so authorised or regulated, whose corporate purpose is solely to invest in securities;

 

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(b) at any time to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than €43,000,000 and (3) an annual net turnover of more than €50,000,000, as shown in its last annual or consolidated accounts; or

 

(c) at any time in any other circumstances which do not require the publication by us of a prospectus pursuant to Article 3 of the Prospectus Directive.

 

For the purposes of the above, the expression an “offer of shares to the public” in relation to any shares in any Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the shares to be offered so as to enable an investor to decide to purchase or subscribe the shares, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State and the expression Prospectus Directive means Directive 2003/71/EC and includes any relevant implementing measure in that Member State.

 

United Kingdom

 

Each underwriter has represented and agreed that it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the Financial Services and Markets Act 2000) in connection with the issue or sale of the shares in circumstances in which Section 21(1) of such Act does not apply to us and it has complied and will comply with all applicable provisions of such Act with respect to anything done by it in relation to any shares in, from or otherwise involving the United Kingdom.

 

Pricing of the Offering

 

Prior to this offering, there has been no public market for our common stock. The initial public offering price was determined by negotiations between us and the representative. Among the factors considered in determining the initial public offering price were our future prospects and those of our industry in general, our sales, earnings and certain other financial and operating information in recent periods, and the price-earnings ratios, price-sales ratios, market prices of securities, and certain financial and operating information of companies engaged in activities similar to ours.

 

Directed Share Program

 

At our request, the underwriters have reserved              percent of the shares of common stock offered by this prospectus for sale, at the initial public offering price, to directors, officers, employees, business associates and related persons of InnerWorkings, Inc. If purchased by these persons, these shares will be subject to a 180-day lock-up restriction. The number of shares of common stock available for sale to the general public will be reduced to the extent these individuals purchase such reserved shares. Any reserved shares that are not so purchased will be offered by the underwriters to the general public on the same basis as the other shares offered by this prospectus.

 

Other Relationships

 

Certain of the underwriters or their affiliates may provide in the future financial advisory services to us in the ordinary course of business, for which they may receive customary fees and commissions.

 

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LEGAL MATTERS

 

The validity of the common stock offered hereby has been passed upon for us by Winston & Strawn LLP, Chicago, Illinois. Certain legal matters with respect to this offering will be passed upon for the underwriters by Mayer, Brown, Rowe & Maw LLP, Chicago, Illinois.

 

EXPERTS

 

The consolidated financial statements of InnerWorkings, LLC at December 31, 2005 and 2004, and for each of the three years in the period ended December 31, 2005, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent registered public accounting firm, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.

 

WHERE YOU CAN FIND ADDITIONAL INFORMATION

 

We have filed with the Securities and Exchange Commission a registration statement on Form S-1, including exhibits, schedules and any amendments with respect to the common stock we are offering hereby. This prospectus is a part of the registration statement and includes all of the information which we believe is material to you in considering whether to make an investment in our common stock. We refer you to the registration statement for additional information about us, our common stock and this offering, including the full texts of the exhibits, some of which have been summarized in this prospectus. Statements contained in this prospectus as to the contents of any contract or any other document referred to are not necessarily complete. With respect to each such contract or other document filed as a part of the registration statement, reference is made to the exhibit for a more complete description of the matters involved, and each such statement shall be deemed qualified in its entirety by such reference. The registration statement is available for inspection and copying at the Securities and Exchange Commission’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site that makes available the registration statement. The address of the SEC’s Internet site is http://www.sec.gov. As a result of this offering, we will be required to file reports and other information with the Securities and Exchange Commission pursuant to the informational requirements of the Securities Exchange Act of 1934.

 

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InnerWorkings, LLC and Subsidiary

 

Consolidated Financial Statements

 

Years Ended December 31, 2005, 2004, and 2003

 

Contents

 

Report of Independent Auditors

   F-2

Consolidated Financial Statements

    

Consolidated Balance Sheets

   F-3

Consolidated Statements of Operations

   F-4

Consolidated Statements of Members’ Equity

   F-5

Consolidated Statements of Cash Flows

   F-6

Notes to Consolidated Financial Statements

   F-7

 

InnerWorkings, Inc. and Subsidiary

 

Condensed Consolidated Financial Statements

 

Three Months Ended March 31, 2006 and 2005

 

Condensed Consolidated Financial Statements

    

Condensed Consolidated Balance Sheets

   F-19

Condensed Consolidated Statements of Operations

   F-20

Condensed Consolidated Statements of Cash Flows

   F-21

Notes to Condensed Consolidated Financial Statements

   F-22

 

 

F-1


Table of Contents

Report of Independent Registered Public Accounting Firm

 

The Members

InnerWorkings, LLC and Subsidiary

 

We have audited the accompanying consolidated balance sheets of InnerWorkings, LLC and Subsidiary as of December 31, 2005 and 2004, and the related consolidated statements of operations, members’ equity, and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of InnerWorkings, LLC and Subsidiary as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December, 31, 2005, in conformity with U.S. generally accepted accounting principles.

 

Chicago, Illinois

March 15, 2006, except for the “Stock Split” section of Note 2,

as to which the date is                     , 2006

  /s/ Ernst & Young LLP

 


 

The foregoing report is the form that will be signed upon the completion of the common stock split described in “stock split” section of Note 2 in the consolidated financial statements.

 

Chicago, Illinois

May 9, 2006

 

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Table of Contents

I nnerWorkings, LLC and Subsidiary

 

Consolidated Balance Sheets

 

     December 31,

 
     2004

    2005

 

Assets

                

Current assets:

                

Cash and cash equivalents

   $ 1,475,791     $ 2,962,740  

Accounts receivable, net of allowance for doubtful accounts of $173,839 in 2005 and $153,693 in 2004

     9,878,792       14,520,055  

Unbilled revenue

     894,595       1,974,920  

Prepaid expenses

     659,615       2,612,752  

Advances to related parties

     173,348       124,534  

Other current assets

     47,677       1,486,407  
    


 


Total current assets

     13,129,818       23,681,408  

Property and equipment, net

     448,034       1,538,794  

Intangibles and other assets:

                

Goodwill

     234,500       352,954  

Intangible assets, net of accumulated amortization of $236,711 in 2005 and $98,351 in 2004

     790,149       930,774  

Deposits

     57,757       12,176  

Investment

           125,000  

Other assets

     53,139       43,559  
    


 


       1,135,545       1,464,463  
    


 


Total assets

   $ 14,713,397     $ 26,684,665  
    


 


Liabilities and members’ equity

                

Current liabilities:

                

Accounts payable—trade

   $ 8,609,120     $ 13,488,237  

Distribution payable

           2,987,000  

Outstanding line of credit

     678,154       2,923,511  

Current maturities of capital lease obligations

     52,972       109,185  

Customer deposits

     240,840       284,407  

Other liabilities

           51,697  

Accrued expenses

     81,443       297,310  
    


 


Total current liabilities

     9,662,529       20,141,347  

Capital lease obligations, less current maturities

     75,175       283,645  

Mandatorily redeemable preferred stock—Class D

     2,021,774        
    


 


Total liabilities

     11,759,478       20,424,992  

Class D, convertible redeemable preferred shares, $3.125 par value, 1,600,000 shares authorized, 1,600,000 shares issued and outstanding; liquidation preference of $5,007,525

           5,007,525  

Class C, convertible redeemable preferred shares, $1.00 par value, 2,580,000 shares authorized at December 31, 2004, December 31, 2,580,000 shares issued and outstanding at 2004; liquidation preference of $2,862,853

     2,862,853        

Members’ equity:

                

Class B, convertible preferred shares, $.80 par value, 937,500 shares authorized, 937,500 shares issued and outstanding; liquidation preference of $1,500,000

     750,000       770,625  

Class A, common shares, $0 par value, 31,926,375 shares authorized, 31,926,375 and 29,521,375 shares issued and outstanding at December 31, 2005, respectively

     528,591       2,635,091  

Member receivable

     (188,469 )     (188,469 )

Additional paid-in capital

           46,500  

Accumulated deficit

     (999,056 )     (2,011,599 )
    


 


Total members’ equity

     91,066       1,252,148  
    


 


Total liabilities and members’ equity

   $ 14,713,397     $ 26,684,665  
    


 


 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

InnerWorkings, LLC and Subsidiary

 

Consolidated Statements of Operations

 

     Years Ended December 31,

 
     2003

    2004

    2005

 

Revenue

   $ 16,228,456     $ 38,883,542     $ 76,869,586  

Cost of goods sold (exclusive of depreciation and amortization)

     12,487,388       30,482,928       61,271,453  
    


 


 


Gross profit

     3,741,068       8,400,614       15,598,133  

Operating expenses:

                        

Selling, general, and administrative expenses

     2,959,352       6,105,317       10,605,248  

Depreciation and amortization

     17,713       223,027       387,911  
    


 


 


Income from operations

     764,003       2,072,270       4,604,974  

Other income (expense):

                        

Interest income

     2,785       9,222       78,627  

Interest expense

     (88,555 )     (131,551 )     (98,128 )

Minority interest

     (7,618 )     (191,837 )     58,244  

Other, net

           (1,294 )     (9,580 )
    


 


 


Total other income (expense)

     (93,388 )     (315,460 )     29,163  
    


 


 


Net income

     670,615       1,756,810       4,634,137  

Dividends on preferred shares

     (176,029 )     (462,000 )     (761,825 )
    


 


 


Net income applicable to common shareholders

   $ 494,586     $ 1,294,810     $ 3,872,312  
    


 


 


Basic earnings per share

   $ 0.02     $ 0.04     $ 0.12  

Diluted earnings per share

   $ 0.02     $ 0.04     $ 0.12  
    
    Pro Forma

   
 

Historical net income

   $ 670,615     $ 1,756,810     $ 4,634,137  

Pro forma provision for income taxes

     (261,540 )     (685,156 )     (1,807,313 )
    


 


 


Net income adjusted for pro forma provision for income taxes

   $ 409,075     $ 1,071,654     $ 2,826,824  
    


 


 


Pro forma basic earnings (loss) per share

   $ 0.01     $ 0.02     $ 0.07  

Pro forma diluted earnings (loss) per share

   $ 0.01     $ 0.02     $ 0.07  

 

See accompanying notes to consolidated financial statements.

 

F-4


Table of Contents

InnerWorkings, LLC and Subsidiary

 

Consolidated Statements of Members’ Equity

 

     Common A

    Class B Preferred

  

Member

Receivable


   

Additional

Paid-In

Capital


  

Retained

Earnings

(Deficit)


        
     Shares

    Amount

    Shares

   Amount

           Total

 

Balance at January 1, 2003

   15,384,375     $ 327,091     937,500    $ 750,000    $ (188,469 )   $    $ (322,565 )    $ 566,057  

Net income

                                  670,615        670,615  

Shares issued

   13,969,000                                        

Preferred Series C dividends

                                  (108,529 )      (108,529 )

Distributions on Common A

                                  (740,267 )      (740,267 )

Preferred Series B dividends

                                  (67,500 )      (67,500 )
    

 


 
  

  


 

  


  


Balance at December 31, 2003

   29,353,375       327,091     937,500      750,000      (188,469 )          (568,246 )      320,376  

Net income

                                  1,756,810        1,756,810  

Shares issued

   2,568,000       835,500                          (634,000 )      201,500  

Shares repurchased

   (2,400,000 )     (634,000 )                               (634,000 )

Preferred Series C dividends

                                  (387,000 )      (387,000 )

Distributions on Common A